The Virgin Islands lies in a hurricane zone, and hurricanes pose a serious risk to VI residents’ economic and financial security, as well as their personal well-being. Prior to being slammed by hurricanes Irma and Maria — two historic and catastrophic Category 5 storms — within two weeks in September 2017, the VI luckily escaped being directly hit by a major hurricane for several decades.
Thus, before Irma and Maria, the last major storm with the eye passing directly over the territory was probably the 1924 Gale (in September 1989, the Category 4 Hurricane Hugo was the first storm to hit Tortola in 50 years, according to Wikipedia). During the 1924-2017 interval, the VI was only brushed by storms of Category 3 and above. And generations of Virgin Islanders may not have experienced the impact of the territory being hit directly by a major hurricane.
This situation may have created a sense of complacency, resulting in many residents letting down their guards. Nevertheless, hurricanes Irma and Maria devastated the VI, causing approximately $3.6 billion in facility damages; damaging about 70 percent of homes; disrupting the gross domestic product and economy (especially tourism); impacting employment; and changing many lives and circumstances. Moreover, the monster storms exposed and highlighted some property insurance issues, revealing that some property owners’ property may have been either uninsured or underinsured.
Property insurance is a tool that is commonly employed to mitigate damages resulting from perils such as wind, tornados, earthquakes, fire, smoke and so on. It is the transferring of risk from insured to insurer — the pooling of resources by the insured to spread loss among all policyholders and substituting average loss for actual loss.
Generally, there are three types of property insurance: replacement cost, actual cost and extended replacement cost. Unlike automobile insurance, which is mandatory, property insurance is optional if it is not required by banks, other lenders and so on. Nonetheless, it is a vital investment to protect property, including homes, one of the largest assets owned by many residents.
The replacement cost
Replacement cost pays the cost to repair or replace damaged property with material of like kind and quality at current prices. For example, if the replacement cost of a property is $500,000, any loss up to this amount would be reimbursed to restore the property to its condition before the damaging event. Actual cash value is replacement cost minus depreciation. And extended replacement cost pays for loss over the coverage limit, if cost increases.
Generally, there is a moderate to low probability of an insured suffering a total property loss. Most losses are partial. As such, some insured owners may buy property insurance below the replacement cost. Typically, if an insured buys insurance for at least 80 percent of replacement cost, a partial loss is reimbursed at 100 percent up to the limit of the policy. For example, if the replacement cost of a building is $500,000 and the property owner insures it for $400,000 (80 percent of replacement cost), the insured would be reimbursed 100 percent for any partial loss up to $400,000. On the other hand, if the insured insures the same property for $250,000 (50 percent of replacement cost) and suffers a $100,000 loss, the insured will not be reimbursed 100 percent for the partial loss. Instead, the insured will only be reimbursed $62,500 of the $100,000 loss (250,000/(0.80×500,000)x100,000). Nonetheless, though an insured may pay a lower premium for underinsurance, a major loss like many incurred during Irma and Maria could be problematic. Another factor that could result in a property being underinsured is inflation. Replacement cost should be increased annually for inflation.
Pooling — spreading the losses of a few among the group — is the essence of insurance. As such, it is problematic if large portions of exposure units incur losses at the same time — as in Irma and Maria. Therefore, if most exposure units (buildings and other facilities) simultaneously incur losses, the pooling technique breaks down and insurance becomes challenging, if not unworkable. Consequently, after a catastrophic loss and large/multiple insurance claims payout, insurance premiums typically increase, as is currently occurring in the VI. Many property owners are stressing the astronomical rise in insurance rates post Irma and Maria. It is alleged that some property owners’ rates may have doubled.
Nevertheless, the increases may be to improve the solvency of insurance companies. Moreover, to minimise catastrophic losses, insurance companies try 1) to avoid the concentration of risk by dispersing coverage over larger geographical areas and 2) adopt reinsurance. Further, many policyholders upon filing a claim after hurricanes Irma and Maria were dismayed on learning the terms of their contracts. For example, they may have found that they are underinsured, or they may have been surprised by the slow process of processing their claims.
There are no universal or uniform practices for regulating insurers or the insurance industry. Locales may have different and varied means for regulating insurers. Nonetheless, the VI may need to update its insurance regulations for several reasons: a) to maintain insurers’ solvency; b) to promote reasonable rates; c) to make insurance available; and d) to protect consumers. Legislation should regulate 1) forming of insurance companies; 2) licensing of agents and brokers; 3) setting insurance rates; 4) processing sales and claims practices; and 5) establishing consumers’ rights.
Further, the VI needs an insurance commissioner or an equivalent titled position to administer the insurance legislation and sector.
Finally, because insurance is the pooling of resources to share and spread the losses of a few among the many, the VI’s small size and small population may result in VI residents paying more for insurance than residents in larger locales. Moreover, the VI may need to collaborate with nearby countries and others to increase the insurance pool so as to lower rates. Further, insurance companies in concert with government and H. Lavity Stoutt Community College should launch an outreach programme to educate residents on property insurance and other insurance products. Actions are needed to make property insurance affordable largely so that homeowners can protect their biggest asset: their home.