Insurance catastrophe

Extreme weather events brought on by an unfolding climate crisis are expected to trigger a significant reduction in insurance coverage for Jamaican homeowners, industry experts are warning.

Already, major insurers in the United States, a main market for local insurance companies’ reinsurers, have announced their intent to cease writing coverage for some regions because of troubling weather patterns caused by climate change.

The ripple effect will be an increase in premiums and deductibles for some homeowners while others are expected to be priced out of catastrophe insurance coverage.

International reinsurers, the finance companies that cover risks taken on by local insurance companies, want more and are moving to other markets to do business where Jamaican insurance companies fail to increase coverage rates, The Gleaner reported months ago.

Approximately 90 per cent of the premiums charged by local insurers on property is ceded to reinsurers and those funds are put in a pool to cover payout from a disaster.

For several years, Sharon Donaldson, president of the Insurance Association of Jamaica, has said the Caribbean has experienced an increasing frequency in the number of natural disasters that have resulted in significant damage to properties.

She said general insurance companies and reinsurers have funded these economic losses caused by natural disasters (windstorms and earthquakes) for many years.

“These pool funds are rapidly declining and have been said in some quarters to be at an all-time low. The result is catastrophe risk insurance is less available and more expensive,” she told The Gleaner.

Donaldson said 2023, even as it draws to a close, saw one of the most challenging renewal seasons for the entire region to include the Caribbean and North America.

She said many reinsurers reduced capacity to the region while others withdrew entirely from the market.

“Given the continuing negative impact of climate change on the frequency of natural disasters, I don’t think the reinsurance capacity for the upcoming year will improve. I believe that commercial businesses will continue to purchase insurance, but homeowners may find the price a tad too steep and opt to self-insure,” Donaldson theorised.

“Will the average homeowner be able to afford catastrophe insurance as a pre-disaster risk management mechanism in the near future? Probably not,” she added, noting that post-disaster may be burdensome on the community, the economy, and the family.

Donaldson said that without catastrophe insurance, the recovery process would become even more challenging, which would produce a drag on economic recovery.

She said the importance of catastrophe insurance for countries in natural disaster corridors cannot be underestimated.

“I suspect business owners and homeowners will continue to face difficult choices on insurance spend,” said Donaldson.

The 2022 Atlantic Hurricane Season produced 14 named storms (winds of 39mph or greater), of which eight became hurricanes (winds of 74mph or greater) and two intensified to major hurricanes with winds reaching 111mph or greater, according to the Washington, D.C.–based National Oceanic and Atmospheric Administration (NOAA).

The NOAA is a scientific and regulatory agency.

The 2021 season saw 21 storms, ranking as the third-busiest Atlantic season on record, behind 2020’s unprecedented 30 named storms, and the 27 named storms and one unnamed storm that developed in 2005.

“I don’t think people understand the extent to which property insurance underpins all formal commercial activity,” environmentalist Diana McCaulay noted.

McCaulay, whose background is also rooted in general insurance, said given the current climate crisis that is unfolding in several kinds of hazards – windstorms, hurricanes, typhoons, flooding, wildfires – it is not surprising that insurance is becoming more expensive and less available in regions of the world that are particularly subject to these hazards.

“Yet as I look around Jamaica, we continue to build as if we are still in the climate of the past. Will we be able to buy property insurance for hotels on the coast in the near future? Will our people be able to withstand the heat, which is made worse by all the concrete and hard structures we are laying down? I don’t know, but this summer is a true wake-up call for what lies ahead,” she said.

Beachfront properties and others closer to the sea are considered a “problematic type of risk”, Managing Director of BCIC Jamaica Peter Levy told The Gleaner, noting that they carry a 50 per cent higher rate.

Still, the company has not seen a falloff in its portfolio and has seen a “commensurate” movement with respect to coverage for flood-prone or low-lying areas that would run on average 25 per cent higher in terms of premium.

“I think that’s partly because [of] climate change. Sea level rise is the expected outcome of climate change that a lot of people are aware of whereas changing rain patterns and flood frequencies is not something that has received the same amount of public [attention].

“So I would say it’s the coastal risks rather than the flood-prone risks that have seen reductions [in appetite] from the insurance market. I would also say at the same time, though, that we haven’t seen people opting out of the insurance market. In fact, we’ve seen a higher-than-normal level in increases of value,” he said.

kimone.francis@gleanerjm.com