The Caribbean region faces a high degree of catastrophic events and natural disasters. A history of repeated natural calamities has made economic insecurities a major concern across the region. In this white paper, we are analyzing the challenges the Caribbean insurance sector is facing at the occurrence of catastrophe and the possible technology recommendations to deal with such situations and bringing operational efficiency in general.
Catastrophe Insurance Marketplace Overview in Caribbean
Over the last two decades, the Caribbean countries are threatened by significant loss of life, property damage, and social disruption as a result of natural calamities. The consequence of natural devastations prevails long after the disasters have happened. Though it can’t be stopped but preparedness can lessen the impact of disasters by structuring in advance the emergency response system. There has to be planning for both short-term and long-term damage control towards the reduction of vulnerability in this sector.
The short term measures can include – monitoring of hazard, prompt forecasting, identifying early warning systems, evacuation plans, and shelters, specialized networks of responders and contingency plans in critical sectors. For long-term planning— Insurance is one proven tool. It’s a coping mechanism that has proven successful and treats everybody equal when compensating for the losses. It comes as a huge relief while fulfilling financial needs at the time of disaster. Insurance can take care of financial resurrection after the disaster, however, not everyone is eager to be insured and even if they do, they try to cut short on the sum insured to save on premium amount. This is nothing but a careless short-sightedness. There are many examples in both private and public sector where people fall short of insuring themselves even when they have the budget. Adding to this un-insured group are the underprivileged lot who cannot afford insurance premium, hence stay uninsured.
In most Caribbean countries, property owners are required to purchase a catastrophe insurance to access mortgage financing and once the outstanding mortgages have been paid off, a large number of property owners either underinsure or do not insure their properties at all to save on premiums. In all this, the underprivileged lot are left out as requirement to buy catastrophe insurance only applies to those who go for mortgage financing. Ironically, the catastrophe insurance market does not cater to all segments of the economy. The proportion of residential and commercial properties covered by insurance is significant in the Caribbean region. However, the vast majority of insured properties are hotels, tourism-related properties, large and medium-size private industrial and commercial businesses while many dwellings and small businesses remain uninsured. For example, a large segment of the population in Barbados, Jamaica, and Trinidad and Tobago lives in vulnerable, uninsurable properties (lacking dug-in foundations, secured frames or bolted roofs) which could be easily dislodged in the event of flooding or strong winds. The public sectors also don’t take insurance seriously and the public assets against catastrophic events are not insured. State-owned enterprises are not insured either, with the exception of Trinidad and Tobago where state-owned enterprises do have some catastrophe insurance.
Challenges with Catastrophe Insurance
To find out why few entities skip catastrophe insurance, we have to see what role catastrophe premium plays and understand where the premium for catastrophe is coming from. The provision of insurance is classified into life insurance and non-life insurance with the former insuring against the loss of life.
Although it varies slightly across countries, the classification of non-life insurance may be divided into six classes – Property, Marine, Aviation and Transport, Motor Vehicle, Pecuniary Loss, Liability and Personal Injury. Insurance against damages done by natural hazards such as hurricanes, earthquakes etc. are covered under the first four classes. The coverage against catastrophic perils is bundled and sold together with other adversities such as fire, explosion, riots and strikes, aviation and motor vehicle collision. There is no clear bifurcation of the premiums.
An estimated 45 percent of total non-life premiums corresponds to insurance against natural hazards. In Trinidad and Tobago and the Dominican Republic, premiums are split between natural hazards and other risks. In these countries, under property insurance, the premiums that correspond to coverage for catastrophic events account for about 45 percent of total premiums. However, most Caribbean insurance companies do not routinely split the catastrophe elements of their premiums. Earthquake and hurricane premiums are bundled with the premiums of other perils. Premium splits are available from re-insurance companies, which indicates that on average about 25 percent of the premiums in the property class correspond to insurance against earthquake, 20 percent against hurricanes and the remaining 55 percent against other perils including fire.
Mainly, a portion of premium taking care of catastrophe part is neither well-defined and nor properly calculated in all of the Caribbean islands, and this leads to many blind spots for losses at the time of calamities.
Listed below are few other reasons, which undermine the popularity of catastrophe insurance.
Provision of risk identification and of forecasting is insufficiently developed.
When it comes to natural disasters, risk identification is the most critical aspect of risk management more so as risk-reduction and preparedness policies directly depend on the original assessment of risk. Additionally, forecasting the location, frequency, duration and magnitude of future catastrophic events is the major part of being prepared. As the cost attached to risk identification and forecasting of future catastrophic events is high, there are no clear pointers to define appropriate catastrophe premiums.
Insurers do not discriminate by a zone of risk or the implementation of risk-reduction measures, which amplifies adverse selection and moral hazard.
