Tuesday, December 5, 2017
By NEIL HARTNELL
Tribune Business Editor
Bahamian businesses and households were yesterday warned to "brace" for insurance premium increases of up to 15-20 per cent as a result of the 2017 hurricane season.
Property and casualty insurers warned of potentially "significant" rate increases as reinsurers sought compensation for storm-related losses in the US and Caribbean, and adjusted their pricing to reflect the increased severity and frequency of hurricanes. They added that they had 'no choice' but to pass these increased costs on to Bahamian consumers, but said rising premiums "shouldn't be a shock to anyone" given the devastation inflicted elsewhere in the region by Hurricanes Irma and Maria.
Tom Duff, Insurance Company of the Bahamas (ICB) general manager, told Tribune Business: "The position right now, as far as we can determine, is that reinsurers that typically provide cover to the Caribbean are most likely going to be looking for increases in their prices for providing catastrophe coverage.
"All the conversations we're having so far is that the reinsurers that provide catastrophe coverage to the region, they are looking for significant increases in their charges. I wouldn't like to put particular figures on it as it's still early in the negotiation process, but the reality is that as the cost of catastrophe cover is typically increased, we have to pass it on to the customers as that's a major expense that has to be covered.
"I think that in general terms consumers need to brace and prepare themselves for rates to rise. Our costs are going up, and we have to pass them on to consumers. I think we'll see a significant increase. Most insurers will be anticipating a level of increase, and will be factoring it into their December results."
Mr Duff was backed by Timothy Ingraham, Summit Insurance Company's president, who told Tribune Business that Bahamian property and casualty insurers would get a better understanding of the extent of reinsurance price increases over the next fortnight.
Based on preliminary feedback, he suggested Bahamian businesses and households needed to ready themselves for increases that could be material.
"It's tough to say," Mr Ingraham said, "but most reinsurers are saying 15-20 per cent increases in areas which didn't have a loss in the recent storms this year. That's the initial comments.
"What it ends up being at the end of the day, I couldn't say. We'll have to wait and see what happens. Obviously, from our perspective, we hope it's not quite that high. For some of those areas hit [in the 2017 hurricane season], they will be be looking at 100 per cent increases, so hopefully we will be on the lower end rather than the high end.
"The three storms, Harvey, Irma and Maria, and the two Mexican earthquakes, caused total insured losses of $95 billion, so a lot of pain is being felt by reinsurers and some insurers as well."
Bahamian property and casualty insurers typically purchase and seal reinsurance contracts towards the end of the calendar year, ensuring they have sufficient protection for the following 12 months.
As a result, the industry is only now gauging the extent of the cost increases that it will largely have to pass on to Bahamian consumers.
Even a 15-20 per cent increase in local insurance premiums will concern policymakers as well as the industry, given that such a rise could price catastrophe coverage - a necessity in the hurricane-prone Bahamas - out of reach of a significant segment of the population.
This, in turn, could expose the Government and Bahamian taxpayer to increased post-storm restoration costs if more home and business owners do not possess property and casualty insurance. Hurricane recovery will thus become more protracted, creating a further drag on an already-struggling economy.
And, for those still able to afford insurance cover, the increased premiums mean less disposable income for business investment or consumer spending.
Global reinsurers tend to treat the Caribbean as a single market, grouping the Bahamas with the entire region and Florida, which means insurance premiums here are not immune from the impact of Irma and Maria's Category 5 winds.
Mr Ingraham suggested reinsurers were still determining the severity of their losses and payouts, given that the three hurricanes and Mexican earthquakes had occurred towards the end of the year.
"I just had a conversation yesterday with our brokers, and was commenting on how slow the pace has been this year in getting quotes back from the reinsurance market," he told Tribune Business. "It's been one of the slowest years for a while.
"We're still waiting, and anticipate a mad scramble in December to get this done. We're sitting on our hands, waiting to see where this all goes. In the next two weeks, we anticipate things will start heating up quickly and we will start to see some pricing coming back from the market."
Reiterating Mr Duff's warning to "brace", the Summit Insurance chief added that the Bahamian insurance industry would do its best to minimise the property and casualty premium increases passed on to consumers.
"The local insurers will do their best to contain the increase as much as possible," Mr Ingraham said, "but I would say to clients to expect some increase. Talk to your agent, look at the options to soften the impact as much as possible. We're hoping this is not a large increase, but it's very much out of our hands.
"A lot of numbers are thrown out, and it may be in the heat of the moment. Many reinsurers are waiting to see how their losses develop; do they go higher, or lower, than expected. But given the [hurricane] activity we've had in the region, it shouldn't be a total shock to anyone that their insurance premiums might go up this year."
While the Bahamas largely escaped Irma and Maria (Ragged Island, Inagua and Acklins excepted), Mr Duff said this nation had incurred "a run of significantly high losses" as a result of Matthew in 2016 and Joaquin the year before.
Bahamian insurers have not choice but to purchase huge quantities of reinsurance annually, as their multi-million dollar capital bases pale into comparison to the multi-billion dollar risks they underwrite. This effectively makes them a 'price taker' from reinsurers, which cover the bulk of these risks.
Mr Ingraham described the sector as "resellers", adding: "We get charged a price and, like any retailer, we have to look at it and see what our selling price will be."
Giving a more technical explanation, Mr Duff said: "The reality is that if you insure your home, a very substantial part of the insurance cost is the cost the insurer has to pay to purchase catastrophe protection from reinsurers.
"This is how the market works. Many insurers give away a proportion of the rate to reinsurers, and the reinsurer pays a portion of the claim in proportion to the premium received. That's the first line of defence.
"In regard to insurance retention, the bit of the premium the insurer keeps, that has to be protected by catastrophe excess of loss coverage to protect the balance sheet," Mr Duff added. "When that cover rises, it has to be met with premium increases as it's a major cost.
"The majority of our costs is the cost of catastrophe protection. It's a simple fact of life. Most Bahamian insurers, like Caribbean insurers, don't have the capital base to write risks on their own account. We have to protect the capital base, and the only way to do that is purchase catastrophe reinsurance. That comes at a price."