The hidden reason for the sticker shock in your post-María insurance premiums

The ongoing nightmare of thousands of policyholders whose claims after Hurricane María have not been paid, or whose payment was not enough to cover the losses, could have been avoided if the island's Catastrophic Reserve had not been reduced by amendments promoted by insurance companies with the consent of the Insurance Commissioner's Office, an investigation by the Center for Investigative Journalism (CPI, for its initials in Spanish) concluded.

The Catastrophic Reserve is a fund created by law in 1994 to reduce dependence by insurers on the international reinsurance market and to avoid increases in premiums after a catastrophic event.

But as the Reserve's objectives were voided with amendments to the law approved in the past decade, and insurers depended more on reinsurance, the clients of these companies have faced significant increases in the amount of the premium every time a catastrophic event occurs, according to the research findings. After Hurricane María, that increase ranges between 300% and 400%.

When the Reserve was created 24 years ago, the administrative measure forced insurers to contribute 10% of the total premiums underwritten for catastrophic insurance to the fund. But, in 2003, when the Reserve had accumulated $311.1 million, that contribution was reduced to 1%. In 2006, during the so called joint government of the Popular Democratic Party (PDP) and the New Progressive Party (NPP), it was given a death blow by establishing a legal limit to the amount of money that the Reserve could accumulate and exempting insurers from continuing to make their contribution after the limit was reached.

The new law also guaranteed that insurers would seek reinsurance to protect 98% of their catastrophic risk. The remaining 2% would be protected with the amount accumulated in the Reserve, if a catastrophic event occurred.

Jointly, the amendments and modifications represented the defeat of the Catastrophic Reserve's goals. In 2017, when the island suffered the destruction caused by Hurricane María, the biggest catastrophe in its recent history, the Reserve only had in $299 million of the $2.3 billion it should have had by then if the said amendments had not been approved, according to an analysis by the CPI, confirmed with consultant and specialist in insurance accounting, Gregorio Del Valle.

For the rest of the story, click here to go to the Center for Investigative Journalism's website.