As both the hurricane and the government budget seasons approach, the Virgin Islands is once again faced with a choice: Set aside a little extra money in a special account for insurance, as mandated by law, or use the money for immediate expenses.
Unsurprisingly, the cash seems to be looking more and more tempting as the government slips further and further into debt. But officials in the insurance industry are warning that it would be dangerous to drain the fund.
At issue is the Insurance Guaranty Fund, a rainy-day account created about 30 years ago.
Money in the fund is used to compensate policy-holders when their property insurance carrier defaults and is unable to pay legitimate claims. The fund is fed by a portion of the 5 percent gross premium taxes that insurance companies pay to the V.I. government.
Half of those taxes, (up to $3 million) goes to the division of Banking and Insurance to cover administrative costs. The rest of the money is supposed to remain in the fund until it reaches a specified minimum balance. Anything above the minimum, plus any interest earned on the account, goes to the General Fund where it is available to pay general government expenses.
All 50 states, the District of Columbia, and Puerto Rico have similar funds to the Virgin Islands, according to the National Association of Insurance Commissioners. While they vary in amounts and administrative structures, all are designed to protect residents from catastrophic losses if one or more insurance companies licensed to do business in their jurisdiction becomes insolvent.
Over the past 10 days, the Source has made repeated requests for information about the fund from Lt. Gov. Osbert Potter, who serves as the commissioner of Banking and Insurance, and Gwendolyn Hall Brady, the director of the division. Brady referred the request to the Lieutenant Governor’s public relations officer who checked with Potter who referred the matter to Brady who then referred the reporter back to Potter. Calls made to the Office of Management and Budget and to the Finance Department were not returned.
As one industry representative put it, the issue is a “political hot potato.”
The only person talking on the record at this point is Henry Feuerzeig, the attorney for the Insurance Guaranty Association, the private sector entity that administers the fund, working closely with Banking and Insurance.
Feuerzeig said that as of Feb. 14, the Department of Finance General Ledger reflected a balance in the IG fund of $16,758,867.56. A notation next to the amount read “available for budget.”
“It can’t be available for budget as far as I’m concerned,” he said. Because the law requires the government to maintain the fund at a level higher than $16.7 million.
And that’s where it gets stickier. There may be dispute about exactly what that level is.
It was set at $50 million in 1990, the year after Hurricane Hugo showed just how large property claims could be. Payouts caused by insolvencies have not approached that level in ensuing years, but some warn that the Big One could still be coming. They point to the collapse of the Dome Insurance Company in 1984 – which was the impetus for establishing the fund in the first place – and the fact that thousands of residents were left holding the bag, collectively, for $48 million.
Over the years, the Legislature, on its own or at gubernatorial urging, has repeatedly reached into the fund to pay unrelated expenses, everything from asbestos removal to retroactive pay increases for government employees.
In 2012, after the HOVENSA oil refinery closed and threw the economy into a tailspin, the Legislature passed a bill to lower the cap from $50 million to $10 million, temporarily. The bill’s sunset clause was Sept. 30, 2015, meaning the cap would then return to $50 million. The idea was that it might take a couple of years for the fund to build back up to the $50 million level. But the economy got worse instead of better and in 2015, the Legislature extended the sunset clause to Sept. 30, 2017.
In July 2017 when Gov. Kenneth Mapp submitted his fiscal year 2018 budget, he also sent the Legislature a bill proposing to extend the lower, $10 million cap, for yet another two years.
But Hurricanes Irma and Maria struck in September 2017 and upended all the budget figures and made FY 2018 deliberations moot. By February, it was official: the government would finish out FY 2018 at FY 2017 levels, making adjustments where necessary.
The bill to extend the sunset clause was not passed.
So, the position of the Insurance Guaranty Association, Feuerzeig said, is that the $50 million cap is back in place and the fund should be allowed to grow to that level. All gross premium tax collections should flow into the fund until it does.
In recent years, six property insurance companies doing business in the V.I. have become insolvent, Feuerzeig said: Island National Insurance Company, Phoenix Fire and Marine, American Alliance Insurance Co., Reliance Insurance Co., Corporacion Insular Co., and American Property and Casualty Insurance Co. Most of the insolvencies were triggered by natural disasters.
From 1997 to the present, the only time frame for which he had figures, Feuerzeig said there have been 168 claims made against the Insurance Guaranty Fund. Of those, 117 have been paid, 45 were resolved without payment and six are pending. The fund paid out $1,401,240, obviously a fraction of the $10 million lowered ceiling.
And Feuerzeig is not suggesting that there will be a major insolvency in the near term. The primary carrier, Lloyds of London,(which Feuerzeig represents in the territory) took out an advertisement declaring its solvency and pledging its continued support of the Virgin Islands. As for others, Feuerzeig noted that when Brady and her team testified at the Legislature last month, they expressed confidence in all the territory’s property insurers.
“I hope and pray that the division is correct,” he said.
But the stakes are very high. As of Feb. 15, more than 16,000 hurricane-related claims had been made against carriers and about half of them had been resolved – that is, paid or denied.
Officials have predicted the losses will top the $1.5 billion figure for Hurricane Hugo.
And can all carriers withstand another onslaught of claims if the territory suffers another major hit in 2018? Or 2019?
Feuerzeig said there is another issue to consider in deciding how much should be in the Insurance Guaranty Fund – how much it can pay to policy-holders of insolvent companies.
Current law states that the most it can pay a single claimant is $50,000 minus $50, or $49,950, regardless of how great the person’s loss may actually be.
Feuerzeig said the association believes the ceiling on payments should be raised substantially, but he did not suggest a figure.
Members of the association met with administrative officials – including Potter and Brady – Feb. 27 to discuss the status of the fund and the association’s position that gross premium taxes should be forwarded to the fund until it reaches the $50 million level.
“They are well aware of these facts,” Feuerzeig said.
But the administration is also aware that the government is facing a $110 million deficit and there has been talk of furloughs and lay-offs.