Chamber lunch addresses insurance rates: “Ivan costs add up to 25 years premiums”

Kurt Tibbetts asks about flexible premium payments

Oswell Rankine talks about premium financing

Nigel Twohey, a principal
speaker

(L-R) Wil Pineau, Joseph Hew, Nigel Twohey, Robert
Stewart, Ken Chand, Fabian Stewart

by Shurna Robbins

Monday,  January 31, 2005

It was no surprise the Cayman Islands Chamber of Commerce luncheon at the Wharf Restaurant, was sold out last week, given the topic was insurance.

‘The New Insurance Landscape,’ on 27 January, gave industry experts and the business community an ideal opportunity to discuss important and pressing issues in the post-Ivan environment.

A lot of insurance ground was covered by experts Nigel Twohey, Marketing Manager at Island Heritage, Robert Stewart, Chief Underwriting Officer at Island Heritage and Ken Chand, Branch Manager at Motor and General.

Topics included slow payments, underinsurance, rate increases, problems with claim adjustors, price differences, price gouging, government legislation and flexible premium payments. The audience was also given the opportunity to ask questions. 

“Traditionally, the relationship between insurers and customers have been regarded as adversarial,” said Mr Twohey. “But that role really should be regarded as a business partner, because insurance plays a vital part in business.” 

The luncheon gave Mr Twohey the opportunity to address the issue on everyone’s minds, namely the status of claim payments for the country as a whole. 

“There are approximately US $1.5 billion in insurance claims from Hurricane Ivan, spread among ten insurance companies,“ said Mr Twohey. “Certain companies have paid at least 80 percent of their claims. Other companies have paid less, so overall, an average of 60 percent of claims have received some payment. A vast majority of people have received some sort of pay out.”

“What is left are the big ones such as stratas and claims in dispute. They all have received some payment but their claims haven’t been finalised.”
Mr Twohey also addressed the issue of slow payments. “Certainly, the size of Ivan slowed us down,” he said. “If we have a claim on one house with a fire – there is no problem in paying it quickly. But in a large catastrophe like Ivan, where you have 90 percent of houses damaged, you have to fly in people to adjust claims. It takes a long time to get going on the claims process. Purely the size of Ivan slowed us down.”

Mr Twohey acknowledged that the claims process was cumbersome and added that what might help is for insurance companies to be more prepared on making partial payments more quickly. He also denied recent speculation that insurers are slow to pay claims because they are earning money on the interest. 

“The process is that premiums are paid to reinsurers, which is held in an escrow account and factored as part of the reinsurance premium. When the reinsurer releases the money, it is for claims payment,” he said. 

Underinsurance was another big issue that Mr Twohey addressed during his presentation. “The general insurance rule: ‘the premiums of the many pay the claims of the few,’” he said.

Mr Twohey went on to explain that many properties become underinsured because of out of date valuations. Over time, most homes increase in value. If insurance premiums do not get updated to match the increased value, the home becomes underinsured. Another reason for being underinsured was that people needed to read their insurance policies.

One option to prevent underinsurance is reassessing the value of the strata or the home every couple of years and using an insurance survey. 
“I believe banks on the Island will start taking a keener interest on the quantity and quality of insurance as well,” said Mr Twohey.

Concerns over price gouging have been much in the fore recently and government involvement in regulating rents remains a controversial issue. Mr Twohey argued why the government should not be involved:

“Cayman rates rise and fall in a free market. If Government gets involved too much, it impedes the process. The more red tape there is - the more expensive insurance will be.”

“The insurance market in Cayman is competitive and if the market is left alone, the rates will work in favour for the consumer,” said Mr Twohey. “But enacting a new insurance act for Cayman, similar to legislation in Barbados or Trinidad might ‘not be such a bad thing’.” 

He said, “It would allow the Monetary Authority to check on reinsurance.”
“What can the public do to treat the insurance broker as a partner? Demand your rights from the broker. Get an explanation, ” Mr Twohey told his audience.

When it came to price differentials Mr Twohey explained that it can sometimes be the simplest of issues that affect price positions.

“Why is the guy down the road paying two percent versus one percent? Look at the policy,” he said. The price can be affected by taking a higher deductible or enhancements such as shutters or hurricane straps.

“How much will insurance cost in 2005?” said Mr Twohey. “Rates in Cayman before Ivan averaged one percent. They will go up to two percent, maybe more. Deductibles will likely go up to three percent.”

“2004 was the worst insurance year in history and not all from Hurricane Ivan. There were many other catastrophes in the world and they have an impact on reinsurance rates overall. 

“The costs of Ivan add up to about 25 years in premiums. All the pricing is going up. Reinsurers are going up, and our prices will be going up to reflect that cost,” added Mr Twohey.
During his addressing, Chief Underwriting Officer at Island Heritage looked at underwriting issues.

“We know from experience in the Virgin Islands that insurance rates went up two and a half percent because Hugo did tremendous damage.” Said Mr Stewart. “It had four major storms in a 16-year period. The rates have stayed high, because there is a serious perception they are very exposed.

“Cayman should not assume that rates are going to fall dramatically in the next couple years. The Cayman Islands is closer to the centre of the bullseye and it is very likely to be hit again.” 

Even though many homes were constructed within building codes, Mr Stewart explained there were two major factors contributing to damage, and therefore risk. “The damageability is greater because of sea surge exposure. Second, Cayman does a lot of construction with sheetrock on wall and ceilings, which is good while it stays dry. But once it floods, the walls dissolve and crumble. This is also true with kitchen and bathroom cabinets made from pressed wood, which are great unless it gets wet.”

Mr Stewart explained why Grenada had not experienced as much of a rate increase. “Grenada is too far south and not as exposed to hurricanes and almost out of the hurricane belt. The probability of Grenada being hit again is remote and it is not nearly as exposed to storm surge as Cayman, because it is a hilly island, whereas Cayman is in a low-lying area and therefore more of the Island is affected by sea surge,” said Mr Stewart.

“For example, a house in the centre of the island on legs and a good roof may not need insurance. But a house on filled land, with the mangroves removed have increased exposure.”

Mr Stewart explained the two primary types of reinsurance: non-proportional and proportional. Rates on non-proportional reinsurance are being raised 50 to 60 percent, while proportional rates are being raised 100 percent or more. The combination of the two rates averages out to 100 percent. Which means, the cost will be reflected back to the customer. 

Kurt Tibbetts, Leader of the Opposition, raised a number of issues during his speech and suggested insurers extend monthly premium payments over a twelve-month period. 

Ken Chand addressed questions on the motor insurance sector. “We can safely say there will be an increase in premiums. Liability coverage on average was $150 to 300 for the past four to five years. We are raising premiums 25 percent, but that really means $100 per year,” he said. “These rates should have been raised in 2004, before Ivan. So this is the bottom of the rate premium.”

The insurance sector has been in the spotlight in recent months and The Chamber’s lunch provided an ideal forum for members of the industry to address many of the questions that have been raised recently, and next month’s Chamber luncheon, ‘The road to restoration’, will focus on the crucial role of the planning department to the rebuilding process.

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