Louisiana Citizens Property Insurance Company is the state’s residual market providing property insurance to homeowners and businesses that have been unable to procure insurance in the private market. Louisiana Citizens came out of the 2005 hurricane season nearly $1 billion in debt from Hurricane Katrina and Rita losses.
Since then, Louisiana Citizens appears to have transformed itself into a leaner, financially disciplined, and well governed organization. While it has yet to publish estimated losses from Hurricane Ida, there appears little chance of a similar financial hole opening in Louisiana Citizens’ balance sheet this year.
A Brief History of Louisiana Citizens
Starting in1970, Louisiana operated the Louisiana Joint Reinsurance Plan (FAIR Plan) and Louisiana Insurance Underwriting Plan (Coastal Plan) to support homeowners and small businesses unable to purchase property insurance in the private market. If either plan ran a deficit, it would levy an assessment against the state’s licensed property insurers. These insurers were expected to simply absorb Plan assessments as a cost of doing business. After a series of significant storms in the early 2000s the assessment burden on Louisiana insurers had become unsustainable.
In 2004, the Louisiana legislature brought both plans together under a nonprofit state-sponsored corporation known as Louisiana Citizens Property Insurance Company. The idea was to run Louisiana Citizens more like a traditional insurance company by building policyholder surplus to fund the risk of loss and transferring catastrophic risk into the private reinsurance market. For extreme events, the legislature introduced a sophisticated financing structure allowing insurance companies to pass assessments on to policyholders and facilitating the spreading of very large deficits over many years.
The 2005 Hurricane Season
By the time Hurricanes Katrina and Rita hit in 2005, Louisiana Citizens had grown to become the third largest property insurer in the state with some 135,000 policyholders and nearly $15 billion of insured value. Confronted with $1.4 billion in claims, Louisiana Citizens found itself more than $1 billion short after exhausting its reinsurance.
Louisiana Citizens made an immediate $193 million cash call from insurers through two regular assessments - equivalent to 15% of the total property insurance premium written in the state. While insurers could recover their outlays through policyholder surcharges the following year, many of these insurers were under financial pressure as they paid the claims of their own policyholders from Hurricanes Katrina, Rita and Wilma as well as from the prior year’s Hurricanes Charley, Frances, Ivan, and Jeanne.
The following year Louisiana Citizens placed $978 million in revenue bonds backed by emergency assessments levied on the state’s policyholder and collected through insurers. Those assessments have reached up to 5% of property insurance premiums some years and currently stand at about 2.5%. 15 years later, Louisiana Citizens must generate another $336 million in emergency assessments from the state’s homeowners and businesses before it will have fully paid off its claims from Hurricanes Katrina and Rita.
The surcharge burden quickly became too much for policyholders as they struggled to recover from the devastation of their homes and businesses and as the cost of insurance renewals surged. By the end of 2006, the Louisiana legislature had enacted a tax credit to reimburse policyholders for 100% of the Louisiana Citizens surcharges they would pay. For some policyholders, total surcharges that year had exceeded 20% of policy premium. In 2015, the legislature scaled back reimbursement to 72% of the assessment amount and then the following year further reduced the credit to 25%. The tax credit expired entirely at the end of 2019.
Reflecting on this experience, it is clear Louisiana Citizens had taken on far too much exposure supported by desperately inadequate policyholder surplus and insufficient reinsurance protection. While Louisiana Citizens avoided a financial meltdown by levying regular assessments to quickly secure liquidity and financing claim payouts with a 20-year bond, the resulting burden on the state’s policyholders proved politically unbearable. The legislature ultimately had to divert hundreds of millions of dollars to relieve this pressure in a circuitous bailout.
This Time It’s Different
While Louisiana Citizens has yet to publish an estimate of its losses from Hurricane Ida, there is every reason for the state’s taxpayers and policyholders to expect a far better outcome than they faced following the 2005 hurricane season.
First, Louisiana Citizens is a shadow of its former self. Its statewide share of the Louisiana property insurance market currently stands below 2%. With some 36,000 policyholders, Louisiana Citizens is nearly one quarter of its size when Hurricanes Katrina and Rita struck.
Second, even though its exposure has contracted, Louisiana Citizens has doubled its reinsurance protection to $560 million. Moreover, Louisiana Citizens has diversified its reinsurance portfolio through a series of successful catastrophe bonds placements that now represent fully one-third of its current protection.
Third, going into the 2005 hurricane season Louisiana Citizens had policyholder surplus of just over $5 million. Today that buffer has grown to $162 million.
Louisiana Citizens is an exponentially more healthy, disciplined, and stable organization than it was 16 years ago. While we will have to wait for publication of loss estimates, it appears entirely possible Louisiana Citizens will be able to rely on its current resources to pay Hurricane Ida claims without the need to levy assessments on the state’s insurers or policyholders.
Louisiana Citizen’s hard-won progress should not be taken for granted. The 100,000 policyholders that moved out of Louisiana Citizens did not just disappear. Those risks are on the balance sheets of private insurers that may be reevaluating their portfolios. Reinsurers are likewise more cautious with capacity reportedly pulling back and pricing on the rise. Louisiana Citizens may also face pressure on the rates its charges for coverage, potentially reducing its ability to fund an appropriate reinsurance program and build back policyholder surplus.
In short, the Louisiana Citizens is in a far better position today to serve the policyholders and taxpayers of Louisiana than it was 16 years ago. Through its commitment to financial discipline and sound governance Louisiana Citizens will continue to be an asset for the state as a viable property insurer of last resort rather than a liability for Louisiana’s taxpayers and private policyholders.