The Norwegian Solution to Natural Disaster Insurance

In 2022, more than NOK830 million (approximately USD85 million) was paid as compensation for damages resulting from natural disasters in Norway. The amount is almost twice as high as in 2021, indicating that natural disasters became more frequent and had a more significant economic effect. Sufficient insurance cover for natural disasters is therefore essential for both private individuals and companies.  

The consequences of a natural disaster can be extensive and potentially devastating for entire communities. To ensure that properties are sufficiently insured against natural disasters, Norway has introduced legislation that provides an obligation on insurance companies to insure against losses resulting from disasters.

This article will provide a short overview of how Norwegian legislation regulates natural disaster insurance, and how the newly introduced amendments to the legislation will have implications for both insurers and insureds. The overview is not intended to be exhaustive, but it will highlight the most important aspects of the Norwegian natural disaster insurance regulations.

The special regulation on natural disaster insurance was incorporated in the Norwegian Insurance Act in 1979, and it placed a legal obligation on insurance companies to automatically insure against natural disasters, along with a standard fire insurance. In 1990, separate legislation was introduced; this was the Natural Disaster Insurance Act. The Act established a centralised Natural Disaster Pool, which was given the task of co-ordinating with insurance providers. The insurance companies were in charge of allocating a certain amount of their premium to cover natural disasters and oversee the claims handling, while the Pool was in charge of deciding the premium amount to be set aside and allocating the costs.

On 1 January 2023, amendments to the Natural Disaster Insurance Act came into force, expanding the authority of the Natural Disaster Pool. Since the insurance companies themselves were in charge of setting aside funds for natural disasters, the larger companies accrued substantial reserves over the years. It was argued that the scheme was a disadvantage to insurance providers that were new on the market. To avoid this, the Pool is now established as a separate legal entity, and the insurance companies pay a premium to the joint pool. The Natural Disaster Pool will be in charge of reimbursing the companies on a cost basis.

The Natural Disaster Insurance Act is intended to ensure that the consumer will be covered on equal terms, regardless of which insurance company they use. That being said, this will of course result in less flexibility for the insurance providers.

The legislation exhaustively defines what can be considered a natural disaster, listing them as landslides, storms, floods, storm surges, earth quakes and volcanic eruptions. The amendments of 1 January 2023 also included flood waves and meteorites in the definition.

Any damage that occurs as a result of the above-mentioned events will be considered a natural disaster, thereby activating the cover provided by the Natural Disaster Pool.  

In accordance with the Act, buildings and other movable property are automatically covered if they have fire insurance. Since most standard property insurance includes fire, almost all buildings will be covered in practice. It is also important to note that both private homeowners and business owners are insured under the Natural Disaster Insurance Act; therefore, business owners do not need to obtain separate insurance in order to be insured against natural disasters.

The Natural Disaster Insurance Act covers the physical damage to the insured object. The insured object can be property or a movable object. However, exclusions from cover include oil and gas installations, fish farms, forest and crops, cars, goods under transport, and ships and airplanes.

The costs covered for physical damage can be either the repair costs or the costs of replacing a lost object. However, the Natural Disaster Insurance Act also includes cover for reasonable expenses if, for instance, a home becomes uninhabitable. The insurance will then cover hotel expenses or other necessary expenses while the damage is repaired.

Following a natural disaster, if it is considered unsafe by the local authorities to repair or rebuild the damaged property in the same area, the natural disaster insurance will compensate relocation costs, limited to the value of the property (up to five acres).

Business owners will generally have the same cover as private individuals/homeowners, albeit with some restrictions. For instance, a business owner will not receive relocation compensation as mentioned above, as the potential exposure for the Pool would be too substantial. Further, loss of income will not be covered and must be insured separately by the company.

If the current trend continues, we will most likely see more natural disasters in the years to come. Therefore, it is important to have proper regulation in place to ensure that the values affected are properly insured when a natural disaster hits. The amendments to the Natural Disaster Insurance Act provide a welcome change, further enhancing the predictability of the Norwegian natural disaster insurance legislation and making sure that homeowners and business owners have sufficient insurance cover for their interests.