N° 86 : Some statistics concerning French Construction Insurance Market (Building Damage Insurance and Construction Liability Insurance)

For a new entrant, it is therefore difficult to compile reliable statistics on this segment based on its own data, since it may have to wait for several decades to observe the full development of an underwriting exercise (settlement of all claims and collection of all recoveries). The use of market data is therefore necessary to address this lack of history. In this context, this study provides compiled statistics from a representative sample of French construction players and thus numerical benchmarks for some key parameters of this activity.

Over the period 2011-2015, direct French business was on average more than € 2.1 billion written premiums per year, with slightly more than a quarter relating to building damage insurance. Within these premiums, the acquisition costs averaged around 11%, all liabilities combined. The main mandatory guarantees (as provided for by law) account for most of the premium paid, with additional optional guarantees weighing no more than 20% of total premiums.

The total claims for a given underwriting exercise (including claims management costs but net of recoveries) is generally close to or higher than the total premiums corresponding, after deduction of the acquisition costs. Financial income plays a central role in the profitability of construction insurance contracts. More specifically:

• For building damage insurance, the average loss rate is 94.3%, with half of the observations in a range 77.4% - 108.2% around the median (93.1%);

• For construction liability insurance, the average loss rate is 127.4%, with half of the observations in a range 112.9% - 144.2% around the median (125.4%).

Within this total charge, claim management costs on average represent 7.5% of the total cost of claims in contruction liability insurance and building damage insurance, with the majority of observations falling within a range of 4.7% -11.7% in building damage insurance and 6.6% -8.6% in contruction liability insurance.

Recoveries - which reduce the final cost of claims for the insurer - play an important role in the building damage contracts. Indeed:

• For building damage insurance, the average recovery rate is 42.9%, with half of the observations in a range 36.7% - 52.5% around the median (by 41.7%);

• For construction liability insurance, where the recovery rates appear more dispersed, half of the observations are in a range 1.7% - 8.4% around the median (by 4%).

The study also analysed the weight of the regulatory schedule in the ‘reserve for not yet manifested claims’ (Provision pour Sinistres Non Encore Manifestés in French or PSNEM) that was effectively recorded by insurers on their accounting balance sheets as a complement to the “classical” provision for claims outstanding, assessed on the basis of claims already manifested. It appears that if a significant part of insurers deviate from this default method (about one third), the difference between the two amounts is still very small (at most some percentage points). This evidence suggests that the regulatory schedule introduced in 1994 is considered by France headquartered insurers to be a generally acceptable approximation of the PSNEM. In addition, the minimum amount of PSNEM calculated according to the amount of premiums, rather than according to the claim burden, seems to prevail in most cases.