While residents weigh the necessity of various types of insurance coverage, brokers and agents must also assess their risk of doing business in a saturated market and a disaster-prone region.
By Joy White
The May 15 brush with Typhoon Dolphin reminds residents that the island has not been hit with a major typhoon in more than a decade. As superstition forecasts, it is only a matter of time before a big one comes this way.
Home, automobile and business owners can protect themselves in advance using a readily available tool — insurance — yet many home, automobile and business owners only purchase insurance when they are required to.
“Clients purchase insurance because they have to. They have to comply with the law, requirements from the bank, lease agreements or other forms of contract. Given a choice, a majority would cut on their insurance coverage to cut costs. There are a few who would prefer to secure insurance so they can have that peace of mind and cost is not an issue,” says Marilou L. Miguel, general manager of Great National Insurance Underwriters Inc.
Personal lines, such as auto and homeowners are the leading lines for Great National Insurance Underwriters.
Whether the purchase is out of obligation or for peace of mind, the insurance customers on Guam have made the industry an active one, with many brokers and agents competing to offer a variety of policies at the best prices.
The Department of Revenue and Taxation sets tariff rates that dictate the base price of insurance, but insurance companies compete by offering discounts on the set tariff and using a variety of other methods to attract customers.
“For a small island, we do have a number of insurance companies competing for the same piece of the pie. Companies must learn how to share the pie or be resourceful and creative on how we can retain the whole piece. Capacity is another challenge, for this can limit one’s opportunity in the market,” Miguel says.
According to Joseph C. Barcinas, risk analysis manager of Takagi Associates Inc., insurance companies become competitive through innovative features, such as distinctive customer service, different types of coverage and enhancements to existing product lines.
Takagi & Associates, for example, offers many U.S. policies, such as accident forgiveness, deductable shrinkages and automobile replacement, to set it apart from other companies.
“The hard thing about insurance is that it’s not tangible — you can’t kick the tires of the car, you can’t just drive it — so most of the time how insurance works is only when you get into an accident, you understand the value of it, and so in that sense you also learn the difference of coverages,” says Jo Takagi, administrative manager for the company.
Nuanced differences between policies offered by different companies can make a difference, Takagi says.
In addition, rates are regulated through the Department of Revenue and Taxation, and Guam insurance companies are bound by a prior approval structure and must get permission from the department to change or introduce new rates.
In some cases, however, insurance companies must team up to meet a customer’s needs.
“There are cases wherein insurance companies pool resources to insure a big account in order to retain it here and avoid placing the risk outside,” Miguel says. “There are certain lines wherein our carrier is unable to write; therefore, we have to outsource the cover. Our priority is placing all risks that come our way with our carrier, but if they are unable to, then we have to work with partners in the industry, other insurance companies, in order to place the account.”
Insurance experts agree the insurance industry on Guam is experiencing a soft market. In general, the casualty market has been stable for the past couple of years, says Absalon “Vic” Waki, consultant to Nanbo Insurance Underwriters.
“[…] There is more supply than demand, so insurance companies compete by offering more premiums or by applying an approved discount to the tariff. Meanwhile, the premiums for life and health have decreased,” Waki says.
Despite the soft market, local insurance agencies are experiencing a degree of growth.
- In June, Guahån Insurance Services Inc. signed a general services agreement with Sompo Japan Nipponkoa Insurance Inc., the largest property and casualty insurance carrier in Japan. Guahån Insurance Services also received the carrier’s approval to offer the carrier’s personal auto insurance policies and started selling automobile policies in July.
- Great National Insurance Underwriters Inc. will be completing construction on its Tamuning branch by the end of the summer.
- Other insurance companies have upgraded recently as well, including Nanbo Insurance, which moved into its new building in Hagåtña in 2013.
While insurance companies work to offer competitive rates, typhoon insurance remains the most costly policy.
At Nanbo Insurance, typhoon insurance comprises 70% of total property and casualty insurance costs, Waki says. For a residential home valued at about $200,000, the homeowner might pay $2,000 per year on typhoon insurance, he says.
