In the dark years after Hurricane Katrina, Insurance Commissioner Jim Donelon was desperate to find businesses ready to sell home insurance in South Louisiana.
Armed with a $100 million pool, the state offered insurers millions of dollars in government grants if they could sell a number of policies in parishes near or below Interstate 10 and stay at the less than five years.
Free money is catnip for any industry. But these were high-risk insurance policies, and the devastation of Katrina — America’s costliest disaster, by far — was still recent.
In the end, Donelon was only able to donate $29 million from the incentive fund, less than a third of what had been set aside. The money went to five companies. Despite the limited number of takers – and their relative caution – Donelon sees the program as a great success. He says it sparked more interest in the state insurance market and eventually other insurers got into business here without the need for incentives.
But a review of records by The Times-Picayune | The lawyer tells a more complicated story.
Three of the five insurers struggled or outright failed to write enough policies to fully earn the money. As a result, the Department of Insurance clawed back about $4.4 million, or about 15% of what it distributed in the first place.
One insurer, Companion Property and Casualty, kept less than half of the $2 million it received from the state, records show. Another company, Southern Fidelity, had a few good years, but went bankrupt last year and is now in liquidation. It is one of 11 Louisiana insurance companies to fail in the past two years.
This week, short of long-term solutions, lawmakers will convene a special seven-day session on Monday to decide whether to spend $45 million on reviving the post-Katrina incentive program.
Donelon said incentives are the best short-term solution to life in Louisiana’s moribund insurance market. In addition to the 11 insurers that went bankrupt, a dozen or more others simply ripped off stakes, leaving desperate consumers to rely on state-run insurer of last resort, Louisiana Citizens Property Insurance Corp.
Citizen roles have more than doubled amid the crisis; it now holds approximately 125,000 policies. And its prices will rise significantly in the coming months as a rate increase approved last year, averaging 63%, takes effect. If citizens cannot offload much of their politics, Donelon warns that another big increase is likely in 2024.
Regulators hope the incentive money will convince private insurers to take policies out of state hands, though the incentive plan, as written, does not require insurers to take policies out of citizens . This is something the previous iteration did.
The commissioner will likely face a skeptical group of lawmakers who would prefer a more comprehensive solution to the state insurance crisis. Governor John Bel Edwards, rather than the leaders of the Legislative Assembly, called for the special session.
At the last meeting of the Joint Legislative Budget Committee, Donelon answered questions for nearly two hours. At one point, a lawmaker asked outright if he had the votes to support his plan.
“I don’t want to go to a special session if you don’t have all the numbers to get it through on both sides,” said state Rep. Denise Marcelle, D-Baton Rouge.
Donelon replied, “I didn’t think the Legislative Assembly would hesitate to fund what they unanimously created.”
Market stimulus or giveaway?
A low-key crisis at first, the cost and availability of insurance is now a dominant concern.
After four hurricanes made landfall in Louisiana in 2020 and 2021, lawmakers were eager to tighten requirements for handling, adjusting and paying claims. Few saw the approach of the second storm, a series of cascading failures.
“The big picture that was lurking was the fact that you had a simmering crisis on the horizon that we hadn’t done anything about in the last couple of sessions to shore up the insurance market,” Kevin said. Cunningham, an insurance lobbyist. “The chickens came home to roost relative to the availability of insurance. We really need to focus on that.
Incentives aren’t a bad short-term approach, Cunningham said. However, he thinks the best long-term solution is to require better construction, which would reduce the number of major claims.
“If we can keep the roof on a house when we have a storm, the damage it causes goes down quickly – if the roof stays up,” Cunningham said.
In Louisiana, corporate grants are generally paid to manufacturers and real estate developers. Florida has floated the idea of using them to attract insurers.
But getting the desired outcome from such an unpredictable industry is hardly guaranteed.
Although Donelon has said that easing the burden on citizens is his main concern, the current program does not require participating insurers to underwrite citizen policies – which Donelon described as a compromise with the author of the Bill, Sen. Kirk Talbot, R-River Ridge.
Even if participants avoid citizen policies, Donelon said he thinks more competing insurers could help reduce costs for other residents and stimulate interest from even more insurers.
Some observers think there is a better solution.
“I’m not a big fan of paying companies to underwrite policies. I don’t think that’s an optimal use of state resources,” said Charles Nyce, an insurance professor at Florida State University. “I don’t think you subsidize the private market that way.”
Instead, Nyce recommended direct subsidies to consumers based on their ability to pay, if affordability is the goal.
“Be upfront about it,” Nyce said. “If you want to look and see if people meet certain income requirements and subsidize them at the state level, go ahead and do it, but do it means-tested.”
The first round of the incentive program, launched in 2007, attracted the interest of only six companies. Only five made the cut. Most had sold little or no home insurance coverage in Louisiana that year.
Some of the objectives of the insurance program were intangible. However, some things were clear: Regulators wanted to reduce the number of citizen-carried policies and increase options in the bottom third of the state.
The legislative auditor later revealed that the insurers had received the funds before the two parties signed the agreements. Donelon attributed the misstep to the state’s inexperience in administering the program.
To start, insurers, who received subsidies ranging from $2 million to $10 million, had to invest at least as much money as they received. For every dollar of subsidy and matching funds, insurers promised to sell at least $2 of premium.
So if an insurance company received a $10 million subsidy, as Occidental Fire and Casualty did, it had to invest at least $10 million in excess – the extra money used to pay claims. Therefore, Occidental needed to sell at least $40 million worth of premiums every year.
According to the rules, at least a quarter of that bounty had to come from citizen policies and at least half from southern Louisiana parishes. But Occidental has missed its target by a wide margin each year, records show.
Over five years, he was supposed to underwrite $200 million in premiums. In seven years, it reached barely half, or about 102 million dollars. As a result, Occidental had to return approximately $2.2 million to the state.
According to Donelon, the real triumph of the program came years later. He said the five companies had “primed the pump” to develop a more competitive market.
“Eventually, in the years that followed, two dozen more in addition to those five companies came into our market – small, regional companies – and frankly, not as strong as the ones we gave the incentive money, who had higher requirements to qualify,” Donelon said in a recent interview.
Where are they now?
Another measure of the effectiveness of the program is what happened once the five insurers were no longer tied to the state by obligation.
Southern Fidelity was one of the biggest companies to fail last year, sending 42,000 policyholders scrambling.
Three of the insurers are still around to some extent. Three were sold, including Companion Dommages, because property insurance was no longer part of the growth plans of its new parent company.
Imperial Fire & Casualty, which was based in Opelousas, was sold in 2013 to a new private equity firm called Southport Lane Management, run by a 28-year-old man with no previous industry experience.
Donelon’s LDI approved the sale. The company began to crumble a year later after the U.S. Securities and Exchange Commission accused the young financier of committing fraud by transferring assets from newly acquired insurance companies. Louisiana regulators took control of the company and it was resold; today it is a subsidiary of Allstate and a modest player in the state market.
One of the group’s top performers was ASI Lloyds, which received $5 million from the state pool. The Progressive Group acquired a majority stake in the parent company in 2014.
ASI Lloyds collected nearly three times as much premium as was needed under the grant. But today, the insurer is a fairly small player in the state market.
In some ways, the challenge is more acute now than it was after Katrina, Donelon said, because the reinsurance coverage that helped small businesses take risks has dried up.
“It’s the biggest challenge I’ve had in 16 years as an insurance commissioner,” Donelon said. “The crisis is existential, really. If we don’t do what I propose to do, I truly believe that thousands of people in our state would lose their homes due to the unaffordability of citizen policies. »