Cedric E. Stephens, Contributor
Exposed seaside locations such as this promontory in Grenada may find it more difficult to get hurricane insurance coverage in future. - Norman Grindley/ Deputy Chief Photographer
BUSINESSES THAT operate in coastal areas, and persons who have houses there, face higher insurance prices for coverage against natural disasters like hurricanes, floods and earthquakes. This is the good news. The bad news is that insurers who offer this type of coverage may soon begin shedding risks in these zones, forcing the owners to self-insure.
Developments now taking place in the global insurance and reinsurance markets, the Gulf States, Florida, and in the coastal regions of the eastern seaboard of the U.S.A. from the State of Georgia to New York suggest that it is not a question of if, but when these trends will spread to Jamaica and the other Caribbean islands.
One view is that the culprit is Hurricane Katrina. That hurricane caused US$60 billion in insurance claims during 2005. Actually, 'Katrina' and the other hurricanes last year provide only part of the explanation. Raffique Shaw, writing in The Trinidad & Tobago Express on February 9, 2005, warned that "billions of dollars worth of sea-front properties may soon become uninsurable or, if they are insured, the cost could become prohibitive."
He reported that insurers in Trinidad had declined to comment on the suggestion that the world's largest reinsurers (Munich Re) were "re-examining its coverage of properties within 300 metres of the shoreline in disaster-prone countries." Months before 'Katrina'
created the largest insurance loss, Mr. Shaw drew attention to the potential impact for 'East Coast USA' and the Caribbean if
reinsurers imposed restrictions based on the proximity of property to the shoreline. Global weather-related losses during 2003-4 especially in coastal areas were cited as the trigger for the measures.
In its April 26, 2006 issue USA Today said that in Florida alone, "insurers that are undercapitalised or fearful of losses" have notified the state of plans to cancel more than 500,000 policies before the start of the 2006 hurricane season. That state, which has an estimated US$2 trillion of coastal properties and a population of some 13 million persons living in those areas, is described by insurers as "the nation's most challenging property insurance market." Other sources say that buyers lucky enough to still have coverage are seeing price increases of 50 to 100 per cent.
Spencer S. Hsu, writing in The Washington Post on April 30, 2006 under the headline 'Insurers Retreat From Coasts' said that "home insurers are pulling back from some coastal markets." He warned about "gathering financial storm clouds over how the United States pays for the damage of catastrophes." That country's second largest insurer has stopped writing hurricane policies in Louisiana, Florida, the coastal parts of Texas and New York State, and earthquake insurance coverage in California and elsewhere. Katrina, climate trends and population growth in coastal areas were, the reporter said, pushing insurers to 'breaking point'.
Munich Re, one of the world's leading reinsurers, in its 2005 report to shareholders stated that "avoiding construction on highly exposed shore locations" is among some of the measures it adopts "to enable the insurance industry to continue assuming its economic responsibility" in the face of increased exposures from hurricanes. Other steps include imposing limits where a single disaster can generate substantial losses due to the concentration of values.
Insurance companies that provide coverage against hurricane and earthquake in Jamaica are heavily dependent on reinsurers like Munich Re. If, for example, Dyoll Insurance had adequate reinsurance it would have met its financial obligations to policyholders in Grand Cayman after that island was hit by Hurricane Ivan in 2004 and not gone into liquidation.
REDUCTIONS IN RENEWAL LINES
Insurance broker Willis also tells a tale of woe about property insurance in the U.S. In a report written in April titled "Marketplace Realities 2006," the company says that "U.S. Earthquake, Flood and Wind exposures are being shed on a broad scale through non-renewals, reductions in renewal lines or declinations ? (or) simply to reduce risk accumulations." Many re/insurers "cannot afford to or will no longer take on natural catastrophe risks they had previously and remain financially solvent ?"
Lloyd's, a 300-year-old insurance entity with long-standing ties to insurance companies and retail buyers in the Caribbean, said in its market commentary for 2005: "With a third successive year of major windstorms predicted (we) cannot afford to be complacent - especially given the contraction in ? capacity and the reduction in underwriters' reinsurance protection."
