By NEIL HARTNELL
Tribune Business Editor
THE IMF “hit the nail on the head” over the Bahamas’ disaster exposure, a senior insurance executive yesterday urging a “holistic” approach that includes the regional catastrophe scheme.
Emmanuel Komolafe, the Bahamas Insurance Association’s (BIA) chairman, told Tribune Business that this nation’s economic and fiscal consolidation plans risk “being blown off course” in any year by a major hurricane.
He argued that the International Monetary Fund’s (IMF) analysis of methods to mitigate the Bahamas’ natural disaster exposure mirrored recommendations by the insurance industry, including improving penetration rates by making coverage more affordable to households and businesses.
The Fund, in its Article IV report, called for this along with continued membership in the Caribbean Catastrophe Risk Insurance Fund (CCRIF), an issue than in recent months has become a ‘political football’ between the Government and Opposition.
However, it conceded that the CCRIF could only provide “limited protection” from hurricanes and other natural disasters because claims were based on damage to public infrastructure, the majority of which is located in New Providence.
Thus the Bahamas will only secure a major payout if there is a direct strike on Nassau from a Category 4 or 5 storm, something the IMF said left the rest of the country “underinsured” notwithstanding the Government’s efforts to divide the archipelago into different zones.
“The Bahamas is a member of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), but membership provides only limited protection owing to the Bahamas’ geographic diversity,” the IMF’s Article IV report said.
“Claims are evaluated based on damage to public infrastructure - which is concentrated in New Providence - leaving the bulk of the country underinsured in practice, which calls for enhanced use of market-based insurance, complemented with self-insurance.”
Mr Komolafe yesterday told Tribune Business that the BIA and its members had been calling for just such “a holistic approach” to disaster recovery and mitigation, agreeing that CCRIF and its payouts were there to help kick-start rebuilding efforts.
“That has to be combined with a number of other initiatives, including the establishment of a Disaster Recovery Fund with monies set aside in every Budget cycle,” he said.
Mr Komolafe reiterated calls for funds raised by the 3 per cent ‘premium tax’ levied on insurers to finance a Disaster Recovery Fund, noting that other jurisdictions leaned on foreign direct investment (FDI) projects for such help.
“The Government also has to take an approach where some of its public assets are insured,” the BIA chairman added. “You would then have a Disaster Recovery Fund, insurance of assets and need to make micro insurance more affordable.”
The IMF’s report said almost two-thirds of the economic damage inflicted by Hurricane Matthew in October 2016 was cover by reinsurance flows relating to private sector claims payouts. These equalled 4 per cent of Bahamian GDP, or more than $320 million, at year-end 2016 compared to Matthew’s estimated impact of 6.75 per cent GDP.
Yet while agreeing that the Bahamas has “a relatively well-developed natural disaster insurance market”, with the eight property and casualty underwriters earning a collective $300 million in annual gross premiums, the IMF said 60 per cent of households were either uninsured or underinsured.
“Insurance on public assets has also lapsed in recent years,” the Fund added. “Empirical research has shown that countries with more private and public insurance penetration experience far lower output and income losses from disasters.
“Penetration is weak, especially among the most vulnerable segments of the population. The cost of obtaining insurance is regarded as the main obstacle to entry among the population of uninsured/underinsured, reflecting in part the legacy of consecutive years of weak economic activity. This gap in coverage constitutes a contingent liability for the public sector in terms of ex-post direct and indirect social support and rehabilitation expenses.”
Besides the Government insuring its own public infrastructure assets, the IMF said the Bahamas needed to better exploit private insurance to “minimise and smooth revenue and expenditures impacts, thus laying the groundwork for a timely disaster response that reduces the potential economic dislocation”.
“Policies should also be developed to broaden insurance coverage by reducing the costs of insurance plans on a targeted basis, informed by cost-benefit analyses,” the Fund added.
“One possibility is to provide means-tested subsidies to low-income households for micro-insurance disaster instruments. Mandatory property insurance, supplemented by targeted subsidies, could also decrease the cost of insurance plans by expanding the premium base.”
Mr Komolafe yesterday said the industry had been studying solutions such as micro insurance, but added that legal changes were required to facilitate such products.
“We’ve been looking at this for quite some time with support from some multilateral agencies,” the BIA chairman told Tribune Business, “but for that to happen we’re going to have to revisit our laws.
“The Insurance Act will have to be amended to allow for that to happen with small and medium-sized enterprises and low income earners.”
Mr Komolafe continued: “I think the IMF report pretty much hits the nail on the head. It reiterates the need to have a better insurance penetration in the Bahamas, so that in the event of a disaster, particularly a hurricane, persons are basically able to fix their own home.
“It reduces reliance on the Government in the event of a natural disaster. In the absence of insurance, you don’t just have an impact from a micro level, because persons are unable to rebuild their homes, but it impacts the country at a macro level.”
The IMF report noted that the Bahamas has sustained annual hurricane damage averaging around 2 per cent of GDP for the last 20 years, a figure higher than the 1.25 per cent Caribbean average. The probability of an annual hurricane strike is also higher for this nation, standing at 30 per cent compared to the region’s 20 per cent.
Spelling out the economic consequences, the Fund added: “Natural disasters can have severe macroeconomic consequences. The recurrent destruction of a country’s productive assets constitutes an implicit tax on capital that tends to deter investment, lowers productivity, and income.
“Natural disasters also worsen external trade balances and fiscal balances, often leading to a rapid accumulation of debt. The erosion of these policy buffers entail broader risks to economic stability.”
Mr Komolafe, putting these concerns into a Bahamian context, said: “In the absence of a disaster management framework, any economic or fiscal plan you have is at risk of being blown off course by a hurricane.
“Not only are you losing revenues because of exigency Orders, you are spending more on the expenditure side to finance recovery. Having a National Development Plan, a fiscal consolidation plan, without having a disaster management plan will leave us exposed as a nation.
“It’s only then, with such a plan, that we can begin to say we have a National Development Plan, a fiscal consolidation plan, that we are confident - in the event of a major hurricane or natural disaster - we can still achieve the targets for,” he added.
“Without a disaster management plan, we are at risk six months of every year. We have to make decisions and start planning now.”