It appears that Louisiana Citizens Property Insurance Corp. may not have to draw on its Pelican Re catastrophe bond, after all.
In an interview with The (Baton Rouge) Advocate, Louisiana Insurance Commissioner Jim Donelon said he expects claims to the state-run insurer stemming from last week’s strike of Hurricane Isaac will amount to less than $75 million. The cat bond, which Citizens issued earlier this year, offers $125 million of reinsurance coverage, but only if claims exceed $200 million.
Donelon expects the storm’s damage will be less than half the $2.2 billion in privately insured damage caused by 2008’s Hurricane Gustav, with most of the damage coming from flooding in St. Tammany, Plaquemines and St. John the Baptist parishes. Only about 31% of Louisiana residents have policies from the National Flood Insurance Program.
Catastrophe modeling firms like AIR Worldwide and Eqecat have estimated Isaac’s total private insured loss to be in the range of $500 million to $2 billion.
Louisiana Citizens, which has about 6% market share statewide but a much higher figure in the coastal counties, will turn first to its cash on hand to pay claims. Chief Executive Officer Richard Robertson told the Times-Picayunne last week that the company has about $125 million in cash resources.
Should it run through its cash resources, Citizens has a $75 million line of credit and a $125 million layer of private reinsurance that attaches at $75 million and is exhausted at $200 million. For losses between $200 million and $400 million, the burden is shared between Pelican Re’s $125 million of coverage and $75 million of traditional reinsurance. That layer of traditional reinsurance becomes the sole reinsurance coverage for losses between $400 million and $450 million.
Above $450 million, Citizens would turn to assessments on private insurance companies to fund its obligations. The assessments are passed on to policyholders in the form of surcharges, and because the surcharges are deductible from state income tax, they are ultimately borne by the state’s taxpayers.
If Isaac doesn’t end up triggering the cat bond, that’s good news. It means the damage from windstorms wasn’t terrible, and that Citizens – which already has had to pay out $104 million this year to settle a six-year-old class action lawsuit – will not see its resources tested even further
But the most important facet of the Pelican Re story is that it works. Public and quasi-public insurers like Citizens and its Florida namesake, which issued its own $750 million cat bond this year, can engage in meaningful risk transfer that takes this exposure off the backs of taxpayers and puts it back where it belongs – in the private sector.