The Caribbean: cracking the market
The insurance industry in the Caribbean has its origins in composite companies from the UK such as The Royal and The Sun Alliance, but these days the sector is taking on an increasingly local flavour, backed by international reinsurance expertise. While Bermuda’s influence in the region is limited, its involvement is growing, with a number of players exploring opportunities.
As Will Turkel, senior vice president and general manager for Latin America and Caribbean Reinsurance at Allied World explained, while the region is only a small part of the company’s overall book of business, it is continuing to develop its presence there. Other players are doing the same as they build out complementary lines of business to augment an increasingly global footprint. However, as with many markets, the Caribbean is not without its idiosyncrasies—factors that those looking to develop their presence in the region would do well to consider.
One of the major hurdles for those looking to develop a presence in the Caribbean is the diversity of language and cultural influences. Martin Heinz, managing director of property and casualty for Latin America Caribbean and the Iberian Peninsula at Agricultural Risks Worldwide, describes the region as “a mixed bag”, one that demands close attention to the particular nuances of the regional market.
“We have English, Spanish and French-speaking islands, and some are part of the Netherlands. All of this influences what can bedone in the region. For example, on most of the French-speaking islands it can be difficult to do business because much of it is naturally ceded to France, whereas on the English-speaking islands most of the insurers are dependent on international reinsurance since their capital base is comparatively small compared to the risks they take on.” As such, business in the region is often compartmentalised by linguistic and cultural ties, creating evident challenges for Bermuda and international players looking to develop a presence in the region.
One of the other key ingredients of the region is the dominance of proportional reinsurance treaties. As Turkel explained, “Outside of Puerto Rico, the market is very much oriented toward proportional treaties. It is often not possible to participate on a catastrophe excess of loss treaty without taking a share on a proportional programme.”
"You really have to acquire existing insurers in the region to successfully penetrate a market. And opportunities for acquisition don't come up very often."
As a result, local insurers are generally seeking partners with strong financials and the technical capabilities to support their underwriting. As Daniel Duesterhaus, senior underwriter for Latin America and the Caribbean at Hannover Re explained, primary players in the region are “looking for reinsurers that support them across the board. They are looking for partners that can provide them with advice at the primary level and about what reinsurance protection they need to buy. They are not as sophisticated as some of the midsize companies in the US”.
Such an environment creates unique challenges and opportunities for reinsurers looking to develop a presence in the region—one that the Bermuda market can ably exploit.
One of the leading opportunities arises from the loyalty of primary players, said Duesterhaus, with the relatively small size of the market encouraging close relationships between insurer and reinsurer. Such relationships are all the more telling due to the limited number of international players with a presence in the market.
“There are relatively few multinational insurers operating in the region but some of the pan-Caribbean carriers, such as Guardian, United or BF&M, have a major presence throughout the territory,” said Turkel.
Reinsurance penetration in the region is, meanwhile, relatively high—particularly in property—due to the level of cat exposure. For reinsurers that can gain a foothold in the region, there are considerable opportunities. John Wight, BF&M’s president and CEO said that BF&M sources a “substantial” amount of reinsurance from Bermuda, principally though the European market and Lloyd’s,with Bermuda players able to leverage existing Island relationships. Turkel added that there is also general public awareness across the Caribbean of the need to protect against what are significant exposures, with consumers and primaries willing to purchase insurance and reinsurance coverage.
BF&M is one player that has been successful in developing a presence in the Caribbean. The company writes predominantly property and motor insurance for 13 Caribbean islands, and also provides a range of life and non-life lines including casualty, marine, accident and health life, in both personal and commercial capacities. Wight said that the company writes 90 percent of its insurance in Bermuda, Barbados, the Cayman Islands, the Bahamas, and the US Virgin Islands.
Addressing the potential for insurance opportunities on other Caribbean islands, Wight said that it very much depends on the strengths of the individual economies. With most heavily linked to tourism, the relative success of this sector will remain a determining factor in insurance buying behaviour, but he added that opportunities do exist right across the region.
Bermuda and the Caribbean
BF&M has achieved considerable success in the Caribbean, but Bermuda’s involvement in the region—particularly on the reinsurance side—has been somewhat limited. Asked why, Wight said “I think it’s very difficult to start from scratch on a Caribbean island.
“Over the last several years we’ve been doing research into which jurisdictions we want to do business in, and we concluded that you really have to acquire existing insurers in the region to successfully penetrate a market. And opportunities for acquisition don’t come up very often.” Wight said that few companies opt to begin their operations in the Caribbean, with greener pasture available elsewhere. Further compounding the issue has been the limited number of regional companies coming up for sale in recent years. The M&A route has been decidedly constrained, limiting opportunities for regional expansion.
