Louisiana bailout fund to borrow $600 million to pay insurers’ claims

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NEW ORLEANS (AP) — A state-approved bailout fund is seeking to borrow $600 million after seven Louisiana insurers went bankrupt in the wake of 2021’s Hurricane Ida.

The Times-Picayune ′ The New Orleans Lawyer reports that the Louisiana Insurance Guaranty Association will seek approval for the bond sale plan this week. The association would collect the money from the surviving member insurers, but those insurers get a tax break for those assessment payments, which means Louisiana taxpayers will ultimately foot the bill.

The association pays the claims of policyholders from insolvent insurers, ensuring that individuals and businesses are not wiped out when an insurer is overwhelmed with losses. The bond issue plan is an admission that the association cannot raise enough money to pay around 24,000 claims it owes without keeping policyholders waiting for years.

It would be the first time the association has borrowed to pay claims since the national auto insurance crisis in the early 1990s.

John Wells, executive director of the Guarantee Association, said the group is used to one to three insolvencies a year, paying a few dozen claims. But the association expects to pay about 40,000 claims in 2021 and 2022, as insurers weakened by three major hurricanes that hit the state in 2020 found themselves without sufficient reserves to pay claims after Ida.

“What makes them (the business failures) particularly extraordinary is that they happen at around the same time,” Wells said.

However, severe hurricanes have already caused waves of failures in various states.

The Louisiana association has fallen far behind in paying claims, with a backlog of more than 10,000 pending claims. Another 14,000 claims have yet to be turned over to the association following the recent collapse of Southern Fidelity Insurance Co.

“It’s just damn frustrating – paying all this fucking money for insurance and they treat you like shit. They kick you to the lowest point,” said Markey Dietrich, a resident of Kenner, whose home insurance policy was underwritten by the bankrupt Americas Insurance Co. He is awaiting full settlement of his claim after Ida and cannot afford to complete the rebuild.

The association can assess its members up to 1% of their written premiums per year, using that money to pay claims from insolvent insurers. Wells said the appraisal typically brings in about $100 million a year.

Wells said the association evaluated its members in December and again in April, but that was not enough. Insurance companies can deduct 10% of their state insurance premium tax bill each year until they recoup the cost of an appraisal, which means taxpayers in the Louisiana ultimately pay for the assessments.

The Guarantee Association would issue bonds with an interest rate of up to 6%, repaying them over 12 years through additional valuations.

After Hurricane Katrina in 2005, the public insurer of last resort, Louisiana Citizens Insurance Corp., borrowed $1 billion in bonds to pay claims. State taxpayers continue to pay these obligations.

The guarantee association could have paid only part of what it owed and made policyholders wait until it could raise more money. Wells said issuing bonds is a better option “rather than keeping owners waiting for the next five years.”

Longtime Louisiana insurance commissioner Jim Donelon said the seven companies that went bankrupt did not buy enough reinsurance. Reinsurance allows them to spread the risk of disaster-prone areas among different companies. Buying less reinsurance could allow a company to offer cheaper policies, competing for more business.

Small insurance companies, in particular, must buy enough reinsurance or risk running out of cash quickly to pay claims after a catastrophe. State insurance regulators are supposed to monitor compliance.

Donelon, a Republican-elect, said the seven failed companies were on a list of 15 failing companies created after Hurricane Laura in 2020. “The rest are ready to go,” Donelon said.

Copyright 2022 The Associated Press. All rights reserved.

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