Jim was kind enough to share this week’s column with us including fresh rumors from the Louisiana Department of Insurance that explains why they did not cooperate with the investigation that lead to the indictment of Citizens former CEO Terry Lisotta. – sop
Thursday, December 11th, 2008
Baton Rouge, Louisiana
LOUISIANA CITIZENS INSURANCE SCANDALS CONTINUE TO GROW
A year ago, it would have been hard to imagine that conditions at Citizens Property Insurance Company could get any worse. The state created and state run company was in debt by over $1 billion. The Rouge Business Report called Citizens the biggest financial disaster in the state’s history. But never underestimate the ability of some state agencies to make a dysfunctional situation go from bad to worse. The Board governing Citizens, that includes statewide elected officials, has shown little oversight of the Companies’ spending and management decisions, sparking not only criticism from the Legislative Auditor in Louisiana, but also provoking major investigations by both state and federal law-enforcement agencies.
The latest Citizens scandal boiled over last week when the former CEO was indicted with 14 counts of theft by fraud, filled with allegations that he spent more than $285,000 on questionable expenses including airline tickets, meals, retirement gifts and stays at lavish hotels. But his attorney said last week that his client is being singled out and “used as a scapegoat” in the poor management of the insurance company. Sources close to the investigation seemed to agree, saying that the latest indictments are just “the tip of the iceberg.”
The whole controversy has significantly elevated due to the resistance of Louisiana’s Insurance Commissioner to turning over some 2000 e-mails requested by the Legislative Auditor’s office. The Louisiana Insurance Department is arguing that the information requested by the auditor is proprietary, and it cannot allow this information to be made public. Such an argument is spurious at best, since, by law, the Auditor’s office has the same confidentiality restrictions that apply to the Commissioner of Insurance. Questions are being raised as to why the insurance department has been so defensive in turning over these 2000 e-mails requested.
Rumors are rampant throughout the Department of Insurance that many e-mails are “extremely personal” in nature with risqué and bawdy language flowing freely. So some department employees are concerned that the Auditor’ office will weed out these salacious e-mails to show a pattern of employees abusing the use of state owned computers for matters of a personal nature. But that’s not what has piqued the interest of the outside offices investigating ties between Citizens and the Insurance Department.
The focus of investigators is not on the titillating e-mails, but rather on the number of lengthy mundane transmissions involving the rates that are charged to policyholders by Citizens. By law, the state run company must charge a rate that is 10% higher than the rates being charged by companies in the private sector. Also by state law, the property rates charged by Citizens must be “actuarially sound” and be adequate enough to keep the company on solid financial footing. When Citizens takes huge losses, as it did following Hurricane Katrina, the rate charged to policyholders has to be raised to keep the company from going broke.
Actuaries who studied the financial data of Citizens determined last spring that a 31% rate increase would be required to keep the company on sound financial footing and in line with state law. But with no explanation, the final rate approved by the Department of Insurance turned out to be only 6%. A long explanation would be required to fully understand the process. But the bottom line is this. Was there price-fixing involved? Was there a possible conspiracy with certain parties conspiring with Citizens to keep rates artificially low? Was the recently indicted ex-CEO part of any effort to fix rates that would benefit certain insurance companies that use Citizens? These are all questions that are being examined at the present time. Investigators feel that the several thousand e-mails being demanded by the Auditor’s Office may be a key as to whether any criminal activity actually took place.
Citizens Insurance Company was a disaster waiting to happen from its very inception. Created by the Louisiana Legislature at the behest of the Insurance Department, Citizens had to be one of the most poorly constructed business operations ever conceived by a state legislature. The company was broke from day one, with no capital and surplus made available to get Citizens started on sound financial footing. It became obvious early on that no one at Citizens had any idea of how to run an insurance company.
And a mother’s mantra of any successful insurance company is to have adequate reinsurance. Have a safety net in case a storm like Katrina comes along. The legislature and the insurance department failed to require that Citizens have sufficient reinsurance, and that single negligent decision stuck every policy holder in the state for a bill that will far exceed $1 billion. In virtually every standard that would be required of any private insurance company, Citizens failed miserably.
