Unyielding Dryness: France's Escalating Droughts

It’s hot on all fronts in France. From Bordeaux to Strasbourg, no parts of the country are hidden from heatwaves. Iterated by Christelle Castet, Head of Science at AXA, stating “All of France is affected. At different levels and by different perils, but there is no spared zone.” Like many other regions across Europe preparing themselves for hot temperatures to return and have faced persistently low rainfall for more than a year, France in Western Europe has also been experiencing detrimental temperature rises.

In turn, decreasing precipitation and prolonging heat waves all contribute to the growing problem of escalating droughts - which is experienced closely by French nationals facing high crisis water restrictions in 22 regions and 27 regions at an enhanced alert, shown in Figure 1.

Physical natural hazards that can exacerbate other natural hazards such as flash floods from when a heavy downpour eventually occurs, land subsidence risks when soil and rocks lose moisture as well as wildfires that have led to the burning of approximately 66,000 hectares, affecting 90 metropolitan departments, with 291 wildfires in 2022 covering an area exceeding 30 hectares.

Over the past few decades, the frequency and intensity of droughts have increased, transforming vast stretches of once-fertile land into arid wastelands.

France usually receives 512 billion m³ of rainwater annually, of which nearly 60% evaporates, and the remaining 210 billion m³ supply surface and groundwater is utilised. However, the quantity of groundwater has decreased.

Three-quarters of the country is experiencing groundwater levels falling below monthly averages, with around 68% facing a groundwater deficit. As showcased in Figure 2, the highest level of groundwater is showcased in blue and the lowest level in red, highlighting in south-east France the intenseness of the impact of droughts on groundwater reserves.

Thus, a winter rainfall deficit for several weeks or months prevents the underground water storage points from sufficiently refilling.

The lack of rainfall is impacting the tourism industry from the Pyrénées to the drying of vineyards in Provence. While vines need very little water, it is reaching certain limitations for wine producers across France. To make matters more difficult, France has no comfortable reserves as summer approaches.

This results from an exceptionally arid 2022 and winter 2023 – no rain fell between January 21 and February 21 – from which nature has not recovered. The droughts dramatically negatively impact industries expressed by European drought, inflicting roughly €3.3 billion in European insured losses in 2022, ranking Europe’s worst drought in 500 years.

Crédit Agricole Guillaume Oreckin and Guillaume Rousseau highlighted the need for industries to focus on the importance of physical climate risk prevention. But as droughts worsen, when will French industries peak in terms of their limitations to the negative impact of droughts?

France's real estate industry faces significant challenges by escalating droughts. Already under pressure with the French real estate market decreasing by 14.1% since the first half of 2022, droughts have the potential to depreciate property values further as buildings undergo material changes.

The consequences of droughts include shrinkage and swelling, which lead to cracks in buildings. This affects the aesthetics of the structures and poses a direct threat to the shallow foundations of buildings as the soil supporting them erodes and experiences shrinkage.

For France, over 10 million individual houses, which account for 54.2% of the individual habitat, are currently at risk of shrinkage-swelling of clay (RGA) during droughts, followed by soil swelling when the rains return. Surprisingly, only 50% of municipalities manage to obtain recognition of the state of natural disaster, highlighting the inadequate response to this pressing issue.

The problem is particularly pronounced around the capital city of Paris, where more than three-quarters of the soils in the Île-de-France region are affected by RGA, compared to 48% in the rest of the country, according to the Paris Region Institute. Consequently, 1.15 million homes in Île-de-France are in danger, with 350,000 facing even higher risks due to their single-story construction.

Alarmingly, over half of France's 19.2 million single-family homes are located in areas with medium to high drought exposure, and around 3.3 million homes, constituting approximately 16% of the total, are in high-risk regions. Adding to the concerns, the CatNat regime (natural disaster coverage) is projected to not cover claims by 2040.

Recognising the severity of the situation, the French Senate has raised the alarm about the lack of prevention measures. Senator Christine Lagarde (LR) highlighted the housing problems and droughts' impact, emphasising the absence of sufficient risk prevention measures in the built environment. While prevention techniques exist, their effectiveness remains unproven due to limited large-scale deployment and lack of long-term follow-up.

Consequently, real estate companies face multiple predicaments as they navigate shifting demand patterns, with individuals and businesses seeking more climate-resilient locations. This may lead to increased demand and higher property prices in areas of France less affected by droughts.

