Citizens taking work in-house to lower costs Citizens taking work in-house to lower costs BY TED GRIGGS| Advocate business writer Dec. 19, 2012 Comments Louisiana Citizens Property Insurance Corp. will take over issuing policies and handling noncatastrophe claims, which officials said could reduce its costs as much as $8 million a year. Insurance Commissioner Jim Donelon warned there’s a high risk involved in changing a successful operating system and taking the work in-house. “My head’s on the chopping block, but it will be after your heads are in the bucket,” Donelon told Citizens’ management. Quin Netzel, Citizens’ director of claims, said he would be 100 percent accountable for the restructuring’s success. “My head’s not going to be in the bucket,” he said. Netzel said service providers do a good job for Citizens, the state-run property insurer of last resort, but their charges are higher than the expense of taking the work in-house. In other action, the Citizens board voted to form a special committee to examine its wind-and-hail-only coverage, which covers the damage from hurricanes and tropical storms. The committee will also look at reducing the commissions agents receive on the wind-only policies as part of an effort to reduce the wind-only business. Vijay Ramachandran, chief operating officer, said that by issuing policies in-house, Citizens would cut costs by $2.4 million. Handling the nondisaster claims in-house would cut adjustment claims by more than $3 million and save $1 million to $3 million in reinsurance costs. Netzel said Citizens pays a surcharge on reinsurance because its loss-adjusting expenses are higher than the industry average. That’s because contracting for those services costs more, he said. However, board member Jim Napper questioned the savings numbers. Citizens’ staff is calculating future savings based on new, more efficient processes that are coming, Napper said. But the service provider costs don’t include those future efficiencies. Those costs will go down regardless, he said. Citizens Chief Executive Officer Richard Robertson said there could be some savings regardless, but they won’t be significant. If the board wants to continue paying more by using service providers, that’s fine, Robertson said, and if the board wants to restructure, that’s fine, too. But the process must move forward today, he said. Service provider contract extensions are coming up for bids again, and the scope of the work that will be performed must be determined before the requests for proposal are issued. Although Donelon stopped short of endorsing the in-house work, Robertson did not. “I feel pretty strongly about it. Otherwise I wouldn’t have put together this presentation,” Robertson said. This is an opportunity for Citizens to reduce its expenses, the only thing an insurer of last resort can control, he said. Board member and Sen. Dan “Blade” Morrish, R-Jennings, said Citizens has been putting out fires since Hurricane Katrina, but the executive team has been in place for years and the company is finally stable. Restructuring is an opportunity Citizens can’t afford to pass up, he said. Board member Eric Berger, who voted against the proposal, said he did so only because he would like to see the changes done in phases. Citizens could opt for a more cautious approach, taking over issuing policies in 2013 and claims handling in 2014, Berger said. The board voted 6-2 in favor of restructuring. Gene Galligan also voted against the proposal. In addition to Morrish, Napper, Craig LeBouef, Sam Little, Eugene Montgomery and Johnny Reeves voted for restructuring. Robertson said the committee examining Citizens’ wind-and-hail-only coverage should include legislators, Insurance Department staff and industry representatives. He said the options include making Citizens into a company that sells only this coverage or getting out of the business altogether. Those changes will require legislative action, he said. As for the wind-only commissions issue, Citizens pays a 10 percent commission for these policies. Robertson said 20 of the 29 state-backed insurers nationally pay at least 10 percent; seven pay between 12 percent and 15 percent; one pays 5 percent; and two pay 5 percent for renewals and/or homeowner business. Cutting the Citizens commission to 7 percent would save $1.7 million a year; to 5 percent would save $2.7 million; and to 3 percent would save $3.9 million, Robertson said. However, board member Little said those figures don’t reflect Citizens’ new rates. Earlier this year, Citizens increased wind-only rates an average of 58 percent for homeowners and 45 percent for commercial coverage. Even if the commissions were cut in half, agents would make the same amount of money, Little said.