Even CARICOM governments who have traditionally self-insured are worried about the increasing incidence of natural disasters. They have sought help from the World Bank to set up a special facility to insure infrastructure. Each member country will pay a contribution to a specially-formed insurance company. Coverage will be triggered when disasters attain a pre-agreed level.
CLIMATIC CHANGE IS THE MAIN TRIGGER
Jamaica and the other islands in the Caribbean are not insulated from the events that are taking place in North America. In an article I wrote 15 years ago ('Non-Life Insurance In Jamaica: An industry in crisis' Data Pac Caribbean Business Trends Volume II, No. 2, 1991 pages 2-6), I highlighted "evidence of the mounting concern of international reinsurers and insurers about climatic changes globally and the vulnerability of the Caribbean region to the perils of earthquake and hurricane." The same article also said that Swiss Re, another leading international reinsurers used by several insurance companies operating in Jamaica reported to its shareholders (in 1987) that: "the increasing frequency in recent years of windstorm (hurricane), flooding caused by heavy rainfall and earthquake make it necessary for reinsurers to keep a constant check on their catastrophe commitments..." The hurricanes which occurred in 2004 and 2005 have increased those concerns. Forecasts of more intense and frequent hurricane events over the next few years have also contributed to the severity of the problem. Harder times are definitely ahead for insurance buyers.
In its review of natural catastrophes for 2005, Munich Re stated that roughly half of all the natural catastrophe loss events were caused by windstorms (hurricanes). The costs to world's economies exceeded US$185 billion. Nearly half of those losses were borne by the insurance industry. It also said that it had long been warning that "increasing global warming will be accompanied by extraordinary weather-related natural catastrophes (and) the likelihood of greater loss potentials ?" and that those "fears were confirmed in 2005."
Signs of what lay ahead for local consumers are plain to see. In 2005 for example, one of the island's leading property insurers was forced to cut the size of its portfolio. Risks in coastal areas were the main targets of that exercise. Evan Thwaites, head of Globe Insurance stated, according to the May 17, 2005 issue of The Jamaica Observer that "reinsurance rates on property have gone through the roof ?" Another industry source provided information about a regional insurer that was finding it "very difficult" to conclude negotiations for the renewal of its catastrophe reinsurance contract before the April 30, 2005 expiry due to lack of interest on the part of reinsurers.
THERE ARE NO QUICK FIXES TO THE PROBLEM:
Insurance consumers in the US may get some measure of relief from the crisis, courtesy of the State and Federal Governments. Florida's government for example, is debating measures to encourage private insurers not to flee the state which was battered by eight hurricanes in two years. Some legislators have even admitted that the weather is at the heart of its problem.
Small island economies in the Caribbean do not have insurers of last resort to fill the gap when the private insurance market decides not to insure property close to the shoreline or when there is market failure. Additionally, the local insurance system is vulnerable to weather-related shocks as was very evident in the cases of Dyoll and United General. In 2005, according to The Jamaica Observer, "more companies chalked up net loss(es) than ? in 2004, when the entire industry had to struggle with the effects of Hurricane Ivan ?"
"Difficulties in acquiring insurance or reinsurance (by regional buyers) have highlighted the need for a comprehensive approach to risk mitigation," according to a statement attributed to The Caribbean Disaster Emergency Response Agency (CDERA) in 1993. Insurance is only one method of handling natural hazards. Clearly, now is the time for all parties in the risk management process to start developing and implementing strategies to reduce the region's vulnerability to catastrophe losses over the long term. In spite of the lack of substantial progress in Jamaica after all of these years (as businessman Aubyn Hill and environmentalist Peter Espeut clearly demonstrated in their respective articles in The Gleaner on May 24, 2006), it is not too late to start now - especially in the face of what has been forecast to be a very active hurricane season for the next several years and before the centenary of the destructive 1907 earthquake during next year.
Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel to help you solve a problem write to The Financial Editor or contact Mr. Stephens directly at aegis@cwjamaica.com
- Taken from the Financial Gleaner
