Insurance Transparency Project

Insureds,

Due to an annoying technical error yesterday, I linked to and commented on an A.P. summary of David Hammer’s original piece on the Louisiana Recovery Authority’s finding that it is being asked to make up for a $3 billion shortfall in private insurers’ wind payments. Here’s David’s story:

Times-Picayune/Hammer $3b shortfall, 5/26/07.

It raises the issues that War Eagle was so frustrated about, namely, why the government isn’t asking insurers to meet their obligations. It’s a strong story. Check this out:

Federal and state documents obtained by The Times-Picayune pin the largest chunk of a multibillion-dollar shortfall on hurricane wind damage that Road Home is paying because insurance companies did not. The two sides are in dispute about who is responsible, a debate that will figure strongly in whether Congress steps in with more money to cover an estimated $3 billion gap.

The state documents contend that a significant part of the Road Home shortfall emerged either because homeowners had insufficient insurance coverage or because insurance companies failed to meet their obligations.

The Bush administration, stunningly, despite everything, gets it wrong, blaming the state for paying wind claims, instead of blaming insurers for NOT paying wind claims.

But the Bush administration foresees the Road Home coming up short by anywhere from $2 billion to $6 billion simply because Louisiana decided — against the federal government’s wishes — to pay for homeowners’ uninsured wind damage instead of limiting grants to flood damage.

According to an analysis by the Bush administration, if the Road Home had paid only for flooded homes and administrative costs, the program would have cost $7.6 billion. As it stands, paying for wind and flood damage will cost the Road Home at least $10.2 billion, by the state’s own analysis.

A source close to Federal Recovery Czar Donald Powell is quoted as saying he’s concerned the state is wasting federal money.

“We see it as our continued role to work with the state, but serious concerns have been raised. That’s why we need to sit down with the governor, and we will ask the governor if she has a backup plan,” the official said Wednesday.

War Eagle says: How about making wind insurers pay for wind damage as a backup plan? Is this complicated?

The story includes data (our favorite thing) from an LRA study, which is posted on ITP’s key documents page and here: Louisiana Recover Authority Insurance Analysis, May 2007, which can also be found on ITP’s key documents page. The report is excellent and is only a couple of pages long.
Among the reports findings:

1. Insurers paid only 61% of total damages, including the flood program, while the state expected 76%.

2. Only 23% of policyholders got 100 cents on the dollar.

3. 37% of policyholders received less than 50 cents on the dollar, including flood.

4. About 8% received less than 10 cents on the dollar.

And here’s the key analysis paragraph; emphasis is mine:

Clearly low insurance levels will have a negative impact on the budget. The big question behind these numbers is “Are Louisiana citizens generally underinsured or do we have insurers who are not fully honoring their obligations?” With further analysis, we could look for trends in terms of which insurers have low payout ratios, but this is dangerous territory especially as we are still relying on the cooperation of insurance companies to continue the program. However, this might be good information to have in our back pockets. If it is the case that we are subsidizing insurance companies at the expense of taxpayers, it is coming at a hefty price. Unfortunately, Road Home applicants have little incentive to pursue insurance claims if Road Home is going to pick up the balance.

It is “dangerous territory” to ask insurers to make good on their contracts.

Hammer includes a couple good anecdotes that illustrate exactly how insurers’ wind denials led directly to the shortfall.

Margaret Badger, a Road Home applicant living in a FEMA trailer in Harvey, said that was apparent to her from the start. In August, with an initial one-year deadline for filing court claims looming, she filed a claim against her insurance company, which she said paid her $9,000 for $128,000 in estimated damage. But she didn’t pursue it vigorously because the Road Home, which was slowly getting under way at that point, promised to make her whole.

“Why pursue the lawsuit if the Road Home is just going to subtract the insurance off of it, especially when I have a limited tolerance for stress and can only deal with the most important crises of each day?” said Badger, 66, who is still waiting for her Road Home grant and says she feels as if the walls of her trailer are closing in on her every day.

