Insurance Rates – Past, Present & Future
By Victoria Rankin, Vice President – Group Reinsurance, BF&M Group / Island Heritage, ACMA, ACII, Chartered Insurer
One of the main reasons we purchase home insurance is to keep the bank happy when buying a house. In the back of our minds, it is yet another cost for a service, which we are unlikely to use and if we could avoid it, we would. Having sufficient insurance is so much more than keeping the bank happy; it is a necessity – especially living here in Cayman, which is prone to catastrophic events such as hurricanes. There are many benefits of buying insurance but in my mind the most simple, most important is taking comfort in knowing your house and belongings can be rebuilt or replaced.
Insurance companies apply a ‘rate’ to the value of the house and/or contents, to calculate the premium. But where does this ‘rate’ come from and what factors could possibly affect it? To understand this, we must understand the relationship between insurance and reinsurance and then look at how this relationship has affected the historic rates in Cayman.
Reinsurance is simply, ‘insurance for the insurance company’. The main benefit afforded by reinsurance in this context is the ability to increase the insurers’ capacity to accept more risk or policyholders than the balance sheet allows. Post event, the cost of claims is shared with the reinsurer, therefore minimising the capital impact to the balance sheet of the insurer. In a soft market when capacity is plentiful, the margin on capacity will be less, which in turn allows insurance companies to reduce rates. In a hard market, when capacity is scarce, (i.e. post Ivan), capacity becomes expensive, resulting in increased insurance rates. Insurance companies do not increase rates after a hurricane just because they have incurred claims; the increase is a function of price changes in reinsurance driven by the availability of capacity.
Reinsurers and insurers are not all created equal; one way to help differentiate between them is by their rating which is a measure of their financial strength. The rating process is conducted annually by rating agencies such as AM Best and Standard and Poor’s. The rating can vary from A++ (Superior) to S (rating suspended). Those with a secure rating (A++ to A-) will likely charge more for their capacity as they are financially stronger and perceived to be better able to meet their liabilities as they fall due than those rated as being vulnerable (B to S).
When purchasing insurance, it is wise to understand the rating of your insurance company and the reinsurers backing them. When looking at rates, those insurers who are financially secure and also have the backing of reinsurers who are in the same bracket or above will likely have a slightly higher rate than those with a vulnerable or unrated rating. Buyers beware!
Pre Ivan (2004), rates ranged between 0.7% and 0.85%. This reflected the UK tariff rates with an underwriting load for windstorm based on historical loss experience gained from hurricanes such as Hugo and Andrew. This method of rating remained intact until Hurricane Ivan.
Hurricane Ivan was a global event with total losses for the Caribbean and US estimated at $19.88bn, of which Cayman losses were $2.8bn. This significant loss resulted in a withdrawal of capacity and players from the market. The increase in demand for insurance combined with a reduced supply in capacity led to a doubling of insurance rates from 0.85% pre Ivan to 2.2% post. The higher rates attracted opportunistic (re)insurers, looking to benefit from higher prices. The steady influx of cheap capacity eroded the rate as can be seen in the table below.
Year 2005 2006 2007 2008 2009 2010
Rate % 2.2 1.9 1.85 1.8 1.75 1.7
Year 2011 2012 2013 2014 2015 2016
Rate % 1.7 1.65 1.6 1.5 1.3 1.2
Despite the recent lack of catastrophic activity, Cayman rates are still among the highest in the region. Higher rates have continued to attract foreign players into the market resulting in an oversupply of capacity, which is the primary reason insurance rates are now the lowest they have been in over 10 years.
Cayman is situated in the Hurricane graveyard making the possibility of being hit by another CAT 4/5 storm inevitable. When this happens, insurance rates will increase but not in the same proportion as experienced in Ivan. The development of Catastrophe models has enabled underwriters to better estimate losses associated with hurricanes as well as gain their own independent view of risk and margins. The varying views make it hard to assess the point at which reinsurers will withdraw capacity due to margin deficiency. Given that we are fast approaching historical lows in rates, which are below those of pre Ivan, it is just a matter of time before we see capacity being restricted or withdrawn. When this happens you may expect the cost of insurance to rise.
Providing there are no substantial losses, rates should stabilise. Conversely they will increase following losses depending on the scope, scale and nature of the loss.
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