FRANCE: An Introduction to Insurance

Faced with a multitude of risks (energy, climate, geopolitical, etc), insurers, in partnership with public decision-makers, try to find solutions to threats (climate, pandemics and infectious diseases, cybercrime) that could destabilise their insurance books of business.

Natural Disasters 

Among these threats, natural disasters are putting French insurers and companies under great pressure. Indeed, for more than ten years, the costs of climatic events have been increasing.

According to the reinsurer Munich Re, global losses from natural disasters for 2022 amount to around USD270 billion (compared to USD320 billion the previous year) and insured losses of around USD120 billion (a level equivalent to 2021), 2022 thus joins the recent series of years with high losses.

Due to the decline in financial markets, reinsurers’ capital has decreased for the first time since the 2008 financial crisis. To address these risks, reinsurers, in order to pass on the cost of weather-related claims to insurers, have imposed rate increases on their clients. As a result, for companies, insurance premiums are expected to increase for the fifth consecutive year.

Under these conditions, the French Ministry of Economy and French insurers have agreed on the implementation of measures that consider this “very tense situation for the insurance world”, following an exceptional year of climatic events, in order to moderate the increase in premiums, despite the sharp rise in claims.

In addition, a decree published on 31 December 2022, in the Journal Officiel implements the principles set out in the law of 28 December 2021, on compensation for natural disasters. This law aims to improve the compensation procedure and to better consider the risks.

First, the decree specifies the formal and procedural requirements for decisions recognising the state of natural disaster. Secondly, it details the rules for the organisation and operation of the national advisory commission on natural disasters and the inter-ministerial commission for the recognition of the state of a natural disaster. Finally, with regard to companies, the decree provides for the abolition of the modulation of deductibles implemented by insurers for companies in municipalities without a natural risk prevention plan (PPRN), which will come into force on 1 January 2024.

Cyber-Risk 

In addition to natural disasters, cyber-risk, which is increasing in frequency and complexity, makes the entire economic ecosystem vulnerable, is still relatively uninsured.

In this regard, a decree published on 20 December 2022, relating to the classification of insurance commitments resulting from breaches of information and communication systems creates two categories of operations dedicated to cyber-risk in the Insurance Code, “Property damage resulting from attacks on information and communication systems” and “Financial losses resulting from attacks on information and communication systems”, in order to improve the economic and regulatory management of liabilities exposed to this risk.

In France, the cyber-risk insurance market is still maturing. In 2021, this market was estimated at EUR219 million in premiums, or 3.1% of total professional property insurance premiums (EUR7.07 billion in 2021) and 0.35% of property and liability insurance revenues. Among the cyber-risks with various consequences, affecting individuals, administrations, and companies alike, ransomware attacks are on the rise and raise the question of their coverage by insurers.

In France, the High Legal Committee of the Paris financial market, has taken a position in favour of compensation for cyber-ransomware by insurers. On the other hand, the French National Agency for Information Systems Security (ANSSI) advocated a ban, as did a Parliamentary report published at the end of 2021, which advocated a strict framework in lieu of a ban. Several insurance companies had announced the suspension of their offers from 2021, proposing to cover the payment of ransoms, while demanding a clarification of the rules in force. One of the reasons put forward is that the payment of ransoms could contravene public order and encourage offenders, which could contribute to the financing of terrorist organisations. Furthermore, the payment of a ransom to cybercriminals cannot guarantee that an information system will be unlocked or that data has not already been exfiltrated.

To address this risk, the programming law (LOPMI) of the French Ministry of the Interior, adopted by the French Parliament on 14 December 2022, improves the situation of the insured for cyber-risks. Indemnifications will be conditional on the victim filing a complaint within 72 hours “after the victim becomes aware of the breach.” This measure will apply three months after the promulgation of the law, the French Constitutional Council having validated the provisions relating to cyber-risk insurance on 19 January 2023. Depending on the insurance contracts taken out, various consequences of a computer attack could be covered, such as operating losses, remediation costs and payment of a ransom. In return, companies are encouraged to take measures to increase their IT security.

Captive Insurers and Risk Pooling as Solutions for “Uninsurable” Risks

Due to their systemic nature and high costs, some experts argue that natural disasters and cyber-risk may become uninsurable. Therefore, in order to cope with increasing insurance premiums and deductibles, and in some cases insurers’ refusal to cover certain risks, the creation of insurance and reinsurance captives may be an alternative solution to manage risks. This tool offers several advantages, including efficient risk management adapted to the specific needs of the group. In certain situations, it also makes it possible to obtain better coverage at more competitive prices on the insurance market by pooling insurance and reinsurance programmes within the same group.

In order to make French legislation more attractive and to avoid companies setting up their captive abroad, in particular in Luxembourg where the tax regime is considered more attractive, the 2023 Finance Law introduces a tax advantage, in the form of a tax deferral linked to a provision, for reinsurance captives of non-financial companies. Thus, as of 1 January 2023, these captives will be able to deduct from their taxable income a provision intended to cover expenses related to reinsurance operations for certain risks. The goal is to encourage the development of these entities in France.

Furthermore, the mechanism of risk pooling and financial solidarity between operators from different sectors, such as the one set up by certain companies, gathered around a structure called Miris Insurance, may constitute a useful tool for covering risks. Thus, the promotion of self-insurance through the creation of insurance and reinsurance captives or risk management through the pooling of resources may constitute a solution for companies.