France s Funds and Insurance Schemes for Natural Disasters Update 1
Mandatory cover of losses arising from Natural Catastrophes in: all Physical Damage (a.k.a. Fire ) insurance policies covering risks located in France and, in the case of Automobile P.D. covers, motor vehicles licensed in France The scheme is secured by Government backstop: through a financial guarantee provided to state-owned reinsurer CCR it is an option for insurers to buy reinsurance protection from CCR 2
The extent of the mandatory Natural Catastrophe cover may not differ from that of the regular Fire portion of the policy: including any additional guarantees such as Guaranteed Reconstruction Cost or Business Interruption provided always that the loss has been caused by direct physical damage to the insured property however the law provides for specific deductibles in respect of the mandatory Natural Catastrophe cover (rather complex, partially linked with insured s exposure and behaviour) 3
Conditions for the mandatory scheme to kick in: an insurance policy has been taken up for damage to the affected property (or automobile) the Natural Catastrophe has been recognized by government order, based on the occurrence of a natural phenomenon of exceptional intensity and, of course, the insurer finds that the damage has been caused by the natural phenomenon described in the government order 4
Barring a government order, the parties are back to a regular contractual situation: the policy may or may not cover the damage and, if it does, there may or may not be restrictions. People or businesses who have not voluntarily taken up Fire insurance are not covered under the Natural Catastrophe scheme in case people incur damage as a result of a major natural disaster and either are uninsured or have property in an area not covered in a government order then there is no predefined insurance response. A good example is the 2003 subsidence wave. 5
The scope is open: uninsurable, direct material damage arising solely as a result of a natural phenomenon of abnormal intensity (unofficial translation of French law) some included perils are specifically named in law, but no exhaustive list some exclusions are given in law, but again no exhaustive list Examples of perils generally covered by the scheme (i.e. that have been included in government orders): Floods, mudslides or landslides when caused, or contributed to, by rare circumstances (unusual rainfall, etc.) Large earthquakes Subsidence when linked to unusually dry weather Tidal waves Avalanches Major cyclones or tropical storms or hurricanes 6
Where there is an implicit consensus between the market and government that a peril is insurable and is, in actual fact, routinely insured, it will not be considered in government orders. For example: Hail Weight of the snow Wind damage However damages caused by major cyclones or tropical storms or hurricanes, as have occurred e.g. in the French overseas districts, are covered under the Natural Catastrophe scheme, by law NOTE: other than major cyclones, wind damage is also mandatorily covered in all Fire insurance policies, but the regulations are different (more flexible as to trigger, limits and rates, and no government backstop). 7
The premium collected for the Natural Catastrophe guarantee is regulated. Currently it is expressed as a fixed percentage (for instance 12% in non-automobile policies) of the otherwise unregulated premium set by the insurer for the main section of the policy in respect of Physical Damage guarantees. In 2007 the overall market premium for France s mandatory Natural Catastrophe insurance scheme was EUR 1.3 billion. On an average year, insured losses amount to EUR 0.9 billion. But results have become more and more volatile and there are few average years any more. When considered from inception (in 1982) to-date, the scheme has been profitable. But the distinct growth in exposures and actual losses, as well as the increasing volatility, are making it unsustainable and have caused the government to start working on adjusting the system. 8
Another reason for change is that the current scheme does not create compelling enough incentives for insured people or local officials to invest in prevention measures. In 1995, a separate government-sponsored fund was set up to finance prevention and protection measures against natural disasters. Funding is entirely through a tax levied on the Natural Catastrophe insurance premiums. Note: Where Natural Catastrophes are concerned, there is no specific scheme covering Bodily Injuries. 9
Coverage for Other Types of Catastrophes Agricultural Calamities a government-sponsored fund was created in 1964 it covers direct physical damage to crops, livestock and bloodstock (including forestry, fruit & vegetable growing, fish or oyster farms, etc.) it is subject to a Physical Damage insurance policy having been taken up by the farmer for buildings or contents it is triggered by government order upon natural phenomena of unusual intensity happening, such as for instance Frost (EUR 233 million in 1996-2005), Drought (EUR 980 million over the same period), Floods (167 million), Storms (51.5 million), etc. it is funded partly through a contribution levied on insurance premiums 10
www.ccr.fr 11