Cedric Stephens Staying covered amid rising insurance costs
Managing Director of the International Monetary Fund Kristalina Georgieva warned a few days ago, according to a report in this newspaper, that 2023 will be tougher than the previous year for most of the global economy.
The United States, European Union and Chinese economies are projected to slow down at the same time. The global economy is therefore projected to contract as a result.
Local technocrats, on the other hand, are predicting that the Jamaican economy will expand by three per cent this year. This does not mean that things will be rosy for local insurance buyers. Three months ago, I wrote that and Organization of American States-USAID-World Bank working paper, ‘Insurance, Reinsurance, and Catastrophe Protection in the Caribbean’, estimated in 1996 that Caribbean insurers retained, on average, $15 out of every $100 that consumers pay as property insurance premium.
“Eighty-five per cent is passed on to foreign risk-bearing entities as a reinsurance premium. Caribbean insurers are very dependent on foreign reinsurance to provide capital, by way of reinsurance contracts. Capital is deployed to facilitate the insurance of assets like houses, factories, offices, hotels, motor vehicles, and other properties exposed to catastrophic losses from earthquakes, hurricanes, and floods.
“When the price of oil rises, consumers pay more for electricity, and for goods and other services. Similarly, when reinsurers raise prices, retail insurance consumers pay more.”
Institutions like the IMF, World Bank, the United Nations and its agencies, and the Inter-American Development Bank group Caribbean islands with Latin American countries.
“Global reinsurers, in contrast, have historically placed these islands in the same rating cluster as Florida in the United States. This means that the cost and supply of reinsurance to the Caribbean’s small island developing states are often affected directly and indirectly by happenings in the US’s third-most populous state.”
Parris Lyew-Ayee Jr and Rafi Ahmad, in their Natural Hazards Atlas of Jamaica, wrote that “Jamaica is subject to four main natural hazards: floods, landslides, earthquakes, and hurricanes. Over its recorded history, it has had numerous disaster events resulting from the impacts of any of these hazards.”
This is the context within which a December 5 forecast about the impacts of reinsurance availability and pricing by local insurance officials (and their foreign proxy) will be examined. This analysis is taking place during the first phase of the 2023 ‘reinsurance renewal season’, which began on January 1.
Today’s article will also review and update the predictions that were made by this column last July 1 and October 16. It will also offer generic advice to consumers about what they can do to respond to the many changes that are now taking place in the insurance marketplace.
A few days ago, the Financial Times reported that this year’s renegotiation of reinsurance policies has been “the most challenging in years”. Reinsurers are responding to pressure from spiralling inflation and large losses from natural catastrophes, as well as the fallout from Russia’s invasion of Ukraine.
Property catastrophe reinsurance, which shoulders losses from hurricanes and other natural disasters, jumped with rates in the US, increasing between 45 and 100 per cent for loss-hit policies. The cause: Hurricane Ian, which struck Florida and South Carolina last year, the succession of similar events that occurred in previous years, and the threat of more intense and frequent occurrences in future years – triggered by global warming.
One reinsurance broker described ongoing negotiations with reinsurers as “the toughest since 9/11”. Capacity squeeze is also causing reinsurance prices to increase. Some reinsurers have decided to pull out from areas that are subject to natural disasters or have stopped offering protection in areas that are exposed to these events. For example, one report last month stated that 13 home insurers in Florida have stopped writing new business in either parts of or the entire state since January 2022.
Industry experts are predicting that the present market conditions are unlikely to improve any time soon.
Can insurance buyers do anything to cut their insurance costs without sacrificing protection? The answer to this question is, maybe.
One local broker recently launched a major advertising campaign on the premise that by using its custom-designed technology platform, all types of consumers can realise savings of more than 50 per cent off their motor premiums. Similar levels of savings are not possible for property insurance policies, for reasons previously cited.
Underlying the promise of cost reductions is not the magic of the technology but rather, the broker’s in-depth knowledge of the many factors that influence how motor insurers make pricing decisions. Gaining deep insights into how insurers make pricing decisions in relation to the risks of natural disasters for property insurance is the right place to begin.
William S. McIntyre IV and Jack P. Gibson offer suggestions in their publication, 101 Ways to Cut Business Insurance Costs without Sacrificing Protection, 4th Edition. The book was written for a North American audience. It, therefore, assumes that the reader is familiar with the theory and practice of how property insurance is conducted in that jurisdiction and the many differences in state laws and regulations.
Here are a few ideas that are relevant to the local situation:
o The ‘greatest determinants’ of property insurance cost are the characteristics of the insured property. Some of these features include the characteristics of the buildings and their susceptibility to damage by natural disasters and other insured perils and their contents; the type of operations conducted at the locations and the nature of the risks to which they are subject; the building design and the extent to which it complies with current regulations and standards with respect to natural disasters and fire protection; the exposures presented by neighbouring property and the geographical area in which the insured premises are located.
o Full details of the loss history covering a period of the last five years, at the very least.
o The nature of the coverage. Generally, broader coverage costs more than narrower coverage.
o Most property insurance is written subject to a deductible. A deductible is a portion of each loss that the buyer must bear before the insurance comes into play. The deductible (or excess) gives the policyholder ‘skin’ in the game.
Local insurance buyers pay insufficient attention to the training, technical competence, and experience of their service providers. Are they members of internationally recognised institutions? Are they trained in risk management?
Insurance, like many specialities, is a complex subject that involves many uncertainties. Finding an organisation or an individual with the right mix of skills, experience, and training is one of the many ways to navigate the many challenges that confront buyers during these uncertain times.
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.