Jim Donelon looks to the past to solve Louisiana’s insurance crisis

Louisiana Insurance Commissioner Jim Donelon has more on-the-job experience than 98% of his colleagues.

Whether that is a positive attribute is the subject of much debate in his state. Louisiana is wracked by an insurance crisis that much resembles the crisis that followed Hurricane Katrina and Hurricane Rita in 2005.

Donelon's solution is the same one he pushed for then: an incentive pool to encourage insurers to return to writing policies in Louisiana.

Incentives are the best short-term solution to pump life into Louisiana's depressed insurance market, he said. So far, 11 insurers have gone broke and another dozen or more stopped selling policies, leaving desperate homeowners to rely on the state-run insurer of last resort, Louisiana Citizens Property Insurance Corp.

The incentive program is simple. Insurers that agree to do business in the state are eligible for matching grants between $2 million and $10 million from a $45 million pool. Ten insurers have expressed interest in the program, Donelon said.

“The incentive program, which has a proven record of lowering rates and stabilizing our market after hurricanes Katrina and Rita, is only one part of our plan to protect our homeowners and our way of life from the ongoing crisis in the international insurance market," the commissioner said after the inventive program passed the state legislature last week.

A numbers game

In an interview with InsuranceNewsNet, Donelon said the 2008 incentive program was "a success" and he pointed to a set of numbers. Five insurers took advantage of the program and wrote 40,000 policies that were taken from Citizens, which had swelled to 173,000 policies at the time, Donelon explained.

As the insurer of last resort, Citizens is required by law to charged 10% higher than the highest private insurer in each parish.

But critics point out that just $29 million of the then-$100 million pool was ever distributed. And of the five insurers who signed up, a review by The Times-Picayune and The Advocate found a mixed record.

Three of the five insurers struggled or outright failed to write enough policies to fully earn the money. As a result, the Department of Insurance took back about $4.4 million – roughly 15% of what it gave out in the first place.

One insurer, Companion Property and Casualty, kept less than half of the $2 million it received from the state, records show. Another company, Southern Fidelity, had a few good years, but went belly-up last year and is now being liquidated. It's one of 11 Louisiana insurance companies to fail in the last two years.

But Donelon noted that the incentive program showed the industry that insurers can make a go of it in Louisiana and two dozen insurers eventually joined the market. That led to a stable eight-year period in which homeowners saw 1% annual rate increases and Citizens' policy count drop to about 35,000.

'Create less of a threat'

Birny Birnbaum was an economist and associate commissioner for the Texas Department of Insurance during the 1990s when worker's compensation insurers fled the market under similar circumstances.

Texas created a public mutual worker's comp insurer and let it take as much of the market as it could handle, recalled Birnbaum, now a consumer advocate and executive director of the Center for Economic Justice.

“If the private industry doesn't want to play, then that's what you have a residual market for," said Birnbaum, who disagrees with the incentive approach in Louisiana. “What they should be doing is saying, ‘Look, we're going have these residual markets be true competitors,’ so instead of just taking the worst of the worst risks, they can make and diversify their risks and create less of a threat to state taxpayers."

Allowing Citizens to grow unfettered is not desirable for residents because of the 10% added cost to what is already very expensive insurance, Donelon explained.

"We can't afford it," he said flatly.

The longer answer is found in the details of Hurricane Katrina debt. One month on the job, Donelon pitched Wall Street on a billion-dollar bond issue to help pay for Katrina damages. Although the bond was refinanced a few years later to take advantage of lower interest rates, he noted, it's impact is still being felt.

"Still today, property insurance policyholders, commercial as well as residential, are assessed every year to pay those bonds off," Donelon said. "So, we can't afford the kinds of losses that that come with hurricane events."

The need to again lure insurers with million-dollar incentives seemed far-fetched as recently as 2020. Unlike nearby Florida, which has seen leery insurers pulling back for many years, Louisiana largely enjoyed a stable property insurance market once the Katrina damage was fully accounted for.

Then Hurricane Laura made landfall near the Louisiana-Texas border on Aug. 27, 2020, causing 33 deaths and $17.5 billion in damages. One year and two days later, Hurricane Ida hit, bringing winds in excess of 150 mph. It also killed 33 people and inflicted $18 billion in damages.

Donelon does not deny climate change playing a major role in the growing power of the storm events in his state.

"There is a definite need for us to adjust to this new reality," he said. "Rising ocean waters also is a measurable reality, threatening coastal communities with flooding events. So, we need to be more resilient for sure. And I do believe Louisiana is in the forefront of the coastal states responding to that challenge. We better be because we're the most vulnerable state."

What's next?

The second significant piece of Donelon's plan calls for residents to "hurricane-proof" their roofs. Support is growing among Louisiana legislators to fund grants up to $10,000 for homeowners to fortify their roofs, which experts say can withstand winds up to 150 mph.

Forty percent of Louisiana's population resides along or near the Gulf Coast and are particularly vulnerable, Donelon said. Fortifying roofs is an idea that is proving successful in other hurricane-prone states.

"Alabama started that program five years ago, maybe a little less, and has now fortified over 30,000 homes in the state," he said. "North Carolina copied them two or three years ago, starting with the Outer Banks and spreading inland, where 5,000 homes are built to fortified standards. That's the future and we are heading down that road in a big way."

The second-longest-serving insurance commissioner in the United States, Donelon assumed office in 2006 and won five successive terms. Mike Kreidler of Washington is the only senior insurance commissioner, having been in office since 2000.

At 78, Donelon vowed to resume his 2023 campaign for another term in the coming weeks.

"I was actively campaigning up until the holidays and I frankly, hit pause then because of the crisis and haven't been able to return to the campaign trail," he said. "But my intention is to do that and to seek re-election."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.