The growing threat of climate changes continues to put pressure on the Caribbean as reinsurance costs spike for general insurance companies, a scenario that has led to a sharp spike in insurance costs for regular consumers.

For many homeowners across the Caribbean, they’ve likely seen their annual premium spike by as much as 50 per cent in the last two years despite their property not incurring any damage and no claims being made to their general insurance company. There are two main factors which are driving up insurance premiums: reinsurers and inflation.

When a general insurance company insures a client’s property and collects a premium, they will pay or cede part of the premium to a reinsurer(s) who effectively insures part of the insurance policy on that general insurance company’s book. Reinsurers generate income from the premiums they collect and in turn pay the insurance company based on the arrangement they have in place related to claims incurred in the relevant period. Reinsurers and insurance companies renegotiate treaties every year with general insurance companies to provide them with a particular amount of coverage they’ll cover.

Over the last several years, there has been a sharp rise in the severity and frequency of storms and the associated damage. Reinsurers, like any other business, don’t want to incur losses and have to continue attracting different forms of capital in order to provide business to general insurance companies. The rise in interest rates has decreased the pool of available capital for reinsurers to provide coverage to the general insurance companies whose book of business grows due to higher home values which are also influenced by inflation.

“The more hurricanes and the more damage put pressure on the reinsurers to reconsider their models and increase rates, but we work with them openly. We plan for this, of course we’ll wait to see how the rest of the season goes,” said Ian Chinapoo, group chief executive officer of Guardian Holdings Limited (GHL) at an investor briefing on Wednesday.

While the easier route might be to forego home insurance, that comes with a critical cost of the homeowner having to find the money to rebuild their property. In Florida, insurance premiums have gotten so expensive that an estimated 15 to 20 per cent of Floridians are self-insuring or have no property insurance.

The recent passage of Hurricane Beryl left the Caribbean with an estimated US$1 billion in damage, but apparently only US$500 million was insured as per Chinapoo’s research. This meant that many persons in the Caribbean are effectively starting from ground zero again.

In the case of GHL, they have an estimated gross claim value of US$48 million before reinsurance which takes that associated cost down to US$10 million. Reinsurance effectively cut the amount GHL was exposed to pay its clients by 80 per cent.

“Within the first week, we were getting advanced payments from them to help settle claims. They’re very much partners in how we manage through this, but of course, everybody looks at their statistics and they would do reviews of every season to see what they would need to do with their rates in the future,” Chinapoo added on the recent engagement with reinsurers.

While many persons might think general insurance companies generate a ton of money from their insurance business, in some periods, that might be far from the truth. GHL had a 13 per cent increase in property and casualty revenue to TT$1.46 billion for the first six months, but the 15 per cent jump in net reinsurance costs to TT$636.45 million and 13 per cent rise in insurance service expenses (claims and other insurance costs) to TT$670.51 million left it with only TT$150.05 million in net insurance result/revenue.

Chinapoo noted that GHL negotiating sufficient capacity in 2023 was key to allowing the group to grow last year. GHL operates in more than 20 territories across the Caribbean.

In the case of General Accident Insurance Company Jamaica Limited, which operates across Jamaica, Barbados and Trinidad & Tobago, a 25 per cent jump in insurance service expenses and 37 per cent jump in net reinsurance costs pushed its net insurance revenue down by 76 per cent to $79.71 million for their second quarter. Strong investment and other income were enough to see consolidated net profit only down 46 per cent to J$103.58 million.

Even the smallest general insurance company in Jamaica, IronRock Insurance Company Limited, saw a 17 per cent rise in its net reinsurance costs and a 116 per cent rise in its insurance service expense which cut its insurance service revenue by more than three-fifths.

Thus, if general insurance companies don’t adjust their rates for their customers, they can end up losing money as a result. The tight reinsurance market resulted in many Jamaican general insurance companies reducing new property business last year or quoting outrageous rates for new clients. This has pushed more persons to consider insurance premium financing or instalment plans with their insurance brokers or third-party firms.

“Interestingly, I will tell you that despite the significant increase in premiums, we have seen where people, especially on the commercial side, have been increasing their [insurable] values. Persons are not increasing the values, and we have seen the impact of that coming through on the claims that we’ve had for Beryl,” said Karen Bhoorasingh, president of Guardian General Insurance Jamaica Limited.