THE LOCAL INSURANCE ENVIRONMENT
Legislation, size, rates and impact of local, regional and international disasters. ( by Tarran Dookie)
The first ReCover was published in December 1985. In this article we take a look at the general insurance industry and factors affecting it then and compare it with what obtains today.
LEGISLATION DIRECTLY IMPACTING INSURANCE
The Insurance Act 1980 became operative on November 1, 1982. This piece of legislation provides for the regulation of insurance business and encompasses all players: insurers (both long term and general), brokers, agents, salesmen and adjusters. Hence, when ReCover first appeared this was the governing legislation and still is. The Supervisor of Insurance was the person responsible for the overall administration of the Act and reported to the Minister of Finance.
The responsibility for the supervision of insurance business was transferred to the Central Bank with effect from May 25, 2004 by way of the Insurance (Amendment) Act, 2004. The person now responsible for overall supervision is the Inspector of Financial Institutions.
The current legislation is expected to undergo changes in 2015 following the unravelling of Trinidad’s largest life insurer and its impact both locally and regionally. An insurance bill has been reviewed by a Joint Select Committee of Parliament and the final bill is expected to be laid this year and will replace the current Insurance Act 1980. Some of the proposed amendments include: greater ability of the Central Bank to deal with unauthorised activities, increased capital requirements to ensure viability of companies (a risk-based approach will be adopted), establishment by each insurer of an independent Audit Committee, enhancing the protection of consumers regarding funds handled by intermediaries (specific timeframes to pay over monies and creation of consumer accounts separate from intermediaries’ accounts).
Motor Vehicle Insurance (Third Party Risks) Act
In 1985 the minimum third party limits required by law for motor policies were in respect of death or bodily $200,000 for any one claim by any one person and $1,000,000 for total claims arising from any one accident and for third party property damage $50,000 for any one claim by any one person and $200,000 for total claims arising from any one accident. This was changed in 1996 so that now the minimum amount of cover required for death or bodily is $1,000,000 for any one claim by any one person and $2,000,000 for total claims arising from any one accident and the minimum amount of cover required for third party property damage is $500,000 for any one claim by any one person and $1,000,000 for total claims arising from any one accident.
Value Added Tax
In 1989 the Value Added Tax Act, 1989 was passed into law. Among other things it requires an insurer to deduct from indemnity claim payments the VAT element and pay it over to the relevant tax authority.
Six Percent Insurance Premium Tax
In 1995 a six per cent premium tax was introduced. The tax is imposed on most classes of general insurance (the major exception being marine and aviation insurance).
Workmen’s Compensation Act
Section 24 (1) of the Workmen’s Compensation Act 1960 became law in March, 1997. This made it compulsory for all employers (with the exception of the Government) in Trinidad and Tobago to effect workmen’s compensation covering their liability to pay compensation under the Act.
Occupational Safety and Health Act
The Occupational Safety and Health Act 2004 as amended by Act No. 3 of 2006 was proclaimed on February 17, 2006. This legislation imposes various obligations on employers, occupiers and employees in respect of health and safety.
Dogs Control Act
After proclamation by the President of Trinidad and Tobago certain sections of the Dog Control Act, 2013 (as amended by the Dog Control (Amendment) Act, 2014 came into force on June 02, 2014. However none of the sections dealing with insurance have been proclaimed.
Under the legislation dogs are categorised into Class A (dogs known to display dangerous behaviour and Class B (dogs which are not known to pose any threat). Six breeds of dogs are listed as dangerous (or class A) breeds: the American Pit Bull Terrier, the American Staffordshire Terrier, the American Bully, the Dogo Argentino, the Japanese Tosa and the Fila Brasileiro.
Section 11 creates an obligation on the owner or keeper of a class A dog to obtain a policy of insurance of not less than $250,000.00. Section 12 creates obligations on the owner or keeper of a Class A dog with regards to the cancellation or lapse of a policy of insurance. Section 13 provides requirements for the joiner of an insurer as a co-defendant in civil proceedings.
MARKET SIZE GROWTH, DECLINE AND RATIONALISATION
In 1985 there were twenty-eight (28) general insurance companies in Trinidad and Tobago serving a population of just over one million persons. Many new players entered the market and there was a proliferation of brokers to match the large number of insurers. This situation did not last very long and there were some spectacular collapses. Many brokers and agents fell by the wayside as well. Among the insurers and brokers that ceased operations were Crown General Insurance Co. Ltd, Caribbean United Insurance Co. Ltd, Republic Insurance Co. Ltd, Mountain General Insurance Co. Ltd, Apex Insurance Brokers Ltd and D’Arcy, Alcantara & Rojas Brokers Ltd.
