Donelon Emphasizes the Positives in Louisiana’s Property Market

Louisiana Insurance Commissioner James Donelon believes there is “light at the end of the tunnel” for the property insurance market in his state. The devastation of the coastal areas in 2005 via Hurricanes Katrina and Rita threw a wrench into a market that had been gearing up after legislative reforms in years preceding the hurricanes sparked insurer interest in the state. Since 2005, however, Louisiana has struggled with recovery from the hurricanes both in the insurance market and in general. In an interview with Insurance Journal‘s Andrea Ortega-Wells, Donelon, who was re-elected to his post in November 2007, discussed efforts to entice insurers to write more property in his state, federal legislative plans regarding natural catastrophes, his relationship with agents doing business in Louisiana, and more.

Donelon said recent positives in the property market include State Farm’s plan to write new policies in southern Louisiana, which was hard hit by the hurricanes and the pull back of insurers in their aftermath. In addition, Donelon said, the state’s market of last resort, Citizen’s Property Insurance Corporation of Louisiana is for the first time seeing a downward trend in renewals and new policies.

Another development, Donelon said, is the $100 million insurance incentive program the legislature approved that aims to entice insurers to write property policies in the state including some of those currently covered by Citizens. Donelon said the program is designed to generate, when fully utilized, $400 million in new premium, which represents a 15 percent increase in the state’s $2.3 billion market. As of early November, six qualifying companies requesting a combined $34 million in grants had submitted applications to participate in the program.

Insurance Journal: Given Louisiana’s catastrophe risk, what are your thoughts on a federal catastrophe plan?
James Donelon: There’s no doubt in my mind that is the ultimate solution and will happen. Probably not before the next round of national elections, when the new president is sworn in and he or she has campaigned up and down the East Coast and, of course, all around the Gulf Coast. And hear, over and over again, the same message — that we’re in crisis, we need help. The private market is leery of doing business in our coastal counties and parishes, whether that’s Brooklyn, the entire state of Rhode Island, or Texas to Miami.

I think Congress will react then and the president will support a federal fix. Whether it’s a backstop, a TRIA-style CAT fund, an all-perils policy, expanding the flood policy to include all-perils or a tax program that would allow companies to, on a tax-free basis, create separate reserves for CAT exposure. …

My preference is the TRIA-style backstop. And if I were king, I’d pass legislation to do that for CAT exposure for hurricanes as well as for earthquakes. But I’m not king and I will accept what Congress does to help coastal states.

IJ: What do you say to those states with little or no catastrophe risk that are leery about implementing some kind of national program?
Donelon: I understand their reluctance to put their taxpayers on the line for this exposure. But I would point out to them that we, in Louisiana for example, provide 25 percent of the seafood that’s consumed in the United States [and] a large, large percentage of the oil and gas that is consumed in the United States. That San Francisco, a major economic engine for our national economy, sits on an earthquake fault as we speak. These natural disasters are affecting them just like the attacks of 9/11 affected Nebraska. These natural catastrophes affect the heartland. …

We can … build smarter, build better, discourage development in high-risk areas. … We can do those things and should do those things. I enthusiastically endorse such measures, but we can’t relocate New Orleans. We can’t relocate Miami, San Francisco or Brooklyn, for that matter.

IJ: You recently made a trip to London, can you tell us a little bit about that?
Donelon: I went to tell the Louisiana story. I call it the three L’s of Louisiana.

Our legislative initiatives in the most recent session that were private-sector based, not a state takeover of the property insurance business — incentives to get companies to come back into our market.

Our levee rebuild, the federal government has spent $1.5 billion to date, strengthening and raising the levees in the bowl, as we refer to Metropolitan New Orleans. And they have $5.7 billion available to be spent by the year 2010, over a billion a year on levees in the Metro New Orleans area. Compared with $30-80 million a year that was being spent prior to Katrina.

And finally, litigation. We’re the only state in the union that is a civil law based state. We got our law from what’s called the Napoleonic Code, which actually, Napoleon got from the Spaniards. It goes back 400 years.

But what differentiates us from the rest of the 50 states is they’re all common law based states with punitive damages as part of their system. Ours does not have punitive damages in it … except for two legislatively created areas. One is drunk driving and the other is child abuse.

Other than that, there are no punitive damages available for the arbitrary handling of a claim in our state. Unlike Mississippi, Alabama, Florida, who have had those bad experiences.

I welcomed the opportunity to go to London, to go to Seattle, to meet with the annual meeting of the National Association of Mutual Insurance Companies, the PCI Annual Board Meeting that invited me to tell our story. To encourage them to take a second look at Louisiana and see the opportunity that is there, the pent-up demand for property insurance coverages all across south Louisiana.

And it’s a boom area. From Lake Charles on the west to St. Tamany on the east and Baton Rouge and Lafayette in between, their economies are growing at a robust rate.

So, I was thrilled to have the opportunity to go to London, to tell that story to Lloyd’s and to the Association of Surplus Companies that hosted a lunch for me.

IJ: And what was their reaction?
Donelon: Very positive, truthfully, very positive and I think the reason we’re seeing downward trends in our residual market, in that Citizen’s book of business, is because the surplus market is stepping up. Primarily, in particular, on the commercial side and providing coverages for business owners who can’t get it from the admitted market.

IJ: You advocate abolishing the Property Insurance Association of Louisiana and contracting with the Automobile Insurance Planned Service Office to take over the duties of the Louisiana Automobile Insurance Plan. What are your reasons behind those initiatives?
Donelon: They were prompted by very critical audits done by the legislative auditor of the books of those two plans. Those plans considered themselves to be private entities since their creation in the ’90s and before. Now the legislature has ordained that they are public, that their meetings should be subject to the open meetings law, public records laws, etc. And the legislative auditor went in and conducted audits of their activities going back three years, I believe, and documented great abuse by the people in charge of those operations.

In addition to that, we’re one of a handful of states that provide those functions on a state basis rather than contract with national associations, like ISO, like ABSO, on the auto side. Less than a handful, one handful of states do it like we do in Louisiana. [We want] to eliminate the opportunity for abuse, to do it as other states are doing it, which again, will reinforce our effort to attract companies to the Louisiana marketplace. When we can tell them the bad old days are behind us, there’s a new day — a new era in Louisiana.

IJ: What has been the industry’s reaction?
Donelon: The national associations have reacted positively. The service companies have stepped up and said they are perfectly willing to do the job for us and take it over immediately, if possible. I think we’re going to need legislative approval to do the fire rating function, to contract it out with ISO. If that’s necessary, we’ll do it that way.

IJ: With all the challenges the Louisiana property insurance market has experienced, how has your relationship with agents and brokers in your state been?
Donelon: It’s been great and, and it’s been vital. They were a large part of the great success we had in our most recent legislative session — in preventing the legislature from going down the Florida path of taking over the property insurance business — and passing a politically tough measure, cash incentives to be given out to insurance companies.

That’s not an easy sell in any place and in particular, in a state that is going through a million claims, over $40 billion in payments. Needless to say, not all of those million claimants are happy.

And they are talking to their legislators. They’re reaching out to us, to the governor, all of the elected officials. And their unhappiness makes it an even tougher sell for the legislature to do things like abolish the Insurance Rating Commission, which is perceived to be a consumer protection body. And truthfully is not … and with agent support, with broker support, we abolished that. … We passed the incentive program that will result in a 15 percent increase in capacity in our state property market. So, to answer your question, it’s a great relationship. I value it greatly and it’s been a big help.