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Insuring the uninsurable The French Natural Catastrophe System

Insuring the uninsurable The French Natural Catastrophe System. Paris 1910 - French Parlement. Windstorms and hurricanes Lothar & Martin (1999 ) EUR 7-8 Billion Cyclone Hugo (1989) : EUR 700-750 Million Floods Centennial flood in the Paris area (IIBRBS estimate )

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Insuring the uninsurable The French Natural Catastrophe System

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  1. Insuring the uninsurableThe French Natural Catastrophe System Paris 1910 - French Parlement

  2. Windstorms and hurricanes • Lothar & Martin (1999) EUR 7-8 Billion • Cyclone Hugo (1989) : EUR 700-750 Million • Floods Centennial flood in the Paris area (IIBRBS estimate) • EUR 3.2 billion for direct damages • EUR 1.5 billion for indirect damages • 200 towns • 250 000 persons What perils menace France ?

  3. What perils menace France ? • Landslides (including subsidence) • At least EUR 2.6 billion since 1989 • Earthquake • EUR 61 million for the small Annecy earthquake • “The Big One” : a major earthquake in south of France would cause very important damage • Avalanches

  4. France has split natural perils in two categories : • Perils considered as insurable : • windstorms/hurricanes • hail • snow pressure • freeze • Perils considered as uninsurable : • all others (floods, earthquake, landslides, avalanches…etc). • The border between these two categories is not fixed. Insurability of natural perils

  5. Public funds • State systems • Financed by taxes National Fund for Agricultural Disasters - 1964 Law • A mixed scheme • State and Re/insurance industry • Certain conditions fixed by the State • Solidarity Natural Catastrophe Scheme - 1982 Law For uninsurable risks

  6. “…non insurable direct material damage arising solely as a result of a natural element of abnormal intensity, …when normal preventive measures have not been respected“ The damaged property must be covered by a “property damage” insurance policy • Prevention • Compensation The 1982 Law

  7. Main characteristics of the “Natural catastrophe” insurance • Solidarity – obligatory extended guarantee on fire policy (direct damage and/or business interruption) • Security – guarantees replacement value of insured property, no time depreciation • Factors fixed by the State • declaration of the state of natural catastrophe, • definition of the perils, • deductibles, • rating.

  8. Declaration of an Eventby inter-ministerial decree Compensation Decree Inter-Ministerial Commission Prefecture Prefecture Mayor Mayor

  9. Inter-ministerial Commission • Distribution of accepted files by type or peril • (from 1982 to June 2002)

  10. Deductibles and Rating • Deductibles fixed by the State and cannot be bought back • Rating : percentage of damage guarantees of the basic policy (or, failing this, 0,50% of the damage premium).

  11. Risk Prevention Plans (“PPR”) : mapping of the risk used to develop durable urban planning (land use and construction codes) • 13,000 towns have a PPR • Deductibles : multiplicative factor applied to towns without a PPR where events are frequent : • 1 or 2 decrees : basic deductible • 3 decrees : doubled deductible • 4 decrees : tripled deductible • 5 or more decrees : quadrupled deductible Prevention

  12. Market Premiums and losses –Non Auto (data source : ceding company accounts as at May 2002) M EUR %

  13. CCR is able to offer the market a reinsurance scheme with unlimited cover, backed by the State guarantee : a guarantee of solvency. • CCR’s duty : increase the responsibility of those involved in the scheme, to insure the continuity and theviability of the system. • CCR and prevention : develop an effective prevention policy CCR’s Role

  14. Evolution of cessions to CCR(loss occurring basis - millions of Euros) (*) Estimates

  15. Evolution of CCR’s equalization reserve (Accounting years - millions Euros)

  16. The 1982 law has shown to be adapted to the situation in France. However, France benefits from: • Moderate exposure to natural risks • A well developed insurance sector While it is not adapted to every situation, the French system can be used as a reference. Each market can find its own answer to financing natural risks depending on its exposure to perils, insurance market, culture and history. The French System : is it ideal ?

  17. For further documentation on the French Natural Catastrophe Scheme:http://www.ccr.fr

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