The Louisiana Insurance Guaranty Association, or LIGA, will seek State Bond Commission approval for its plan this week.
The action is uncommon. If the bond sale is approved, it will be the first time the organization has borrowed to pay off claims since the early 1990s, when there was a nationwide auto insurance crisis.
"This is a reasonable approach, but it is far from ideal. Someone has to pay the piper with interest at some point "said Robert Hartwig, director of the University of South Carolina's Risk and Uncertainty Management Center.
Every year, insurance companies go out of business, leaving unpaid claims. LIGA takes on those responsibilities. As a result, the association is used to seeing one to three insolvencies per year, each of which generates a few dozen claims, according to LIGA's executive director, John Wells.
However, the seven insurance company failures in the last year, caused by Hurricane Ida, have disrupted the organization's normal operating rhythm.
According to its annual report, by the end of 2020, a year in which three major hurricanes made landfall in Louisiana, LIGA had oversaw the final payment of approximately 1,232 pending insurance claims to Louisiana policyholders across the industry.
Following Ida, a wave of homeowners' insurers went bankrupt, having already been weakened by the previous storms. LIGA was on the hook for 13,434 open claims by the end of 2021, more than five times the number in a typical year.
"What makes them (the company failures) especially extraordinary is that they happen at the same time," Wells explained.
As of July 1, the association had received over 26,000 homeowner claims, causing a bottleneck as LIGA tries to finish the job left by the insolvent companies. Despite the fact that the association has hired at least nine adjusting firms to deal with the influx, consumer complaints about delays have already surfaced.
There is still a backlog of over 10,000 claims.
"It's just so frustrating that you pay all this money for insurance and they treat you like garbage. They kick you when you're at your weakest "Markey Dietrich, a Kenner resident, had a homeowners policy with Americas Insurance Co., the fourth Louisiana insurer to go out of business.
LIGA is having difficulty keeping up with the number of insurance company failures. The association is currently handling claims for five of the seven failed firms, and they are bracing for up to 17,000 additional unpaid claims from the recent failure of Southern Fidelity Insurance Co.
Claims from Gulfstream Property & Casualty, the first company to fail before Ida, are far fewer in number.
THE ROLE OF LIGA
When a Louisiana insurer fails and runs out of money, the remaining insurers licensed in the state can be fined up to 1% of their written premium in a single year. LIGA uses the funds to pay off outstanding claims. The association may be held liable for up to $500,000 per claim.
In the end, however, taxpayers foot the bill. Insurance companies can recoup the money they paid to the association by lowering the amount of premium taxes they pay to the state. Until the money is fully recovered, insurers can deduct up to 10% of their tax bill.
According to Wells, the 1% levy typically generates around $100 million per year. He stated that the board, which is mostly made up of industry representatives, approved assessments in December and again in April.
"We did bring in nearly $200 million, but of course, we spent that much money on insolvencies and homeowner claims," Wells explained.
According to public records, LIGA's board of directors agreed in June to issue bonds with an interest rate no higher than 6% and a plan to repay the money through assessments over a 12-year period. If the plan is approved by the State Bond Commission, Wells stated that they will continue to collect assessments from member insurers in order to make future payments.
Though this is the first time in three decades that LIGA has had to take such drastic measures, borrowing from Wall Street to pay off insurance claims is not a new concept in Louisiana. Following Hurricane Katrina, Louisiana Citizens Insurance Corp., the state-run insurer of last resort, borrowed $1 billion by issuing bonds in order to settle claims. The state's taxpayers are still paying off those bonds.
The plan to issue bonds is an admission by the association that it cannot raise enough money to pay all of its claims without making policyholders wait years.
"Ultimately, this will cost more than if these insurers had not gone bankrupt because interest will have to be paid on this obligation," Hartwig said.
LIGA could have taken a different approach and issued an IOU to homeowners with outstanding claims. That's what they did in 1993, after Champion Insurance Co. and a slew of other auto insurers went bankrupt.
According to Wells, the officials in charge of LIGA at the time paid consumers 30% of their claims and promised to pay the rest once the money was raised through bonds and future assessments. According to Wells, issuing bonds is a better option than "making homeowners wait for the next five years."
Kenner is still waiting.
Dietrich's Kenner home had to be gutted to the ceilings after Katrina. Nonetheless, he and his wife stated that they would be back in the house by June of the following year.
In comparison, it's been a year since Ida ripped off parts of their roof, allowing "just enough" water in that they had to replace the floor. Mold appeared quickly.
Dietrich received a $43,000 check from Americas Insurance Co., which allowed him to replace the roof, but the interior damage remains. Dietrich stated that he requires additional funds to complete the repairs.
His fortunes have changed little since the state took over the company last December. The same information has been requested by multiple adjusters. It appears to Dietrich to be a stalling strategy.
"It appears LIGA is trying to pay the least amount possible," Dietrich said. "It appears that their strategy is to delay and deny claims."
He was initially more optimistic, especially after reading on the Department of Insurance website that LIGA could pay up to $500,000 per claim. What's another $40,000 compared to that? he reasoned.
But, he said, it's been a battle with the adjusters on multiple fronts. Following the storm, he and his wife rented a home owned by her mother and have been battling to be reimbursed for living expenses while their home is being repaired.
He stated that they sent him a copy of the lease as well as monthly receipts. However, the adjusters demanded more proof of payment, such as bank statements and checks. Dietrich now considers hiring a lawyer on a regular basis, especially after hearing snippets of their advertisements on the radio.
"We've had to rebuild this house twice in the last 20 years, and I'm not getting any younger," Dietrich, 67, explained. "Something has to change in the way they do things."
More bankruptcies on the way?
Insurance regulators and LIGA officials are concerned about the possibility of more company failures in the near future, such as if Louisiana experiences another busy hurricane season. What form would the state's response then take?
To date, the underlying causes of each of the insolvencies have remained somewhat elusive.
"We had never had insolvencies caused by a hurricane before Hurricane Ida," said Wells, the head of LIGA. "There is so much that goes into managing insurance companies, and so much that goes into regulating them, that it's difficult to pinpoint any single cause."
Wells offered his own educated guess: that several carriers were attempting to compete by underpricing their policies and underfunding their reinsurance - essentially, insurance for insurance companies. That was a risky strategy that cost them "the ultimate price, shutting down."
Insurance Commissioner Jim Donelon agreed that the seven companies did not purchase sufficient reinsurance. Reinsurance allows them to spread the risk of underwriting in disaster-prone areas across multiple companies around the world.
Smaller insurance companies, in particular, must buy enough coverage or risk running out of cash and assets to pay claims after a disaster. As a result, insurance regulators in every state are constantly monitoring them for compliance — and to avoid a catastrophic failure.
In a recent interview, Donelon stated that he is not concerned about the possibility of further failures.
"I don't see any on the horizon," he said. Donelon stated that the LDI identified 15 troubled companies following Hurricane Laura, and the seven that failed were all on the list. "The others are all set."