Insurance Commissioner Jim Donelon worried about possible ‘redline’ for Louisiana

Staff Report
Louisiana Insurance Commissioner Jim Donelon speaks to the Press Club in Baton Rouge.

Catastrophic hurricanes the past two years could lead insurance underwriters to “redline” Louisiana property owners, state Insurance Commissioner Jim Donelon said Monday.

“Redlining” is an underwriting practice that involves rejection of a risk based solely on geographical location.

He told Press Club of Baton Rouge he is “very concerned” about that possibility.

Donelon said he heard “by word of mouth” that reinsurers who provide financial protection to insurance companies are angry because of an effort by a failed company to get an additional layer of reinsurance payments for Hurricane Frances that made landfall.

“Frances came into Louisiana unnoticed, but this company was trying to get a second paunch of money for their shortfall,” he said.

Donelon considers the back-to-back years of powerful hurricanes – particularly Laura and Ida – has been more problematic in terms of loss. 

“Having said that, I emphasize we went five years – really 15 years with relatively quiet hurricane seasons after Katrina and Rita – and in the last five, none,” he said.

The calmer seasons resulted in rates for homeowners increasing by only 1 percent for each of the past five years, until this year when they went up statewide 6.7 percent driven primarily by increased costs of reinsurance.

Louisiana has been the “bull’s eye” for hurricane targets, he said.

It his hit four times harder on a per capita basis than other states in the Gulf Coast region.

Reinsurers have paid bills totaling $23.7 billion for Laura, Zeta, Delta and Ida over the past year and a half.

That level of expense is problematic,” Donelon said. “But having said that, they’re in the risk business, and the price will go up for sure based on the price of reinsurance, but the industry will come back to that market ultimately, no doubt about it.”

The active storm seasons led six companies to declare insolvency, including three from Louisiana.

All six companies were rated “exceptional” by Demotech, an Ohio-based financial analysis and ratings firm, he said.

Donelon said he would be in favor for reinsurance of those companies, but his office could not take on that task.

“We don’t have the resources to better regulate reinsurance buys made every spring leading up to hurricane season when it starts June 1,” he said. “But we’re talking about that, looking into that to better monitor the companies.”

All six bought from catastrophe “cat” models, which involve a computerized process that stimulates potential catastrophic events and estimates the amount of loss due the events.

Catastrophe models incorporate advancing technology, scientific insight, engineering methods, and statistical data analysis to model complex scenarios and events.

The models are used to justify rates. They utilize actuary justification, which focuses on age and location of a home

“The market is not as hard in Baton Rouge as Slidell, which is more vulnerable and therefore harder to get coverage from private sector,” Donelon said. “For us to monitor that would be a huge expansion of our ability.”

By law, the Office of the Insurance Commissioner must monitor their books a minimum of every five years to audit their books and do what is called “risk- based capital,” which means that the more policies you write, the more reserves they must have to protect policyholders, he said.