With a declining economy restricting premium income growth and bringing rates under sustained pressure, 2016 was a challenging year for Trinidad and Tobago’s insurance sector. The relative scarcity of foreign exchange has also caused some issues with regard to the payment of reinsurers.
However, the sector continues to demonstrate its resilience. A number of companies have responded to a limited market by reaching out to attract uninsured or underinsured customers. Others have relied on investment income to offset a squeeze on margins. The sector is also looking at ways of using new technology to improve sales channels and control costs. Propelled by these and other developments, the sector continues to operate profitably.
Structure & Performance
Insurance penetration remains relatively low in T&T, meaning local companies have significant room to expand. Total premiums represent an estimated 2.6% of GDP (of which 1% is from life and 1.6% is from non-life). In comparison, the average across the OECD is over three times higher, reaching 8.8% of GDP in 2015.
T&T’s insurance companies fall into three broad groups; life insurance, general insurance (largely dedicated to property and casualty, or P&C, lines) and a small group of composite companies writing both life and P&C policies. There are seven active life insurance companies, 17 general insurance companies and seven composite companies. Other players include brokers, sales staff and agents.
Regulation
The Central Bank of T&T (CBTT) regulates the industry under the terms of the National Insurance (Amendment) Act of 2004. Since 2007 the CBTT, the Association of T&T Insurance Companies (ATTIC) and other stakeholders have consulted periodically on the terms of a new Insurance Act, the introduction of a risk-based capital reserves framework, updating reporting protocols and determining a common actuarial valuation methodology.
Main Players
According to the CBTT, total assets of life insurers stood at TT$23.7bn ($3.5bn) at the end of 2016, up 9.7% on the year before. In its 2015 Financial Stability Report, the latest available, the CBTT described the sector as highly concentrated, with the top two players accounting for 58.9% of total assets and 66.3% of premium income.
Gross premiums in the life segment have been rising, increasing 19% between 2015 and 2016 to reach TT$4.9bn (732.2m). Claims have also been growing, but less quickly, up 11.8% in the same period to TT$2.3bn ($343.7m). Investment yield was 4.6% in 2016, up marginally on 4.5% the year before, but down from 5.7% in 2011. The expense ratio has been falling steadily from 38.6% in 2011 to 28.7% in 2016.
The general insurance sector is also quite highly concentrated, with the top three players accounting for 54.8% of premium income. Assets increased by an average of 4% per annum in the four years to 2016, though growth slowed in 2016, ending the year at TT$5.8bn ($866.6m). Premiums had been on a similar trend, rising by an average 3.7% to 2015, but then fell by 8% in 2016 to TT$3.6bn ($537.9m).
This drop was due to a decrease in property premiums, which ended the year at TT$1.4bn ($209.2m), down 21%. Adding to pressure in this segment, claims were up 82% to TT$295.3m ($44.1m). Motor vehicle insurance accounted for some 41.2% of total premium income in 2016, while property accounted for around 40.1%. Since most property cover is reinsured, motor line makes the biggest contribution to net premium income. Investment yields rose by 3.2% to end 2016 at TT$5.8bn ($866.6m).
According to the most recent data from Axco Insurance Information Services – which ranks insurance companies by volume of gross written premiums (GWP) irrespective of whether they are operating in the life, general or composite segments – the largest providers are Guardian Group, with 38.6% of total GWP, followed by Sagicor, with 14.9%, Tatil, with 7.9%, Beacon (6.4%), and Colonial Fire and General Insurance (Colfire, 4.8%).
There has been no significant mergers and acquisitions activity in the industry since May 2016, when National Commercial Bank Jamaica sealed an agreement to buy a 29.9% stake in Guardian Holdings, the parent company of Guardian Group. Throughout 2015 premium income grew in the life segment, driven by unit-linked and annuity products, according to the CBTT. The bank noted, however, that the low-interest environment was affecting investment income and leading some companies to explore alternatives, including participation in residential mortgage lending. Profit levels also remained stable in 2015. In non-life, premium income was led by property and motor vehicle insurance. In these segments, overall margins began to fall as a result of three main factors: increased operating expenses, lower underwriting profit and declining investment yields.
