Jamaica’s Dennis Lalor, one of the Caribbean insurance industry’s leading executives, likes to say that the regional insurance sector “obtained its own identity” 25 years ago, when governments first passed legislation to regulate insurance activities.
As it happens, this “identity” was formally celebrated in May/June this year when the Insurance Association of the Caribbean (IAC) held its 19th conference in Jamaica and turned it into an anniversary party for a quarter-century of relatively successful existence.
“Relatively” is the key word. Like insurance companies elsewhere in the world, Caribbean general and casualty insurers have had their ups and downs, depending on the loss situation in any particular year. Insurance supervisors in most Caribbean countries tend to be slow in assembling their figures, and the IAC’s office in Barbados, headed by director general Alister Campbell, which depends on them to draw an overall picture, has difficulty in keeping information up to date. But 1996, the year analysed in the IAC’s latest statistical survey, clearly represented one of those “downs”.
The general insurance industry in the six main insurers’ locations — Jamaica, Trinidad and Tobago, Barbados, Guyana, St Lucia and Grenada — recorded a collective net loss of US$149.3 million that year. Not exactly the kind of business that a savvy investor would rush to enter, you might say. But obviously the good years must outweigh the bad or there would be no indigenous general insurance sector in the Caribbean at all; and it has to be remembered that insurers in the region exist in a particularly challenging environment, where costs are high and risk virtually impossible to avoid or manage.
Because most companies operate in more than one territory, overhead expenses tend to be duplicated. The need to computerise has added considerably to costs in recent years. Because there are at least nine different Caribbean currencies, exchange rate fluctuations are a cost factor. General expenses, such as salaries, wages and office supplies, have also been rising.
Operating expenses as a percentage of net premium have increased significantly. Jamaica is a fairly stark example of this trend — in 1996, net written premiums of the Jamaican companies reporting to the supervisor totalled US$119.4 million, but operating expenses added up to a whopping US$275.1 million. Jamaica, not surprisingly, recorded the largest net loss in general insurance of any Caribbean country — US$164.4 million.
As for risk, the Caribbean has a reputation in international insurance circles as a high risk area. About 10 serious storms can be expected in any given year, with about six developing into hurricanes, of which some may become “intense” hurricanes wreaking havoc which costs billions of dollars. Add in damage from earthquakes, floods, fires and, of course, the reborn Montserrat volcano which has succeeded in depriving that unfortunate island of certain types of insurance cover completely, and the extent of the claims that Caribbean insurers have to meet on a continuous basis is obvious.
Companies have tried their best over the years to protect themselves from excessive vulnerability to the effects of “catastrophe”, as these natural disasters are called, by transferring a substantial portion of the risk to international reinsurers. Mr Lalor, as chairman of a Caricom working party on Caribbean insurance and reinsurance which reported in February 1996, estimated that 85% of the risk held by regional insurers in relation to property cover was offloaded onto reinsurers abroad. Grenada insurers ceded almost 50% of their total general insurance income to reinsurers in 1996. Trinidad and Tobago general insurers collected US$118.3 million in gross premiums in the same year and sent US$63.6 million abroad to reinsurers for taking well over half the risk off their shoulders.
Part of this money, of course, is recovered in the event of a claim, and some remains at home as commissions from the reinsurers, which probably explains why none of the countries in the IAC survey actually suffered an underwriting loss in the year under review. Even the Jamaican companies made collective underwriting profits of US$63.7 million.
But there is a near-unanimous view among analysts that general insurers need to get back to basics and ensure that their pricing is right. “Caribbean insurance companies must be prepared to price their products according to the risks involved,” insists Bertrand Doyle, the region’s leading insurance consultant and arbitrator, who operates from a Trinidad base.
Ray Sumairsingh, senior vice president and chief operating officer of Nationwide Insurance Company in Trinidad and Tobago, who was elected the new president of IAC during this year’s Jamaica meeting, is adamant that Caribbean insurers “have simply not built enough profit margin into their pricing practices.”
