1 HISTORICAL CONTEXT BEFORE 1982, NATURAL CATASTROPHES WERE EXCLU...

4.1  Historical  Context  

Before 1982, natural catastrophes were excluded from French insurance policies. Three main reasons

were cited by the industry for the difficulty in providing effective coverage (World Bank, 2012):

● Lack of reliable time-series data regarding the frequency and damage related to natural

disaster phenomena.

● Severe correlated risk of a single event affecting large numbers of adjacent policyholders

meaning that an insurer’s loss exposure is hard to assess in advance.

● The commercial difficulty of providing affordable insurance premiums under conditions that do

not discourage adverse selection of risk i.e. those most exposed to risk (or at least have high

perception of risk) are willing to purchase insurance which results in high cost cover.

The occurrence of serious floods in 1981 and the difficulties experienced during the recovery increased

public awareness of the lack of insurance and prompted the introduction of legislation upon which the

national catastrophe

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insurance regime (NAT/CAT) is based. It is ex-ante public-private insurance

system that relies for successful operation on collaboration by both the insurance industry and the

French state (ibid).

The NAT/CAT insurance guarantee is based on solidaristic principles to cover all ‘uninsurable damage’

caused by natural hazards. It is valid across France which has the advantage of enabling the pooling of

risk between different natural perils. The NAT/CAT covers incidents of flooding, as well as other natural

hazards including earthquakes, landslides, drought, and volcanic eruptions. Damage caused by wind,

hail, snow, and crops are excluded (Paudel, 2012). This risk pooling is an essential component of the

NAT/CAT that helps it satisfy the mutuality principle of effective insurance.