Citizens was an inauspicious cataclysm from day one. Now, with the ex CEO under indictment and an investigation underway of whether or not there was a conspiracy to fix property insurance rates, the Citizens debacle continues to get even worse. The best solution would be to shut the company down completely. At a minimum, Citizens needs major restructuring with more requirements for both legislative and auditor oversight.
The auto companies and key financial institutions that will receive a federal bailout often showed gross incompetence in how their businesses were run. But if one is looking for an even worst recipe for disaster, Citizens is heading toward the record book of being in a class all to its own.
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“I either want less corruption, or more chance to participate in it.”
Ashleigh Brilliant
Peace and Justice
Jim Brown
Jim Brown’s weekly column appears in a number of newspapers and websites throughout the State of Louisiana. You can read Jim’s Blog, and take his weekly poll, plus read his columns going back to the fall of 2002 by going to his own website at http://www.jimbrownla.com.
Jim also has a new book out on his views of Louisiana. You can read about it and order it by going to www.jimbrownla.com. .
Jim’s radio show on WRNO (995 fm) from New Orleans can be heard each Sunday, from 11:00 am until 1:00 pm.
Just another FINE example of a government run entity. And people wonder why socialism is a bad idea….
As opposed to what? A Proximo certified capitalist company that fucks it’s homeless customers after a natural catastrophe?
For people that claim to dislike socialism and the government in business you boys sure are accomplished at showing up at the TARP trough come feed time.
Pot meet kettle.
sop
Message for Proximo from CLS
WOW SOP, you really got me. Man, oh man. You worked in capitalist and catastrophe and homeless. Holy cow you even dropped the F-Bomb on me. Man oh man have I been told! WOW, guess I am just a sop myself. Hope that welfare state takes care of you fine people down there. I’m sticking with the USA until you all change it to the USSA. Prox OUT.
It’s nice to hear Commisioner Brown ackowledge something that ought to have been obvious: rate-setting by a government-run carrier is a political exercise, even when the law says it ought to be “actuarially sound”.
The actuaries said to raise rates 31%, but the politicians only raised them 6%. That is a reasonably predicitive example of how the HR3121 mechanism would have worked, too. That kind of political meddling is inevitable. (Think about multiple years of compounding that sort of underpricing. The end result had to be pretty ugly.)
Which is why such schemes end up being thinly-disguised wealth transfer mechanisms. In LA, the wealth transfer is between taxpayers (the transferors) and the Citizen’s policyholders with claims (the transferees). In HR 3121, the transferors would have been US taxpayers who didn’t have claims, and the transferees would have been Gulf Coasters with claims. In the NC beach pool, the transfer is between upstate policyholders (and their carriers) and beachfront policyholders.
I remain baffled that people think the rest of us should subsidize beachfront development.
I have no quarrel with people who want to live in sunny tropical climes. But they should have to pay the full costs of that lifestyle decision.
Sorry I missed the opportunity to get in on this conversation when it was happening.
Need to do a couple of things before I reply. Just saw these as I was checking to make certain I had working connection.
http://www.newsobserver.com/news/story/1318341.html
Note that the N&O is in central North Carolina about 2-1/2 drive from the coast.
North Carolina is having issues with its own state run coastal insurance option.
Coastal Interests have a disproportionate strength within the the state for a number, and they have kept the Beach Plan rate so low it has become the main option rather than the ceiling.
Thought some might like to see this–
Working Paper Series
Congressional Budget Office
Washington, D.C.
Financing Losses from Catastrophic Risks
KENT A. SMETTERS
Non-resident scholar, American Enterprise Institute
http://www.cbo.gov/ftpdocs/99xx/doc9910/Working_Paper_2008-09.pdf
“I remain baffled that people think the rest of us should subsidize beachfront development. ”
Edward M. Liddy, chairman, president and chief executive officer, Allstate, said the 2005 hurricane season has raised awareness of the need for a plan to deal with mega-catastrophes.
