The Tribune

By NEIL HARTNELL

Tribune Business Editor

A LEADING Bahamian general insurer yesterday said it was "becoming more and more difficult" to attract reinsurance support for this market, although a reduction in competitive pressures meant this might ease somewhat.

Steve Watson, RoyalStar Assurance's managing director, told Tribune Business that increased reinsurance demands from Florida, and the pressure on both insurers and reinsurers to acquire more coverage following a 2011 that was one of the worst years on record for catastrophe losses, meant the market was suffering from capacity issues.

Describing the facultative reinsurance market as been especially tough, Mr Watson said: "The facultative market has become very difficult. It's very difficult to find facultative support for Bahamas-related risks."

The facultative market is one where insurers enter into a treaty with reinsurers for the latter to assume all or part of the risk associated with a specific policy, and the RoyalStar chief added: "We're seeing the facultative market becoming more difficult, and we are having to write more premiums ourselves. So our exposure is up, but if rates go up we're reasonably happy to do that."

While RoyalStar may be assuming more of the risk, in a hurricane-free year this strategy would ensure it reaps greater profitability.

Still, the RoyalStar managing director explained that capacity on the London-based Lloyds insurance market was determined by premium income, not risk exposure, and when rates went up there was less capacity.

"The reinsurance premium rates are going up, reducing capacity for more people, and making it tough to find reinsurance support for the Bahamas," Mr Watson told Tribune Business. "That's becoming more and more of a problem."

He added, though, that "some competitive pressures are easing off", better news for a Bahamian property insurance market where premium rates are currently flat.

"Property rates are stable - they've not gone up, they've not gone down," Mr Watson said. "In times like this, when facultative market prices are going up or down, we expect prices to move ultimately, whether in three months, six months. Who knows?"

He added that RoyalStar suffered a loss on its property insurance portfolio in 2011 due to Hurricane Irene, explaining that because the "margins are very small, it doesn't take much to turn that. When you have a hurricane, you find your results are subsidised by motor, liability, marine and other lines".

Outlining RoyalStar's underwriting philosophy, especially when it comes to its property business, Mr Watson wrote in the company's annual report: "The rating environment remained challenging, with increased competition, even in high risk unprofitable lines of business, which is something that continues to be disappointing.

"As a company, the biggest risk that we face by far is the property catastrophe risk, which over the longer term is very much a constant, unchanging risk. If premium rates accurately reflect the risk then the prices should also be constant, but strange as it sounds, premiums often bear no relation to the risk; they are more a function of the supply and demand of reinsurance.

"As the risk is effectively a constant, when premium levels fall the insurer is assuming the same risk for less premium; as premiums rise, the insurer assumes the same risk for more premium. RSA therefore adopts a strategy of growing our exposures when premium levels rise and reducing them when premium levels fall. As a company we have made a conscious strategic decision to be flexible and nimble, as opposed to blindly grow no matter what the external factors may be."

Meanwhile, RoyalStar is preparing for a September 2012 move from its long-standing head office in Centreville House to its new, purpose-built complex on JFK Drive, into which it has invested over $5 million since acquiring the property from BISX-listed Premier Commercial Real Estate Investment Corporation.

The property was formerly occupied by Caribbean Bottling, the Coca-Cola producer and bottler, and RoyalStar, according to chairman Franklyn Wilson, is set to rent out the ground floor to Royal Bank of Canada - implying that the latter is set to move its branch from the Finlayson family-owned property just up the road at the Bethel Avenue/JFK junction.

Mr Watson said the new head office would have 20,000 square feet of space split between three floors, with Royal Bank taking all the ground floor apart from space allocated for RoyalStar's claims department. The insurer will be on the first and second floors.

Some $2.948 million worth of capital commitments for construction of the JFK property were outstanding as at end-December 2011 and, explaining the move, Mr Watson said: "It's improved visibility, because we're tucked away on the 6th floor of Centreville House, and the biggest benefit is to our customers - we'll be far more accessible and customer-friendly. It'll just be a far more customer friendly experience.

"It's a sign of the company's maturity. We started with $10 million in capital, and can't buy a building by sinking 50-60 per cent of your capital into it. Now, when we have $40 million in capital, and the majority of that in cash, we can do it."

The JFK head office will include drive-in areas for vehicle inspections and claims/damage assessments.