Going forward some mergers and acquisitions took place among insurance companies. The most significant was the merger of NEMWIL (N.E.M. West Indies Insurance Ltd) and Caribbean Home Insurance Co. Ltd to become Guardian General Insurance Ltd, the country’s largest general insurer today. This was preceded by the taking over of Caribbean Commercial Insurance Ltd by Caribbean Home Insurance Co. Ltd and the absorption of Nationwide Insurance Co. Ltd into Royal Caribbean Insurance Co. Ltd which was later taken over by NEMWIL. Sagicor General Insurance Inc. and United Insurance Co. Ltd established branch offices in Trinidad and Tobago.
A significant development was the formation of brokerages by the conglomerates. Risk Management Services Ltd was established by the Neal & Massy group and Maibrol Insurance Brokers was established by Ansa McAl group.
Today the population is estimated to be 1,310,000 and there are fewer insurance companies. There have been a few recent cases where companies have been put under judicial management by the supervisory authorities. Only recently ALGICO ceased writing general insurance business, following the problems experienced by its parent company (AIG) resulting from the financial crisis in the US. We now have some eighteen (18) general insurance companies operating in Trinidad & Tobago.
Early in 1986, in what was perceived by some to be a cartel, seventeen (17) general insurers agreed on minimum rates for fire, earthquake, riot and strike and other perils. This resulted in substantial premium increases for property insurance covers. It marked the end of three years of intense competition by a market overfilled with underwriting capacity and too many insurers for its population size.
The fact that the rates were inadequate was somewhat overshadowed by investment income being the mainstay behind the profits realised by many companies.
Reinsurers who had just suffered from hurricanes Elena and Gloria and an earthquake in Mexico welcomed the rate increases. However, in subsequent years the underwriting discipline broke down as the market softened and rates were reduced.
While the earthquake in Haiti and floods in Pakistan did not involve insurers to any great extent, insurance losses were paid for the Chilean earthquake and claims from the Australian floods and cyclone. Similarly the world’s most expensive insured losses from the Hurricane Katrina in 2005 and the 8.9 earthquake and consequent tsunami in Japan on March 11, 2011 did not result in any increased rates in the Trinidad and Tobago market.
General accident rates have also increased from what existed in the 1980s but it is in the liability lines (public, products, professional indemnity and workmen’s compensation) that substantial increases have been seen from what obtained in the mid-eighties. This may yet be exacerbated by a trend where people are becoming more litigious and damages awarded are increasing. Motor insurance premiums for portfolios with good claims experience have become extremely competitive as new insurers compete for market share.
The many insurers operating in Trinidad & Tobago in the mid-eighties were offering low rates spurred on by competition and the availability of excess reinsurance capacity. Many new reinsurance participants appeared, lured by the attraction of a quick profit.
This situation did not last unduly long as losses from hurricanes and earthquakes took their toll. Some of the new players disappeared just as fast as they came in the first place. Capacity was suddenly reduced severely. Insurers were also faced with a substantial change in that reinsurers were less willing to offer proportional reinsurance , where they shared claim payments with the insurers in an agreed proportion, and now imposed non-proportional reinsurance arrangements ,where the reinsurers only stepped in when the losses exceeded a certain amount (a deductible which the insurers paid fully). Today, many insurers are forced to accept non-proportional reinsurances as disasters and claims increase. Non-proportional reinsurance is particularly hard on companies that are inadequately capitalised.
Although we are in a soft market with capacity not being an undue problem, this can change quickly if more disasters impact negatively on reinsurers.
TWO DECADES PLUS OF DISASTERS
As we look back to 1985 to now, we see that there have been many disasters many of them having quite an impact on the insurance industry.
During the latter half of the eighties there were several disasters. An 8.1 earthquake in Mexico on September 19,1985 caused 10,000 deaths and three to four billion USD damage as 412 buildings collapsed and over 3000 badly damaged. There were several hurricanes and storms, the most significant being Gilbert (1988) which caused over 7.1 billion USD damage as it wreaked havoc in the Caribbean (Jamaica was hit particularly hard) and the Gulf of Mexico and caused 433 deaths, and Hugo (1989) which caused 56 deaths and 10 billion USD damage to the Caribbean (mainly Montserrat) and Carolina in the US. Then there was the 1989 Exxon Valdez oil spill.