I think the Citizens situation in LA makes the point why we should not have a federal program. Even though the staute calls for sound rates the political ramifications of hat will never happen. Hence, we will always have underfunded pools. FL is another prime example.
One poster mentioned NC and it is the same thing and it has become critical. Because of the fund structure all caariers are assessed based on total state writngs. One major carriers has left the state. Another announced last wee k they were accepting no more new business anywhere in the state. Many more carriers are nervous.
Politicians will never get a complicated issue like this right.
Sup you do know the current CAT model for hurricanes is broken?
Steve,
The paper has its moments, but starts coming off as one of those Libertarian Screeds left over from the Greenspan era.
Is he really saying that if the insurance companies are left to their own pricing devices the market will fund itself?
I am not sure that makes sense even within the old model of market equilibrium. Part of the problem is that the home owners and business owners for various reasons are REQUIRED to carry the insurance. Since the financial institutions have far more market information and economic clout then the majority purchasers it is not too surprising that there is intervention to level the playing field.
An example: don’t you think it would be nice if option-Arm loans had been banned or at least severely limit a few years ago by the regulatory authorities? But a garbage product was allowed to float out there because it is a free market. I would love to see what the insurance equivalent of an alt-A loan would be.
I really wonder if the authors of the report know what they are talking about. You have a Ph.D. from the insurance gods at Wharton writing this stuff. I take what they are saying to mean that they believe there is not an ACC clause for earthquakes in California fire policies. If this is the case than why do they write for the budget office? Won’t the projections for federal expenditures be off if they don’t know about the ACC clause?
Some insurers in California are also worried that they would face either public pressure or lawsuits, or both, forcing them to expand coverage to pay most claims following an earthquake irrespective of the terms of the insurance policy (Grossi and Muir-Woods 2006). Depending on the circumstances, determining whether losses should be attributable to quake damage (which is excluded under many policies) or to the fires following the quake (which are not) might be difficult. This distinction is importantbecause only about one in eight residences in California carries earthquake insurance. (Page 14 para. 2 the report)
VS,
“The ACC was intended to decieve and it achieved its goal. Wait for fire after earthquake and the claimed exclusion of the fire cover. What else will drop out of the coverage we consumers thought we bought? ”
A guy calling himself Bob Hunter on a blog on insurance.
Just a couple of comments on Steve’s posts.
As for the hurricane models being broke. No one knows whether they are broke or not until the next big one. After each event the models are tweaked. If history is an indicator, they under estimate potential loss.
The “fire after” exposure to carriers in CA is the big issue as the “pool” (CEA) handles the shake. This becomes an agent/customer conversation. There are policies that include it and those that do not. I still believe in the idea there is personal responsibilty to know what you are buying. It is the agent’s professional responsibility to offer both and explain the difference. In my over forty years in the business I have found most consumers opt for less coverage to save money and then wonder why it is not covered.
Sup the question isn’t whether the models are broke. Rather it is are they being used correctly. Our first post om this blog 366 days ago dealt with that issue. One of pioneers of the field says they aren’t. It is a damning indictment IMHO
Sop
We have explained all this several times, but you industry boosters have short memories. The NC Beach Plan policyholders pay quite a bit more in premiums than their expected claims, but not enough for the plan to build enough cat reserves because it has to overpay for reinsurance. The insurers want the policyholders to pay enough to buy more overpriced reinsurance so they are protected from any possible assessments. The definition of risk pool escapes them.
What the industry calls actuarial rates in coastal areas are five to ten times more than the expected losses. The Wharton Risk Management Center says so, and cites other studies that say the same thing. Their research is sponsored by the industry so they point this out to justify the high rates as the cost of accounting for enough capital to cover a catastrophe. But if you look at some of the data, the industry wants to lock in returns in the range of 15% per year, the reinsurers want to promise investors returns of 15-20%,and that is what they are asking coastal property owners to pay for. And then they want the federal government to provide the backstop so the insurers can collect high premiums based on megacatastrophe risk while pushing the risk off on to taxpayers.
What is the composition of the LA Citizens board?
I am pretty sure that industry representatives were the majority until this year.
Brian, the recent developments make the board composition a timely question.
