Cedric Stephens | Tough year ahead for property insurance

Two weeks before this year’s hurricane season began, I wrote an article titled ‘Storm Season Preparations Should be Left to Experts’. This function, I argued, was too important to be placed in the hands of politicians.

Implicit in that headline was the idea that politicians who had no expertise in risk mitigation should take a back seat to experts.

The next day, May 16, this newspaper reported the Insurance Association of Jamaica president as saying that “insurance rates could rise due to a reprioritisation of reinsurance funds”. The article was headlined ‘Insurers Warn of Rising Premiums if Reinsurers Bolt’. It did not correctly reflect market conditions or describe the looming and serious problems facing consumers and insurers.

Reports from other sources a few weeks later indicated the formation of a “tropical disturbance with a well-defined centre (and) with sufficient convection strengthening into Tropical Storm Alex on June 5. The system was located approximately 165 miles (265 kilometres) east-southeast of Fort Pierce, Florida”.

I looked into my crystal ball as the first month of the hurricane season ended. I wrote ‘Gloomy Outlook for Price, Availability of Property Insurance’ afterwards. The article, which was based on my research, offered a forecast of what was likely to happen in 2023. Today’s piece was conceived three months later, in the aftermath of Hurricanes Fiona and Ian. Fiona, according to The New York Times, “ripped through Puerto Rico, (in mid-September), bringing more than 30 inches of rain and causing at least three deaths”.

The plan to update my July 3 forecast took more shape after I spoke with the CEO of a regional insurer. He recently returned home after discussions with his company’s reinsurance partners in Europe. Last Sunday’s Observer article, ‘Reinsurers Affected by Climate Change, Inflation’, added urgency to my task.

Hurricane Ian began as a tropical wave that moved off the coast of West Africa and then across the central tropical Atlantic towards the Windward Islands. The wave moved into the Caribbean on September 21. It caused gusty winds and heavy rains in Trinidad and Tobago, Aruba, Bonaire, Curacao, and the northern coast of South America.

On September 23, it became a tropical depression. It developed into a tropical storm the next day while located to the southeast of Jamaica. Losses in Jamaica associated with flooding caused by Tropical Storm Ian were estimated at $600 million.

Ian intensified in 24 hours and developed into a Category 3 hurricane that struck western Cuba. It strengthened again after it left Cuba and then grew into a Category 4 hurricane early on September 28 as it progressed towards the west coast of Florida. When it made landfall, it was near peak intensity, with winds slightly below that of a Category 5 hurricane. One hundred and nineteen deaths occurred as a result.

Hurricane Ian, according to a Bloomberg report, will cost private US insurers US$63 billion in claims. This estimate was made by the risk-modelling firm Karen Clark & Company. It was the largest storm-related loss in Florida’s history. Other experts have put the price tag at US$74 billion.

Outlook for the region

An Organization of American States-USAID-World Bank working paper – Insurance, Reinsurance and Catastrophe Protection in the Caribbean – estimated in 1996 that Caribbean insurers retain on average $15 out of every $100 that consumers pay as property insurance premium. The situation has barely changed during the last 26 years.

Eighty-five per cent is passed on to foreign risk-bearing entities as a reinsurance premium. Caribbean insurers are heavily dependent on foreign reinsurance to provide capital, by way of reinsurance contracts. The capital is deployed to facilitate the insurance of assets like houses, factories, offices, hotels, motor vehicles, and other properties exposed to catastrophic losses arising from earthquakes, hurricanes, and floods.

When the price of oil rises, consumers pay more for electricity. Similarly, when reinsurers raise prices retail insurance consumers pay more.

Institutions like the International Monetary Fund, World Bank, the United Nations and its agencies, and the Inter-American Development Bank often group Caribbean islands with countries in Latin America. The group is collectively referred to as Latin America and the Caribbean or LAC.

Reinsurers have tended to place the islands in the same rating cluster as the state of Florida in the United States. This means that the cost and supply of reinsurance to the Caribbean’s small island developing states are often affected directly by developments in the US’s third-most populous state.

Recent reports out of Florida indicate that it was facing an ‘insurance/reinsurance crisis’ before Hurricane Ian. Risk takers were exiting that market and consumers were finding it hard to obtain coverage. Ian will worsen the crisis. The ripple effects in the Caribbean have already begun.

Peter Levy, managing director of British Caribbean Insurance Company, recently declared that “there is now an interesting and somewhat unusual confluence of factors present in the global insurance market”. He cited the following:

• High interest rates would normally be expected to attract capital to insurance/reinsurance markets due to the opportunity to realise bigger investment returns on the ‘float’. This has tended to stabilise prices in the past. This is not happening now. Real returns are negative because actual interest rates are still below the inflation rate.

• Suppliers of reinsurance are expressing increasing concern about the impact of climate change. “This has materially shifted the risk/reward proposition to a degree that is, at this point, hard to measure and therefore hard to account for in setting prices. Further, the causes of climate change are not being addressed so catastrophic losses caused by weather events are expected to continue to get more frequent and more severe”.

• The inflow of insurance-linked securities or ILS, financial instruments that allow investors to speculate on catastrophes, have in the past, provided additional capital to reinsurance markets and helped to create increases in insurance capacity. The inflow has slowed. Year-to-date returns on ILS for the first half of this year were negative.

• Some reinsurers have reduced capacity in peak zones or closed their natural catastrophe portfolios entirely. This is evident in Florida and the Caribbean. Experts have forecast that some insurers in Jamaica will find it difficult to obtain the same levels of property reinsurance protection that they had in previous years.

Property insurance buyers in Jamaica and the rest of the Caribbean are in for a tough year in 2023. Price rises and coverage restrictions are inevitable, at best.

In Florida, according to an October 13 New York Times article, experts are now saying that Ian’s “record-breaking cost will make it even harder for many to get insurance — threatening home sales, mortgages, and construction”. Is something similar likely to happen in Jamaica and the rest of the Caribbean?

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com