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Louisiana insurance tussle has national implications

Apparently, the attempt by Allstate Insurance to drop wind and hail coverage on roughly 30,000 homes in the Louisiana coastal parishes has ramifications that far exceed the state’s boundaries.

RS 22:635.3, Allstate claims, allows it to withdraw certain kinds of coverage even if the stipulation of two catastrophic storms in three years has yet to be met (in the same place; Katrina and Rita were not). Insurance Commissioner Jim Donelon says the law (only Louisiana has such an interventionist law) cannot be interpreted the way Allstate argues, which is that there is a difference between cancelling and nonrenewal and with changing a policy endorsement.

The semantics seem destined to head to court if Allstate carries out its plan at the beginning of next year. And, a reading of the statute indicates that Allstate may be able to claim there has been a “material change in the risk being insured,” especially given that hurricane forecasters universally recognize that a more-active phase of hurricane activity in the cycle has been reached and that improved prediction methods may indicate that past risk was understated.

But by backing off its claim that the second-largest insurer would leave the state unless it could follow through on this, Allstate indicates that its basic homeowner insurance line is too profitable to pass up. Then why push the issue and get Donelon all ginned up about it during an election year, if it’s just throwing the dice hoping to get a better outcome?

This is because Allstate’s move appears to be part of a larger campaign to spread risk out to the Louisiana or American taxpayer. Speakers on its behalf hint that the real solution to it would be to create a state or, better for them, a national risk pool for high-risk homeowner insurance. In short, rather than have the companies and their policyholders responsible for their decisions, make those who have no connection at all to the company, who perhaps decided so exactly on the basis of risk avoidance, bear some of the risk.

To allow this would be a travesty. There’s no good reason why somebody in Alaska, or Hawai’i, or North Dakota, or north Louisiana ought to subsidize somebody who wants to own and insure a house in certain high-risk places in Louisiana – or that a Louisianan would subsidize risky residences in those other states. If you want to take the risk, it’s your responsibility to pay for it, not that of others entirely unrelated to the process.

One hopes Donelon, Gov. Kathleen Blanco who also has rapped the company, and a number of other Louisiana policy-makers don’t get sucked into this pipe dream of spreading the risk to unrelated parties. Not only does it abrogate the idea of self-responsibility, but it’s just not going to happen: you can bet that in the majority of congressional districts, and maybe even in the majority of states, there will be net losers in the subsidization game and this will go nowhere in Congress. So they need to do what’s possible and not waste their time and efforts.

(Of course, subsidization already is being practiced in Louisiana. Ratepayers currently, and perhaps in the future taxpayers, are being forced to make up losses by the state’s entity, Louisiana Citizens Property Insurance, which insures where nobody else will, even if they live in low-risk areas and bought policies through companies with low exposure to the ravaged regions of the state.)

The best solution would be for the state to steer insurance with as light of a hand as possible, giving the free market maximal latitude to determine rates without provider collusion. One very good first step would be getting rid of RS 22:653.3 at the first opportunity and thus maybe save the state some dollars in defending it in court.

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