While the Government continues to improve Jamaica’s legislative framework to meet relevant international criteria, British Caribbean Insurance Company (BCIC) Managing Director Peter Levy is drawing attention to the looming risk of being moved to the European Union’s (EU) black list of non-cooperative jurisdictions for tax purposes.

The EU black list is published as an annex to conclusions adopted by the EcoFin Council and is listed as Annex I. It is meant to encourage countries to make changes to their tax legislation and practices through cooperation. Jurisdictions which do not cooperate with all the international standards but have committed to making reforms fall under the state of play document dubbed as Annex II and is in the grey list. Jamaica currently falls in the grey list.

Levy is worried about the risk of Jamaica being moved to the EU’s black list which would have a significant impact on Jamaican insurance companies relationships with reinsurance companies, the largest ones being based in Germany. Germany passed The Act to Combat Tax Avoidance and Unfair Tax Competition in December 2021 to deter individuals and companies from continuing or entering business with tax havens. Tax havens are countries which are on the EU’s black list.

“There are three major reinsurance companies that are German, and they provide a significant amount of the capacity for us to write business especially catastrophe exposed business like property insurance. Those three companies would be in a situation where they would either not do business with us or, well, they could do business with us but couldn’t pay us. Obviously, you can’t do business with an insurance company that can’t pay you or you have to take 15 per cent of whatever they’re going to pay you and pay it over to the Government. It could potentially have a devastating effect on the ability of property owners to get insurance. This would be significantly damaging to the economy because all these properties that are the subject of loans would be struggling to get insurance and the lenders would be exposed,” said Levy in an interview with the Jamaica Observer.

According to Investopedia, reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the practice whereby insurers transfer portions of their risk portfolios to other parties by some form of agreement to reduce the likelihood of paying a large obligation resulting from an insurance claim. Reinsurance is what effectively allows general insurance companies to offer certain insurance policies to the general public.

When asked about the dialogue which has occurred in recent times, he said, “The insurance industry has spoken to the Ministry of Finance as well as our regulators, FSC [Financial Services Commission], and we have been assured that there is an amendment to provisions of a law. One of the things that the EU doesn’t like is differential tax rates for different industries and so on. We’re assured by the fact that the minister’s given an undertaking and obviously, I expect that the guys at the Ministry of Finance know exactly what it is that they need to do.”

Speaking at the Lynk ABM Feature Launch last Tuesday, Finance Minister Dr Nigel Clarke spoke on Jamaica’s progress on coming off the Financial Action Task Force’s (FATF) grey list. He said, “Yes, Jamaica is making good progress. What we have are commitments that we have made of changes that we’re going to make. Of the commitments we’ve made, there are only a few [one, two or three] that are outstanding.”

The remaining issues include bringing the legal profession under POCA (Proceeds of Crimes Act) regulations which is to be heard by the Privy Council, amending the Companies Act to bring the beneficial ownership regime up to FATF standards and amendments to the framework for charities and charitable organisations. Dr Clarke indicated that both amendments should be brought before Parliament by March 2023.

Jamaica was first put on the FATF grey list in February 2020 with some Jamaican companies and individuals facing difficulties conducting business with certain jurisdictions. The FATF is the global money laundering and terrorist financing watchdog. Thus, inclusion on the EU’s black list would further impact the ability for Jamaican companies to do business.

When asked about Trinidad and Tobago (T&T) which is currently on the EU’s black list, Levy said, “They [T&T] had withdrawals of reinsurance capacity from that market. There are companies that will not do business with Trinidad-based insurance companies. They haven’t had a catastrophe, and this wouldn’t necessarily show up unless you have a significant loss event. The thing about Trinidad is that they’re not as catastrophe exposed as we are. So, it will be easier for them to attract replacement reinsurance into that market.”

This comes at a time when some industry analysts expect reinsurance rates to rise by 10 per cent as the ceded premiums to reinsurers cannot match the losses incurred by the Caribbean as a segment. The recent passage of hurricanes Ian and Fiona are also likely to impact negotiations since one catastrophic event in one territory can exceed the premiums collected for the whole region. Motor insurance has become a lot more expensive in the last year as motor parts price spike due to inflation and supply chain disruptions. The reduction in equity prices across the globe has also impacted the balance sheets of reinsurers.

At the recent General Accident Insurance Company Limited (Genac) annual general meeting (AGM), Chairman Paul B Scott explained that rising interest rates are also impacting the reinsurance market and the capacity as well.

“When LIBOR was so low, there was a lot of non-traditional insurance money that was effectively invested in reinsurance type products. So, capacity when interest rates are low expands. When capacity expands, then effectively rates drop. When interest rates go up, capacity retreats because it’s not that Munich Re or Swiss Re are coming out of insurance, but the non-traditional money like hedge funds, private equity investors that have invested in that space are not getting the returns that they need because their cost of capital has gone up substantially. They’ve removed themselves from that space and therefore, rates will go up,” said Scott.

“There have been reinsurance companies that have indicated that they will be reducing their exposures to Jamaica as well as other territories. We know that we have reinsurers that we do business with who will not have the same capacity for us,” Levy added on the reduce reinsurance coverage which can be compounded by the possible inclusion on the EU black list.

There were 11 general insurance companies and six life insurance companies at the end of 2021. Net premiums for the general insurance industry totalled $53.3 billion with accumulated total revenue at $61.9 billion according to FSC data. Income before tax totalled $8.9 billion with the fourth quarter up six per cent to $3.4 billion. Total assets amounted to $103.2 billion with capital at $29.1 billion.

“The industry as a whole must find a way to retain capacity so that they can continue to provide insurance product to those in Jamaica, particularly businesses and homeowners. We need to do as much as we possibly can to ensure to make sure that our reinsurers continue to back us. We must do the best that can to price the product in such a way that reinsurers will stay with us and to provide the insuring public with proper terms and conditions in their policy to do a little bit of education to help them to see how they can mitigate against their losses,” said Insurance Association of Jamaica President Sharon Donaldson-Levine after the Genac AGM.

“We’re starting to put through price increases already. Inflation is a factor, and we need to be able to show our reinsurance that we’re able to give them the kind of prices that they’re looking for. We prefer never to have to put through price increases, but there’s no alternative in the current situation. We’re also concerned about inflation’s impact on our motor vehicle insurance as parts prices have really been spiralling. It’s an uphill ride right now, but we’re up to the challenge,” Levy said in response to the evolving environment.