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National disaster compensation scheme in France(Principles and operation)

South of France - Flood in June 2013

French exposure

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What perils menace France?

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► Windstorms and hurricanes

Lothar & Martin (1999) : EUR 7-8 Billion

Cyclone Hugo (1989) : EUR 700-750 Million

► Floods

1910 flood in the Paris area (2014 OECD study) : EUR 30 Billion, including EUR 19

Billion covered for insured damage.

► Landslides (including subsidence) Cost of subsidence losses for 2003: EUR 1 billion for the market

► Earthquake

EUR 61 million for the small Annecy earthquake in 1996.

The Big One” : a major earthquake in south of France would cause very important

damage (estimation : EUR 11,5 Billion – 2004 european study)

► Avalanche

Natural perils – what kind of cover?

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Cover for natural disasters in France

Specific compensation schemes

(all others : floods, earthquake, landslides,

avalanches…)

The National disaster compensation scheme (1982

Law).

Public funds

(National Fund for Agricultural Disasters - 1964

Law)

Facultative or compulsory insurance with explicit contractual conditions

(storm, hail, snow pressure and freeze)

Why perils are covered under specific compensation schemes:

Lack of statistics and large mutualisation, Risk of accumulation and anti-selection

Scheme principles

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Bases and principles

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► The French natural disaster scheme was created by the law of 13 July 1982. It

was introduced to make up for the inadequate cover of natural disasters, for

which, until then, only very low levels of insurance were provided. It is not a

true insurance scheme but a compensation scheme based on a public-private

partnership.

► It is based on paragraph 12 of the preamble of french Constitution, which

states : « The Nation declares all French Citizens to be equal and united in

solidarity when faced with loss resulting from natural disasters »

► The scheme’s design is comparable to a building :

It has been skilfully designed, based on a detailed plan (legislator’s specifications)

It rests on solid foundations (solidarity and responsability),

It has a efficient cornerstone (public-private partnership),

Il has solid pillars (Insurance industry and State backed reinsurance),

It has a keystone providing stability (State garantee).

Scheme’s working

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Main characteristics of the

“Natural catastrophe” scheme 1/2

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► Conditions for the scheme to operate :

A state of “natural catastrophe” must be declared by the Government, by way of

decree (signed by different ministries after consulting an inter-ministerial committee)

The damaged property must be covered by a “property damage” insurance policy

► Automatic inclusion of the “Natural catastrophe guarantee” in

insurance contracts covering damage to buildings and moveable

property located in France

► The legal “Natural catastrophe” guarantee covers:

property covered by the main contract

against “non insurable direct material damage arising solely as a result of a natural

element of abnormal intensity” (1982 law definition)

Main characteristics of the “Natural catastrophe” scheme

2/2

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► The legal “Natural catastrophe” cover follows the rules defined by the

main insurance, normally concerning insurance policies covering:

Fire or other material damage (water damage, theft,…)

Automobile damage

Business interruption (resulting from direct damage)

► There are four factors over which the insurer has no control:

definition of the perils,

deductibles,

rating,

declaration of the state of natural catastrophe.

Perils covered

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“non insurable direct material damage arising solely as a result of a natural

element of abnormal intensity“ (1982 law definition)

► Perils generally covered:

floods of any kind,

mudslides,

earthquakes,

landslides (including subsidence),

tidal waves and tsunamis,

avalanches,

volcanic eruptions

cyclonic winds (greater than average windspeed of 145 km/hour or gusts of 215

km/hour) .

This enumeration is not exhaustive.

Rating

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► The “Natural catastrophe” scheme premium is an additional premium

based on the main contract’s premium amount.

► The additional premium rates are fixed by the State by way of decree.

► Present rates:

Property other than motor vehicles :

12% of damage guarantees of the basic policy

Motor vehicles :

6% of theft and fire premium (or, failing this, 0,50% of the damage premium)

Deductibles

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► Fixed by the State

► Compulsory and cannot be “bought back”

Since 1st January 2001, they are as follows:

► Since 1st January 2001, they can be modulated for communes without

“risks prevention plans”

1 or 2 decrees : basic deductible

3 decrees : doubled deductible

4 decrees : tripled deductible

5 decrees or more : quadrupled deductible

The reinsurance of “Natural Catastrophes”

in France

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► CCR is the State-backed reinsurer of the natural disaster scheme. It

does not have monopoly. It fullfils a public interest role within the

framework of the scheme.

► The State guarantee is granted to CCR since the beginning of the

scheme.

► Reason for CCR’s intervention : the 1982 law obliged insurers to offer

unlimited cover (except deductibles). CCR’s reinsurance, on an

unlimited basis, is a counterpart of this obligation.

CCR’s reinsurance scheme

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► CCR proposes to the market an original cover based on two reinsurance

formulas:

a quota-share,

an unlimited stop-loss on the retention.

► Reasons of this choice:

Definition of natural perils is imprecise and constantly changing, especially

in a climate change context. The choice of a quota-share is in order to

ensure a sharing of outcome, to avoid anti-selection and to guarantee

liability between insurer and reinsurer.

the stop-loss cover is added as a protection against the frequency risk.

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Thank you for your attention

Malgorzata Sroka-Picot : msroka@ccr.fr