By NEIL HARTNELL
Tribune Business Editor
A Bahamian insurer has blamed “an usually large number of claims” for a non-hurricane year resulting in 2018 profits being slashed almost in half.
Tim Ingraham, Summit Insurance Company’s president, told Tribune Business that the underwriter’s 48.1 percent “bottom line” fall had been driven “by a large number of small and medium-sized claims” stemming mostly from property fires.
Net claims soared by 40.3 percent to $2.993m, compared to $2.133m in 2017, with the $860,000 increase accounting for much of the $1.22m profits decline. Net income dropped from $2.664m to $1.382m, but Mr Ingraham voiced optimism that Summit’s bottom line will return to the peak in 2019 - hurricane season permitting.
He added that the government’s 2018-2019 budget decision to exempt residential property insurance from 12 percent VAT had helped offset a five to ten percent increase in reinsurance costs, ensuring that premiums largely remained flat on policy renewals.
However, Mr Ingraham warned that while the VAT homeowners exemption had largely benefited homeowners to-date, “there could be some negative impact” when clients have to make claims.
This, he explained, is because the property and casualty industry’s claims costs and business expenses have increased for all companies as a result of underwriters no longer being able to reclaim or ‘net off’ the VAT paid on their ‘input’ costs due to the residential property exemption.
The Summit chief echoed his colleagues in urging Bahamians to “review the sums insured” on their homeowners and personal contents policies, especially those who had purchased their properties before VAT’s introduction on New Year’s Day 2015, as could have resulted in their assets becoming under-insured.
Conceding that Summit’s 2018 financial performance “fell slightly below expectations”, Mr Ingraham told this newspaper: “Last year we had a number of claims we do not usually see. It’s the kind of year that reminds us we’re not in business only for hurricane claims but all claims clients are insured for.
“It was really a large number of smaller claims or medium-sized claims; an unusually large number of claims last year compared to a normal year which led to that. There were two significant fires. We had a warehouse fire, which cost us a few million dollars, and a shopping centre fire around $1m, plus a number of homeowner fires in the $100,000 to $150,000 range.
“We had a number of more attritional losses that usual, which would have impacted the bottom line. We also saw reinsurance costs go up in 2018.” The claims surge cancelled out a 7.2 percent rise in Summit’s net written premiums, which rose by more than $650,000 to $10.043m.
The claims increase, together with a $450,000 rise in catastrophe and excess of loss reinsurance, resulted in the general insurer’s total direct expenses jumping year-over-year by more than $1.2m or 21.5 percent to $5.645m. As a result, Summit’s underwriting gain fell by 26.3 percent to $2.987m from $4.054m the year before.
Mr Ingraham said Bahamian insurers saw increased reinsurance costs as a result of 2017’s multi-billion dollar hurricane losses, stemming mainly from storms such as Irma and Maria, as well as other natural disasters such as the Mexico earthquake. Collectively, these resulted in a $140bn loss for the global reinsurance industry.
Bahamian property and casualty insurers, which have little choice but to buy huge quantities of reinsurance, were forced to accept reinsurance rate increases that were implemented “across the board” as companies sought to recoup “significant losses” from 2017.
“It was probably anywhere from 5-10 percent at the end of the day,” Mr Ingraham said of the reinsurance increases seen in The Bahamas. “It was definitely expected given the year the insurance industry had in 2017. It was one of the worst years for this region.
“Areas that were impacted [by hurricanes] might have seen reinsurance rates increase anywhere from 30 percent to 70 percent. For the most part, I think most people in The Bahamas saw a flat premium renewal last year. On the homeowners insurance, dwelling insurance, the Government has removed VAT so some people might even have seen a slight decrease.”
Mr Ingraham, though, warned that the VAT exemption on residential property premiums contains a potential sting in the tail for consumers if they are not careful. It is already hitting underwriters such as Summit, through which Insurance Management places much of its general underwriting business, through increased costs.
“Some of the changes with VAT have impacted the way claims are handled,” Mr Ingraham told Tribune Business. “Making homeowners insurance exempt means you cannot claim back VAT so claims costs go up.
“Because it is exempt means our business expenses connected to that line of business will go up as we can’t claim our input VAT back, so there will be an increase in business expenses and increase in claims experience. At the end of the day, there could be some negative impact but we won’t know until we have claims.”
The Summit chief explained that the $400m in claims submitted over Hurricane Matthew in 2016 would now be more expensive due to the VAT-exempt treatment for residential homeowners insurance premiums.
As a result, he called on Bahamian homeowners to “review your sums insured and account for that 12 percent, as you could be under-insuring if persons are not increasing the value of their homes and personal contents”.
“On the one hand, as far as policymakers are concerned, they don’t have to pay VAT on premiums, but on the other hand if they don’t increase the sums insured they could find themselves underinsured if they don’t factor VAT in,” Mr Ingraham explained, “especially if they bought their home five to 10 years ago. Adding in 12 percent VAT could be a major increase in value.”
He echoed other insurance industry executives in expressing hope that the Government and insurance sector will soon be able to settle their dispute over whether carriers can recover VAT on all or only some claims that were settled on a cash basis.
“It would just be something that we want to get behind us,” Mr Ingraham told Tribune Business. “For the Government it’s the same thing. From Summit’s perspective, until the negotiations are completed, we’re just waiting and seeing what happens.
“It’s the uncertainty of exactly what your tax bill is at the end of the day. That’s the main thing. We want to operate in an environment that’s certain, and the more uncertainty there is, the more concern we have about how business plays out.”