Fri | Oct 23, 2020

Cedric Stephens | Insurance won't escape the economic turbulence

Published:Sunday | September 27, 2020 | 12:15 AM

ADVISORY COLUMN: RISKS & INSURANCE

QUESTION: The head of one of our local insurance companies recently warned of what one editor at this newspaper called "a market fallout". He forecasted that the industry outlook for the rest of 2020 was "extremely uncertain and probably more negative than positive". This was due to the impact of COVID-19. Insurance officials are cautious and often assume the worst. Do you agree, and if so, why?

− T.E., Kingston 6

RISKS & INSURANCE: When US Attorney General William Barr was being grilled by Democratic Senator Kamala Harris following the release of the Mueller report, she posed a series of seemingly simple but tough questions to him. The AG, a powerful member of the Trump Cabinet with nearly five decades of experience as an attorney, to use his own words, “grappled with the meaning of the word (sic) 'anybody else'”.

Like him, two words in your question stumped me. They were 'market fallout'. Unlike him, I had time to refer to a trusted source in order to answer your question (Investopedia). He avoided giving a direct answer.

I learned what fallout risk is in the context of mortgage lending. It is the risk to a mortgage lender that a borrower backs out of a loan after a formal offer has been made and before the closing, that is, prior to the signing of mortgage. 'Market fallout' was the wrong expression used in the context of insurance transactions. The insurance official, by my reading, was talking about situations where policyholders had already signed on the dotted line.

He is worried that hotel and other interests could cancel insurance contracts that are now in force due to the economic downturn caused by the pandemic. Discontinuation of these contracts would lead to a reduction in the income of insurers. He also believed that the present conditions could lead to a spike in fraudulent claims.

Insurance company revenue growth is driven by movement in gross domestic product, GDP. According to a recent Bank of Jamaica forecast: “The economic outlook is grim as GDP is expected to fall sharply this year due to the global health crisis and the closure of the Alpart alumina refinery. The pandemic and associated containment measures will weigh heavily on domestic activity, exports, and tourism. However, international financial support and fiscal stimulus should soften the fall somewhat. The panel sees the economy contracting 6.2 per cent in 2020, which is down 0.1 percentage points from last month’s forecast, before growing 3.1 per cent in 2021.”

Double blow

Other sources agree with the insurance company CEO. Insurance analyst A.M. Best said in a report this month that Caribbean property/casualty insurers are suffering what it called a “double blow from rising reinsurance rates and COVID-19”.

“The socio-economic impact of COVID-19 has been a catastrophe for the entire Caribbean, on top of current and prior-year tropical storm activity that has led to reinsurance price firming, especially for loss-affected areas," A.M. Best said.

Storm activity is closely correlated to the earth’s temperature. The UN’s World Meteorological Organisation confirmed that the past five years have been the hottest on record globally. The 2020 Atlantic hurricane season is, according to Wikipedia, an ongoing tropical cyclone season that has featured tropical cyclone formation at an unprecedented rate.

So far, it has featured a total of 24 tropical or subtropical cyclones, 23 named storms, eight hurricanes, and two major hurricanes.

With 23 named storms, it is the second most active Atlantic hurricane season on record, behind only the 2005 Atlantic.

Even though Jamaica has been spared thus far, the costs associated with these weather events are estimated at US$22.3 billion.

In the same way that the local economy is dependent on overseas sources to supply capital, consumer and other goods, and machinery for the economy to function, the insurance industry requires overseas capital in the form of reinsurance as an input to meet the collective needs of all insurance consumers. The local insurance market is affected by what happens overseas, much in the same way that spikes in overseas oil prices tend to trickle down to motorists at the gas pump.

Lloyd’s, the UK-based global insurance franchise, said in a recent report drafted in the wake of COVID-19 that “the magnitude of the pandemic’s financial and social impacts has exposed the shortcomings of society’s preparedness for, and resilience to, systemic risks of this scale and nature, including the ability of some risk transfer (insurance) products and structures to provide protection”. It said it was working with stakeholders to address the shortcomings.

Even though local insurance executives have not started to publicly discuss the nature of the changes that are likely to take place in the future, changes are a-coming.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to aegis@flowja.com.