Despite a soft market, local insurance industry remains strong

Yet again, the year (2008) started with a soft market (which is to insurance what a buyer’s market is to real estate) and, by year-end, not much has changed.

Property & casualty (P&C) insurance rates have declined roughly 10% since 2007, as a result of declining construction and economic activity (soft market), and industry executives expect further drops until the economy turns around.

“P&C is directly connected to the economy, and the state of Puerto Rico’s economy today has affected the way this sector behaves. There are lots of things affecting P&C, such as fewer construction projects, slow auto sales and fewer housing loans,” said Francisco Díaz, president of American International Insurance Company of Puerto Rico (AIG), who added the island’s recession should begin to ease in 2009.

During a soft market, premium prices also tend to decrease because of excess capital in the reinsurance market, Díaz explained.

“There is excess capital in the reinsurance market, making producers and consumers more aggressive when negotiating policy price,” he added.

Softening P&C insurance rates present a challenge for insurance companies, even though the sector saw strong financial performance in 2007, underwriting $119 million more in premiums than in 2006, for a 2007 total of $2.1 billion. That’s 23.8% of the island’s total insurance market.

Life declines, health grows

While P&C grew, the life & annuities (L&A) sector contracted 7.8% last year, reporting a drop of $62 million in underwritten premiums, compared with 2006 when island insurance companies produced $791 million.

The biggest insurance sector, health & disability (H&D), grew in 2007 to $6.3 billion in premiums, $795 million more than in 2006, for a 12.6% growth rate.

Despite the recession, Díaz said AIG grew 10% in the first semester of 2008, “and we are expecting 9% growth in the second semester. Our organic growth strategy has allowed us to keep growing.”

According to Andrés Piccinoni, president & CEO of Benfield Puerto Rico (which merged with Aon Re Global to become Aon Benfield in December 2008), the excess capital will increase price competition and force companies to look into other lines of business, including U.S. Latino/a markets.

Universal Group and National Insurance have already expanded to the U.S. mainland to target Latinos/as, and others are reportedly weighing their options.

“Company profit margins are being affected by the soft market,” said Piccinoni, who added that they respond by trying new business lines, exploring other alternatives for organic growth and penetrating new markets.

As the economy continues to weaken, operating-cost increases are also taking a toll on all companies, including insurance companies.

Piccinoni explained that during a recession, a company’s loss ratio may remain stable, but its expense ratio increases because of the hike in operating costs. “Once there’s a hard market, companies will expect their profit margins to improve,” he said.

Clients reduce coverage to save money

Another challenge the economy presents is cutbacks in insurance policies, industry experts said.

Even though insurance policies are considered necessary and many times aren’t optional, clients are cutting back on auto and property insurance to save money during the recession.

“For personal lines, once the car loan is paid in full, the owner often decides not to renew the insurance policy and keeps the [obligatory] state insurance. For residences, many are reducing what is paid to cover their property,” Díaz said.

Díaz added that reducing coverage can affect a person’s protection, but this should be examined case by case because each one is different.

“The industry is very sophisticated, but the economic situation has posed some challenges. Puerto Rico is geographically prone to catastrophic events and, therefore, the standards by which the companies are measured are quite strict,” Piccinoni explained.

Even though there hasn’t been a major catastrophic event in the past three years, Alexis Sánchez, senior vice president of underwriting & reinsurance at Mapfre Praico Corp., told CARIBBEAN BUSINESS companies are always expecting one and continuously preparing in case such an event occurs.

“The combination of a recessionary economy and the absence of catastrophes has placed the industry in a negative cycle, but we are optimistic. As the economy improves, we will see good things happening,” Diaz concluded.

Local insurers remain a strong force in the industry, writing 1,115,711 policies (75.1%) in 2006, whereas foreign companies wrote 24.8% of the policies (368,848). In total, almost 1.5 million policies were written in 2006, totaling approximately $8.4 billion for the year, according to the Insurance Commissioner’s Office.