5 RISK TRANSFERENCE MECHANISM PUBLIC REINSURANCE IS THE MAIN FOR...

4.5  Risk  Transference  Mechanism  

Public reinsurance is the main form of upstream risk transference. While a multi-level public private

insurance system is in operation, the fact is that private companies retain only a small fraction of the

flood risk on their own books. The majority of risk is backed-off to a public reinsurance company, the

for half of the insured losses in return. The CCR acts a de facto insurance pool that balances the

financial risk of natural disasters across all insurers. The CCR is backed by an unlimited state

guarantee. This is effect an indirect state subsidy to the French insurance industry (Faure and

Bruggeman, 2007). While this large public role in flood insurance is at the heart of the solidaristic aims

of the NAT/CAT it can also is also a method of state influence on the private insurance sector. This may

have market distortive effects that serve to reduce economic efficiency of the system.

12

The average premium amount of a basic household insurance policy is approximately €220 per year. Therefore, the

average additional premium amount of the NAT/CAT guarantee is about €25 per year for household (World Bank, 2012).

38  

There is only one downstream risk transference mechanism. In 2001, a sliding scale was introduced to

allow the NAT/CAT deductibles to reflect if a community has implemented prevention measures as set-

out in its “plan de prévention des risques naturels prévisibles” (PPRN). This prevention risk plan details

what flood prevention and mitigation strategies are to be adopted. With a PPRN in place, the NAT/CAT

deductible will be lower than if a community has not successfully applied for one (Faure and

Bruggeman, 2007; World Bank, 2012). True to its solidaristic underpinning, there are no premium

differentiation or discounts available to policyholders who have invested in flood protection. Mitigation

incentives and other options for downstream risk transfer are, therefore, limited.