'A win-win situation'
WE'RE NOT FLORIDA
Greater Baton Rouge Business Report
July 31,2007 By David Jacobs
Commissioner of Insurance Jim Donelon says his office avoided Florida's approach to insurance legislation because Louisiana is simply too small and too poor a state to do what Florida did.
With the cost of property insurance going up and the choices for consumers going down,the Legislature was under pressure to do something during the recent session. Of course,the imperative to "do something," especially in an election year,creates the fear that lawmakers will do more harm than good.
Legislators ended up approving a number of insurance-related bills,highlighted by the Insure Louisiana Incentive Program. The bill sets aside $100 million in matching funds for insurance companies willing to come into the state and write new business.
The money will be doled out in increments from $2 million to $10 million. To qualify,companies must meet specific solvency requirements,and they're required to take 25% of their new polices from Citizens. The companies will have to maintain the premium volume they've committed to for five years; if they don't,they have to give back the unearned portion of the money.
The idea is to create more competition,thereby driving down prices for consumers. Commissioner of Insurance Jim Donelon and Gov. Kathleen Blanco both pushed for the program.
Donelon says the incentives will likely be most attractive to smaller,regional companies. He mentioned Cincinnati Insurance Co. and the South Carolina-based Companion Property & Casualty Group as possibilities,and says he expects both the availability and price of insurance to improve for Louisiana consumers by the end of the year.
Donelon says when his office's package of legislation was being hammered out,they deliberately avoided the approach taken in January by Florida,which was in part to make its version of Citizens competitive with the private market and expanding their state-backed reinsurance fund. Critics see this as an enormous gamble by the Sunshine State.
Louisiana is simply too small and too poor a state to consider creating a large reinsurance catastrophe fund or expanding Citizens the way Florida did,Donelon says.
"There's no doubt in my mind,the more competition we create,the more rates will come down," says David Tatman,a lobbyist for the Professional Insurance Agents of Louisiana.
While he didn't mention any specific insurance companies,he said there's "definitely interest out there" in the incentives. Tatman called the program a "win-win for everyone." If companies don't take advantage of the incentives,the state can keep the money,he says.
Greg LaCoste,vice president with the Property Casualty Insurers Association of America,applauds how Louisiana's incentive program is set up. He said when Florida tried a similar incentive program a couple years ago,a few companies got carried away,grew too big too quickly and ended up becoming insolvent when they took more losses than they could handle. By contrast,Louisiana plans to keep closer tabs on exactly what sorts of companies use the incentives,he says.
Not every industry group is so sanguine,however. The American Insurance Association released a statement calling the recent legislative session a disappointment. They say the removal of the 10% surcharge on Citizens' rates in the coastal parishes,where the state-backed insurer dominates,will make private insurers very cautious about writing policies in the state and less likely to take advantage of the incentive program.
"Louisiana had the opportunity to get it right by focusing on long-term solutions that would help fuel the recovery and revitalization of the state's economy without turning the insurance market upside down," says John Marlow,assistant vice president of AIA's southwest region. "Instead,the state did not make many gains in the areas hit by hurricanes Katrina and Rita - where it was needed most.
Bob Hunter is the director of insurance for the Consumer Federation of America. He says the Legislature will discover,as Florida did in past years,that incentives don't actually reduce prices for consumers.
"Florida learned the hard way that passing laws that please the insurers and try to encourage them to either lower prices or write more business doesn't work," Hunter says. "The money does not trickle down to the people; it sticks in the insurers' bottom lines."
Instead,Louisiana should do as Florida finally did in January: take direct action to force prices down. Hunter concedes that Florida took on a big short-term risk,saying that if a hurricane hits Florida this year, the state might have to issue bonds to pay off its losses. But by expanding its version of Citizens and allowing it to take on "good" business,not just the most high-risk policies,the program becomes more viable and could even turn a profit over the next 30 years,he says.
Perhaps surprisingly,Hunter and Donelon seem to agree on the ideal long-term solution: a multistate catastrophe fund that would spread the risk around. Hunter says a reinsurance pool that included all of the coastal states would be "a powerful thing," and Donelon says he recently discussed a similar idea with an insurance industry leader from Rhode Island. One idea that's being tossed around in Washington is an allperils nationwide policy that would cover everything from floods to earthquakes to tornadoes.
"Whatever form it takes,we have got to have it," Donelon says,adding,"I think we will get it."