The hidden reason for lack of insurance payments after Hurricane María
By Miguel Díaz-Román
Center for Investigative Journalism
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 and the New Progressive Party, 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.
After Hurricane María struck, insurers did not respond with claims payments as expected to the point that, a year after the event, the government of Puerto Rico sued 14 insurers for their sluggishness in paying claims or for the lack of payment to thousands of citizens and public and private sector entities.
Insurance Commissioner Javier Rivera-Ríos admitted to the CPI that some insurers had not contracted enough reinsurance for the risks that they had underwritten, which caused the unprecedented situation that some companies lacked funds to pay their insured.
“The models [to estimate the catastrophic exposure] that the insurers were using were not adequate; and those that were quite conservative — each insurer has the discretion to use the model that is favorable to them — because it could have been that the estimates of catastrophic risk were not enough. That did not happen to everyone, but the things we have seen with the reinsurers, they definitely did not have enough. That’s what happened,” Rivera-Ríos said.
The insurers included Triple S Propiedad, Real Legacy and QBE Seguros, which together received injections of $584 million through “special transactions” or injections from their parent corporations because they did not buy enough reinsurance.
The Insurance Commissioner’s Office intervened with Real Legacy and, after an attempt at rehabilitation, sold its assets to Universal Insurance. The Insurance Commissioner’s Office imposed restrictions on Integrand Assurance due to the lack of funds to pay claims and buying reinsurance far below the insured risk.
According to the Insurance Commissioner’s Office, as of November 2018, insurers had received 253,299 claims for more than $5.4 billion. After nearly 18 months after the hurricane, at the beginning of this year there were still about 11,000 unpaid claims. The non-payment has occurred despite the fact that the Insurance Code provides that insurers are obligated to pay within 90 days.
One of these unpaid claims corresponds to Loida Vendrell-Rodríguez, a physical therapist at the Pavía Hospital in Santurce. Vendrell-Rodríguez’s apartment, located at the Atrium Park Condominium in Guaynabo, was affected by Hurricane María. The damages amount to $7,000 and she was forced to take out loan to repair her home, which she hopes to cover with the payment for her claim. The condominium’s insurer is QBE Seguros.
“The $3.5 million claim has not been paid to the condominium yet and I don’t know what will happen. It will be two years soon and I still haven’t received my payment,” said Vendrell-Rodríguez.
Jaileen Rosado, whose apartment in the Torres del Parque condominium in Bayamón suffered structural damage, is experiencing a similar situation, as the Owners Board and insurer Mapfre have not reached an agreement on the amount to be paid.
“The walls where the air conditioners in my apartment are have huge cracks and I don’t know how these damages will be resolved,” said Rosado, who works at a furniture store in Río Piedras.
Reinsurance market, ‘impossible to avoid
’The Catastrophic Reserve was the brainchild of the late former Insurance Commissioner, Juan García, who established it after the approval of Law 73 in 1994, which turned it into Chapter 25 of the Insurance Code.
Since its inception, the proposal recognized that it was impossible to completely avoid dependence on reinsurance, pointing out that reducing that dependence could avoid premium increases after a catastrophic event. It also indicated that the fund created by law aspired for “insurers to have the financial capacity to offer the greatest protection to those insured exposed to said risks.”
Former Commissioner García established that insurers should contribute 10% of the premiums written in catastrophic insurance to the reserve. The Charter Regulations were to be renewed annually. This was the case from 1994 to 2000, when García left the Insurance Commissioner’s post at the end of former Governor Pedro Rosselló’s administration. During Governor Sila Calderón’s new administration, Fermín Contreras was appointed to the post, and he renewed the 10% rate between 2001 and 2003, when he resigned from the position.
But on Dec. 29, 2003, the then Deputy Insurance Commissioner, Dorelisse Juarbe, reduced the rate to 1%
In an interview with the CPI, Contreras said he had nothing to do with the decision to reduce insurer contributions to the reserve from 10% to 1%. “Effective Dec. 5, 2003, I stopped signing documents in that office because my resignation was effective at the end of the year. I had nothing to do with that decision,” said Contreras.
