Louisiana’s incentives may encourage home insurers to return to the state

From the haunting bayous to the lively streets of New Orleans, Louisiana has an appeal that few states can match. But Louisiana’s position along the Gulf Coast and the low-lying areas along its southern border makes it particularly vulnerable to hurricane damage. Because of the risk of storm damage, the state’s home insurance market is facing challenges. Bankrate investigated the situation and spoke with several insurance experts to understand what’s happening and how it impacts Louisiana homeowners.

What is happening to the Louisiana home insurance market?

Many Louisiana home insurance companies are rethinking their ability to write coverage in the risky state. The risk in Louisiana has already caused a handful of companies to go insolvent, while many remaining companies have paused writing new business or exited the state completely. This environment is limiting homeowners options for insurance coverage.

Jim Donelon, the Commissioner of Insurance for the State of Louisiana, spoke with Bankrate about the current situation. “We are challenged, no question about it,” he says.

There is a very hard market out there to get coverage.

— Jim Donelonthe Commissioner of Insurance for the State of Louisiana

While other states have experienced home insurance difficulties — the crisis in Florida continues to worsen — each situation is unique. Let’s take a look at what is happening in Louisiana.

Why are insurance companies struggling in Louisiana?

So what exactly is causing the nervousness among insurers? In Louisiana, it all boils down to storm risk.

Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute, explains: “The insurance crisis in Louisiana is driven by excessive property claim losses from hurricanes, which had devastating effects for small, regional home insurers that were under-capitalized.”

Donelon agrees, noting that at least six companies have gone insolvent since Hurricane Laura in August 2020. While losing six companies might not seem severe, Donelon also points out that there’s no way of knowing how many companies have paused their business operations. Hundreds of thousands of policyholders have been affected, and more could follow.

Hurricane risk

For most companies exiting Louisiana’s market, the reason is simple: the state is too risky.

Donelon notes that Louisiana “had a really long, quiet period of hurricane seasons until 2020.” The home insurance market may have begun to calm a bit after the challenge it faced in the wake of Hurricane Katrina in 2005. Because less damage was happening, home insurance companies may have been able to charge comparatively lower rates and maintain lower claims reserves (the money set aside to pay claims).

But 2020 and 2021 brought four devastating hurricanes in a row — Laura, Delta, Zeta and Ida. These four storms caused $76.65 billion of damage in Louisiana. About 72 percent, or $55 billion in damage, was from Hurricane Ida, which hit the state in late June 2021. The rapid increase in risk level — not to mention the massive influx of claims — was enough to financially cripple at least six property and casualty insurance companies. Even companies that were fiscally strong enough to withstand the barrage of losses may not be willing or able to handle another hurricane season.

This has resulted in companies withdrawing or pausing their writing in our property insurance market.

— Jim Donelonthe Commissioner of Insurance for the State of Louisiana

And it’s likely to get worse. According to the National Climate Assessment, hurricanes have increased in duration, frequency and intensity since the 1980s and are predicted to continue getting stronger. As the risk of widespread damage increases, it may be more likely that home insurance companies will hesitate to do business in Louisiana.

Reinsurance costs

Louisiana’s home insurance market operates, in large part, based on reinsurance. Reinsurance is a type of insurance coverage that your insurance company purchases to protect itself from the financial risk of claims. Essentially, reinsurance means the less-risky areas of the world are helping to subsidize the ability of insurance companies to operate in more risk-prone areas.

But reinsurance costs money, and like many other types of coverage, the cost for coverage is rising. Insurance companies are paying more for reinsurance due to the increasing frequency of natural disasters worldwide. Donelon confirmed that reinsurance rates are rising and that insurance companies will likely pass on some of that cost to policyholders in the form of higher rates.

What is being done to curb the crisis?

While all of this sounds scary — and it’s certainly far from ideal — Louisiana is taking action that will hopefully stabilize the market.

Lee Ann Alexander, Vice President of State Government Relations at the American Property Casualty Insurance Association (ACPIA), talked with Bankrate about the insurance bills included in the 2022 Louisiana Legislative Session. She says, “[The legislators] have raised the financial commitments that companies have to make to participate in the state to ensure that this type of thing doesn’t happen with such frequency, and that’s important.”

Essentially, this means that insurance companies will have to prove a higher level of financial stability to be granted access to write policies in the state. That makes it less likely that the companies will be devastated by widespread hurricane losses.

Incentives are being offered

In early February 2023, the Louisiana Legislature, following a special session to discuss the crisis in the home insurance market, passed a bill allocating $45 million to create an insurance incentive program.

The goal of the program is threefold:

• To bring home insurance companies back to the state
• To motivate existing Louisiana home insurers to continue to write policies
• To help depopulate Louisiana Citizens — the insurer of last resort — to a more stable level of policies

This strategy has served Louisiana well in the past, after Hurricanes Katrina and Rita caused a similar exodus of insurers.

What should Louisiana homeowners expect?

Louisiana already has the eighth-highest average home insurance premium in the country at $1,992 per year for $250,000 in dwelling coverage. That’s 39 percent higher than the national average of $1,428 per year. Home insurance rates are increasing nationwide to keep pace with inflation, and Louisiana’s risk level poses an additional layer of consideration for home insurers as they set rates. Louisiana insurers can’t use past hurricane losses to justify rate increases, but they can use future predictions.

If you are a high-risk homeowner, you may need coverage through Citizens. Be aware that the company is mandated to charge higher rates than the private market, so coverage is expensive. To make matters more complicated, Citizens announced that it is going to increase home insurance rates by an astounding 63 percent starting on January 1, 2023. Any new policies written on or after that date will be rated with the higher rating formula. Existing policies will experience the rate increase at the first renewal after January 1.

There’s no sugarcoating it — this increase is extremely painful but required by law to make sure Citizens can handle a potential future disaster for its many policyholders.

— Jim DonelonCommissioner of Insurance for the State of Louisiana

Despite sky-high rates, Citizens may be the only option for home insurance for many Louisiana residents. The company is designed to handle the influx of policies during riskier times and works to depopulate these policies back to the private market when the risks lessen. The recent reform bill is partially aimed at depopulating Citizens’ policies back to private carriers. But that doesn’t mean Citizens doesn’t have to take action when it has more policies than expected. The increased rates for Citizens policies is intended to ensure it has enough funds to pay out claims should a hurricane cause widespread damage.

Nicole Ganley, Assistant Vice President of Public Affairs at the APCIA, also points out the importance of reviewing your financial situation. “Make sure your finances are up to date,” she says. “Make sure your policies are up to date; go make sure you have enough coverage. Inflation is having a huge impact.”

The bottom line

Louisiana has always been a challenging state, even for the best home insurance companies. However, the string of four devastating hurricanes between 2020 and 2021 has pushed many insurers to the point of collapse and encouraged others to voluntarily leave the state.

I think what you’ll see moving forward is a state that continues, unfortunately, to be in harm’s way.

— Lee Ann AlexanderVice President of State Government Relations at the American Property Casualty Insurance Association

Donelon is hopeful, though, that the state will be able to attract smaller home insurance companies to fill the void left by the carriers leaving. He understands the issues on an intimate level; he was among the homeowners who lost coverage due to a failing company. “It’s tough; it’s hard,” he says. “But hopefully — prayerfully — we can get through another hurricane season without the events of the past two years.”