Caribbean Insurance Report

By
Monday, February 12, 2018

For the Caribbean insurance sector, 2017 will be forever remembered for the multi-billion dollar losses from Hurricanes Irma and María, a catastrophic one-two punch that contributed to the globe's costliest year on record for weather-related disasters.

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Combined with last year's other storms, droughts and wildfires, total global economic losses from weather-related disasters reached US$344bn last year, including US$132bn in insured losses, according to a January report from risk consultancy Aon Benfield.

In the Caribbean alone, Irma and María generated US$94.6bn in economic losses and US$34.8bn in insured losses, casting far-reaching uncertainty for the economic future of the hardest-hit islands, as the insurance industry now faces a new chapter in the region.

Fortunately, local insurers were well-backed by reinsurance, and the reinsurance industry itself was well prepared for a high-disaster year, supported by roughly US$600bn in capital, according to Aon Benfield.

Damage estimates, in addition, have fallen significantly from early projections after the storms, leading reinsurance broker Willis Re to assert that reinsurance renewal rates would not see as steep a surge as initially expected.

The table below details Willis Re's estimates for 2018 renewal rate increases for Caribbean territories that were affected by the hurricanes – and those that were not.

"Notwithstanding reinsurers pushing for improvements in terms and conditions, the market has generally been orderly," said the brokerage in the January report Willis Re 1st view 2018: Extreme Weather, Calm Market.

"It has been methodical and efficient, calming down over the past month from an immediate post-HIM [Harvey, Irma, Maria] hiatus," added the firm.

"With a few exceptions, most reinsurers have been discerning, negotiating sensibly around the issues and, most importantly, in a way that is compatible with their long-term trading relationships."

Looking at the Caribbean specifically, Willis Re said reinsurers are looking to push terms and conditions back to 2012 levels after several years of gradual renewal rate declines, though "with varying success."

The firm said affected islands are being treated on a case-by-case basis and that capacity continued to be available in abundance.

Sector at a glance

While still monitoring developments, insurance-focused rating agency AM Best has yet to take action on any of the Caribbean insurance companies it rates in response to the storms' impacts.

"Loss estimates likely are to remain within each company's reinsurance coverage limits and net risk tolerance," said the agency in a report. "Local insurers operating in Puerto Rico and the Caribbean generally retain very modest property retentions due to modest risk appetite for property exposure. Therefore, these insurers make extensive use of quota share reinsurance and catastrophe reinsurance, which over the years has served them well."

The following tables detail pre-hurricane financial and rating information for the AM Best-rated firms that are based solely in the Caribbean.

The agency also offered an overview of the storms' 3Q17 impact on the industry in a January report, stating, "Primary insurers suffered large losses, but they were prepared for these events and had appropriate reinsurance programs in place aided largely by soft reinsurance pricing."

"With a portion of losses ceded to the reinsurance and retro markets, the companies with concentration issues will be the most affected by the third quarter catastrophes, and most have reported significant underwriting losses for the quarter," said AM Best, adding that the P&C insurance and reinsurance industry generally remains well capitalized.

Puerto Rico's nightmare

The US territory of Puerto Rico stands out both as one of the largest economies in the region – one already in a financial crisis before the storms – and as having received two significant hurricane impacts in the span of only two weeks.

Described by Aon Benfield as "the most prolific financial event ever recorded in the Caribbean Islands," Hurricane María leveled Dominica before smashing into Puerto Rico, crippling the island's already ailing electrical grid and killing hundreds if not thousands of people, as bodies continue to be recovered under mud and debris. 

Estimates for final insured losses still vary, though Aon Benfield data suggests the Caribbean damage from Irma is around US$25bn – mostly in Puerto Rico. The estimate stands roughly in the middle of catastrophe model projections. The resulting impact has spawned a re-examination of the island's insurance industry, including business interruption coverage, and the full reshaping of the industry is still evolving.

AM Best provided an analysis of insurers whose Puerto Rico property direct written premiums (DWP) make up 50% or more of their total DWP with 3Q17 information, detailed in the following table.

