It’s a constant feature of the news from around the world: natural disasters linked to climate change are escalating and occurring more frequently. According to France Assureurs, claims due to natural disasters in France are set to almost double by 2050, from €74 billion for the 1989-2019 period to €143 billion for 2020-2050. Drought/shrink-swell of clay-rich soils and flooding top the list, ahead of storms and marine submersion. How is the French insurance system coping?
What happens in France?
In France, property insurance against loss and/or damage caused by natural risks (non-agricultural) is governed by a classic contractual arrangement for insurable risks such as storms and by the natural disaster compensation scheme (Cat Nat) for uninsurable risks. This scheme, created in 1982 in a spirit of responsibility and solidarity, requires all property damage insurance contracts to include a guarantee against natural disasters, providing cover which significantly reduces vulnerability to a range of physical risks.
The Cat Nat guarantee covers uninsurable direct material loss and/or damage caused by the exceptional intensity of a natural element, when the customary measures to prevent this damage were unable to prevent its occurrence or could not be taken. It applies after flooding (run-off, overflowing watercourse or rising water table), sea-related incidents (coastal flooding, tsunamis, etc.), drought-rehydration of clay soils, landslides, avalanches, cyclones and hurricanes (winds in excess of 145 km/h on average over a 10 minute period or gusts of 215 km/h) and following earthquakes and volcanic eruptions.
The policy does not cover damage caused by forest and wild fires, by strong winds with speeds below cyclone and hurricane level or damage due to hail or snow load. This damage is covered by other guarantees included in “property damage” contracts on a compulsory (storms) or optional (hail) basis.*
In order to benefit from the Cat Nat scheme, property must be covered by an insurance policy and a natural disaster must have been declared by an interministerial decree published in the French Official Journal, following a request from the mayor.
A scheme in deficit since 2015
In France, the Cat Nat scheme is based on both private insurance and on public reinsurance from the state-fundedCaisse Centrale de Réassurance (CCR). However, in late 2022, the CCR issued a warning regarding the sustainability of the scheme in the face of the ever increasing impact of escalating climatic and meteorological phenomena.
In fact, according to the results of a recent study, based on the IPCC’s 8.5 scenario (the worst-case scenario with a doubling of GHG emissions and a temperature rise of 4.4°C in 2050), the risk of drought is set to increase by 23%, floods by 38% and coastal flooding by 82% by 2050.
Climate stress affects not only the policyholders (private individuals, farmers, businesses), but also the insurers and the state (with reinsurers). Obtaining insurance may become increasingly difficult for customers (e.g. ever higher premiums, withdrawal from the market by certain insurers, etc.). In some cases, the only solution remaining for a business will be to relocate and, for a local authority, to abandon new infrastructure projects. As for insurers, they are faced with both a risk to their business model (due to uncertainty around the future) and the financial volatility reflected in their own declining funds.
What can be done?
The CCR estimates that the number of claims will increase by 40% by 2050 due to climate change alone and by 60% if changes in the issues insured challenges are taken into account. Faced with this situation, it envisages three main approaches. Firstly, preventive measures must be reinforced, particularly regarding the risks of run-off and drought. This may be through improving existing tools such as local and intercommunal contingency plans, but also by disseminating a strong culture around natural risk throughout the country (for example, by making climate risk awareness a national priority). Secondly, the original spirit of the Cat Nat scheme, i.e. cover for exceptional natural events, must be upheld. Finally, the CCR considers it necessary to revise the scheme’s resources by raising the additional premium rate to reset the balance within the arrangement.
Task force to examine climate risk insurability
The French government has also reacted to the scale of the crisis. To ensure the sustainability of the Cat Nat scheme and strengthen the role of insurance systems in preventing, mitigating and adapting to climate change, ministers Bruno Le Maire and Christophe Béchu commissioned a task force in March 2023 to conduct a review and put forward recommendations on how the system should evolve. The work of this task force focuses on three areas:
1) resources to ensure the sustainability of the French compensation scheme as a key to resilience,
2) strengthening the role of insurance in financing the prevention and adaptation to climate disruption and greater coordination with existing public intervention in this area,
3) analysing the contribution of the prudential framework and of insurers’ underwriting policy to mitigating climate change and recommendations for increasing the impact. This task force’s findings are to be presented to ministers by the end of December.
*There is a Hail Snow Storm (TCN) guarantee and, for farmers, a climate guarantee for harvests (MRC).