EXPERTS in the insurance industry have warned that premiums on property and casualty policies across the Caribbean will go up as reinsurers increase costs by 15 per cent in order to increase their capacity to pay out claims while facing the ill-effects of climate change and inflationary pressures.

Reinsurance occurs when 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.

Insurance ratings agency AM Best, in a market segment report titled ‘Climate, Reinsurance and Cyber Remain High in the Caribbean Risk Landscape’ has found that while many insurance providers were profitable during the pandemic, they are still vulnerable to a number of risks, chief of which is inflation.

“Climate risks adds an additional layer of uncertainty as it remains the biggest threat to the Caribbean. Despite the low level of claims activity related to catastrophes in 2021 and thus far in 2022, reinsurance pricing continues to reflect increased hardening as insurers and reinsurers are feeling the effects of inflation,” a release from AM Best outlined.

President of the Insurance Association of Jamaica (IAJ) and General Accident Insurance Company CEO Sharon Donaldson agrees that climate change continues to be a significant factor contributing to reinsurers increasing rates. However, she told Jamaica Observer in a recent interview that climate change has always impacted rates, but that the phenomena is not unique to the Caribbean.

“It is continuing to impact it more significantly now than past years because we’re seeing an increase in frequency in losses worldwide and it’s the same pool of funds that is used to pay claims wherever it happens. So climate change is a factor, an important factor, and we need to do all that we can to mitigate against losses to environmental changes,” she said.

General Accident Insurance has operations in Barbados, Jamaica, and Trinidad and Tobago.

Like Donaldson, president of Guardian General Insurance Jamaica and chief technical officer — P&C Group Karen Bhoorasing attributed the increase in reinsurance costs to climate change, but noted that in addition to natural disasters becoming more frequent in the region, they have also intensified.

She pointed to the recent passage of tropical storms Fiona and Ian, while also highlighting Irma and Maria in recent years.

“The hurricanes are more powerful. We never used to have so many category four and five hurricanes,” Bhoorasing stated.

This fact is not lost on AM Best Senior Financial Ricardo Longchallon, who commented, “The growing frequency and severity of global catastrophic events have forced reinsurers to adopt a more circumspect approach to climate risk.

“In some instances, this has resulted in double jeopardy for Caribbean insurers in the form of higher insurance rates, in some cases more than 15 per cent and less capacity.”

On this note, Bhoorasingh explained that capacity refers to an insurer’s or reinsurer’s ability to protect itself from risk with proper capitalisation. Capital is necessary for the payout of claims.

However, with inflation at historic highs in some jurisdictions, and as central banks around the world try to cauterise the impact of inflation with interest rate hikes, Bhoorasing explained that investments in insurance may lose ground to safer interest-bearing instruments.

“You also have the whole economic and financial markets uncertainty with what’s happening as interest rates go up. So if interest rates are going up, it might be safer to put your money in bonds …” the Guardian General executive informed Sunday Finance.

Pointing to recent fires on the premises of major Jamaican manufacturers, Bhoorasing said that catastrophic events of that nature have also influenced the decision of reinsurers.

Responding to the issue of building capacity, Donaldson argued that this responsibility should fall to insurance companies to ensure they have the backing of reinsurers. She said that this may mean increasing rates across all categories of property and casualty insurance, but also suggested a segmented pricing approach to make insurance rate increases less onerous on policyholders.

The IAJ president anticipates that if the price of construction inputs and motor vehicle parts continue to rise, then the same will follow for vehicle policies.

According to AM Best, consolidated gross premiums among rated Caribbean property and casualty insurers rose by 10.6 per cent in 2021, signalling that the cost of insurance cover will continue to increase in some territories.

Back in June, Charles Johnson of the Bahamas Insurance Association had warned that reinsurance cost could continue on an upward trajectory in 2023 as reinsurers adjust their appetites for catastrophic risk in the region based on the findings of research on climate change.

In an interview on Guardian Radio he also shared that at least one reinsurer has completely removed itself from providing catastrophic insurance in the region.

“Recently there’s been some talk on possible rate increases for property insurance. The rates in The Bahamas and the Caribbean are driven by the reinsurers. They are the wholesalers,” The Nassau Guardian quotes Johnson.

“The local insurance company has very little control over pricing. And what is really driving the concern, as we all know, is really what’s happening with global warming and reinsurers. The way they are beginning to look at the pricing of reinsurance for insurers is based upon the science that is being produced,” the article continues.

Johnson said he expects that when insurance providers in the Caribbean renew their treaties with reinsurers, costs could go up 15 per cent.

But while rates have climbed in The Bahamas, demand for property and casualty coverage has also increased — both subsequent to the catastrophic damage caused by Hurricane Dorian on the islands of Abaco and Grand Bahama in The Bahamas in 2019.

“With supply chain issues, inflation, the cost of goods going up… one should also be considering increasing the insured value of their property. There is certainly a requirement under the conditions of your policy that you insure for the full replacement value, which means that one has to pay close attention to the increase in value,” Johnson advised.

Responding to a query from EcoBuzz on the outlook for the region, Randy Graham, president of the Insurance Association of the Caribbean noted, “The Caribbean is expected to experience a hardening reinsurance market where there may be pressure on the availability of reinsurance capacity. This has been a discussion point in the past, but it seems the situation has hardened even further.

“When reinsurance capacity demand is possibly higher than supply we see increases in the cost of reinsurance. It is still too early to say what the amount of the increase will be because many insurance companies in the Caribbean will not renew their reinsurance treaties until January 1, 2023. When the reinsurance treaties are renewed, companies will have a better sense of the additional cost of their reinsurance programmes,” he continued.

Graham concluded that, “Early indications suggest increases in the reinsurance cost, and then companies will have to make their own internal decisions on how to manage the increased reinsurance cost. The level of increase in reinsurance cost will impact whether rates charged to customers in the Caribbean are impacted.”