Overall, the Caribbean insurance market remained profitable in 2016 despite the region’s high exposure to a variety of natural catastrophe events, helped by the softening reinsurance pricing landscape and the high use of reinsurance protection amongst Caribbean firms, says A.M. Best.
International rating agency A.M. Best has underlined the high use of efficient and available catastrophe reinsurance protection as a driving force behind the continued profitability of the Caribbean insurance sector.
Most Caribbean general insurers that A.M. Best rates recorded strong earnings in 2016 and over the last five years, as underwriting gains and investment returns remained positive despite the regions high exposure to catastrophe events, such as earthquakes, tropical storms, flooding, and hurricanes.
A.M. Best says the fact the region hasn’t experienced any major catastrophes and that general insurers utilise catastrophe reinsurance to protect shareholder equity, has enabled companies to build strong balance sheets.
“All property writers in the Caribbean use reinsurance extensively to minimize their net exposure to loss from natural catastrophes. A comprehensive catastrophe reinsurance program, in combination with underlying reinsurance treaties, is essential for protecting shareholder equity, given the potential for hurricanes, flooding, and even the occasional earthquake in the region,” says A.M. Best.
In fact, as much as 75% to 80% of a property book of business might be transferred to the global reinsurance market, says A.M. Best, significantly reducing firms’ net loss exposure as a percentage of shareholder equity.
Benefitting insurers in the region’s high use of reinsurance, in recent times, has been the softening market landscape. Overcapacity and high competition has driven down rates in the global reinsurance market, and cedents have been able to take advantage of prolonged buyers market conditions, essentially purchasing efficient reinsurance protection.
A.M. Best highlights this point; “Although there have been several hurricanes in the Caribbean in recent years, the lack of a significant event and the below average frequency of hurricane activity, coinciding with excess capital in the reinsurance marketplace, have resulted in lower reinsurance costs for the region’s general insurers. Lower reinsurance costs and competitive market conditions are contributing to the lower rates for coverage that primary companies are charging and the soft market pricing environment.”
The rating agency also explains that reinsurance limits in the region are typically based on knowledge and understanding of risk exposure, and are usually well above catastrophe modelling maximum probable loss estimates that the broker community provides.
“However, in A.M. Best’s opinion, although the quality of data used in catastrophe modeling throughout the islands is improving, it is still somewhat deficient in terms of the building materials used in the region, types of roofing structures, and mechanical systems,” explains A.M. Best.
Looking forward, A.M. Best warned that the ongoing softening of markets, excess reinsurance capacity, and costs related to regulation will continue to pressure the Caribbean insurance industry, and add to this a substantial loss event and it will be interesting to see how companies in the Caribbean perform.