Jim Beam column: Insurance audit great guide
Published 5:54 am Thursday, October 20, 2022
Anyone who buys or sells property insurance in Louisiana would get some valuable and helpful information by reading a special audit done by the state’s legislative auditor. Michael J. Waguespack and his staff have done another thorough job of tackling a difficult subject.
In a letter to legislative leaders, Waguespack said the purpose of the audit is to provide information about what happens when residential property insurance companies become insolvent or voluntarily leave the market.
The audit is available at www.lla.la.gov and can be reached at the bottom of the homepage. It is important to know about the major organizations involved in what has now become an insurance crisis in Louisiana.
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The state Department of Insurance (LDI) regulates the insurance industry, serves as an advocate for consumers and analyzes and examines the financial condition of insurance companies operating in the state.
The Louisiana Insurance Guaranty Association (LIGA) is a safety net for damage claims if an insurance company becomes financially insolvent. It gets money to settle those claims from 1 percent of total premiums written in the previous calendar year and can borrow money to meet its obligations.
The Louisiana Citizens Property Insurance Corp. (Citizens) was created in 2003 as a non-profit insurance company for individuals unable to obtain insurance through the private market.
OK, what has happened to create the insurance crisis? For starters, 11 insurance companies became financially insolvent between July 2021 and September 2022, six of them because they didn’t have adequate reinsurance for Hurricane Ida that hit southeast Louisiana.
Sen. Jeremy Stine, R-Lake Charles, asked Jim Donelon, state insurance commissioner, at a Tuesday insurance hearing if that wasn’t a failure of his department’s job to make sure insurance companies are solvent.
Donelon said that it is his job but the failure to buy enough reinsurance has been repeated in states all over America. Banks are regulated and they fail too, he said, adding that it was his suggestion that the reinsurance situation be monitored.
LIGA took over when the companies failed. The cost of claims and premium refunds paid by LIGA rose from approximately $4.8 million in 2020 to about $268.1 million in the first eight months of 2022 as a result of those companies becoming insolvent.
LIGA can pay up to $500,000 per claim and up to $10,000 to refund policyholders their premiums. Louisiana is one of 10 states that pays up to $500,000 for unpaid claims, while 35 states pay $300,000.
For the first time since 2004, LIGA assessed insurance companies the full 1 percent for calendar years 2021 and 2022. That will give it $205.9 million to pay claims and premium refunds. LIGA also got approval from the State Bond Commission to borrow up to $600 million to meet its obligations.
Citizens is also affected. Its total policies and the insured value of those policies rose from 35,670 policies totaling approximately $6.7 billion in January 2021 to 112,035 policies totaling $33.3 billion in August 2022. That is a 214.1 percent increase in policies and a 397 percent increase in total insured value.
The National Oceanic and Atmospheric Administration (NOAA) said Louisiana ranks second in the nation for the highest costs due to storm damages.
For the calendar year 2020 and 2021 hurricanes, insurance companies received 784,436 claims across all insurance lines, paid approximately $18.4 billion in losses and set aside $5.3 billion in reserves for losses incurred but not yet paid.
LDI said six of the 11 insolvent insurance companies didn’t have enough reinsurance to pay claims resulting from Hurricane Ida. Reinsurance is insurance for insurance companies. Under a reinsurance contract, the insurance company transfers all or part of the financial risk of loss for claims to the reinsurer, in exchange for compensation.
When Citizens doesn’t have adequate funds to pay claims, insurance companies and Louisiana policyholders can be assessed. After Hurricanes Katrina and Rita in 2005, Citizens had to assess policyholders in 2007 and they will continue to pay the assessments through June 2026.
The legislative audit said the Department of Insurance has enhanced its review to determine whether companies have sufficient reinsurance. The Legislature has also made changes to state law to improve the financial condition of insurance companies.
Incentives have been used in the past to entice companies to sell property insurance in Louisiana. Whether that will work again remains to be seen, but, for now, the major burden is on Citizens and it’s costing policyholders much more for insurance than they should have to pay.
The Legislature has to try and do something to ease their financial burden — and their pain.
Jim Beam, the retired editor of the American Press, has covered people and politics for more than six decades. Contact him at 337-515-8871 or firstname.lastname@example.org.