The nineties had many disasters as well. Trinidad witnessed an attempted coup on July 27, 1990 which caused some loss of life and substantial property damage, including looting that may have been triggered indirectly by the coup. Hurricane Andrew (1992) caused 26 billion USD damage (mainly South Florida and the Bahamas) and is the second most destructive US hurricane. Mitch (1998), the second deadliest hurricane on record killed some 19,325 most of them in Honduras and Nicaragua.
Disasters seemed to worsen as we entered the 21st century. A 7.7 earthquake struck El Salvador on January 13, 2001 killing 944 persons and destroying over 100,000 houses. September 11, 2001 saw terrorist attacks on the World Trade Center. Damage to the Twin Towers and surrounding buildings was estimated to be over 50 billion USD, heavily involving insurers. 2996 persons died from the attacks. The policies covering the buildings had a war risks exclusion but it did not apply because the attacks were not done by a sovereign nation. This ‘loophole’ has since been blocked by detailed and wide-ranging terrorism exclusions globally. One of the effects of 9/11 was a dramatic increase in insurance and reinsurance rates and a reduction in capacity.
Hurricane Ivan (2004) caused 18 billion USD damage and 91 deaths wreaking havoc to the Windward islands and flattening Grenada and causing damage to the eastern US. The Sumatra 9.3 earthquake of December 26, 2004 triggered a large tsunami in the Indian Ocean region that killed over 300,000 persons some 240,000 in Indonesia alone. Katrina (2005) the costliest US hurricane on record caused 81 billion USD damage and 1836 deaths affecting most of eastern US (severely affecting Louisiana when storm surges caused the levee system to fail) . The same year Rita caused 10 billion USD damage to the US and Wilma caused 29 billion USD damage to the US and some Caribbean territories. The floods of 2007 in the UK has caused some 9 billion USD damage.
A 7.0 earthquake struck Haiti on January 12, 2010 killing over 300,000 persons and destroying 250,000 residences and 30,000 commercial buildings. An 8.8 earthquake struck Chile on February 27, 2010 triggering a tsunami and causing 486 deaths and damaging over 370,000 homes (insurance industry estimated loss 4-7 billion USD). The April 2010 oil spill following the Deepwater Horizon explosion off the Gulf of Mexico is the largest oil spill in US history (at one stage some 60,000 barrels of oil were being leaked daily into the sea). The July 2010 floods in Pakistan has affected over 20 million persons and the estimated damage is 43 billion USD and a death toll of around 2000. Recently there has been substantial damage from an earthquake in New Zealand and massive flooding in Australia. The 8.9 earthquake and tsunami in Japan on March 11, 2011 has caused damage estimated to be over 50 billion USD and a death toll of more than 10,000.
Insurers and reinsurers globally are witnessing larger claims emanating from natural disasters perhaps spurred on by climate changes as global warming worsens. Seismologists say that the last fifteen years have seen a huge increase in seismic activity. We are likely to see increased deductibles on policies and higher rates for catastrophe perils. More significantly, insurers may shift the burden of catastrophe risk bearing to governments if they believe it is no longer commercially viable to offer cover. Following the severe hurricane damage caused by Hurricane Ivan in the Caribbean in 2004, the Caribbean Catastrophe Risk Insurance Facility was formed.
This facility is a regional insurance fund for Caribbean governments, designed to limit the financial impact of catastrophic hurricanes and earthquakes on governments by quickly providing funds. The facility has made payouts in respect of the 29 November earthquake in the eastern Caribbean in 2007, Hurricane Ike which made a direct hit on Grand Turk in 2008, the devastating earthquake of magnitude 7.0 on 12 January 2010 that struck Haiti, and tropical storm Tomas which struck Barbados, St. Lucia and St. Vincent and the Grenadines in October 2010.
It goes without saying that back in 1985 nobody used a cell phone (smart or otherwise) to conduct insurance business and mainframes ruled the day. There was no widespread use of internet, intranet or laptops.
All of that has changed as insurance practitioners have embraced the latest technology to conduct the business of insurance.