State program placed Louisiana’s riskiest policies with untested insurers; many then failed
New Orleans Advocate, The (LA)
Over the last decade and a half, more than 129,000 policyholders have been offloaded from Louisiana Citizens Property Insurance Corp., the state-run insurer of last resort. Through a program known as depopulation, some of the riskiest policies were placed with untested private insurers as the agency tried to reduce its exposure to future hurricane losses.
Few homeowners knew how vulnerable some of the new private insurers really were until companies faced their first major challenges in 2020 and 2021 — a period that included four powerful hurricanes.
The flaws of the program are now becoming clear.
Every year since 2008, Louisiana Citizens policies have been offered to private insurers. No company that has applied has ever been turned down. Some insurers were barely up and running when they opted to underwrite homes for vulnerable Louisianans.
Six of the 18 companies participating have since been declared insolvent – including the four that took on the lion's share of the policies. Two insurers were consumed during mergers after struggling financially. At least two others have since left the state.
Half of the 18 companies had low financial stability ratings when they agreed to underwrite hundreds and — in some cases thousands — of policies, a Times-Picayune review found. These firms were one rating downgrade away from being ineligible to sell insurance to people with federally backed mortgages.
Not every company that participated failed financially. Insurers with better ratings usually took on fewer policies from the risk pool. Most of them survived the tough storm seasons — even if their balance sheets took a beating.
Consumers rarely questioned the switch from Louisiana Citizens to some unknown insurer, because it often came with a deep discount. Once the insurer for some 170,000 policyholders, Louisiana Citizens' headcount fell to about 36,000 by 2021, largely because of the depopulation program.
The grim results suggest the government's strategy is unsound. But regulators and lawmakers say they want to do it again. Some analysts predict the migration away from Citizens will be handled more cautiously this time.
"Almost everybody wanted out back then," said Ross Shales, an independent insurance agent in Metairie and consultant with Expert Insurance Services. "This time, we would probably look at it a little bit closer and speak to clients because of what's happened with a lot of these companies."
The growing number of bankrupt insurers is forcing homeowners back into the arms of Lousiana Citizens where, by law, coverage offered must be at least 10% higher than private options. The organization now has more than 100,000 policyholders, nearly three times as many as before Hurricane Laura.
Insurance Commissioner Jim Donelon is pushing a plan to give millions of state dollars to insurers in exchange for taking policies off Citizens' books again. Not removing them, he said, could overwhelm the state-run insurer.
Some political leaders have blessed Donelon's pitch, citing Citizens' near-demise when Hurricane Katrina struck and the agency was holding some 170,000 policies. The fallout led the organization to borrow nearly $1 billion and force every homeowner in the state to pay regular assessments through 2026.
"It's a good tool," state Rep. Mike Huval, R-Breaux Bridge, told the Joint Budget Committee last month about Donelon's incentive plan. "I'm not going to say it's going to fix everything."
Close observers of the insurance industry, in interviews, expressed skepticism after reviewing data on the program's past performance. At a minimum, one said the state should commit to closely watching the private insurers indefinitely as long as they're underwriting policies in coastal Louisiana.
"These are effectively creations of government policy, and therefore the government has a responsibility to monitor them closely," said Robert Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina'sDarla Moore School of Business. "Anything short of that is going to have very significant and detrimental public policy consequences."
Low stability ratings
Louisianans have for years faced challenges in finding property insurance in parishes below Interstates 10 and 12. Well-known insurers like Allstate and Travelers retreated from the region after Hurricanes Katrina and Rita.
In the years since, Donelon's LDI has lured small, upstart firms to replace them, in some cases offering multi-million dollar incentives to companies that agreed to underwrite properties along the coast.
Four of the 18 companies that participated in the depopulation program took state grants totaling $29 million. The depopulation program – bolstered by the grants – offered an easy if risky way into the Louisiana marketplace, allowing small firms to build a substantial book of thousands of customers overnight.
Underpinning the effort was Donelon's belief that even small insurers can do a better job managing catastrophic risk than a government-created entity like Citizens. He believed creating competition was key.
"Our companies all would have been fine through Hurricanes Laura, Delta and Zeta. The ones that failed didn't adequately reinsure themselves for Hurricane Ida," Donelon said. "That's on them, frankly, but we're not going to let that happen again. We're going to try not to let it happen again."
To better understand the depopulation program, The Times-Picayune sought a list of the companies that applied and how many Citizens policies each received. The newspaper also examined the stability rating given to each company at the time by AM Best and Demotech — two of the industry's most well-known rating agencies.
The industry relies on the ratings because the Federal National Mortgage Association, or Fannie Mae, has minimum requirements for property purchased with government-backed loans. Each company has its own grading system and scale. For AM Best, the minimum is a "B," and the minimum for Demotech is an "A." If an insurer slips below that threshold, it can quickly spiral into collapse.
Of 18 insurers that relied on depopulation, half had an "A" rating or better from Demotech when they first participated. Only seven firms had a "B" or higher from AM Best. Two of the insurers were unrated by the two agencies.
Creating a risky, 'niche market'
Ultimately, it was Louisiana Citizens' 16-member board of directors that approved which companies could assume the organization's policyholders.
Slidell Mayor Greg Cromer, who sat on the board from 2012 to 2016, said companies that failed after taking on Citizens policies may have just been unlucky.
"I know that wasn't the intended consequence of what occurred. They were well-capitalized," said Cromer, a Republican who once chaired the state House of Representatives'Insurance Committee. "They were taking on risks that major companies weren't willing to take. They were creating a niche market."
Few changes have been made to the program since it began. In 2018, the Legislature gave Citizens more discretion to decide when its policies could be offered to private insurers. By then, private firms were taking out only a few dozen policies a year. The overall number of policyholders had dwindled below 50,000.