The rates question was an important informal topic of discussion in Jamaica, as IAC members surveyed the road they had travelled since 1974 and the path that lies ahead into the next millennium. While the indigenous insurance sector has managed to survive against the odds for its first quarter-century, the challenges it will have to face in the second quarter-century will be just as difficult and probably of a different kind.
Local insurers in major territories like Jamaica and Trinidad and Tobago did receive some protection from the authorities, principally through foreign exchange control, which prevented locals from doing business with companies abroad. Now that foreign exchange restrictions have been removed in Jamaica, Trinidad and Tobago and Guyana, anyone is free to buy insurance policies anywhere they wish. What’s more, some legislation — in Trinidad and Tobago, for example — is hazy on the procedure for admitting an insurance company to do business locally, which means that local incorporation, or even a local presence, is not mandatory. Electronic commerce, via the internet, is a new factor on the Caribbean scene, permitting those so inclined to purchase insurance overseas without even seeing a salesman in the flesh.
These forces will combine to put enormous pressure on the indigenous Caribbean companies, and Ray Sumairsingh expects a merger mania among local insurers in the early years of the new millennium. At last count, there were 137 general insurance companies in Caricom, a region with no more than about 6 million people (excluding Haiti), which seemed to suggest a grossly over-insured market. Indeed, it is the fierce competition between these insurers in places like Trinidad and Tobago, Jamaica and St Lucia that has served to keep rates artificially low and robbed companies of the premium income necessary for sound reserving. If companies come together into larger and stronger units, as seems inevitable, then the Caribbean general insurance sub-sector will be in a much better position that it is now to weather the storms, in every sense, of its next quarter-century.
The role of the brokers
The importance of brokers in the development of the indigenous Caribbean insurance industry over the last 25 years is well illustrated by the choice of two brokers for inclusion among the nine people on the IAC’s “honour roll” for the anniversary conference held in Montego Bay earlier this year.
They were William Hansel Barrow, chairman of Insurance Brokers of Guyana and a past president of IAC, and Gerard Richard Fontaine, president of Fraser, Fontaine and Kong Ltd. of Jamaica, a member of the IAC’s executive committee.
Brokers tend to stay out of the limelight — few Caribbean insurance brokers’ names are household words in the same way as insurance companies like Caribbean Home or Guardian Life are. But they are the key to the survival of many companies — certainly the smaller ones — by bringing the business that provides these companies with essential cash flow. Brokers can also be instrumental in helping devise new insurance products or promoting to their clients new products introduced by insurance companies.
Some companies over the years have attempted to circumvent the broker and go direct to clients to sell products. A good example was Trinre in Trinidad and Tobago, which advertised itself as a computer-driven direct insurer, especially for motor vehicle policies, after it turned from reinsurance to primary insurance underwriting.
But the brokers’ resentment of this may have hindered Trinre’s early development. Under new ownership and management, Trinre is again wooing the brokers. “They have pledged their support to us,” says chairman Dennis Lalor. “We are getting business from them. They have now accepted the company, which was not so under the previous management.”
Brokers like M&M Insurance Services Ltd. believe that their role will always remain fundamental to the success of the insurance industry in all its aspects.
Insurance fraud was apparently not a serious threat 25 years ago when the Insurance Association of the Caribbean (IAC) was being born. The subject is nowhere mentioned in the six main reasons for the IAC’s establishment put forward at the time, nor has it been officially cited since.
But there is general consensus among Caribbean insurers that fraud is a growing problem, particularly in the general insurance sector. Reliable estimates are hard to come by, for obvious reasons, but Trinidad and Tobago insurance company executive Ray Sumairsingh, incoming IAC president for the first year of the millennium, believes that “10% of all general insurance claims are fraudulent.”
