RMS Says Windstorms Threaten Small French Insurers

Risk Management Solutions (RMS) says its analyses shows that losses from Windstorms Lothar and Martin could threaten the viability of some small French insurance companies. The company estimates that losses from the storms, the largest windstorm catastrophe in France in 400 years, will exceed the reinsurance programs of more than 80 percent of French insurers, leaving further losses to be paid from the insurers' own reserves.

After 10 years of falling premium income, RMS says there is a possibility that French insurers could suffer the fate of poorly capitalized U.S. insurers after the Northridge earthquake in California in 1994 and Hurricane Andrew in Florida in 1992, when several companies went out of business.

RMS technical director Dr. Robert Muir-Wood commented, ``Following the storms, we have been monitoring the situation in France very closely and are witnessing classic 'loss-cost inflation,' also known as demand surge, in full flow. With a major windstorm, overall losses increase not only because of economic shortages in roofing materials and workmen, but because insurance companies are unable to police the volume of claims. For the largest of all catastrophic losses, politicians put pressure on insurance companies to relax their internal rules and 'fast track' the processing and repayment of claims, which is exactly what is happening in France.''

On Dec. 29, the French Insurance Association doubled the normal 5-day period for submitting claims, and the government subsequently extended this deadline until Jan. 31. On Dec. 31, French Finance Minister Christian Sautter announced that a simple letter addressed to the insurer describing the nature of the damage would suffice in place of a claims form.

Sautter also got a guarantee from insurers that they would not exact a deductible higher than 1,500FF (U.S. $235) and announced that visits from loss assessors would not be needed for losses below 20,000FF (U.S. $3,140). Other insurers have already publicized higher thresholds. GAN, for example, declared that it would not review claims below 50,000FF (U.S. $7,850).

With regard to industry losses under these conditions, Dr. Muir-Wood added, ``We are modeling a loss-cost inflation of up to 30 percent. We stand by our original estimate that the loss across all affected countries could exceed the previous European record set by Windstorm Daria, an event costing 6 billion Euros (U.S. $6.1 billion) in 1999 values. Lothar and Martin will definitely cause insured losses in France of double the 1.3 billion Euros (U.S. $1.3 billion) recorded for 1990 Windstorms Daria and Herta combined.''

Reinsurers face uncertainty over whether insurers will consider the two storms separately or together, as they occurred within the critical 72-hour period that defines an event in reinsurance contracts, and it may in any case prove impossible to determine whether damage was caused by one storm or the other. Such serial windstorms are not uncommon, as this is the third time in a decade that pairs of damaging European windstorms have occurred within 72 hours.