Posted on 30 Aug 2010
For Denise Heston, the post-Hurricane Katrina insurance market has proved to be as turbulent as the storm itself.
Heston, who works for Catholic Charities, insured her shotgun double in the Bywater through AAA. The auto club took on a lot of policies in early 2006 after Katrina because it was one of the few companies writing policies. It raised prices, then began cutting wind and hail coverage and ultimately pulled out of the homeowners insurance market.
As the company went through its gyrations, Heston had to get a wind policy with Louisiana Citizens Property Insurance Corp., the state-sponsored insurer of last resort, which, in the event of really big storms, bills policyholders around the state for whatever claims it can't pay. Coverage through Citizens tends to be expensive and poor in quality.
When AAA pulled out, Heston said finding coverage wasn't easy even though her home had been completely rebuilt in 2001. She eventually found coverage with a new company in the market, Americas Underwriters of Louisiana, and the price dropped to about $3,000 -- still double her pre-Katrina insurance but better than the quotes of $5,000 she had been receiving.
As Heston has dealt with AAA's whims, she has spent an enormous amount of time and emotional energy on generating options and worrying whether she can afford to hang on to her home. Although things have worked out, Heston, who originally moved here from California so she could work on her screen-writing in a place with a high quality of life and a lower cost of living, finds that she doesn't get to write as much anymore because she's too busy working to keep up with the bills. "I've had to change my lifestyle," she said.
Heston's experience mirrors many of the trends that unfolded in Louisiana's post-Katrina insurance market. Prices skyrocketed, making it difficult for people to afford to rebuild their lives in New Orleans, and private companies largely stopped selling new policies, forcing many homeowners to scramble for coverage. Today, homeowners have more choices, but prices remain high, and no one expects them to return to pre-Katrina levels.
"There is no question that our market has recovered to its pre-Katrina status," Insurance Commissioner Jim Donelon said. "In fact, it's more competitive today than it was before Katrina. That's the good news. The bad news is it's still very expensive.
"That stabilization continues today, but that doesn't negate the fact that the cost is still very high, and still very burdensome to property owners."
Insurance agents credit Donelon with creating programs that unfroze the market and protected consumers, but note that the quality of the companies isn't as good as it was before the storm, and that not all consumers have the choices that they need.
Competition not an end-all
Since Hurricane Katrina, seven new property insurance companies came into the market on their own, and the state got five more to come to Louisiana with $29 million of incentives.
Together, these companies have taken about 40,000 policies out of Louisiana Citizens Property Insurance Corp.
Donelon admits that taking business out of Citizens has been an expensive venture, but says it was worth it, because it jump-started competition in the state and decreased the chance that people around the state will foot the bill for future hurricanes. "We did pay a significant price to get those companies into our state, but consumers are benefitting," he said.
Most of these companies have names consumers have never heard of, such as Lighthouse, Gulfstream, ASI Lloyds and Southern Fidelity, and haven't been around long enough to earn a traditional rating from A.M. Best Co.
Chris Paulin, vice president of Insurance Underwriters Ltd. in Metairie and this year's president of the local chapter of the Independent Insurance Agents and Brokers of Louisiana, said the situation makes insurance agents nervous.
"Just because the department brings them, it doesn't mean that we're comfortable," Paulin said.
The insurance department has taken steps to increase protections surrounding these largely untested companies, and got the Legislature to increase coverage from the Louisiana Insurance Guaranty Association from $150,000 per home to $500,000. That means that if an insurer defaults, the Guaranty Association, which is funded by regulated insurance companies in the state, would step in and pay for up to $500,000 per policy.
While agents say that those changes have increased their confidence in writing policies with the new companies, it's still not easy for everyone to find coverage.
All of the companies are looking for the newest homes in the New Orleans area, built to the latest building codes. They frown upon things such as knob-and-tube wiring, slate roofs, asbestos roofs and raised homes, because of the risk that wind will get underneath in a storm and cause damage. In general, the older the home, the greater the problems finding insurance - and there are a lot of antique homes in New Orleans.
