“Insurance is one of our most mature industries,” says Sen. Michael San Nicolas. He chairs the legislative committee with oversight on insurance and banking through the Department of Revenue and Taxation. Eyeing the diversification of an economy driven by tourism revenues and federal and local government spending, the senator says nurturing the insurance market and helping it to grow would go a long way toward this end.
While tourist arrival numbers have shown resurgence in the visitor industry, which has many residents optimistic about Guam’s economic future, the collective mindset has been loath to take government of Guam and U.S. military spending for granted. And though initiatives to grow industries that would bolster the main economic drivers are nothing new, enterprising and energetic individuals have sprung up with vigor in the last three years alone, championing grassroots efforts to prioritize the development of a self-sustaining economy.
The most recent report submitted to the Guam Legislature in January by Banking and Insurance Commissioner Artemio B. Ilagan shows a $20 million increase in premiums in calendar year 2011. The 4.29% increase is made up of premiums generated by the 228 insurers admitted by Rev and Tax’s regulatory body.
It may be too early to tell whether Guam’s insurance industry is the sleeping giant San Nicolas envisions; however, its performance over the last year does indicate growth and also provides insight into the island’s evolving economy.
David E. Silva, general manager at AON Risk Solutions, reports rising demand in industry-specific insurance products, such as those covering environmental pollution and employment practices for construction companies.
“Many of the large contracts of late are design-build and/or in the Northern part of Guam over the aquifer and/or with large fuel tanks for generators and equipment,” Silva says. “Errors and omissions coverage is required of the designer, and pollution coverage is required in case tanks or equipment fail. Clients with large employee bases have also been keener to know about how employment practices liability coverage might protect them in the current economy.”
The increasing demand for these different and very specific types of coverage show positive and steady activity in the construction sector, despite the general public’s apprehension over the stalled military buildup. In fact, Silva is concerned about the shortage of bonding capacity on the island in the face of a recent upswing in military construction.
A bond is a third-party guarantee that the principal or contractor will perform the tasks specified in the bond. If the tasks are not performed, the surety or bonding company is obligated to pay the obligee (usually the owner of the project) the fixed amount listed in the bond. While individuals and groups inviting bids on projects may require bonds at their discretion, the federal government has required bonds on all of its funded contracts since 1894 and on all contracts exceeding $150,000 since 1935.
“Large contractors are passing bond requirements down the line so that smaller subcontractors are now having to show up with bonds and many are not able,” Silva says. “Choices in this area are limited.”
Joseph Barcinas, risk analysis manager at Takagi and Associates Inc., did note a recent increase in the company’s client demand for surety bonding, as well as broad, unique and increased liability coverage limits, builders’ risk and specialized coverage for alternative energy sources, underscoring the current trend observed by companies like AON and Takagi that provide property and casualty insurance.
Another trend gaining traction in the insurance industry is the bundling of policies, which, Barcinas says, benefits the customer with competitive premium rates, convenient payment options and assurances that specific insurance needs are met.
Benefits to the provider include retention of customers, retention of market share, reduced administrative expenses due to a lesser number of policies requiring processing and a continuous relationship with customers.
“When coverage is bundled, insurance companies often extend multiline or multiyear discounts. It allows an insurance company to stabilize costs by spreading the loss potential over different lines,” Silva says.
So how do competing insurance companies increase market share in such a small and isolated market with a mostly loyal customer base?
According to Barcinas, “An admitted carrier can decide to increase its market share through the introduction of new products with specific coverage enhancements, appropriate discount features and competitive rates.”
Silva also advised creating new demand in a market climate that is purely price-driven, as is the local insurance industry’s.
“In order to increase my share of the pie,” Silva says, “I must do what I can to grow the pie. If, by using resources available, we’re able to introduce the market to new ways of risk management, we offer something that wasn’t there yesterday. We create a new demand.”
Just as bundling insurance policies results in lower premiums and just as maximum participation in the new nationwide insurance plan would help to defray its inevitable costs, the costs of claims against existing policies affect premium rates across the board, however unrelated.
“Recent catastrophic events around the world — Japan’s quake and tsunami, floods in Thailand, fires in Australia, snow and tornadoes in the U.S. — all have a significant effect on the cost of reinsurance, an insurance company’s pricing,” Silva says. “And almost always it means an increase in rates. Even if Guam hasn’t had a storm hit in 12 years, an insurance company or their reinsurer may have had significant losses elsewhere that affects pricing for a Guam client. There isn’t much that can be done to mitigate this, and it is often very hard to explain to a client why their premiums went up whilst there have been no claims.”
Efforts by insurance companies nationwide to introduce products and services aimed at prevention mutually benefit customers and insurers at the same time. Insurers can afford to reward safe drivers with bonuses or discounted rates because they did not have to expend any of their reserves toward claims.
It seems the attitude toward initiating positive change rather than reacting to catastrophe has been gaining momentum in the last few years. As Barcinas says, “Insurance agencies representing various admitted carriers can take a proactive role in working with risk managers who represent large prime contractors to determine meaningful coverage that is mutually rewarding and beneficial to project owners and all parties involved.”
Silva says he tries to do a better job of explaining to his clients the value of the insurance policy they are buying. “It’s not just a stack of papers,” he says. “It’s a promise to protect them when the worst possible happens; when customers do not appreciate the value of insurance, coverage finds its way to the top of the list of things to cut — a dangerous proposition.”