Following the tragic events of September 11, 2001 in the United States, the reinsurance community adopted a much tougher line with regard to these risks and imposed terrorism coverage exclusions, especially on the largest risks. The result was that market capacity for terrorism coverage dropped substantially and that the capacity available was to a large extent limited to small and medium-sized risks.
This situation confronted the insurers of large French risks with a difficult choice: reduce their exposure on large risks, insure them against attacks without resort to reinsurance, or find alternative reinsurance solutions (the third option being scarcely practical, given the market context and the limited timeframe in which to set up and complete the arrangements).
The Public Authorities (through the intermediary of the Treasury Division) along with France’s two main professional Insurance Associations — the Federation Francaise des Societes d’ Assurance (FFSA) (stock companies) and Groupement des Entreprises Mutuelles de l’Assurance (GEMA) (mutuals) — began discussions in order to find a suitable solution. A compromise solution was found with the creation with effect from January 1, 2002 of Gestion de l’Assurance et de la Réassurance des risques d’Attentats et Terrorisme (GAREAT), which is structured around five guiding principles:
- Maximum coverage (perils covered - amount - frequency) with French state intervention for an unlimited amount in excess of a certain threshold
- Distinction drawn between small risks (the responsibility of traditional reinsurance) and large and medium-sized risks (GAREAT’s responsibility)
- The largest possible mutualization of large and medium sized risks (the risks in question are those with sums insured, including business Interruption, or a contractual loss limit above EUR6 million - obligatory scheme for the members of the FFSA and of GEMA)
- Progressive rating, depending on the size of the risks (rate between 6 percent and 18 percent of property premiums - up to 24 percent in specific cases); these rates are reinsurance rates charged by GAREAT to their members, though the insurers (GAREAT members) are free to charge these rates or different rates to their insured as they whish
- Limitation of unlimited Motor coverage (waiver of recourse against the insurer of any vehicle involved in an attack)
Renewal for 2009
The 2008 placement was done through a tender offer mechanism. The 2009 placement is a mix of a tender and a more traditional placement, where each layer is ultimately placed at a fixed and unique price for all participants. Quoting reinsurers having offered the best terms have benefited from a privileged signing.
Total capacity and functioning of the cover remain unchanged with:
- EUR1.8 billion XS EUR400 million
- Above EUR2.2 billion (USD3.1 billion), the unlimited state warranty (through Caisse Centrale de Réassurance vehicle) comes into play
Layering remains unchanged over last year with six layers of EUR300 million (USD420 million) each.
The program has been loss free since inception, worst cumulative loss situation being estimated below EUR7 million (USD 9.8 million) for the 2002 underwriting year.
Pricing for 2009
Despite difficult market conditions due to the global financial crisis, the overall price has again decreased for 2009.
Terrorism coverage on small risks (Personal Lines, commercial and agricultural risks below EUR6 million) began to pose a problem on the reinsurance market when programmes were renewed at January 1, 2005. In contrast with the large and medium-sized risks, a market solution including an unlimited state guarantee could not be found at that time. After more than a year of negotiation, the Public Authorities (through the intermediary of CCR) agreed to give an unlimited guarantee with effect from January 1, 2006 in order to cover small risks.
This cover protects against terrorism losses for:
- Personal Lines (no cession limit)
- Professional, Commercial Risks and Agricultural Risks on which the insured amounts (Property and Business Interruption) are below EUR6 million
- Motor branch — physical damage business only (excluding Third Party Liability TPL)
- Per the law passed in 2006, the cover has been extended, with specific agreement of GAREAT, to damage to the hulls of pleasure craft and to aircraft designed for private use whose value does not exceed EUR1 million
The state, through CCR, continues to provide its full unlimited warranty in case of aggregate Terrorism losses during the year above retention calculated as follows:
Twenty percent of the premium declared in Statement C4 for the following categories:
- Personal Lines (Category 24)
- Professional Risks (Category 25)
- Agricultural Risks - hail excluded (Category 262)
Two percent of the premiums declared in Statement C4 for Category 23, Motor (excluding liability), is also included.
Renewal for 2009
For 2008 the overall market retention, when applying the above percentages, is estimated at EUR2.53 billion (USD 3.5 billion) while 2007 has been revised at EUR2.45 billion (USD3.4 billion). For 2009 GAREAT is estimating a figure of EUR2.65 billion, (USD3.7 billion) split as follows:
Each insurance company in France negotiates directly with CCR the unlimited coverage after a retention applying the above calculation method to their own premium income.
Below this threshold, insurers have access (on a voluntary basis) to the GAREAT Scheme which has been reviewed as follows in order to match with the new level of attachment of the State guaranty. Furthermore you will notice that the old second layer has been split into two layers in order to ease the 2009 placement:
In 2008, the insurers who joined the Small Risks Pool, mainly small mutuals, regional companies and “bank-insurers,” represented an estimated market share of 14.4 percent. Since it is too early to know the exact weight of companies joining the Small Risks Scheme for 2009 (estimated so far at 11.4 percent), the overall placement for GAREAT 2009 market share is based on an approximate figure of 12 percent.
Once again, as we only attract part of the market within the GAREAT Small Risks Scheme, the exposure and the probability to attach the cover is therefore very much reduced. Furthermore, the fact that, each insurance company in France will negotiate individually the unlimited cover of the state with CCR, creates a mechanism that is reducing the effective retention of each individual company protected under the Scheme and even further reduces the probability of attaching the GAREAT Small Risks Scheme.
(The report includes all charts and exhibits)
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