Louisiana Property Residual Market Mechanism
Presented By Dave Thomas, CEO
Louisiana Citizens Property Insurance Corporation
August 2, 2014
The Louisiana Citizens Property Insurance Corporation (“LCPIC”, “Citizens” or “the Company”) is a
statutorily-created market of last resort for property insurance for the property owners of Louisiana. It
is, for all intents and purposes, an insurance carrier – but with several significant differences. We are
similarly organized internally as any property-casualty carrier with underwriting, claims, legal, finance,
actuarial and information technology divisions. But, as is the case with all residual market mechanisms,
we have no marketing or sales functions – for obvious reasons. LCPIC is a not-for-profit entity and pays
no income and sales taxes. We have the power to assess the private-market carriers doing business in
the state and their policyholders to recoup deficits. As such, we cannot become insolvent. We receive no
contributions from the state treasury and we are not a state agency. But there are some aspects of
LCPIC that are operated as a governmental agency, and knowing when we are and when we are not to
operate as a state-run entity is perhaps my most challenging task as CEO.
For the next few minutes I am going to discuss the following subjects as they relate to LCPIC:
Historical Timeline
Constituency Influences
Rate-Making Process
Depopulation
Historical Financial Results
Historical Timeline
The Idea for Creation was not an Original
The history of Louisiana Citizens actually begins in Florida. Following Hurricane Andrew in 1992 which
caused $26.5 billion in property damage in Florida, the state formed two Underwriting Associations –
one for wind coverage and one for non-wind perils. They did so to provide a market of last resort for the
one million property owners which were unable to find coverage from a private insurance market which
had seriously contracted following Andrew. Eleven carriers became insolvent, and an even greater
number exited the state. The few that remained limited the number of high-risk properties they were
willing to write. Those that they did insure were charged much higher premiums for policies with much
higher deductibles. Between 1992 and 2003 hurricane losses in Florida became more manageable and a
number of insurance carriers returned to the state. By 1999, the number of policies insured through
these two Underwriting Associations had dramatically decreased. In 2002, the Florida legislature created
Citizens Property Insurance Corporation into which they merged the two Underwriting Associations with
the goal to more efficiently and effectively serve as the market of last resort for Florida property
owners.
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Louisiana also had two Underwriting or FAIR plans operating as markets of last resort for property
owners. Unlike Florida, they were not differentiated between wind and non-wind coverage. One
provided coverage for the southern most parishes along the Gulf, and the other served as the property
residual market for the balance of the state. Having studied the rationale for, and the operation of,
Florida Citizens, the Louisiana legislature enacted a statute in 2003, creating Louisiana Citizens Property
Insurance Corporation. In fact, the enabling legislation was actually created from a draft of the Florida
statute. Louisiana Citizens was born, and placed into operation on January 1, 2004 as the merger of its
two FAIR plans. No state funds were contributed then or any time since. Given a very short time window
for implementation, the initial Board of Directors contracted with the same organization which had
managed the two FAIR plans to oversee the operations of LCPIC.
Ready or Not, Here Comes Katrina
By August 2005, the fledgling organization was nearing completion of agreements for third-party
administration of underwriting and claims with experienced service providers, and implementation of a
computer system to support the Company. But before either became operational, on August 29th
Hurricane Katrina struck Louisiana and it was, by any measure, the single largest catastrophe to ever
strike US soil. In today’s dollars, the economic toll of Katrina was estimated to be $146 billion. No one
was ready for the horrific wind and even more cataclysmic flooding that resulted. And that includes
Citizens. Eighty-one thousand claims were eventually filed. And as of today, nearly $1.65 billion of losses
have been incurred – with only $400 million of that figure recoverable from reinsurers. Due to the
severity of the storm, the extent of the claims volume and the infancy of the organization, Citizens was
unable to initiate the claims settlement process as timely as is required under Louisiana statute. Nor
were any other insurers in the state.
The Dark Ages of Louisiana Citizens
Within three months of Katrina’s wrath, several class action lawsuits were filed in state courts asserting
that Citizens had failed to meet the statutory 30-day time requirement for claims settlement initiation,
the penalty for failing to do so being $5,000 per claim. Similar class actions were filed against nearly
every other insurer doing business in the state. Since all other insurers - other than Citizens and one
other - did business in states other than Louisiana, they were filed in federal courts. The federal courts
dismissed every single suit due to the extraordinary circumstances surrounding Katrina. The Louisiana
courts allowed the suits against Citizens to continue, ultimately rendering adverse judgments against us.
To date, we have paid $152 million in judgments and settlements, with reserves for $60 million yet to be
paid.
