Cedric Stephens Insurance crisis needs unified approach from Caricom
Jamaica and its Caribbean neighbours are facing an insurance crisis. This emergency is like the increasing inflow of illegal guns and ammunition from the United States into the region.
The entry of weapons of war will destabilise the region’s economic development. As a result, Caricom’s political leaders recently declared a ‘war on guns’.
The emerging property insurance crunch also has the potential to hinder the region’s economic development. Input from regional governments, regulators, and the private sector will be critical to finding solutions.
Christopher Flavelle wrote in The New York Times last October that Hurricane Ian, which devastated Florida a month earlier, “will make it even harder for many to get insurance, experts say – threatening home sales, mortgages, and construction (and that) it will destabilise the state’s insurance and real estate markets”. Information from local consumers and industry sources say the same has started to happen even though Ian did not hit Caribbean islands.
Reinsurers – big capital providers enabling regional carriers to offer insurance against natural disasters like hurricanes and earthquakes – treat the small Caribbean islands, Florida, and the Gulf States alike. Is this reasonable? If Florida were an independent country, its economy would be the 15th largest in the world, with a gross domestic product of US$1.4 trillion. In contrast, according to Elizabeth Morgan, a Gleaner contributor, the combined GDP of Caricom members is US$82 billion.
Florida insurers, like their Caribbean counterparts, depend heavily on reinsurers. These European, Bermudan, or Caribbean-based reinsurance companies are often the same ones that provide capital to regional insurance companies.
Reinsurance contracts are negotiated annually. If reinsurers decide risks are too high, they can raise their rates as much as they like – or simply walk away. Several reinsurers raised their rates and imposed coverage restrictions last year. Others walked away from Florida and the Caribbean.
Florida has faced a recurring insurance crisis during the past three decades. Ten hurricanes hit the state between 1992 and 2022. Many insurers packed their bags and left the state. The formation of a state-owned insurance company has not resolved the insurance availability problem. The exodus of insurers and reinsurers increased following Hurricane Ian. Some of the insurers that remain have refused to insure private homes. House owners who are lucky to obtain coverage have seen their premiums triple.
Jamaican insurance industry sources and consumers have started to feel the crunch. Industry insiders estimate that the allotted reinsurance capacity to the island has declined by about five to ten per cent of what it was in 2022.
This means that financial institutions cannot grant mortgages if prospective buyers of new apartments struggle to get property insurance. Brick-and-mortar businesses will also be unable to expand their operations because less insurance will be available than in the previous year.
Significant premium increases are being sought because of the reduction in the supply of reinsurance. This has led to some consumers deciding not to buy coverage against earthquakes and hurricanes or, effectively, to self-insure. Others who have increased their assets and need more insurance find it hard to get coverage. If they do, the cost is beyond their reach. How will this impact bank loans, the construction industry, and the economy?
The problem is broader than Florida and Jamaica. Here is a snapshot of what others across the Caribbean have said about the incipient crisis.
President of the General Insurance Association of Barbados Randy Graham said that insurance companies there and in the wider region would have to pay between 15 and 30 per cent more for reinsurance.
“Unfortunately, we hear these responses from the reinsurers throughout the Caribbean. As far up as The Bahamas in the north, right back down to Guyana in the south, the reinsurers are giving us the same stories,” said Graham.
The Association of Trinidad and Tobago Insurance Companies (ATTIC) said that its members are bracing for a hardening reinsurance market, which will result in double-digit increases in reinsurance costs this year. ATTIC warned that several Caribbean insurers are facing the possibility of their current reinsurance programmes not being fully supported, hardening the renewal terms and increasing costs.
“This will undoubtedly have an adverse impact on the future sustainability and survival of some insurers if they cannot recover those increased costs,” it said.
And The Bahamas Insurance Association, according to The Tribune, confirmed earlier market forecasts. It warned that “persons may find that they may have difficulty obtaining catastrophe insurance protection due to shortage in capacity”.
The report also said that the increase in reinsurance costs would add another element to the cost-of-living crisis sparked by multiple price rises across all economic sectors and make it increasingly difficult for homeowners and businesses to fully insure their assets – despite the growing threats posed by more frequent and severe storms.
Another worrying trend has developed in The Bahamas, which does not augur well for the tourist-dependent economies of the Caribbean. Properties within 200 feet of the sea may find it more difficult to obtain coverage soon.
None of the four sources has explicitly connected the insurance crisis to global warming. In Small Island Developing States in the Eye of the Hurricane and Teeth of Climate Change, Carlton Joseph wrote: “For years, scientists have been warning that storms are increasing in frequency and severity as global temperatures rise. Hurricane Ian has exposed the growing risk of climate disasters and the scale of havoc they can wreak on a country’s economy, infrastructure, and liberalised global food system. The US coasts, Caribbean countries, and coasts globally are at exceptionally high risk of more flooding, property damage, food insecurity, unemployment, and life-threatening conditions”. The same could be said of Hurricane Dorian.
Consequently, the immediate threats posed by the volatility in reinsurance markets to Caribbean economies are unlikely to disappear soon.
Caricom leaders presented a unified front at the United Nations General Assembly on the challenges posed by climate change to SIDS. A similar approach should be adopted in relation to the turmoil that is now taking place in the global reinsurance markets and its impacts on Caricom members. CCRIF SPC was invented in the Caribbean to help solve the financing of natural-disaster risks. Does the emerging reinsurance crunch present us with another opportunity to innovate?
Jamaica’s Minister of Finance and Public Service, Dr Nigel Clarke, despite the spate of criticisms levelled against him during the recent budget debate, has displayed a deep understanding of Jamaica’s vulnerabilities to natural disasters and what can be done to finance these risks. He has earned my vote to head the group to find solutions to a developing regional problem.
– 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