Opportunity Outweighs Risk

The Louisiana Post-Katrina Insurance Market

By Jim Donelon, Louisiana Commissioner of Insurance

There has never been a better time to enter Louisiana’s insurance market. Rather than follow the example of Florida after the 2005 hurricane season, we have been proactive rather than reactive through several regular and special legislative sessions in our efforts to make insurance more available and affordable for our consumers. We understand that to increase insurance availability in the state, we must be less restrictive and allow the free market to operate.

During the past two years, tremendous local and state attention has focused on increasing insurance availability and capacity. Gov. Kathleen Babineaux Blanco and I worked with the Legislature, business leaders, and agent associations to craft innovative and promising measures aimed at maintaining and expanding the existing private insurance market in Louisiana, while also attracting new providers to the state. Key legislation passed in 2007 focuses on deregulating the state’s insurance industry, offering incentives to insurers to underwrite, and establishing tax incentives for property mitigation.

In the most recent legislative session, we developed the Insure Louisiana Incentive Program in an effort to attract more property/casualty providers to our state and increase the private-market capacity by 15 percent. The incentive program provides matching capital to qualified property insurers from a $100 million state fund. Individual grants awarded will be no less than $2 million and no more than $10 million to companies that will write new policies in Louisiana. A second round of grant applications will be issued in the event that all monies in the fund are not allocated in the first phase. As a condition of the grant, insurers must write 25 percent of the net written premium for policyholders whose property was formerly insured by the Louisiana Citizens Property Insurance Corporation, the high-risk property insurance program.

Incentive grants will reduce the cost of capital and have a direct, positive impact on every participating insurance company’s rate of return on surplus. More information on the incentive program and applications for participation can be found at the Louisiana Department of Insurance website: www.ldi.state.la.us.

We also modernized our rating process this year and eliminated the politically appointed Louisiana Insurance Rating Commission, which had rate-setting authority for all lines of property/casualty insurance for revisions of more than 10 percent. We established an efficient file-and-use rating system for property/casualty rates and retained a use-and-file system for commercial programs where the policy premium exceeds $10,000. Under the new file-and-use system, it is expected that rate filings will be reviewed and approved in less than 30 days. Overall, the statutes, policies, and administrative processes have been streamlined to be user friendly, allowing greater efficiencies and speed to market.

In the first special session following hurricanes Katrina and Rita in 2005, we established the first statewide building code – the Louisiana Uniform Construction Code. The code applies to all new construction and major renovations of more than 50 percent of the property. Residential dwellings must meet the International Residential Code and commercial structures must meet the International Building Code. The State Uniform Construction Code Council oversees the training and certification of certified inspectors who enforce the building code. Also recognizing the need for strong code enforcement at the local level, the state and the Louisiana Recovery Authority have allocated $35 million for training and code enforcement. The bottom line is that residential and commercial properties in Louisiana are now being built stronger than ever, which will improve safety and mitigate losses in future storm events.

Two recent decisions issued by the U.S. Fifth Circuit Court of Appeals in New Orleans have reaffirmed flood limitations in the wind versus water claims disputes arising from Louisiana after hurricanes Katrina and Rita. These rulings maintain the sanctity of contracts and reaffirm the clear policy exclusions for water damages. These federal appellate decisions give hope that insurers’ flood exclusions will be held valid and that statutes, such as the Valued Policy Law, will be interpreted fairly and not be used to find insurance coverage where none exists.

Louisiana has also made a strong commitment to coastal restoration and flood protection. Much of the destruction from Hurricane Katrina in southeast Louisiana was caused by the internal levees failing and the related massive flooding throughout the area. The levee breaches and subsequent flooding caused billions of dollars in damages, paid out in many cases under the National Flood Insurance Program. Following Katrina, we have had commitments at the state and federal levels to improve storm protection – short term, in the most vulnerable and populated areas of our state, and longer term, to build a comprehensive system and restore Louisiana’s coastline to provide first-line barriers for future storms.

Congress has appropriated $6.2 billion for levee repairs and improvements, such as new flood gate systems, higher levees, and floodwall armoring. The White House has committed to adding $6 billion in 2008 for future work. The U.S. Army Corps of Engineers’ 100-year storm protection levee program is targeted for June 2011. Congressional passage of the Energy Security Act of 2006 provides recurring revenues from offshore oil and gas royalties – totaling $13 billion over the next 30 years – toward coastal protection and restoration. And Louisiana officials have dedicated $147.3 million in state funds for coastal restoration projects.

One of the greatest recovery challenges still facing Louisiana is insurance availability and affordability. But I am confident that all of the measures we have enacted in our state to create a stronger business and regulatory climate will continue to have a positive impact on our entire insurance market, benefiting consumers and insurance companies alike. I am always willing to meet with representatives from any insurance company to discuss the progress that’s been made in Louisiana, and I invite all insurers to take a closer look at why opportunity in the Louisiana insurance market is greater than risk.

Posted: Monday, January 21, 2008 12:00:00 AM. Modified: Monday, January 21, 2008 3:48:18 PM.

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