Patrick Zoe, a former Trinidad and Tobago police officer who does investigative work on suspected fraudulent insurance claims right through the Caribbean, insists from his own experience that the figure is twice that, nearer 20%.
The danger posed to insurance companies by false claims is obvious: not just financial loss — they could even go out of business.
In fact, the Insurance College of Jamaica regards fraud as one of the main reasons for the “declining results” of so many general insurers in that country. The average honest policyholder may consider that fraud has nothing to do with him or her, and assume that it is the insurance firm’s responsibility; but as the Insurance College points out, fraud eventually leads to higher premiums, and thus impacts directly on the customer. Mr Zoe even foresees a time when “because of fraud, insurance may no longer be available to the ordinary man”.
What kinds of fraud are currently common in the industry? Principally the kind that Ingrid Bullard, director of financial services for the St Lucia government, describes as “soft fraud” or “opportunity fraud” — “inflating the amount and value of items stolen from a home or business” or “failure to report an accurate medical history when applying for health insurance”, for example.
But probably the most prevalent type of insurance fraud in the region has to do with motor vehicles, the coverage of which is big business. Gross premiums worth US$186,979,000 were paid for vehicle insurance in the six main Caribbean insurance centres of Jamaica, Trinidad and Tobago, Barbados, Guyana, St Lucia and Grenada in 1996, the latest year for which the IAC has full statistics. Of that amount, US$99,610,000 was returned to policyholders in claims payments in five of the territories (no figures were available for Trinidad and Tobago at the time of collation).
If Ray Sumairsingh is right, then about US$9.9 million of that sum represented fraudulent claims; if you believe Patrick Zoe, the figure is nearer US$19.9 million.
In either case, substantial sums are involved.
Insurance companies are faced with the dilemma of not wanting to offend clients in a very competitive insurance market, while simultaneously trying to weed out fraud.
Mr Sumairsingh applied one direct remedy at an insurance company for which he once worked — he simply cut every claim by 10%. Of course, that penalised the innocent along with the guilty, but it probably did wonders for his cash flow.
A more refined method is now being used by the Association of Trinidad and Tobago Insurance Companies (ATTIC). It has set up a Motor Claims Insurance Data Bank to keep track of every motor-related claim and ascertain whether the same numbers and names keep turning up. The companies can then take action against specific individuals.
Mr Zoe says fire-related claims should also be tracked, because he believes — and his view is shared by the authorities — that many fires in Caribbean city centres are deliberately set.
And what about Y2K?
How will the millennium bug computer problem affect Caribbean insurance companies?
Some executives take the optimistic view. “We don’t think that companies can be held liable,” asserts Jeffrey Montano, executive director for insurance operations of NEM (West Indies) Insurance Ltd., the region’s largest indigenous general insurer. “When policies were being renewed last year, we excluded all Y2K matters. All new policies also have this exclusion.”
Maybe . . . but Ray Sumairsingh, senior vice president and chief operating officer of Nationwide Insurance Company in Port of Spain, is not too sure. “You can put all the endorsements you want on an insurance policy,” he insists, “but it will not eliminate your liability entirely, only minimise it at best.”
There are two distinct possibilities on which Caribbean insurers are focusing as far as the millennium problem is concerned. One is the failure of computer systems themselves and the havoc that might be wrought when they are required to perform calculations, comparisons or data field sorting involving years later than 1999.
The other, and probably more serious, is the impact on processes and activities that are run by date-related micro-chip technology. Jamaica insurance consultant Dennis St Bernard warns that “the operations of all micro-chip controlled businesses are at stake.”
