Homeowners must brace for a 10% to 30% increase in property insurance rates this year.
The Cayman Islands Insurance Association has released a notice stating Cayman residents should anticipate increases in their property insurance premium rates due to the Atlantic region being affected by strong hurricane activity in recent years.
There were 17 storms in 2017, which included major hurricanes Harvey, Irma and Maria that caused insured losses of more than US$90 billion. This was followed by the fourth-most active hurricane season on record in 2019. Last year, Hurricane Dorian, the strongest Atlantic hurricane ever to make landfall, with windspeeds of up to 185 mph, generated insured losses in excess of US$8 billion.
In response, international reinsurers have increased their coverage cost for the region. Reinsurance, which is used by insurers to spread some of the risks of covering property in the global insurance markets, makes up a significant portion of home insurance rates. The basic principle of insurance and reinsurance is the pooling of all premiums received to pay for the claims of those that have suffered losses, the CIIA said. The fact that these premiums are pooled regionally explains why Cayman property will see rate increases even though the islands have not been hit by a major hurricane since 2004. The last hurricanes to affect Cayman were Gustav and Paloma in 2008.
The insurance association said, “Although we in the Cayman Islands have been fortunate to avoid any major hurricane losses since Hurricane Ivan in 2004, we fall into the same reinsurance pool bracket in the Caribbean and face similar risks and consequently it is necessary to increase premium rates this year.”
Depending on the type of construction, protections, property location, elevation and other factors, the increases are expected to between 10% and 30%.
Several supply and demand factors are also contributing to the price pressure. Some of the largest reinsurers have cut back on unprofitable lines of business, while large insurers who recently retained more of the risk in their property lines are now, after several years of rising insurance claims following natural disasters, more inclined to buy reinsurance.
Alternative capital in reinsurance, in the form of investments from hedge funds, sovereign wealth funds, pensions and mutual funds in insurance-linked securities, almost doubled between 2012 and 2018. The additional source of capital for reinsurers acted as a dampener on reinsurance rates.
When there were few natural catastrophes, such as in 2014, 2015 and 2016, the investments also produced decent returns. Last year, however, after investors were stung by stronger-than-expected catastrophe losses, alternative capital in the insurance-linked securities space dropped from $98 billion at the end of 2018 to $93 billion in June 2019, according to Fitch Ratings.