The idea of turning to insurers to pay is fully articulated the next day, when Hammer again steps up with a fine piece that says LRA Housing Chairman Walter Leger a tort lawyer made famous in tobacco litigation, says the state should step into the shoes of policyholders whose wind claims the state is paying and pursue the claims against insurers.

With federal officials hinting it is unlikely Washington will bail out Louisiana’s Road Home program from a projected $3 billion shortfall, Gov. Kathleen Blanco and a top Louisiana Recovery Authority member are recommending the state seek more money from the group they claim caused about half the deficit — insurers who underpaid homeowners for wind damage….

But, of course!

Governor Blanco, to her credit, says she will ask A.G. Charles Foti to get on it. I know some people are skeptical of Foti, but War Eagle says: Y’all give the feller a chayence.

If the state is paying those claims, that means either people didn’t have enough homeowners’ insurance or the private carriers just didn’t pay. To be sure, as the Lovely Big Easy Stats Mistress reminds us, it is true that many Louisianans owned their homes outright, and didn’t bother with homeowners’ coverage. ITP has less sympathy for this crew.

If you’re wondering, the Insurance Information Institute says insurers paid $10.3 billion in Louisiana Katrina claims, with about 95% of claims closed. Louisiana says they came up $2.7 billion short, about 26%. But think about this: the III figure includes commercial, auto, business interruption and other claims, while the Louisiana number is pure homeowners. I think insurers’ shortfall is going to wind up in the 40 to 50% range.

Remember, this is like a bank giving you 50 cents on the savings you deposited. There is no difference.
I’m going to note a couple things and then move on to my other job, saving the business press from itself.

First, I pass along remarks by Greg LaCost, the bright, young legislative chief for the Louisiana wing of the Property Casualty Insurance Association of America. Greg, whom I met, repeats what I regard as a serious industry miscalculation: in effect threatening to withdraw from the market if the State of Louisiana seeks to enforce its own insurance laws.

“If the insurance companies see the government is stepping in in a negative way against the industry, they’re going to have to look at if this market is good for their business plans,” he said.

Greg, insurer pals: You have a very strong hand, but ITP believes it is possible to overplay it. Providing an essential financial service does not put you above the law. Make good on contracts. You have for decades enjoyed extraordinary tax benefits, captive regulation, government subsidies in the form of backstops, wind pools, the flood program and more, as well as a unique exemption from U.S. anti-trust laws. Don’t push it. Sow the wind and reap the coming political whirlwind. ITP is trying to help you here. Don’t listen to those enablers at Tillinghast. This is for your own good.

Bob Hunter, the head of the Consumer Federation’s insurance section and well-known man about the nation’s capitol, offers some historical perspective:

Hunter said Louisiana is proceeding like Florida did after Hurricane Andrew in 1992, trying to placate insurers to keep them in the market, rather than following Florida’s current policy, hewn from its own 2005 hurricane losses. This year, Florida beefed up its insurance regulations and the ability of its own Citizens Property Insurance program to offer competitive rates. Such reforms already have reduced some private carriers’ rates by more than 10 percent, although studies by the insurance industry predict premiums will shoot up again if another disaster hits.

But leave it to ITP to look at the big picture. I’m an idea guy, is what I am. The preceding paragraph quotes an insurance spokesman cautioning that Florida because of its size has a lot more leverage than Louisiana:

Understanding that, Dean Starkman, who started the Insurance Transparency Project to track how the insurance industry is handling Katrina, said he empathizes with the state’s conundrum.

“To me, Katrina shows it’s almost impossible for a single state, let alone a small state like Louisiana, to regulate insurance carriers and at the same time maintain a market for insurance carriers; you can’t punish and cajole insurance carriers at the same time,” he said.

All that wisdom, and he cooks, too. ITP, the total package. One at a time, ladies. No need to push.

Thanks to the Boulevardier.