The Caribbean insurance industry, severely bruised by a series of large claims arising principally from storm damage, is actively seeking ways of strengthening its position and preserving the region’s indigenous insurance capacity.
From The Bahamas in the north to Guyana in the south, most insurance companies’ property portfolios — traditionally one of their biggest sources of premium income — have been recording losses for several years. In Trinidad and Tobago for example, the region’s second largest insurance market, the latest figures (1994) show that despite gross premiums of US$29.08 million, 18% of which is retained at home, the 22 companies writing property insurance declared a collective loss of US$ 1 .38 million.
A weak property insurance sector could seriously imperil the Caribbean’s economic development, including the all-important hotel industry on which Caribbean tourism depends. “Without insurance,” says Dennis Lalor, chairman of the Jamaica-based ICWI Group, one of the region’s leading insurers, “a brake will be applied to new development and the expansion of existing businesses will be greatly hindered.”
Several general insurance companies have collapsed under the dual weight of high claims settlements and inadequate premium levels. Indeed, Mrs Orinthia Nesbeth of The Bahamas, current president of the Insurance Association of the Caribbean (IAC), says candidly that “insurance in the region is in a state of crisis never before experienced in its history”
The problem particularly affects companies in the northern Caribbean — The Bahamas, Jamaica, Antigua, Puerto Rico, the Virgin Islands and St Kitts – but the rest of the region is not immune from the fallout. With three major hurricanes in four years — Gilbert (1988), Hugo (1989) and Andrew (1992) — Caribbean insurance companies have found themselves inundated with claims within a relatively short timeframe. The damage caused by Gilbert in Jamaica in 1988 resulted in claims of almost US$200 million. Claims in The Bahamas after Andrew in 1992 were estimated at US$29 million.
About 80% of Caribbean property risk is reinsured abroad, and another 15-20% of the retained aggregate exposure is also transferred to the reinsurers. This considerably softens the blow from a major catastrophe like a hurricane or an earthquake, but does not eliminate it. And when the reinsurers themselves begin to put on the pressure, as they have been doing in recent years because of their own burden of worldwide claims, the difficulties facing Caribbean insurers multiply.
The international reinsurers have been tightening the screws in a number of ways. They have withdrawn some primary reinsurance capacity, either by limiting the business they do or washing their hands of the Caribbean entirely. Bernard Aquing, managing director of the Reinsurance Company of Trinidad and Tobago (Trinre), estimates that proportional treaty capacity has fallen by 32%. Reinsurers have also imposed events limits on claims, under which they are only responsible for a fixed monetary amount of the proportional risk taken.
As far as aggregate cover is concerned (cover designed to assist insurers in the aftermath of a natural disaster, when most of the policyholders on their books may be making claims at the same time), the reinsurers have for the first time insisted on deductibles, insurance companies paying between two and five percent of the claim themselves. They have also upped the price of their services, demanding between 40 and 70% of insurance companies retained income in return for aggregate or catastrophe cover, as it is called.
The effect of all this eventually reaches the insurance customer, who has seen the cost of property insurance leap upwards by as much as 300% in some parts of the region. The natural reaction has been to cut down on the amount of insurance purchased, leaving tens of thousands of Caribbean homeowners and hundreds of businesses without the appropriate safety net to satisfy bankers and investors.
The practical result in real terms is that new businesses do not get started, others fail to expand, economic growth is slower than it should be and thousands of extra jobs do not materialise.
Caribbean insurers, most of whom grew out of long-standing branch operations of British, Canadian and American companies, are not standing by helplessly and watching their business wither away. They have begun to fight back.
The IAC, located in Barbados, is actively lobbying governments for the imposition of a mandatory uniform building code, so that all new Caribbean buildings will be constructed to hurricane-resistant standards. Some architects and construction companies have already taken it upon themselves to apply such a code voluntarily.
Mrs Nesbeth believes mortgage companies are also in a position to play their part by “providing funds not based on the traditional certificate of completion but on a certificate of compliance with the building code”
The industry is also lending support to the Caribbean Cyclone Resistant Housing Project at the University of the West Indies in Trinidad, led by Professor Desmond Imbert. Professor Imbert and his team have found that 80% of windstorm damage is done to dwelling houses rather than commercial properties. Relatively simple techniques like hurricane straps, tying the top-plate at the wall and foundations with vertical reinforcements, installing window and door shutters and regularly checking roofs for loose and rotten members, could go a long way to reduce damage.
Mandatory hurricane-resistant building practices are only one aspect of the campaign to minimise the threat to the insurance industry. Equally important is a mechanism for substituting some of the reinsurance capacity lost to the region by the establishment of local catastrophe reserve funds. The IAC has been pushing for such funds to be set up “with the full support of member governments”, such support to take the form of “full exemption from all tax liabilities”
Only the Trinidad and Tobago government has so far responded to the call. In his 1994 budget, the finance minister, Wendell Mottley, announced that companies writing property business would be able to set aside catastrophe reserve funds of up to 20% of net premium income for an initial period of five years. The funds will be accessed only to meet losses arising from natural disasters, and will restore some of the lost reinsurance capacity as well as bringing “comfort” to the international reinsurers and persuading them to reduce the current high charges.
Trinre’s Bernard Aquing, who was instrumental in persuading local authorities to support the idea, estimates that about US$13.1 million will be accumulated in the five-year period, at a cost in tax foregone of about US$1.05 million.
The international reinsurers have welcomed the Trinidad and Tobago initiative and expressed the hope that other countries will follow. Jamaica will probably be next in line. The government has been studying a proposal from Dennis Lalor for a compulsory national catastrophe reinsurance pool, with contributions from both the companies and the state. He believes that even foreign agencies like the United States Agency for International Development could be persuaded to assist.