Louisiana Citizens Property Insurance Corp. will raise rates for wind-only policies an average of 58 percent following the failure Wednesday of state Treasurer John Kennedy’s alternative proposal for an increase of 12 percent.
During a special Citizens board meeting, Kennedy claimed the state-backed insurer of last resort had broken the law in calculating rates for the wind-only policies, which cover hurricane damage.
“This is about following the law, and these rates are illegal,” Kennedy said.
The state law that set up Citizens says the insurer must charge 10 percent more than actuarially sound rates, or those that cover expected losses and expenses; or the market rate, the amount charged by private insurance companies that sell at least 2 percent of the policies in a given parish, Kennedy said. But at the time it calculated its new rates, Citizens was the only company selling wind-only policies in several parishes, so there was no market rate, he said.
Because of that, Citizens is required by law to use the actuarially sound rates, those that cover expected losses and expenses, Kennedy said.
Jim Napper, Kennedy’s representative on the board, said Citizens’ market rates were an assumed, extrapolated rate based on what a company would have charged if it sold wind-only policies and controlled 2 percent of the market.
However, Insurance Commissioner Jim Donelon said Kennedy’s proposal would lead to a financial catastrophe as large as the $18 billion Louisiana owes state retirees but lacks the money to pay.
Citizens would create an albatross and attach an anchor to the state’s economy while emasculating the private insurance market, Donelon said.
Donelon said he understands the pain property owners in coastal parishes are feeling, but Citizens’ new rates, which go into effect in June, are legal.
The old rates were too low, and probably illegally so, which is why Citizens’ sales of wind policies increased 37 percent over the last two years, Donelon said. The low prices made it cheaper for a person to buy wind coverage from Citizens and a policy covering everything else from a private insurer.
Each homeowner’s policy covers a variety of risks, such as hurricane damage, liability, and fire, and each of those risks cost a certain amount, Donelon said. Citizens looked at the price for full coverage from State Farm, Allstate, Louisiana Farm Bureau and Travelers and how much of the premium went for wind coverage.
Citizens then used that figure as the market rate for wind-only coverage, Donelon said.
Napper said he was not suggesting lowering rates or doing anything different.
Citizens has been using the actuarial rates since it began selling the wind policies four or five years ago, he said.
Napper cited the wide variances in some parishes to illustrate the problem. He used a $100,000 house with $50,000 in contents as an example
In Jefferson Parish, the actuarially sound increase for that house is $133 a year, or 8 percent, while the market rate increase is $861, or 52 percent. In St. Mary Parish, the actuarial increase is $125, while the market rate increase is $1,990, or 171 percent — 16 times the actuarial increase. In Cameron Parish, the actuarial increase is $125, or 11 percent, and the market rate is $2,531, or 216 percent.
The cost to consumers in seven high-risk parishes, if they buy the wind-only policies, will be around $15 million, Napper said.
“We are the insurer of last resort. If we depopulate by making policies so expensive that no one can afford them, we are not acting as the insurer of last resort,” Napper said.
State Rep. Joe Harrison, R-Napoleonville, said people are paying more for their property insurance than their house note, and that’s a problem.
The coastal parishes are still struggling to recover economically, and the property insurance rates are almost anti-economic development, he said.
Citizens has depopulated, or lowered its policy count, by 13 percent overall in the last two years despite the increase in wind-only policies. The company now has 116,500 policies overall, 35,000 of which are wind-only. Still, the company has fewer policies than it did before Hurricane Katrina struck in 2005.
Napper offered a motion to use the actuarial rates for the parishes where there is no market rate for wind policies and to resubmit the rate filing to the Department of Insurance.
However, board member Fred C. Bosse, southwest regional vice president for the American Insurance Association, successfully offered a substitute motion to ask the state Attorney General for an opinion on how much latitude Citizens has for establishing the wind and hail policies.