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Louisiana recovery Insiders discuss the good and bad By Phil Zinkewicz
The hurricane season of 2005—noted as the “worst on record” spawned 14 hurricanes causing 3 million claims and $46 billion in insured losses—all record highs, according to the Insurance Information Institute. (I.I.I.). Hurricane Katrina has become known as the most costly and one of the deadliest hurricanes in United States history. According to the latest estimates from the Insurance Services Office (ISO), insurers will pay out $34.4 billion in claims to victims of the storm. Louisiana was the hardest hit state, with $25.04 billion in insured losses. Dr. Robert Hartwig, chief economist of the I.I.I., says: “The scope, magnitude, and complexity of Hurricane Katrina have posed an unprecedented challenge to the insurance industry claim process. While progress in settling claims has been steady, it has gone slower than the industry’s experience in past natural disasters due to the unique obstacles posed by this devastating catastrophe.” As of this writing, insurers have settled 479,500 home owners’ claims in Louisiana, according to the I.I.I., or 69% of expected homeowners claims from Hurricane Katrina, totaling $7.5 billion. These estimates do not include claims filed with two government entities: Louisiana Citizens Property Insurance Corp., the state-owned property insurance company of last resort, or claims for flood damage filed with FEMA’s National Flood Insurance Program. But these statistics, harrowing as they are, tell only part of the story in Louisiana. By their nature, statistics are cold and heartless. To get a feel for what the people of Louisiana are experiencing, and particularly insurance agents caught in a web of uncertainty, one must examine the situation from the inside out. Jody Boudreaux, a spokesperson for the Professional Insurance Agents of Louisiana, says that, after all this time, many questions still remain unanswered. “Our office is continuing to receive calls from agents who want to get a fix on what insurance market conditions are like and will be like in the future. Will insurers exit the Louisiana market after being hit with so many claims, leaving residents no other options but the Louisiana Citizens Corp. or leaving the state? Will insurers change their underwriting methodology for homeowners insurance, commercial property insurance, business interruption insurance?” Boudreaux says that people want to begin rebuilding, but they are having a difficult time finding the necessary workers. “Not only are people out of their homes, but it is almost impossible to find housing for migrant workers coming in, looking for work in construction,” she says. “Agents have particular concerns. Many of our agents have had not only their [own] homes destroyed, but their businesses as well, relocating or working in tandem with agents who were luckier and still have a place from which to operate. They are concerned also that many of their insureds will decide not to rebuild in Louisiana and that carriers will leave the state. That would mean a loss of business and a loss of company markets. Companies have not said directly that they are leaving the state, but there is uncertainty,” Boudreaux says. Al Aparicio, of the Metarie, Louisiana-based Aparicio, Walker & Seeling, prefers to discuss the progress made to date in New Orleans before tackling the continued problems there. “I just want to say that we are not dead in the water as certain news reports would have people believe. The city is on the rebound. Tourism is our number one industry and now the convention center is reopening. We have housed 2,000 first responders as well as the members of the National Guard and have also set up a MASH unit there. The first show that will be put on there will be a jewelry exhibit, a traditional, annual event. Our Central Business District has 28,000 hotel rooms and 21,000 of them are up and available. Cruise ships are coming back into New Orleans ports. There will be a jazz festival coming up, which will boast stellar headliners,” he says. “Our Superdome is getting ready to open, and September 24 will be our first football game of the season.” Nevertheless, Aparicio admits that New Orleans still has a lot with which to contend. “One of our dilemmas is that industries are being held back by our inability to house migrant workers. We have had 110,000 houses damaged or destroyed in New Orleans alone. We need the workers but we have nowhere to put them. Some of them are living in tents,” says Aparcio. “Also, FEMA has been a little slow in getting its recovery program up and running. The difficulty in rebuilding housing is not only the delays caused by a lack of manpower, but also that FEMA has not yet issued compliance rules for rebuilding, so people are reluctant to rebuild until they have the guidelines. That only serves to increase people’s anxieties regarding the level of protection they will have for the next hurricane season, which is coming up soon.” The Louisiana insurance agent says that the state legislature is doing some positive things. “They’re consolidating the levees and fortifying them as best as they can. There is talk of creating a special fund to