Louisiana regulators continue to allow weak insurers to take on risky policies – InsuranceNewsNet

After the bankruptcy of four insurers at the end of 2021, the insurance commissioner Jim Donelon put the fate of thousands of Louisiana owners in the hands of unknown Safepoint Insurance Co.

the FloridaA New York-based firm has taken out 30,000 risky policies after three companies went bankrupt. Three months later, security point assumed 24,000 more.

“Policyholders can start the new year knowing their homes are protected by a viable insurance company,” Donelon said at the time, praising having found a “suitable landing spot” for abandoned clients. of State National Fire, Access Home and Americas insurance.

But Safepoints the eagerness hid another fact not mentioned in the press releases: his finances were shaky, and had been getting worse for years.

Five months before security point extended the first lifebuoy to Louisianain June 2021his rating of AM Best – the main rating agency for insurers – fell so low that it could no longer insure homes with federally backed mortgages.

But security point was able to easily avoid the bad review. Instead, security point simply removed the negative rating, which means AM Best no longer rates the company. The company continued to expand in Louisiana carrying an “A” rating from Demotech, another rating company.

This month, security point asked the state for permission to underwrite another 19,800 Louisiana citizen policies.

Even as other insurers bend or flee the state, security point is doubling. The company’s strategy is well known in Louisianawhere insurers have often used citizens’ policies to sustain their business before it eventually fails.

The state should spend at least $874 million to cover the insolvency claims of 11 insurance companies – six of which have direct ties to the depopulation program.

In the 13-year effort to keep the public insurer as small as possible, half of participating insurers have failed, left or merged under financial pressure, a review by The Times-Picayune | The lawyer found. The four companies that supported the most Citizens policies all went bankrupt.

Donelon says encouraging small private businesses like security point underwriting homes and businesses is better than relying on Citizens, the public insurer.

But consumer advocates fear that Donelon’s preference for a market solution could exploit desperate consumers.

“When the private market disappears, I don’t think the solution is to let risky players in, just because you think private is better than public,” said Amy Bachexecutive director of United Policyholders.

“I understand what he was thinking: competition is good for consumers. That’s true when it works, but when it doesn’t, you need a strong government program.”

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It is not uncommon for the insurance industry to shun certain perils, or entire geographic markets deemed too risky. But when the private market says “no”, the government usually steps in.

“That’s why we have the terrorism risk insurance pool, because the private market said, ‘We don’t like that bet,'” Bach said. “And that’s why we have the California Earthquake Authority — because the insurers didn’t like that bet.”

For years, Louisiana residents could rely on a high-risk pool, should they be denied property insurance coverage, through state-run insurance schemes. The high-risk insurance pools were transferred in 2004 under the responsibility of the new citizens of Louisiana, which now operate more like an insurance company.

There is a key difference: state legislators did not want citizens to compete with private insurers, so they created a number of constraints. Citizens must charge 10% more than their peers, and it must offer its entire portfolio of policies each year to any private insurer willing to take one.

These insurers are also known as “take-out companies”, a term that has also become synonymous with a beginner insurer with little money. But the defining characteristic is their reliance on depopulation programs to win customers.

“I wouldn’t call it the private market,” said Martin Graceinsurance teacher at Temple University. “It’s basically a state-created market that’s a placeholder for all the high-risk policies, and for people to pretend that the private market has it.”

Donelon praised takeout companies in the years following Hurricane Katrina for their willingness to do business in the state. After the withdrawal of the large traditional insurance companies, the new entrants supported by investors were the only ones willing to bet on louisiana bad bet.

No constraints

The only requirement written into the law was that any insurer underwriting policies to citizens had to have a B+ rating of AM Best – or its equivalent. Ratings are meant to determine whether a business is likely to fail.

But less than half of participating insurers complied with the strict letter of the law; the others were admitted with lower grades deemed equivalent. The loose interpretation of the rule allowed fragile companies to take the most risk.

So far, state lawmakers have been unwilling to change the depopulation program’s scoring requirement. Although some lawmakers have complained about the practice, attempts to toughen the rules have been brushed aside.

“The insurance commissioner is so adamant about depopulating these (policies) that he’s resisted at every turn,” the state senator said. Bret AllainR-franklinwho introduced a bill earlier this year that would have raised the rating requirement for the program to an “A” from AM Best.

Allain said he was motivated to change the law after his own policy was taken from citizens and placed with House Insurance Co. He couldn’t remember ever signing anything or giving his agent permission to switch carriers.

Allain said he came to regret not sticking with Citizens after Maison folded.

“I didn’t think it was right,” he said. “I think they should require the signature of the insured before removing you from citizens.”

Allain’s bill was never even discussed at the Senate Insurance Committee. President Sen. Kirk TalbotR-river ridgesaid he did not support her, largely because it would have been harder to take policies away from citizens.

Like Allain, representative of the State. Ryan BourriaqueR-Abbeville, has publicly criticized the way the changes are communicated. Citizens do not send letters to inform consumers directly; instead, it relies on individual insurance agents to call thousands of consumers within 90 days to get their consent.

Bourriaque said louisiana approach is wrong.

“The state can no longer get excited about the amount of companies that write, but should instead focus on the financial capability of that company,” Bourriaque said in an interview earlier this year.

Policy unchanged

Even after a series of business failures, the state’s game plan remains unchanged.

Home and business owners were forced to revert to citizens after several insurers went bankrupt, which more than tripled the number of policyholders from around 41,000 at the end of 2021 to 129,000 today.

Donelon, a non-voting member of the citizens’ council, is eager to offload politics again.

security point is one of two insurers who have aligned themselves.

Just a year ago, AM Best had downgraded Safepoints financial notation to C++.

The rating firm summed up its rationale concisely: The balance sheet was “weak.” The company’s operational performance was “marginal”. And its surplus, the money used to pay claims, was eroding. Additionally, the insurer was struggling to mitigate the risks of operating in hurricane-prone areas. Florida.

The downgrade would have made the insurer ineligible, under state law, to underwrite citizens’ policies. But security point withdrew the rating, and the company now relies on another from Demotech to stay in business.

Safepoints President, David Flitman, did not respond to emails and voicemails seeking comment. But the insurer said in its financial records that it had no immediate plans to leave Louisiana.

In its 2021 annual report, security point said he was looking to expand outside of Floridawhere a deluge of litigation has stung many insurers. security point said it would continue its growth plans in Louisiana adding more commercial coverage and, perhaps, relying more on the depopulation program.

It is therefore not surprising that the insurer has requested almost 20,000 additional policies by depopulation this year.

Insurance agents moved almost a fifth of these to security point already, according to Citizens. But other consumers have until the end of February to decide whether they will be better off in the hands of another unknown insurer.