Insurance failures put Louisiana in a crisis. What’s to stop it from happening again?

Those include giving batches of policies from the state-backed insurer of last resort, Citizens, to small, regional insurers, and doling out grant money to companies willing to write in storm-prone south Louisiana.

But state officials have made several changes since the cascading collapses, which helped spawn high rates, few carriers and swelling rolls for Citizens. It remains to be seen whether the state's actions — including beefing up oversight of reinsurance, a key part of the failure — will stave off another crisis.

Stewart Guerin, deputy commissioner of financial solvency, said late last year that insolvencies may be inevitable, depending on the weather.

"There's nothing that's going to prevent insolvencies at the end of the day if there's another Hurricane Katrina or Hurricane Ida," Guerin said.

The companies that collapsed were largely smaller, regional insurers who shared key characteristics. Many grew rapidly, drawing concern from auditors. Several took big batches of risky policies from Citizens, and most concentrated their policies in the storm-prone Gulf South. And 11 of 12 farmed out the work — and significant chunks of the premium dollars they collected — to less-regulated affiliates, making it difficult to know if they spent money wisely.

'Deeper dive' promised

Since the multiple failures, the Louisiana Department of Insurance has homed in on reinsurance, which provides insurers a backstop when a catastrophe hits. Several of the companies came up short on reinsurance after Ida, prompting their liquidation.

The Legislature also agreed in 2022 to raise the minimum capital requirements for new insurers from $3 million to $10 million, as part of an effort to prevent ill-equipped companies from writing policies. Existing companies have longer to raise their minimum capital; the level will be $5 million in 2026 and $10 million by 2031.

And the agency is pushing companies to spread out their risk across a broader swath of the state, instead of concentrating policies in a few coastal parishes.

Companies will no longer be able to have more than 15% of their policies in a single parish if they participate in the incentive program, though former Insurance Commissioner Jim Donelon issued two waivers before he left office Jan. 8. That allowed Gulf States and Cajun Underwriters to have more than 15% of their policies in a parish, though the full breakdown of policies by parish is confidential by state law.

Tim Temple, who took over for Donelon this month, has said he opposes the incentive program and will not be pushing for new funding for it. He said he'll honor the incentives — and waivers — already granted by Donelon. Temple recently tapped former Republican state Sen. Barrow Peacock, of Shreveport as his deputy; Peacock was the only Senator to oppose the incentive plan.

One key problem the failed insurers faced was their level of risk. For instance, Americas Insurance Company, one of the failed companies, saw more than half of its 25,000 policyholders file claims after Ida, a staggering amount.

John Ford, spokesperson for the Department of Insurance, said the agency has hired a consulting actuary to take a deep dive into insurers' reinsurance.

The consultant is looking at hurricane models that underlie the reinsurance, and evaluating which entity performs the catastrophe modeling, among other things, Ford said.

The LDI has also started reviewing, parish by parish, how much property companies participating in the incentive program are insuring, something it wasn't doing before.

"More of our focus has been on the reinsurance aspect of these insolvencies," Guerin said. "To take a deeper dive into what their reinsurance program is...to determine whether or not the reinsurance they're getting is adequate in the event of another Hurricane Ida."

An analysis by the Louisiana Legislative Auditor after Ida found several companies had far less reinsurance than they needed to weather the losses.

Affiliates may get scrutiny

Close observers of the industry have also raised red flags about the companies' affiliate structure, which effectively moved huge amounts of money to less-regulated sister firms, while the insurers themselves struggled with losses.

Four of the top 20 home insurers that survived the crash and were writing in 2022 use the affiliate model. Those companies are SureChoice Underwriters Reciprocal Exchange, Allied Trust Insurance Co., Centauri National Insurance Co. and Gulf States Insurance Co.

Donelon said recently he would support legislation to shine more light on the bonuses and pay executives receive from those affiliates. Analysts who follow the industry closely have said salaries from affiliates can incentivize CEOs to maximize profits at affiliates, sometimes at the expense of the insurer itself.

Safepoint, a small insurer that is one of the biggest beneficiaries of the incentive program, has also raised concerns from analysts. The company took tens of thousands of policies from failed insurers, but its finances have been shaky for years. In 2021, A.M. Best, the premier ratings agency for insurance companies, dropped its rating for the firm so low it could no longer insure homes with federally backed mortgages. Safepoint instead withdrew its A.M Best rating and got an "A" from Demotech, another rating company that gave passable marks to many of the failed companies.

Safepoint has also taken more than 23,000 policies from Citizens, most of them in the last two years.

Temple says he will focus on making sure the companies writing policies in Louisiana are able to "be here for the long term." A former insurance executive, Temple also said he has experience evaluating reinsurance contracts, and intends to keep up the agency's work of diving into those deals.

"If their model is to shift assets out, not purchase adequate reinsurance, which would subject their companies to potential failure and shelter their assets somewhere else for the sake of them making the dollar and leaving the policyholder in the lurch, I don't support that," Temple said.

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