Real estate developers and investors must also assess climate risks when planning projects or acquiring properties. Infrastructure challenges can arise due to strained water supply systems, hampering new developments in affected areas and driving up costs for implementing water-saving measures.

Moreover, commercial properties may be adversely impacted as businesses prioritise locations with reliable water resources.

Water has become a major commodity for the agricultural sector, which consumes 45% of the country’s water. The concentrated water consumption during the three summer months intensifies the challenges faced by the industry.

In 2022, several agricultural sectors experienced significant declines in yields, ranging from 10% to 30%. However, the situation for grasslands stands out as a defining aspect of droughts negatively impacting the agricultural sector, with cumulative production 33% lower than the average of the past twenty years.

Meadows drying up and reduced maise yields, essential food sources for livestock such as cattle and sheep, contribute to farmers expecting their worst yields in decades.

Drought stress poses a particular threat to grapevines, crucial for the renowned French wine industry, resulting in diminished grape quality and yield losses. Last of all, a decrease in wheat yields by France, the largest wheat exporter in Europe, has severe knock-on effects on driving further food prices up and incurring further instability for food security across the globe, given the existing pressure of the global wheat market. Ultimately, the worsening agricultural damage puts one of the historically important pillars of the French economy at risk with knock-on effects worldwide.

The agricultural sector is projected to reach $67.13 billion in 2023, demonstrating an annual growth rate of 2.43% (CAGR 2023-2028). With its extensive cultivation of diverse crops across approximately 28 million hectares and 456,000 farms, France's agricultural production value ranks among the highest in the European Union.

To financially secure farms against droughts and other climate risks in France, multi-risk climate crop insurance plays a vital role, and public authorities support its development by partially covering premiums or insurance contributions. This support is financed by the European Agricultural Fund for Rural Development (EAFRD).

In response to the persistent drought situation, Marc Fesneau, the Minister of Agriculture and Food Sovereignty, and Pascal Cormery, the President of the Caisse centrale of the Mutualité Sociale Agricole (MSA), have announced financial aid up to €2 million in the form of payment of social security contributions for the Pyrénées-Orientales department, particularly the Agly area.

Yet, this support is unsustainable, applying greater pressure on insurance companies and, eventually, the farmers themselves.

The escalating droughts caused by climate risk in France significantly impact insurance companies with increasing claims and losses; insurers face financial strain and the need to raise premiums. The projected cumulative cost of claims resulting from droughts between 2020 and 2050 is estimated to reach €43 billion, three times the costs observed between 1989 and 2019.

In 2022, climate-related hazards in France led to losses amounting to €10 billion, reaching a level not seen since the devastating storms of 1999.

Insurance costs for properties in vulnerable regions are expected to rise as insurers adjust pricing to account for heightened climate risks, potentially modifying or limiting coverage terms. Despite reimbursements from France's natural disaster compensation scheme, insurers will likely exceed their annual budgets for natural catastrophes and weather claims in 2023, weakening their underwriting profitability.

French insurers anticipate raising premiums for property catastrophe and agriculture insurance to mitigate future risks while reducing their exposure to climate-related risks. However, it remains uncertain whether insurers can quickly raise premium rates to keep up with escalating claims costs, particularly in the face of persistent inflation.

The competitive market landscape and societal pressures further constrain insurers from passing on higher costs to customers, as the government urges them to provide rebates amid consumer struggles with inflation. In response, insurance companies must reassess risk models, adjust policy coverage, and manage long-term investment risks.

Moreover, the reinsurance market may come under pressure, and regulatory requirements may demand greater transparency regarding climate risk, acknowledged by French reinsurance firm Caisse Centrale de Réassurance, with Director Edouard Vieillefond iterating collective challenges, showcasing the need for collaborative efforts to navigate the changing climate landscape and build resilience.

The undeniable impact of climate change on France is evident.

Droughts significantly threaten multiple industries nationwide, potentially leading to other natural hazards. To mitigate the detrimental effects, businesses, from tourism to insurance companies, must proactively equip themselves by implementing preventive measures, comprehending shifting demand, and incorporating climate risks into their planning and investment decisions.

In this regard, Climate X plays a vital role by providing essential climate data to various industries, enabling them to tackle present and future challenges effectively.