Cedric Stephens Climate crisis outmatching insurance
Three years ago, The Gleaner tweeted the following: “There is the old clich? about the United States sneezing and everyone else catching its cold. These days, and in a literal sense, Jamaica’s biggest worry from America is the spread of the COVID-19 virus.”
Those words can be applied to other situations in today’s post-pandemic world.
‘If Climate Shocks are Making Parts of America Uninsurable. It just Got Worse,’ as The New York Times declared on June 2, 2023, what are the odds of small developing Caribbean states avoiding the fate of Haiti due to climate and other shocks?
“The climate crisis is becoming a financial crisis. This month, California’s largest homeowner insurance company, State Farm (which earned premiums of US$74.3 billion in 2022), announced it would stop selling coverage to homeowners. That’s not just in wildfire zones but everywhere in the state. Insurance companies, tired of losing money, are raising rates, restricting coverage, or pulling out of some areas altogether — making it more expensive for people to live in their homes,” the New York Times reported.
These assertions echoed concerns I expressed two months ago that consumers in the Caribbean are facing an insurance crunch in ‘Insurance Crisis Needs Unified Approach from Caricom’. When I shared this information with my walking companions a few days ago, the 50 per cent premium increase to insure their houses seemed less like ‘hold dung and tek wey’. They paid it without protest.
The Caricom Working Party, set up over two decades ago, among other things, to find solutions to a then budding problem, is MIA. Is this issue on the industry regulator’s radar? Has it been brought to the portfolio minister’s attention, or is it hidden in a report in a filing cabinet ? la the Stocks & Securities mess?
Two of Jamaica’s leading Kingston-based property insurers – with centuries-old histories in the housing market and now parts of competing financial groups – have devised separate strategies to minimise one of the by-products of the rapidly developing crisis.
One, JN General, advocates business continuity planning, or BCP, which is a system of prevention and recovery from potential threats to a company. The plan ensures that personnel and assets are protected and can function quickly in the event of a disaster – an appropriate strategy for disaster-prone countries like ours.
The other insurer, British Caribbean Insurance Company, launched a new Hurricane Insurance Policy for homeowners and renters on July 18. Typically, local insurers have avoided discussing hurricane insurance products in the past except to say that the coverage was unavailable as tropical storms approached the island. BCIC’s product was developed with the United Kingdom-based insurtech company Yokahu.
Insurtech is “the innovative use of technology in insurance and is a subset of fintech, or financial technology. Fintech has transformed the banking industry. Insurtech is altering the insurance industry’s business models and the competitive landscape”. Yokahu says it “believes in the potential of data science to build climate resilience worldwide. We develop advanced simulation and forecasting models, which greatly improve accuracy and precision and offer reactive risk and pricing”.
These are some of the elements that have contributed to the design and development of BCIC’s groundbreaking new product. Another is that many of the principles and customs that have governed the practice of indemnity insurance in the past have been abandoned by parametric insurance providers.
As explained by the National Association of Insurance Commissioners, a body representing state insurance regulators across the United States, parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event. It pays a set amount based on the magnitude of the event. Traditional indemnity insurance, however, provides compensation based on the extent of the losses in a policy.
For a parametric policy that pays $100,000 if a hurricane of Category 3 or greater occurs, it said, that amount, the parameter, will be delivered on verification by an independent third party specified in the contract. But in the case of an indemnity contract, the amount payable depends on the size of the loss caused by the hurricane as verified by a loss adjuster.
Understanding these differences is critical to BCIC’s new hurricane product. The payout process differs significantly from what one typically expects from a traditional insurance contract.
“There is no claims process or need to show proof of damage to receive a payment. Once the strength of a hurricane rises to approximately Category Three or above with wind speeds reaching 74mph, the customer is automatically paid. Payouts for customers begin at US$160 and go as high as US$10,000,” BCIC says.
Other features include no average clause; no deductible or excess; premiums ranging from US$60 to US$750; consumer choice on how much premium to pay, determining their potential claims payout; payouts of up to US$10,000 in US currency; the central pressure of the storm determines the payout; a no-hassle payout within days when a qualifying hurricane hits and meets the specified category and wind speed; cumbersome claims forms, loss adjusters, and long waits for reimbursement will be avoided; and claims will be paid digitally into the policyholder’s designated bank account
Traditional insurers typically bundle or sell fire, earthquake, and hurricane in a package. BCIC’s new product allows consumers to buy hurricane insurance only. Renters can buy the product to cover their property, and consumers use it to ‘top up’ their standard home insurance. The company is also taking steps to ensure that the contract wording aligns with the standards in its homeowner’s contract.
Despite the laudable efforts of the insurers, much more work must be done by the state actors. With temperatures this month predicted to be the highest in recorded history, time is of the essence. The Natural Disaster Risk Financing Policy needs to take centre stage.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com