He assured that he favored the Catastrophic Reserve, which is why during the three years he held the post of Insurance Commissioner he renewed the 10% rate and was in favor of maintaining it as it was conceived in 1994.
“Because it is a useful mechanism to benefit the consumer.” Contreras also endorsed that the insurers make an adequate contribution to the reserve, although he said the payment should consider insurance market conditions to avoid affecting the economic viability of the companies.
“You have to do a thoughtful analysis of the underwriting, of the insured risk and how all this affects the insurers’ overage. It’s a complex issue,” he said.
Contreras warned that the serious default situation in which many insurers have incurred could be avoided if there is a solid Catastrophic Reserve.
“A robust reserve would have allowed the companies to be in a better position to pay the claims and it would have avoided what happened: that they have not yet paid thousands of claims,” he said.
Juarbe, who was appointed to the position of Insurance Commissioner by Calderón and then by Governor Aníbal Acevedo-Vilá, refused to answer the CPI’s questions alleging she had no time and that she did not have documents related to the Catastrophic Reserve at hand.
The amendments to the law that were passed during the so-called shared government under the Acevedo Vilá administration from 2005 to 2009, were included in House Bill 2106. The measure did not come from the executive branch, but was an initiative of then NPP Representative Antonio Silva, then chairman of the Finance Commission.
Measures tailored to insurance industry
At the Capitol, Silva sponsored numerous bills of interest to the insurance industry. In the Senate, the measure was evaluated by the Legal and Financial Affairs Commission, which was chaired by former Senator Jorge De Castro-Font, who accepted bribes from the Puerto Rico Association of Insurance Companies (ACODESE, for how it is known in Spanish) in exchange for the approval of several measures, according to the corruption-related legal proceedings that the former Senator faced in court, crimes for which he served time in prison.
The bribes were paid by Betsy Barbosa, former executive director of ACODESE, according to reports in court. Barbosa was the only person to testify in the public hearings for Bill 2106 to amend the Catastrophic Reserve, according to the bill’s transcript sheet provided by the Capitol’s Legislative Services Office.
The document shows that Silva presented the bill in October 2005, and in September 2006 the legislator presented a substitute bill with several modifications. The measure was approved in the House and Senate without amendments and without a technical study that the Office of the Insurance Commissioner had to draft to identify how the new proposed cap would affect consumers and the impact that the changes would have caused to the Catastrophic Reserve.
In an interview with the CPI, Silva said in spite of having presented Bill 2106 and the substitute, he does not remember the reasons that gave way to the profound amendments the measure proposed to the Catastrophic Reserve.
“What I remember about this is that it benefited consumers and helped insurance companies to continue ensuring and, since almost 100% [of insurers’ risks] were covered by reinsurance, I did not see anything wrong. But if there is something after María … then I urge the Insurance Commissioner and ACODESE to make some kind of approach to the Legislature to reverse it. Never, never, never, in all the bills I drafted, did I foresee [negatively] affecting the Puerto Rican consumer,” said Silva.
The former lawmaker’s arguments coincide with the proposals that Barbosa made on behalf of ACODESE, in which she described the goal of reducing reliance on reinsurance as “unrealistic;” She supported the insurers using reinsurance to cover their catastrophic risks and supported imposing a cap on the Reserve.
In her testimony, Barbosa recommended amendments to the way in which payments to the Reserve were recorded in the insurers’ annual statements, in order to boost the surplus and the capacity to sell insurance. This, because the Insurance Code provides that the accumulated overage amount multiplied by three will be the total of insurance premiums that an insurer can sell in the market.
Although the ex-legislator could not say whether he exclusively came up with the measure, or if other people approached him to present the amendments, he left open the possibility that the measure originated in Acevedo-Vilá´s desk because, as he said, on occasions, the ex-governor would ask him to present certain bills under his name to avoid the obstacles that arose in the House and the Senate, which were dominated by the New Progressive Party majority.
