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Louisiana needed more insurance companies so gave incentives.

In the grim years after Hurricane Katrina, Insurance Commissioner Jim Donelon was desperate to find companies willing to sell homeowners insurance in southern Louisiana. Armed with a $100 million pool, the state offered insurers millions of dollars in government grants if they could sell a certain number of policies in parishes near or below Interstate 10 and stick around at least five years. Free money is catnip for any industry. But these were high-risk insurance policies, and the devastation of Katrina – America’s costliest disaster, by far – was still fresh. In the end, Donelon was able to give away just $29 million from the incentive fund, less than a third of what had been set aside. The money went to five companies. Despite the limited number of takers – and their relative caution – Donelon sees the program as a great success. He says it kindled more interest in the state’s insurance market, and that eventually, other insurers went into business here without the need for incentives.

It was not as simple as that.

But a review of records by The Times-Picayune | The Advocate tells a more complicated story. Three of the five insurers struggled or outright failed to write enough policies to fully earn the money. As a result, the Department of Insurance took back about $4.4 million — roughly 15% of what it gave out in the first place. One insurer, Companion Property and Casualty, kept less than half of the $2 million it received from the state, records show. Another company, Southern Fidelity, had a few good years, but went belly-up last year and is now being liquidated. It’s one of 11 Louisiana insurance companies to fail in the last two years. This week, short on long-term solutions, legislators will convene a seven-day special session Monday to decide whether to direct $45 million into reviving the post-Katrina incentive program.

Incentives work – or so they say.

Donelon has said incentives are the best short-term solution to pump life into Louisiana’s moribund insurance market. Along with the 11 insurers that have gone broke, another dozen or more have simply pulled up stakes, leaving desperate consumers to rely on the state-run insurer of last resort, Louisiana Citizens Property Insurance Corp. Citizens’ rolls have more than doubled amid the crisis; it now holds about 125,000 policies. And its prices will rise significantly in the coming months as a rate increase approved last year, averaging 63%, takes effect. If Citizens can’t offload a large share of its policies, Donelon warns another big increase is likely in 2024. Regulators hope the incentive cash will convince private insurers to take policies off the state’s hands, though the incentive plan, as drafted, does not require insurers to take policies away from Citizens. That’s something the earlier iteration did. The commissioner will likely face a skeptical group of lawmakers who would prefer a more comprehensive solution for the state’s insurance crisis. Gov. John Bel Edwards, rather than the Legislature’s leaders, issued the call for the special session. At the most recent meeting of the Joint Legislative Budget Committee, Donelon fielded questions for nearly two hours. At one point, a legislator asked flatly if he had the votes to support his plan. “I don’t want to go to a special session if you all don’t have the numbers to pass it on both sides,” said state Rep. Denise Marcelle, D-Baton Rouge. Donelon replied: “I did not think there would be any hesitancy on the part of the Legislature to fund what they created unanimously.”

It was a quiet problem but after so many left the state it is no longer quiet.

A quiet crisis at first, the cost and availability of insurance is now a dominant concern. After four hurricanes made landfall in Louisiana in 2020 and 2021, lawmakers were eager to shore up claims handling, adjusting and payment requirements. Few saw the approach of the second storm, a cascading series of failures. “The bigger picture that was lurking was the fact that you had a crisis brewing on the horizon on which we had done nothing in the last two sessions to shore up the insurance market,” said Kevin Cunningham, an insurance lobbyist. “The chickens have come home to roost relative to the availability of insurance. We really have to concentrate on that.” Incentives are not a bad short-term approach, Cunningham said. However, he thinks the better long-run solution is to require better construction, which would reduce the number of large claims. “If we can keep the roof on a house when we have a storm, the damage that it causes diminishes quickly — if the roof stays on,” Cunningham said.

Funding insurers is a new take on an old policy.

