With the recent rise in natural disasters around the world, we will share in this article how the reinsurance industry is covering those events, with a particular focus on a French specificity of the reinsurance market: CCR’s “Nat Cat scheme”.
What is the “Nat Cat scheme”?
The natural disaster compensation scheme, also known as the "Nat Cat scheme", guarantees all French citizens compensation for material damage caused by a natural phenomenon. It was established by law in 1982 to compensate for a lack of cover for natural risks which were only very poorly insured until then. This law makes it compulsory to include coverage for damage caused by natural disasters in all insurance contracts covering property located on French territory.
What are the perils covered?
The 1982 law does not list the perils covered and those excluded. However, Article 1 of this law describes what is considered to be the result of a natural disaster: "direct non-insurable material damage caused by the abnormal intensity of a natural phenomenon".Insurable perils, such as storms (except large-scale cyclones), hail, snow, frost and wildfire – as those that impacted France's Gironde region – are usually excluded from the Nat Cat scheme. The main perils covered by this scheme are floods and drought, accounting for 90% of claims (53% floods and 37% drought - source: CCR Bilan Cat Nat 1982-2020). According to SwissRe, in 2021 the amount of natural disasters reached €4.3B in France (v. €810M in 2020).
Who manages this scheme and how does the reinsurance cover work?
CCR (Caisse Centrale de Réassurance) is a French public reinsurer operating in most lines of business of reinsurance markets. Since January 2017, the market reinsurance activities have been managed by CCR Re, CCR's subsidiary. CCR offers unlimited cover to companies operating in France, backed by State guarantee, for substantial risks, especially those from natural disasters listed in the natural disaster compensation scheme.CCR is the only reinsurance company authorized to offer State-guaranteed cover. Thus offering unlimited cover against natural catastrophes to insurers operating in France. For natural catastrophes, it is made of two treaties, a quota share (50% cession rate) and a stop-loss. Thanks to the State guarantee, the stop-loss reinsurance treaties offered by CCR are unlimited. The State intervenes if the claims burden for CCR exceeds an amount called the State Intervention Threshold (SIE), which depends on the amount of the equalization reserve and the special reserve set up for the natural catastrophe risk. To date, the state guarantee has never been requested, as the threshold has never been exceeded.
How is the scheme funded and structured?
The scheme is based on two main principles: solidarity and responsibility. Solidarity is reflected in the uniqueness of the additional premium rates, applied to all property insurance contracts. Currently, it is 12% of the premium for property damage cover, other than motor vehicles, and 6% of the theft and fire premiums for motor vehicles. Thus, all policyholders take part in financing the scheme, regardless of their risk exposure. The other solidarity element is public reinsurance, which allows insurance portfolios to be pooled at national level and guaranteed by the State.
Responsibility is shaped by deductibles and prevention mechanisms, the Risk Prevention Plans (PPR). The deductibles are set by the State and cannot be bought back.The compensation scheme is based on a "public-private" partnership that uses the mechanisms and networks of the insurance industry with strong State supervision. To trigger the compensation mechanism, two conditions must be met:
• A public order condition: a decree declaring a "state of natural disaster" must be published in the Official Journal;
• A private order condition: the damaged property must be covered by a damage insurance contract.In addition, there must be a causal link between the natural disaster and the damage suffered.
How does it work in other countries ?
The French “Nat Cat scheme” is unique in the world. For the majority of countries, insurers buy reinsurance from private reinsurers. However, some countries have a State guarantee when original insurers cannot face the loss. For example, in Spain, the Insurance Compensation Consortium (CCS) can compensate if the original insurer cannot meet its obligations.Private international reinsurers can also underwrite Nat Cat business in France and some French insurers have underlying CCR reinsurance cover to enjoy better protection.
At Bifröst, we know that CCR reinsurance cover is an important piece of insurers’ cover. Our platform supports all types of structures (including quota share and stop-loss) to enable our clients to efficiently manage their reinsurance treaties all in one place.