Paulin said that there are also gaps in available coverage based on the value of the home. The most choices in the market are between $150,000 and $450,000. Almost no companies are writing policies between $450,000 and $750,000. Homes worth less than $150,000 are also a problem, because insurers believe the amount they can earn in premium isn't worth the cost of underwriting and managing the policy, something that's a major problem because much of the sales activity in the New Orleans area over the past year has been smaller homes because of the first-time home-buyer tax credit.
More flood polices
As the market has responded post-Katrina, consumers have been through the ringer. When Katrina hit, Collen Boyle Gannon was paying about $2,000 a year for a Farmers Insurance Group homeowners policy for her family's raised-basement bungalow in Mid-City. Soon after the storm, her bill shot up to $7,800 a year.
In January 2009, Gannon was able to find coverage with one of the new companies that came to Louisiana to take advantage of the state's high insurance prices, Bankers Specialty Insurance Co.
Her new coverage is only $3,500 a year, a huge improvement. But the coverage is not equivalent: Farmers has an A credit rating, and Bankers is only a B+. Meanwhile, Gannon's flood insurance has climbed to about $2,000, meaning that they're still paying more than they can afford in insurance coverage for the property.
"We're still in a situation where we're paying more than $5,000 a year in total insurance," Gannon said.
After several years of burning through savings by paying the inflated prices with Farmers, fronting their own home repairs after a contractor stole their insurance proceeds, and being unable to sell a home they bought in Prairieville immediately after Katrina, the family is planning to move out. They figure they can collect enough by renting both the upstairs and downstairs of their Mid-City home to cover the mortgage, and they'll move some place cheaper.
"I was thinking the other day, for us, the effects of Katrina just don't go away," she said. "We didn't have the most horrible things happen to us, but it really has derailed our lives. The effects just continue."
As homeowners have dealt with insurance fluctuations, the Louisiana insurance market has changed considerably since Katrina, when private companies paid $25.5 billion in insured losses in the state across all lines of coverage, according to the Louisiana Department of Insurance.
The National Flood Insurance Program paid another $17.7 billion in 2005, most of which is attributed to claims in Louisiana.
After such a handsome payout, many saw the value of having a flood insurance policy, and many lenders started requiring it, no matter where a home is located. Today, Louisiana has 102,329 more flood insurance policies in force than before Katrina. In May 2010, there were 483,404 flood policies in the state, up from 381,075 in May 2005, according to the Federal Emergency Management Agency, which runs the program.
The state's biggest insurers retreated in the wake of the storm. State Farm, which had 35 percent of the homeowners policies in the state at the end of 2004, now has 28 percent and is not writing new homeowners policies in the New Orleans area.
Allstate, which had 22 percent of the homeowners policies in the state at the end of 2004, has shrunk by one-third, and now has 14 percent of the market. The company will write new business in the New Orleans area, but only if the wind coverage comes from Citizens. Other major insurers such as Louisiana Farm Bureau Mutual Insurance Co. and Travelers also have sought to reduce business.
With few alternatives as companies dropped business, homeowners turned to Louisiana Citizens, which had 171,000 policies at its apex in March 2008. But as new companies have come into the state to do business, the count has dropped to 127,000 - not far off the 125,000 policies Citizens had when Hurricane Katrina hit.
While Citizens remains the third-largest residential insurer, Donelon said the company will hit a milestone later this year and will fall below Louisiana Farm Bureau Mutual Insurance Co. and Liberty Mutual in the market-share list, to fifth place.
Meanwhile, as new companies have come into the market, wind-only policies such as what Heston had to buy from Citizens basically have vanished, even though back in 2006 Citizens predicted that these riskiest type of policies would become 30 percent of its growing book of business.
Similarly, named-storm deductibles became common place after Katrina, and reached as high as 5 percent. But as competition has increased, they've fallen to a more manageable 2 percent to 3 percent.
Donelon remains optimistic that the active dynamics of the past few years show that prices can fall further with competition. His job, he said, is to tout the fact that Louisiana's levees are stronger, homes have been rebuilt to a new building code, and insurers can make money if they come to Louisiana. "The thing I have to do now, is to sell our market," Donelon said.