Insurance premiums are expected to rise in 2023 as reinsurers face the retreat of invested capital due to rising interest rates and significant losses from catastrophes which have been compounded by elevated levels of inflation.

According to Investopedia, reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim.

“We certainly have observed rate increases as high as 15 per cent in several territories this year. We do expect this trend to continue into 2023. Our reinsurers who support our risk and are our suppliers of risk have experienced significant losses so far this year in 2022. In fact, some reports indicate catastrophe losses that amount to close to US$100 billion not including recent Hurricane Nicole. As a result, we predict reinsurers will have no choice but to increase their rates and we will be constrained to manage and share this burden with our customers,” said newly installed chief executive officer of Guardian Holdings Limited (GHL) Ian Chinapoo at NCB Financial Group Limited’s investor briefing last Friday.

GHL had exited the reinsurance business at the end of 2021 following a US$10-million (TT$67.94-million) loss it incurred in the third quarter related to floods in Germany. Guardian Re (SAC) Limited was the subsidiary that reinsured GHL’s hurricane and earthquake risk along with reinsuring the bulk of risk to external, professional reinsurance companies. GHL operates in 21 countries across the English and Dutch-speaking Caribbean with Guardian Life Limited in Jamaica being a core profit maker for the regional insurance group.

Inflation has reached record levels in 2022 across the globe with central banks in turn increasing their policy rates to combat the scourge. Reinsurers benefited before the rising interest rates when non-traditional money from hedge funds and private equity funds invested into reinsurance type products. With interest rates rising, so does the cost of capital.

“Across the industry, as the cost of claims increase, insurance rates will have to be readjusted upwards so we can continue to pay for the future claim. Inflation has become a major focal point across the insurance industry as well. It has increased the cost of claims and values of insured properties. Additionally, inflation will clearly impact the sums insured for both new policies and policy renewals to ensure that appropriate replacement values and thus adequate coverage is in place. Notably, for example, the cost of vehicle parts, building materials and labour escalate because of inflation. Thus, when rates are applied to these higher values, we do expect insurance premiums will rise,” Chinapoo added on the impact inflation has on the cost of insurance premiums to customers.

The Caribbean is typically grouped together as a basket for reinsurers when they price reinsurance to companies in the region. As a result, when a Caribbean country is impacted by a hurricane, it can in turn drive up the reinsurance rates in other countries and territories even if their risk has not materially increased. Reinsurance companies include Swiss Re, Munich Re, Allianz and Lloyd’s of London.

Locally, Insurance Association of Jamaica President Sharon Donaldson mentioned the fact that there was a hard reinsurance market and that reinsurance rates were likely to rise based on the evolving market dynamics. Donaldson, who is also the managing director of General Accident Insurance Company Limited, mentioned that claims inflation was being impacted especially on the motor side where parts have increased by as much as 40 per cent in recent times.

“We must do the best that can to price the product in such a way that reinsurers will stay with us and to provide the insuring public with proper terms and conditions in their policy to do a little bit of education to help them to see how they can mitigate against their losses,” said Donaldson on September 14.

The rising claims situation also comes at a time when insurance companies are spending more to prepare for the implementation of IFRS (International Financial Reporting Standards) 17 on January 1. IFRS 17 will replace IFRS 4, which currently permits a wide range of accounting practices for insurance contracts. As noted on www.ifrs.org, insurance contracts combine features of both a financial instrument and a service contract.

“Our group embarked on this IFRS 17 implementation journey since 2018. We’ve implemented robust IT infrastructure, made all the necessary technical quality decisions in both our group finance and actuarial departments. We are currently nearing completion in the preparation of our financials and updated disclosures required by the standard including proactive reviews conducted by our auditors PWC. The group is confident therefore, that we will adopt the standard as planned and as required on January 1, 2023,” Chinapoo explained on GHL’s readiness for the new standard.

GHL third quarter saw it record a 206 per cent increase in net result from insurance activities to TT$652.48 million which was largely driven by actuarial reserve releases during the quarter. Although net result from investing activities was relatively unchanged year over year, GHL’s net profit attributable to shareholders grew 209 per cent to TT$619.97 million which was almost comparable 2021’s performance of TT$782.33 million.

For the overall nine months, GHL’s net result from insurance activities is up 112 per cent to TT$1.33 billion with net profit attributable to shareholders increasing by 131 per cent to TT$1.06 billion.