Tag: Reinsurance

Reinsurance Issues In Puerto Rico After Hurricane Maria

Practically every insurance company utilizes reinsurance to pass on the risk of claims to other insurance companies, or reinsurers. Reinsurance is basically insurance for insurance companies. In principle, the practice of reinsuring risk should help policyholders get their rightful payments without fear that the insurance company will become insolvent. However, in practice, reinsurers are typically foreign based companies that have no incentive to expediently investigate or pay claims. Most primary insurance companies in Puerto Rico cede the vast majority of the liability from their insurance policies to reinsurers. Since Hurricane Maria, insurers have been so slow to act that Puerto Rico’s Commissioner of Insurance has levied over $2 million in fines to insurers who are delaying the processing and closing of claims.

The Power of Maria

Hurricane Maria was the most powerful storm to hit Puerto Rico in almost 100 years, and it came right on the tail of Hurricane Irma, which had already knocked out power on parts of the island. The island faces billions of dollars of damage and is still, eight months later, not fully recovered. Sadly, with the trend over the last 35 years of increased natural disasters more storms like Maria are to be expected. The problem of reinsurer recalcitrance after natural disasters is not going away.

The Reinsurance Traffic Jam After Hurricane Maria

Many business and commercial buildings were damaged by Maria, and thousands of business policyholders filed claims with the insurer they received their policy from, only to find their insurer had ceded the vast majority of their coverage to a reinsurer. While there is nothing unique about that process, the way the insurance market is structured in Puerto Rico has created a traffic jam preventing insurance capital from flowing back into the economy. Here’s why: the insurance market in Puerto Rico is dominated by thinly capitalized domestic insurers who ceded almost all of their risk to European reinsurance companies. But the primary obligation to inspect properties and handle claims falls to these marginally capitalized primary insurers, some of which are nothing more than fronting entities. Given the vast numbers of claims filed after Maria, these domestic insurers lack the resources and expertise to handle the volume of claims they are being presented with, and many continue to do absolutely nothing with those claims.

Meanwhile, in the United Kingdom, German, Switzerland and elsewhere, the reinsurers who bear the vast majority of the risk on Maria claims are simply watching, waiting, and investing money they should be paying out to rebuild Puerto Rico. The reinsurer generally doesn’t have an obligation to pay until the primary insurer completes its investigation and requests payment; and the primary insurers don’t have the resources to accomplish these basic tasks.

The policy holder now has two companies either unmotivated or incapable of paying out on claims. Recalcitrant, slow paying insurance companies are causing policyholders additional economic hardship in a time when it matters the most. Without prompt payouts some businesses are unable to make the repairs necessary to rebuild and reopen.

Know Your Rights

Recalcitrant reinsurers have been a huge issue in Puerto Rico in the aftermath of Hurricane Maria. There are many ways recalcitrant insurers can slow down the claims process. They have every motivation to do so: most profits for an insurance or a reinsurance company come from the “float,” meaning the cash difference between premiums and claim payouts. Insurers invest the float, and make money on their investments. Even though the insurers are being fined for their wrongful conduct, it is still cheaper for them to pay the fines than to pay the claims. This is a gross violation of the legal rights of the insured. Under Puerto Rico’s insurance laws, policyholders have the right to have their claims handled in a timely manner. Policyholders in Puerto Rico can report abuses by their insurance company to the Commissioner of Insurance. Once reported, the Commissioner of Insurance will investigate these claims and levy fines if the insurance company is found to be acting in bad faith.

Commercial Insurance Attorneys

What Is Reinsurance?

Natural disasters have the potential to cause millions of dollars in claims payouts from insurance companies. Most insurance companies would be unable to make such large payouts if it weren’t for reinsurance. Reinsurance is like insurance for insurance companies. It allows insurance companies to pass on the risk of large payouts to other insurers in exchange for part of the premium they receive from policyholders. Commercial insurance attorneys frequently witness firsthand the effect reinsurance has on insurance claims.

Why Do Insurance Companies Need Reinsurance?

By law, insurance companies are required to have enough capital in their reserves to pay all potential claims. This protects policyholders from not receiving payouts if an insurance company becomes insolvent. For example, if an insurance company receives $50 million in premiums from policyholders in a year, but a natural disaster comes and causes $100 million in covered damages, the insurance company may not have enough money to pay out on all the claims. To prevent this, insurance companies will mitigate their risks through reinsurance. When insurance companies utilize reinsurance to mitigate their risks, they are also lowering the amount of capital they are required to have in their reserves.

What Is A Reinsurance Treaty?

A reinsurance treaty is like an insurance policy between insurance companies. The original insurance company contracts under a treaty with the reinsuring company for it to cover a particular type of risk in a group of policies. The original insurance company cedes the risk to a reinsurer and will share the premiums it receives from its own policyholders with them. In turn, the reinsurer will pay out on claims against the original insurer that involve that particular type of risk.

What Is A Reinsurance Bordereau?

An initial reinsurance bordereau is a detailed report to the reinsurer on the premiums ceded from each of the underlying policies. Typically, it includes basic details about each policy including the gross premium and ceded premium. This is how the reinsurer initially finds out the details of the policies they are reinsuring. Bordereaux are usually required periodically under a reinsurance treaty. In this case, they are frequently monthly or quarterly reports of premiums and losses. A loss bordereau will contain details of claims on reinsured policies and any paid-out losses or expenses.

Limitations Placed On Reinsurance

Insurance companies are regulated by the state (or commonwealth in the case of Puerto Rico) governments where they do business. Each state can put limits on how much risk an insurer can cede, but it often is a very high percentage. The Office of the Insurance Commissioner (OIC) of each state can require extra approval for insurance companies to reinsure more than a certain amount of risk. For example, in Puerto Rico an insurer can cede the total or partof their risk, but a domestic insurer needs written authorization from the OIC to cede more than 75%. Various states have similar rules on whether an insurer can cede all or part of its risk to other insurers. Similarly, states and territories may place restrictions on whether an insurer may reflect proceeds due from a reinsurer as an asset on the insurer’s balance sheet, and these limitations are important when insurers calculate their compliance with capitalization rules.

Commercial Insurance Attorneys

The use of reinsurance can complicate the insurance process. Regardless of whether an insurance company has a reinsurance policy, policyholders are entitled to complete protection under their policies. If your insurance company has delayed, underpaid, or denied your insurance claim, contact the commercial insurance attorneys at Raizner Slania LLP today for a free consultation to discuss your case. We have experience dealing with the largest insurance companies in the world and our commercial insurance attorneys can make sure you get what you are rightfully entitled to under your policy.