In Louisiana, corporate subsidies typically flow to manufacturers and real estate developers. Florida pioneered the idea of using them to lure insurers. But getting the desired result from such an unpredictable industry is hardly guaranteed. While Donelon has said lightening Citizens’ load is his top concern, the current program doesn’t require participating insurers to take any Citizens policies – something Donelon described as a compromise with the bill’s author, state Sen. Kirk Talbot, R-River Ridge. Even if participants avoid Citizens policies, Donelon said he believes more insurers competing could help drive costs down for other residents and stimulate interest from still more insurers. Some observers believe there is a better way. “I am not a big fan of paying companies to take policies out. I don’t think that’s an optimal use of state resources,” said Charles Nyce, an insurance professor at Florida State University. “I don’t think you subsidize the private market that way.” Instead, Nyce recommended direct subsidies for consumers based on their ability to pay, if affordability is the goal. “Be upfront about it,” Nyce said. “If you want to look and see if people meet some income requirement and subsidize it at the state level, go ahead and do that, but do it means-tested.”

The first group had little experience in Louisiana.

The first round of the incentive program, starting in 2007, drew interest from only six companies. Only five made the cut. Most had sold little or no homeowners insurance coverage in Louisiana that year. Some of the insurance program’s goals were intangible. A few things were clear, though: Regulators wanted to reduce the number of policies carried by Citizens and increase options in the lower third of the state. The Legislative Auditor later revealed that the insurers received the funds before both parties signed the agreements. Donelon chalked that misstep up to the state’s inexperience in administering the program. To start, insurers, which received grants of between $2 and $10 million, had to put in at least as much money as they received. For every dollar of the grant and matched funds, insurers promised to sell at least $2 of premium. So if an insurance company received a $10 million grant, as Occidental Fire and Casualty did, it was required to invest at least $10 million as surplus — the extra money used to pay claims. Therefore, Occidental was on the hook to sell at least $40 million in premiums every year. Under the rules, at least a quarter of that premium had to come from Citizens’ policies, and at least half from parishes in south Louisiana. But Occidental missed its goal by far every year, records show. Over five years, it was supposed to write $200 million in premiums. Over seven years, it reached barely half that, about $102 million. As a result, Occidental had to return about $2.2 million to the state. In Donelon’s view, the real triumph of the program came years later. He said the five companies “primed the pump” to grow a more competitive market. “Ultimately, in the years to follow, two dozen more in addition to those five companies came to our market — small regional companies — and frankly, not as solid as the ones who we gave the incentive money to, which had higher requirements to qualify,” Donelon said during a recent interview.

Where are the initial ones now? Still here?

Another measure of the program’s effectiveness is what happened once the five insurers were no longer tethered to the state by obligation. Southern Fidelity was one of the larger companies to go under in the last year, sending 42,000 policyholders scrambling. Three of the insurers are still here in some capacity. Three were sold, including Companion Property & Casualty, because property insurance was no longer in the growth plans of its new parent company. Imperial Fire & Casualty, which was based in Opelousas, was sold in 2013 to an upstart private equity firm called Southport Lane Management that was run by a 28-year-old with no previous industry experience. Donelon’s LDI approved the sale. The company began to unravel one year later after the U.S. Securities and Exchange Commission accused the young financier of committing fraud when he moved assets from newly acquired insurance companies. Louisiana regulators seized control of the company and it was sold again; today, it’s an affiliate of Allstate and a modest player in the state market. One of the most successful of the group was ASI Lloyds, which received $5 million from the state pool. The Progressive group purchased a controlling stake in 2014 of the parent company. ASI Lloyds collected nearly three times more premium than it had to under the grant. But today, the insurer is a fairly small player in the state market.

It is a more acute problem now.

In some ways, the challenge today is more acute than it was after Katrina, Donelon said, since the reinsurance coverage that helped smaller companies take on risk has dried up. “This is the biggest challenge I have had in 16 years as insurance commissioner,” Donelon said. “The crisis is existential, truly. If we don’t do what I’m proposing to do, I truly believe thousands of people in our state would lose their homes because of the unaffordability of Citizens policies.”

We will see as the legislator is back on a special session just for this.

Insurance incentives both worked and did not
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