There is a crisis with windstorm insurance in the Virgin Islands. There simply is not enough capacity available from the worldwide insurance markets to provide coverage for all Virgin Islands property owners. The reasons for this are varied and complex. The most obvious is the greater frequency and severity of hurricanes over the last 12 years and the damages they have inflicted on the Virgin Islands, particularly Hugo in 1989 and Marilyn in 1995.
Second, rates for reinsurance — insurance purchased by insurers — are significantly higher than last year. Indeed, several of the world's primary reinsurers have increased their rates anywhere from 30 percent to 100 percent over last year's rates.
A third factor is the end in the United States of the "soft market," reversing the insurance premium rate decreases that occurred in the late 1990s. The result is that insurance companies are electing to reduce their risk exposure in the Caribbean and, instead, are insuring in parts of the world where the risk of catastrophic losses is far less.
Here in the Virgin Islands, several major homeowner's insurers have reduced the amount of coverage they previously provided, some by as much as 50 percent. Commercial property insurance rates have risen dramatically. Driven by increased reinsurance costs, insurers also are being forced to increase deductibles and reduce discounts. Unfortunately, it appears that many Virgin Islands homeowners will be unable to renew their current insurance policies, and new policies may not be available — or will be available only at a higher price or different terms. This is a frightening prospect as we enter the 2001 hurricane season.
As an alternative to obtaining their own insurance, ever since Hurricane Hugo, a significant number of Virgin Islanders have relied on their banks to cover their properties. In fact, it is estimated that approximately 40 percent of all homes in the territory are covered by "force-placed policies," policies that banks acquire at the homeowner's expense when the homeowner does not obtain his or her own coverage.
While bank customers have found these policies less expensive than obtaining their own homeowner's policy, these policies cover only the bank's mortgage on the property. They provide no coverage for the homeowner's equity or contents. Significantly, rates for these policies also are rising dramatically. Many of the force-placed policies of major banks in the Virgin Islands are due for renewal in the next month or two — right before the heart of the hurricane season — and rate increases of 30 percent to 65 percent are being required by their insurers.
Although we all wish to keep insurance rates as low as possible, the reality is that because we live in the "hurricane belt" and because of the high cost of reinsurance, insurance costs in the Caribbean are going to rise and be very expensive for the foreseeable future. We are dangerously close to that point where coverage for windstorms becomes so expensive that it is unaffordable, making many properties uninsurable by presently available traditional insurance.
One viable long-term solution is the creation of a federal windstorm insurance program similar to the current federal Flood Insurance Program. The V.I. Insurance Association urges everyone to write to our congressional delegate and other public officials to re-activate support for HR-21, a bill that was before the last session of Congress to create a federal insurance program that would provide windstorm protection to residents of states and territories.
Our job as agents and brokers is to find the best possible coverage at the best possible price for our clients. This is how we create a competitive marketplace and strive to keep the cost of insurance down for our customers. Unfortunately, in our worldwide search for insurers, we are finding fewer and fewer that are willing to insure property in the Virgin Islands. As a result, we in the local insurance industry are as frustrated as the public. We are in the business of selling insurance, and when we have no insurance to sell, we are out of business.
This crisis poses a very difficult situation for our lieutenant governor, who is the commissioner of Insurance. He must attempt to strike a balance between trying to keep insurance premiums at an affordable level and at the same time making the Virgin Islands an attractive place for insurance companies to provide insurance. The problem is only aggravated when the demands for windstorm insurance exceed supply, as is the case today in the Virgin Islands. As insurance agents and local business owners, we believe allowing free-market forces to operate will result in more comprehensive and competitively priced insurance.
We recognize the regulatory responsibilities of the Division of Banking and Insurance and are not suggesting that the division lower its standards as to the quality of insurers it licenses to do business here. Rather, we continue to urge the division to nurture and encourage those insurers who are doing business here to make more capacity available. By working cooperatively with insurers to develop modifications to their rating structures, the division can create and maintain a viable, healthy and competitive market.
We are looking for solutions. We are hopeful that, by working together, the insurance industry and the commissioner of Insurance and the Division of Banking and Insurance can find an acceptable way through this crisis.
Editor's note: David C. Ridgway is president of the Virgin Islands Insurance Association and writes in that capacity.