At Takagi & Associates, the deductible for typhoon insurance is 2% of the total sum insured of the property. For residential owners, if the insurance is required by a lender, the required minimum deductible for a residential property is $2,500, Barcinas says.
Typhoon insurance rates are set based on the frequency and severity of storms in the area and the amount of claims made during those times.
“Prior to [Super Typhoon] Pongsona, it was a five-year history between the major storms, and that type of experience has a tendency of resulting in increased rates and increased deductibles just in order for these private insurance companies to continue to offer typhoon coverage,” Barcinas says.
Residents are not the only ones that stand to be adversely impacted financially by a typhoon or natural disaster. Insurance companies also take a hit and must ensure the rates are such that they can continue to offer the insurance.
“[…] Considering the significance of the losses that are left behind by these storms and the huge astronomical figures that these private insurance companies have to pay, the rates must be adequate to sustain these private insurance companies to continue to offer typhoon coverage to consumers,” Barcinas says.
Carriers looking to enter the Guam insurance market have to assess whether they would be able to survive the risk of operating in a natural disaster prone region.
“In order for an [insurance] carrier to come to Guam, they would have to recognize that Guam has exposure to typhoons, windstorms and earthquakes, and I think that weighs heavily on their minds […] as a potential for large losses would be there,” says Brent Butler, president of Guahån Insurance Services.
“For [Guahån Insurance Services carrier] Sompo Japan Nipponkoa Insurance Inc., we aren’t expecting major underwriting losses from the recent typhoon, but if we had experienced major losses and if the insurance industry in general had experienced losses — much like back in 2002 when Super Typhoon Pongsona hit — [insurance carriers] would be forced to pay out a lot of money in losses, and so that would affect the rates,” Butler says.
A natural catastrophe could have devastating consequences on the insurance industry, especially for companies that do not have a strong financial standing and the ability to pay out claims.
“When we talk about personal lines of insurance, the risk is spread out. We have so many drivers and so many homes, so not everyone is impacted by one single event. But when you have an earthquake or when you have a typhoon, the large property risks — like the hotels, the commercial buildings, the malls — all at once all of them could be affected, and the insurance company could be forced to pay out a large amount in losses,” Butler says.
On the bright side, Guam is a veteran of many typhoons, and government agencies have put into place fail-safes to guard against possibly devastating events.
“Typhoons used to be a major risk,” Waki says. “But now most homes are made of concrete and have metal typhoon shutters.” Building codes now require structures to withstand winds of up to 150 miles per hour. As long as the buildings follow the code, which is required by loan institutions, “They are not exposed to substantial damage,” Waki says.
Commercial buildings, on the other hand, still pose some risk. Some aesthetically constructed buildings that have glass panels, for example, are difficult to protect in a typhoon or other natural catastrophe, Waki says.
Coverage for commercial buildings depends on the type of building. Hotels and smaller buildings are built to the building code to withstand winds. However, warehouses and similar pre-fabricated structures are more at risk because if one side gets damaged, the rest of the warehouse is likely to collapse or become damaged. These types of buildings require a higher insurance rate.
A majority of Nanbo Insurance Underwriters’ typhoon insurance policies are purchased by commercial clients, Waki says. He says not many people will typically purchase typhoon insurance for their vehicles once the car loan is paid off.
However, for the most part, because companies and the homeowners are linked with a loaning institution, there is a substantial amount of coverage.
As of June 5, Guahån Insurance Services received 15 counts of claims from Typhoon Dolphin. The insurer’s homeowner claim loss reserve is set at $30,700, while commercial property claim loss reserve is set at $1,150. The claims were most likely not detrimental to the company’s underwriting results, Butler says.
“A lot of companies have been getting higher deductible options, but now maybe that they’re finding out that their actual losses are less than the deductible amount, maybe it’s time for them to review their polices to make sure the deductible is somewhat reasonable,” says Yuka Oguma, assistant general manager of Guahån Insurance Services.