While insurance companies were able to write more premiums in the first quarter, rising claims costs and reinsurance placements impacted the underwriting profit of various insurers across the industry.

Despite IronRock Insurance Company Limited seeing a 31 per cent rise in gross written premiums to $260.99 million, the nascent company saw its proportional reinsurance grow by 49 per cent to $212.08 million. The company’s claims balance remained flat at $18.58 million with the bottom line moving from a $4.46 million net profit to a $8.55-million net loss.

According to Investopedia, 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. In Jamaica, there were 11 general insurance and six life insurance companies at the end of 2021.

“On the general insurance side, the same challenges we’ve been talking about [regarding] supply and logistics would have also impacted general insurance, the availability, and subsequent cost of parts. That has flowed through the entire general insurance sector. If you see the numbers you would have seen that all the general insurance companies are being impacted with motor claims just through the cost of parts, said chief executive officer of GraceKennedy Financial Group Limited (GKFG) Grace Burnett at the recent GK annual general meeting.

Key Insurance Company Limited generated an underwriting profit of $1.71 million compared to an underwriting loss of $22.68 million for its motor division which recorded a 12 per cent rise in revenue to $371.42 million. Claims for the overall company was up 35 per cent to $197.71 million in the first quarter.

GK General Insurance Company Limited saw its claims cost grow by 20 per cent to $1.98 billion with its underwriting profit declining by 56 per cent to $201.26 million for 2021. This was against revenues increasing by nine per cent to $7.20 billion and the company generating 14 per cent of the general insurance industry’s $53.30 billion in premiums for 2021.

The issue was not isolated solely to companies in the general insurance industry, but also for those in the life insurance industry as well. Sagicor Group Jamaica’s (SJ) saw its employee benefits segment profitability decline by three per cent to $1 billion due to the 16 per cent rise in benefits incurred to $4.95 billion largely from higher health and death claims. This was against the backdrop of $6.92 billion in gross premiums.

“On the medical inflation side, which would impact Canopy, you’d also know that the inflation you’re seeing in the overseas markets and locally would impact the cost of drugs, and subsequently impact the costs of claims as well. The external factors are driving what we’re seeing with the claims on both general insurance and with the health insurance portfolios,” Burnett added on the rising costs seen in the life insurance industry.

While some executives believe that premiums will remain stagnant for property and motor-related business lines, president and chief executive officer of Advantage General Mark Thompson believes that gross premiums may rise to deal with the rising claims and inflation.

These events are all occurring ahead of the implementation of International Financial Reporting Standards (IFRS) 17 at the start of 2023. 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.

As noted in the SJ’s 2021 audited financials, “The standard requires a current measurement model where estimates are remeasured each reporting period. Contracts are measured using the building blocks of discount probability — weighted cash flows, an explicit risk adjustment, and a contract service margin (CSM) representing the unearned profit of the contract which is recognised as revenue over the coverage period. IFRS 17 requires the increased use of current market values in the measurement of insurance assets and liabilities. Additionally, the treatment of the CSM liability will reduce both tangible and overall equity; however, the group expects that the CSM will be considered as equity for the purposes of measuring regulatory solvency.”

Both SJ and Guardian Holdings Limited, which are some of the largest insurers in the Caribbean, haven’t provided any estimates on the potential impact of IFRS 17’s implementation on earnings.

Canadian-based insurance companies Great-West Lifeco Inc, Manulife Financial Corporation and Sun Life Financial Inc noted in a joint release that that the adoption of IFRS 17 will not change the underlying fundamentals of their businesses, their financial strength, or ability to pay claims.

Sun Life noted in an online presentation that IFRS 17 would have no impact on business strategy and that underlying net income would be more stable. However, it noted that 15-20 per cent of shareholders’ equity would be transferred to liabilities to establish the CSM and that there would be a mid-single digit reduction in underlying net income in the comparative 2022 year. The CSM is a new liability that reflects future profits. CSM is released into earnings as insurance contracts are fulfilled as expected.

Despite all these events happening for the insurance industry, GK CEO Donald Wehby is confident that the industry represents a greater opportunity for the group to grow. GK’s insurance segment grew its revenue by nine per cent to $1.76 billion and improved its profit before taxation by 205 per cent to $452.52 million in the first quarter. Canopy Insurance Limited reported a higher loss in 2021 despite revenues rising due to higher claims. GK Life Insurance Eastern Caribbean Limited is the group’s latest addition to its growing insurance presence in the region as it currently serves seven territories. It generated $93.46 million in profit from $244.06 million in the five months’ contribution in 2021.

“Obviously, we realised that GK, our life insurance is an area or segment that has an opportunity to expand further. We have applied to other islands to register outside of the ones that we acquired. We’re looking at an additional acquisition to expand GK Life. I’m hoping to say that by our next AGM I’ll be able to say to you our shareholders that we’re in now 14 or 15 countries. We’re very focused on it and believe this is an area that GraceKennedy can and will expand.”