complement FEMA. The federal government has already allocated $6.2 billion and recently decided to allocate another $4.2 billion. But one thing that legislators are going to have to deal with is our need for a coastal restoration system. And I want to point out that this is not just a Louisiana problem but a national one as well. Thirty percent to 40% of the nation’s energy comes from Louisiana. If our coastlines continue to erode, there will be considerable difficulties in delivering oil. Louisiana has the seventh largest delta in the world, and we’re losing a football field a day.” Aparicio says that many believe Louisiana’s major problem is its levees, but he says that problem is secondary to coastal erosion. “Our state legislators are trying to convince federal legislators to establish a fairer way of allocating royalties on our drilling, so that we can produce more revenues. If the Feds gave us our fair share of revenues, we would be able to handle our problems—coastal erosion, levee protection, the anxiety of the people, the unwillingness of our people to return—on our own.” Aparicio also addressed the insurance problems being faced by agents today. “There has been considerable criticism of how our claims have been handled to date. That’s not fair. We have had 90,000 square miles impacted by Katrina. The devastation has been unbelievable. So, the claims process has been slow. Fidelity National, our primary carrier in New Orleans, has processed 85% of its claims to date. As for how insurers are reacting to the situation in terms of the business they are able to write, it should be remembered that insurers must operate on a ratio of written premiums to assets, usually three to one. The hurricanes have depleted insurance company assets, so they have to reduce the premiums they write. So far, at our agency, we have not seen any significant reduction in written premiums or revenues, but we anticipate a 20% reduction in revenues by the end of the year,” he explains. “Insurers are re-thinking how they will write homeowners business in Louisiana. They will insist that anyone seeking homeowners insurance [must] demonstrate that they have flood insurance protection from FEMA in place. There will probably be wind and hail exclusions in homeowners policies in some parts of Louisiana. Agents are coping as well as they can, sharing space and, in some cases, consolidating. Unfortunately, too many people are spending too much time pointing fingers of blame for our dilemmas. It’s time to stop pointing fingers and to look forward,” says Aparicio. Mark Egan of the Egan Insurance Agency, also in Metarie, Louisiana, says that insurance companies are drawing boundary lines in the south in terms of what they will write—nothing south of the Interstate 10/Interstate 12 system. “The market is limited for homeowners insurance for values under one-half million dollars. As far as claims are concerned, the Citizens Property Corp. has been inundated and probably has not settled more than 50% to date. The process is long and expensive. In the standard market, there are probably two companies still writing houses under a half-million in value, but they have very little capacity. In personal lines, there are wind deductibles of 2% to 5%. The surplus market has not filled in yet. Even London has not come into the surplus lines area,” Egan says. “Excess flood insurance is non-existent,” he says. Egan says that 40% of Louisiana residents didn’t have flood insurance and that, now, carriers fear that they might be on the hook for those losses, even though homeowners policies traditionally have flood exclusions. It is not unusual for flooding to accompany a hurricane, but the scope and magnitude of Katrina has added to the complexity of claims, especially regarding the issue of wind vs. flood. Attorneys general and trial lawyers in some Katrina-impacted states are suing homeowners insurance companies in an attempt to force them to pay flood losses that insurers say are not covered under the terms of the contract. “The results of this litigation are bound to have an effect on insurers’ ability to write business in flood-prone areas,” says Egan. Egan says that, on the commercial side, things are not as bad as on the personal lines side. “We have Regulation 23, which says that companies cannot non-renew or substantially change insurance policies in effect on damaged property until year end. After that, who knows? There could be as much as 300% increases on property risks in the surplus lines market. The average standard market increases at renewal are between 5% and 20% if a risk can get into the standard market. There is a move to limit business interruption coverage by imposing a 5% deductible in the New Orleans area,” he says. Egan says there has been a good deal of “knee-jerk” reaction on the part of insurers because of Katrina. “Insurers should remember that we are not like Florida,” he says. “We are 85 miles from the Gulf of Mexico. We’re in the same latitude as Houston, Texas. Katrina should not be considered the norm of what is to be expected here in Louisiana. We have to get through this next hurricane season for insurers to recognize that fact,” says Egan. * |
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