Insurance panel OKs rate increase
It's likely to be first of many after storm
Thursday, January 19, 2006
By Rebecca Mowbray
BATON ROUGE -- The Louisiana Insurance Rating Commission reluctantly approved its first post-Katrina increase in homeowners insurance rates Wednesday, beginning what is likely to be a painful stream of rate increase requests over the next few months.
"We do have a little indigestion," commission member Christine Berry said. "My concern is we are setting a precedent here."
After an hour and a half of debate, the commission voted 4 to 1 to allow ANPAC Louisiana Insurance Co. to increase homeowners insurance rates by an average of 23.3 percent statewide. New Orleans area homeowners likely will bare the brunt of that increase and see their rates rise much more than the average 23 percent.
The approved increase comes on top of a 9.9 percent increase the company didn't have to take to the commission, plus another increase of about 9 percent to replenish reserves of the state's insurance company of last resort.
ANPAC said the rate would keep the company solvent and account for new hurricane risk.
"This is not about recouping Katrina's losses. That would be impossible," said Byron Smith, vice president of actuarial services for ANPAC, a subsidiary of American National Insurance Co. in Galveston, Texas. "It's about giving us long-term viability."
"Our risk was turned upside down in Katrina," Smith said. "What we're after is an adequate rate to stay, with profitability, in the state."
But the dissenting commission member, Steven "Rock" Ruiz, said insurers should find other ways to address business concerns before turning to policyholders for more money. He worries that rising insurance rates will make it harder for people to return to the New Orleans area.
"We are not just going to rubber stamp increases," Ruiz said. "People aren't going to buy insurance. They're going to move to the north shore or up north. They can't afford to pay insurance and eat, too."
ANPAC's was the first of what's expected to be a wave of homeowners insurance companies who will come before the commission to raise rates.
Under the state's "flex band" program, insurers can change rates by as much as 10 percent without going before the rating commission as long as the state determines that the proposed changes are statistically justified.
Additionally, insurance companies including ANPAC, Aegis Security Insurance Co., Amica Mutual Insurance Co., Horace Mann Insurance Co. and Teachers Insurance Co. have filed plans with the rating commission to pass on increases of up to 10 percent to help replenish reserves of the state-sponsored Citizens Property Insurance Corp., the insurer of last resort.
The Citizens plan expects losses of $1.2 billion from Hurricanes Katrina and Rita. But its cash reserves and reinsurance, or insurance that insurance companies buy to cover a portion of claims in a disaster, won't cover it all. The State Bond Commission has allowed Citizens to issue up to $1.4 billion in bonds, which will be paid for by every insurance company operating in the state. In turn, those companies are allowed to pass on assessments to policyholders.
Profits wiped out?
Earlier this month, the Insurance Information Institute, a nonprofit financed by the industry, issued a press release saying that the record $12.4 billion in claims from Hurricanes Katrina and Rita in Louisiana is enough to wipe out all homeowners insurance premiums paid in the state in the past 25 years and all profits ever earned in Louisiana.
"After the megacatastrophes such as Hurricane Katrina, insurers and reinsurers will assess the risk associated with writing homeowners insurance in Louisiana," Robert Hartwig, chief economist of the Insurance Information Institute, said in the release. "Clearly risk is heightened and premiums must rise to more accurately reflect that risk."
Intense storms are more likely to hit Louisiana during a period of heightened hurricane activity predicted for the next 15 to 20 years, according to several scientific models. Katrina gave insurers a new appreciation of how much damage a hurricane can cause and what they may face in the near future, ANPAC and the institute said.
"Katrina demonstrated to us in the industry that we all misconstrued our coastal losses," Smith said. "My point in all this is, Katrina has changed the industry permanently."
But Bob Hunter, director of insurance for the Consumer Federation of America, doesn't buy that argument.
"There are serious questions about raising rates after one or two hurricanes," Hunter said.
Hunter, a New Orleans native, former insurance commissioner in Texas and former head of the National Flood Insurance Program, said that after Hurricane Andrew, companies refined their computer models to better simulate hurricanes and predict how much damage storms might cause in different areas. The models could even factor in active or slow hurricane seasons to spread risk over a period of years, something that allowed insurance companies to plan for major disasters and set rates accordingly so they would be better prepared to handle a single catastrophe.
"The question would be, if you've gone to a scientific method, why do you have to make such a big rate change after one storm? What was the mistake in the model?" Hunter said. "Because if they want to raise rates, there must have been a mistake."
ANPAC said the scope of Hurricane Katrina simply overwhelmed its risk projections.
The company faced $335 million of insured losses from Katrina, $250 million of which were in Louisiana.
In December, ANPAC was insolvent until its parent company gave it a $50 million cash infusion, Smith said. The injection was the third since ANPAC Louisiana was incorporated in 2001, but Smith said the company's board has indicated there won't be any more assistance. ANPAC has been operating in Louisiana for a long time, but the company created a Louisiana subsidiary a few years ago.
ANPAC expects that many of its 21,640 Louisiana policyholders won't return to the New Orleans area because their homes were so badly damaged.
Commission member Ruiz expressed concern that ANPAC's corporate structure shielded the parent company from obligations, but Smith dismissed his worries. "There's absolutely no gimmicks being done," he said.
Confusion reigned over exactly what rate increase ANPAC proposed to the commission.
Initially, the company asked for a 46.2 percent increase on the commission agenda, and then raised it to 53.3 percent to make sure it had a rate increase large enough to cover itself.
Insurers can go before the commission with only one rate change of more than 10 percent a year. But in the hours before the meeting Wednesday morning, Louisiana Chief Actuary Rich Piazza questioned some of ANPAC's assumptions about reinsurance, which caused ANPAC to reassess and lower its proposed rate increase to 23.3 percent.
Even with the lower increase, commission members were uneasy at the prospect of raising insurance rates for homeowners.
Jabari Ragas wanted to know whether ANPAC was writing new policies in the New Orleans area, but Smith couldn't answer him.
"I cannot honestly answer in Southern Louisiana, because we are hurting so badly," Smith said. "I do know we are writing in North Louisiana."
But, in the end, commissioners voted for the increase after Piazza said the rate increase appeared to be statistically sound and forward-looking rather than making up for past failures in assessing risk.
"We did go through this with a fine-tooth comb," Piazza said. "There's a much greater chance that a hurricane will make landfall in Louisiana and cause damages. We should expect more loss due to hurricanes than previously anticipated. That means hurricanes should be a greater percentage of the overall premium."
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Rebecca Mowbray can be reached at email@example.com or (504) 826-3417.