Cedric Stephens | Disaster meltdown
I wrote two pieces this month about natural disasters and their effects. Today's is the third.
Last week witnessed another record-setting hurricane Maria. It battered Dominica, parts of the US Virgin Islands, created widespread havoc in Puerto Rico, and was threatening the Dominican Republic and the Turks & Caicos Islands at the time of writing.
If that was not enough, a magnitude 7.1 earthquake the second to hit that country within a week occurred in Mexico City. At least 250 persons have lost their lives.
Jamaica is exposed to hurricanes and earthquakes. When this column was conceived some 20 years ago, it was never imagined that the region would have to cope with five disasters in a single month. These events have led me to ask: What if ...?
The insurance industry life and non-life has an important part to play in the helping society cope with and recover from the economic effects of disasters. There is, however, a very big gap between losses that are recoverable from the private insurance market and the total economic losses.
While governments can help to bridge the gap, they can only do so much. Experts suggest that government-private sector partnerships can offer solutions. Yet, to many persons in Jamaica and other countries at a similar stage of development, insurers and insurance are not seen in a positive light.
The person in the street's image of insurers and their products is built more on past experiences and hearsay (extrinsic indicators) than on things associated with the quality of the goods or service (intrinsic indicators).
On the other hand, insurers and banks regard low-income households as 'too poor' to insure or to save and tend to discriminate against persons they do not personally know.
Financial exclusion exists. It is one of the many reasons for the low rate of insurance penetration, or to put it more simply, why most personal assets and small businesses remain uninsured.
This state of affairs should not exist. Bank of Jamaica (BOJ) Governor Bryan Wynter in his August briefing on monetary policy provided some clues for the poor image that banks, and by extension, insurers have. The "large spread between lending and deposit interest rates was a symptom of inadequate competitive behaviour in the market (and) poor information and information asymmetry."
This condition exists when one party in a contract has more material knowledge than the other party.
Insurer-consumer transactions are typically one-sided. The imbalance in information between what the consumer knows versus what the seller knows creates nasty surprises when a claim occurs and leads to distrust. The government of the United Kingdom, from whom we inherited our insurance traditions, recognised this a long time ago. It enacted pro-consumer rules and regulations and reformed laws to make insurance transactions fairer. The imbalance was not in the society's long-term interest.
Successive Jamaican governments have not fully recognised the important functions that insurance companies can play in social and economic development.
The situation is slowly changing. There is now talk about financial inclusion. Also, a national health insurance plan is currently being considered by the health ministry. If implemented, the plan will be used as a social device aimed at reducing the uncertainty of economic loss or risk "through the combination of a large number of similar uncertainties, and through distribution of the burden of loss ... by the use of funds accumulated in advance".
The Financial Services Commission (FSC) can help remove some of the distrust that members of the public have against insurance companies and their products. For example, they can follow the lead of the central bank. In August 2016, the BOJ introduced a code of conduct that governs how deposit-taking institutions should treat their customers.
The banking lobby, Jamaica Bankers Association (JBA) had strongly opposed the measure. JBA would draft its own code. But when the BOJ stepped in as the regulator, the opposition vanished. The following is a partial list of some of the matters dealt with in the code:
- Keeping language in contracts simple and clear;
- Identifying key terms in contracts for customers' attention;
- Notifying customers of fees, charges, terms and conditions of contracts;
- Providing customers with reasonable notice of changes to fees, charges, terms and conditions of contracts; and
- Advising customers of the procedure for making complaints.
Similar protocols do not appear on FSC's website, and as far as I am aware, do not exist in the insurance industry. Mandating minor changes like these which prudent insurance company managers have introduced already would go some way in improving customer experiences and help reduce the chasm of consumer-insurer distrust which currently exists.
A Hurricane Gilbert-like event at current exchange rates could create potential economic losses to the Jamaican economy of $520 billion. This compares with a price tag of $140 billion which, according to a recent report in this newspaper, was the cost to repair "the systemic failure in the local financial system" in the 1990s.
The central bank and other regulators have developed a mechanism to prevent a recurrence of the financial sector meltdown. Given the huge gap between insured losses and the potential economic losses from natural disasters, would it not be prudent for the insurance regulator and private sector insurers to follow the BOJ's lead and develop and implement strategies to minimise the effects of natural disaster events before they arise?
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance.
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