Outsourcing Risk
Local insurers have traditionally been undercapitalized in relation to the risk inherent in doing business in The Bahamas, which has led to an overwhelming dependence on foreign reinsurers to protect their ability to provide cover to local consumers.
For example, in 2002 five major insurers receiving a total gross written premium of $228 million, used $170 million to purchase reinsurance overseas.
This puts pressure on the country's foreign currency reserves, although the outflow is reduced by commissions paid to local companies by reinsurers and by reinsurers' share of claims - such as the $200 million received after Hurricane Floyd.
Steep declines in equity markets in the early years of this decade were compounded by losses from the September 11 terror attacks to lower the capital bases of many reinsurers. The industry has also been impacted by higher claims and, as a result, the pricing of reinsurance products has risen in recent years.
The Bahamas is also located in a catastrophe-prone area, and recent hurricane activity has exacerbated reinsurance capacity restrictions. Our proximity to Florida also affects our ability to attract capacity as reinsurers aggregate their total exposure by combining The Bahamas with the eastern seaboard of the United States. And due to the greater volume of premium that can be derived from the US, we are at a competitive disadvantage.
This is one of the reasons why The Bahamas has a higher rate for catastrophe cover than our Caribbean counterparts, who are not faced with the same demand and supply restrictions.
It is challenging to operate in a region with a small population and modest economic base, but a severe exposure to natural hazards such as hurricanes. This is a problem that plagues the entire region.
Protecting against catastrophic events is only one kind of reinsurance. There are many reasons an insurance company will choose to reinsure as part of its management of risks for policyholders and investors.
The main use of reinsurance is to allow the ceding company to assume individual risks greater than its size would otherwise allow, and to protect that company against catastrophic losses.
This allows a company to offer larger limits of protection to policyholders than would otherwise be possible. If an insurer can safely write only $100,000 in limits on any one policy, it can reinsure (or cede) the amount of the limits in excess of $100,000 to reinsurers.
