Battening down the hatches: coastal-state homeowners are facing a crisis in finding homeowners insurance. And in cases where they can find it, they may not be able to afford it

Mortgage Banking, August, 2007 by Jack Milligan

Sticking with the private sector

Louisiana likewise opted not to convert its residual market facility--Louisiana Citizens Property Insurance Corporation, Metairie, Louisiana--into a multi-line insurance company like its Florida counterpart. "We're focused on a private-sector solution to our crisis, unlike what our brethren in Florida have done," says Insurance Commissioner James J. Donelon.

Instead, Donelon has been trying to build support for an unusual incentive program that is designed to stimulate greater participation by private insurers in the state. Under the terms of the proposed Insure Louisiana Incentive Program, which would include homeowners coverage, participating insurance companies would have to agree to write the new property for a minimum of five years. Twenty-five percent of the risks would have to come from the state's residual market facility, whose policyholder base has grown rapidly since Katrina. In return, participating insurers would qualify for grants ranging from $2 million up to $10 million.

In an effort to encourage new companies to do business in the state, Louisiana also has abolished a decades-old insurance rate-setting commission, which was comprised of political appointees and was the last of its kind in the nation. "It takes the politics out of rate-setting and makes companies less reluctant to come to Louisiana," says Donelon.

The insurance commissioner has also been trumpeting the advantages of doing business in his state to any private insurer willing to listen. "There's huge demand, so the opportunity for profit is significant," he says.

A role for the feds?

So, too, is the opportunity for billion-dollar losses if Louisiana or any of the other coastal states get pounded during this year's hurricane season, and that has some people wondering if the federal government should play a role in bringing stability to the homeowners insurance market.

In the Senate hearing last April, Florida Gov. Charlie Crist advocated for the formation of a "national catastrophe insurance plan" that would not only respond to a hurricane in his state, but to any natural disaster in the United States. In his written testimony, Crist said that despite all the work his state has done to strengthen building codes and reinforce many existing structures, many private insurers are not yet convinced that Florida is worth the risk.

"Floridians are being forced to choose between paying skyrocketing insurance premiums or selling their homes," Crist says. "I've heard from many Floridians who are worried that soaring premiums are threatening their chance to raise a family in a Florida home. This is not the American dream."

Insurance industry reaction to the idea has been mixed. NAMIC believes the federal government probably should have a role in providing financial relief to insurers after a natural disaster of catastrophic proportions, but wants to make sure it doesn't compete with the private reinsurance marketplace. The AIA, on the other hand, opposes the concept altogether.