As policy load rises steeply, Louisiana's insurer of last resort prepares for the worst

Tens of thousands of homeowners and businesses have lost their property insurance coverage in the last year, following four major hurricanes, eight company failures and a dozen pullouts from the state's increasingly dicey market.

The shakeup has triggered a mass migration away from small private insurers. Most people left without coverage have only one place to turn: Louisiana Citizens Property Insurance Corp., the state-run insurer of last resort.

The 75,000 homes and businesses Louisiana Citizens now counts on its rolls is more than double the number the insurer had when Hurricane Laura struck in August 2020. As of June 2022, Louisiana Citizens had added some 40,000 policies — a 109% increase, according to the most recent data.

The bulk of the policies were added in the New Orleans metro area, the state's largest population center, with thousands of others being added in other coastal parishes south of Interstate 10. Officials say the trend has not slowed. Unofficial figures suggest the number of policies will top out above 100,000 as the number of broke insurers grows and more companies flee the state.

By midyear, the organization had written $154 million in commercial, homeowners and dwelling premiums — putting it among the largest property insurers in the state, data shows.

Richard Newberry, Louisiana Citizens' chief executive, said the most the organization had ever added over 12 months was 40,000 policies — including the tumultuous period after Hurricanes Katrina and Rita. This year, Louisiana Citizens has added 40,000 policies in just a month and a half, largely due to the spate of company failures.

"It's just a quicker process when a company goes insolvent versus when they non-renew or stop writing new business," Newberry said. "We're averaging about 530 new policies a day here."

While consumers may find getting coverage a relief, the government-backed insurance is a double-edged sword. Louisiana Citizens' policies must be priced 10% higher than private options.

The four hurricanes to make landfall in Louisiana since late 2020 have plunged the insurance market into crisis, state and industry officials say. Since those storms, property insurers have paid out $18.4 billion in claims as of June 30, according to Louisiana Department of Insurance data. About $11 billion of that was paid to homeowners, the data shows.

Eight insurers have gone broke and several others have retreated from writing policies or left the state altogether. The latest to leave was Bankers Specialty Insurance Co., which plans to cancel 6,200 policies by the end of October, records show.

The unraveling of Louisiana's insurance market may have another culprit: reinsurance. It's the coverage insurers buy to backstop their losses; small insurers tend to be especially reliant on reinsurance when they underwrite property in high-risk areas.

"The problem with reinsurance right now is that it's expensive," said Lars Powell, who directs the Alabama Center for Insurance Information and Research. "The reinsurance industry has been getting hammered for several years in a row. The cost of everything is going up."

As a result, Powell said some insurers must either raise their prices or try to make do with less reinsurance. If they take the latter approach, a major storm can mean financial failure.

The combined effects of the marketplace shakeout are shifting more people to the state's insurer of last resort.

$125 million line of credit

So much so that Louisiana Citizens is now preparing for the worst possible financial scenario.

The organization now has more than $1.1 billion in reinsurance coverage in place to pay off losses, according to a quarterly financial statement filed in June. Last year, by comparison, the organization had just $540 million in reinsurance coverage, reflecting its much smaller pool of policyholders and relatively lower risk.

"We never anticipated the seven companies were going to fail, but as we went out we knew that we were going to increase quite a bit," Newberry said. "We actually increased our (coverage) by $640 million and in the hardest market in the history of reinsurance, I believe."

In keeping with that strategy, Louisiana Citizens will go before the State Bond Commission this Thursday to request approval to increase a line of credit from $50 million to $125 million. Newberry said the loan money has never been tapped before, but Louisiana Citizens keeps it available in case its finances take a turn for the worse.

The idea is more than a hypothetical forecast: Homeowners are still paying off a debt of nearly $1 billion accrued in the aftermath of Katrina and Rita. Back then, Louisiana Citizens, then newly formed, went broke and was forced to issue bonds to pay claims.

If that ever happens again, Louisiana Citizens could raise about $250 million in 30 days through a regular assessment from the state's licensed property insurers. The line of credit would cover expenses until the funds come in.

"The only reason that $125 million is there is to bridge that gap between 30 days of getting paid by those companies," Newberry said. "That line of credit has never been touched, but we've always had it, because (state law) says we have to be at a deficit before we can assess."

The recent surge of growth was not entirely unexpected, Newberry said. But Louisiana Citizens struggled to manage the sudden influx of customers after the mass cancellation of 22,000 policies from Lighthouse Property Insurance Corp. and its subsidiary Lighthouse Excalibur Insurance Co. The two firms were the fifth and sixth companies to collapse under financial strain.

Some insurance agents complained that the computer system was strained, and they had to process applications during off hours late at night.

Newberry said the growing pains were quickly addressed in July when Louisiana Citizens purchased two new servers to speed up the process.

"When you have 130,000 quotes and 40,000 policies in 30 days," Newberry said, "there's no system in the world that could take care of that and not slow down."