Notre-Dame de Paris and Insurance for Large or Complex Risks

Having read the LinkedIn post shown below, which references an article titled “Notre Dame has no insurance policy“, I wanted to provide an overview of how the insurance marketplace could cover a risk like the Notre-Dame de Paris Cathedral.

Mechanisms currently exist that allow the global insurance industry to write coverage for very large and complex risks.

Risk transfer is a great way for insureds to protect themselves from loss, particularly those with potentially catastrophic impacts.

A risk like the Notre-Dame de Paris Cathedral would be complex to insure, but it can be done. Doing so would require the participation of many insurance companies.

By using [facultative] reinsurance, insurance companies can spread the risk amongst each other. It would allow them to keep their exposure to loss at an acceptable level. It also lets insurance companies come together to support the risk for 100% of the values insured.

Two important types of property affected by the Notre-Dame fire were – (1) the building itself and (2) fine arts. An insurance program can be developed to cover both.

Fine Arts Insurance

Fine Arts Insurance is available to cover individual works of art. Policies can be written to cover single paintings with values in excess of one hundred million dollars.

Coverage is also available for fine art collections and museums.

Due to their similarities, the manner how museums are insured can serve as a great example of how a cathedral like Notre-Dame can be covered.

Property Insurance

Property insurance is readily available to cover very large and complex risks such as infrastructure projects, industrial complexes and skyscrapers. Insuring the Notre-Dame Cathedral would involve much of the same mechanisms used to insure other large property risks.

The Reinsurance Program

If the building and its contents were valued at USD 10 Billion, an insurance policy could be written to cover its value in full. Behind the scenes, a facultative reinsurance program would be structured to spread the risk of loss amongst multiple insurance companies. This allows insurance companies to participate in the risk while maintaining their exposure to loss at acceptable levels.

There are different ways in which a facultative reinsurance program may be structured to write the referenced risk. Hereunder, we use facultative excess of loss reinsurance, which allows the risk to be split up in layers, as an example of how the property may be covered.

Facultative Excess of Loss Reinsurance

• Insurance Company Retention: USD 50 million.
• Reinsurance Layer 1: USD 250 million in excess of USD 50 million (retention).
• Reinsurance Layer 2: USD 700 million in excess of USD 300 million (retention + (layer 1)).
• Reinsurance Layer 3: USD 2 billion in excess of USD 1 billion (retention + (layers 1 and 2)).
• Reinsurance Layer 4: USD 3 billion in excess of USD 3 billion (retention + (layers 1 to 3)).
• Reinsurance Layer 5: USD 4 billion in excess of USD 6 billion (retention + (layers 1 to 4)).
• Total reinsured amount: USD 9.95 billion in excess of USD 50 million.
• Total insured amount: USD 10 billion.

Multiple reinsurers will participate in each layer until the risk is insured for 100% of its value. This allows the impact of a loss, as large as the fire of April 15, 2019, to be absorbed by the insurance industry. Not all insurers may survive the loss, but a mechanism is available to provide coverage.

There are alternative ways to insure the building, such as covering it on a first loss basis. This considers the probable maximum loss (PML), and other metrics, and sets a coverage limit in line with the PML estimate. That discussion is beyond the scope of this blog post. The point is brought up only to show that insurance is available and there are also various ways to structure a reinsurance program to cover the property.

The Notre-Dame fire is an example of a low frequency, high severity loss which the insurance industry is well equipped to handle. Insurance is available for such risks, provided that the insured is willing to pay the corresponding annual premium. Otherwise; the insured can choose to retain the risk and absorb all the losses that occur.

While I have not worked on a risk of the magnitude described above in the past, I am familiar with the concepts of structuring an insurance program for large risks. The same concepts I have used to write complex accounts in the past could be used to insure larger, more complex risks.

Risk Reinsurance Holdings, Inc. is a (re)insurance brokerage company based in South Florida. We can help with complex reinsurance transactions. You may contact us for assistance with your coverage needs or visit our facultative reinsurance page for more information about the product.