The future of Caribbean property and casualty insurance

Ruben Onsu

Everything changed for the Caribbean insurance sector in 2017 when hurricanes Irma and María accounted for $94.6 billion in economic losses and $34.8 billion in commercially-insured losses —among the insurance sector’s costliest years.  As a result, the ability to secure insurance has become increasingly difficult for government leadership, infrastructure project […]


Everything changed for the Caribbean insurance sector in 2017 when hurricanes Irma and María accounted for $94.6 billion in economic losses and $34.8 billion in commercially-insured losses —among the insurance sector’s costliest years.  As a result, the ability to secure insurance has become increasingly difficult for government leadership, infrastructure project owners and island nations in need of robust policies.

A changing tolerance for risk: Since today’s insurance firms — from local advisors to large, global institutional players — are more selective in who and what they choose to underwrite, the need for independent financial and insurance advisory on major projects has never been greater.  The continued hardening of the market and growing intolerance for risk among the largest institutional providers has made cost-effective insurance particularly hard to secure. 

An independent insurance advisor will understand the limitations of each insurer and their appetite for risk.  For example, if you have a $100 million airport, the local insurer may retain just 5% of the risk and distribute the rest of the risk amongst a panel of reinsurers.  The key is finding the panel of reinsurers that have the appetite to assume a portion of the risk. An advisor may customize an approach consistent with investors’ risk profiles.

The option to self-procure: Project owners have the option to purchase their own insurance in the form of an Owner-Controlled Insurance Program (OCIP), a single insurance policy designed to cover a project on an “all risks” basis, rather than have each individual contractor bid for their phase of the project, inclusive of insurance costs which are inevitably marked up for contractor profit and/or administrative fees. 

When the owner decides to purchase insurance for the entire project under an OCIP —covering all contractors and sub-contractors under one policy the insurance costs are collected into a single policy premium.  This strategy is similar to an owner going to a wholesale store and buying goods in bulk, versus buying them at a luxury shopping mall where the cost-per-unit is higher.

By procuring insurance in this way, the owner has more transparency and control over their purchasing strategy, costs, security and terms and conditions, while benefiting from the economies of scale that come from a bulk purchase. Throughout the life cycle of the construction, the money saved by the project owner can be substantial as a result of implementing this strategy.

A single insurance policy will also allow governments and sponsors to fulfill any necessary supplier goals, such as dedicating a percentage of the project’s contracts toward local businesses who might otherwise struggle to meet the insurance requirements of a project. This effort has a positive community impact, opening up the project to a broader base of local contractors where they gain valuable experience and grow their businesses as well.

A niche market with unique needs: When it comes to insurance, it is critical to look at the size of the market, the ease and sophistication of doing business there, and that location’s sovereign and geographical risks.  Many firms lump the Caribbean — representing 26 countries, 13 of which are sovereign states — with South America, but this approach is simply incorrect.  We ask the rhetorical question: how many national brokers have an office presence in the Caribbean, and trade in those markets, day in and day out?  The answer is, few, if any.

Amongst the most urgent issues in the Caribbean are climate change and cyber security, and a comprehensive insurance solution is needed to protect on both fronts.

Environmental concerns in the Caribbean are at an all-time high, and while its resilience agenda is ambitious—with many new projects proposed as well as under development—there is a level of unpredictability as well.

Aside from environmental risk, cyber security across the Caribbean is a major vulnerability. Outmoded IT software and systems have made government websites susceptible to cyber-attacks, comprising confidential sovereign information and communications. 

Key risk management considerations: Project owners need to know who their insurer, or insurers, are.  They must understand who comprises their reinsurance panel behind the local insurance coverage. Rigorous analysis of the financials of the companies providing the insurance (in the U.S. there are independent ratings) is of utmost importance. 

We have seen from the catastrophic events of 2017 that a number of local carriers had inadequate reinsurance behind them, and subsequently reneged on legitimate claims because they went into liquidation or delayed payments trying to survive.  Having A-rated insurers and reinsurers carrying your risk gives you more peace of mind that a widespread disaster will not prevent you from collecting your claims.

Asset valuation is critically important as well. Project owners often don’t have their projects valued or assessed frequently. They might go five years without valuing an asset, but getting the asset valued on an annual basis is essential. Insurance policies are often written in one direction, so project owners need to take a “defensive” position and maximize any potential payout by keeping the project or property’s values up to date and accurate. Project owners need to have a fair insurance policy that protects their interests first and foremost, and asset valuation is a major part of this process.

Lastly, project owners should have an insurance report that is separate from the broker and underwriter’s report. An insurance advisor can either recommend a third-party to write a report, which can help with unexpected legal challenges.

Documentation to support a claim will mean the difference between securing a proper payout, or not. Project owners should maintain proper documentation with digital copies as well.  Documentation is known to be a weak point in the Caribbean, with most governments not having implemented digital systems. Groups need to understand that without documentation, they will likely lose any claim or arbitration case that may arise.

The benefit of working with an independent advisor: An independent advisor is inherently a better option than an insurance company representative, who will be biased toward his or her company’s offerings. An independent advisor will instead have a mission to provide the client with the best and most cost-effective insurance coverage products utilizing a global network of professional experts to get the best possible results. 

Project owners should perform their own due diligence. Seek out insurance and financial advisory experts with experience in the region. Scrutinize that individual’s qualifications, and what kind of expertise they are bringing to the table. Check that the broker has adequate errors and omissions insurance and speak to their existing or past clients in order to build confidence in the broker’s ability to perform.

Insurance enables progress: Insurance has many benefits, most importantly bringing a level of predictability to large-scale economic improvement projects. The best insurance policies allow groups to expect the best, but also to plan for the worst. 

Having a strong insurance policy and plan in place allows investors and project owners to move forward confidently with high-stakes, high-impact projects.  It’s not a matter of whether to get insurance—which is a must—rather, it’s a matter of how to secure the right insurance that protects to the maximum extent. With the help of an insurance advisor, groups are better equipped to secure the best insurance solutions for their needs and help their region’s most important projects come to fruition.

Image description: Aftermath of Hurricane Irma, St Maarten. Credit, 3-Netherlands Red Cross (NLRC)

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