In addition to vowing to find methods to encourage household and commercial sector self reliance in the face of risks associated with climate change, The Central Bank of The Bahamas (CBOB) stated it intends to work more with the banking and insurance industries on more robust links between borrowing and insurance.
Pointing to insurance outcomes in the aftermath of Hurricane Dorian, the Central Bank said its impression following an industry-wide survey found that overall the banking industry expends considerable effort and expense to monitor borrower compliance with insurance coverage requirements, but a collective approach from the banking and insurance industries would likely reduce costs and increase compliance.
“There is mixed practice in the industry on requiring borrowers to pay their insurance premiums monthly, often in an escrow arrangement tied to the monthly home loan payment, or to allow borrowers to separately arrange insurance, with an annual premium,” the bank noted in its paper on the financial stability lessons learned post-Hurricane Dorian.
“All banks monitor the ongoing insurance coverage of their secured loans, but some banks discovered that their monitoring was imperfect, in that lapsed insurance coverage was discovered and generated a response from the bank, but this response might take a few months to reinstate insurance.”
The CBOB also highlighted the practice by some banks of not monitoring insurance coverage on low value loans, because of high operational costs to do so.
“Policies on purchasing insurance coverage at the portfolio level to cover lapsed or defaulted policies are inconsistent. In a few instances, local managers allowed borrowers to insure for the loan amount, rather than the full value of the insured building. Such an approach does not work, as insurance companies will pay only a proportion of the losses in such cases,” the bank stated.
“Even if this proportion covers a residual loan amount, it leaves the borrower unable to rebuild and thus in a more general disaster weakens the entire community’s economic recovery capacity.”
The CBOB also pointed to current lending policies which do not require commercial borrowers to purchase business interruption insurance, or require personal borrowers to purchase income interruption insurance.
“The former is often unavailable or cripplingly expensive; the latter does not to our knowledge exist in any reasonable form. It would be fair to assert that Bahamian lending practice on insuring buildings is sound, but practices on insuring business or personal cash flows are rudimentary,” the paper notes.
“The industry does practice a form of macro self-insurance on cash flows, in that bankers in communities affected by a disaster more or less automatically grant several months of repayment forbearance to borrowers. This approach has also been applied at a national level during the COVID-19 lockdown.
“By granting broad forbearance, over the medium term the industry protects its collateral values and maximizes eventual loan collections. This approach also allows time for insured borrowers to collect on their insurance, rebuild or repair their properties and resume business and salary cash generation.”
Not all was grim, however, as CBOB noted overall encouraging results from a survey.
“With minor variations, all banks require borrowers pledging a building as collateral to purchase all-risks insurance on that building, including hurricane-relevant risks; and require that the insurance names the lending bank as a beneficiary. Banks monitor not only initial uptake of insurance, but ongoing renewal of insurance,” the paper states.
“The industry’s unexpected loss experience due to effective insurance not being in place or able to meet claims was minimal. There were no such losses in the commercial loan portfolio. There were a minor number of partial losses associated with a few instances of poor procedures in the residential loan portfolio.”
As a result of these findings, the banking industry has indicated its intention to tighten up its required insurance policies in a few areas, although it holds the general stance that the current arrangements are adequate.