In July and December of this year, the island will mark the sixth anniversaries of Typhoon Chata’an and Supertyphoon Pongsona. While Chata’an, which struck on July 6, 2002, was a much milder storm, the island had barely recovered from its 105 mile-an-hour winds when Pongsona unleashed its 150- plus-mile-an-hour rage on Dec. 8. The storm flattened homes and businesses, left residents without power for weeks, and started several fuel storage tanks on fire at the port. The ensuing gasoline shortage tested residents in ways they could not have anticipated – gas rationing, long lines at the pumps and theft by siphoning. The Federal Emergency Management Agency logged more than $278 million worth of damage from the two storms.
A Soft Market
Six years later, the destruction and hardships seem all but forgotten, as the island’s insurance industry is now in the midst of what professionals refer to as a “soft” market. A soft insurance market is characterized by a lot of capacity, or companies willing to write insurance policies, and few major losses. The situation presents numerous challenges to the industry.
“The further away from a typhoon, people forget,” says Monique Baysingar, chairwoman of the Insurance Association of Guam. “The main challenge is in maintaining adequate insurance rates, or tariffs.”
On Guam, automobile, fire, earthquake, typhoon and worker’s compensation use rates assigned as tariffs set by the insurance commissioner’s office. All other insurance rates are non-tariff, or open. Insurance companies must file their open rates with, and have those rates approved by, the commissioner. While Department of Revenue and Taxation Director Art Ilagan currently holds that title, the regulatory work is done by John Carlos, Rev and Tax’s regulatory administrator, and his staff. Even with the rising cost of doing business on the island, Carlos says insurance rates cannot be changed without approval from his office. “Anything in deviation from the Guam tariff or in deviation from what the insurance commissioner has previously approved,” has to be filed, according to Carlos.
But with a staff of only three, and duties that include oversight not only of the insurance industry, but banking, securities and real estate licensing as well, Carlos can only shrug his shoulders and point to the stacks of paper piled around his office when asked if he knows whether all 213 insurers transacting business here are complying with the rules.
With current conditions in the insurance industry being so soft, Baysingar and others note that some companies are lowering their rates in order to attract more business. “Maintaining pricing is important, because in the long run, if an insurance company does not collect fair and adequate premiums for a risk, then carriers may leave Guam, which ultimately could result in a lack of capacity for the island,” says Baysingar, who is also the underwriting agent of Pacific Indemnity Insurance Co. “But if you maintain pricing, then you fund for that loss.”
Cassidy’s Associated Insurers is a general agent for Pacific Indemnity, which qualifies it as a domestic insurance company, or a company that is domiciled on Guam. President David Cassidy says his company has put a lot of research into how to price its policies. “When there’s a disaster, we want to be able to pay,” Cassidy says. “We know what we have to charge in order to be able to do that.”
Cassidy admitted his company has lost business to companies that are currently offering discounted rates. “We know that they will get slammed. We have all the stats to back that up,” he warned of not if, but when Guam experiences its next typhoon. He also warned that alien companies — insurance companies that are incorporated and licensed in a non-U.S. jurisdiction — may have less commitment to the island, and can simply pick up and leave if their losses become too great. He recalls two Australian insurance companies that folded after typhoons. In such cases the company would simply refer its customers to the main office in the country of origin for the purpose of filing claims. The situation could create a bureaucratic nightmare for claimants. All the company would lose is the bond money (from $50,000 to $250,000) that’s required to be deposited in a local bank in order to be able to do business on Guam, Cassidy says.
Having been in business for 70 years, Calvo’s Insurance Underwriters is Guam’s oldest insurance company. The company is the market leader in property and casualty lines and also has been challenged by the soft market, says Paul Calvo, vice president and general manager. Insurance carriers have filed amendments to their tariffs with the insurance commissioner, and he admitted that Calvo’s has done so as well. But he advised that because typhoons and earthquakes are prevalent on Guam, carriers recognize that they need to have reserves to be able to pay major claims. “So there’s a limit to how much you can discount,” he says.