In Caribbean region, catastrophic risk insurers do not discriminate between areas that are considered high risk for natural disasters and those areas where risks are lower. Moral hazard refers to the fact that once insured, individuals are not likely to engage in risk-reduction activities that would reduce the negative effects of potential natural disasters and assist in reducing insurance premium. This ignorance leads to high premiums which further depress risk transfers.
Individuals ignore the facts
Leading to the low frequency risk of natural disasters and their complexity, individuals tend to under-insure. For instance, Hurricane Georges hit the Dominican Republic in 1998, and last time it was hit by a significant catastrophe was back in 1979.
Insurance payments are delayed
There is a general belief that insurers are quick to collect premiums but very slow to settle claims or meet other customer needs at the time of crisis. This becomes more obvious with catastrophic events, which may generate at once a large number of claims that may exceed the response capacity of most insurers and lead to lengthy appraisals of damages.
Regulation is inadequate
With the exception of the Dominican Republic, there is no regulatory barrier limiting the access of foreign firms and protecting the local insurance industry. The presence of regulatory guidelines, which restrict investments, together with the presence of underdeveloped financial markets, limits insurance companies’ profitability. Restrictions to invest on the international financial markets also prevent the insurance companies from buffering their assets against a possible fallout from catastrophic occurrences (their assets may be heavily concentrated in housing, which an earthquake could damage). This leads insurance companies to set prices above those that would prevail if they could diversify their investments. “High” prices lead to “low” level of risk transfer.
How Technology Modernization can help?
Technology modernization can help Caribbean insurers attract new age customers and increase their customer base. It also allows staying ahead of competitors and making informed decisions on behalf of insured individuals and themselves. To spur growth faster in an underinsured market, new products, services, distribution channels, sales and marketing techniques are becoming a great tool. By leveraging telematics and IoT technology, insurers can make their life products more relevant to buyers with healthy living incentives, investment tips, and dynamic pricing, while Robo-advisers can bolster life and annuities services for middle-market prospects. Some consumers shy away from complex Life insurance & Annuity products that are hard to understand. With the help of technology, insurers can create simpler policies designed to meet clearly defined needs, for instance, a guaranteed income in retirement.
To advance operational transformation; legacy systems will require modernization to stimulate heightened efficiency, more precise risk selection and pricing, and stronger insurer/client relationships. Insurers can use such techniques as advanced analytics, robotic process automation, and other emerging InsurTech applications for core operations to streamline sales and underwriting and make the customer side of transactions more user-friendly.
To adapt to today’s rapidly evolving, consumer-centric culture, and increasingly technology-driven economy, insurers likely need to continually upgrade their operating systems, business models, and value proposition in 2018 and beyond. They should also consider undertaking an ongoing, holistic transformation of products, services, legacy systems, and business processes to drive growth, bolster efficiency, improve customer experience, and head off emerging competition.
Learning from the natural disasters and hurricanes in 2017, Caribbean Insurers need to be mindful of optimizing their business processes. Below are the details on how they can get benefitted from technology.
Document Digitization: Natural disasters not only cause structural damage to business but can also cause catastrophic data and document loss. Digitization of these documents and maintaining them in a digital document repository would secure Insurers against these losses and also add efficiency in Claims processing, Fraud detection, and Customer profiling.
Claims Processing: Hurricane Irma almost generated 10,000 claims by the time it left the Islands. Once can imagine the anxiety and pressure associated with each of these claims and the pressure it brings on to Insurance companies employees. Outsourcing Insurance Claims Processing services can not only save Insurers a lot of time, money, and paperwork but also allow them to rapidly scale up and scale down the team size to accommodate a sudden surge in the claims volume because of such adverse calamities & Situations.
Mobile Apps for Agents, Customers, and Underwriters: When things are settling down after the crisis, how fast one can get back on its feet matters. A dedicated mobile application can help Underwriters and agents to manage their business from remote locations, irrespective of their locations to bring back things to normal. Customers can swiftly submit their FNOL and concentrate on other life critical things. Additionally, they can track their status of claims and submit any missing documents online.
Other technology recommendations are listed below for empowering Insurers to:
Develop new products to meet emerging coverage needs in a sharing, connected economy
Expand digital distribution and virtual service to cut costs and gain competitive advantages
Enhance cyber risk management to stay ahead of evolving threats and comply with new regulations
Treat technology modernization as a journey rather than a final destination
Deepen client engagement beyond renewals and claims while differentiating with ancillary services
Drive IoT strategies beyond auto insurance for personalized pricing and risk-management incentives
Explore potential M&A opportunities to deploy excess capital, create scale, and add capabilities
Facilitate InsurTech innovations by launching pilot tests and perhaps financing startups
The journey might look challenging, but the destination has many promises to make. With little investment in technology and support of a reliable and experienced technology partner, Caribbean Insurers can put up a good plan to tackle catastrophes in a much better way and improve operational efficiency tremendously in general.