The doomsday scenario of power generating stations shutting themselves down, production grinding to a halt in factories, traffic lights in busy city centres going haywire, even life support systems in hospitals failing to function, has been invoked by some worried Caribbean insurers. Trinidad and Tobago, with the most advanced industrial structure in the Caribbean, is considered to be particularly exposed. Ray Sumairsingh points out that “the valves along the country’s undersea oil and gas pipelines are all controlled by embedded chips and, as far as I am aware, no one knows for sure whether they are Y2K compliant or not.” The multi-billion dollar Point Lisas energy-based industrial complex on Trinidad’s west coast is full of gas-processing industries, whose temperature and pressure-controlled systems could malfunction if there is a micro-chip failure.
So where will insurance liability come from, if the caveats written into policies stand up? Ray Sumairsingh suggests that policyholders would not be able to claim on damage to computer systems themselves or from property losses attributable to micro-processor failure, but for the secondary effects of such events.
He offers the example of a microwave oven which malfunctions because a computer timing device does not shut off and the house in which it is located subsequently burns down. The householder would probably not be able to claim on the oven itself, since the systems failure is expressly excluded. But the house would be covered under the “accidental loss or destruction” clause in the insurance contract. Likewise, damage done to computer systems in offices would not be indemnified by insurance companies, but the policyholder might have a valid claim for the business interruption he has suffered.
There will no doubt be long and complicated arguments throughout the year 2000 as to whether insurance companies should pay up on thousands of claims or not. Good for the arbitrators and the lawyers, perhaps; but the impact on Caribbean insurers may eventually turn out to be far more costly than they had imagined.
The 137 general insurance companies in the Caribbean face a situation unique in the insurance business: they operate in the most risky area, per capita, in the world.
The island nations of the Caribbean Community and Common Market (Caricom) have a total population of only about 4.7 million and a land area of some 33,350 square kilometres. Yet that small number of people and the relatively modest physical space they occupy are menaced annually by such natural hazards as hurricanes, earthquakes, drought, floods and volcanic eruption. In addition to which, the effects of global warming and rising sea levels are said by experts to be likely to affect the Caribbean more than most places in the world.
Natural disasters inevitably lead to the destruction of large amounts of property, household effects and even motor vehicles, the main assets protected by general insurance companies. This, in turn, requires substantial payouts by insurers, often exceeding the amount they collect in premiums each year. The result: continuing weak financial performance by many Caribbean insurers, who are forced to fall back on the income they receive from investments in order to stay in business.
For decades, Caribbean insurers have been trying to find ways of minimising the inordinate risk they face in the daily course of trade. The most effective has simply been to transfer it elsewhere, by persuading reinsurers in much bigger metropolitan markets to take most of the risk off their hands. As much as 85% of the risk they carry on property is off-loaded onto reinsurers: another 15% of the remainder is also covered by reinsurance.
This mechanism is a two-edged sword, however. It lessens the risk of underwriting in a catastrophe-prone location, but it also deprives Caribbean insurers of a large part of their cash flow. Companies have to hope that calls on retained income are minimal and that enough of it can be invested at good rates to cover all costs and produce some sort of positive return.
Reinsurance is all very well when international rates are soft and Caribbean insurers do not have to pay through the nose for catastrophe cover — the 15% of retained risk that is insured against a major event which may cause extensive damage in one go, such as a hurricane or Montserrat’s Soufrière Hills volcano.
That seems to be the situation today, though it was so in 1994 when, following a series of particularly disastrous hurricanes, Caricom governments were forced to set up a working party headed by Jamaica’s leading insurance executive, Dennis Lalor. The group was mandated to examine the high cost of reinsurance then prevailing and to make recommendations about how Caribbean insurers could continue to have access to reinsurance at reasonable cost. One of the Lalor’s report’s main suggestions was that insurance companies in the region should be prepared to shoulder more of the risk they faced and that governments should help them to do so.
A Caribbean Regional Reinsurance Pool was proposed, to which insurers throughout the region would contribute. It was envisaged that the pool would complement, and even partly take the place of, international reinsurance facilities. The matter has been passed to the World Bank, whose senior finance specialist for Latin America and the Caribbean, John Pollner, presented an outline of the Caribbean Reinsurance Pool at the June meeting of the Insurance Association of the Caribbean (IAC) in Jamaica.