Discounted tariffs may fuel more competition in the insurance industry during a soft market, but they also create collection problems for some companies. Michael Camacho, president and chief operating officer of Personal Finance Center, says his company is brainstorming on how to mitigate the risk of customers jumping from agent to agent or broker to broker, trying to get a better deal, and leaving an outstanding balance with their previous insurer.
A lot of times they walk away from a policy we’ve issued and start a relationship with another broker or agent,” says Camacho. The problem arises when the initial broker or agent allows a payment plan for the policy over the course of a year. Insurance companies require full payment on policies within 90 days of issuance. If the customer walks away before the year is completed, the policy is voided, but the agent or broker is still out the balance owed on the policy, says Camacho. “We’re left holding the bag.”
Marilou Miguel, Great National Insurance Underwriters general manager, says the issue of whether premiums charged on the property lines, especially on the catastrophe, or CAT perils, are adequate, has been a concern for quite some time.
“Insurance companies have gone through major typhoons and earthquakes and we have seen insurance companies pull out because they do not see it economically viable for them anymore,” says Miguel. “As far as GNIU is concerned, we make sure that we work side by side with our carrier and that we disclose to them all pertinent information so in turn, we can charge a premium that we think is in accordance with the guidelines given to us, and at the same time, acceptable to our carrier and competitive enough for the client to come up with the best choice.”
Alpha Insurers has been doing business on Guam for 30 years and offers personal line packages such as combined auto and homeowners’ insurance. President Joseph Hsiao says his underwriter, Taiwan-based Chung Kuo Insurance Company Ltd., paid out $28 million in insurance claims for Supertyphoon Pongsona. Hsiao doesn’t see discounted tariffs as a problem if companies do their math correctly. “Every insurance company, before you give a discount you have to calculate whether there’s a profit margin, and whether, when you get a hit, you’ll be able to recover within the next five to ten years’ time,” Hsaio says.
“The general nature of personal lines is it’s going to be price-driven,” says George Takagi of Takagi & Associates. While his company is primarily a commercial insurer specializing in hotels, golf courses and major construction projects, Takagi & Associates does write some personal lines. Takagi says creative pricing is not only an issue on Guam, but worldwide.”
“In the end, you’re hurting your carrier,” says Staywell Insurance marketing and administration consultant Francis Santos. He was speaking of insurance agents who do not collect the premiums they will need to cover future losses. Those companies that engage in such practice will either have to raise their rates or try to make up the difference perhaps by giving up some of their commission. “The spread of risk is a defined market,” says Santos of the situation on Guam. “We can’t afford, here on the island, to lose carriers.”
The current soft market is good for the consumer in the short term, says Greg Kalbaugh, general manager of Marsh Micronesia Inc. But like Santos, he believes it could present a challenge in the long run. “Guam is a small pool of risk,” says Kalbaugh. “There hasn’t been a CAT (the industry acronym for a catastrophe) in a long time.” The issue now, especially with the impending military buildup, is the island’s capacity for larger accounts, Kalbaugh says.
As more risk comes to Guam in the form of military housing, hotels, condominiums and national chain stores, the island’s pool of insurers has to have the capacity to meet those insurance needs, Kalbaugh says. Marsh, which came to Guam in 2004 to service its hotel, telecommunications and other global accounts located here, has the ability to line up reinsurers to meet the insurance needs of these high-risk entities, he says. Insurance companies don’t take on the entire risk themselves, he says. Behind the main insurer, companies have set up layers of other companies, called reinsurers, to help cover major losses. For example, insurance giant Lloyds of London has 10 to 15 reinsurers backing up its policies, he says.
Reinsurance can be split two ways, either vertically or horizontally. In a vertical split, each company insures an equal percentage of the loss up to the point of policy coverage. If the policy is split horizontally, the main insurance company will take, for example, the first 10 million in loss, with successive reinsurers behind it taking a certain percentage of loss after that first 10 million, again up to the point of policy coverage.