Wight added that “to the extent that new capital requirements are making it necessary for some of the weaker insurers to look for new owners, that certainly may prompt a change going forward”, but the M&A route may not suit every Bermuda player. Some may want to go down the route of organic growth, while others might see greater potential in more long-term, but larger, markets such as Latin America and East Asia.
Nevertheless David Sloan, Aon Benfield’s executive managing director for the Caribbean, estimates that Bermuda provides around 10 percent of the English-speaking Caribbean’s insurance and reinsurance, rising to around 20 percent in Spanish-speaking Puerto Rico and the Dominican Republic. He said that reinsurance buying is “heavily driven by property”, presenting significant opportunities for Bermuda—a market with some pedigree in property underwriting.
"While Bermuda's knowledge in the cat area can certainly help local understanding, modelling shortfalls will continue to inhibit the assessment of risk exposures."
Sloan said that while regional insurance penetration is currently low, Bermuda companies’ excellent security, significant capacity and strength of intellectual capital mean they are well positioned to build a presence in the Caribbean market. “There are a lot of smart people in Bermuda across a lot of different companies,” Sloan explained. “Bermuda has come up with many interesting ideas over the years and as a reinsurance centre it has some significant value which is perhaps not being fully exploited at the moment.” Bermuda could evidently bring more to the Caribbean.
One of the major strengths Bermuda can draw upon is its expertise in writing catastrophe coverage. Situated as it is on active tectonic plates and within an active hurricane zone, the Caribbean has suffered a number of cat events in recent years. From the volcanic eruption on Montserrat in 1995–1997 and the earthquake in Haiti in 2010, to more regular wind events that have battered the region over the years, there is significant need for cat expertise. Bermuda is just the sort of market to bring much needed specialist knowledge to the market.
The region is, however, dogged by limitations in available cat data, particularly in the face of such a diverse and significant set of perils. As Sloan outlined, “trying to understand the cat risk, whether it’s wind or earthquake, is challenging”, and while Bermuda’s knowledge in the cat area can certainly help local understanding, modelling shortfalls will continue to inhibit the assessment of risk exposures. “There are modelling agencies with the ability to model most of the Caribbean islands, but very little resource—in terms of time and personnel—has been put into the Caribbean models by any of the modelling agencies,” said Sloan.
Duesterhaus concurred that modelled data is not as developed as it is in other geographies, creating evident challenges for those writing regional business. “Modelling in the Caribbean still needs some advancement because of what we have seen in the results for historic events—models tend to overstate the loss,” he said. Until such time as model improvements are introduced, there may be a tendency among some companies to shyaway from the market due to incomplete assumptions regarding loss exposure. And one significant and rising factor is likely to make this kind of knowledge all the more pressing—climate change.
Regardless of the outcome of the ongoing debate over the cause of climate change, it is clear that variations in global climate and rising sea levels will have considerable implications for the Caribbean region. The latest data from modelling agencies show fluctuating sea temperatures in the region, which may raise the prospect of wind or flood events, while issues such as the Atlantic multidecadal oscillation will generate further changes in sea temperature, with resulting implications for exposed islands. “Climate change is very much a focal point for Hannover Re,” said Heinz, with the region more exposed than most to its potential implications.
Turkel agreed that climate change is gaining more prominence in the region, with global and regional organisations paying increasingly close attention to methods of limiting exposures. “The World Bank, through the Caribbean Catastrophe Risk Insurance Facility project, has successfully convinced Caribbean governments that they need to purchase insurance to provide immediate short-term funding in the aftermath of a major event.”
Other similar projects are being discussed in the region. The industry has a potentially significant role to play in the provision of such coverage.
“It is clear that strong winds, storm surge and flood are major threats to virtually all of the islands, especially low-lying territories such as the Cayman Islands, the Bahamas and the Turks and Caicos. And there is no indication that the high level of hurricane and flood activity that we have seen in the region since the early 1990s will diminish in the near future,” said Turkel. The region would do well to prepare.
Sloan, however, warned that assumptions regarding climate change may prove premature. The science is not yet fully understood, he said. “There is a potential issue concerning sea temperature. In theory, if temperatures continue to rise, that may increase the level, frequency and strength of hurricanes, but the real impact is still unknown. In recent years, hurricane activity in the Caribbean specifically has been lower in the last five years than it was in the previous five.”
Recent changes may be part of longer-term fluctuations. Wight added that the implications of climate change on rates and insured values remain “more theoretical than practical”, but added that increased volatility in weather patterns would have long-term consequences for pricing and the market. For now however, “because a lot of the business we do is annual renewal business, insurers, reinsurers and policyholders are more focused on how the results were last year or over the last three years”, thereby limiting the repercussions of long-term climate change.
It seems climate change is not an immediate game-changer for the region, but Caribbean governments and the re/insurance industry will undoubtedly be watching the science and its development with some interest.