Louisiana’s insurance industry is in crisis. Eleven insurers have gone under over the past year and a half. Other insurers have stopped writing new policies or are refusing to renew existing policies because of the risks of operating in the storm-ravaged state. And the state’s own insurer of last-resort – which bails out policyholders of insolvent companies – now says that if another storm like Hurricane Ida hits Louisiana, it will not have enough reinsurance to cover the expected losses.
For residents, politicians, and insurance companies, the problem is untenable, but each has different opinions on who is responsible for the crisis and what the possible solutions could be.
The Crisis
The crisis has affected every aspect of the insurance industry. The companies’ insolvency has strained the state’s insurance safety net, reduced competition in the marketplace and sent premiums surging — along with the increased risk of major storms driven by climate change.
In a report released Monday, the Louisiana Legislative Auditor found more than half of the companies that failed since July 2021 went under because they did not have enough reinsurance — the insurance policies that insurance companies take out to protect against catastrophic events — to cover losses from Hurricane Ida.
The auditor called on the state Department of Insurance to determine how each of those companies' reinsurance buys was deemed adequate by rating agencies and the department but fell short when disaster struck.
The Louisiana Insurance Guaranty Association, which bails out policyholders when their insurance company goes under, has to pay $268 million in outstanding claims and premium refunds for the companies that went under. Louisiana Citizens Property Insurance Corporation, the state-run insurer of last resort, saw its total number of policies triple since January 2021 as more than 110,000 customers were unable to secure property insurance on the private market.
To meet the demand and cover the rising cost of reinsurance, the semi-public corporation announced that it will increase its already high rates by 63% when customers renew their policies starting 2023.
Louisiana Commissioner of Insurance Jim Donelon told state lawmakers that Citizens is intended as a short-term solution for homeowners with nowhere to turn. In a meeting of the legislature’s Joint Insurance Committee on Tuesday, Donelon said he expects several insurers will return to Louisiana and start taking policies off Citizens’ books.
Rep. Larry Frieman (R-Abita Springs) said he has received angry calls every day from constituents seeking relief from high insurance premiums. He pushed Donelon for industry-friendly policy recommendations to bring more insurers to the state and drive down rising costs.
“We live in a hurricane-prone state and we can’t force insurance companies to write (policies) in our state,” Frieman said. “We may have to think out of the box to find solutions to bring these rates down across all markets.”
Donelon asked lawmakers to allow his agency to take a portion of the licensing fees it collects from insurance companies each year into a fund that provides financial incentives to attract new insurers to the state. The state used similar financial incentives to lure new companies to Louisiana to “depopulate” the 173,000 policies Citizens had after Hurricanes Katrina and Rita.
Climate Change
Neither Donelon nor the Republican majority of the Joint Insurance Committee made any mention of climate change as a potential factor in the increased incidence of severity of storms in Louisiana or in companies' miscalculation of risk when determining the amount of reinsurance they needed.
But Democratic Gov. John Bel Edwards was quick to point to climate change as a contributing factor in the crisis.
“It’s climate change driven,” Edwards said Wednesday during his monthly radio show. “The models that predict the frequency and severity of storms and the claims that can be expected have proven over the last few years to be off by 100%.”
On Wednesday the Biden administration announced that it would begin collecting more data from more than 200 top insurance companies about the location of its policies, claims, premiums and losses. Treasury Secretary Janet Yellen said the department’s plan to collect information by ZIP code would help determine “climate-related exposures and their effects on insurance availability.”
Edwards recently traveled abroad to meet with representatives of Llyod’s of London to discuss the ways climate change has affected the reinsurance market and companies' risk assessment methods. Edwards said they discussed ways to reduce prohibitively high reinsurance prices and to make Louisiana more attractive to insurance companies through regulatory and statutory changes.
But those changes would not happen overnight, Edwards said, and many would be unpalatable to Louisiana policyholders and storm victims who are frustrated by surging premiums and slow payouts for their claims.
“I believe insurance companies have not acquitted themselves very well,” Edwards said. “Many of the things they would want us to do to make our market more attractive fly in the face of their performance so far.”