Insurance Act
The CBTT is continuing to work with companies in the sector to strengthen their corporate governance and risk management practices, capital and internal controls and their compliance with regulatory requirements.
The focus has been on the new Insurance Bill, which, though approved by the Senate in 2015, was not voted into law by the lower house due to a lack of time in Parliament ahead of the September 2015 general elections. The bill is expected to be resubmitted to the House of Representatives in the near future. Informed by the Solvency II international insurance regulation standard, the bill is considered by many in the industry to represent a necessary and urgent modernisation of the regulatory framework.
Ravi Tewari, group CEO of Guardian Group, told OBG that the act’s greatest impact will be in allowing insurers to implement strategies on both the liability and asset sides of the balance sheet. “This is in the interest of capital providers because it removes many of the arbitrary restrictions currently creating a drag on returns for policyholders and shareholders,” Tewari said. Several firms have already begun to observe its capital reserve requirements as a matter of best practice and in preparation for the point at which it acquires the force of law. According to industry sources, re-submitting the insurance bill is a high priority in the government’s legislative agenda.
The insurance sector’s main financial soundness indicators remained strong up to September 2015. More recent data published by the CBTT, covering the period up to September 2016, confirmed that this trend has continued. Gross premium income received by T&T’s life insurance companies in the first nine months of 2016 totalled TT$3.007bn ($449.3m), a year-on-year (y-o-y) increase of 0.9%.
Industry Views
Industry leaders interviewed by OBG described a sector experiencing a diverse range of challenges. For some players, trading conditions have become difficult, but others are performing well, maintaining sales and improving profitability.
Anand Pascal, president of Guardian Life of the Caribbean, the market leader in the life insurance segment, acknowledged concerns over the macroeconomic recession and a degree of general business uncertainty, but remained optimistic about 2017. “We are not focused on the headwinds,” he told OBG. “We are continuing to focus on our own strength and capabilities.” Pascal said that there are still substantial opportunities for growth, given that market penetration remains low.
Life insurance premiums paid in T&T represent approximately 1% of GDP, significantly below the total in other countries with similar levels of development. Though contribution to GDP fell in 2015, industry players considered the year to be highly successful in terms of sales. Various factors are set to help increase revenues in the coming year. As gas production comes on-stream from the Juniper field developed by BP T&T, macroeconomic conditions should improve in 2017 (see Energy chapter). Confirmation of a major hotel investment project by Sandals Resorts in Tobago is also expected. Anand told OBG that he forecasts a lift in life and pensions premium income, which together represent 75% of total sales. Health insurance, which represents around one-quarter of the remaining premiums revenue, also performed well in 2016, although it tended to be more volatile in nature. The view from the non-life side was somewhat more influenced by the challenging market conditions. The headline for this segment in 2016, according to Robert Lazzari, managing director of Agostini Insurance Brokers, was a sustained reduction in P&C insurance rates. Claims have remained generally low and, against the background of recession, insurers have had to compete intensely among themselves to retain market share. Although T&T is outside the hurricane belt, it sometimes experiences spillover effects from major storms. In 2016 the southern Caribbean suffered one major event: Hurricane Matthew. This caused significant damage in the southern subregion, particularly in Haiti, where insurance coverage is low. As a result, property insurance rates in T&T and other nearby markets continued to fall. “Every insurer is fighting to retain customers and slash rates, sometimes taking them down to an uneconomic cost, and the local companies are losing substantial revenue by trying to retain customers,” Lazzari told OBG.
Foreign Exchange
Also causing difficulty in the market is the relative scarcity of foreign exchange. Lazzari told OBG that some domestic companies that import goods for the local market, or for processing and re-export purposes, were finding it difficult to secure the necessary foreign exchange to pay for the items. For example, a large retail customer who insured $100m worth of imported stock last year may be carrying only $60m worth of stock this year, because he can’t obtain enough hard currency to pay for the imports. Therefore the value to be insured would be much less and he would also be in need of a lower rate for that reduced level of cover. “Whereas last year the rate was, for example, $4 per $1000 worth of insured stock, this year, if I want to keep the retailer on as my client I would have to accept a reduced rate of $3 per $1000,” Lazzari said.
