Louisiana may soon regulate insurer affiliates more closely, amid failure concerns

Rep. Edmond Jordan, D-Baton Rouge, said he filed HB 672 in response to a series published in January by the Times-Picayune — The Advocate that found 11 of the 12 firms that went belly-up used an affiliate model that has come under scrutiny by regulators.

The companies sent hundreds of millions of dollars to affiliates, taking it off their own books and making it more difficult to determine if they used the money wisely. Meanwhile, many of the companies were growing too quickly, concentrating too much risk in coastal areas and buying inadequate reinsurance. When a series of hurricanes hit in 2020 and 2021, they all failed, leaving taxpayers to foot the bill and forcing thousands of policyholders onto the rolls of Louisiana Citizens, the state-backed insurer of last resort.

Several close observers of the industry said in interviews that the affiliate model can create perverse incentives, encouraging executives to maximize profits at affiliates without regard to how the insurer itself is faring. An executive of one of the failed companies acknowledged that he used the affiliate model to extract more profits with less scrutiny from state regulators, though he said none of the transfers were improper.

Jordan's bill, which advanced out of the House Insurance Committee Thursday without objection, would require affiliates, called managing general agents, to file more detailed information about their activities to the Department of Insurance, and allow the agency to more closely examine them.

"We want to make sure the commissioner has the authority to examine not only the insurer but the affiliates so there's no shifting of funds and that LIGA and the taxpayers are not on the hook in times of claims," Jordan said. LIGA is the Louisiana Insurance Guaranty Association, a state-supported backstop that takes over claims from failed insurers.

Insurance Commissioner Tim Temple said he agreed with the intent of Jordan's bill, though he said affiliates often operate without "nefarious" purposes. He also suggested that his predecessor, Commissioner Jim Donelon, didn't scrutinize the companies enough, but that he will. Temple took office in January.

Temple has continued a probe of reinsurance contracts started by Donelon after the companies' collapse, and maintained new rules aimed at preventing insurers from concentrating policies only in risky areas. One company, Americas Insurance, had so little diversification that over half of its Louisiana policyholders filed claims after Ida, an extraordinary number. The state Insurance Department is suing the firm over allegations it misled regulators about its financial condition.

Donelon, who chose not to seek reelection last year, welcomed with open arms the smaller regional insurers that used the affiliate model after Hurricane Katrina caused an insurance crisis in the mid-2000s. He sent millions in tax incentives to the companies and encouraged the transfer of tens of thousands of Citizens policies to the companies.

Some of the insurers that took on the most Citizens policies failed.

Last fall, Donelon conceded that the affiliates can extract profits with less scrutiny, and said he would support legislation that shined more light on the executive compensation extracted from the companies.

Jordan's bill is one of dozens filed this session in response to the state's insurance crisis, a top issue for voters and legislators. Temple is pushing a package of bills that would make it easier for insurers to do business in Louisiana — by allowing them to more easily raise rates and drop customers, among other things — in hopes that more companies will enter the market and that the competition will drive down rates.

Some lawmakers have voiced concerns about the strategy, but other tactics have not gotten far. The committee on Wednesday rejected a bill to give Citizens policyholders a 10% break on their insurance premiums for the next two years.

The Legislature will also decide how much money to send to a program that doles out $10,000 grants to people to offset the cost of putting fortified roofs on their homes.

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