“Everybody needs reinsurance,” says Hsiao of Alpha Insurers. But because they know Guam is a big risk, “sometimes the reinsurers hesitate to take the reinsurance. Every five to eight years you’re bound to get (a disaster) – it’s just a matter of how much damage.”
When none of the local insurers wants, or is able to, insure a business or entity, brokers such as Marsh or AM Insurance write what are called surplus lines of insurance.
Surplus lines were introduced to Guam in the early 1990’s, when licensed insurance carriers started to pull out after sustaining major losses from Typhoons Yuri and Omar in 1991 and 1992, and the 8.0 earthquake that rattled the island in 1993, says AM Insurance president and general manager, Annmarie Muna. Working at another insurance company at the time, Muna began searching for carriers that would be willing to do business on Guam. But, many weren’t interested because of the island’s small volume of business and high risk. In Los Angeles, an associate introduced her to a London broker. Today, AM Insurance represents high-risk entities such as the Guam Power Authority and the Port Authority of Guam. The port has a huge loss history from natural disasters, so it has full typhoon and earthquake insurance through Lloyd’s of London, says Muna.
As a broker, “I represent the client, so all my priorities are with the client,” says Muna. The difference, she points out, is that an insurance agent represents the insurance company that underwrites its policies. Muna’s company is positioned to be accessible to both local and off-island companies. AM Insurance collects a certain percentage from other companies for placing policies with those companies, whether on or off-island.
The issue of surplus lines is one of contention for some insurance companies. Brokers and agents used to be able to write surplus lines after querying and being denied by three local companies, Muna says. In February 2006, then-Banking and Insurance Commissioner Andy Jordanou issued a memorandum clarifying the issue, stating that “an insured or licensed surplus lines broker should first attempt to place the property and liability coverage with admitted insurers and licensed underwriters in Guam.” Now, Muna says, all locally admitted carriers have to be queried before a surplus lines policy can be written.
According to Insurance Association of Guam Chairwoman Baysingar, the law is clear on the issue of surplus lines. It states that non-admitted insurance is allowable only when “an authorized surplus lines broker demonstrates in affidavit form that the amount or kind of insurance is unavailable from any admitted company,” that “admitted insurers must be given the ability to write part of a risk before the remainder of coverage may be sought from an unauthorized insurance source,” and that the rates charged are no less than the Guam tariff.
The local industry has “had problems with brokers or agents placing business off-island because often a non-admitted insurer will extend better prices, which if subject to tariff may be illegal,” Baysingar says. She contends that unauthorized use of surplus lines may cause an eventual lack of capacity. “We’re such a small market. We need to maintain as many players as we can to maintain fair competition and maximum capacity,” she says.
Calvo agreed and says, “every piece of insurance that can be written locally should be.” Often, surplus lines queries do not give local agents enough time to submit a quote, he says. Common practice within the industry is to query all of the locally admitted carriers by e-mail and give a time frame – from days to weeks – to respond. Calvo recalled one query that gave three to four days to submit a quote on a big risk, an unreasonable time frame, he says. “We can’t quote on something this size in three to four days.”
Cassidy’s Associated Underwriters and Marsh are two admitted companies that offer malpractice insurance, which must be written as surplus lines because to date, no local company has expressed interest in providing that type of insurance. Cassidy’s has been providing malpractice insurance to local physicians, engineers, architects and certified public accountants for nearly a dozen years, says David Cassidy. He contends that the surplus lines law is “not really a hassle,” and that it’s good to have everyone local get the first shot at coverage. Often, it is simply a matter of e-mailing everyone, waiting 10 days and then writing the policy, he says.
“It’s a big hassle,” says George Takagi. His company cannot give a client a quote until they query all admitted carriers on whether they want to submit a quote. If one says yes, then they have to wait for that company. He noted occasions when a local company has submitted a quote that is far higher than what can be procured off-island, but the client is forced by law to take the local company’s bid, even though it may cost nearly twice as much.