Insurance companies in the region responded to the challenges of the financial fallout from the COVID-19 better than their deposit-taking counterparts, the Caribbean Regional Financial Stability Report (RFSR) 2020 has outlined.

The RFSR tested the soundness of the financial institutions in three key areas: asset quality, profitability and capital adequacy.

Overall, the report noted, “The performance of the regional financial sector has recorded some significant changes in important areas over the last two years. In particular, while capital adequacy levels remained robust, indicators of asset quality and profitability weakened within both the services and commodity-based economy groupings. Developments were dominated by the impact of the COVID-19 pandemic, as globally imposed travel restrictions adversely impacted the operations of all financial institutions in the region.”

Travel restrictions negatively impacted the tourism sector which depends on credit facilities from deposit-taking institutions. As a result, companies in that sector could not meet their debt obligations to financial institutions as economic activity came to a halt.

So, while non-performing loans (NPLs) declined from 2015 and 2019 from 10.3 per cent to 6.5 per cent, they increased within a year to 7.2 per cent with the onset of the novel coronavirus pandemic.

On the other hand, NPLs in commodity-based economies reverted to over five per cent in 2020, eroding gains made between 2015 and 2019.

The RFSR also pointed out that banks saw their profitability decline due to the fallout of the pandemic as they faced small interest rate spreads, low demand for credit, low payment moratoria and increasing provisions for bad debts, which also slashed their return on assets and return on equity in 2020.

Banks’ capital adequacy ratios, though above the regulatory minimum, fell from 22.5 per cent in 2019 to 21.6 per cent a year later. From 2015 to 2020, their liquid assets as a percentage of total assets remained above 25 per cent

“This dynamic was driven by central bank policy measures to sustain market liquidity, government COVID-19 support measures and lower credit demand in the wake of the pandemic. Service-based economies have generally had higher levels of liquidity, relative to their commodity-based counterparts over the period 2015-2020,” the report shared.

In the region’s insurance industry, where life insurance providers dominate the market, companies “remained highly capitalised relative to total assets”. Whereas capital adequacy ratios stood at 23 per cent overall, life insurance companies in the region saw their capital to asset ratios increase from 27.2 per cent in 2018 to approximately 29 per cent, despite the onset of the pandemic.

Life insurance companies also saw their profitability increase over the period 2015–2020, as the regional return on asset of life insurance companies increased to 5.2 per cent in 2020, up from 4.4 per cent in 2019.

“Similar dynamics were observed for profitability as defined by the average return on equity (ROE) for the region. The average ROE for the region increased from 15.6 per cent in 2019 to 18.0 per cent in 2020,” the RFSR said.

“The average performances concealed significant variances in the performance of the life insurance sector in individual countries. In particular the ROE for Jamaica, Suriname and The Bahamas improved significantly over the review period, while ROE for Guyana, Trinidad and Tobago, Barbados, and Belize declined significantly in 2020,” it continued.

For non-life insurance companies across the region, their capital to asset ratio averaged above 30 per cent over the five-year period, increasing from 32 per cent in 2019 to 36.9 per cent in 2020.

While profitability as defined by ROA declined from 2015 to 2017, it improved into 2020, even with the onset of the pandemic. A similar trend was observed when profitability was measured against return on equity.

“This increase in profitability during the pandemic is largely attributable to lower net loss ratios, especially in the motor insurance segment of the market due to pandemic restrictions,” the report said.