Fortunes of Trinidad and Tobago's insurance providers improve with wider economic outlook

While the economic upheavals of recent years have posed challenges for Trinidad and Tobago’s insurance sector, the industry remains resilient overall. In 2017, as it experienced economic downturn with the GDP contracting by 6.1% in 2016 and 2.6% in 2017, the country was affected by over TT$35bn ($5.2bn) in insured losses as a result of the impact of Tropical Storm Bret in June 2017. However, local firms were largely able to protect themselves from losses through reinsurance policies.

While an ongoing scarcity of foreign exchange (forex) poses a challenge for the sector, macroeconomic conditions are expected to continue to recover, which bodes well for the industry. Though penetration levels remain low, T&T exhibits strong growth potential, with a comparatively wealthy population and rising demand for health and life insurance products. Moreover, improvements to the regulatory framework, notably the Insurance Act of 2018, appear set to ease business operations and increase consumer confidence.

“The insurance industry in the country is well developed compared to most markets in the Caribbean,” Jeffrey Lamoureux, risk analyst for Fitch Solutions, told OBG. “This is due to the affluence of the local population and the high level of industrial development, namely that of the natural gas sector.”

Structure

Overall, companies operating in the sector fall into three distinct categories. These are life, general – which mainly consists of property and casualty (P&C) coverage – and a small group of composite firms writing both types of policies. As of September 2018 there were seven active life providers operating in the country, 17 general insurance firms and seven composite firms. Other entities operating in the sector include agents, sales staff and brokers. Some of the largest providers in T&T are Guardian Group, Sagicor, Beacon, and Colonial Fire and General Insurance (Colfire). The sector is highly concentrated, with the top three companies controlling over 50% of premium income. There have not been any significant mergers or acquisitions in the industry since May 2016, when National Commercial Bank Jamaica agreed to buy a 29.9% stake in Guardian Holdings, the parent company of Guardian Group.

Strong Life

Life has shown consistent growth in recent years. According to the most recent data available from the Central Bank of T&T (CBTT), total gross written premiums (GWP) in the segment grew from TT$3.5bn ($519m) in 2013 to peak at TT$4.9bn ($727m) in 2016, before declining to TT$4.5bn ($667m) in 2017. However, in 2016 the TT$800m ($119m) acquisition of the ArcelorMittal pension fund plan had highly inflated the figure for that year.

The value of total assets had risen to TT$26.2bn ($3.9bn) by June 2018, growing from TT$25.6bn ($3.8bn) in December 2017, which marked a 7.9% increase over TT$23.8bn ($3.5bn) at the end of the previous year. In June 2018 life recorded an expense ratio of 30.6% and a liquid assets to current liabilities ratio of 22.6%, fluctuating slightly from December 2017 figures of 31% and 25%, respectively. The investment yield was 4.8% in June 2018, a figure that was nearly the same over the previous two years.

Profits before taxes in the life segment reached TT$715m ($106m) in 2017, a significant increase on the TT$417m ($61.8m) recorded in 2013. Nevertheless, the return on equity (ROE) stood at 13.7% in June 2018, approximately the same as December 2017, though down from 15.4% in 2016.

Life claims reached TT$655.4m ($97.2m) in 2017, rising from TT$548.9m ($81.4m) and TT$496.6m ($73.7m) in 2016 and 2015, respectively. According to the CBTT, overall performance was boosted by demand for life unit-linked and annuity products.

Mixed Non-Life

Meanwhile, non-life has experienced a somewhat mixed performance. Total GWP in the segment fell steadily to reach TT$3.5bn ($519m) in 2017, from TT$3.6bn ($534m) in 2016 and a fiveyear high of TT$3.9bn ($578m) in 2015.

The asset base fell to TT$6bn ($889m) in June 2018, from TT$6.2bn ($920m) in December 2017, though this latter figure had marked an increase of 6.8% over TT$5.8bn ($860m) seen one year earlier. The ROE stood at 3.9% in June 2018, a slight decrease from 4.5% in December 2017, though this was a more dramatic decline from 12.7% at the end of 2016. The segment recorded a return on assets of 1.8% midway through 2018, from 1.6% in December 2017, a drop from 5.8% one year earlier. This performance was related to the impact of Tropical Storm Bret, which brought significant damage to the country in 2017, leading to a net loss ratio of 55%, from 47.2% in 2016. The gross value of claims rose in 2017 to TT$3.6bn ($534m), from TT$1.3bn ($192.8m) and TT$1.1bn ($163.2m) in 2016 and 2015, respectively.

In December 2017 non-life recorded a risk retention ratio of 45.2%, which was 45.8% in 2016 and 43% in 2015, low figures by industry standards. Net technical reserves to average of net claims were recorded at 161.2% in December 2017, declining from 168.2% in 2016, and a five-year high of 176.1% in 2015. Overall, in 2017 auto insurance accounted for 39.5% of the country’s gross non-life premiums, while property accounted for 43.1%. Other segments include liability and worker’s compensation.

