Louisiana lawmakers are making it easier for insurance companies to drop their riskiest properties in a bid to shore up the rest of the state’s teetering home insurance market.
The state Legislature this week passed a bill to repeal what’s known as the three-year rule. Instituted after Hurricane Katrina, the law blocked insurers from dropping a policy or raising its deductible after it has been renewed for three years.
Under H.B. 611 — which awaits action from Republican Gov. Jeff Landry, who is expected to sign it — insurance companies would be allowed to drop 5 percent of their policies, or more with the state’s permission, as long as they aren’t concentrated in a single parish. Insurers also could raise deductibles up to 5 percent of a home’s value.
The bill is part of an effort by Louisiana officials to stabilize the state’s eroding property insurance market after four major hurricanes in 2020 and 2021 caused $75 billion in combined damage.
“We are in a crisis,” said state Rep. Chad Brown, the Republican vice chair of the House Insurance Committee and a supporter of the bill. Insurance companies need more flexibility if they’re going to stay in the state, he said, even though that “may not be popular with some people.”
Insurance claims from the storms bankrupted 12 insurers operating in Louisiana and left tens of thousands of residents without property coverage or claims payments. To pay the claims, a state insurance association borrowed $620 million, which is being repaid by assessments on insurers in Louisiana.
At the same time, some remaining insurers have scaled back coverage or withdrawn from Louisiana’s notoriously risky coast.
In response, newly elected Insurance Commissioner Tim Temple (R) and other officials are pushing to liberalize the state’s insurance market as a way to lure back companies.
Insurance companies currently are charging higher rates across the state to offset losses from the riskiest policies they’re locked into, supporters of the bill argued.
“We’re the only place in the entire world” that has this three-year rule, said Rep. Michael Firment, chair of the Insurance Committee and sponsor of H.B. 611. “It has been identified as something that is keeping new insurers from coming into the market [and] is keeping current carriers from expanding their book of business.”
Keeping insurers in the state over the long term will require some people to pay more in the short term, they said. The bill is designed to allow a gradual shift in policies, they argued, but even those who lose their current insurance ultimately would benefit from more insurers competing in the state.
“It’s not just gonna be a wholesale rip the Band-Aid off,” Temple told a House panel in March when lawmakers first took up the bill. “This is part of an overall package designed to recraft Louisiana into a more friendly, competitive marketplace, which the consumers ultimately benefit from.”
Temple said insurance companies were closely watching H.B. 611 as they consider their future in the state. And the industry’s trade association cheered its passage as bringing Louisiana in line with the rest of the United States.
“Louisiana’s three-year rule is the most restrictive in the U.S. and one of the factors that has generated the state’s risk crisis,” Insurance Information Institute spokesperson Mark Friedlander said. “The new regulation will be in line with most other states and enable home insurers to write the best risks without being forced to insure properties that don’t meet their underwriting criteria.”
Louisiana’s continued instability is reflected in the large number of residents forced to buy property coverage from a state-chartered insurer that sells policies to people who can’t find them elsewhere. By law, those state-backed policies are at least 10 percent more expensive than market rates.
Louisiana Citizens Property Insurance Corp. saw its policy count soar to 155,000 in 2022 from 40,000 in late 2021. The organization has shifted thousands of policyholders to insurance companies but still had 129,000 in September, records show.
Critics of H.B. 611 questioned whether it would simply shift the liability of risky properties from private companies onto the state’s program. And although the bill passed with large majorities, it also drew bipartisan opposition from southern Louisiana lawmakers, whose constituents are expected to bear the brunt of the changes.
“I’m losing constituents; people are losing generational homes — where they grew up in, their parents grew up, maybe even their grandparents grew up — because they can’t afford” insurance increasing housing costs, said Rep. Matthew Willard, a Democrat from New Orleans.
Louisiana residents also are struggling with rising premiums on flood insurance policies sold by the federal government.
In some parishes, residents will see flood premiums increase by up to 1,000 percent, rising gradually over a period of years to $7,500 annually from less than $700, according to the Federal Emergency Management Agency, which runs the insurance program.
The legislation does not affect flood insurance, which is separate from homeowners insurance. But the compounding costs of insurance are forecast to reshape the state in fundamental ways.
A report published April 23 by Moody’s Ratings said soaring home insurance costs in Louisiana will prompt residents to leave the state, depress property values and disrupt local services by shrinking local tax revenue.
Moody’s said Louisiana residents pay the highest portion of their income for property insurance and that the state will experience a “severe” loss of working-age residents due to demographic trends and “susceptibility to natural disasters.”
As the state tries to stop population loss, Willard said he would struggle to explain to his constituents to accept H.B. 611’s potential long-term benefits, when the short-term costs could be “devastating for you, your family and your friends.”
“Because if you did have Allstate, State Farm, whomever, you may now go back on to Citizens,” he said. “If you did have a 2 percent or 3 percent deductible, which enabled you to pay the cost to get your home repaired after [Hurricane] Ida, it’s going to go up to 5 percent now.”
“People are really going to have to make tough decisions,” he added. “And I can tell you … in New Orleans, they’ve been making those tough decisions for over a year now.”