The agency reported, "All but United Surety & Indemnity Company incurred underwriting losses in the third quarter."

"These losses led to an overall decrease in surplus of 7.0% for Puerto Rican property insurers, with four of seven companies experiencing decreases in surplus greater than 9% during the quarter," it continued. "Only one insurer, INTEGRAND, had a decrease in surplus greater than 10%."

The firm noted, nevertheless, that the majority of incurred losses from the hurricanes will be passed to reinsurers.

"These companies' earnings have been negatively impacted by Hurricane Maria, but we don't expect to take ratings actions as a direct result of the hurricane," AM Best said.

Diverging economic paths

With storms stealing the spotlight, it is important to mention other major influences on the region's economies.

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Headed into 2017, the diverse Caribbean insurance market, existing within multiple regulatory frameworks and varied economies, had both benefited by a relatively soft reinsurance market and below-average frequency of natural disasters and weakened on the 2014-2016 oil price crash, particularly in territories that are heavily dependent on oil exports.

Both of these influences, however, reversed course last year. Global oil prices have recovered significantly in 2017, and the reinsurance market is raising rates this year for the first time in roughly five years.

The latest influences look to enhance the growing divergence between those territories whose economies are primarily tourism-based and others that are commodity-export driven, particularly oil exporters such as Trinidad & Tobago and Suriname.

According to the IMF, Suriname's economy contracted 10.5% in 2016, while Trinidad's contracted 5.1%. With the rebound in oil prices, however, T&T's GDP contracted again but only by 3.2% in 2017, and for the first time in five years looks to grow, according to the IMF, to 1.9% in 2018. Likewise, Suriname's GDP showed a smaller 1.2% contraction in 2017, and the IMF expects the economy to grow by 1.2% in 2018.

AM Best also noted that Barbados has become a concern, with mounting fiscal deficits and declining government reserves pressuring sovereign ratings. Although the current government has pledged to pursue fiscal consolidation and asset sales, it is unlikely to be able to significantly lower the high current account deficit or rebuild its international reserves in the near term. Lack of action on the governments' part over the near term could lead to a liquidity event or destabilization of the current 2:1 currency peg with the US dollar.

Responding to climate change

Beyond the impacts of Irma and María, the intensely destructive hurricane season – coming in the third warmest year on record – brought renewed attention to climate change and its effects on highly exposed territories.

At a November conference raising US$1.35bn for recovery in the hard-hit region, UN chief António Guterres described a triple threat facing the region: climate change, high debt loads, and limited access to concessional financing (loans with better than market terms).

"It is time for long-term mechanisms that recognize vulnerabilities as the new normal," said the secretary-general. "We can no longer rely on exceptions and ad hoc decisions," as reported in IRIN News, an independent news outlet focused on humanitarian crises.

The sentiment is one that has been repeated by the IMF, Caricom, ECLAC, the World Bank and other organizations urging attention to the Caribbean, including calls for improvement of catastrophic bond programs, such as the CCRIF (which paid out US$50.7mn with Irma and María), and exploration of other mechanisms such as risk mitigation debt swaps and processes to streamline reinsurance efficiency.

A recent Moody's report listed the following seven Caribbean nations as particularly exposed to future climate-related disasters: St. Vincent and the Grenadines (Aa2 stable), the Bahamas (Baa3 negative), Jamaica (B3 stable), Trinidad & Tobago (Ba1 stable), St. Maarten (Baa2, ratings under review), Barbados (Caa3 stable) and the Cayman Islands (Aa3 stable).

Moody's added that smaller and less diverse economies were particularly exposed, citing St. Vincent and the Grenadines as among the most exposed and least resilient, given its very small economy, high economic concentration (sea-based tourism), frequent natural disasters and low income levels.

The agency said the Bahamas is also highly exposed; "although, the situation is somewhat mitigated by higher income levels, while Jamaica has the lowest resilience due to low income levels and the government's limited fiscal flexibility."