Caribbean general insurance market remains profitable: A.M Best report

The Caribbean general insurance market remains profitable, albeit challenging, for participants, according to the latest special report by ratings firm A.M. Best. Company Inc.

The company’s special report, titled Caribbean-based General Insurers: What Lies Ahead? and released on Monday, states that the region is susceptible to major storm damage, earthquakes and flooding, which can be exacerbated by economic, political and catastrophe modelling challenges. Overall, Caribbean general insurers rated by A.M. Best have been profitable, on an operating and bottom line basis, over the past five years. These rated companies have also consistently maintained more-than-adequate capitalization relative to their risk profiles, the report said.

However, an increasingly competitive landscape has driven Caribbean-based general insurance companies to enhance their profiles in the marketplace, which includes developing relationships with rating agencies. In 2000, only one Caribbean-based insurer was rated by A.M. Best, compared with 17 rated general insurers at year-end 2014. In addition, the prolonged economic slowdown in the region has led to some contraction of insurance markets as a result of increased price competition and more selective consumers.

The report said that several key factors have transformed the competitive landscape and influenced operating strategies in the region:

• Industry consolidation on the back of poor economic conditions;

• Increased regulatory scrutiny;

• Increased and evolving accounting and reporting guidelines;

• Globalization of the region; and

• Excess reinsurance capacity.

Caribbean-based general insurers generally operate in markets with limited growth potential. Acquisitions of other insurers or existing blocks of businesses have been the main growth vehicle in recent years, the report said, noting that this has led to industry consolidation with fewer market participants. “The remaining insurers are larger, stronger entities, and in general, are better able to withstand the impacts of natural catastrophes, unexpected losses and adverse changes in underwriting results, fluctuating investment returns or investment losses and changes in regulatory or economic conditions,” A.M. Best added in a statement.

Overall, Caribbean insurers rated by A.M. Best have historically done an “admirable job of managing their significant exposure to hurricanes, wind events and the potential exposure to seismic and other natural catastrophe peril,” the report said. Rated Caribbean insurers utilize the reinsurance market as the primary loss mitigation mechanism, with property and auto products (61% and 23% respectively) as the predominate lines of business written by Caribbean-based general insurers.

Given the evolving regulatory landscape in the region, the increasing costs associated with compliance could dampen earnings, the report noted. “Additional headwinds that will present obstacles for rated Caribbean insurers include prevailing low interest rates, high unemployment, economic uncertainty and higher inflation,” it concluded. “Furthermore, given the finite risk pools of each territory, insurers will be challenged to maintain earnings and market share in the face of rigorous competition from their domestic and regional peers. Historically, rated insurers have been good at managing the underwriting cycles given their underwriting discipline and conservative operating fundamentals, and are expected to continue to perform well in the near term.”