Foreign exchange scarcity has also had an impact in other ways. For insurance brokers offering policies for marine cargo, personal accident and property, securing enough foreign currency to remit the necessary premium payments can be difficult. Some of the larger companies operating both locally and in other parts of the Caribbean can access hard currency from their transactions outside T&T. However, smaller, purely local insurers have experienced difficulty in securing sufficient foreign currency. The scarcity of foreign currency has also affected remittances for international reinsurance cover.
According to sector stakeholders the foreign exchange problem has regularly been discussed by ATTIC in liaison meetings with commercial banks and with the CBTT. Some were of the opinion that commercial banks tended to prioritise the foreign exchange needs of merchandise importers, considering the requirements of insurers to be a lower priority. Thus industry executives have been lobbying for insurance companies to be placed somewhat higher up the queue for foreign exchange.
Sharon Melville, general manager of Nagico Insurance (Trinidad and Tobago), which has been operating in T&T for the last five years, told OBG, “The situation is mixed. While the market is soft and is expected to remain so in the months ahead, things are neither overly optimistic nor pessimistic, and we are continuing to tackle challenges as they come.” She offered an additional perspective on opportunities and threats. According to Melville, though the compression of premium rates had created downward pressure on sales volume, some players within the industry have managed to expand.
Continued Profitability
While much difficulty has stemmed from the exchange rate and foreign exchange availability, almost all companies in the sector have continued to make profits. For many companies, however, profits have come in at lower levels. If current trends continue, the future may bring consolidation. The industry could become more vulnerable if major storm-related losses are incurred, especially if the fall in rates continues.
Regarding current market conditions, Chip Sa Gomes, head of financial services at ANSA McCal group, which owns Tatil, said that the recession was affecting sales of core banking and core insurance products, but that the impact on profitability was being contained thanks to solid investments and the state’s monetary policy. Throughout a decade of growth preceding the oil price slump, the majority of the country’s financial companies had built up significant portfolios of overseas investments. Those investments, combined with the controlled level of currency depreciation, have enabled firms to rely on a relatively strong local currency revenue stream.
Sa Gomes noted that the relative foreign currency scarcity was causing problems, particularly for companies seeking overseas reinsurance cover. “Intense competition is driving insurance premiums down y-o-y,” he told OBG. “Therefore, the top line for insurance companies is being challenged for growth, and that filters down to the bottom line.” However, most players have had a good year in terms of their investments, and the sector withstood the effects of Hurricane Matthew. Claims have been manageable and investments strong, but the major constraint has been the compression in premiums.
Technology & Innovation
Strong competition and the downward pressure on insurance premiums has led a number of T&T-based companies to innovate, and experiment with new business models or technologies. Chris Woodhams, the COO of Beacon Insurance, told OBG that competition between brokers, excess reinsurance capacity, shrinking insurance market and aggressive insurer growth targets is driving down premiums.
Innovation and adaptation will be key going forward, and internet-based sales have high potential. Boosting online presence and relying less on brokers could allow companies to quickly widen their customer bases. However, Pascal told OBG that T&T’s insurance industry will likely feel the effects of increased use of technology. Whereas it used to take up to five years for new technologies and innovations in developed economies to reach the Caribbean, the lag has now shortened to 18 months or less. Changes that would have an impact on the local sector include the decision by US online retailer Amazon to sell own-brand insurance products. The sector could also be affected by pay-as-you-go offers, as well as by a range of data-mining techniques. This includes the sale of discounted health insurance, which is linked to fitness targets monitored by personal digital devices. Pascal believes the greatest impact of these changes will be on providers and processes.
Outlook
Looking to the immediate future, Lazzari told OBG that the fall in insurance premiums would eventually come to a stop, but probably not in the short term. “There is going to be a turnaround in perhaps one more year. We will likely see a further 10-15% reduction in the cost of insurance, and that will be the bottom of the market.” From there, premiums are expected to bounce back and claims should be brought under control, particularly those made for Hurricane Matthew-related damage. Barring any similar storms in the upcoming season, the sector will likely benefit from a recovery period. This will be aided by a turnaround in the energy sector, which will be a key driver of financing. While there are challenges ahead, the insurance sector seems set to re-enter a growth environment in the near term.
Read More from OBG