Before the end of 2005, the Board of Directors had authorized the first – and only – Regular Assessment
of all insurers writing property insurance in the state. By statute the maximum assessment which could
be made was 10% of prior year premium volume. By January of 2006, Citizens had run out of money to
pay claims. All checks were put on hold as the Company raised $1 billion in debt through the sale of
bonds. The bond issues were closed in March, and the Company resumed paying claims. The Board then
authorized the first – and only – Emergency Assessment of every policyholder in the state no matter
who their carrier was or is today to annually raise the funds to service the bond debt. Those Emergency
Assessments will continue until all bonds mature in 2026.
The computer system had been implemented to produce quotes and policies; however, the data
exported to financial systems was corrupt. Therefore, the Company was unable to produce statutory
financial statements. Citizens had continued to outsource all operations, including management
oversight, through this point in its history. With all of the issues – both financial and operational – facing
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the Company, in the spring of 2007, the Board of Directors decided that Citizens should begin to hire its
own management team. Between April and July of 2007, the Company hired its first CEO, CFO and Chief
Information Officer.
A New Day Dawns
Between April 2007 and the end of 2012, Citizens continued to build its administrative staff; however,
the Company continued to outsource its underwriting and claims activities to multiple service providers.
Many hours and millions of dollars were poured into legal fees to deal with and settle the several
Katrina-related class action lawsuits, as well as, building a new technology platform. In 2008, Hurricane
Gustav struck Louisiana and generated 52,000 claims totaling $327 million in losses to the Company.
Because the Company’s reinsurance program had been dramatically improved, there was no need for an
assessment. And the Company’s ability to handle claims in a timely fashion had improved to such a point
as to meet all statutory time frames for settlement. In the summer of 2012, Citizens was called upon for
the third time to respond to a hurricane when Isaac hit the state. Although far less catastrophic than
Gustav, it did generate 18,000 claims and $121 million in losses. Again, the Company responded in an
admirable fashion, and 94% of all claims were closed within 60 days. In late 2012, the Board of Citizens
ratified management’s proposal to terminate all third-party outsourcing agreements and to begin
building out the staff so as to be able to perform all insurance-related functions within the four walls of
the Company.
Today
Today all functions of an insurance company are performed by Citizens’ staff with the exception of the
field handling of catastrophic claims which, when needed, will be outsourced. Our computer systems are
stable, though not as robust as we would like. We have strong redundancies throughout the
organization and our infrastructure to withstand a very significant hurricane. Our reinsurance program is
comprehensive and viewed in London and Bermuda as the most responsive and affordable program
among all of the coastal wind pools from Texas to Massachusetts. Though all class action lawsuits have
been settled, not all class members have been paid. We anticipate that will be completed by this year
end. Cash management will continue to challenge us until all class actions suits have been paid and
finalized. In 2013, Citizens premium volume was $179 million placing it as the third largest property
residual market in the US behind Florida and Massachusetts. The future is as bright as it has ever been
for Louisiana Citizens.
Constituency Influences
I cannot stress emphatically enough the extent to which the affairs of Louisiana Citizens are under a
microscope within this state. That is a testament to the importance this residual market mechanism
plays in providing property insurance in an area prone to catastrophic events, and a property insurance
market where availability ebbs and flows on an all-too-routine basis. At its peak, Citizens insured 10% of
the property market in the state when the voluntary market shrunk to near non-existence particularly in
the coastal parishes. As memories of Katrina have diminished in insurance carrier boardrooms, the
voluntary market’s willingness to write property business in the state has improved. Today, Citizen’s
market share has dropped to just less than 3%.
Being under the microscope invites interest, a watchful eye, and at times, criticism from all of the
constituencies directly and indirectly impacted by what we do, when we do it, and how it is done. Those
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constituencies include citizen and commercial property owners, insurance agencies, state governmental
agencies, trial attorneys, courts and legislators. And, oh yes, let’s not forget the media. At the heart of
most of the criticism from these various constituents is a lack of understanding of the statutes under
which we operate – specifically that we are a market of last resort, that we are only required to offer
property insurance to risks which are insurable, and that we are required to charge premiums higher
than the voluntary market. We were not constructed by the legislature in 2003 to be a come-one-comeall, affordable insurance option for property owners. I spend a considerable portion of my work week
educating agents, policyholders, government officials and the media on the bases under which we are
by law required to operate.
The “life under the microscope’s lens” will never change. But, I am happy to report, that despite the
glaring spotlight, our Board of Directors and management team have done an exemplary job staying on
course with the purpose for our creation and the necessary constraints placed on us by the law. I assure
you that is not true with all residual markets in other states.
Rate-Making Process
By law, we are required to do a full rate analysis at least every twelve months for each parish in
Louisiana. A rate analysis is completed for all policy types sold by Citizens including Homeowners,
Dwelling, Builders Risk, Condo, Mobile Home, Wind and Hail, and Commercial. Ratemaking is a four-step
process.
