PCI: Ivan Will Test Louisiana’s New High-Risk Pool, But Insurers Should Be Able to Meet Claims

While Louisiana’s new insurance high-risk pool reportedly hasn’t had enough time to build up a financial cushion to absorb the potential effects of Hurricane Ivan, other reforms in place should enable insurers to pay ensuing claims.

“There is a concern that Ivan will hit before sufficient reserves were built up, but recent insurance reforms should enable the state to adequately confront the issue,” Greg LaCost, senior counsel and regional manager of the Property Casualty Insurers Association of America (PCI), commented.

In 2003, state lawmakers approved a mechanism that provides bond financing to spread catastrophic losses over time and reduce insurers’ assessments, LaCost said. “The state’s high-risk pool can pay claims by floating bonds over a 5 or 10-year period. Then the companies can pay out their assessments over a 5 or 10-year period, which allows companies to know what their losses are, and how long they have to pay them. It gives companies a more manageable way of dealing with assessments.”

On Jan. 1, Louisiana’s FAIR and Coastal insurance programs merged into Citizens Property Insurance Corporation, designated as a last-stop for homeowners unable to find insurance in the private sector.

The state-run catastrophic reserve fund covers damages caused by hurricanes, hail storms and other natural disasters. All insurance companies operating in the state must cover damages that exceed the reserve fund, but companies can pass that cost to policyholders. Under Citizens, catastrophe loss reserves can be built up without being taxed, which allows the funds to reach adequate levels quickly. At issue is whether enough reserves are currently available to adequately cover the losses of this storm.

“Before Citizens Property emerged, insurers had no mechanism to recoup losses when severe weather struck,” LaCost said. “Insurance companies had been assessed more than $100 million over the last three years to cover the losses of the state-run plans of last resort. These assessments, combined with no procedure to recoup these payments, were driving companies out of Louisiana’s market.

“Since the FAIR and Coastal Plan assessments were based on their percentage of market share, there was an enormous incentive for insurers to leave Louisiana and a strong disincentive for those companies remaining to write new policies. When severe weather hit Louisiana in the past, these residual plans had losses greater than the premiums collected, and Louisiana insurance companies were forced to pay those deficits, as well as the claims on their own policies. The new plan makes Louisiana a more attractive place for insurers to come and conduct business.”

Citizens Property offers coverage up to $350,000 for the home, additional structures, contents and liability, according to PCI. The standard hurricane deductible is $500, while optional deductibles of two percent and five percent are available. Citizens represents 10 percent of the state’s market.