Trinidad and Tobago's insurance sector adapts to a changing operating environment

The Trinidad and Tobago insurance industry was affected by a slower economy in 2015, and the macroeconomic environment will remain difficult in 2016. Despite this, most of the largest insurers remain profitable. Key metrics suggest the industry is resilient, although companies will have to adapt their business models to keep abreast of market developments.

Industry Structure

The Central Bank of T&T (CBTT) regulates the insurance industry. Companies are registered with the CBTT in three categories: life insurers, general insurers and composite companies, which provide both life and general insurance products and services. The CBTT also registers other players, such as loss adjusters, brokers, sales staff and agents, described as insurance intermediaries. At the end of 2015 there were seven active life insurance companies, 17 active general insurance companies and seven active composite companies registered.

According to figures from the Association of T&T Insurance Companies (ATTIC), which represents most insurance companies operating in the country, gross written premiums (GWP) received by its general insurance reporting members in 2014 stood at TT$3.58bn ($551.3m), an increase of 7.1% on the preceding year, but still below the TT$3.69bn ($568.3m) registered in 2012. Of this total, TT$1.76bn ($271m), or 49.2%, related to property lines, TT$1.22bn ($187.9m), or 34.1%, to motor and TT$177.4m ($27.3m), or 4.9%, to general accident/casualty. Measured by GWP in that year, the largest companies operating in T&T were Guardian General Insurance, with a 40.3% share of GWP, followed by Tatil (9.9%), Colonial Fire & General Insurance (COLFIRE) (8.2%) and Beacon (6.9%).

For the life sector, GWP totalled TT$3.24bn ($499m) in 2014, of which Guardian Life of the Caribbean (GLOC) held the largest market share, at 45.8%. This was followed by Sagicor Life with a 16% market share, Scotia Insurance with 11.9%, Pan-American Life Insurance with 9% and Maritime Life with 6% of the share.

Mergers & Acquisitions

In late 2015 National Commercial Bank Jamaica agreed to buy a 29.9% stake in the T&T-based Guardian Holdings Limited (GHL), the parent company of the regional insurance and financial services group known as Guardian Group. The acquisition, which was subject to regulatory approval, was significant since GHL is one of the leading insurance companies not just in T&T but also in the wider Caribbean region. The transaction involved the private sale of shares held by several stakeholders – the Lok Jack and Ahamad families, Royal Bank of Canada (RBC) and the International Finance Corporation (IFC), a World Bank subsidiary.

The overall value of the sale and purchase operation was not revealed, but is estimated at TT$898m ($138.3m). Following the deal, the two families will still be key shareholders in GHL, with a stake of around 22%, and Arthur Lok Jack will remain as chairman of the board. The IFC said it was selling its entire 12.8% holding in GHL as part of the transaction, but that it would continue to invest in the insurance sector in Latin America and the Caribbean, where it has assets worth around $650m. RBC’s stake had been 10%.

Growth Potential

The then executive director of Guardian Group, Douglas Camacho, told local press that the group wanted to expand its footprint in the Caribbean. Ravi Tewari, GHL’s group CEO, told OBG, “There is further potential for regional financial conglomerates to be competitive at an international level, especially in the Central and South American markets.” GHL has enjoyed modest growth in premium income since 2010 – a year of record profits, with net earnings of TT$423m ($65.1m). It nonetheless registered a loss in 2013, and in the first nine months of 2015 profits were down 9% on the previous year, at TT$240m ($36.9m). Assets grew from TT$21bn ($3.2bn) in 2010 to TT$23bn ($3.5bn) in September 2015, a trend that reflected some acquisitions, such as the takeover of Global Insurance in 2012.

Elsewhere in the insurance sector there were signs of rising capacity, leading to some concerns that a battle for market share might put additional pressure on margins. Some companies signalled that they would be stepping up a drive for new business. One such business was Massy Group, which is among T&T’s largest diversified conglomerates, and returned to the insurance sector in 2008 through its purchase of United Insurance, acquired as part of Massy’s purchase of Barbados Shipping & Trading. The company has been rebranded Massy United Insurance. Speaking to the press in 2013 Gervase Warner, CEO of the parent group, said that the firm’s strategy was to expand Massy United Insurance to make it the second-largest underwriter in the T&T market.

Another insurer with strong growth ambitions is NAGICO, a pan-Caribbean operator, which began operations in St Maarten and is now present in 19 local markets. The eventual sale of the insurance assets of Colonial Life Insurance Company (CLICO), which failed in 2009, could also lead to an adjustment of market shares in the life insurance sector.

