Louisiana: Citizens raises policy premiums

Statewide average boosted 18 percent

By Rebecca Mowbray
Business writer
Times-Picayne--June 24, 2008

Homeowners insurance rates at Louisiana Citizens Property Insurance Corp. will increase by a statewide average of 18 percent in October as premiums at the state-sponsored insurer catch up with the dramatic run-up in prices from private companies after Hurricane Katrina.
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The rate increase is the first to take into account the changes in the private market since the storm. Barring another hurricane sending shocks through the insurance market this season, customers are unlikely to see further increases at Louisiana’s third-largest residential insurer.

“This is probably it,” said John Wortman, chief executive of Citizens. “I think we’re probably reaching the peak of rates now.”

Assuming they are approved by the Louisiana Department of Insurance, the rate increases will start taking effect Oct. 1 as policies renew each month.

The rate increase will not make a meaningful difference in the special assessments paid by all owners of insured property throughout the state to pay back the nearly $1 billion in bonds issued to pay Citizens’ claims after Hurricane Katrina. The annual assessment, which was 5 percent this year, is expected to be slightly less than 5 percent next year.

In some parts of the New Orleans metropolitan area, the actual Citizens rate changes will be much higher.

— Some increases higher —

The biggest jumps will be in Jefferson Parish, the state’s second most populous parish, where homeowners insurance rates will rise by an average of 35 percent.

Rates for dwelling/fire policies, essentially a bare-bones residential policy with depreciated value coverage that does not include liability or displaced living expenses, will rise by 26 percent in Jefferson.

In St. Tammany Parish, homeowners insurance rates will rise by an average of 15 percent, less than the statewide average. Dwelling/fire policies will go up by 26 percent, the same as in Jefferson Parish.

But rates are not expected to change in Orleans Parish. The reason, Wortman said, is that rates were already high before the storm, so private insurers didn’t raise rates as dramatically after the hurricane.

In setting rates, Citizens calculates what it needs to be actuarially sound, then calculates what private insurers are charging in each parish and adds 10 percent, then charges customers the higher of the two.

The 10 percent mark-up on Citizens’ policies is designed to make sure coverage from the state-sponsored insurer of last resort is more expensive than at private companies to discourage people from buying policies with the state plan.

Rate changes would have been even higher, but last year the legislature passed a law removing the 10 percent markup in hurricane-affected parishes where the private market is deemed non-competitive.

— Reacting to the market —

But one problem with the plan to make Citizens unattractive to potential customers is that rates always lag the private market since they, by definition, react to what private companies are doing. And Citizens was so busy after the storm that it was slow in calculating rate changes.

Citizens did raise homeowners insurance rates last year in the first rate change after the storm, but the increase was only a statewide average of 7 percent because it was calculated on data from before many insurance companies had boosted their prices. This year’s rate increase is the first one that reflects the market post-Katrina, Wortman said.

Prices for Citizens commercial policies and wind-only policies are not expected to increase this year after taking big jumps last year, Wortman said.

The rate increase is set to begin Oct. 1, because that’s the date that 26,885 Citizens policies are being transferred to private companies. Those policies will be rewritten on private company stationery as they renew for the next 12 months starting in October as part of a “takeout” program created by the state.

That leaves about 133,000 households that could be affected by the rate changes.

“The bad news is that the marketplace has gone up really high. The good news is that the takeout is going to help,” Wortman said.

— Clearing out policies —

Insurance Commissioner Jim Donelon predicted that the Citizens rate changes will push another group of people out of Citizens.

Citizens customers will be highly motivated to check out the private company options that should start to become available in the coming months, he said, and the companies that won incentive grants from the state need to pick up additional customers in the hurricane-affected parishes to fulfill their commitments to the state.

“I think this will result in another huge exodus of policies from Citizens this fall, assuming we have a successful hurricane season,” Donelon said, meaning no hurricanes. “These companies still need more policies than they got in the first round.”

Assuming Gov. Bobby Jindal signs a bill that would finance another round of incentive grants for companies to take policies out of Citizens, Donelon and Wortman said they would like to institute another round of takeouts in the fall to spare as many people as possible from the Citizens rate increases.

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