“I wanted to help Puerto Rico,” said the former lawmaker.
The CPI questioned Acevedo-Vilá in writing whether it was true that Silva presented measures at his request to avoid the rejection of the NPP majority, and his assistant, Juanita Colombani, said in writing that: “Neither the legislative advisor nor the ex-governor have any specific recollection that it happened and both agree that they would remember something like this.”
Silva also ruled out that Bill 2106 was an initiative of the insurance industry.
“If it underwent amendments, the industry did not file them. If it were an industry bill as such, it would not have received so many amendments. At the end of the road, if the governor signed it, the Insurance Commissioner had to say yes, because otherwise they would have vetoed it,” the former legislator said.
However, some of the amendments that the measure suffered are suggested in the ACODESE testimony that Barbosa read before the Finance Committee chaired by Silva, the CPI found.
The bill became Law 227 after Acevedo-Vilá signed it in October 2006. The former governor signed it without the benefit of a technical evaluation from the Insurance Commissioner’s Office and without the observations of a memorandum of law that expanded on the convenience of signing or rejecting the measure, as is often the case with bills coming from First Executive’s office prepared by the legislative legal counsel’s office at La Fortaleza.
Acevedo-Vilá was not available for interview nor did he respond to several questions that the CPI sent him.
More questions than answers
He was asked if Bill 2016 was part of his political platform and what led him to convert the measure into law. Another question was whether he received a detailed report of the reasons for limiting the Reserve and how the benefits of the insured could be guaranteed in the event of a catastrophic event without a Reserve as originally established.
He was also asked if he knew the consequences of the approval of Bill 2106 and why he signed a bill that was approved without analysis in the Legislature and for which the Insurance Commissioner’s Office did not attend public hearings.
In written statements, the former governor’s assistant, Colombani, said “Law 227 of 2006 did not originate with an administration bill, but was authored by NPP majority Rep. Antonio Silva. The only memory that former governor Acevedo-Vilá has about this measure is that it did not generate controversy or opposition. We checked the legislative record and it was approved 41-4 in the House and unanimously in the Senate (27-0.)
“Because of your questions and given the CPI’s interest in this issue, we tried, for more than a week, to rebuild the period with the then-Insurance Commissioner, Dorelisse Juarbe, but she has not been available, although she was informed of the specific matter of the consultation.”
Law 227 established a limit to the amount of money that the Reserve could accumulate and exempted insurers from their contribution after reaching the limit. The cap was defined as 8% of the so-called “probable maximum loss,” which is an economic estimate of the losses that an insurer would face after a catastrophic event taking into account all the catastrophic risks insured.
With these changes the amount accumulated in the Reserve, which includes the contributions of the 20 insurers that offer catastrophic insurance in Puerto Rico, reached $299 million in 2017. Fourteen years ago, in 2003, when the insurers’ payment to the Reserve was reduced, the fund was of $311.3 million.
Meanwhile, Law 227 of 2006 guaranteed that insurers would sign up for reinsurance for 98% of their probable maximum loss. The remaining 2% of that loss would be covered by the Reserve in the event of a catastrophic event. Through its regulation, insurers were allowed to buy reinsurance for 100% of their catastrophic risk.
Chapter 25 established that the Catastrophic Reserve would be deposited in a trust and that its funds would increase until it reached “at least four times the annual average of the direct net premiums of the insurer for the three preceding calendar years.”
Using this formula and the figures of the island’s insurers on premiums subscribed for catastrophic insurance from 2012, the CPI estimated that for 2017 the Reserve should have accumulated $2.35 billion.
Consultant and specialist on insurance accounting, Del Valle, supported the estimate and added that “if the trust had achieved an annual return of 6%, the Reserve would have reached the approximate limit of $2.37 billion.”
According to Barbosa’s statements in Court, in September 2006, while Bill 2106 cleared its final stage in the Legislature before becoming law, De Castro-Font requested a payment of $10,000 (from Barbosa.)
