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Prudence penalized, risk rewarded with Louisiana insurance

You are a Louisiana homeowner who bought insurance, kept the premiums up to date, and made no claims on it. The reward for your foresight is a 15 percent rate hike to pay for a state welfare program.

In essence, that’s what the state has done for the next year to replenish the risk fund of its home insurer, the Louisiana Citizens Property Insurance Corporation. Further, it can keep two-thirds of that increase for up to the next 25 years. The government corporation writes policies, at a higher average rate of at least 10 percent that a parish’s top 10 insurers, where other insurers might not write such policies.

(It is not mandatory that insurers assess this charge, which applies to fire, homeowners, allied lines, and commercial multi-peril - nonliability, but if the state is going to hit up insurers extra, you can be sure they’ll want to recoup the extra charge rather than sacrifice revenues elsewhere.)

In other words, the presence of this mechanism creates an artificial ceiling on premiums and invites building in areas not properly valued in terms of risk. Even as Insurance Commissioner Robert Wooley defends the agency, which came about as a result of state law, it’s clear that its presence is just a way to shift costs from people willing to engage to riskier behavior to those who are more prudent.

Wooley points out that without the agency many people could not get insurance because policies wouldn’t be written for them in some areas. This is untrue: insurance companies will write policies for anybody as long as they are given the right, in the aggregate, to make money doing so. This may result in sky-high rates in some areas but it is the state itself whose regulatory practices artificially keep rates down that actually discourages the policy writing.

Instead of hitting up ratepayers (or, for that matter, taxpayers) to subsidize for others’ risky mistakes and the state’s insistence on regulating insurance rates, the state needs to abolish this agency and to legally require anybody who lives below sea level to buy flood insurance. In all cases – standard homeowner’s, fire, commercial, and also flood – the state must largely deregulate pricing, concentrating only on preventing collusion. By doing so, rates will be allowed to rise to realistic levels, insurers will step forward and, probably, owning and building may suffer because of increased costs. But that’s acceptable to prevent the state absconding with other ratepayers’ funds to make up the difference – nobody has the right to occupy structures wherever they want and to have others pay for it.

Letting the free market work never is a bad idea – a notion Louisiana historically has had a difficult time accepting, and in large part explains why the state remains economically developmentally backwards compared to its brethren.


Anonymous said...

Stay tuned.

The rate increase is likely to be greater than 15 percent.

So far, all policyholders are seeing is the assessment the state-run Louisiana Citizens Property Insurance Corporation has made on other insurers in the state. These insurers are allowed to pass on a limited amount of that assessment as a surcharge on every property insurance policy.

Next, policyholders will be seeing a second new charge on their invoices. It will be for Citizens' emergency assessment. Right now, Citizens is expecting to sell $900 million in bonds so Citizens can settle remaining Katrina and Rita claims. Cost of retiring those bonds will be tacked on all property insurance policies sold in this state. I am unaware of any statutory cap of what can be passed on to individual policyholders, and the charge they see this year and in subsequent years will depend on the duration of the bonds and the number of other insureds (and the value of their insured properties)that remain in the state.

Professor Sadow was correct in all of his points, save one. It wouldn't have saved Citizens Property Insurance Corp. anything if the state had required every property owner below sea level to buy flood insurance. Citizens' policies did not cover flood losses. Costs of flood damage will be passed on in other ways to policyholders and taxpayers --
through the Federal Flood Insurance Program which has no relationship to the state-run plan.

Meanwhile, the state has received about $6 billion in community development block grants. Expect that money to go to fund uninsured losses (both public and private).... while the prudent insurance buying Louisianans bear the loss costs of the state run company.

Jeff Sadow said...

I didn't intend to imply that this corporation dabbles in flood insurance, just that the state as part of reform in the area ought to mandate it for below sea-level structures -- or pass a law saying that if you inhabit a structure below sea level, don't buy flood insurance, and then get flooded, that you can't sue insurance companies or the state, or will get any compensation from the state.

Rep. Bowler, thanks for the warning it's probably going to get worse before it's better for responsible ratepayers.