A crack in the wall of your home: it could be subsidence, an almost invisible natural hazard

An abrupt rise in drought-induced subsidence losses in France – the result of socioeconomic factors?

Subsidence is an almost invisible natural hazard that manifests itself typically with a crack in the wall of your home. Without noticing anything beforehand, the ground under your house has settled. Human activity such as mining or over-farming, but most often a drought in combination with clay-rich soil, causes subsidence. Buildings with poor foundations are at high risk from this peril, and an initial crack in the wall may well develop into a threat to the stability of the building structure.

As elaborated in our latest Sigma study, subsidence is becoming an increasingly important secondary peril for (re)insurers. Not only soaring losses, but also claims handling pose new challenges for the industry.

France: covering building losses caused by subsidience for more than 30 years

Looking at Europe, this peril receives the most attention in France. In contrast to most other insurance markets, since 1989 the French natural-catastrophe (CatNat) insurance system covers building losses caused by subsidence as a standard cover. After a long period of moderate annual losses that was peppered with a few exceptional years, subsidence claims have recently reached new dimensions.

Since 2016, inflation-corrected, annual insured losses have continuously exceeded EUR 600 million1 (see Figure 1). During this period, the average annual loss reached EUR 840 million, which corresponds to about 50% of the CatNat premiums2 collected and thus, makes subsidence the costliest natural hazard in France. Taking the pre-2016 loss statistics with an average annual loss of EUR 343 million (2000 – 2015) as a reference, this sudden and persisting claims explosion since 2016 is puzzling.

A study by Swiss Re from 2011 suggested that climate change would lead to more droughts and thus, to increasing subsidence losses in France.3 Considering the dry years 2017-2019, it seems that this prediction is indeed being confirmed. On a closer look, however, we would expect climate change to appear as a gradual upward trend of annual losses instead of a sudden, step like increase. Hence, we suspect that additional loss drivers are at play.

Climate change leading to increasing subsidence losses: the socioeconomic angle

One of those drivers may be found within the French insurance scheme itself. A key feature of the scheme is that individuals are only compensated for their losses after their municipality has been awarded a CatNat declaration.4 This requires that the respective mayor has requested such a declaration for his or her municipality. Later, an interministrial commission reviews this application based on soil moisture data that is not publicly available.

When analyzing the CatNat-declaration history since 2003, we observed that the geographical spread of municipalities having requested a declaration has continuously expanded (see Figure 2). Alone in 2018 and 2019, 23% of declaration requests came from first-time applicants, which cannot be explained by increasing drought conditions alone.5 This suggests an increasing awareness in society for the possibility of  getting compensated for subsidence losses and claiming rights accordingly.

The key question is whether the observed trend in elevated claims is here to stay. Based on our findings regarding climate change, drought trends, and socio-economic factors, in our view it will not only stay, but even accelerate further. The awareness of municipalities and individual policy holders of the possibilty to recoup subsidence losses will rather expand: First, there are still  62% of French municipalities, which have not requested a subsidence CatNat declaration since 2003 (see grey area Figure 2). Hence, individual policy holders in these municipalities have so far not received any compensation, despite the fact their municipality might have had qualified for a declaration according to the CatNat criteria.

Second, the French government is currently discussing a reform of the NatCat scheme. Coverage of rehousing costs, an extension of the damage reporting period for policyholders from 18 to 24 months, and appointing local representatives to assist communities in the CatNat declaration process are foreseen as part of the reform. Subsidence victims will be better informed and assuming climatic conditions remain equally dry, losses might substantially exacerbate in the coming years. Mitigation by replacing or strengthening weak buildings alone can hardly compensate for increasing claim costs in the mid term, as only 1% of building stock is renewed each year.

Solving the situation: the way to a more transparent CatNat scheme

We believe that a more transparent CatNat scheme would help to increase overall resilience on the long run. Hence, we recommend that declarations are only issued to drought-affected municipalities based on robust criteria.

In addition, the soil moisture data, which underlies the decision-making process should be made publicly available. These two measures would ensure that individuals are still compensated for their losses but the insurance industry could better assess and understand the subsidence hazard. In the short term, however, increased transparency on soil moisture data could lead to an explosion in refurbishment costs due to higher claims potential awareness.

In view of the current trend, this would further endanger the first principles of insurability for this hazard. A non-fortuitous loss outcome calls for other pre- or post-financing mechanism than insurance risk transfer. As a consequence, adjusted insurance conditions and underlying pricing will need to be considered because otherwise, the already loss-making CatNat scheme may no longer be sustainable.

Apart from France, subsidence and associated damage to property is also gaining attention in other European countries. For example in the UK, it is expected that climate change will  increase subsidence hazard6 and in Belgium, there are discussions about  including subsidence coverage in property insurance policies. Nevertheless, in most other European countries, explicit insurance cover for subsidence is not yet offered on a nationwide basis but rather as a bespoke endorsement. In consequence, the impact of this peril on the (re-)insurance industry in these countries is no comparable to France.

Not just in France, increased subsidence hazard gains attention in other countries too

Although subsidence mainly plays a role in France, the socio-economic drivers seen there may also impact insurance pay-outs elsewhere. Multiple secondary-peril insured events with losses cracking the USD 1bn mark in a given year have become a global norm rather then an exception in the past decade. While climate change is often suggested as the culprit, our research has shown that urbanization, urban sprawl, increased vulnerability, but also a significantly changed claiming behaviour and indemnification principles are key drivers of this rapidly increasing risk level. As for subsidence in France, the industry needs to accommodate a forward looking perspective to ensure a sustainable insurance product, where reliance on the level of past claims may be misleading.

Figure 1

Figure 2