Thursday, October 14th, 2010
Baton Rouge, Louisiana
HOMEOWNERS INSURANCE MAY BECOME UNAFFORDABLE ALONG THE GULF COAST!
Just when you thought the insurance crisis along the gulf coast, particularly in Louisiana, could not get any worse, along comes congress to really muck up the problems faced by property owners who are trying to protect the value of their property. If congress and the Obama Administration have their way, look for already sky-high insurance coverage costs to leap even higher. And not one discouraging word is being heard from state officials on behalf of the property owner.
Here’s the clinker that will cause these big premium increases. Right when congress goes back to work after the November election, the first order of business will be the administration’s $3.8 billion spending plan for the coming year. Included is a new income provision with a dull, but important title that few will understand. It’s called deduction disallowance for excel non-taxed reinsurance premiums paid to affiliates (yawn). But a little explanation will enlighten us on the negative impact this provision will have on property owners in Louisiana and other states throughout the Gulf South.
The key word here is “reinsurance.” You and I don’t buy it, but most insurance companies do. When an insurance company insures property, they often find another company to take part of their risk. Something like the bookie that lays off part of the bet he takes. A company like State Farm, Allstate and most other insurers selling property insurance will shop around for someone to partner up with in case there is a major disaster. The majority of insurance companies looking for reinsurance go to Europe and work with reinsurers like Lloyds of London, Swiss Re, Munich Re and numerous other companies that operate worldwide.
These reinsurers can make money, for they are insuring a wide variety of risks all over the world. A disaster in Japan may cost such a company a bundle in one year, but profits are being made elsewhere. Just like an American company operating in my home state of Louisiana who “spreads the risk” across the country, reinsurers “spread the risk” worldwide.
And yes, these foreign companies do pay U.S. taxes. Off shore companies pay an excise tax that is roughly equivalent to the corporate income tax paid by American insurance companies. But if this “disallowance “provision is passed into law, guess who ends up paying? The increased tax will be passed along to the American insurance companies who then will pass it on to the property owner. And your property insurance costs will take a big leap.
On my radio show recently, I was joined by several representatives from The Brattle group, a Washington, D.C. research firm. They estimate that the new reinsurance tax proposal will cost American property owners some $10 to 12 billion in higher premiums and drive away some one fifth of presently available reinsurance. Louisiana and the gulf south will see the biggest increases, with the likelihood that many homeowners’ will be priced out of the property insurance market.
And what about trade sanctions? If the U.S. sticks foreign insurers, look for countries where these reinsurers are located to retaliate in kind. Numerous American companies that have a strong presence in Louisiana for instance, also operate in a number of other countries worldwide. AIG and Pan American are two such companies. British giant Lloyds of London sells more insurance in Louisiana than any other state. So here is what will happen. More taxes at home, retaliation abroad, and the property rates go even higher.
This, unfortunately, is not the only bad news. Two percent deductibles have become the norm, adding thousands of dollars of exposure without adequate insurance coverage for most homeowners along the coast. So the owner of a $600,000 house has to come out of his or her pocket for the first $1200.00.
If your rates go up and you are stuck with high mandatory deductibles, just be glad if you don’t live in Louisiana. What if you were to consider moving to The Bayou State, but were told there is a mandatory surcharge that applies in no other state, requiring you to pay the sum of $1100 or more, just for the privilege of living there? And every other Louisiana citizen who buys a home and owns a car has to pay the same surcharge. Would you move there?
That is exactly what is happening in Louisiana now. The surcharges are from the cost of insurance, and if you live in Louisiana, you now have to pay the highest premium costs in the nation. And not just by a small amount when compared to other states. Louisiana exists in its own world of escalating insurance costs that are completely out of line with the rest of the nation.
The latest figures show that Louisiana is also at the top of the list for having the highest premium rates. The average national premium for home insurance is $690.62. The south has a higher rate because of the hurricane threat. The average homeowner premium for southern states is $801.75, which is 16.1 % above the national average. The average cost for a Louisiana homeowner continued to be the highest in the country at $1392. This is an increase of 0.2% from last year. No surprise, since Louisiana officials pay scant attention to insurance rates and make little effort to lower them.
