A section of the Petrojam Refinery in Kingston. The refinery is in the process of renewing its insurance contracts. - file

Petrojam Jamaica Limited is taking steps to award another multimillion-dollar insurance contract to cover assets of the refinery in Kingston and Montego Bay.

CGM Gallagher Insurance Brokers Jamaica Limited and Petrojam have agreed to a US$5.18-million deal (J$460.8 million), which on March 25 hurdled the national contract-review process, according to the latest report out of the contractor general's (CG) office.

The contract is equivalent in value to the $400-million deal that Advantage General Insurance Company (AGI) said it struck with the refinery.

The Financial Gleaner has since learned that the $400 million will not enrich AGI but will flow to an overseas company. AGI is merely 'fronting' the contract, according to industry sources, and will earn a fee from its overseas partner for overseeing the contract.

Facultative placement

"There is a cover on record but there is a facultative placement with an insurer overseas," confirmed Mark Thompson, chief executive officer of AGI, when contacted for clarification on the matter following an April 15 story by sister publication Wednesday Business, saying the premiums would have flowed to AGI and boosted its top-line income.

Thompson insisted that such placements were standard industry practice, and that the majority of the risk associated with property and liability policies is often 'ceded' - that is, reinsured internationally.

"The level of net retention of risk for most of the general insurance companies in Jamaica is very minimal," he told the Financial Gleaner.

The name of the overseas insurer was not disclosed, nor the amount of fees AGI would collect under the arrangement.

Captive insurance market

Fronting is a specialised form of reinsurance where 100 per cent of the insurance risk and premium is transferred by one company toanother. The practice is frequently employed in the captive insurance market.

While the policy contract issued by AGI to Petrojam remains intact the Jamaican company will not retain any of the risk or premium associated with the cover given.

Instead, AGI will be paid a percentage of the gross premium collected on behalf of the international insurer.

Thompson did not disclose the fee.

Commonly, a commercial insurer licensed in the jurisdiction from which the risk emanates issues a policy to the insured. That risk is then fully transferred from the fronting company to a captive insurance company through a reinsurance agreement, known as a fronting agreement.

The insured receives a policy written by the licensed commercial insurer, but the economic risk of that policy resides in the captive insurance company.

The authorised insurer 'fronts' the risk for a specified fee or premium.

"I would not be surprised if all companies have some ... but there is just a few with any significant amount of fronting," said Peter Levy, newly appointed managing director of BCIC.

Three such arrangements

The Financial Services Commis-sion said, however, that it only has a record of three such arrangements - all fronting deals must be reported to the regulator - but the agency, when asked the combined value of the contracts, said it had no time to count them up.

According to Levy, the fee associated with fronting agreements ranges within three to five percentage of gross premium income.

This form of reinsurance agreement differs from a normal reinsurance agreement in which the local insurer retains a percentage of the risk.

"In this case, the more risk retained the more premium you keep," explained Levy.

Normally, in this case the FSC then determines aggregate net retention. But each individual company will define the level they are comfortable keeping.

The regulator said there is no prescribed limit on the level of coverage under a fronted contract, but the deal is assessed based on the capacity of the receiving company.

The latest data posted on the Insurance Association of Jamaica website show that 43.7 per cent of gross premium written for the general insurance market goes towards reinsurance, including facultative placements.

As at June 2008, the general insurance market was valued at $12.5 billion, of which $5.5 billion was ceded.

"Fronting is not prevalent in Jamaica any more as the companies become more aware of the possible risks associated with the practice," said Leon Anderson, senior director, insurance at the FSC.

"Fronting is now employed in respect of title insurance cover and in large complex insurance covers where the capacity of the local insurer is inadequate to cover the risks," he added.

The $400-million Petrojam contract insured a company with balance sheet assets of a projected $29 billion and turnover of $90 billion.

The CGM and AGI contracts are valued at just under $900 million, with indications that Petrojam's insurance bill is set to grow even further.

Reached for comment, Petrojam's chief financial officer said she would not discuss the refinery's insurance deals, saying they were still finalising the tender process in several cases, but did not specify them.

The AGI contract was issued April 1, according to Thompson, but the three-year CGM Gallagher deal would need to hurdle Cabinet approval before an award can be made. The CG report did not specify the assets.

Eight classes

Industry sources said tender notices had been placed for coverage for Petrojam under eight classes of business: non-marine property, comprehensive general liability, cargo, employer's liability, fidelity guarantee, loss of money, computer all risks and motor.

An October 23, 2008 advertisement also requested bids covering seven areas: property and business interruption; comprehensive general liability, marine cargo, motor comprehensive and contingent liability; employers liability; computer all risk; and loss of money and fidelity guarantee.

Non-marine property, comprehensive general liability and cargo are said to represent about 80 per cent 90 per cent of Petrojam's total insurance expenditure. All its insurance contracts are issued for a three-year period, renewable annually.

sabrina.gordon@gleanerjm.com

Left: Matthew Pragnell, chief executive officer of CGM Gallagher, whose US$5.18m bid for a Petrojam insurance contract has hurdled the contract review process. - File photos Right: Mark Thompson, chief executive of Advantage General Insurance, whose company is fronting another $400m Petrojam contract for an overseas firm.