Don't count on lower insurance rates

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Louisiana legislators are ringing their hands over the increasing cost of property insurance. "How are we going to bring insurance premiums down? What to do, what to do?" Will enforcing stronger building codes work? How about giving grants for people to reinforce their roofs? Will any of this make any difference? Don't count on it.

Yes it's true that insurance is regulated on a state-by-state basis. But unfortunately, any state actions will be merely a drop in the bucket. In recent months alone, there have been two major hurricanes along the Gulf Coast, and now, can you believe, another in the mountains. Hurricanes Francine, Helene and Milton have taken their toll on reinsurance, not just in the Deep South, but the whole rest of the country.

Here's how reinsurance works. Any storm of $10 billion or less can generally be handled by U.S. insurance companies operating in each individual state. After all, in many states it's been a number of years since any hurricane caused significant damage. Look at western North Carolina where I happen to have a home. Most folks cannot remember how far back it was that a weather related disaster took place in the Blue Ridge Mountains. Homeowners often pay premiums year after year, and expect their insurance company to save those premiums for a time when a big storm occasionally hits.

Of course that's why insurance premiums are so much higher in states like Louisiana and Florida. There may be a few years in between significant hurricanes. But as a whole, those of us living here in the Bayou State just know that every few years, there is going to be a big storm when you will need significant insurance coverage. Quite frankly, we would be lucky if premiums just stayed on an even keel and not take any significant jump. But that also is not going to happen.

When people talk about lowering their property insurance premiums, just look at what has taken place in the past four or five years. The cost of rebuilding or replacing a house has jumped considerably. As much as 25% in many areas. This increase has included in the cost of labor as well as the cost of materials. Much of this increase is related to inflation and the cost of importing building materials worldwide.

Many homeowners are underinsured and do not have sufficient replacement coverage. The American Property Casualty Insurance Association did a study that determined as many as 30% of all insured homes need to increase their insurance coverage because of rising building costs. They just do not have enough insurance in case their home is seriously damaged.

When major storms cause more than $10 billion in damages, that's when an American insurance company needs a reinsurance company. Insurance companies buy insurance just like you and I do. Kind of like the bookie laying off part of his bet. To protect themselves, insurance companies buy a portion of what they might owe from reinsurance companies, primarily located in Europe. There have been major natural disasters all over the world in recent years, and many of these reinsurance companies have taken huge losses. So they are not about to lower their rates. Hopefully, these current rates will not go up too much.

Some legislators are proposing giving grants to strengthen the roofs of homeowners, and others want to enforce the building codes. But there is only enough money for a handful of grants to build new roofs, and building codes will face an uphill fight in the legislature, from realtors and contractors. So any such changes might offer help in the future, but really nothing of substance in the short term.

I know it's disappointing and bleak to hear these observations. I'm just pointing out my experience of being the Louisiana insurance commissioner for 12 years. Let's face it. We benefit here in the Bayou State from a warmer climate and for many good paying jobs in plants along the Mississippi river. But we all pay a price for living near coastal waters in the Deep South.

The long-term solution is for Congress to create, as this column has been arguing for years, a national reinsurance backstop similar to the terrorism insurance program, which guarantees that the government will step in and help cover catastrophic losses once they reach a certain dollar amount.

These suggestions will not force insurance rates to take a major drop. But they will stabilize a volatile insurance market that has made the cost of property insurance unaffordable for thousands of Louisiana homeowners.