There are several bits of good news and some bad news when it comes to hurricanes and home insurance in the Cayman Islands.
The good news is that Cayman has been spared significant impacts from hurricanes for years now and as a result, home and contents insurance rates have now dropped to pre-Hurricane Ivan levels.
The bad news is that the 2017 Atlantic Basin hurricane season starts on 1 June and the Cayman Islands remains vulnerable to the impacts of storms, which experts predict may become stronger in an era of rising global temperatures.
“We say everybody has to be prepared every single year,” says Nigel Twohey, Deputy Managing Director of Aon Risk Solutions in Camana Bay.
“There are hurricanes every year and certainly the long-term projections are – whether you believe in climate change or not – that it’s going to get hotter. and as it gets hotter we may have fewer hurricanes, but they’re going to be fiercer.” Stronger storms are the real danger, Twohey says, adding that any major hurricane of Category 3 or above is serious.
Almost everybody is underinsured for their contents and it’s a big issueNigel Twohey
“That’s when they really hurt,” he says. “Category 1s and 2s are annoying; Category 3s, 4s and 5s are dangerous.” Rates Cayman dodged potential disaster last October when Hurricane Matthew, on a track toward the western Caribbean, turned north and crossed Haiti instead. “The meteorologists kept saying, ‘it’s going to turn right, it’s going to turn,’ and it actually did,” says Twohey. “But if it hadn’t, we would have had an effect from it, … and Matthew was a biggie.”
Although Hurricane Matthew was devastating to Haiti and its people, it didn’t have much effect on Caribbean insurance rates because so little property is insured there. It did cause insured damage in the Bahamas, but largely spared Nassau, keeping the total of insurance claims lower.
Because of the time elapsed since a hurricane caused much damage in the Cayman Islands and the fact that the Caribbean in general has avoided significant insured damage in recent years, rates are now the lowest they’ve been in more than a decade.
“After Ivan, insurance rates doubled and tripled, so you were looking at premiums somewhere between 1.5 percent and 2 percent [of insured value] on your house, whereas before Ivan we were around the 75 cents mark,” says Twohey. “So we’re back in that area now.”
The Cayman Islands learned many lessons from Hurricane Ivan, which impacted Grand Cayman in September 2004, and Hurricane Paloma, which impacted Cayman Brac and Little Cayman in November 2008.
From a construction standpoint, almost all new structures since Hurricane Ivan are built with raised foundations to mitigate against storm surge flooding. They are also built to higher standards in their ability to withstand wind damage.
“That helps the insurance industry because if we have an Ivan exactly the same again, we’d expect those buildings to do a much better job and be above the water,” Twohey says. “We always say that if Ivan hit again, it wouldn’t cause nearly the same level of damage.”
Even so, insurance companies are in a better position to withstand major claims arising from a significant impact from a hurricane in the Cayman Islands.
“The local companies are all very strong these days,” says Twohey. “They haven’t paid out too many claims, so a lot of them have accumulated capital. The rates are going down, but generally speaking, the local companies are much fatter, their reinsurers are fatter and they’ve spread their risk.” At the time of Hurricane Ivan, some of Cayman’s insurers did business only in the Cayman Islands, resulting in claims on a very large percentage of their policies. It’s different now, with all companies having a presence in multiple jurisdictions.
“A lot of Caribbean companies have been advised by their reinsurers to spread your own risk, which we’ve seen happening,” says Twohey. “The local market is very strong. Some people will still express their doubts about the local companies … but they learned their lessons of how to structure their reinsurance and their balance sheets. If we had Ivan again, the loss would be smaller, but in addition, the local companies are very strong.”
As the devastating impacts of Hurricanes Ivan and Paloma fade deeper into the memories of Cayman Islands residents, it’s easy for people to get complacent, particularly when it comes to insurance.
“Most people still have the memory of the hurricanes, but the problem is that each year that passes we forget and there are people here now who weren’t here then,” says Twohey. From an insurance standpoint, one of the key messages that homeowners should remember is to avoid being underinsured because the percentage of a paid insurance claim will equal only the percentage of the value of a home insured, less any deductible. For example, if a home is valued at $200,000, but is only insured for $150,000 – or 75 percent of the value – and it sustains $100,000 of damage in a hurricane, then insurers will only pay $75,000 on the claim, less the applicable deductible.
Many homeowners learned hard lessons about being underinsured when making claims after Hurricane Ivan. As a result, insurers make it a point to educate customers on the issue.
“Not everyone will pay attention, but a lot of people do because they realise they have to protect their houses correctly,” says Twohey. “The banks have a positive influence on that to make sure that their interests are covered.”
The key things homeowners should do to avoid being underinsured are to have their properties appraised every three years and adjust the insured value of their homes accordingly. In the years between appraisals, it is recommended that the insured value be adjusted by the rate of inflation.
“Cayman’s inflation rate is actually quite low at the moment, but anywhere from 3 percent to 5 percent is smart,” says Twohey, adding that the main thing is to get regular property
valuations. “Make sure you have an up-to-date, recent valuation.”
The other major thing to consider is contents insurance. Contents aren’t typically covered in the regular homeowners’ insurance.
“Almost everybody is underinsured for their contents and it’s a big issue,” Twohey says. “People don’t realise that after Ivan, the thing that came out very strongly was how many very expensive kitchens there are in the Cayman Islands. People forgot just how much some of those fixtures and fittings can actually cost.” Twohey says that in the UK, the rule of thumb is that household contents are generally worth about a third of the value of the home.
“That’s the guideline, but in England people tend to have more stuff,” he says. “We live a little lighter in the Caribbean, so I’m not saying people should really do that here.”
Still, Cayman consumers need to understand how much they could potentially lose if a hurricane were to destroy all the contents of their home and they weren’t covered adequately. Twohey acknowledges that it’s hard to get the value of contents exactly right, but insurance companies offer forms that allow customers to list their home contents from room to room.
“Some people take photographs, some do videos even, but it’s a tough one,” he says.