French P&C insurers are currently facing credit negative increase in drought losses this year amid forecasts of prolonged warm and dry weather, according to Moody’s Investor Services.
French insurance industry association, drought-related insured losses reached €2.8 billion last year.
This compared with an annual average of just €485 million before 2016.
According to France Assureurs, climate scientists from the Bureau de Recherches Géologiques et Minières have forecasted that drought could cause €43 billion of insured losses over the 2020-2050 period, three times the amount between 1989 and 2019.
Moody’s Investor Services came out with a report that suggests the key drought-related risk for insurers is the shrinkage of clay soils, which can cause buildings to subsidence. Almost half of private homes in France are exposed to this risk.
In France, this damage is covered under home insurance.
Most French insurers in turn reinsure this risk with the government-owned Caisse Centrale de Réassurance, typically through a treaty combining a 50% quota-share 1 and a 200% stop-loss.
Some of the other factors that come with the correlation between the onset of drought are insured losses from wildfires, water shortages affecting livestock and electricity production both in nuclear and hydropower.
Agricultural insurance claims related to both crop and livestock are directly linked to drought in large parts of France, particularly the southern and western regions of the country. Large parts of mainland France have exposure to droughts.
The report suggests that proposed legislative changes that would make it easier for policyholders to claim for drought-related damage could further increase their final claims bill.
Proposed reforms would further inflate French insurers’ drought-related costs. These costs could rise further as a result of a proposed new law which would reduce the administrative obstacles to claiming for drought-related damage.
The proposed reform is a response to increasingly long and severe dry periods in France. The aim of this is to relax the criteria used by the authorities to determine whether a region has been hit by drought, increasing the number of homeowners eligible to claim.
It would also make it easier for policyholders to prove that the loss they are claiming was caused by drought, and would simplify the claims process.
The National Assembly, the lower house of the French parliament, approved the current draft on 6 April on first reading by a large majority, despite a lack of support from the government.
The Senate estimates that the measure would impose additional costs of €850 million per year on the industry.
To offset these additional natural catastrophe losses, the industry would need to increase the charge included in all French motor and home insurance premiums by 12 percentage points to 24%.
French lawmakers have however expressed their opposition to an increase in premiums, and have urged the industry to simply absorb the additional costs.
Moody’s belief is that it would be challenging for insurers to do so, and expect them to increase their prices if the law were approved in its current form.
Reinsurers typically pay back a proportion of the premiums they receive from primary insurers in the form of “ceding” commissions to acknowledge that their administrative costs are lower than those of their customers.