By then, the former legislator had already received $30,000 through false invoices that ACODESE paid to advertising agency Sajo, García & Partners. In response to questions from the CPI, De Castro-Font denied repeatedly that he had requested money in exchange for approving this legislation and said, “if the measure did not work, then they should repeal it.”
The current executive director of ACODESE, Iraelia Pernas, declined to comment on the actions described by Barbosa in the courts and on whether the association paid a bribe to approve the measure that amended the Catastrophic Reserve.
“I don’t know if it was paid or not, I was not there. Ask Betsy Barbosa,” Pernas said. The executive also refused to comment on the amendments to the Reserve. “I didn’t participate in that analysis and I prefer not to comment on that,” she said.
ACODESE plans to modify Law 73
Pernas revealed that ACODESE is preparing a bill to modify the accounting treatment that Law 73 contemplates for the Catastrophic Reserve and that, in summary, allows the insurers’ financial books to register 2% of the Reserve as a liability or money that will be used to pay commitments, while the remaining funds are considered excess or surplus.
The latter responds to the fact that since the Catastrophic Reserve was established, part of the accumulated amount was added as part of the overage, which favors the accreditation of insurers.
Pernas acknowledged that the 2% increase in the surplus will favor the accreditation of insurers and will place these companies in a more competitive position in relation to U.S. insurers operating in the local market.
She added that good accreditation is necessary so banking institutions allow insurers to sell their insurance products to complement mortgage financing, car loans and financing for construction projects.
Jaime González, president of Antilles Insurance Company, one of the main insurers on the island, believes that the Catastrophic Reserve “does not work.” “It’s useless. They should eliminate it. Puerto Rico is the only jurisdiction in the United States that has that reserve. I consider it as part of my capital and of my family’s.”
“I don’t use it [the Catastrophic Reserve] for anything. I [Antilles Insurance] retain between $4 million and $5 million [the value of the assured catastrophic risk for which Antilles should respond,] and the rest I reinsure,” González explained.
The executive insisted that “nobody [no insurer in Puerto Rico] used the Catastrophic Reserve to buy less reinsurance. For more than 20 years I have been withholding the same amount [between $4 million and $5 million,] and the rest I reinsure,” admitting that insurers have not used the Reserve for what it was designed.
Asked about whether the use of the Reserve could reduce the surplus and, as a result, put accreditation at risk, González said: “If you use the Reserve, there is no doubt that the surplus is affected.”
Meanwhile, Insurance Commissioner Rivera-Ríos was cautious about the alleged effect that the Reserve could have on the finances of local insurers.
“In addition to the traditional reserves that are requested from the insurer, there is also the Catastrophic Reserve and you have to be very careful with that because you have to have a balance and see that the insurer in the market is solvent and acceptable, and how much you can ask of them … it’s a progressive balance,” Rivera-Ríos said.
However, the Commissioner warned that “at this time, we’re not contemplating increasing the Reserve.”
According to sources close to the Catastrophic Reserve’s approval process, its strategic justification was based on the fact that Puerto Rico is located in an area prone to natural disasters such as earthquakes, due to the numerous geological faults that cross the island and also, given its location in the Caribbean, it’s in the path of hurricanes that originate off the coast of Africa.
According to the National Association of Insurance Commissioners (NAIC,) one of the main reasons why the Catastrophic Reserve resource has not been used in the United States is due to the federal government’s reluctance to grant tax exemption to the funds deposited in that type of reserve.
In Puerto Rico, the Reserve is tax-exempt as long as its funds are used to pay claims for catastrophes or remain deposited in the trust established by Law 73.
In a document prepared after Hurricane Katrina, the NAIC supports the establishment of these types of reserves and points out that numerous countries in Europe and the Caribbean have established them to deal with the losses caused by natural disasters. Recently, the government of the Dominican Republic took out a $300 million loan to establish its catastrophic reserve.