Finding coverage getting tough for homeowners in southern Louisiana

After the wreckage caused by last year’s Hurricanes Katrina and Rita, many home insurers in southern Louisiana are refusing to write new policies, or are leaving vulnerable coastal community markets in fear of potential losses occurring from future storms. Concerned about changing weather cycles, global warming predictions and the expectation of stronger, more frequent hurricanes over wider areas for the next 10 to 20 years, some insurers are moving or whistling to a stop all writings of homeowners in Louisiana’s extreme south. In addition, many companies have ceased writing to handle claims still lingering from last year’s storms.

The climate is tough not only for renewing homeowners, but for those looking to buy a house in the affected areas, as well.

Jarred (Butsy) Martin, president of the Professional Insurance Agents Association of Louisiana, said, “I had a real estate agent from Houston call my office for a young couple looking to purchase a house out here,” and he said, “they couldn’t find anybody to write the homeowners policy except Citizens.”

Louisiana Citizens Property Insurance Corp., the state’s insurer of last resort, is a nonprofit organization created by the legislature a few years ago exclusively to provide insurance to applicants who are unable to procure coverage through the voluntary market.

The tough homeowners insurance situation appears to be putting a strain on the real estate market. John Casbon, president of First American Title Co., told the New Orleans Times-Picayune that trouble getting a homeowners insurance policy is proving to be an impediment for many potential homebuyers. He noted that Citizens was set up as an emergency measure in part to ensure a healthy real estate market by providing short-term coverage to homeowners or renters in high-risk locations.

As it stands, Citizens is the third largest provider of property insurance in Louisiana with 7.6 percent of the market at year-end 2005. It was created in 2003 to oversee the state’s high-risk property insurance pools, the FAIR and Coastal Plans and provide insurance coverage to people living in high-risk areas.

To pay claims, the plan calls for regular assessment fees to be collected from other companies in the state. The fee averages around 15 percent of prior-year earnings according to Jeff Albright, chief executive officer of the Independent Insurance Agents and Brokers of Louisiana. The Fair plan assesses 10 percent and the Coastal plan assesses up to 8.27 percent. The total 18.27 percent is mandatory to all admitted property insurers, but the Coastal plan has a write-out provision where other companies can write business in coastal parishes and credit it against any coastal plan assessments.

“Not everyone will pay the full 18.27 percent,” Albright said. “Some may pay as low as 10 percent if they have written themselves out of the Coastal assessment.”

Companies now have to decide if they are going to impose a rate hike to recoup their assessment and pass costs through to their policyholders. The deadline to decide is May 22.

Rising rates
According to the Associated Press, the Louisiana Insurance Rating Commission (LIRC) already approved rate increases for the Louisiana Farm Bureau and Fireman’s Fund. The Farm Bureau won approval for a 49 percent rate increase, drawing $30.6 billion from some 70,000 homeowners in susceptible areas. Fireman’s Fund won approval for a 19 percent rate increase that will affect some 4,000 policyholders, mainly in New Orleans and Jefferson parish. They will draw $2.76 million from the increase.

Tiffany O’Shea, Public Affairs Director for the American Insu-rance Association, told Insurance Jour-nal that the Farm Bureau insures a large number of properties in the areas affected by Hurricanes Katrina and Rita, and was hard hit by claims resulting from the storms. The massive rate increase was necessary to address solvency issues.

Bob Hunter, a former Texas insurance commissioner and now head of insurance matters with the consumer group, Consumer Federation of America, said the moratoriums on canceling policies or changing rates that former Insurance Commissioner Robert Wooley enacted after the storms should have run for at least a year. Hunter feels Louisiana insurance regulators should prevent homeowner insurance companies from raising rates and canceling policies of residents hit by Hurricanes Katrina and Rita, according to the Associated Press. The provisions enacted by Wooley expired at the end of 2005.

“What you need is a moratorium. You have to stop the insurance companies from terminating business,” Hunter said. He was the keynote speaker at a seminar on filing hurricane insurance claims in New Orleans on March 30.

Donelon told the AP that Hunter’s idea of keeping a moratorium in place is unrealistic. Louisiana left its insurance moratorium in place longer than Florida did after the disastrous 2004 hurricane season, and longer than Florida and Mississippi did in 2005.

Under a rule now in effect, insurance companies cannot cancel policyholders in Louisiana while they’re repairing their homes, but can change insurance rates through the normal rate-setting process.

According to PIA’s Martin, many policyholders will have to buy wind coverage through Citizens in addition to any other homeowners’ coverage.

“I’ve spoken with local Farm Bureau, State Farm and Allstate agents and none of them can write any business with any windstorm coverage. They are going to be selling policies excluding wind and then would have to go to Citizens to buy the wind coverage with a regular homeowners policy,” he said.

An opportunity
Still, O’Shea said while “it’s true some insurers have stopped writing, I don’t think it’s that many,” noting that coverage is out there for those who choose to shop for it. She added that, “a lot of companies are still committed to Louisiana and are still writing business. There actually have even been some companies that are offering new products, and there are some companies that have been coming into the state and see this as an opportunity to take on some new business in Louisiana.”

Rate increases in general have not been as steep as many expected, she said “given the losses that were incurred and considering the future risk. … [And] looking at the upcoming storm potential for next year.”

Paying for Citizens’ claims
Despite the regular assessments, Citizens has not accrued enough reserves to pay its claims resulting from last year’s storms, estimated at $1.7 billion.

“The plan only started a few years ago and the reserves building up in there were doing real well until the storms hit this past year,” Martin said. “A few more years and the reserves would have had enough to cover the claims.”

The strategy to pay the rest at this point is by way of an $825 million bond issue. Insurance Commissioner Jim Donelon, was invited to meet with the nation’s largest bond insurers and bond rating agencies in New York recently in an effort to help with Louisiana’s recovery following Hurricanes Katrina and Rita.

“This is the first significant Louisiana bond transaction post-Katrina and Rita and potentially the largest bond issue in the state’s history,” Donelon said in a news release. “Its success is important to restoring investor confidence in Louisiana.”

He added that the state’s rebuilding effort would also depend upon confidence in Louisiana’s insurance market.

The state’s governor and treasure joined Donelon in some of the bond meetings via telephone conference calls. Donelon pointed out that the state officials “recognize the importance of this financing in providing sufficient funds to pay policyholder claims as expeditiously as possible. So together, Governor Blanco, Treasurer Kennedy and I all helped show the nation’s top credit review agencies that Louisiana is serious about helping its policyholders recover from the hurricanes as quickly as possible.”

The commissioner was encouraged by the response the state received during the meetings. Standard & Poor’s later gave the Citizens bond issue an “A-” rating. Donelon said the high rating is significant because it demonstrates the underlying strength of the Citizens Corporation.

“This favorable rating is good news and a positive for Citizens and the state of Louisiana,” he said. “The better the rating, the lower the interest rate will be on the bond issue.”

The bond was to be sold April 4 and close on April 12, according to the Louisiana Department of Insurance, but no word had been released at the time this was written.

For more information on the bonds or other issues concerning the Louisiana homeowners market visit the Louisiana Department of Insurance Web site: www.ldi.state.la.us.