Despite covering costs from Tropical Storm damage, the segment proved to be robust and stable, with reinsurance providing sufficient protection against damaging losses. Industry analysts have reported that the speed and responsiveness of reinsurers was a testament to their functionality. Moreover, as the region is at risk for continuing difficulties caused by changing climates, such as rising sea levels, flooding, erosion and warming sea temperatures, which have the potential to generate more large-scale storms in the future, the connection between firms and reinsurers will be all the more necessary.

Overall Development

Overall, finance and insurance activities accounted for over 10% of GDP in 2017, making it the fourth-largest contributing sector after mining and quarrying (19.1%), manufacturing (18.3%), and trade and repairs (15.6%).

Positive insurance industry-wide trends mostly carried over to individual companies. On a case-bycase basis the companies in the sector are finding ways to confront the challenging environment and remain financially stable and profitable. “I am optimistic that the insurance sector will continue to grow and evolve in 2018 and 2019 as the economy stabilises,” John Gonzalez, a domestic industry consultant, told OBG. “There is a bright future ahead with the input of regional capital, support from international reinsurers and the passing of the new act.”

New Regulation

The industry is regulated by the CBTT under recently amended terms in the Insurance Act of 2018. The legislation was approved by both houses of Parliament in early 2018 and signed into law in June of that year, although it has yet to come into operation. The act is looking to promote good governance and risk management among insurance companies by setting limits on risk-taking, strengthening financial oversight and introducing additional capital adequacy requirements.

The 2018 changes are a continuation of the central bank’s efforts to work with companies in the sector to improve the industry’s corporate governance and risk-management strategies, modernise internal controls and bring the country’s insurance firms in line with current regulatory requirements. The act is based on Europe’s Solvency II regulatory standards, and is considered by many stakeholders within the industry to be a beneficial and necessary modernisation of the legal framework.

Top Firms

In its 2017 annual report, Guardian Group explained, “The calamitous effects of Hurricanes Irma and Maria caused 2017 to be, by far, the worst year for incurred losses suffered by the Caribbean insurance industry, which exceeded those of Hurricanes Frances, Ivan and Jeanne in 2004.” Overall, however, even as Guardian Group wrote off losses of TT$99m ($14.7m) related to hurricane damage, the company recorded profits attributable to equity shareholders of TT$407m ($60.4m) in 2017, up 3% from the TT$396m ($58.7m) figure for 2016. The company’s net income from its P&C division declined due to hurricane-related losses but the long-term trend remained positive. GWP in the firm’s P&C increased by 6% to TT$2.1bn ($311.4m) in 2017, up from TT$2bn ($296.6m) in 2016. The company also recorded strong gains from its investment strategy, logging net investing income of TT$1.2bn ($177.9m) in 2017, up from TT$1bn ($148.3) in 2016.

Sagicor, the leading Caribbean-focused provider, employs 300 people at its main office in the country, and offers a variety of products for the T&T market. The firm is listed on the local exchange, as well as in London and Barbados. Overall, Sagicor recorded net premium revenue of TT$745.6m ($110.6m) in 2017, up from TT$664m ($98.4m) in 2016. Meanwhile, the firm’s total external revenue derived from T&T increased to TT$173m ($25.7m) in 2017 from approximately TT$166.1m ($24.6m) a year earlier.

Other companies showed some positive financial signs, despite the impact of the overall economic difficulties facing the sector. Beacon recorded net income of TT$277.2m ($41.1m) in 2017, up from TT$273.5bm ($40.6m) in 2016. The company’s insurance premium revenue decreased slightly to TT$380.1m ($56.4m) in 2017 from TT$381.8m ($56.6m) a year earlier. Though this was offset by an increase of investment income to TT$205.4m ($30.5m) in 2017 from TT$203.8m ($30.2m) in 2016. Beacon’s total comprehensive income attributable to shareholders in 2017 fell to TT$14.5m ($2.2m) in 2017 from TT$18.2m ($2.7m) in 2016.

Similarly, in 2017 Colfire’s net revenue reached TT$189.6m ($28.1m), down slightly from 2016’s figure of TT$194.1.m ($28.8m), with premium revenue declining to TT$284.5m ($42.2m) from TT$291.5 ($43.2m) over these two years.

Overall, the insurance sector has largely persevered through recent economic struggles. As the country’s financial growth picks up, the industry should improve. Ravi Tewari, CEO of Guardian Group, told OBG, “While the T&T economy continues to show weakness, exacerbated by excessive bureaucracy, we are optimistic. Our markets continue to be challenging but we see signs of improvement. We are confident that there remains tremendous value to be extracted from our core businesses.”

Industry Views

Industry leaders interviewed by OBG explained that the sector is working to overcome a number of challenges. For some companies, trading conditions have been challenging, while others are finding ways to succeed in protecting profitability. Despite uncertainty about the country’s economic future, stakeholders are optimistic that the sector will continue to grow in 2018 and 2019.

Currently, life premiums are equivalent to less than 1% of GDP, significantly below levels recorded in other countries with similar levels of development. Robust sales growth in 2015, 2016 and 2017 shows that the industry is beginning to build a more established position within the economy. As gas production expands in 2018 and the economy recovers, the outlook for the industry should improve. Life and pension premium income are two areas that should enjoy considerable growth moving forward.

