Islands in the Sun.

A disparate Caribbean insurance industry seeks common ground in an effort to improve its appetite for risk and to address catastrophe exposures.

Living on islands is more than a fact of geography for the insurance industries of the Caribbean. Their markets share characteristics of climate and business: tropical, often hurricane prone, and heavy on tourism. But among the islands that dot the waters from the southern tip of Florida to the South American coast, the insurance sectors are distinguished, and sometimes divided, by economic and political factors. Bridging those differences and bringing cohesiveness to the region's insurance sector is an ongoing process--one that by most accounts will require patience and perseverance.

Insurers in these countries often find their business runs in strings of profitable years, punctuated with devastating losses inflicted at the whim of meandering hurricanes. The companies operate in markets that end at the water's edge, hoping to be among the handful of players with enough premium volume and market share to withstand the big losses and fend off would-be acquirers.

Meanwhile, fitful efforts to tie the industry together across the region have moved slowly--partly because the players find that they have less in common than might be expected. Ian Carrington, supervisor of insurance for Barbados, said that varying levels of development among the Caribbean nations pose a challenge to the cause of cooperation, because each player brings different interests and priorities to the table. It's futile to seek an accommodation that addresses every concern, so agreements need to start with the relatively few areas of shared interest, he said.

"If you wait for the slowest person to catch up, you're going to be waiting for a long time," Carrington said. Meanwhile, the most advanced will be widening their lead, he added. The idea of a Caribbean pool to share catastrophe risk, long advocated by prominent figures across the region, is a case in point, stalled in part by concerns that richer countries would end up subsidizing poorer ones. Carrington maintained that there is a way to isolate the relevant risks for each member of the pool and tie the premium to that risk. The key, he said, is to design the pool so that "the door is always open" for new members to join when they are ready.

There is another, more fundamental barrier to creating a pool, Carrington said. It is simply that too little risk is retained within the Caribbean region. Many companies cede 60% to 80% of the premium into the global reinsurance markets, supplemented by stop-loss coverage--in effect acting as brokers for international reinsurers, Carrington said. Alister Campbell, director general of the Insurance Association of the Caribbean, quoted even higher figures--around 90% of property risk in countries such as Jamaica and Trinidad and Tobago. There is no uniform approach to how the risk is reinsured, but much of it is done on a quota-share basis, Campbell said, with insurers paying a percentage of the premium to reinsure a corresponding percentage of any claims.

Kendal Munnings, supervisor of insurance in the Bahamas, expressed little concern over the heavy use of reinsurance and offered little hope for change. "I think they will continue to use reinsurance, and their retention will continue to be a smaller portion of the risk," he said.

A Different Strategy

Domestic Caribbean companies have long been content with such arrangements, which give them income at both ends of the transaction: premiums from the insureds, and ceding commissions from the reinsurers, Carrington said. He expressed hope that a new generation of management at Caribbean insurers would adopt a different strategy, making their companies act more like true insurers. But Barbados hasn't waited for its insurers to see the light. In 1996, the country adopted a new insurance law that strengthened capital and solvency requirements--and accomplished the objective of consolidating the island's industry into fewer but stronger companies. Barbados also allows insurers to set aside 20% of property premiums tax free as catastrophe reserves.

Campbell said Barbados took a step in the right direction with the catastrophe-reserving provision, and he predicted that most Caribbean countries would follow suit before long. But he cautioned that given the relatively low shareholders' equity of most Caribbean companies, capping the reserves at that level would limit them to a small amount.

Widespread adoption of tax-advantaged catastrophe reserves might buy some time while regional leaders work on other issues. The Insurance Association of the Caribbean, together with the Caribbean Community and the World Bank, has been working for years on the concept of a regional catastrophe pool, but first the feasibility and mechanics of such an entity need further study, Campbell said. "Pooling is going to take some time before it is meaningfully applied to this region," he said.

More promising in the short term are efforts at catastrophe mitigation, such as building codes that would require structures to be able to withstand a Category 4 hurricane--that is, with sustained winds of at least 131 mph, Campbell said. There is widespread interest in the issue, from government as well as industry, as the Caribbean region faces increasingly frequent hurricanes, he said.

Three Principles

The working model for development of the Caribbean insurance industry is embodied in three principles adopted by a working party of the Caribbean Community, known as Caricom, in 1996. These were the development of strong and effective insurance regulation, improving the industry's capacity to accept and retain risk, and strengthening of regional measures to address catastrophe risks. An overarching theme was to reduce the region's reliance on outside reinsurance.

Campbell noted that Trinidad and Tobago has hired a consultant to advise it on strengthening the island's regulatory regime, and he said visits to other countries have been encouraging in this vein. "The message is coming through quite clearly to us that they are moving in that direction," Campbell said. One regulator, he said, is putting teeth in financial-reporting standards by imposing fines on companies that fail to comply. In addition, the region's insurance regulators have formed a regional body that meets at least once a year in conjunction with the Insurance Association of the Caribbean's annual meeting.

The Bahamas' Munnings suggested that existing regional and international structures are sufficient to exert pressure for higher regulatory standards in the Caribbean. These include the Caribbean Association of Insurance Regulators, the International Association of Insurance Supervisors, the Offshore Group of Insurance Regulators and the Organization for Economic Cooperation and Development, he said. "We're not operating in a vacuum, and we've got to be very responsible," he said.