A Year Of Resilience

According to emerging data, the general slowdown of economic activity in T&T has begun to impact the domestic insurance sector. Ashraff Ali, director of COLFIRE, told OBG that data from the regulator pointed to a 7.1% decline in property premiums in the first nine months of 2015, while motor premiums in the same period were up by 3%. Both of these trends occurred against the backdrop of a flat or contracting economy caused by the downturn in the energy sector.

Another trend affecting the market was the relatively sharp rise in property claims for fire, which occurred in the third quarter of 2015. In addition, Ali noted that competition among insurers remained fierce, with companies stepping up their presence in the market. These factors, combined with the absence in recent years of major catastrophes, such as severe windstorms – a common risk for the Caribbean islands – have served to exert continual downward pressure on property insurance rates. New home building might also take a hit because of the downturn in the business cycle. On the motor side, meanwhile, the announcement of lay-offs in some sectors of the economy is expected to put pressure on new vehicle sales and, therefore, on the associated insurance business. In relatively hard times, some motor customers might reduce the level of their cover from comprehensive to third-party only.

A further general issue highlighted by insurance executives is the limited availability of foreign exchange. In October 2015 the CBTT reinstated a foreign exchange operation in use prior to 2014 in order to revitalise the foreign exchange market. The CBTT imposed a queueing system designed to clear the backlog of arrears of foreign exchange demand, which meant companies seeking to buy US dollars or other hard currency often received less than they had requested. According to some industry figures, this has caused difficulty in the management of business relationships with overseas-based reinsurers, whose premiums are mostly payable in US dollars, euros or pounds sterling. “It is a problem for us getting hold of US dollars to pay our reinsurers,” James Camacho, president of ATTIC, told OBG.

Market Conditions

The latest available data from the CBTT confirms the overall financial health of the sector despite difficult market conditions. Return on equity (ROE) for life insurance companies was 11.2% in the last quarter of 2015, up from 10.6% in the same period the previous year. ROE for non-life insurance firms was 10%, down from 14.2% in the year-earlier quarter. The ratio of liquid assets to current liabilities was 37.7% for life insurance firms and 58.8% for non-life firms in the last quarter of 2015.

ATTIC’s Camacho told OBG that current market conditions had created a challenging environment. In his view, gross premiums had held up relatively well but will come under further pressure in 2016. He highlighted that, despite some recent tightening, interest rates in T&T, and global markets, remain at historically low levels, meaning the yield on insurance company investments has been disappointing, and margins are consequently lower than would otherwise be the case. Some international oil firms have been scaling back their operations in T&T due to the energy slump, but since most insured their risks internationally, that should not affect local insurers directly. However, an indirect impact could be felt as a result of a reduction in local staffing levels, which may reduce demand for employee health and compensation schemes.

Anand Pascal, president of GLOC, one of the market leaders in the life sector, told OBG that 2015 had been a good year for the company, which had equalled its best-ever performance in terms of new annual premium income achieved in 2013, but had managed to deliver a better mix of business, more closely aligned to the type of long-term risk products it considers to be its core competency, such as life insurance, critical illness and registered deferred annuities.

The performance of GLOC in terms of shorter-term insurance products, like health plans, was not as strong, with a deterioration of loss ratios. Pascal said the company was still analysing its data, but that the poorer performance in the health segment may have been due to a rise in the number of low-value claims associated with cases of the mosquito-borne chikungunya virus in the first half of 2015. Asked how GLOC could prosper amid a macroeconomic recession, Pascal noted that life insurance is a resilient business because products typically offer long-term protection. In previous downturns the sector also avoided a fall in premium income, with growth slowing or turning flat but not dropping. He also felt that T&T offers further room for growth as the market remains underinsured, with life insurance premiums representing 1% of GDP, compared to 2-3% in Central and South America and 3-5% in developed markets.

Bancassurance

An important development in the life insurance sector has been the emergence of bancassurance, which consists of cross-selling relatively simple life and annuity products to bank customers. This method is most prevalent in Europe, and is growing in popularity in Asia and Latin America. It has been adopted most successfully in the local market by Scotia Insurance. Robert Soverall, the company’s managing director, told OBG that since the model was adopted in 2004, the firm has achieved an average 20% compound annual growth rate in its after-tax profits, making it the third-largest player in T&T’s life sector, behind GLOC and Sagicor Life.