Health Care

An area that has developed slowly but will continue to grow in the coming years as a business segment is health. In the past medical coverage in the country had been seen as a luxury expense. However, it is greatly valued by those able to purchase it, particularly in a region with a relatively high incidence of non-communicable diseases.

Currently, the country has a two-tier health care system, with a decentralised and free public system coexisting alongside private facilities. It is not uncommon for people to access services in both systems, depending on waiting times, expertise and the availability of equipment.

P&C insurance, meanwhile, has been vulnerable to impact from the country’s weak macroeconomic indicators. Competition remains intense in this area of coverage, as T&T remains vulnerable to hurricane impact. In 2016 the southern Caribbean was affected by Hurricane Matthew, and in 2017 Tropical Storm Bret caused significant damage. Despite the certain exposure to risk due to natural disasters, companies have sometimes struggled to retain P&C customers, perhaps due to the impact of slow economic growth on household finances.

However, as the economy continues to emerge from recession from 2018 onwards, major insurance lines should feel the positive impact. “Market conditions will remain challenging over the near term, but long-term trends point to growth in consumer lines such as life and health coverage, as affordability grows and the number of retirees buying products increases,” Lamoureux told OBG.

Foreign Exchange

Another factor affecting the industry is the scarcity of forex, caused by over-valued official exchange rates, among other factors. “We have been managing the prevailing exchange shortage successfully, but a lack of reasonable and timely access to hard currencies over a prolonged period will eventually lead to the curtailment of reinsurance coverage at an industry level,” Richard Lewis, chairman of Beacon Insurance, told OBG.

Companies that import goods for the domestic market have had difficulties securing foreign currencies, and the resulting financial strain has affected their ability to pay for coverage. Brokers offering policies for personal accident and property or marine cargo have had trouble securing foreign money to pay for premiums. Lodewijk Smets, senior economist for T&T at the Inter-American Development Bank, told OBG, “There is a lot of anecdotal evidence that forex is hampering business in the country, though in 2018 tensions have eased a bit and companies have come up with strategies to source foreign currencies.” Multinational firms that operate across markets can secure the necessary currencies with access to exchanges outside the country, but smaller, domestic companies have significant difficulty in securing forex. Some industry insiders also complain that T&T’s commercial banks are prioritising the needs of merchandise importers at the expense of insurance companies. Industry executives have been lobbying hard to draw attention to the problems they face related to foreign currency issues. One pressing difficulty is the fact that local insurers need foreign money to purchase reinsurance policies in order to protect themselves from things such as hurricane damage claims. Gonzalez told OBG, “Companies in the P&C segment face the challenge of the rising costs of motor vehicle claims due to the lack of immediate forex to replace damaged parts, along with higher overhead costs in an extremely competitive premium environment.” However, these issues are likely to persist in 2018 and 2019.

Staying Afloat

Despite the problems caused by the economic climate and a lack of access to forex, firms have remained profitable overall. Still, lowered performances leave the sector more vulnerable to financial difficulties arising from a sudden shock, such as a potential spike in claims due to severe weather damage. The industry may face pressure to consolidate moving forward. One plus is that over the past decade many diversified financial companies in the country have collected stock of foreign assets and overseas investments, leaving them in a stable position to meet the short-term challenges posed by fluctuating market conditions. Moving forward, the sector will have to find new ways to confront problems related to the compression in premiums.

Technology & Innovation

One way that firms are looking to get an edge over competition is through adoption of new technologies and business models. In particular, internet-based sales are one segment that is attracting attention. Augmenting online presence and reducing reliance on brokers could help companies expand customer bases. In general, the Caribbean is starting to adopt technology at a faster pace, which is driving companies to embrace innovations to remain competitive. Global e-commerce giant Amazon now offers its own insurance products. New uses for big data and products such as health insurance linked to fitness goals and personal digital devices are offerings that firms may need to explore to stay on top of their game. Gerald Hadeed, CEO of Beacon Insurance, told OBG, “Looking ahead, we are confident that the evolution of the industry on the innovation front will continue.”

Outlook

Despite facing the challenges of a difficult operating environment brought on by an economic downturn and the strain of hurricanes and tropical storms on financial reserves, T&T’s insurance industry is looking ahead. Garvin Joefield, director of the Economist Intelligence Unit at Republic Bank, told OBG, “I think the sector is fairly strong and will continue expansion. Like the banking sector, it will face challenges from time to time, but I see a bright future for the financial sector as a whole, which includes the insurance industry.” According to an IMF report released in July 2018, the economy, driven by energy growth in the second half of 2017 and non-energy improving in 2018, is showing signs of improvement and is projected to expand by one percent in 2018.

With recovery setting in, downward pressure on premiums may ease; however, industry stakeholders will need to keep costs down and preserve competitiveness to take full advantage of the opportunities to expand market share. Smets told OBG, “The country does have a regional comparative advantage in financial services; building on that would diversify the economy. There is much scope for the financial sector to grow, including the insurance industry.”