Caribbean domestic insurers are grappling with a challenging reinsurance renewal season this year, as per a recent report by AM Best.
The region has experienced a reduction in reinsurance capacity between 10% and 15% in 2023, primarily driven by factors such as increased non-modeled events in the United States and Europe, high interest rates, and a strong dollar for European reinsurance carriers.
The decline in reinsurance availability has had significant consequences for the Caribbean insurance market. Most notably, primary policyholders are facing large rate increases.
To cope with the reduced capacity, insurance carriers have increased primary retention and expanded self-insured sub-layers to maximise the limits they can acquire for excess-of-loss towers. These measures, while necessary, also expose carriers to additional capital risk.
AM Best anticipates that this situation will put pressure on the profitability of Caribbean insurers in the near term.
Many of these primary carriers heavily rely on reinsurance due to a lack of capital to retain a significant amount of additional premium. Consequently, they are highly sensitive to changes in reinsurance rates and terms.
John McGlynn, senior financial analyst at AM Best, explained, “Carriers who could not acquire higher limits or aggregates were forced to reduce the amount of business they plan to write or get creative and place larger risks in the facultative market to conserve aggregates for smaller customers that lacked access. Some primary carriers were forced to drop customers in the face of reinsurance capacity constraints.”
The impact of reinsurance pressure extended to quota share (QS) treaties, where continued participation by reinsurance carriers was often conditioned on significant primary rate increases.
While the Caribbean’s general insurers experienced positive results in 2022 due to the post-pandemic economic recovery and limited storm activity, the current reinsurance environment has led to increased costs.
Gross written premiums for AM Best-rated insurers in the region grew to USD 1.9 billion, with aggregate net income reaching USD 24.9 million.
However, net premiums written increased only 5.0%, primarily due to rising reinsurance costs and increased property limits/aggregates to cover larger exposures.
The report also highlights the vulnerability of Caribbean economies, which are dependent on external demand for growth.
Events such as the COVID-19 pandemic, Russia’s invasion of Ukraine, and global financial conditions have underscored the need for diversification in these economies, which often rely on activities like tourism, financial services, and commodity exports.