Step One – Market Analysis
We send out a survey to all companies that write property insurance in Louisiana (approximately 100
companies). We ask the companies for their premium dollar amount written and the number of policies
they wrote within the last 12 months by parish, by product type. In order to qualify as a “market”
company, the company must have at least 2% of the market share of the product in the parish or have
written at least 25 new policies in the previous year.
Once the market companies have been qualified, we send them a product survey asking them for their
rate for a subject or sample property. The combination of multiple products in multiple parishes
generates more than 300 rate surveys. After the surveys are returned, we verify the reasonableness of
the company’s rate calculation and determine the highest rate for each product in each parish from the
market companies.
Step Two – Calculation of an Actuarially Sound rate for LCPIC
Concurrently with the market survey as described in step one, our in-house actuary calculates an
actuarially sound rate for each product for each parish.
Our actuary uses the actual expenses and historical loss experience for all perils except wind. For the
wind peril he considers actual expenses and modeled storm losses for the current LCPIC book of
business. An actuarially sound rate for Citizens is defined as a breakeven rate due to our status as a nonprofit company.
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Step Three – Rate Selection
The market rates from step one are compared to the actuarially sound rates from step two, and the
higher rate is selected for each product in each parish.
Per the statute governing our rates, the selected rate is increased by 10% in all parishes except 12
coastal parishes, and becomes the proposed new rate for Citizens.
Step Four – Rate Approval
The proposed rates and all rate calculations are sent to an outside actuary for review and comment
following which the proposed rates and all documentation are presented to our Board of Directors for
approval to submit the proposed rates to the Louisiana Department of Insurance for their review and
approval.
Once the Louisiana Department of Insurance has reviewed and approved the new rates, the rates are
again presented to the Board of Directors for approval to implement. The approved rates are then
implemented by the Company. The entire rate-setting cycle takes eight months to complete.
The Importance of Proper Rates
Ratemaking is not only governed by statute, but is also one of the most critical processes we perform –
and I dare say – any residual market organization performs. When rates are set in accordance with the
four steps I’ve outlined, three positive results follow.
First, proper rates provide an incentive to Louisiana property owners to make sound economic decisions
and to seek out more affordable property insurance in the voluntary market if available. Secondly,
proper rates make our policies more attractive to private market carriers who participate in our
depopulation efforts. And thirdly, proper rates generate sufficient premium for Citizens to purchase
adequate reinsurance to manage our portfolio risk exposure.
Depopulation
The enabling legislation that created Louisiana Citizens went into great detail in several key operational
aspects with the primary purpose of keeping the Company no larger than was absolutely necessary to
affect its sole purpose. One aspect – ratemaking and the resulting higher-than-market premiums – I’ve
already discussed. Secondly, the legislative architects laid out a mandatory process to be followed by the
Company at least annually that seeks to depopulate itself by transferring policies to the voluntary
market. This process begins each year in August and concludes in December. There are four general
steps in this process – a process which is highly computerized and utilizes secure portals for the
participating carrier and agencies.
Take-out Carriers Select Which Policies They Wish to Assume
Carriers writing property risks in the state are solicited in June and July each year to determine which
carriers have the desire to participate in the depopulation process which begins in August. Citizens plays
a very important role in identifying, encouraging and educating eligible insurers. The more carriers that
participate in the depopulation round will generally result in a more positive outcome. In early August, a
complete data base of our inforce policies is made available to those carriers approved to participate as
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take-out carriers. The take-out carriers are given several weeks to identify which policies they wish to
assume from Citizens. Often the same policy is selected by more than one carrier.
The Affected Agencies Control the Outcome
In Louisiana, unlike some states, statutes grant sole ownership of policies to the agents that produce the
business, and not the carrier that writes the policies and bears the risk. Once the take-out carrier portal
is closed and the participating carriers have made their selections, each agency which controls one or
more policies requested for take-out is so notified. They are given several weeks to decide whether or
not to authorize the proposed take-out on a policy-by-policy basis. During this time, the participating
take-out carriers are making contact with the agencies which produce the policies they selected in an
effort to convince the agents of the merits of authorizing the transfer. The agency portal closes on
November 15, and all agency authorizations have been made.
The Policyholder has the Last Word
In each instance where a policy has been requested and authorized for take-out, the policyholder has
the right to opt out and remain with Citizens.
Assumption
Assumption agreements are perfected between the Company and each take-out carrier effective
December 1. The policies remain on Citizens paper until expiration and Citizens services the policies for
the remainder of the term. The take-out carrier is responsible for paying claims post-December 1. At
expiration, the policies are renewed on the take-out carrier’s paper.
In the history of Citizens, some 84,000 policies and $18 billion of exposure have been depopulated to
the voluntary market. With the emergence of willing participating carriers the past three years, thirty to
forty percent of our policies have been requested for take-out by these carriers. And the more critical
aspect – agency authorization – has continued to improve. Last December agents authorized an all-time
high of 35% of requested policies.