Reasons for high rates in Louisiana are varied and numerous. At the top of the list is the unfathomable creation of a hybrid state run insurance company called Citizens. It has been called Louisiana’s biggest financial disaster, and reeks with corruption and ineptitude. The financial records are so bad that the state auditor refused to issue an opinion of the company’s financial condition. The cost to the taxpayers has now topped $2 billion.
Many other states are facing increasing rates, though few of Louisiana’s magnitude. But with congress dabbling in potential tax increases on reinsurers outside the U.S, the outlook for more affordable rates on homes and commercial property, particularly along the Gulf Coast, becomes increasingly grim.
*****
“It’s not hurricanes that are causing high insurance rates, but bad public policy.”
-Policy analyst Michelle Minton
Peace and Justice
Jim Brown
Jim Brown’s syndicated column appears each week in numerous newspapers and websites throughout the South. You can read all is past columns and see continuing updates at www.jimbrownusa.com. You can also hear Jim’s nationally syndicated radio show each Sunday morning from 9 am till 11:00 am, central time, on the Genesis Radio Network, with a live stream at http://www.jimbrownusa.com. The show is televised at http://www.justin.tv/jimbrownusa.
Or the insurance companies can just transfer some of the risk to their customers like they have done with their outrageous “Named Storm Deductibles.” The LDI, under Jim Brown, permitted the insurers to increase their deductibles exponentially when the wind damage resulted from a named storm(tropical storm) or hurricane. By way of example, if one owns a $500,000 home and has a 5% NSD, there is no coverage for wind damage from a tropical storm or hurricane until the damage exceeds $25,000. If however, that same home is damaged by a micro-burst that is unrelated to a tropical storm or hurricane, there would be coverage for wind damage subject to the policy deductible, which is usually about $500-$1,000. The premise for this defies logic. The NSD essentially bars coverage for anything other than serious or catastrophic wind damage from tropical storms or hurricanes.
And of course, the named storm deductibles ONLY apply to wind damage because the only other component of a hurricane, storm-surge/floodwater, is not covered by a homeowner’s policy anyway.
Talk about “bad public policy.”
I’m not with Jim on this one.
sop
Can’t believe he is defending the reinsurance cartel.
How about we regulate them AND tax them AND break up the anticompetitive way they sit down with brokers and divvy up the reinsurance layers rather than compete with each other in free market transactions.
Or do what Florida did. There are much more efficient ways to pay investors to put up collateral than being gouged by Bermuda reinsurers.
Hurricane insurance only works economically if you save the profits from the years with no hurricanes to pay for the years with hurricanes. In the current system the profits for the no-storm years disappear to the tax havens so the capital does not accumulate to pay for the storm years.
I wholeheartedly agree with Brian, and the NSD plays right into this. Because of these excessive premium structures (blessed by both the La. and Miss Depts. of Insurance), coverage only exists for the expected damage from a Cat 3 or higher, in most instances. And the coverage from a Cat 3 or higher is greatly reduced to the benefit of the insurer because in my previous example, $50,000 in wind damage automatically becomes $25,000 in damage. Reinsurance and Cat Bonds are just more sophisticated methods of protecting the insurers, instead of their customers, from tropical storms and hurricanes.
I wish someone would have been paying attention when these NSD’s were implemented.
OOOOOOOOOOOOOOOOOoowweeeeeeeeeee With increased wind premiums I don’t know if we in the rainforest can even afford to insure our ” nana’ leaves roofed pallets” anymore, which is another reason why less people and monkeys will be moving back here. Can we make this proposed federal deduction for reinsurance a political election issue with the current candidates for La.’s U.S Senate seat?I’m sending Parrot for a fly over to Vitter’s HQ to drop a note about same, among other things avians do on David occasionally.OOOOOOOOOOOwweeeeeeeeee