Could parametric insurance help Louisiana homeowners?

With the widespread recent media attention around the insurance crisis in Louisiana, Gov. Jeff Landry recently expressed his frustration with insurance rates, up on average another 6 percent in 2024.

State officials have struggled to find a solution, and insurance companies have yet to make it more affordable. There could be help in a type of insurance known as "parametric insurance." Parametric insurance has the potential to give immediate financial relief to homeowners and to improve long-term resilience.

The problem

In a state prone to hurricanes and flooding, homeowners are vulnerable.

I spoke recently to a homeowner from a leafy neighborhood in New Orleans about her homeowner's insurance. "When we bought our house, I had to call over 50 agents and brokers for quotes. We finally found coverage, which is costing us about $9,000 a year, and that is with a $25,000 hurricane deductible."

She continued, "The reality is for us, it's already a struggle, and we know that if a storm were to hit, we would have to pull the deductible from our savings." When I ask her about the future, she says, "We still have kids in school. When they are gone, even though we love it here, we may leave as well. We have friends who live in other states, and they all pay around $1,000 a year. We just can't retire here with these insurance rates."

So, while she and her family were relieved to find insurance, getting insurance with a sky-high deductible just makes storm repairs even more unaffordable. And that's not the end of the problem. Southeast Louisiana and the Mississippi coast have some of the highest rates of nonrenewal in the whole country, as the New York Times recently reported, with as many as 1 in 25 policies not renewed in 2023 ("Insurers Are Deserting Homeowners as Climate Shocks Worsen").

What is parametric insurance?

Parametric insurance is a supplemental policy with no deductible, meant to be used alongside a current homeowner's policy.

Traditional homeowner's insurance only pays out after a homeowner can prove damages. Parametric doesn't require proof.

Currently offered for hurricanes in Hawaii and Florida, wildfires in California, and flood in the United Kingdom, parametric insurance uses predetermined triggers related to specific events. If that specific event occurs – such as a hurricane reaching a certain wind speed or floodwaters reaching a certain level – the policyholder automatically receives a payment in an amount the policy sets, usually between $5,000 to $15,000 and up to $25,000. But it could be any amount.

While you wouldn't insure whole home like this, you could receive enough to pay your deductible and make some initial repairs while waiting on your main homeowner's policy.

One website says it pretty well: "The bigger and closer the storm gets to your residence the more you get paid," and the policy "offers payouts whether or not property damage is incurred." This could be an attractive option for homeowners in Louisiana.

Why parametric insurance?

1. Immediate financial relief. One of the greatest advantages of parametric insurance is speed.

Traditional insurance claims can take weeks or even months to pay, especially after a major disaster. In contrast, parametric policies pay out quickly, often within 72 hours of the specified event.

For homeowners dealing with high deductibles, parametric insurance can also serve as a kind of "deductible insurance." A parametric policy could help cover all or part of the deductible, evacuation expenses and short-term repairs following a storm, all while avoiding debt.

2. Encouraging innovation and growth in the insurance market. Parametric insurance is not just a new concept for homeowners; businesses and public entities have been using these types of policies for years.

For instance, when a city gets hit by a storm, they often need quick cash to deal with the emergency response. This product is now emerging for individual homeowners, but it's not yet readily available in Louisiana. It could eventually become a critical tool in stabilizing Louisiana's insurance landscape.

As insurers grow more comfortable with these products, they could help lower overall premiums and reduce financial uncertainty, leading to more resilient and affordable future for Louisiana's homeowners.

3. Allow homeowners to afford deductibles and get lower premiums. If you currently carry a $10,000 deductible, parametric insurance might let you get a $25,000 deductible, but any deductible would be paid instantly by your parametric policy.

With the financial risk mitigated, savings could be passed on to the homeowner in the form of lower premiums.

Given the need for an "all-of-the-above" approach, many people think that parametric insurance can help Louisiana keep insurance affordable and keep people in their homes.

Will Longwitz is an attorney living and practicing law in New Orleans. His primary practice areas are personal injury and property damage claims. He regularly writes about insurance- related issues at RealRiskReview.com.