"The goal was to move people into the private market as much as possible," Cromer said, "to give them an opportunity to compare rates, as opposed to a rate that's set by the state."
Agents played a role, too. Prospective insurers would review all the policies on Citizens' books, picking those they wanted to assume. Then the agent who helped create the original policy chose whether to approve the new insurer.
Then an "opt-out" letter was mailed to every policyholder, notifying them of the change and how they could stop it. If they took no action, their coverage rolled over to the new insurer.
Most people saw the new, lower-cost insurance coverage as a reprieve from Citizens' legislatively mandated high prices, said Shales, the independent insurance agent.
"There's a lot of people — the only way they got into houses over those 15 years is because they were buying these less-expensive policies," Shales said. "If we would have had Allstate or State Farm's premiums, if they were actually going to be in the wind business, (they) would have been twice as high."
Communicating the tradeoffs to homeowners – for instance, that the new companies had limited resources – was a major shortcoming of the program, said state Rep. Ryan Bourriaque, R-Abbeville. He said the process should have been more transparent and its voluntary nature more clear.
"Many homeowners were unaware that their policies had changed hands," Bourriaque said. "In some cases, many homeowners saw a reduction in premiums from Citizens to the new insurer and assumed that would be a positive outcome."
Copying Florida, with similar results
Louisiana's depopulation efforts were inspired by a similar initiative in Florida, where the state's insurer of last resort has also paid companies to mitigate its risk. And it has had similarly dismal results there, experts say.
Martin Grace, a professor of insurance at Temple University, saw a familiar pattern in the record of Louisiana's depopulation program, calling the effort no more than "a short-term solution."
"Florida provided subsidies, so if you took policies, you got a bounty," Grace said. "When the sun was shining, people collected the bounty, and they just didn't have enough capital for when it rained. And they went bankrupt. What we're doing is just postponing the problem."
Louisiana's program was not free of questionable players. A case in point: Excalibur National Insurance Co.
Formed in 2016, the insurer struggled to raise the $8 million that regulators required for their license. It was nonetheless allowed to assume more than 600 policies in the same year from Louisiana Citizens, putting those property owners at risk.
The firm's managers skirted the capital requirement for nearly two years until 2018, when the LDI seized control of the insurer. Regulators alleged that the firm's CEO, Jeffrey Pollick of Clearwater, Florida, tried to trick the government into thinking it had fully funded the company. They said Pollick passed off funds from a certificate of deposit as free and clear capital for the insurance company he'd just started, when in fact the money was encumbered.
Regulators also told a judge that Excalibur National's managers and board of directors were incompetent, adding that allowing them to continue operating would be "hazardous to their policyholders, creditors and the public."
Excalibur National was later sold to Lighthouse Property Insurance Corp., an enthusiastic participant in depopulation since 2008, when it was first licensed in the state. The company assumed nearly 20,000 policies from Citizens over seven years. In 2019, Excalibur National was renamed Lighthouse Excalibur Insurance Co.
Both insurers went under earlier this year, sending more than 5,500 outstanding claims to an industry bailout program run by the Louisiana Insurance Guaranty Association. Their 22,000 policyholders were left without insurance on the cusp of hurricane season.
In theory, offering consumers a private market solution over the state is not a bad idea, Grace said. But these small firms are nothing like Allstate, State Farm or Farmers.
"The well-capitalized private market insurers could (do it) because they're in business for the long run. These other companies are not," Grace said.
"I don't want to call them fly-by-night (insurers) because that sounds like they're set up to commit fraud. They're set up opportunistically to be alive when the sun is shining, and to walk away when the sun is not."
Private market dreams
State political leaders are still convinced that Louisiana's salvation may come from these small private insurers.
Of the nine insurance companies writing policies that have collapsed in the last two years, six had a hand in the state's depopulation program.
When insurers collapse, their outstanding claims are sent to LIGA, which is supported by fees from viable insurance companies in the state. The guarantee fund will borrow $600 million in bonds to handle the liabilities left by the insolvent insurers. Those costs will ultimately be passed on to taxpayers, in the form of rebates to the insurance companies that front them.
But some lawmakers still believe depopulation is Louisiana's best chance at taking the pressure off the newly swollen state-run insurer.
Homeowners steered to Citizens after their insurer collapsed are already feeling the pinch of its steep prices. Still, it could get worse: The organization is awaiting a decision from the LDI for a proposed 63% rate increase.
The Legislature this year agreed to reinstate the Insure Louisiana incentive program, which was created after Katrina and encouraged insurers to offer homeowners coverage where it was scarce.
Donelon has said he wants to use it to lure companies to the state again.
The incentive plan has not yet been funded. At a Joint Budget Committee last month, Donelon suggested the money could come from about $20 million in excess revenue in the LDI's budget. Then he would just need the Legislature's permission.
It's unclear what other aspects of the program might be tweaked.
State Sen. Kirk Talbot, R-River Ridge, who carried the incentive program bill, said a new capital requirements law will help. The statute raised the minimum capital required for the new and existing insurers from $3 million to $5 million, though the change doesn't take effect until 2026. The minimum will rise again to $10 million by 2031.
The idea is that insurers will be motivated to buy more reinsurance if they have more of their own money on the line.
The bigger risk, though, is geography.
Many of the failed insurers were crippled by the scores of claims created after hurricanes rocked areas near the coast. Talbot said he hopes the LDI will find a way to address insurers that carry too many of those risky policies through regulation, but the details are still hazy.
"We're only going to offer the incentive program to (insurers) that want to write policies below I-10. Unfortunately, that's where all the people live," Talbot said. "You've got to get them out of the hurricane-affected areas. That's the balance."