Are we running out of reinsurance?

Indeed we have now run out of the names for tropical storms for the 2005 hurricane season and we still have few weeks remaining so we have had to turn to the Greek alphabet for the 22nd storm of the season which started with Alpha.

This breaks the record for storms in the North Atlantic and the big question is whether we are now in a period of hyperactivity for more frequent and intense storms and is supportive of the theory of global warming and higher temperatures. In fact there is evidence that category 4/5 hurricanes worldwide have nearly doubled over 35 years from ten in the 1970s to 18 in the 1990s.

UNDER SCRUTINY

Following the huge losses for the insurance industry resulting from Katrina and Rita and now more losses from Wilma, which will run into billions depending on what is the level of damage in Florida, there is no denying that the international market will have the Caribbean and the Americas under scrutiny.

The losses from these natural catastrophes have had a major impact on the balance sheets of the big players — a number of them posting third quarter losses in excess of US$1 billion and as expected the rating agencies will have their say. It was therefore not unusual for Standard and Poors and others to place even these blue chip companies on credit watch with negative implications in order for them to repair their capital base. On the other hand, these rating agencies forecast that the insurance industry will treat with these losses through higher premiums and more restricted cover over a longer period, thereby recouping these losses over a much shorter period than in previous cycles.

ALARM BELLS RINGING

We have had our own challenges this year — the most recent of which was the wave activity along our coastline this past week which caused destruction and flooding from the North Coast to Cedros in the farthest part of the country. There was no active weather system in and around the country but we were affected by a system which emanated as far north as Jamaica which had huge waves crashing against our shores.

Naturally, this kind of event has the alarm bells ringing as we live on islands surrounded by water with many heavy industries as well as prime properties situated all along the coastline. It means therefore that higher water levels will have the potential for causing damage when previously this was not seen as a major risk and it is for this reason that the insurance industry is required to improve its risk assessment and to price polices on a risk adjusted basis.

This year has seen some very unfortunate events. We live in an inter-connected world and anything that happens here is reported in the international market since insurance companies must interface with the reinsurance community especially when large losses occur. We have had the conflagration in downtown Port-of-Spain in April where the People’s Mall was burnt and although there was little insurance on those properties there were significant losses to surrounding buildings and even worse properties across the street. That was inexcusable and reflected what’s wrong with our fire-fighting capabilities and lack of water in a high risk area. Every subsequent fire in the country appeared to have faced the same problems and there is no reason to believe that the situation will improve in the near term.

INSURANCE SIGNALS

Recently, it was reported that insurance industry was moved to record its dissatisfaction with the state of affairs in the country and such statements would not have been made unless they were reflective of the concerns of the international community, since in the final analysis it is reinsurers that carry a significant share of risks especially as we live in an area that is prone to natural catastrophes. It is not only the fire risks that pose an above average risk but in recent times the flooding that occurs with only the slightest of rain is now a worrying sign. Fire and flood ought to be attrition risks that lend themselves to rating experience based on the law of large numbers and historical data unlike natural catastrophes which can have a long return period spanning hundred of years.

In recent times, Trinidad and Tobago have come under the microscope when compared with only territories in the region. Insurance premiums have risen everywhere but they have fallen during the year on account of the highly competitive nature of the market. The international community has been signalling that it would not support the current pricing levels given the risk adjusted basis for natural catastrophes coupled with the worsening claims experience.

Simply what this means is that premiums cannot remain at their current levels and every indication is that the local insurance industry will be faced with absorbing increased costs which they will have to pass on to their clients.

It is possible that when insurance companies seek to have their reinsurance treaties renewed by year’s end they could be faced with shortage of reinsurance because demand could outstrip supply. These companies have been instructed to manage their business to ensure that their risk exposures receive a commensurate pricing so that they could repair their balance sheet in the shortest time to meet the expectation of their shareholders and rating agencies.

We are not likely to receive any favours since we live in a catastrophe region albeit to a lesser extent that our neighbours in the northern Caribbean. But we are bedevilled by infrastructural problems which do not appear to have a solution any time soon. The end result is that the risk has to be adjusted to cater for our special circumstances which means higher premiums if coverage is at all available.

E-mail:bkaquing@hotmail.com