Insurance Availability and Affordability

Background:
Competition is the key to achieving widely available and affordable private property and casualty insurance. Several factors are necessary in attracting insurers to a state to write business and increase competition. Many companies may consider the overall risk exposure of a geographical area, as well as the political, regulatory and legal climates in a state before entering the market or expanding business in that market.

Louisiana has been struggling for decades to develop an adequate private property and casualty insurance market that balances insurance availability with insurance affordability. The challenging insurance market is not solely caused by the state’s proximity to the Gulf of Mexico or the frequency of hurricanes. Its political, regulatory and legal environments have played a large role in the problematic private insurance market, which was only compounded by the 2005 hurricanes. Prior to the hurricanes, Louisiana was experiencing rising property and casualty insurance rates due, in part, to high levels of insurance fraud, a highly punitive tort system and a politically appointed insurance rating commission.

Facts and Figures:
Hurricanes Katrina and Rita significantly changed the way some insurance companies write property and casualty insurance throughout the United States, not just in Louisiana. Some insurers had to re-examine their books of business across the country and lower its exposure risk in certain areas. The factors driving this retooling included:

  • Seven of the nine costliest hurricanes in the nation’s history had occurred in three storm seasons (2003, 2004 and 2005).
  • The record losses in Louisiana caused by Hurricanes Katrina and Rita resulted in nearly 1.2 million claims totaling $27.3 billion in paid insurance losses. (homeowners and business interruption). This total excludes flood and storm surge claims, which totaled $39 billion in Louisiana alone. In comparison, the next costliest storm next to Hurricanes Katrina and Rita is Hurricane Andrew, which cost insurers less than $1 billion.
  • Agencies that rate an insurer’s financial stability changed their evaluations and more heavily considered the effects of Probable Maximum Loss (PML) and Total Insured Value (TIV) on the financial strength of insurers. In many instances this forced insurers to consider the extent of their catastrophe exposures or maintain a higher level of capital to support the same level of catastrophe exposure.
  • Increased demand for reinsurance created higher prices for reinsurance. While reinsurance prices are unregulated, the prices and terms of property insurance remain highly regulated; this complicated insurance companies’ ability to manage reinsurance costs.
  • The increased cost of labor and materials after a catastrophe has exponentially increased the costs imposed on insurers and property owners following severe catastrophes.

Regulatory Reforms and Legislative Action:
Louisiana cannot change its geographical location, however, efforts can be made to reform its political, legal, and regulatory environments, all of which contribute to the viability of the private market. There have been reform efforts during the last decade which have brought about deregulation of the insurance market including:

  • Transforming the Louisiana FAIR and Coastal Plans into the Louisiana Citizens Property Insurance Corporation, which is the state-run insurer of last resort on residential and commercial property insurance.
  • The abolishment of the Insurance Rating Commission in favor of a file-and-use system with the Department of Insurance.
  • The implementation on the Insure Louisiana Incentive Program, which gave financial incentive to qualified insurance companies to write new business in the state.
  • Application of named-storm deductibles by region.

However, more deregulation of Louisiana’s insurance market needs to occur to increase competition in the state. Louisiana is the only state that does not allow an insurer to drop coverage on a policyholder once that policyholder has had the same policy with the insurer for three years, unless the policyholder has been delinquent in payment or filed fraudulent claims. In addition, Louisiana’s legal climate has discouraged insurer interest in the state and contributed to increased costs on existing business. If Louisiana wants to have more companies writing in the state, which will expand coverage and could reduce costs, the state must continue to make regulatory reform and judicial reforms a priority.

Citizens depopulation a success
Louisiana Insurance Commissioner Jim Donelon has been working to reduce the number of policies in Citizens since the 2005 hurricanes. This is very good news for consumers and shows the strength and stability of private market in Louisiana.

The reduction of Citizens policies benefits all property owners by:
• Preventing or reducing future assessments that could be charged to all property insurance consumers in Louisiana.
• Enabling property owners to obtain lower premiums through the private insurance market.