In keeping with regulatory requirements, Scotia Insurance has 23 separate sales offices directly adjacent to the 23 branches of its sister banking company, Scotiabank. The bank can refer its customers to Scotia Insurance products being offered “next door”, but cannot directly bundle the two together, nor use a single sales force. Executives say one of the benefits of this is that it allows the company to dispense with a costly sales force of insurance agents. They hold that traditional life insurance products often take four to five years to become profitable for the underwriter because of the front-loading of broker commission fees, while Scotia Insurance products can be profit-positive within two months. Finally, Scotia Insurance believes that its products, with lower pricing points, can access lower-income market segments not served by other insurance providers.

Not everyone agrees that the bancassurance model is the shape of the future. Some have noted that the size of the business is limited by the size of the associated banks’ database of customers. Using the oft-quoted maxim that insurance products are sold while banking products are bought, meaning that insurance requires greater sales and marketing effort, they also justify the role of the insurance agent as necessary to selling high-value, high-margin products in the homes of the prospective clients.

It is acknowledged that different models will continue to compete in a dynamic market. The view from GLOC is that other factors will also influence the nature of the business in the coming years, including technology and analytics, which could prove to be even more important than macroeconomic cycles and are likely to drive a further degree of consolidation. “The insurance sector is expected to undergo a substantial process of digitalisation over the next few years,” Tewari told OBG. “Investing in data centres and software robotics have the potential to streamline many internal processes.”

Insurance Law Delayed

The industry suffered a setback in 2015 when efforts to introduce a new national regulatory framework for insurance companies, in the shape of the Insurance Bill 2015, were unsuccessful. The proposed bill came close to being approved in May of that year, but was not given sufficient time to be fully debated or voted on due to the dissolution of Parliament ahead of the general elections, which took place in September 2015.

The bill included the introduction of risk-related capital reserve requirements, modernised corporate governance standards and new insolvency procedures. “The Insurance Bill is extremely important to the continued viability of the industry,” Pascal told OBG. “We cannot continue to rely on a 30-40-year-old piece of legislation.” Pending the new law, which has been under discussion for several years, the industry continues to be regulated by the Insurance Act of 1980, as amended in 2004, 2007 and 2009.

Robert Lazzari, managing director of Agostini Insurance Brokers, told OBG that the local market is characterised by an oversupply of general insurance companies and brokers, and that the introduction of more modern regulations, including enhanced stringent capital reserve requirements, would help further a necessary process of consolidation. The more reputable companies and brokers had already voluntarily introduced higher capital reserve ratios and risk management systems, but having them uniformly enforced and required by law would strengthen the sector. Pascal was of a similar opinion, telling OBG, “I think the capital regulations will help thin out operations that are undercapitalised.” Lazzari said that it was not just a question of insurance regulation, as other areas needed to be tightened up as well. “Our legal system is close to being overwhelmed by a large number of cases,” he told OBG. “So many motor-related claims are often not settled in a timely manner.” Although motor vehicle insurance is compulsory in T&T, it is estimated that 15% of cars are circulating on the roads without proper insurance. Accidents involving one uninsured party can lead to costly, and often unsuccessful, court action. For that reason, some insurers advise their clients to take out comprehensive rather than third-party only polices.

Raising Standards

Although it might still require some small adjustments, the text of the proposed 2015 bill has been broadly welcomed by the insurance industry. One benefit will be the introduction of a common standard of actuarial valuation for life insurance. At present, companies operating in T&T use different US, Canadian or European standards, making comparisons between companies difficult. Should it be passed, the new bill requires all insurers to comply with the Caribbean policy premium method. Relatively minor worries about the existing text include its provision for punishments, including prison sentences, for independent directors who fail to bring loosely defined “material risks” to the attention of company boards. This, it is felt, is imprecisely drafted and could discourage many from taking up the post of director. There are also some instances of what can be considered over-regulation – such as the requirement for actuaries to report all emerging problems simultaneously to both insurance company management and the regulator. The industry believes management should be given a reasonable timescale to fix problems before matters are taken to the regulator. It is hoped that the new bill will be voted into law in 2016. The process could take between three and 12 months and will involve the creation of a new joint select committee and a fresh round of discussions and expert testimony before it can be sent for debate and approval in Parliament.

Outlook

Although T&T’s national economy could be facing difficult headwinds in the coming years, industry experts believe that, overall, the future of the sector looks promising. The prospect of more rigorous insurance regulations could prompt further sector consolidation as increasing solvency reserves and encouraging greater professionalism become areas of focus. “This will still be a profitable industry,” Lazzari told OBG. “But we may see margins come down from 15% to maybe 10% or 12%.”

Despite the upcoming period of economic austerity, it is believed that the dynamism of the sector will offset any losses incurred. “Insurance will continue to do well,” Soverall told OBG. “It is true that some individuals may not be able to continue servicing their policies but this will be offset by others choosing to increase their level of protection and savings.”