Insurance affordability fears rise on 15-20% premium increases


Tribune Business Editor

BAHAMAS First's top executive believes "the time is really ripe" to examine how insurance can be made more affordable with property premiums set to increase 15-20 per cent in 2018. Patrick Ward, the underwriter's president and chief executive, told Tribune Business he will "certainly be making representations" to both the Government and his industry colleagues about the need to prevent insurance coverage being priced beyond the reach of lower and middle income Bahamians.

Conceding that there would be "some fall away" in catastrophe cover due to the significant increase in premium costs, Mr Ward said expanding the pool of Bahamian homeowners and businesses able to afford private property insurance was critical to reducing the financial burden on government/taxpayers following a major hurricane.

And he promised that "we'll certainly be raising again" the Christie administration's decision to levy Value-Added Tax (VAT) on property and casualty premiums, given the growing need to combat increased insurance costs.

Mr Ward was speaking after Bahamas First's brokers informed him of the increased premiums being demanded from local underwriters by international reinsurers, eager to recover capital following a 2017 in which natural disasters - including Caribbean hurricanes - generated an estimated $135 billion in global insured losses.

"There's no question that property rates in 2018 are going to go up," the Bahamas First chief told Tribune Business, suggesting that the Bahamian market would fare better than those that suffered a direct hit from hurricanes Irma and Maria.

He estimated Bahamian property and casualty rates would likely suffer "an increase in the lower double digits", with a 10 per cent rise on "the lower end" and 20 per cent at the upper end of the scale.

"I think it's a bit of a mixed bag," Mr Ward said. "There are primarily two categories of companies in terms of how the impact is going to be spread among insurers in the region.

"If you are operating in a country that had a direct or major impact from hurricanes in 2017, then the level of increase is going to be significantly higher than areas where the impact was minor or non-existent."

Mr Ward said locations such as Dominica, Puerto Rico, the British and US Virgin Islands, Turks & Caicos, St Maarten and Anguilla, which took the brunt of Irma and Maria, were likely to experience 20-30 per cent - even as high as 50 per cent - increases in the cost of catastrophe coverage in 2018.

"In the case of those areas that were less affected or spared, and I'm including the Bahamas in that, the increase is likely to be in the lower double digit category, with 15 per cent mid-range," he told this newspaper. "I would say 15 to 20 per cent just be be on the safe side."

Mr Ward's estimate is bang in line with the prediction given by his colleague Timothy Ingraham, Summit Insurance Company's president, who warned in early December of a 15-20 per cent increase in property and casualty prices for 2018.

The Bahamas First chief executive's figures, coming one month later and after local carriers have obtained a 'better read' of what global reinsurers are demanding, indicates that the magnitude of the increase is now effectively 'fixed'.

A 10 per cent change in a 'line item' on a company's financial statements is described as 'material', and Mr Ward conceded that the rise would almost certainly result in homeowners and businesses electing to under-insure or drop catastrophe coverage altogether.

"The demand for insurance is highly sensitive to price increases," the Bahamas First chief conceded. "Our experience is that there are probably going to be clients looking to make adjustments to their cover and, hopefully, there will only a small number of clients that opt to get no cover at all. That would not be a safe route to go.

"The message to our brokers and agents is to try and accommodate every client in terms of ability to pay in a way that satisfies the client, agent and broker, and Bahamas First."

Bahamian commercial banks will be able to apply some brakes to the shedding of catastrophe coverage, as they require mortgage holders - both commercial and residential - to maintain comprehensive cover as a condition of the loan.

This, though, will not affect homeowners and businesses unencumbered by mortgages, while the premium increase may also drive many borrowers on to the banks' group policies.

Mr Ward declined to estimate the potential fall-out, though he anticipates it will be nowhere near the 'coverage shedding' that followed Hurricane Andrew's aftermath in 1992.

"It's very difficult to tell because the increases are substantial," he acknowledged, "but it it won't be the same as the position after Hurricane Andrew, when rates went up 300 per cent.

"Thirty per cent of the portfolio went from catastrophic to non-catastrophic coverage. We're not expecting anything near that kind of fall-out. But there will be some movement and fall away."

Arguing that insurance was a 'socially desirable' good, especially in a nation so frequently hit by hurricanes, Mr Ward agreed that the Government and local industry needed to work on expanding the affordability of catastrophe coverage following the latest reinsurance-imposed increases.

"I think the time for us to have a conversation around expanding the insurance pool for people in the lower income bracket is really ripe," Mr Ward told Tribune Business.

"I'm certainly going to be making representations to my colleagues in the insurance industry, and the Government as well, about ways to tackle that issue that not only help the Government contain what they're having to spend in the event of catastrophe, but also bring relief to people that need it.

"Unfortunately, in this part of the world, given the frequency and severity of such events, the cost of protecting against natural catastrophes such as hurricanes has to be factored into the cost of daily living. It's one of the things that we have to settle for when living in this past of the world."

Mr Ward said removing 7.5 per cent VAT from insurance premiums was an immediate way to make catastrophe coverage more affordable, given that it is levied on top of the 3 per cent 'premium tax' and acts as a 'tax upon a tax'.

"It goes back to what the industry has been saying: Is it really appropriate for VAT to be charged on property and casualty premiums?" he asked. "The answer, from the industry's perspective, is clearly 'no'.

"The Government should be encouraging the public to buy insurance through their tax policies, rather than discouraging it. We'll certainly be raising the issue once again." The Bahamas is one of just a few countries to levy VAT on property and casualty premiums.

The Government's post-Hurricane Matthew repair bill was exacerbated by having to finance repairs to private homes lacking catastrophe coverage, and the insurance industry's argument is that expanding the insurance pool would save the taxpayer and Public Treasury a multi-million dollar sum.

Tom Duff, Insurance Company of the Bahamas (ICB) general manager, told Tribune Business that the Bahamian property and casualty industry had no choice but to "suck it up" and pass increased reinsurance costs on to consumers.

He sought, though, to soften the blow by pointing out that local carriers had passed reduced reinsurance cost on to consumers for the past two years, helping to negate the impact of VAT's imposition.

"It's major expense factor for all insurers writing business in the region," Mr Duff said of reinsurance. "We have to suck it up, whatever the costs are.

"The important thing for consumers to reflect on is, over the last couple of years, they will have enjoyed a reduction in premiums costs and a reduction in the cost of catastrophe coverage. Some of that reduction will have been disguised and, in some cases, cancelled out by the introduction of VAT."

Bahamian insurers have no choice but to purchase huge quantities of reinsurance annually, as their multi-million dollar capital bases pale into comparison to the size of the multi-billion dollar risks they underwrite.

This effectively makes them a 'price taker' from reinsurers, which cover the bulk of these risks, giving them little choice but to pass on increased reinsurance costs to consumers. One former insurance chief executive said of the relationship: "They [reinsurers] say jump; we say: How high?'."

Mr Duff, declining to estimate the magnitude of 2018 premium increases, said the Bahamas was fortunate to have been spared the worst in terms of both the rises and storm damage.

"The common theme, not just from our reinsurers but other reinsurers that support the Caribbean, is they are certainly looking for a correction in regional rates including the Bahamas," he said.

"On the back of these 'super storms', and Matthew in 2016, they're looking for the insurance industry to introduce some form of correction. The cost of catastrophe cover will increase this year as insurers look to claw back some of these [reinsurance] costs from consumers."

Mr Duff said it was up to individual Bahamian property and casualty insurers to determine the extent of their respective premium increases, adding: "We're not a cartel."

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