Barbados' General Insurance Industry Faces Challenges Amid Escalating Reinsurance Costs: Analysis from 2023 Financial Stability Report

Barbados’ General Insurance Industry is facing a major challenge, one that has negative implications for the country’s ability to recover if homes and commercial properties are damaged or destroyed by a disaster.

Not only are insurers worried about underinsurance and uninsurance on the island, but limited and more expensive reinsurance is also a major headache for the sector.

These challenges which are outlined in the 2023 Financial Stability Report (FSR), were confirmed by General Insurance Association of Barbados representative David Alleyne during a roundtable discussion to launch the report published by the Central Bank of Barbados and Financial Services Commission (FSC).

The FSR said that the “hardened” global reinsurance market has brought escalating costs for third-party coverage.

It explained that a hard reinsurance market “is a situation in which certain reinsurance coverage is limited, and the resulting costs of the available coverage are expensive. Reinsurers may tighten their standards, increase costs, and require more stringent conditions to access coverage”.

The reported shared that “these developments have prompted the industry to implement further rate hikes, particularly in the property and motor lines, to enhance financial resilience to the heightened risks”.

“The evolution of climate risks makes it increasingly difficult to secure adequate coverage within the region. In 2023, an estimated 56.2 per cent of total business was transferred to reinsurers, with the most ceded risks being property insurance,” the publication stated.

“Though the industry utilises a combination of proportional and non-proportional treaties to limit financial losses, excess-of-loss treaties are generally employed to provide further protection against catastrophic events.”

Reinsurance arrangements “typically have short durations, which allows the reinsurance market to quickly incorporate the latest findings from scientific research and risk assessments into pricing”.

The FSR said, however, that “given the region’s vulnerabilities, insurers are finding it difficult to secure adequate reinsurance coverage, thus limiting their capacity to underwrite property business”.

Regulators said this “presents implications for the broader economy as the country’s protection gap widens, increasing strain on state resources should an event materialise”.

Alleyne said local insurers “cannot take on the risks that we have on our books without the support of the world’s reinsurers”.

He explained that “reinsurance is in its most essential form insurance of insurance companies”.

“The primary companies insure people’s homes [and] property, but you cannot keep that liability for your balance sheet, it is too much,” he said.

“What insurance companies then do is seek arrangements with companies called reinsurers which generally are companies of substantial size . . . which take a portion of every house, every property, for their own account. And so your balance sheet is in a sense enhanced to be able to take on the risk.”

Alleyne noted that “the challenge with us within the last year or two is that the world’s reinsurers have had second thoughts about putting their capital at risk for the risks in Barbados and the wider Caribbean”.

“The increased frequency [and] severity of risk means that they are not comfortable writing this level of exposure and many companies in the Caribbean have not been able to what is called complete their treaty arrangements and get enough aggregate, enough capacity, to write the risk which they have on their books. It is a problem and the industry is working on it constantly,” he said.

“Now, a facet of that scarcity is that rates have escalated because that is one aspect of reinsurer’s concern, not just the capacity, but the price. And so rates in Barbados have escalated over the last year or so to be able to attract and retain the support of reinsurers.”

Alleyne continued: “What can we do about it? We have been trying to lobby and ensure that our housing stock and our commercial properties are upgraded in terms of the ability to withstand [hazardous events], which will then attract reinsurance support and maybe lower the price.

“But when . . . we have impacts like [Tropical Storm] Tomas and [Hurricane] Elsa, where a storm that is barely a category one or below causes extensive damage which we still are paying for as a country, then reinsurers say ‘well, suppose it was a category three [hurricane]?’.”