As the national economy plunged this fall, the timetable for the recovery of Louisiana’s beleaguered property insurance market may have slowed with it, Insurance Commissioner Jim Donelon said.
Insurers are required to have a certain amount of capital on hand for every dollar of each homeowner’s policy that they write to make sure they have enough money to pay claims in case a hurricane or earthquake destroys large swaths of homes.
But with the value of insurers’ investments being eroded with the stock market in recent months, companies have less money available to write new business. In the most extreme cases, insurance companies could find themselves without enough money on hand to cover the homes that are already on their books.
Bob Hartwig, an economist who is president of the Insurance Information Institute trade group, said Louisiana’s large and ever-present risk of hurricanes is a much bigger factor in insurance availability and price than any fluctuations in the value of insurers’ investments.
Hartwig told Times Picayune reporter Rebecca Mowbray he believes market conditions will affect the state’s property insurance landscape. How insightful!
But with insurers having much less capital on hand than they did a few months ago because of the declines in their investment income, doing business in a catastrophe-prone state eats up a greater share of their available cash, which could make them averse to doing more business in coastal areas.
“It does mean that insurers will be able to assume somewhat less risk than they otherwise would be able to,” Hartwig said.
Hartwig notes that insurer insolvencies are rare. This year, there have been no failures of property and casualty companies, but 22 bank failures. Hartwig doesn’t include insurance giant AIG on that list because the company’s property insurance units were solid.
Insolvencies may be rare among insurers but they seem to be increasinly common among the insured. I wonder if Mr. Hartwig has noticed that.
One way for insurers to make sure they meet regulators’ capital requirements or to be able to continue to afford to write new business, Hartwig said, is to buy more reinsurance, which effectively takes risk off their books by transferring it to another company.
Mr. Hartwig’s comment begs questions about risk transfer when an insurer also owns a reinsurance company. The risk may not show on the books in that case but it’s still there.
Dennis Burke, vice president and co-director of state relations for the Reinsurance Association of America, said his industry believes it will see a flood of new demand for reinsurance as regular insurance companies need to shore up their balance sheets.
The reinsurance market froze in 2006 as insurers rushed to buy coverage after being stunned by Katrina’s losses. Since then it has been loosening, with capacity increasing and prices falling, though coverage remains more expensive than it was before Katrina.
Anderson Baker, a commercial insurance agent in New Orleans who is president of the firm Gillis, Ellis and Baker, said he is already starting to see the impact of the implosion of the national economy in insurance deals.
While the commercial insurance market remains much more constricted and expensive than it was before Katrina, prices have dropped and coverage is more available than it was in the first year and a half after the storm. Commercial property insurance is much more fluid than homeowners insurance because deals are individually tailored and prices are unregulated.
But Baker said any improvements in local commercial property insurance are over. “In recent negotiations I’ve had to go all the way up to the CEOs of large insurance companies and they’ve said, ‘This is the last concession you’ll get.’ ”
Baker also said that wind coverage for commercial buildings is not as available as it was a year ago. “That suggests that they are either not as comfortable with their balance sheet as they used to be, or their reinsurers are not as comfortable,” he said.
In checking out offers, Baker said it’s more important than ever to understand the soundness of the reinsurer backing the insurance company writing the policy, because many reinsurers are international companies that are not subject to the same capital requirements as U.S.-based companies and could have had much riskier investments. (emphasis added)
Remember that increased risk when the conversation about regulating the industry picks back up after the first of the year.
If reinsurance was a viable solution, then State Farm, Allstate, et al would buy reinsurance and write the polices, and we would not need Citizens or wind pools or FAIR plans. The insurers know that reinsurance is not worth the cost. Reinsurance also is not worth the cost for the wind pools or Citizens plans. The state risk pools are all set differently, yet not one of them is a sustainable model.
Exactly, Brian. When I read these articles, the “have our cake and eat it, too” just hops off the page. The same thing for most of the briefs filed in these cases. I’d put “reinsurance” and “out of state conduct” in same category – and both “cakes” are getting stale.