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Undercurrents: Cash Flow Woes Make for Risky Business

A regular Source column, Undercurrents explores issues, ideas and events developing beneath the surface in the Virgin Islands community.

“The insolvency of the Dome Insurance Company (hereinafter ‘Dome’) continues to leave a trail of hurt and heartbreak across the width and breadth of the Virgin Islands. The court is required to make a King Solomon-like decision as to who will share in the meager remaining resources of this defunct insurer. We decide the matter without confidence that the decision will measurably alleviate the economic injury suffered by so many Virgin Islanders from the Dome fiasco.”

The words are those of David V. O’Brien, the District Court judge who had to decide how to parcel out the pennies left after the company collapsed in 1984. 

The event shook the territory’s insurance industry, the government and a large swath of the V.I. population. According to news accounts from the time, more than 2,600 policy holders (and their families) had claims against Dome totaling more than $48 million. In the end, the vast majority were left with nothing but a sour taste in their mouths.

The Dome debacle was widely viewed as an internal failure, but it highlighted what could happen if one or more companies were crushed by an overwhelming natural disaster.

In response, the government created the Insurance Guaranty Fund.

This was a rainy day fund to protect against ruinous fallout should there ever be a similar collapse in the future.   It was a sort of insurance on insurance.  If for whatever reason a company was unable to cover all legitimate claims, the government could tap the IGF to compensate policyholders.

In the early 1980s, companies doing insurance business in the territory were paying a gross premiums tax of 2 percent. When the IGF was created, the first $1.5 million of those taxes was put into the fund; the rest flowed, as before, into the government’s General Fund.  The figures were obviously pitifully small compared to those involved in the Dome event, but it was a start.

The cap rose quickly to $2 million.  Then from 1985 to 1988, it went to $5 million, then $7 million, then $15 million.  Hurricane Hugo in 1989 was a nasty lesson illustrating how vulnerable the territory was to property losses in the tens of millions.  The next year, the mandatory minimum for the IGF was set at $50 million.  Meanwhile the tax gradually increased until it was 5 percent.

As the years rolled by and officials struggled to keep the government afloat, their eyes wandered often to the little pot of gold in the IGF fund.  It was tapped for relatively small sums to pay for such items as improvements in Fire Services and asbestos removal at the Legislature.  In 2007, the government used the fund to pay a portion of the infamous outstanding retroactive salary increases to government employees.   It left behind a $40 million letter of credit with the Insurance Guaranty Association (the companies who pay into the fund) as the beneficiary.

In 2012, the Legislature temporarily lowered the mandatory statutory balance in the IGF to $10 million, gambling that the money wouldn’t be needed for a few years.  The cap would stand at $10 million until Sept. 30, 2015, and the fund was anticipated to build back up after that, reaching $50 million by or before March 2019.   If there were a natural disaster that triggered an insolvency or two before that time, the Public Finance Authority was authorized to borrow an additional sum – up to $40 million – to provide some relief to stranded policy-holders. Former Gov. John deJongh Jr. signed that bill into law.

However, two months ago, just before the sunset provision was about to kick in, and at the urging of Gov. Kenneth Mapp’s current administration, the Legislature extended the deadlines.  So the mandatory minimum will remain $10 million until Sept. 30, 2017, and the fund should be replenished to $50 million by March 2021.

Both the original measure and the bill extending the sunset provisions were passed over the opposition of the local insurance industry, though it did manage to get amendments protecting insurance companies from being assessed for shortfalls while the mandatory minimum is low.

St. Thomas attorney Henry Feuerzeig, who represented the IG Association during legislative consideration of the extension, said, “Is the insurance industry happy with it? No!”

“As long as they’re no claims, it’s okay,” he said.

“After Hugo we had several insurers who went belly-up, and the same thing after (Hurricane) Marilyn,” he acknowledged.

Even the $50 million minimum – which was put in place 25 years ago – is “insufficient,” he said. In fact there was a move to increase the amount to $75 million, but that was set aside given the recent extension of the temporary $10 million minimum.

In Fiscal Year 2014, Feuerzeig said, collections for the fund were $16.1 million.  With the minimum set at $10 million, that means $6.1 million could be transferred to the General Fund.  Any earned interest also goes to the General Fund.

That’s money sorely needed in government coffers.  No doubt the move to keep the minimum at $10 million was seen as the lesser of evils by political leaders dealing with a financial crisis.

What it means for taxpayers is that for the next few years, the territory’s safety net for insurance claims rests with its ability to borrow millions of dollars in the face of economic disaster.

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