Independent sources continue to praise our Depopulation process and results, and routinely rate it as
the most successful program of its kind in the United States.
Historical Financial Results
As previously mentioned, Louisiana Citizens is a non-profit organization. It has no statutory capital and
surplus requirement, and has the statutory authority to levy assessments to cover operating shortfalls.
Despite these fundamental differences, the Company prepares its financial statements in accordance
with Statutory Accounting Principles.
A review of historical financial performance from 2004 through 2013 reveals several significant aspects.
Katrina Created a Hole that Citizens Continues to Backfill
In 2005 following Citizens’ second year in existence, the Company reported a net income loss of $1.1
billion entirely attributable to Hurricane Katrina. In 2006, another sizable net income loss of $254 million
was reported as adverse development in Katrina claims and reserves for the aforementioned class
action law suits were established. In total, between 2005 and 2013, the Company has experienced an
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income deficit attributable to Katrina of $1.4 billion. For the entire ten-year period beginning at the
Company’s inception through 2013, the Company has a cumulative net income loss of $1.1 billion.
Therefore, you can deduce that in the history of Louisiana Citizens were it not for Hurricane Katrina,
Citizens would have reported net income of approximately $300 million.
Policyholders’ Surplus is Only Surplus Thanks to Citizens’ Ability to Assess
Policyholder surplus was $27 million at the end of 2013. Starting from near zero at inception in 2004
means we have been able to slightly more than offset a net income deficit of $1.1 billion. How? Through
both 1) an ongoing Emergency Assessment on all policyholders in the state used to service the nearly $1
billion of debt incurred through bond issuance, and 2) a one-time Regular Assessment on all carriers
writing property insurance in the state following Katrina – a cost which they pass on to their insureds.
Therefore, one can accurately conclude that Citizens’ share of the economic cost of Katrina has been,
and will continue to be, borne by all insured property owners in the state until such time that the entire
principal on the bonds is repaid.
Premium Revenues Go Up, Then Down
The Company recorded $118 million in premiums in its first year of existence in 2004. That figure rose
dramatically over the ensuing four years to an all-time high of $280 million in 2008. This was a direct
result of the significant voluntary market contraction following Katrina. The Company conducted its first
successful Depopulation program at the end of 2008, and has conducted the program in each
succeeding year. Despite the fact that rates have risen in each year since inception, depopulation has
reduced the number of policies such that premium volume has decreased each year since 2008 to $179
million in 2013 – its lowest level since before 2006.
Setting Katrina Aside, What Do ‘Normal’ Financial Results Look Like?
It is not oversimplifying to say that we will lose money in years in which there is a significant weather
event, and make money in years that we do not. So normal operating results look like one of two
models.
In years when we have had a hurricane strike Louisiana since our creation – 2005, 2008 and 2012 – we
have suffered significant, if not horrific, financial results. Setting aside Katrina in 2005, we lived through
Gustav in 2008 and Isaac in 2012. In those two years, our accident-year loss and loss expense ratios
averaged 137%. When adding our normal run-rate underwriting expense ratio of 17%, we had average
combined underwriting ratios of 154% in hurricane years.
In the seven years of our existence in which we did not have a hurricane, our accident-year loss and loss
adjustment expense ratios averaged 41% yielding an average combined underwriting ratio of 58%. In
the nine years excluding 2005 – the year of Katrina – our average combined underwriting ratios have
averaged 83%.
So, what can be concluded from these results? If we set aside Katrina and the cataclysmic results it
produced, then our operating model, reinsurance and rate structures would suggest that we can suffer
the results of a significant hurricane every third year, and over time produce breakeven financial results.
And that is what should be expected of a non-profit entity.
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Summary
Louisiana Citizens, like all residual market mechanisms and private-market insurers, fills a critical societal
need for asset protection in the event of an insurable loss. Federal and state governments have long
recognized that all businesses and citizens have the right to purchase insurance even if the private
market deems individual risks to be uninsurable. Some residual market mechanisms execute this critical
responsibility more effectively than others, and the same is true among all private market carriers.
At Citizens, we view our role within the property insurance marketplace in Louisiana as one which is vital
to businesses, families and individuals and their security in the face of unforeseen losses. In our case, as
is true for other coastal areas, these fortuitous events are often catastrophic. Our ability to manage our
affairs is judged by how we respond when Mother Nature decides we are due for a hurricane.
We still are dealing with the impacts of Katrina, but with each passing year the financial and public
perception issues that have weighed so heavily upon us in the past become more and more
manageable. Were we to experience another storm of similar magnitude today, we are confident in our
abilities to deal with the aftershocks in a way that our various constituencies would find acceptable.
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