Caribbean homeowners are being told to brace for higher premiums as insurance brokers complain about the hard market stance being taken by reinsurers.
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.
Examples of reinsurance companies include: Munich Reinsurance Company, Swiss Re Ltd, SCOR S.E and Berkshire Hathaway Inc.
Of note, most of the companies which provide reinsurance services to the Caribbean are domiciled in Europe.
According to Paul Lalor, vice-president with responsibility for general insurance at the Insurance Association of Jamaica (IAJ), Caribbean reinsurers are "fed up" with the low rates being offered in the region.
"The other problem that we have been facing that's a challenge is what they call a hard market meaning that the reinsurers are now fed up with us giving rates that they perceive to be too low," said Lalor.
A hard insurance market refers to the upswing in a market cycle, when premiums increase and capacity for most types of insurance decreases.
"They come to us and say 'your rates are too low, we expect you to give us this kind of rate instead of per dollar of risk. You haven't done it for too long so I'm not going to give you too much more capacity to grow with, I'm going to give you either less capacity to place business with me or I'm going to give you the same amount of capacity," Lalor continued.
Capacity in this case refers to the largest amount of reinsurance available from a company or the market in general.
He said when reinsurers start cutting back capacity it causes significant issues, especially with inflation.
"Let's say I have a thousand houses and those houses are insured at $1 each and now your house is worth $1.08, I only have $1 of reinsurance cover. I can't write all the houses at $1.08 I can only write 90 per cent of them. I may not have enough capacity to write everybody next year and that, of course, is demand and supply so if I don't have the supply, it's the guy that's going to pay me more that I'm going to supply it to," he explained.
Aside from that, he said reinsurance premiums are already high because of what's happening in the world.
"We've been having catastrophe all over the world, snowstorms, floods, fires but now you have a Florida hurricane. There's probably around US$657 billion of capital in the reinsurance market. I would anticipate that this storm will probably be about US$40 billion so it's a significant loss and then you add that on top of other losses, it eats into the capital," Lalor noted.
With that said, the insurance expert admitted, "If I have to pay more for reinsurance — my catastrophe cover — then I have to charge the homeowner more."
He said momentum has been building for years and is now nearing a peak level where reinsurers are getting stricter.
"If [Hurricane] Ian didn't exist we were going to struggle, particularly in the Caribbean because of our history of catastrophe and our rates have traditionally been very low. The reinsurers have decided that the Caribbean is risky and they're not getting enough money from us for them to want to continue exposing their capital to the Caribbean," he pointed out.
As a result of that Lalor said, "I think you'll see that the insurance rates are creeping up, people are paying a little bit more for their home insurance so the industry is trying to bump it up as best it can but I don't think we can get high enough for them [reinsurers] to really want to not do something dramatic to us this year. I think we will see that we won't get as much capacity, we might get the same amount that we had last year but I think we'll probably get a little less and that means that even if there wasn't inflation we would be struggling to cover everybody and the fact that there is inflation means that we're going to have a bigger gap between demand and supply," Lalor explained.
He continued, "I really hope I'm wrong but everybody I'm talking to including our insurance brokers tell us we're going to struggle this year to place what we would like to place."
In light of that he's urging homeowners to ensure they protect themselves from a "double whammy" by ensuring their premium aligns with the value of their property.
"People must make sure when they're insuring their homes that they're insuring them for the right amount. The double whammy is when we increase the price on you and then there comes a claim and you get hit by average and you're already going to get a deductible of 2 per cent but to be hit by average as well is a real issue. People need to just focus on making sure that their homes are insured for the right amount of money, and if they haven't changed the value of their home in the last four or five years then they are definitely in a position which would impact them if there was a hurricane or earthquake — and we genuinely don't want that," Lalor cautioned.