Louisiana insurance market crashes ahead of hurricane season
Last week, Louisiana Insurance Commissioner Jim Donelon held a press conference to deliver some very bad news.
A few months earlier, a large insurance company called Lighthouse had gone bankrupt, leaving nearly 30,000 homeowners across the state without storm coverage. The company went bankrupt thanks to last year’s Hurricane Ida, which resulted in $400 million in damages, far more money than the company had on hand. It was up to Donelon to find a new company to take over these discontinued fonts, but no other company wanted them. In fact, other companies were fleeing the state en masse.
“Unfortunately, the unprecedented level of damage caused by Hurricane Ida broke the backs of [these] businesses,” Donelon said during the press conference. “Right now, we’re trying to stop the flow of businesses leaving our state.”
As another hurricane season promises to bring extra-strong storms brought on by high ocean temperatures, the Louisiana insurance market is heading for a free fall. Damage caused by Hurricane Ida at least seven private insurance companies to collapse or reverse their policies, and several others could be on the verge of extinction, with disastrous implications for the state’s housing market. The market crash threatens to leave tens of thousands of homeowners without insurance during the most dangerous time of the year. On the heels of turmoil in the fire and flood insurance markets, the turmoil in Louisiana is another glaring signal that the real estate and insurance markets are unprepared for the financial fallout from related disasters. to the climate.
“There’s a lot of panic right now,” said Quan Huynh, an insurance agent with Allstate in suburban New Orleans. “A lot of people really don’t have options.”
Hurricane damage falls into two broad categories. The first category is flood damage, which is covered by the National Flood Insurance Program, or NFIP. The second category includes everything else, from leaks caused by heavy rain to wind damage, which are covered by traditional homeowners insurance.
In the early 20th century, private insurance companies stopped covering flood damage, largely because they could not make a profit – the same houses were flooded over and over again, leading to enormous compensation each time. In the late 1960s, Congress stepped in to create the NFIP, a public insurance program that would provide universal flood coverage.
However, private insurance companies still cover other types of hurricane damage because these risks are lower: floods happen again and again in communities near water, but the chances of a individual owner of being hit by a huge tropical storm will always be quite high. down.
The geographic exception to this reliable rule of thumb is storm-hit Florida, where the insurance market crashed after Hurricane Andrew in 1992. Storm payouts totaled about $30 billion. , enough to bankrupt seven insurance companies and several more to consider. leave the state. The state legislature stepped in to stabilize the marketstrengthening building codes and creating a state-run “insurer of last resort” that could provide coverage for at-risk customers.
Today, as Louisiana’s insurance industry reels from the effects of Hurricane Ida, the state appears to be heading for a similar crisis. Ida destroyed tens of thousands of homes from Baton Rouge to suburban New Orleans. The storm peaked in intensity thanks to extra-warm ocean temperatures in the Gulf of Mexico, and it maintained high speed even after making landfall in part thanks to the disappearance of Louisiana’s coastal wetlands.
As storm victims filed damage claims after the storm, dominoes began to fall. Two insurance companies that covered about 30,000 customers in the state announced in early December last year that they were unable to pay all their debts from Ida. One of them, Access Home Insurance, had received more than $180 million in claims, but only had $115 million in cash and assets. A third insurer goes bankrupt a few days laterand another collapsed some months later. another bent earlier this month.
Even insurers that haven’t faced financial ruin have decided to exit the state market, canceling all their policies rather than risk having to make a huge payout this hurricane season. A dozen insurance companies in total have failed or left state over the past two years, according to the New Orleans Times-Picayune, disrupting coverage for at least 100,000 customers. At least two state legislators lost their coverage, including a member of the state’s House Committee on Insurance.
“It’s now very common for businesses to leave, given that we’ve been hit by multiple storms,” Huynh said. “It caused a lot of companies to reassess the business, and then once they saw a few companies go bankrupt, a few more decided to pull out. The risk pool is getting narrower and narrower.
Huynh’s own company, Allstate, stopped including wind coverage in its owners’ policies years ago; it used to refer customers to a partner carrier for wind cover, but that company stopped issuing policies this year.
In theory, the state takes control of bankrupt insurance companies and keeps them in receivership until another private company comes in to buy the bankrupt policies. That’s what happened to the first three companies that went bankrupt in December, all of which were taken over by a company called SafePoint. Since then, however, the outlook for the insurance market has darkened: the state has unable to find a buyer for one of the more recent failures, Lighthouse, which had over 30,000 fonts on its books. The company’s former customers and tens of thousands of other Louisiana residents are now on their own to find new insurance, just months from the peak of hurricane season.
In the short term, Ida victims can probably count on getting their money back, even if their insurance companies go bankrupt. This is because the state requires all private insurers to contribute to a group emergency fund which can cover compensation for bankrupt companies. Payments from the fund have a strict cap, however, which may not cover full repairs for everyone.
The big question is where Louisianans will buy insurance for the future. Like Florida, the state operates an insurer of last resort that provides coverage for people who cannot obtain it in the private market. the said Citizens of Louisiana The plan will provide a temporary solution for homeowners whose insurers have gone bankrupt, but it may not stabilize the state market in the long term. For one thing, coverage is expensive and comes with a strict cap on claim payments. He also tends to attract riskier clients, which can jeopardize his own finances in the future. Huynh says that in many cases the premiums for citizens are about double that of a plan in the private market.
If more major providers leave the state in the coming years, it could trigger a downward spiral in the housing market. Not only would citizens struggle to stay afloat as more customers seek public option coverage, but individual costs to homeowners in the private market would also soar as companies seek to maintain margins. beneficiaries. That’s what’s happening in Florida right now, as homeowners see it double-digit premium increases this year before the storm season. Further down the road, lenders may be reluctant to take out loans in areas where they know the insurance market is tight, making it harder for many buyers to secure mortgages.
The crisis in Louisiana is another example of how climate change is stressing the financial assumptions that underpin the US real estate market. In California, for example, private insurers have declined thousands of insurance policies amid a growing wildfire risk, leaving homeowners and businesses scrambling to get new cover. In coastal areas, research has shown that lenders are more likely to securitize their flood-prone mortgages with the federal government, thereby transferring climate change risks from their individual balance sheets to those of the public.
“At this point,” Huynh said of the Louisiana insurance market, “it all depends on how this hurricane season goes. If we get hit by a hurricane this year, I think it will implode.