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La. insurance regulator 'optimistic' on cat reforms despite reinsurance squeeze


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La. insurance regulator 'optimistic' on cat reforms despite reinsurance squeeze

➤ Louisiana's insurance commissioner hopes the state's new capital rules will spur carriers to buy more reinsurance even though coverage is getting scarcer and more expensive.

➤ Although in "crisis," Louisiana's homeowners' insurance market is not the "next Florida waiting to happen."

➤ Jim Donelon, the state's longest-serving insurance commissioner, confirmed he will run for reelection in 2023.

After a combined $23 billion hit from the 2020 and 2021 North Atlantic hurricane seasons, Louisiana's homeowners insurance market is now contending with the failure or exit of a number of loss-hit Florida-based insurers that wrote in the Pelican State, in addition to collapses on its own turf. In response, the state passed a package of laws this year to bolster the strength of the remaining insurers and attract new ones.

S&P Global Market Intelligence caught up with Jim Donelon on his recent trip to London to meet representatives from the Lloyd's and London markets, which play a big role in covering insurers in his state and elsewhere in the U.S.

The following interview was edited for clarity and length.

S&P Global Market Intelligence: When do you expect the new laws to start having their desired effect?

Jim Donelon: The immediate and most important legislation we passed was to increase our $3 million capital and surplus requirement for new companies to do residential property insurance in our state. We're being plagued by the failure of about eight or nine companies. Most of them went down not because of our two back-to-back horrific hurricane seasons, but because of the Florida market, which is, in Florida Commissioner David Altmaier's words, in "desperate condition." And it truly is.

We were fine through hurricanes Laura, Delta and Zeta in 2020. But in 2021, the impact of Ida and the domino effect from Florida cost us, and our residual market at Louisiana Citizens Property Insurance Company has exploded. We had it down to 35,000 policies from 173,000 policies right after Katrina and Rita. That book of business is now back up to 120,000 policies. We do not want to have this happen again.

The main reason those companies failed was that they did not buy enough reinsurance to cover their risk, and they left behind $1 billion in unpaid claims that our Louisiana Insurance Guaranty Association will have to deal with. So we have increased the minimum capital and surplus requirement from $3 million to $10 million and hope to incentivize companies to be more prudent and conservative in their reinsurance buys.

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Jim Donelon, Commissioner of Insurance, Louisiana
Source: Louisiana Department of Insurance

Reinsurance, particularly catastrophe cover, is getting much more expensive. What does that mean for your plans?

When we started the session and introduced the bill to incentivize companies to return and increase capital and surplus requirements, we did not anticipate a capacity problem. And we really did not even anticipate a cost problem to the extent that we now fear is on the horizon. But I am cautiously still optimistic that these two efforts will have the desired effect and allow us to depopulate Citizens. It is a burden in the form of a risk of assessment to every property insurance policyholder in the state and certainly to the 100,000-plus folks who have to get their coverage at what the law requires to be more expensive than the highest private company doing business in their parish.

What incentives are you offering insurers, and what types of company are you hoping to attract?

When we offered incentives after Katrina and Rita, then-Gov. [Kathleen] Blanco had unanticipated surpluses for the state government. She said the state had $100 million to help with the crisis. The rules of the incentive program was that the state would provide insurers with $5 million in grant money, but they would have to match whatever they received with additional capital. They then had to write new premiums at twice the amount of the grant and the match, and half of that had to come from the Go Zone parishes — areas that were hit particularly hard by the storms. The rules for the new program will be the same. But we only have about $15 million available for that program right now.

I had dinner with the chairman of the Senate Insurance Committee and his colleague in the House who are both committed to writing legislation for an additional $30 million of funding as soon as the session begins next spring. The kinds of companies we are targeting are the same as before. They will be small, regional insurers that do business in other coastal states or new companies that are willing to put up $10 million of their own money on the table as a protection against them going cheap on reinsurance again.

How can you prevent the problems happening in other states that end up impacting Louisiana's market?

Candidly, I can't. But I can monitor their reinsurance buying better than we did this time. And I have been in conversation with David Altmaier. They have deeper insight into reinsurance than we have had. We're going to contract with solvency market conduct consultants who will be able to do a similar dive into the reinsurance buys of these smaller companies operating in Louisiana.

What are you asking of Lloyd's and the London Market?

We want to make it clear that we are not another Florida. We have taken proactive steps to prevent that. Five years ago, I was asked by Florida companies doing business in Louisiana to require company approval requirement for assignment of benefits. I immediately did that, and it has been very helpful in stopping the spread of public adjusters, roofers and lawyers who have gone door-knocking and robocalling all over Florida. I think we had a successful legislative session that will strengthen our argument to Lloyd's that we are not the next Florida waiting to happen.

Do you plan to stand in the 2023 Louisiana insurance commissioner elections?

I do.

What will be the main thrust of your campaign?

That we know how to do this. We have fixed problems in the market twice already. And that is what I was reelected three years ago to do. To be there just in case something like this happened and help us recover from it.