Bright Spots and Challenges Go Hand in Hand in Louisiana
Despite the challenges faced by the state of Louisiana since Hurricanes Katrina and Rita wrought their havoc in 2005, there are bright spots in the state’s property casualty insurance industry, says Louisiana Commissioner of Insurance Jim Donelon. The workers’ compensation market is one of the healthiest in the nation and the property market is gaining ground with new insurers coming in and policies flowing out of Louisiana Citizens Property Insurance Corporation, the state’s property insurer of last resort. It’s not all rosy, the property market in South Louisiana is still tough, but recovery is always on the agenda.
In the following excerpts from an interview with Insurance Journal‘s Ken St. Onge at the National Association of Insurance Commission-ers meeting in National Harbor, Md., Donelon elaborates on the bright spots, recognizes the challenges and discusses other topics from man-made catastrophes, like the near meltdown of American Insurance Group Inc., to natural ones like the hurricanes that seem to hit the state two-by-two.
Let’s start off by talking about a topic on a lot of regulators’ minds, and that is the federal loan for AIG. What does that mean for Louisiana’s insurance industry.
Jim Donelon: It means a lot, in that it affects policyholders of all stripes — whether it’s retirees depending on AIG products for their annuities or life insurance needs, or commercial ventures, which is a large part of what we in Louisiana consume from the various AIG companies spread across America.
We have two domestics in our state that are AIG companies that were doing business, are doing business, in our state. And by having the threat of the holding company, due to its problems from non-insurance investments, hanging over those products and those companies, that threat was of great concern to policyholders, as well as regulators. … So, when the federal government stepped up and provided that loan and that two-year payback period, to allow for an orderly dissolution or disposal of the significant assets of that company, while at the same time putting in place new management and charging a market — above-market, actually — interest to the company, and taking an 80 percent stake in the company, I think it was a very prudent step on the Fed’s part to prevent the domino effect of a failure of the holding company, due to those other non-insurance issues, from reverberating throughout our economy.
How have Hurricanes Gustav and Ike affected the industry in Louisiana?
Donelon: Gustav hit us directly and crossed our state, from the Houma area through Baton Rouge, Alexandria and Shreveport. It was a major event. But we frankly handled it quite well, beginning with the performance of our state and local government officials. … The federal levee system held and protected us from the tidal surge that came with that storm. And finally, the total dollar event is less than would have been expected: in the two to three billion dollar range.
So, on whole, the reports I’m getting from insurers is that was a manageable event. It demonstrated the effectiveness of our improvements to our response capability in the state.
Having said that, a week later, along comes Ike, and threatens to hit Louisiana, and runs along our coast, creating large flood events in coastal Louisiana, but doing devastating damage in the Galveston-Houston area. And the value of those properties damaged in Texas is so large that I’m fearful that the domino effect of their losses will adversely affect the ongoing recovery of our insurance market in Louisiana. Remains to be seen, but I’m hoping I’m wrong in that fear.
What about the insurance industry in Louisiana, from a bigger perspective? It can’t all be bad.
Donelon: It is not at all bad. In fact, on the workers’ comp market angle, we have — for two straight years running now — been told by NCCI, who monitors workers’ comp markets in almost 40 states nationally, that in 2006, we had the best loss experience of any of the states they monitor: a 15 percent drop in loss experience from the year before, resulting in a 15 percent decrease in premiums for businesses in our state.
And then, in 2007, they came back and said, once again, that we had an 8 percent drop in loss experience in our state. We have a very competitive market, all the major national players. Our residual insurer, the state-created LWCC, is very viable, very profitable, and serving about a third of our statewide market. So, that’s a good news aspect of our insurance.
The crisis continues to be property insurance, primarily in South Louisiana.
What’s the state of Louisiana Citizens?
Donelon: That also is good news, in that our Citizens, our market of last resort for property insurance, topped out, post-Katrina/Rita, at about 15 percent of our market share.
But initiatives that the former governor, [Kathleen] Blanco, the present governor, [Bobby] Jindal, and both legislatures, along with our efforts at the department, have resulted in at least a half dozen new companies writing business new to our state since Katrina visited Louisiana, writing new business, including four of those companies taking 27,000 policies out of the 170, 000 policy book of business that Citizens had on June first, and then coming back to us a week before Gustav and saying they wanted another round. And those four companies, that time, were joined by four other companies wanting to participate in a second round of takeouts from our Citizens book of business.
So we’re depopulating it. It is the market of last resort. But with 10 percent of our policies, statewide, in place when Gustav hit, it was able to respond to that major event in a very efficient, effective way from the day after the storm. The phone systems worked. Their computers worked. They are generating the long-awaited audited financial statements that the previous management could not generate with the computer system that they had put in place. But we have fixed those problems.
What kind of hurricane mitigation and risk reduction programs do you have in Louisiana, and are they working?
Donelon: Two months after Katrina and Rita, then-governor Blanco called the legislature into special session and passed, for the first time in the history of our state, a new state-wide building code, modeled after what Florida put in place after Hurricane Andrew. … In an aerial visit over South Terrebonne Parish, where Gustav made landfall, with the local legislative delegation, two senators and a representative from that area, it was incredibly obvious how much difference it made — those that were newly constructed, those structures that were new, built to the new building code, versus the splinters and rubble of the buildings right next door that were not built to that standard.
In addition to that, as part of the requirements of the federal Flood Insurance Program, the elevations have been raised … so that folks are now being required to build up high, above the ground, to meet those elevation requirements. And we can see, clearly, that building codes and elevating properties makes those structures much more survivable in hurricane events like we have had the past several years.
How would you characterize the department’s relationship with agents?
Donelon: I think we have an excellent relationship with agents. I’m one of the 12 elected commissioners in America, and I can tell you first hand, but for the fact that the agents were virtually united in their support for my candidacy I wouldn’t be here and someone else would be talking to you here today.
We continue to have that relationship. I tell them all the time that we have the same role. We represent both consumers, and have a fiduciary duty to protect their interests, and companies, and have a fiduciary duty to represent them as well. And that is a built-in conflict of interest, it would seem, but it works well. Works well in our state and every other state, works well for regulators and for insurance agents. But it makes for kind of a natural alliance between insurance agents and regulators.
What is your take on a national catastrophe plan, and what elements might you like to see in such a plan?
Donelon: My first concern is that the industry’s effort … is not unique to Louisiana but, in fact, is spread across 18 states, from Maine to Miami and around to Brownsville, Texas. I welcome and urge the federal government to get into the business of assisting companies in providing that coverage, whether that’s to allow tax-free reserving for cat losses; a single policy to include flood, earthquake, and wind, and terrorism, modeled after what they did post-9/11 in creating a terrorism reinsurance act, or cat fund if you will; or the State Farm-Allstate proposal.
The first thing I ask them to do is not to use that as an excuse to deregulate and remove jurisdiction from the states that allows us to protect consumers. And we really do that very well. And not just in Louisiana, but all across the country — much better, in my opinion, than the federal government does in protecting the consumers of banking products, for example. …
Secondly, I support a terrorism reinsurance type of cat fund, or a State Farm-Allstate type of proposal, if it has a high enough trigger. … I want the trigger to be high enough so that competition continues, while at the same time affording some umbrella of protection for companies against the next Andrew or the next Katrina that has the potential of shutting down the property insurance market in coastal America.
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