Premiums going up

This column is reappearing after an absence of about six weeks as I was out of the country. Much has happened during that time especially during the month of September. The lives of many in the Caribbean have changed forever and the horrendous damage caused by Ivan in Grenada and Grand Cayman was beyond the estimation of most insurance companies or risk modeling agencies. The weather channel in Canada reported Ivan was heading to Barbados and at no time did the reports indicate a change of course or that Tobago was in its path until a telephone link with Crown Point — but only after the passage of the hurricane. However, we were in constant telephone link-up with family both in Trinidad and in Tobago during the many anxious hours until the worse weather conditions had passed and that the islands were out no longer under threat. This is proving to be an unusually active hurricane season for the Caribbean and the eastern seaboard of the United States with 14 named storms to date and we still have the better part of two months before we come to the end of this hurricane season.

Indeed the residents in Florida have been suffering from ‘hurricane fatigue’ as millions have had to evacuate their homes and go to shelters not once, twice but in some instance thrice. Residents have had to install hurricane shutters and boarded up their windows in preparation for the arrival of the 120 + mph winds and torrential rains. For us in Trinidad and Tobago, the very near miss of Ivan that still did considerable damage in Tobago will serve as a reminder that we are still geographically situated in a wind exposed area and may yet one day suffer windstorm losses. Weather systems form off the African coast and by the time they develop into hurricane strength they are already turning north or north-west and do not usually pose a threat to us except the debris brings heavy rains. We have had near escapes within recent times as these systems are forming  at the near 10 latitude and not turning sufficiently north as they approach our islands. The jury is still out but it might well have something to do with climate change.

Unlike a tornado which cuts a narrow swathe, hurricanes can extend 100 + miles wide and it is not only the direct wind damage but equally destructive is the heavy rainfall from the system which can produce as much as 6-8 inches of rain and the resulting storm surges i.e. the high waves driven by the hurricane force winds. In Grand Cayman our understanding is that the greatest losses were as a result of the storm surge where waves as high as 50 feet came across the island taking all the condo complexes along the sea front with them. The level of devastation is likely to have a profound bearing on insurance companies since many of the properties will carry insurance cover. When a natural catastrophe occurs whether hurricane, earthquake or flood, it is quite usual that the insured losses will be only a small percentage of the economic loss somewhere in the range of 10-20%. In developing economies the percentage is likely to be at the lower end of the scale which suggests that insurance penetration is low unlike the developed world where more persons effect insurance coverage on their assets. In the case of the Cayman, the insurance industry might well have to cope with a significantly higher level of insured loss as a percentage of economic loss.

In addition, forecasting models in assessing the potential loss from wind/hurricanes never considered that storm surges of 50 feet were possible and insurance companies now have to contend with near total losses that will naturally impact on their own reinsurance arrangements. The Grenada situation is desperate with some 70-90% of all properties affected but it will be some time before a clearer picture emerges. It seems very possible that there will be a lower level of insured losses more in keeping with the worldwide average of 10-20% of economic losses for developing countries as many properties may not carry any insurance at all and this is where international aid and grants are required. The Bahamas and Jamaica have suffered considerable damage not only from Ivan but other hurricanes as well and it is reported that losses in Jamaica could be in the US$400 million range. Haiti is a humanitarian nightmare with loss of life exceeding 2,000 while Cuba and the Dominican Republic were also affected. This hurricane season has affected many islands in the Caribbean chain as well as Florida, the Gulf states and the eastern seaboard.

Losses have been estimated as ranging from US$18-30 billion. It has already been reported in the Miami press that some insurers will run out of cash but in their system losses are likely to be paid and recouped from policyholders. In short it means that premiums will be increased and that appears to be inescapable. We in the Caribbean have no such insurer of last resort and therefore have to rely on the private sector insurance companies and the international reinsurance market. It is always known that the region is exposed to natural catastrophes and in the light of heavy losses in an over-active hurricane season it takes no rocket science to predict that shortly insurance premiums will rise and consumers will have to pay more to insure their risks. The near miss in Tobago could work against our market as reinsurers will now argue that Trinidad and Tobago cannot claim to be outside the wind belt and while recognising that we may not be exposed as our neighbours we are certainly not risk-free. Already the largest insurer in the region has publicly advised that it will take an immediate charge in its accounts. There are other local companies that operate regionally who will have losses but the amounts are not yet known.

email:daquing@cablenett.net