The role of commercial insurance is quite different today from when I entered the industry in the late 1990s, at the dawn of globalisation. While it continues to play a key role as a risk transfer mechanism, new risk management methods and tools are now available to local corporations for the handling of risk. In addition, Barbadian businessmen are much more informed and attuned to the financial and business risks that they face. This has been aided by the development of the offshore sector, which has provided local executives, many of whom sit on the Boards of offshore companies, with excellent insight into global insurance and risk transfer practices.
More and more companies are retaining greater levels of risk, often in the form of higher deductibles and/or, if size or spread permits, through the establishment of loss limits that cap an insurer’s payout in the event of a claim. Some companies are even electing to co-insure the lower levels of insurable risk (the primary or working layer), thus sharing in the cost of claims at this level with insurers, on a proportionate basis.
Self-insurance has become more prevalent, especially in cases where the insurance is seen to be a dollar-swapping exercise, or where it bears little relation to the actual exposure. Perhaps the best example of the latter is the self-insurance fund set up by The Barbados Light & Power Company Ltd in respect of its Transmission and Distribution (T&D) assets. Following the large hurricanes in the Caribbean and Florida in the early 1990’s, which greatly escalated the cost of commercially available T&D insurance and restricted the available insurance capacity, a government-approved self-insurance fund was established by Barbados Light & Power that has today grown to a significant level.
Captive formation, which is really a hybrid form of insurance, has seen substantial growth in the past ten years. This in part reflects the increased sophistication and awareness of the modern businessman and the appropriateness of the medium, but it also synchronizes with the increased understanding of their Captive domiciles and their regulators of this key risk management tool. In our region the emergence of Cayman as a lead alternative has been marked in the past decade, where growth has outstripped even Bermuda. Cayman’s development and marketing of its relatively low intensive capital need for Restricted B licensed Captives, Turks and Caicos’ championing of reinsurance Captives (PORCS) and even the recent moves for segregated captive legislation in St Lucia all testify to increased awareness and understanding not just by suppliers, but providers of the Captive solution. Increasingly, domiciles have also allowed the admission of Captive Policies into their territories. As the freeing up of trade restrictions gains pace, the increased acceptance of Captive use will grow, both in Barbados and throughout the region.
The use of other transfer techniques such as contractual transfers for risk financing is becoming widespread. Onerous contractual terms such as indemnity and hold harmless clauses, subrogation waivers and conditions limiting the supplier’s liability in the event of a claim, are appearing in contracts between local companies and overseas contractors. For the past number of years, local hoteliers have come under considerable pressure from tour operators, particularly those in the United Kingdom, to comply with overseas travel regulations. In order to protect themselves, the overseas tour have included indemnity clauses within their contracts with local hotels, whereby the latter agree to indemnify the tour operators for any claims that are brought against them by an injured or aggrieved client. Without the existence of these contracts, a local hotelier would only be exposed to claims brought by an injured guest within the Barbadian jurisdiction (unless the hotel conducted business in the UK or worldwide, in which case it could be sued overseas). However, through these indemnity clauses they are now exposed to claims brought in the United Kingdom, the United States of America and other overseas jurisdictions where awards for damages are very high.
While it would appear that certain traditional insurances have been diminishing in importance, others have increased in demand. Few local businessmen will sit on a Board of Directors unless there is adequate Directors and Officers Liability insurance in place. Similarly, many organisations now require lawyers, accountants, engineers, architects and insurance brokers to provide proof that they have adequate levels of Professional Indemnity insurance coverage before transacting business with them. A sign of the times, there is also greater interest in Kidnap and Ransom Insurance as well as Terrorism cover.
Coastal construction is seemingly a worldwide characteristic of globalisation, and Barbados is no exception. The insurance of coastal risks is becoming more difficult with increased concerns of global warming and rising sea levels. Rates are increasing while capacity reduces, and more restrictive terms such as higher deductibles are being forced upon the consumer.
Although the cycle varies, local carriers have generally provided more competitive terms than overseas insurers in recent years. They are protected to some extent by an applicable premium tax of 12% in respect of any insurance placed directly with Lloyd’s and 20% in respect of other, non-admitted companies. Very little of the insurance placed with local carriers is retained for their own account, and the majority is reinsured with the London and international markets.
Mergers and acquisitions are part and parcel of the globalisation process, and the names of a number of insurers that were household names twenty years ago have disappeared. Local insurers have also started looking beyond regional boundaries as evidenced in July this year when Sagicor acquired the Lloyds managing agency and syndicate, Gerling. Through mergers and acquisitions a number of carriers operating in Barbados can now claim to have a truly regional (and even international) spread. Despite this consolidation, a number of new players have entered the fray and there are still a relatively large number of insurance providers and intermediaries to choose from for an island as small as ours.
The security of insurance companies is of growing concern among local executives, especially after the insolvency of a number of major companies in Jamaica and the Cayman Islands following the passage of Ivan in 2004. Many companies operating in Barbados have either obtained, or are actively seeking, accreditation from international rating agencies such as A M Best. The Insurance Act is currently being reviewed and amended and some of the amendments will include increased minimum capital requirements as well as the implementation of risk-based assessments.
New risk management services and products are now available to local business and the government to assist with risk financing. Catastrophe-modelling and risk assessments, which were previously only available from overseas companies at a very high cost, can now be obtained locally at affordable prices. Local businesses are therefore able to conduct vulnerability assessments to determine the probable maximum losses they are likely to experience in the event of natural catastrophes such as hurricanes or earthquakes, thus enabling them to make informed decisions on the establishment of catastrophe loss limits for insurance purposes.
Perhaps one of the most interesting developments in insurance in recent times was the launching of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) on June 1, 2007. The CCRIF was developed by the World Bank and acts as a financial intermediary between participating countries and the international reinsurance market. It essentially allows Caribbean states to pool their catastrophic risks in order to lower the cost of coverage by accessing the reinsurance market with a better diversified portfolio. Participating countries such as Barbados are provided with immediate access to liquidity if hit by a hurricane or earthquake and payouts are based on the estimated impact of natural disasters such as hurricanes and earthquakes on each participating government’s budget. The estimated impact is based on probabilistic catastrophic risk models developed specifically for the Facility. Participating countries, such as Barbados, receive compensation proportional to the losses from the predefined events according to the level of coverage agreed upon in the insurance contract. This means that the participating nations will immediately qualify to receive a standard cash injection based on the severity of a catastrophe, eliminating the requirement for time-consuming, damage assessments to be conducted post-loss.
CCRIF was able to secure US$110 million of claims paying capacity on the international reinsurance and capital markets. The reinsurance structure consists of four layers: CCRIF retains the first layer of US$10 million; reinsurers underwrite the second (US$15 million) and third layers (US$25 million); the top layer (US$70 million) is financed with reinsurance (US$50 million) plus US$20 million coverage through a catastrophe swap between the World Bank (IBRD) and CCRIF. IBRD hedged its risk through a companion swap with Munich Re Capital Markets. The US$20 million swap between IBRD and CCRIF is the first transaction to enable emerging countries to use a derivative transaction to access the capital market to insure against natural disasters. It is also the first time a diversified pool of emerging market countries’ catastrophe risk has been placed in the capital markets.
With increased trade liberalisation and movement of capital, people and goods, new risks will emerge as well as new opportunities for managing risk. Whatever happens, insurance will continue to play a pivotal role in risk transfer, either in conjunction with other risk management tools or in a hybrid form.