IF a major natural disaster were to befall Jamaica, most of the country’s general insurance companies would be unable to pay out claims, according to the latest financial reports filed by the firms.

The revelation comes in a year that has been characterised by natural disasters the world over.

In January, Haiti was devastated by a magnitude-7.0 earthquake with damage to date placed at US$13.2 billion, a sum in excess of the country’s total GDP. The following month saw Chile hit by a magnitude-8.8 quake, wreaking damage placed at US$30 billion, 15 per cent of its GDP.

Three months into the year, there have also been earthquakes in Argentina, Venezuela, Baha on the Los Angeles/Mexico border and floods and landslides in Brazil’s Rio de Janeiro. This week saw an earthquake in China and a volcano eruption in Iceland.

Closer to home, on Wednesday a magnitude-3.7 earthquake was felt across sections of Kingston and Portland. Head of the Earthquake Unit located at the University of the West Indies (UWI), Lyndon Brown, is reported to have said that Jamaica was affected by nine earthquakes last year.

All the more reason for local insurance companies to ensure they are in a position to pay out what they should. The regulator, the Financial Services Commission (FSC), defines what the assets are, sets a regulatory margin and then the accepted assets must represent 135 per cent of the liabilities. In other words, the FSC imposes a stress test.

However, a look at the recent release of financial reports from some of the leading insurance companies paints a disturbing picture.

According to the FSC, the all-important Minimum Asset Test (MAT) is set at 135 per cent. Of those reporting results to date, Key Insurance leads the way at 149.64 per cent. Then comes Lascelles DeMercado’s Globe Insurance at 149 per cent. GraceKennedy’s Jamaica International Insurance Company (JIIC) comfortably passes the test at 143 per cent.

Those coming in below the minimum requirement are British Caribbean, 134 per cent; West Indies Alliance, 132.07 per cent; Victoria Mutual, 130.69 per cent; ICWI, 130 per cent; General Accident, 128 per cent; Advantage General, 115 per cent. NEM and American Home are still to file.

A cursory look at Advantage General’s financial statements for the year ended December 31, 2009 is most telling. The company wrote an impressive $4.60 billion in gross premiums, $640 million more than last year. Its operating expenses came in at $850 million, $88 million more than the prior year. Its underwriting loss before other income and taxation was a jaw-dropping $637 million, compared with a profit of $87.5 million in the previous year.

Advantage General recorded a net loss for the year of $55.6 million after posting a profit of $567.1 million in the previous year. It came well below the MAT test at 115.

ICWI traditionally does well with its motor business, but it, too, surprisingly could not pass the MAT test.

In 2008, Globe, Key and NEM passed the test, which means that the others, with the exception of JIIC, have failed for two consecutive years.

More worrying for many local insurance companies is that the test moves up to 150 per cent next year, when many are struggling to meet the 135 per cent requirement right now.

Speaking with Caribbean Business Report from London, Adam Levalle of The London Kerry Group said: “This is a clear case of only a few players in Jamaica able to operate as they should — Globe, JIIC, Key and NEM run good outfits. The others need to be seriously examined because according to this latest news they are picking up premiums but are not in a comfortable position to honour serious claims. The question is, what is the FSC doing about it?”

Yesterday, an e-mail sent to the sector by executive director of the Insurance Association of Jamaica Orville Johnson spoke to the concerns centring on capital requirements as he invited them to a meeting today to discuss the issue.

“This is to remind you of the meeting at the FSC at 2:30 pm today 15th April. Mr Anderson (The FSC’s head of General Insurance) has indicated that it relates to requirements arising from the IMF Agreement. We gather the meeting may have implications with respect to capital requirements. If you are unable to attend it would be prudent to send your CFOs. Please confirm your attendance. The meeting must be taken seriously in the event we may need to take strong positions on any requirement forthcoming, so we speak from a position of first-hand information,” Johnson said.

Brian Roper of the FSC takes a more measured approach on the subject.

“We at the FSC understand the reasons why many of the insurance companies have been unable to pass the MAT. One has to bear in mind the harsh economic climate many of them have been working in since the global financial crisis came down upon us in 2008. We are exercising a certain amount of forbearance as we work with many of them on their capital and asset requirements. We have imposed a conservative figure and at 135 per cent that buffer comes in over the 100 mark. There are no issues concerning the likelihood of many of these insurance companies going under due to their inability to pass the minimum asset test. Do not forget that many companies went through some turbulent times during the nineties and the requirement reflects this. I must add here the industry’s requirement is above those of banks and brokerage houses.”

The importance of earthquake and hurricane insurance

A leading local insurance executive, commenting on this matter, said: “If Jamaica has a run-of-the-mill event, say like a Hurricane Dean, many of the companies which did not pass the test will be stretched to pay out. But if we were to have another Hurricane Gilbert, well, that’s a different kettle of fish.”

In California, only 12 per cent of homeowners with insurance also have earthquake coverage. About 70 per cent of that is underwritten by the California Earthquake Authority (CEA), a state-sponsored entity that sells quake insurance through commercial insurance companies.

The CEA admits that even with its insurance, homeowners could suffer “substantial uninsured loss”. Its policies pay nothing until structural damage exceeds 15 per cent of the home’s insured value. After that, they pay for damage to structure and household goods up to the policy limit. The basic policy pays only US$1,500 in living expenses if one can’t stay in one’s home.

For years, managing director of Globe Insurance Evan Thwaites has been calling for a greater effort to be made with earthquake and hurricane insurance but his warnings have gone largely unheeded. This year’s big earthquake disasters should focus attention on the staggering uninsured losses that will result from the next big natural event to hit Jamaica.

Speaking at a Rotary luncheon in 2002, he said: “The key is to buy more effectively. Look closely at your insurance needs and choose the basis on which you would like to insure. That way, you can ensure some form of coverage while keeping your costs relatively low.”

Thwaites found it disturbing, in light of the number of natural disasters that have come to the public’s attention, that many homeowners and business operators in Jamaica have not insured or have significantly underinsured their property.

“We will be faced with the catastrophic damage caused by the hurricanes and the long-term effect this damage will have on the economy will be amplified by the fact that many property owners and business people will not have the financial resources to rebuild. The potential for mass economic loss is great,” he said.

Thwaites also pointed to the damage to properties along Jamaica’s North Coast caused by storm surges of up to 30 feet associated with Hurricane Allen in 1980 and the deleterious consequences to businesses resulting from Hurricane Gilbert in 1988.