Louisiana auditor urges insurance regulators to scrutinize undervaluing of property

In a report released Monday, the auditor called on the state Department of Insurance to thoroughly examine a claim the agency has made frequently: Why did so many of the failed companies lack enough reinsurance — that is, coverage insurers use as a backstop against catastrophic events.

Insurance Commissioner Jim Donelon has largely blamed multiple insurers for their failures to adequately prepare for the major hurricanes that often threaten coastal Louisiana. Making sure companies are financially fit enough to deliver on their obligations to policyholders is one of the basic duties of insurance regulators. Presumably, that includes verifying that insurers buy enough reinsurance.

Six firms failed because of claims stemming from 2021's Hurricane Ida, even though each of those firms "had what was considered enough reinsurance by rating agencies," the audit noted.

The report touched on a number of potential reasons that might explain the reinsurance gap, but none have been fully investigated. The Department of Insurance said it's reviewing the statistical modeling the failed insurers relied on to make reinsurance purchasing decisions, the report noted.

"What we want to try and figure out is what's the underlying issue," said Chris Magee, who oversaw the state's audit. "Are companies not obtaining the right amount of reinsurance? Or is there something deeper ... maybe the modeling isn't right in the first place?"

In the last 18 months, at least 11 insurers have been declared insolvent, the legislative auditor wrote. That list includes nine previously reported, as well as an affiliate of Gulfstream Property & Casualty Insurance Co., which also failed, and Maison Insurance Co., which was merged into FedNat Insurance Co. before that firm was declared insolvent last month.

All told, those firms wrote more than 13% of the total homeowners' premiums in the state, the audit said.

The growing number of collapsed companies has plunged the state's insurance market into crisis. The Louisiana Insurance Guaranty Association, a state-chartered industry bailout program, plans to borrow $600 million to cover unresolved claims. And tens of thousands of policyholders have been driven to Louisiana Citizens Property Insurance Corp., the state's insurer of last resort.

Louisiana Citizens' rolls have more than tripled in 18 months: The agency had 35,670 policyholders in January 2021 and had 112,035 as of August 2022. And its exposure has swelled by nearly 400% over that time, from $6.7 billion to $33.3 billion.

Auditors said Citizens "may not have adequate reinsurance to pay claims if a major hurricane occurs" thanks both to its swollen rolls and "issues in the reinsurance market." They wrote that Citizens would likely be able to handle claims from a storm that caused damage comparable to 2020's Hurricane Laura, but not 2021's Hurricane Ida.

The state auditor found that the LDI conducted some 228 financial analyses and 13 examinations of the 13 insurers based in Louisiana between 2017 and 2021. While insurance regulators have said they will start reviewing reinsurance separately, auditors suggested they should look closely at the policies themselves and how they were valued by the failed insurers.

"To further understand why the six insurance companies did not have adequate reinsurance, (the) LDI also could analyze information related to policies formerly held by now financially-insolvent insurance companies," the auditors wrote in the report.

The implication of the request is that some insurers may have been inadequately reinsured because their policies were underpriced. The insurance department agreed to review the data, according to the report.

The auditor found gaps between the values of properties recently underwritten by Louisiana Citizens that were previously held by some of the failed insurance companies. One policy, for example, had coverage worth $512,800, but was later insured by Citizens at $737,600. That would have left the consumer potentially underinsured for nearly $224,800 of the property's value.

"There was a pretty stark contrast between what the failed insurance company insured or valued the home at versus what Citizens insured or valued the home at," Magee said. "What we found through just some examples from Citizens is there were homes that they were insuring at a much higher value than the previous company."

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