Louisiana Bailout Fund to Borrow $600M to Pay Insurer Claims

NEW ORLEANS (AP) — A state-chartered bailout fund is seeking to borrow $600 million after seven Louisiana insurers went bust following 2021’s Hurricane Ida.

The New Orleans Advocate, owned by the Times Picayune, reports that the Louisiana Insurance Guaranty Association will seek approval of the plan to sell bonds this week. The association would recoup the money from surviving member insurers, but those insurers get a tax break for such assessment payments, meaning Louisiana taxpayers will ultimately pay the bill.

The association pays the policyholder claims of insolvent insurers, making sure that individuals and businesses don’t get stiffed when an insurer is overwhelmed by losses. The plan to issue bonds is an admission that the association can’t raise enough money on its own to pay roughly 24,000 claims it owes without making policyholders wait for years.

It would be the first time the association borrowed to pay off claims since a nationwide auto insurance crisis in the early 1990s.

John Wells, the guaranty association’s executive director, said the group is accustomed to one to three insolvencies a year, paying a few dozen claims. But the association expects to pay around 40,000 claims in 2021 and 2022, as insurers weakened by three major hurricanes hitting the state in 2020 found themselves without enough reserves to pay claims after Ida.

“What makes them (the company failures) especially extraordinary is that they are happening around the same time,” Wells said.

However, severe hurricanes have caused waves of failures in various states previously.

The Louisiana association has fallen far behind on paying claims, with a backlog of more than 10,000 pending. Another 14,000 claims have yet to be handed over to the association from the recent collapse of Southern Fidelity Insurance Co.

“It’s just damn frustrating _ pay all this damn money for insurance and they treat you like crap. They kick you at your lowest point,” said Kenner resident Markey Dietrich, whose homeowners policy was with the failed Americas Insurance Co. He’s awaiting full settlement of his claim after Ida and can’t afford to finish rebuilding.

The association can assess its members up to 1% of their written premiums per year, using that money to pay claims from insolvent insurers. Wells said the assessment typically brings in about $100 million a year.

Wells said the association assessed its members in December and again in April, but that’s not enough. Insurance companies can deduct 10% of their state insurance premium tax bill each year until they recoup the cost of an assessment, meaning Louisiana taxpayers ultimately pay for assessments.

The guaranty association would issue bonds with an interest rate up to 6%, paying them back over 12 years through additional assessments.

After 2005’s Hurricane Katrina, the state-run insurer of last resort, Louisiana Citizens Insurance Corp., borrowed $1 billion in bonds to settle claims. State taxpayers are still paying of those bonds.

The guaranty association could have paid only a share of what it owed and made policyholders wait until it could raise more money. Wells said issuing bonds is a better option “rather than making homeowners wait for the next five years.”

Longtime Louisiana Insurance Commissioner Jim Donelon said that the seven companies that failed didn’t buy enough reinsurance. Reinsurance allows them to spread the risk of disaster-prone areas among different companies. Buying less reinsurance could let a company offer lower-priced policies, competing for more business.

Smaller insurance companies, in particular, have to buy enough reinsurance or risk quickly running out of cash to pay claims after a catastrophe. State insurance regulators are supposed to monitor compliance.

Donelon, an elected Republican, said the seven companies that failed were on a list of 15 troubled companies created after 2020’s Hurricane Laura. “The others are good to go,” Donelon said.