While regulators and regional authorities struggle with the big picture, individual companies confront the uniqueness of their home markets. Patrick Ward, managing director of Bahamas First General Insurance Co. Ltd., sees his market as distinct from the rest of the Caribbean, marked by a robust economy and no income tax. The country's economy grew by more than 5% last year and is on track for 4% growth this year, and construction is booming, he said.

Ward put total property/casualty premiums in the Bahamas at more than $130 million, excluding business written by foreign companies. Fire business is profitable in years with no catastrophes, with loss ratios of less than 20, and it's possible to write automobile and marine business with loss ratios of around 60, he said.

Large commercial risks that are written locally tend to be backed by extensive proportional reinsurance, supplemented by facultative layers that often are placed in London, Ward said. Net retentions usually are no more than $200,000, he said.

Sharing Capacity

One quirk of the Bahamas, Ward said, is that reinsurers usually aggregate the island with Florida in terms of its catastrophe exposure, putting Ward in competition with his neighbors on the mainland. "We are fighting for the same capacity," he said. Ward's response has been to seek capacity from reinsurers that take a long-term approach, rather than those that are prone to "knee-jerk" responses to every catastrophe loss. But despite the abundance of reinsurance capacity, the players are fewer, and it's getting harder and harder to find long-term thinking in the market, he said.

Munnings, the Bahamian regulator, echoed Ward's complaint about the aggregation of the islands with Florida. "We've been trying to get them to include us as a separate and distinct region," he said. As it is, Bahamas insurers pay rates based on the much more expensive exposures of Florida, as well as weather risks such as tornadoes that don't affect the Bahamas, he said.

Ward said one or two companies in his market might be vulnerable to consolidation, lacking the premium volume and market share to survive on their own. He said suitors would likely be Bahamian or other Caribbean companies. There would be little to attract North American buyers, Ward said.

Munnings echoed Ward's prediction. "You'll continue to see the consolidation of the industry," he said, but not an influx of foreign buyers. He added, however, that the Bahamas would probably invite some larger foreign carriers to set up operations, replacing other big U.S. and British players that have withdrawn in past years. "It would be good to have a good mix and let the competition decide where things ultimately reside," Munnings said.

Seeking Common Ground

As for regional cooperation, "I don't really see that there is enough common ground," Ward said. He said the formation of smaller groupings within the region might be a more realistic aspiration. Countries in the southern Caribbean, for example, might see a need to harmonize their insurance industries, he said.

In the southernmost reaches of the Caribbean sits Trinidad and Tobago, where Caribbean Home Insurance Co. writes a wide-ranging portfolio of personal and commercial lines business. Franklin de Nobriga, Caribbean Home's managing director, is no more enthusiastic about a catastrophe pool than Ward, his counterpart to the far north. He notes that his island is so far south as to be out of the path of most hurricanes, and so would have little to gain by joining a regional pool.

De Nobriga is more concerned with the tepid response to an oil and energy pool formed by insurers on the island in an effort to keep some of that business from going overseas. Despite solid backing by reinsurance, only three or four companies in Trinidad's sizable oil and gas industry have bought coverage from the pool, he said. Beyond that, he said, multinational companies generally take all of their business, except automobile and workers' compensation, offshore.

Locally-based risks are a mixed bag, de Nobriga said. Automobile business, the largest line in the $115 million property/casualty market, is "a loser," he declared bluntly. But marine and property business have been having more profitable years than unprofitable. Casualty lines, he said, are risky because the "limited base of business" leaves profits vulnerable to even a few large losses.

Life insurance generates about $60 million of annual premiums, most of it in ordinary life but with some group business included. Life insurers are being challenged by commercial banks, which are offering annuity-like savings products and encroaching on retirement business, de Nobriga said.

Like Ward, de Nobriga paints his own country as distinct from the rest of the Caribbean, with a more open posture toward the outside world. That position makes insurers there more subject to foreign competition than companies in other Caribbean countries. "It's a market that could be singled out for a new business attack," he said. De Nobriga noted that the openness of the market to non-admitted players forces local insurers to write business at "international terms" that provide broader coverage at lower rates.

No Foreign Threat

But he added that foreign-based mergers or acquisitions aren't much of a threat, with outside players more likely to pursue partnerships than outright purchases of indigenous insurers.

Conversely, for local insurers, growth is "sort of available to individual companies," but only if they reach beyond the shores of their saturated home market, de Nobriga said. "If we don't use our connections," growth won't happen, he warned. Companies with larger ambitions must consider reaching for critical mass through mergers and acquisitions, but even that may not suffice. "In a global world, maybe regional isn't good enough," he said.

De Nobriga said there are many issues standing in the way of regional cooperation in the industry, including matters of taxation and even the difficulty of transferring funds from one island to another. Unless a Caribbean free trade union is formed, "we're not going anywhere," he said.

Carrington, the Barbados regulator, said movement of funds is never a problem in his country, although the government does like to review large transfers. He defended the practice, noting that in such tiny economies, movements of large sums can play havoc with a country's balance of payments. The comment underscores the difficulties that small size alone can pose for the region's insurance industries.

"The problems are very challenging," said Campbell of the Insurance Association of the Caribbean. The way out of a fragmented and disorganized industry lies in free-market principles, he suggested, saying that the islands of the Caribbean need to "see cross-border trade as an opportunity rather than a threat."