FRANCE: An Introduction to Insurance

CHAMBERS – France: Insurance

Natural disasters (1), a global pandemic (2), cyber-attacks (3), the last few years have been characterised by the rise of specific risks which consequences have been felt throughout the French insurance market. The market has had to adapt to these risks and their scope and intensity still remain difficult to assess.

1. Climate change has led to the intensification and multiplication of climate disasters, especially on the French territory. With 60% of the metropolitan soil prone to droughts, a quarter of the population threatened by overflowing rivers and 1.4 million people at risk of marine submersion, France is one of the European countries most affected by natural disasters.

In terms of insurance, the amount allocated to the compensation of losses related to natural hazards continues to increase: it was EUR1.2 billion in the 1990s, EUR2 billion in the 2000s and currently amounts to EUR2.7 billion. This trend is likely to continue, as a 50% rise in climatic claims is expected by 2050.

To compensate for the increase of claims, insurance premiums have been raised. With regards to damage insurance, premiums could increase by more than 22% worldwide over the next twenty years.

This rise of losses calls into question not only the ability of policyholders to pay increasing premiums, but also the ability of the French natural disaster insurance scheme to pursue its compensation objective. Created in 1982, it was indeed developed at a time when the number of natural disasters was not as high as today.

In this respect, last December 13, 2021, the French Parliament definitively adopted a text that includes measures to facilitate the recognition of the state of emergency due to natural disaster. Although the aim seems mainly to improve and accelerate compensation, some Members of Parliament regret the lack of accompanying measures on risk prevention.

Yet, prevention and awareness remain essential to anticipate and limit natural risks. According to a survey by the French Insurance Federation, while 80% of French people consider that natural phenomena will increase in the coming years, only 30% of them indicate that they have taken measures to protect their property located in high-risk areas. It will therefore be necessary to inform people about the need to protect themselves against this type of disaster.

2. Besides climatic risks, another form of risk referred to as “natural” has deeply marked the last two years: the epidemic risk. This risk has surprised both by its unprecedented dimension and by its consequences on the insurance market.

The cost of claims due to the global pandemic reached EUR37 billion worldwide at the end of June 2021. Tourism, catering and the event industries are the most affected sectors and have experienced periods of closure during several months. In France, these closures have led to significant insurance litigation relating to the application of business interruption coverage and certain exclusion clauses provided for in insurance policies.

While many claims have been compensated through legal transactions initiated by insurers, litigation is still ongoing. The year 2022 will potentially mark the judicial outcome of a large number of these cases.

The COVID-19 crisis has also led insurers to revise their offer and their underwriting policy. Thus, while a certain number of contracts already excluded losses arising from the measures implemented to combat the COVID-19 pandemic, all reinsurers and insurers have refused to cover business interruption without property damage and pandemic risks when policies were renewed for 2021.

Regarding liability insurance and in particular D&O coverage, the COVID-19 crisis raises fears of a resurgence of insolvency proceedings, even if state measures have until now provided effective support for companies and jobs. However, insurers have had to adjust their underwriting practices by focusing on the current and future financial situation of policyholders. With regard to insurance coverage, exclusions and sub-limits were integrated in order to limit the feared consequences of COVID-19, particularly in the context of policies taken out by SMEs and MidCaps.

While the trend is undoubtedly to limit insurance coverage, it should nevertheless be noted that this health crisis has been the opportunity to create a new type of insurance coverage, particularly in the field of assistance, where certain companies have developed repatriation insurance in the event of a pandemic.

More generally, the COVID-19 crisis raised the question of the coverage of systemic risks that are normally uninsurable. Considering this risk which is constantly evolving, it seems necessary to contemplate the implementation of new protections. In this respect, the system put in place for the compensation of natural disasters might be used as an inspiration. However, this approach does not seem to be currently supported by public authorities.

3. As a result of remote work, the COVID-19 crisis has also made companies more vulnerable to cyber-attacks. Almost half of French companies have been the target of cyber-attacks during the year 2020. These attacks are on the rise, which raises the question of their coverage by insurers.

As this is a developing market, especially for SMEs and MidCaps, cyber-policies seem to be a promising market. Indeed, the global cyber insurance market is expected to reach 20 billion in annual premiums by 2025. In the same way as for natural disasters, the increase of losses has nevertheless led insurers to raise premiums and limit coverage by introducing higher deductibles and lower coverage limits.

In the absence of a specific cyber policy, this type of loss may be covered by the standard damage policies and liabilities taken out by companies. This is known as the "silent cover", as the policy was not originally taken out to cover this type of loss. In response to the risk of "silent cover" exposure, whose scope and extent remain unknown, many insurers have included exclusion clauses in their contracts in order to explicitly exclude cyber risk.

In the face of these risks, prevention and awareness appear once again as crucial. Often for economic reasons, a certain number of companies, such as SMEs and MidCaps, do not invest enough in IT security or decide to invest only after a loss.

Brokers and insurers have a role to play in supporting their clients to conduct thorough IT audits and to encourage the implementation of systems which could prevent these attacks or at least limit their scope.

To conclude, even if the insurance market has been deeply affected by natural and cyber risks over the last few years, it is necessary to greet the resilience of the market given the constant change of risks to which policyholders are exposed. Whether it be natural disasters, pandemic risks or cyber damages, insurance market participants have shown great flexibility in adapting and protecting their policyholders while preserving the stability of the insurance system.