Best's Market Segment Report: Caribbean Insurers' Near-Term Results Facing Pressure from Challenging Reinsurance Renewals in 2023

Domestic primary insurers in the Caribbean have experienced a difficult reinsurance renewal season this year as the reinsurance industry re-evaluates the capacity it extends to the region, according to a new AM Best report.

A combination of a higher frequency of non-modeled events in the United States and Europe, high interest rates and, for European reinsurance carriers, a strong dollar, has driven reinsurers to reduce the capacity extended to Caribbean primary insurers.

A recently issued Best's Market Segment Report pegs the estimated reduction in reinsurance capacity for the Caribbean region in 2023 at between 10% and 15%. The change in reinsurance availability has had several downstream effects on the Caribbean domestic markets, most notably large rate increases for primary policyholders. Increases in primary retention and the addition or expansion of self-insured sub-layers were tools carriers used to maximize the limits they could acquire for excess-of-loss towers, but with added capital at risk. Higher reinsurance limits are necessary to accommodate higher modeled catastrophe risks from existing policyholders and any potential growth in policy count.

As a result, AM Best expects the Caribbean insurers' profitability to be pressured over the near term. The primary carriers are highly dependent on reinsurance, as they lack the capital to retain any significant amount of additional premium. This dependence also means that financial results can be very sensitive to changes in reinsurance rates and terms.

"Carriers who could not acquire higher limits or aggregates were forced to reduce the amount of business they plan to write or get creative and place larger risks in the facultative market to conserve aggregates for smaller customers that lacked access," said John McGlynn, senior financial analyst, AM Best. "Some primary carriers were forced to drop customers in the face of reinsurance capacity constraints."

Reinsurance pressure was also experienced on quota share (QS) treaties. Continued participation by reinsurance carriers in QS treaties were often conditioned on large primary rate increases.

The post-pandemic economic recovery and limited storm activity in 2022 led to broadly positive results for the Caribbean's general insurers. Gross written premiums for AM Best-rated insurers grew 9.4%, to USD 1.9 billion, with aggregate net income of USD 24.9 million. However, net premiums written increased only 5.0%, as reinsurance costs rose and property limits/aggregates were raised to cover larger exposures. The report includes detailed performance results for region's insurance carriers.

The report also notes that Caribbean economies continue to recover from the pandemic but remain vulnerable, given their dependence on external demand to fuel growth.

"Given the undiversified nature of many Caribbean economies, many depend on a limited range of foreign exchange activities such as tourism, financial services, and commodity exports," said Ann Modica, director, AM Best. "Recent events such as the COVID-19 pandemic, Russia's invasion of Ukraine, and tighter global financial conditions and moderating global growth have all highlighted this vulnerability."

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=336512.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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