Reinsurers affected by
EXPERTS in the insurance industry have warned that premiums on property and casualty policies across the Caribbean will go up as reinsurers increase costs by 15 per cent in order to increase their capacity to pay out claims while facing the ill-effects of climate change and inflationary pressures.
Reinsurance occurs when insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim.
Insurance ratings agency AM Best, in a market segment report titled ‘Climate, Reinsurance and Cyber Remain High in the Caribbean Risk Landscape’ has found that while many insurance providers were profitable during the pandemic, they are still vulnerable to a number of risks, chief of which is inflation.
“Climate risks adds an additional layer of uncertainty as it remains the biggest threat to the Caribbean. Despite the low level of claims activity related to catastrophes in 2021 and thus far in 2022, reinsurance pricing continues to reflect increased hardening as insurers and reinsurers are feeling the effects of inflation,” a release from AM Best outlined.
President of the Insurance Association of Jamaica (IAJ) and General Accident Insurance Company CEO Sharon Donaldson agrees that climate change continues to be a significant factor contributing to reinsurers increasing rates. However, she told Jamaica Observer in a recent interview that climate change has always impacted rates, but that the phenomena is not unique to the Caribbean.
“It is continuing to impact it more significantly now than past years because we’re seeing an increase in frequency in losses worldwide and it’s the same pool of funds that is used to pay claims wherever it happens. So climate change is a factor, an important factor, and we need to do all that we can to mitigate against losses to environmental changes,” she said.
General Accident Insurance has operations in Barbados, Jamaica, and Trinidad and Tobago.
Like Donaldson, president of Guardian General Insurance Jamaica and chief technical officer — P&C Group Karen Bhoorasing attributed the increase in reinsurance costs to climate change, but noted that in addition to natural disasters becoming more frequent in the region, they have also intensified.
She pointed to the recent passage of tropical storms Fiona and Ian, while also highlighting Irma and Maria in recent years.
“The hurricanes are more powerful. We never used to have so many category four and five hurricanes,” Bhoorasing stated.
This fact is not lost on AM Best Senior Financial Ricardo Longchallon, who commented, “The growing frequency and severity of global catastrophic events have forced reinsurers to adopt a more circumspect approach to climate risk.
“In some instances, this has resulted in double jeopardy for Caribbean insurers in the form of higher insurance rates, in some cases more than 15 per cent and less capacity.”
On this note, Bhoorasingh explained that capacity refers to an insurer’s or reinsurer’s ability to protect itself from risk with proper capitalisation. Capital is necessary for the payout of claims.
However, with inflation at historic highs in some jurisdictions, and as central banks around the world try to cauterise the impact of inflation with interest rate hikes, Bhoorasing explained that investments in insurance may lose ground to safer interest-bearing instruments.
“You also have the whole economic and financial markets uncertainty with what’s happening as interest rates go up. So if interest rates are going up, it might be safer to put your money in bonds ...” the Guardian General executive informed Sunday Finance.
Pointing to recent fires on the premises of major Jamaican manufacturers, Bhoorasing said that catastrophic events of that nature have also influenced the decision of reinsurers.
Responding to the issue of building capacity, Donaldson argued that this responsibility should fall to insurance companies to ensure they have the backing of reinsurers. She said that this may mean increasing rates across all categories of property and casualty insurance, but also suggested a segmented pricing approach to make insurance rate increases less onerous on policyholders.
The IAJ president anticipates that if the price of construction inputs and motor vehicle parts continue to rise, then the same will follow for vehicle policies.