Cedric Stephens | Gloomy outlook for price, availability of property insurance
A.M. Best, the largest credit rating agency in the world, specialises in the insurance industry.
A rating agency assesses credit risks and assigns ratings to individuals, entities, and even countries. Local banks, for example, use ratings to make pricing decisions on loans. Debts incurred by governments worldwide are also rated.
Better ratings mean lower interest rates. Poor ratings lead to higher rates.
In more developed economies, insurance buyers use financial strength ratings from companies like A.M. Best to make insurance decisions. Superior ratings indicate financial strength and claims-paying ability.
Insurers with superior ratings are deemed to be better able to meet policyholder obligations and pay claims than companies with inferior or no ratings. British Caribbean Insurance Company, a locally registered insurer, recently disclosed that it had been assigned an A.M. Best financial strength rating or FSR of ‘B++ (Good)’. Only three of the 19 locally registered insurers qualify for global ratings. BCIC’s accomplishment is a big deal.
Local, regional, and global insurers select the reinsurance companies with whom they do business based on the FSRs assigned by international credit rating agencies.
President and CEO of Jamaica Broilers Group, Christopher Levy, according to last Wednesday’s Gleaner, ‘warned that Jamaica should brace for further economic fallout’. US sources had alerted him to “impending, larger economic shocks as food supply chains are disrupted and prices soar”, the article read.
These shocks will not be limited to the food suppliers. Weeks earlier, Insurance Association of Jamaica President Sharon Donaldson advised that “insurance rates (property) could rise due to a reprioritisation of reinsurance funds”. This statement means, in plain English, that “some reinsurers may shift away from Jamaican and regional markets”.
Insurers, here and overseas, need foreign reinsurance to offer policyholder protection.
The grim forecast about the food supply chain also applies to the cost and supply of reinsurance and insurance, according to other insurance experts. Developments that are now taking place in the Florida insurance market, for example, will spread to Jamaica and the rest of the Caribbean.
Reinsurers consider the risks in the Caribbean and Florida to be similar. Some insurers in Florida that are very dependent on reinsurance – like local and regional carriers – are facing an “existential challenge”. This is the opinion of A.M. Best. The rating agency believes, according to another industry source, “that despite the recently enacted property insurance reforms by the Florida legislature to improve insurance availability there, carriers will continue to face financial hardships in the near term” and that the reforms “will not make an enormous difference while reinsurance companies have become reluctant to take on Florida exposures”.
Some reinsurers are already quitting the Florida market. These actions will reduce the supply of reinsurance to insurers in the Caribbean and higher prices for consumers. Additionally, regional governments do not have the financial resources to lessen the impacts on consumers and insurers. The forecast for Florida’s insurance market is gloomy: “There is an existential threat to that market from reinsurance cost and availability and it is likely to persist,” the rating agency said. The same can be said about the Caribbean insurance market.
Other experts agree with A.M. Best. Aon, a global insurance broker, which specialises in the insurance and reinsurance industries and whose clients include Caribbean insurers, disseminated information at the recently concluded Insurance Association of the Caribbean meeting that took place last month. Inflation, social and economic factors, climate change, increased claims costs due to more frequent and severe losses and supply chain disruptions are reducing the availability of reinsurance and driving up costs.
They said that other trends are emerging include:
• Reinsurers have started to incorporate the five factors listed above in their business and pricing models;
• Reinsurers are reassessing their exposures in the Caribbean region (especially in the northern islands);
• Jamaica is identified as ‘problematic’;
• Eight reinsurers have indicated that they are planning to withdraw from the local market or reduce reinsurance capacity;
• This significant shortfall in reinsurance capacity is mirroring what happened in the post-9/11 period; and
• The traditional European reinsurers have stated they do not plan to allocate additional reinsurance capacity to fill the gap.
Aon has recommended that insurers impose immediate price increases on property insurance rates. Meanwhile, in Florida, news reports suggest that thousands of citizens are facing the prospect of being dropped by their insurers, difficulties in finding alternative coverage, and skyrocketing insurance costs, sometimes in the order of 100 per cent during the 2022 hurricane season. The situation in Florida and the Caribbean is said to be part of a global trend.
Greenberg Traurig, a law firm with deep roots in the US insurance industry, authored an article in April in the South Florida Business Journal, which concluded: “Florida’s insurance market will continue to deteriorate and potentially threaten the state’s continued economic growth. Many Floridians already find it difficult to afford homeowners insurance. Higher rates and few insurance choices could deter home ownership and keep new residents away. All of this is hardly a rosy prospect to ponder for Florida as we all continue to hope the 2022 hurricane season does not pack a wallop for the Sunshine State with far-reaching consequences.”
Jamaica and the rest of the Caribbean are unlikely to be insulated from this developing problem.