Can you afford your property insurance in Louisiana? Rates across the state continue to go up. The legislature just finished its regular session, and no viable solutions were offered. Headlines in national publications blurted out: “Louisiana insurance market is collapsing!” All the insurance department has come up with is to give grants to a number of smaller insurance companies. Our U.S. Senator John Kennedy was right on the mark when he said “We tried that one. It blew up in our face.”
The state-run insurance company, Citizens Property Insurance Company, now charges as much as an 83% increase. Citizens was proposed some years back by the insurance department and created by the Louisiana legislature. It has proven to be a disaster from the get-go.
If anyone could find any wiggle room to keep property rates from rising, it would be me. After all, I was insurance commissioner for 12 years. So how are my rates affected? My office is located above the floodplain on one of the highest points in Baton Rouge, the building is only several years old and in excellent condition, and I’ve never had a claim. My property insurance bill rose by 25% from last year.
NBC news recently did an expose’ on the Louisiana crisis, quoting critics as saying many companies failed to buy enough reinsurance, and that the state Department of Insurance should have prevented those mistakes from happening. “This is not a fluke of statistical bad luck. This was very clearly a political decision that the Department of Insurance made to undercapitalized insurance companies to allow them to make more profit on the front end and with the state taking the risk on the back end,” said Jesse Keenan, a real estate professor at Tulane University who studies climate change and the economy. “This is about politics,” he said.
Insurance companies operating in Louisiana argue that they need these high rates because of all the lawsuits. But a series of laws were passed by the legislature three years ago that put limits on a policyholder’s right to sue their insurance company. The end result? Policyholders suffered, and insurance rates continued to rise.
Insurance companies do have a legitimate claim that the cost of buying reinsurance has risen dramatically. Let me tell you why reinsurance is so important. When an insurance company has sold too many policies that might jeopardize their financial standing, they buy insurance just like you and I do. The insurance company goes to a “wholesaler” or a reinsurer to cover a portion of their losses. Kind of like the bookie laying off part of his bet. The insurance company gives up a portion of the premium to buy their own insurance coverage in case the losses potentially get too high.
The problem is that no one Is keeping an eye on the reinsurers. Most of the major reinsurers backing up American insurance companies are located in England, Switzerland, Germany, and Italy. They pretty much can charge whatever they want, and their prices are going up and up.
Here’s what needs to be done. The United States is a major market for reinsurers operating out of Europe. Insurance commissioners should make it clear that they will not allow reinsurers to sell in their states unless they are examined to protect policy holders. They should be treated just like US insurance companies that are regulated by states throughout the country.
Louisiana by the way is a huge market for reinsurers. Look at all the major risks that need to be re-insured. Chemical plants and oil companies up and down the Mississippi River, several nuclear power plants, as well as five of the largest ports in the US. These reinsurers want to do business in Louisiana, but they need to be regulated by the Department of Insurance.
In addition, as this column has been arguing for years, congress should create a national reinsurance backstop similar to the terrorism insurance program, which guarantees that the government will step in and help cover catastrophic losses once they reach a certain dollar amount.
These suggestions will not force insurance rates to take a major drop. But they will stabilize a volatile insurance market that has made the cost of property insurance unaffordable for thousands of Louisiana homeowners. The issue of insurance reform should, hopefully, be a major point of discussion in this year’s gubernatorial elections.