Establishment of a new fund for natural perils capital - changes to the Natural Perils Insurance Act and a new associated regulation

New rules on natural perils insurance were passed in the Council of State on January 26. In conjuction with the entry into force of amendments to Section 4 of the Natural Perils Insurance Act on the establishment of natural damage capital in the Norwegian Natural Perils Pool, a new associated regulation on natural disaster insurance was passed. Both the amendment to the law and the regulation will come into force on January 1, 2025. The regulation on natural perils insurance will replace all the previous associated regulations to the Natural Perils Insurance Act and act as one common regulation.

The natural perils insurance scheme means that fire insurance of property will also give the insured the right to compensation for financial loss resulting from damage caused by natural disasters such as landslides, storms, floods, storm surges, earthquakes and/or volcanic eruptions. The natural perils insurance premium will change from 0.065 permille and will amount to 0.070 permille of the fire insurance sum in 2024. All insurance companies that replace natural perils are part of the Norwegian Natural Perils Pool, which is now tasked with managing and organizing a common natural perils compensation fund based on the capital accumulated through the insurance scheme.

Parts of the current scheme have been criticized because the natural perils insurance premium has been set too high for several years, which has led to established insurance companies accumulating significant natural perils capital over time that they have been able to draw on in the years when the scheme has been in deficit. This has created a competitive disadvantage for newer insurance companies, which have had to draw on other equity for this reason. For this reason, amendments to Section 4 of the Natural Perils Insurance Act were passed in Amendment Act No. 59 of June 17, 2022, establishing a system whereby insurance companies are to set aside the surplus they achieve through the natural perils insurance scheme in a common fund to be managed by the Norwegian Natural Perils Pool, rather than being included in the companies’ own capital. The new regulation will particularly specify new rules on the organization and composition of the Norwegian Natural Perils pool and its board, and a description of the tasks that will follow with the new scheme and the new fund.

Through a transitional arrangement, the aim is to reduce the total natural perils capital in insurance companies. The scheme involves the establishment of a fund that will be provided with funds in surplus years until it reaches a value of NOK 4 billion. We assume that there will be further processes associated with the transitional solutions as the regulation does not solve everything. During the transition period, insurance companies that currently have positive natural perils capital will have to use this to cover their share of the year’s deficit. Companies without accumulated natural perils capital will, on the other hand, have their share of the deficit covered by the fund’s resources. This involves differential treatment, where actors who currently have positive natural perils capital in surplus years must transfer a surplus to the fund, while at the same time not being able to enjoy the fund’s resources in deficit years during the transition period. However, new establishments without already accumulated natural perils capital will be able to insure natural disasters almost without risk of loss during this period. After the value of NOK 4 billion is reached, this transitional arrangement will be replaced by a permanent scheme, where all companies in the pool will be able to draw on the fund’s resources in years of deficit.

The special Norwegian natural perils insurance scheme will still function in parallel with the state natural perils compensation scheme (with a three-month notification period), which can be invoked if there is damage to property that cannot be insured through a regular insurance scheme. These two schemes will still form the basis for compensation to the injured party after a natural disaster has occurred.

The new rules are believed to improve competition in the Norwegian market.

If you have questions to the changes, feel free to contact us.