Faced with a huge and growing number of unpaid claims left by bankrupt insurance companies, a state-sanctioned bailout program that ensures policyholders don’t stiffen wants to borrow $600 million by selling bonds to banks and investors.
The Louisiana Insurance Guaranty Association, known as LIGA, will seek approval of its plan from the State Bond Commission this week.
Action is rare. If the bond sale is approved, it would be the first time the organization has borrowed to pay off claims since a national auto insurance crisis in the early 1990s.
“It’s a reasonable approach — it’s not ideal. At some point, someone has to pay the piper with interest,” said Robert Hartwig, who directs the Center for Risk and Uncertainty Management at the University of South Carolina.
Insurance companies go bankrupt every year and sometimes leave claims unpaid. These become the responsibility of LIGA. The association is therefore used to seeing one to three insolvencies a year, which usually generate a few dozen claims between them, said LIGA chief executive John Wells.
But the seven insurance company bankruptcies last year, caused by Hurricane Ida, disrupted the organization’s normal rhythm of operations.
At the end of 2020, a year when three major hurricanes made landfall in Louisiana, LIGA oversaw the final payment of approximately 1,232 pending insurance claims to Louisiana policyholders across the industry, according to its report. annual.
Then a wave of home insurers collapsed after Ida, already weakened by previous storms. At the end of 2021, LIGA was responsible for 13,434 open claims, more than five times the number in a typical year.
“What makes them (the business failures) particularly extraordinary is that they happen around the same time,” Wells said.
As of July 1, more than 26,000 landlord claims have poured into the association, creating a bottleneck as LIGA attempts to complete the work left by insolvent companies. Although the association hired at least nine fitting companies to handle the influx, consumer complaints about the delays soon surfaced.
A backlog of over 10,000 applications is still pending.
“It’s just damn frustrating – paying all this fucking money for insurance and they treat you like crap. They kick you to the lowest point,” Kenner resident Markey Dietrich said. , whose home insurance policy was with Americas Insurance Co., the fourth insurer in Louisiana to fail.
It is becoming increasingly difficult for LIGA to track the number of insurance company bankruptcies. The association is currently processing claims for five of the seven bankrupt companies, and they are preparing up to 17,000 other unpaid claims following the recent collapse of Southern Fidelity Insurance Co.
Claims from Gulfstream Property & Casualty, the first company to fail before Ida hit, are far fewer.
Role of LIGA
When a Louisiana insurer goes bankrupt and runs out of money, the remaining insurers licensed to operate in the state can be assessed up to 1% of their written premium in a single year. LIGA uses this money to cover outstanding debts. The association is required to pay up to $500,000 per claim.
Taxpayers foot the bill in the end, however. Insurance companies are allowed to recoup money paid to the association by reducing the amount of premium taxes they pay to the state. Insurers can deduct up to 10% of their tax bill until the money is fully recovered.
Wells said the 1% tax typically generates around $100 million a year. He said the board, made up largely of industry representatives, approved the assessments last December and again in April.
“We brought in nearly $200 million, but of course we spent that much money on these insolvencies and landlord claims,” Wells said.
In June, LIGA’s board agreed to issue bonds with an interest rate not exceeding 6% and a plan to repay the money through 12-year valuations, records show. . Wells said if the plan is approved by the State Bond Commission, they will continue to collect assessments from member insurers to make future payments.
Although this is the first time LIGA has had to take such drastic measures in three decades, borrowing from Wall Street to pay off insurance claims is not an unfamiliar concept in Louisiana. After Hurricane Katrina, the state-run insurer of last resort, Louisiana Citizens Insurance Corp., borrowed $1 billion by issuing bonds so it could pay claims. State taxpayers continue to pay these obligations.
The proposed bond issue is an admission that the association cannot raise enough money to pay all the claims it owes without making policyholders wait for years.
“At the end of the day, it will cost more than if these insurers had never gone bankrupt, because interest will have to be paid on this bond,” Hartwig said.
LIGA could have gone another route and given owners with open claims the equivalent of an IOU. They did so in 1993 after the bankruptcy of Champion Insurance Co. and a series of auto insurers.
Wells said LIGA officials at the time were paying consumers 30% of their claim and promising to provide the rest once the money was collected from future bonds and assessments. Wells said issuing bonds is a better option “rather than keeping owners waiting for the next five years.”
Still waiting at Kenner
After Katrina, Dietrich’s Kenner house had to be gutted to the ceilings. Still, he and his wife said they were back in the house in June the following year.
In contrast, it’s been a full year since Ida ripped off parts of their roof, letting in “just enough” water to replace the soil. The mold appeared quickly.
Americas Insurance Co. wrote Dietrich a check for $43,000 which allowed him to replace the roof, but the interior damage remained. Dietrich said he needed more money to complete the repairs.
Since the state took over the company last December, its fortunes have changed little. Several adjusters requested the same information. For Dietrich, this looks like a stall tactic.
“It looks like LIGA is trying to pay as little as possible,” Dietrich said. “It seems their game plan… is to delay and deny claims.”
He was more optimistic at first, especially after reading on the Department of Insurance website that LIGA was able to pay up to $500,000 per claim. He thought, What’s $40,000 more than that?
But it’s been a fight with the fitters on multiple fronts, he said. After the storm, he and his wife rented a house owned by her mother and struggled to get reimbursement for living expenses while their house awaits repairs.
They sent a copy of the lease and receipts for each month, he said. But experts wanted more proof of payment, like bank statements and checks. Today, Dietrich regularly thinks about hiring a lawyer, especially after capturing excerpts from their radio commercials.
“This is the second time we’ve had to rebuild this house in the past 20 years, and I’m not getting any younger,” said Dietrich, 67. “Something has to change the way they do things.”
More insolvencies on the way?
Insurance regulators and LIGA officials dread the idea that there could be more business bankruptcies in the near future – for example, if Louisiana experiences another busy hurricane season. And what form would the state’s response then take?
The underlying reasons for each of the insolvencies to date remain somewhat elusive.
“Before Hurricane Ida, we had never had a hurricane-induced insolvency,” said LIGA chief Wells. “There’s so much that goes into the management of insurance companies, there’s so much that goes into their regulation, that it’s just hard to put your finger on a single thing that caused this. “
Wells offered his own educated guess: that several carriers were trying to underprice their policies to be competitive and were also underfunding their reinsurance — essentially, insurance for insurance companies. It’s a risky approach that cost them “the ultimate price, getting shut down.”
Insurance Commissioner Jim Donelon agreed that the seven companies had not purchased enough reinsurance. Reinsurance allows them to spread the risk of underwriting in disaster-prone areas among different companies abroad.
Small insurance companies, in particular, must purchase sufficient cover or risk quickly running out of cash and assets needed to pay claims after a disaster. So insurance regulators in every state constantly monitor them to make sure they’re compliant — and to avoid sudden failure.
In a recent interview, Donelon said he wasn’t losing sleep over the possibility of more failures.
“I don’t think there are any on the horizon,” he said. Donelon said LDI identified 15 struggling businesses after Hurricane Laura, and the seven that failed were all on the department’s list. “The others are ready to go.”