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Tremors shine light on scale of Puerto Rico's earthquake insurance market


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Tremors shine light on scale of Puerto Rico's earthquake insurance market

Although U.S. states along the Pacific coast tend to be most commonly associated with seismic activity, recent earthquakes in Puerto Rico offer a reminder of the varied geographic scope of the potential risks.

United States Geological Survey data shows that on Jan. 6 and 7, six earthquakes of magnitude 5.0 or stronger occurred along or near Puerto Rico's southern coast, including a magnitude 6.4 tremor that has been blamed for widespread damage to property and the power grid.

SNL Image

Cars are crushed under a home that collapsed following an earthquake Jan. 6 in Guanica, Puerto Rico.
Source: AP photo

There is significant historical precedent for seismic activity in and around Puerto Rico, highlighted by the particularly devastating 7.3 magnitude San Fermín earthquake of 1918. That context may make it less surprising that Puerto Rico ranked fifth-highest among U.S. states and territories in terms of earthquake insurance direct premiums written in 2018, trailing only California, Washington, Missouri and Oregon. Missouri and Tennessee, which ranked sixth, likely owe their relatively high business volumes to proximity to the New Madrid fault.

The commonwealth's $93.4 million in premium volume accounted for 2.9% of the total earthquake business reported by U.S. property and casualty insurers on a total-filed basis and 6.8% of the industry's non-California earthquake business. Across all other P&C lines, Puerto Rico's contribution to total-filed 2018 direct premiums written by U.S. companies was only 0.3%.

On an individual company basis, the largest writers of Puerto Rico earthquake coverage in 2018 were Mapfre SA's Mapfre Praico Insurance Co.; Assurant Inc.'s Caribbean American Property Insurance Co. Aseguradora Ancón SA's Multinational Insurance Co. American International Group Inc.'s AIG Insurance Co. - Puerto Rico and Mapfre Pan American Insurance Co. The Mapfre companies, on a combined basis, held 27.3% of the Puerto Rico earthquake insurance market. Caribbean American, whose dwelling and personal package policies provide coverage for earthquake, windstorm and fire perils, had market share of just under 14%.

Cumulative direct losses incurred on Puerto Rico earthquake business during a 20-year period ended in 2018 totaled only $79.7 million, against cumulative direct premiums earned of $1.89 billion. Nearly all of those losses were incurred by subsidiaries of what is currently Chubb Ltd., including $70.1 million of losses incurred on the earthquake line by Indemnity Insurance Co. of North America.

That company wrote only $3.1 million in Puerto Rico earthquake premiums on a direct basis from 2017 through 2018. Its $68.8 million direct incurred loss on the earthquake line in 2017 in Puerto Rico was the largest reported across all geographies by a U.S. insurer in a single calendar year from 2012 through 2018. Indemnity Insurance Co. of North America reported a de minimis negative amount of net incurred losses on the earthquake line for 2017 across U.S. jurisdictions, however.

A Chubb spokesman declined to comment on the 2020 earthquakes. The company's 2017 pretax catastrophe losses on a net basis as discussed in its annual report totaled $2.75 billion, of which approximately $25 million pertained to earthquakes in Mexico.

Industry representatives have frequently identified earthquake cover among the primary examples of underinsurance in the U.S. and certain other developed countries, which creates the potential for economic losses from an event to greatly exceed the insured losses. Although California accounted for 57.8% of the earthquake direct premiums written in 2018, a series of seismic events in mid-2019 highlighted the significant insurance gap that exists even in a market where that peril is front and center.

The P&C industry in Puerto Rico — and the island in general — continues to recover from the staggering losses associated with hurricanes Irma and, in particular, Maria in 2017. Direct incurred losses across all P&C business lines spiked to $10.99 billion in 2017 and remained elevated in 2018 at $2.03 billion, which resulted in loss ratios of 620.9% and 103.9%, respectively.

The 2017 direct incurred loss ratio ranks as the second-highest annual result recorded by a single U.S. state or territory this century; it was exceeded only by the 822.2% direct incurred loss ratio for the same calendar year in the U.S. Virgin Islands. For additional context, the direct incurred loss ratio in Louisiana in 2005, the year in which Hurricane Katrina made landfall, was 494%.