ADVISORY COLUMN: Property insurance outlook generally sunny, with chance of a few clouds
QUESTION: What is the outlook for insurance prices in the Caribbean during 2015? For the second year in a row, the region did not suffer any major damage during the hurricane season. Are we likely to be seeing any price reductions this year like those that are now occurring at the gas pumps, which are due to the decline in the cost of crude oil?
- C.B., Ocho Rios PO, St Ann.
INSURANCE HELPLINE: This year 2015 marks the second successive year that a reader has posed a question like yours at the start of the New Year.
Last year's article, "No clouds in the forecast on home insurance", was written in response to an enquiry from a householder in Mandeville. He had re-roofed his house and wanted to know what impact that would have on his home insurance premium.
Though the scope of your question is much broader, the consensus among the experts at this time is even more positive than it was last year. To continue the weather analogy: The price outlook for Caribbean insurance consumers this year is can be described as generally sunny with a few clouds.
Crude oil prices affect the retail prices of petroleum products. In the same way, the movement of reinsurance - the form of insurance that insurance companies buy for their protection - prices directly shape how much consumers pay as premiums. Alistair Gray, insurance correspondent for The Financial Times, writing on December 31, 2014, said: "A third straight year of falling prices for back-up insurance against earthquakes, hurricanes, and other catastrophes is raising concerns about the business models of the global reinsurance industry. Tough competition has forced reinsurers to reduce premiums even in areas hit by big claims such as aviation."
Global reinsurance experts Willis Re said in a January 1, 2015, report titled 1st View: Reshaping a Reality that "adding to reinsurer woes are the predictions that the global reinsurance market is only just managing to cover its cost of capital in 2014 and may fail to do so in 2015 as a consequence of continuing rate softening and low interest rates. Arguably, the continued lack of demand and oversupply of capital can only keep driving pricing down."
In looking at the Caribbean region, Willis Re made the following comments: "Substantial increase in reinsurance capacity; reinsurance rates down; and in some territories, primary local rates are falling faster than reinsurance rates."
The company also provided estimates of the range of reinsurance price reductions that took place this year. Caribbean risks that were "loss free" saw reductions ranging from 15 to 20 per cent when compared to 2014. Those that were "catastrophe loss free" saw reductions ranging from 10 to 15 per cent.
Guy Carpenter & Company, LLC, another leading risk and reinsurance specialist, in a January 7, 2015, news release reported that "reinsurance pricing fell at the January 1, 2015, renewals in many segments, affecting almost all lines of business and geographies, continuing recent renewal trends."
The company's 2015 global renewals report, Shaping the Future: Positive Results, Excess Capital and Diversification, said, "A major factor driving market conditions at the renewals was the lack of costly catastrophes that resulted in global insured losses for 2014 of approximately US$30 billion, the lowest total in four years and 25 per cent lower than 2013."
These developments are unlikely to have any impact on motor insurance premiums. The dynamics that influence the price of property insurance are very different from those that affect motor insurance.
Property insurers are very dependent on the global reinsurance market. While motor insurers also buy reinsurance from companies overseas, they spend significantly less for this type of a protection. In 2012, for example, motor insurers in Jamaica spent 11 per cent of the premiums collected from consumers on reinsurance. In contrast, nearly 96 per cent of the $12.1 billion in premiums paid for insuring property, or $11.6 billion, was spent on overseas reinsurance.
The price of crude oil nose-dived by nearly 50 per cent between January and December 2014. Is the price of property insurance in the Caribbean likely to fall by the same amount this year? I strongly doubt it.
n Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: firstname.lastname@example.org