Some insurance executives remain sceptical about whether such a Pool is feasible in the Caribbean, for the same reason they are forced to take out so much reinsurance abroad: the region is too risky. But if the World Bank can come up with a novel way of overcoming that obstacle, it will have performed a great service to a beleaguered industry.
The cosy, well-regulated existence which Caribbean life insurers had come to take for granted, in common with their counterparts elsewhere in the world, is being rocked to its foundations as the new millennium approaches.
Fierce new competition is coming from commercial banks, now rushing to offer products like pensions and annuities that life insurers had historically regarded as their exclusive province. With the dismantling of foreign exchange controls in the major Caribbean territories, “briefcase traders”, as Dennis Lalor, chairman of the Insurance Company of the West Indies (ICWI) group in Jamaica calls them, are arriving from abroad, particularly from North America, to market life and other products locally.
Even official monetary policy is conspiring to destabilise Caribbean life insurers, Jamaica in recent years being the prime example. There, several life insurers suddenly found themselves technically insolvent when anti-inflationary measures caused stock market investments to fall in value and interest rates on high-yielding financial instruments to plummet. This meant that companies’ assets could no longer support their liabilities, and when policyholders demanded their money, it was not immediately available. The Jamaica government was forced to set up a Financial Sector Adjustment Company (Finsac) to salvage the situation.
Jamaican insurance consultant Dennis St Bernard argues: “The investment choices of many life insurance companies, and imprudent policies followed by them, together with bad management, compounded by the downturn in the local economy, were the reasons for the life sector’s problems.”
Trinidad and Tobago’s Guardian Holdings Group, which includes the Guardian Life company, has become one of the beneficiaries of the Jamaican situation. In May, it took over the pension and annuity business of three failed Jamaican life companies — Jamaica Mutual Life, Dyoll Life and Crown Eagle Life — adding 150,000 policyholders to its portfolio.
While the Jamaican experience is unlikely to be repeated elsewhere in the region, other Caribbean insurers certainly can not afford to be complacent. They may be able to hold their own against their banking rivals by offering more attractive products, but the insidious challenge from foreign insurers is a more serious problem.
Economic liberalisation, particularly the removal of foreign exchange controls, has exposed life insurers to a blast of competition from foreign sources, which would have been inconceivable in the days when the various supervisors of insurance had to give permission for foreign exchange dealings. Now, anybody in Jamaica, Trinidad and Tobago and Guyana can buy insurance services anywhere in the world.
Though they have no guarantees that the operations concerned are well run, and can not appeal to local authorities for protection if anything goes wrong, an increasing number of Caribbean policyholders don’t seem hesitant about buying foreign insurance products.
Exchange rate fluctuations and lower costs in their own home market give the “suitcase traders” an edge. St Elmo Whyte, senior manager of Firm Insurance Brokers of Jamaica, recently pointed out that US-based insurers were offering life policies to Jamaicans “at premium rates as much as 50-60% below those written in Jamaican dollars by Jamaican companies.” He lamented that what was left of the Jamaican life insurance industry was “losing the most affluent part of its market to foreign-based companies.” The foreign salesmen often do not even set foot in Jamaica, or anywhere else in the region, since transactions can be conducted over the internet.
The life industry in Jamaica and the rest of the Caribbean seems to be caught in a classic dilemma. It needs the benefits of scale to be able to lower its product costs, but can’t grow because its potential customers are being lured away elsewhere. Jamaica’s Lalor acknowledges that “we need a scale of operations that matches our North American counterparts; without it, our products will always be more expensive in an increasingly transparent global market.”
Mergers and acquisitions are one possible solution, and in that regard the Jamaicans are unwittingly leading the way. Life insurers elsewhere in the Caribbean may well be forced to follow suit, though in a more planned and deliberative manner.