A panel of Caribbean insurance executives exposed defects in catastrophe models, speculated on the need for a revamp of building codes and revealed problems for countries and their insurers in the region, including reduced access to US dollars.

They were among many issues raised during the recent AM Best virtual Briefing - Caribbean Market Perspectives from the C-Suite, involving participation from AM Best analysts and regional insurance leaders.

Participants examined current economic and industry trends in the Caribbean markets; the impact of COVID-19; and regional outlooks, challenges and opportunities in the year ahead, revealing deep concerns for the future.

Randy Graham, the Massy United Insurance CEO based in Barbados, commented on the need for Caribbean insurers to focus on business retention and cash flow because of the need for access to US currency to pay reinsurance bills.

He said: “This will continue to be a challenge as the imports are increasing and the tourism and international business reduces. We have challenges getting US currency. Right now, it is a holding pattern, trying to maintain your business book and manage your cash flow in US currencies as best you can.”

The executives agreed that there will be some need to reassess modeling when it comes to storms, as their changing patterns – more storms and more damaging – were not being accounted for in the existing models.

Mr Graham noted that climate change would mean problems in reinsurance buying in the future, because of models based on historical losses.

He said: “The increased number of storms brings a modeling question. Can history really give us enough insight into the future? There is an attempt to take climate risk into account, but we do not have enough data to model.

“Storm surge for example – a lot of damage is caused by storm surge, but the models find it very difficult to account for storm surge. So, with increased frequencies of storms, increased landfall of the storms and the models not contemplating the proper impact of the storm surge, it means companies have to take the model, but they have to use judgment calls about if they buy excess, or set aside more capital.

“With the frequency now, we have to ask if we are buying enough. Because when spread across the region, you can expect three or four landfalls in a particular year. I think the models are attempting to get better, but they are not there where we are comfortable that we have enough data about all the elements, or that we have properly seen what the climate risk change is that we’ve built into the models.

“There’s still a level of volatility, and we can see it even in the assessments. One modeling agency comes out with their assessment and another one comes out and the volatility between the two is huge.

“And that’s because the models have some work to do. You have to consider that as an insurance company. You cannot rely on them.”

CEO of Summit Insurance Company Timothy Ingraham, agreed that modeling needs to be examined.

He said: “Dorian had insured losses around $2 billion, which was well in excess of anything we had seen here before. And a lot of that was due to storm surge. Storm surge is an area where the models have struggled.

“In Abaco for instance, we saw storm surge going a quarter of a mile inland. We had never seen anything like that before. We need the models to adapt, but we also need to look at it for ourselves and decide what’s going to happen. What we think is going to happen.

“And so that causes us to take a look at what we we’re purchasing as far as our reinsurance programme is concerned. Is it enough?

“If before that, you had assumed a damage factor of 20 per cent and suddenly you are seeing 40 per cent, is this something that’s going to continue? Something that’s a blip on the radar and we won’t see it again?

“Looking at increased catastrophe deductibles is what we are seeing in areas with increased frequency of losses. And we’ve seen the increased premium.

“I think it is going to take a broader view. We have to, in this region, look at climate change and see how we can adapt to it, not just from an insurance perspective.

“In Bahamas, for example, our building code, which to this point had been considered quite robust, is really due for an upgrade.

“I think Hurricane Dorian kind of exposed that a little bit. At the moment, we are required to build buildings to withstand winds of 140 miles an hour. But if we are going to continue to see storms with winds of 150 to 160 miles per hour, the question then becomes do we need to look at something like the Miami-Dade standard of 180 miles an hour? New buildings can go to that, as we retrofit older buildings.

“A lot of people who are re-building since Dorian are already upgrading, without the building code actually even asking for it.

“We are heavily dependent on reinsurance support, and if reinsurers decided tomorrow they didn’t have the appetite to continue doing business in the area, that would definitely be an issue for us, because our capital bases could not withstand it.”

Other dominant features of the region involve their challenges with the hardening rates in reinsurance and the arrival of the global pandemic on the heels of a catastrophic hurricane.

