Subsidence is characterised by vertical land movement that can cause damage to building structures. This stems mainly from the presence of clay in the soil that swells and shrinks in wet and dry weather respectively.
“Whilst most insurers are reinsured against subsidence in France, the retention rate remains high. It is therefore important for insurers to develop their own view of risk to this growing hazard,” explains Hani Ali, Head of Catastrophe Analytics, France and Belgium.
France has experienced an increase in the frequency and intensity of subsidence events since the beginning of this century, with extreme events in 2003 and 2011. The last three years, 2018 to 2020, have also been extremely severe years for subsidence risk, with more than 1billion euros in average losses per year. Consequently, Gallagher Re developed a new subsidence model to enable our clients to understand their portfolio’s exposure to this risk.
Subsidence represents a large proportion of the natural catastrophe losses for insurers in France and was integrated into the French Natural Catastrophe regime starting from 1989. The NAT CAT regime uses geotechnical and meteorological criteria to accept or refuse natural catastrophe declarations (see figure 1).
The graph shows the number of communes in each year, from 1988 to 2020, that are recognised for the first time (yellow), recognised (purple), or not recognised (green) to have declared to the government for subsidence risk nat cat cover. A commune can be classed as ‘not recognised’ but still have subsidence claims. The number of communes in all categories has increased significantly over recent years.
Under this regime subsidence claims for property are usually covered. However, the criteria, which evolved in 2018, while simpler to explain to the public make it more difficult to build a predictive model for the upcoming years based on previous claims data.
Gallagher Re’s approach has been to provide clients with an alternative view of risk by using multiple open access explanatory variables to calibrate the subsidence model: Standardized Soil Water Index (SSWI), Standardized Soil Temperature Index (SSTI) and the Standardized Precipitation Index (SPI) along with the soil type layer.
The French Natural Catastrophe regime classification has been used, which determines whether the event has been declared a natural catastrophe. The model has been calibrated using market historical claims and exposure information at commune level, which aims to predict the cost of subsidence risk for the French market each September for the current year (see figure 2).
This graph is showing model estimates of cost and count of subsidence claims (split by CATNAT and non CATNAT) from the Gallagher Re subsidence model versus CCR as if numbers, for the last 5 years. The model estimates are close to the CCR as if numbers.
Source: Gallagher Re
Informing (re)insurance decision-making through risk quantification
By building our own View of Risk for subsidence, Gallagher Re can provide support varying from reserving and underwriting, to reinsurance, helping our clients to protect earnings volatility. A first estimation for the number and cost of claims at commune level is obtained early September of each year (see Figure 3: 2019 Risk Map).
This image shows an aerial view of France. There are three coloured subsidence risk categories, from pink (low) to red (high) depicting the level of subsidence risk in areas across France, based on our model. Source: Gallagher Re
The risk underwriting layers based on the Gallagher Re model provide a general risk map and also risk maps for a particular year (see Figure 2), demonstrating how the risk has been evolving. The areas with the highest risk predicted by the model are consistent with the historical Nat Cat declarations. By quantifying subsidence risk, insurers can adapt their underwriting strategy and their actual reinsurance covers to take into consideration the strong evolution of this risk in terms of physical phenomenon and the regulatory context.
"If temperatures continue to rise, as predicted by different Intergovernmental Panel on Climate Change (IPCC) reports, there will be a large increase in the amount of property exposed to subsidence risk in France. Gallagher Re can help to manage your risk and include climate change in your strategic decisions," explains Tina Thomson, Head of Catastrophe Analytics, EMEA West & South
Going forward Gallagher Re plans to update the model each year with the new claims data obtained from the market and using the latest physical indicators. Additionally, two climate change scenarios have been tested, which have both been created using an increase in the soil temperature based on projected climate scenarios. The first results show an increase in property damage from subsidence risk in France, which is in line with previous reports published by the Fédération Française de l'Assurance (FFA) on the same subject.
For more information regarding our model please contact us.
