An unprecedented year of natural disasters across the world will have an impact on insurance rates in the Cayman Islands, even though it was a quiet hurricane season here.
This year had more than 240 catastrophic events around the globe, including three of the top 10 costliest natural disasters on record. Some of the year’s major catastrophes included severe flooding in Australia that started in late 2010; the earthquake in Christchurch, New Zealand; the earthquake and tsunami in Japan; a rash of tornados in the United States, including one in Joplin, Missouri, that caused an estimated $2.2 billion of insured losses; Hurricane Irene, which raked the US east coast; and epic flooding in Thailand that is only now starting to ease.
Bart Hedges, chief executive officer of Cayman’s Greenlight Re, said insured losses could reach $100 billion this year.
“When you add it all up, it’s a bad year,” he said. “It’s the worst year on record in terms of world catastrophes.”
A large number of catastrophes with high insured losses during the course of a year is often the impetus for reinsurance rate increases the following year, Mr. Hedges said, noting 2012 will likely be the same.
“I think you’ll definitely see some double-digit increases,” he said.
Speaking at the IMAC insurance conference on Grand Cayman last week, Island Heritage CEO Garth MacDonald also said there could be a hard market for reinsurance leading to double-digit increases next year.
Cayman First Insurance Company Limited General Manager Michael Gayle recently travelled to Toronto, London, Germany and Switzerland to meet with the company’s reinsurers.
“It was not good news,” he said with regard to the renewal rates. “How bad it will be remains to be seen.”
Mr. Gayle said he had 15 to 20 meetings to discuss reinsurance renewal, which for Cayman First occurs on 1 January.
“The message was effectively the same,” he said, noting that the reinsurers all cited the unprecedented number of global catastrophes “of a scope beyond what they would have imagined” as one reason for the pending rate increase.
However, there is another big reason as well. Reinsurance companies make most of their profits from investments and this year they did not do well with their capital investments. This further eroding their capital base and will lead to capital cost increases, Mr. Gayle said.
“As a consequence … the entire Caribbean region is going to be hit with increases in reinsurance costs,” he said. “We don’t know … how it’s going to impact Cayman, but we’re hearing the region can expect anywhere from 10 to 50 per cent increases.”
Mr. Gayle feels certain Cayman will get some level of reinsurance rate increase.
“It’s not a question of if, but how much,” he said. “We’re hoping the increases won’t be as large as some of the other territories, but the trend we’ve had over the past couple of years of rates going down … is certainly coming to and end.”
Mr. Gayle said Cayman First would probably not be able to absorb the reinsurance rate increases, meaning higher premiums for consumers.
“If the increases do come through in any material way, we’re going to be obliged to pass that on,” he said.
Cayman First might not have all of its reinsurance worked out until Christmas week. If premium increases are necessary, as Mr. Gayle expects, he said consumers would start seeing the higher rates on renewals that occur from late January.
“Those with renewals in the first part of January will escape it, but rates will start firming up and increasing for new business and renewals in late January or early February.
Speaking at last week’s IMAC conference, Mr. MacDonald noted that some in Cayman’s insurance industry could try to get away with flat renewals, meaning they would hold last year’s rates for next year, in order to grow capacity.
He said that consumers in the Caribbean are stretched when it comes to insurance rates.
“To pass on price increases is very, very difficult,” he said.
If some companies have significant premium increases while other hold flat renewals, Mr. MacDonald said it could prove very disruptive to the market.
Cayman’s market could see that very scenario.
The Insurance Company of the West Indies (Cayman) Ltd. General Manager Heather Lanigan said that although her firm is also facing higher reinsurance rates when it renews on 1 January, it will likely not increase premium rates to customers.
“We will probably just hold firm,” she said. “But there will be no decreases.”
To a large extent, reinsurance rates are dictated by regional risk models developed by private sector companies. Recent changes to a key model show increasing estimates of loss in the Caribbean region, Mr. Gayle said.
“Fortunately for us, the change in the model hasn’t effected Cayman as much as other places in the region,” he said. “The fact that Cayman has not been affected as badly with some of the models and that we have had a good run [with no hurricanes], we’re hoping means [the reinsurance rate increase] won’t be as bad here,” he said.
Mr. Hedges said the models were only one part of the equation.
“The models without [2011’s catastrophe] losses suggested the rates should increase. Coupled with the actual losses, I think you’ll see some rate increase.”