The Caribbean’s $2 billion-plus insured loss estimates for Hurricane Dorian included the category 5 hurricane parking for nearly 12 hours over the Bahamas, impacting the islands of Abaco and Grand Bahamas.

And while 2020 was a relatively benign year in terms of hurricanes, Covid 19 right behind Dorian paralyzed the tourism sector even more deeply.

Still, AM Best expressed confidence in the Caribbean as “an important market we follow and it has been resilient in the face of the disasters.”

Ricardo Longchallon, Senior Financial Analyst with AM Best, said: “Despite government imposed lockdowns, struggling economies and investment markets and at times, they appeared to be on life support, Caribbean insurers generally maintained strong balance sheets, with sufficient capital cushion.

“In 2020, most of these insurers actually recorded an increase in surplus. As a result, there was very little rating movement within the rated Caribbean group apart from one change in outlook.”

Best’s Associate Director Ann Modica, said however, the Caribbean’s undiversified regional economies left them vulnerable to outside shocks, as evidenced by the pandemic.

Tourism dependent economies are among the hardest hit by the pandemic and expected to be the slowest to recover.

She said: “The IMF does estimate that tourism-based Caribbean nations contracted on average by about 10 per cent last year. And newly released projections even show a downward revision for 2021 growth.

“They’re expecting a full percentage point decline. They were predicting 2.4 percent (growth) for the tourism-based economies and now they have brought that down to 1.4 per cent in expected growth. This really does reflect the significant downside risk and uncertainty in the current situation.”

Ms Modica said a sustainable uptick in tourism depends on: effective vaccination efforts, not just in the region, but globally; the evolution of the virus and the new variants: people’s willingness to travel and feel safe.

The other part of the region depends on commodities to drive economic growth. These countries include Guyana, Suriname and Trinidad and Tobago and as a group, the average growth is positively skewed for the region due to the extraordinary growth in Guyana.

Having suffered through deep recessions, she said, the IMF is projecting only modest recovery this year.

The Caribbean Development Bank has estimated that public sector debt in the region averaged almost 85 per cent of GDP in 2020, up from about 65 per cent in 2019, fuelled by extraordinary spending needs after Hurricane Dorian and the reduction of tax collection exacerbated by a pandemic, for economies already suffering from weak public finances.

Mr Ingraham said while the Bahamas is observing tourism’s return (two cruise ships home porting) covid numbers are surging again.

He added: “The pandemic was just another devastating blow for an economy for which 50 per cent of our employment comes from the tourism industry and there was no tourism for a year.”

Meanwhile, Mr Graham said Barbados, like other eastern and southern Caribbean countries, are dealing with contractions of their economies, increase in government debt, restricted retail activity, while trying to maintain social services.

Vaccinations, he said, are the key to the substantial re-opening of their economies.

Chief operating officer and chief risk officer for Guardian Holdings Group, Paul Traboulay is based in Trinidad and Tobago, which is suffering from production declines of both oil and gas.

Other countries have other issues, he said, including Jamaica which faces tourism declines.

He stated: “The challenge with respect to vaccinations is that there was a paucity of available vaccines through Covax (the global risk-sharing mechanism for pooled procurement and equitable distribution of COVID-19 vaccines.)

“Now the emerging challenge is the increasing vaccine hesitancy. I think that is going to be a challenge for all economies in the Caribbean.”

He points to an uptick in insurance claims and a remarkable 2020 of better combined ratios throughout the Caribbean.

Key company issues include climate risks, IFRS17, cyber threats, reinsurance needs and Covid 19.

Looking at the life health pensions side, he added that the biggest challenge impacting reserves is interest rates.

Mr Traboulay raised an emerging area of regulatory risk.

He said: “In the Caribbean we have some degree of migration to regulatory convergence. But maturity levels vary. Operational compliance varies in terms of intensity and requirements for paperwork and now we also have the emerging challenge of compliance with IFRS17.

“And until you have regulatory convergence with IFRS17, public reporting, you also have statutory reports and tax reporting that will also have their own forms of reporting with little convergence.

“That will represent a significant challenge in the future for all companies - and more so for life companies, as opposed to p&c companies.”