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Insurers, risk managers object to French disaster pool reforms

Insurers, risk managers object to French disaster pool reforms

PARIS—Planned changes to France's natural disaster insurance pool aimed in part at introducing greater competition on rates have drawn criticism from insurers, who say there is no need for a "radical" reform of the current system.

France's two main insurer associations issued a rare joint statement to oppose key provisions of a draft bill that would heavily rewrite the country's natural-disaster pool program. The country's risk manager association also weighed in against the bill.

The draft bill, presented by the Ministry of Economy and Finance, aims in particular to introduce more rate competition among private insurers and to speed the compensation process for disaster claims.

Insurers and risk managers say these are worthy objectives, but that the means proposed could do more damage than good.

Michel Yarhi, president of France's association of risk managers, l'Association pour le Management des Risques et des Assurances de l'Entreprise, said the bill rehashes an old theme.

"They want to make those who are more exposed to risk pay more for their insurance. This targets particularly people and organizations located in flood-prone areas. The problem is that there are other risks, drought for example, for which we cannot prepare as we can for floods," he said.

"The two professional insurance organizations do not see the urgency to reform a system that is well-known, financially balanced and which has proven its merits," said the joint statement by the Groupement des Entreprises Mutuelles d'Assurance and the Federation Française des Societes d'Assurances.

Insurers said the bill "could undermine important features of the current natural disaster regime," which was established in 1982. The current system, based on the principle of national solidarity, provides "unlimited coverage in the event of a major disaster," for which insured parties pay an additional premium at a fixed rate of 12% of their total premium, no matter what the risk profile of their property. Under the reformed regime, the state-backed reinsurer, the Caisse Centrale de Reassurance, would continue to guarantee coverage for natural disasters. However, insurers could adapt the premium rate to the natural risk exposure of the insured asset.

Competition vs. solidarity

According to the government, this leeway would spur healthy competition on rates. But the FFSA and GEMA warned that such competition, and a disparity of rates based on location and other factors, "could diminish solidarity among the French." They urged the ministry to consider other solutions.

According to Mr. Yarhi, "it's unlikely the law would have a direct consequence on rates. In any case, rates will go down when the market is soft and up when it's tight. At best, the law will change nothing. At worst, it will make your insurance situation worse, especially if your buildings are in a high-risk area."

Insurers also oppose the bill's plan to accelerate the disaster compensation process by eliminating the current mechanism by which natural disasters are recognized by so-called cat-nat decrees published in the nation's "Official Journal," following time-consuming consultations between various ministries.

In the case of droughts, for example, damage can take a long time to appear, delaying compensation. In the new system, insurance companies would decide what events qualify as natural disasters based on accepted scientific data, although the government would provide a list of events that could qualify.

According to the ministry's introduction accompanying the draft bill, it wants to introduce more transparency about what kinds of events are covered. It would guarantee such disasters as droughts, floods, earthquakes, mudslides and tidal waves, but exclude smaller events such as rockslides and sinkholes. Other measures deal specifically with drought risk, establishing conditions for granting coverage, as well as encouraging disaster prevention.

GEMA and FFSA said that although "anything that makes the regime more just, transparent, and better understood by citizens constitutes progress," they warned of a "risk of inequality of treatment between insured parties, and potential conflicts with public authorities."

They also said those most exposed to flood and drought risks could face more difficulty getting adequate coverage at acceptable rates. For its part, the ministry contends that reform could lead to creation of private insurance to fill gaps not covered by the pool.

The reform bill was motivated by a need protect the pool's survival following a series of costly droughts, culminating in the heat wave of 2003 that drained the disaster pool of some e3.5 billion ($4.59 billion), according to FFSA.

"The FFSA agrees that reform is necessary to protect the system, but not at the cost of abandoning solidarity," said a spokeswoman for the Paris-based trade body. She suggested other measures, such as better risk control, building standards, and targeted changes to speed compensation without eliminating the current system.

100-year flood

Mr. Yarhi added that, "in France we talk of the once-in-a-century flood. The last one was 1910. Does this new law mean that buildings and businesses near the edge of the Seine in Paris will have to pay higher premiums? That will be a test."

The ministry reportedly plans to submit the draft to Parliament in a corrective finance law by the end of the year.