According to the Plan of Operation posted on the Citizen’s website
Brian, I must disagree. If the premiums are not building enough reserves after reincurance costs then the premiums are not adequate. The purchase of reinsurance is a cost of doing business. If the insurers didn’t buy enough reinsurance they would be considered incompetent. Since they are not the federal government incompetence is not acceptable.
Good question Sup. So when the insurance industry was pushing for these state plans why did they not insist they charge proper premium?
Why was the LA Dept of Insurance in bed with Citizen’s?
sop
Sop, when these plans are set up they all pledge to charge rates that are actuararily sound. Unfortunately, most are managed by folks who are influenced by the “political process”. As time goes by the funds beome underfunded.
There is going to be areal outrage here in my state of NC. If availability becomes limited in inland NC and inland rates go up to subsidize rates on the coast the “folks” won’t stand for it. This is the beauty of our republic system. Local politicians will read the tea leaves and protect their behinds by supporting the “folks”.
Sup what the pols here in Mississippi have realized is that gutting the economic engines of a coastal state so an offshore Bermuda based reinsurer can make obscene profits to pay huge executive bonsus is plain bad public policy.
IMHO the outrage will come to your state but the target won’t be blue collar North Carolinians who work in Wilmington, it will be against the insurers and pols who set up and run the NC beach plan. IMHO.
sop
The reinsurance requirements are high because these single-state wind pools are not able to spread the risk to a large enough area. Adjacent NC counties New Hanover and Brunswick have a total of $30 billion insurance in force in the NC Beach Plan. Those are Galveston/Brazoria county numbers.
There is a low probability of a cat 4 or 5 making an eyewall direct hit on the Wilmington area from the southeast because most storms tend to head north or northeast by the time they are that far north. But for the Beach Plan to account for enough capital to pay for a 200-year or 300-year hurricane hit on New Hanover/Brunswick, it has to pay much more in reinsurance premiums than its annualized expected losses.
It is a trap. The plan does not have the reserves to cover a 1 in 200 storm so it has to buy reinsurance at 5 times the expected losses. Most of the property owners’ premiums go to pay reinsurance premiums so even when there are years without a major storm the plan does not build up its reserves, so it has to keep buying more and more reinsurance.
Our federal wind/water plan would be better because we would be spreading risk to a much larger geographic area. A single storm that would break the NC pool or SC pool or MS pool or AL pool, would affect only a small percentage of the national pool. We could set premiums closer to expected losses, and would put a stop to the industry’s hard market manipulations that follow every major storm.
I read an opinion editorial by director of NC insurance advocacy group that said property owners in the “beach counties” were subsidizing low inland rates. Have not been able to find the link but suppose her point was related to yours.
If you run across the link to the opinion column or the advocacy group (it’s just become non profit but is volunteer effort), please let us know.
Nowdy, I would love to see that article also. I am puzzled how an underfuned pool could be subsidizing anything.
The HO rates in inland NC are less expensive because the losses aren’t there. We are blessed with fewer spring storms, little huuricane exposure (only those that come up from FL & SC affect inland NC) and good fire protection.
http://www.starnewsonline.com/article/20081209/ARTICLES/812090308&SearchID=7333922919392
“Naturally, people in other parts of the state are balking at paying higher rates to shore up a plan that benefits people in 18 coastal counties.
“But as state Rep. Danny McComas, R-New Hanover, notes, the western regions of the state also have suffered heavy damage from hurricanes and tropical storms in recent years.”
The Atlantic Coastal counties obiously have greater risk, but NC has not had a major coastal direct hit in a while. The inland areas have suffered from the remnants of Gulf storms so they may have had more claims in recent years. The Outer Banks have been grazed but not badly hit.
Similarly, in Florida I think there have been more losses west of 95 than east of 95 because some of the worse storms crossed from the Gulf side. Still, insurers are dropped more policies and raised more premiumus east of 95.
These are examples of the difference between a low frequency but high severity risk and a high frequency but low severity risk. The latter may have more claims in most years, but eventually the former gets hit by a big one.
Thanks, so much!