Coast Has Big Influence on Louisiana and Texas Property Markets

After two mild catastrophe years, states hope to share better coverage options

Louisiana and Texas share a lot. Besides sharing a common border, they share the Gulf of Mexico — both its bounty and its battering, in the form of tropical storms and hurricanes. The latter greatly influences the rates consumers of homeowners insurance pay and the coverage they are able to secure in both states, even during quiet catastrophe years.

It’s been more than two years since Hurricanes Katrina and Rita brought back-to-back devastation, but policyholders in both states, but most especially Louisiana, are still feeling their effects. After those storms, insurers pulled back from writing coverage in coastal areas, premiums soared and the numbers of policies sent into their respective “insurers of last resort” — Citizens Property Insurance Company in Louisiana (Citizens) and the Texas Windstorm Insurance Association (TWIA) — swelled.

Hope for Change

Louisiana is hoping to see some changes soon as the result of a state-backed incentive program to bring insurers into Louisiana, as well as the influx of new insurers coming into the state on their own initiative.

The state has attracted the “baker’s dozen” of insurers it hoped for when Insurance Commissioner Jim Donelon and then-Governor Kathleen Blanco convinced the legislature to back the Insure Louisiana Incentive Program with $100 million to lure insurers to the state and take 25 percent of their writings from the Citizens book of business.

Not all of the newcomers are coming as part of the program. Only six companies that applied met the rigorous criteria for the program and only $39 million of the available state money was accessed. Donelon has said he is disappointed and surprised that more companies did not take advantage of the program. However, another six or more companies have entered the state in the past six months, mostly surplus lines carriers, with interest in writing new business in southern Louisiana.

Parke Ellis, chairman of the New Orleans-based independent insurance agency Gillis, Ellis & Baker Inc., would be glad to see a change. He explained that houses valued in the $500,000 and up range have had available markets — like Fireman’s Fund, Chubb and AIG — even after the storms. “They never went away. They adjusted their deductibles and of course their pricing. But they were constant, to their credit. They were here and they were willing,” Ellis said.

“What that left was a tremendous void for 75 percent of the population who live in houses that are valued between $100,000 and $500,000. What was supposed to be the market of last resort … suddenly became the market of only resort.”

To give an idea of what Louisiana consumers have been dealing with in terms of homeowners premiums, Ellis shared examples of rates for a range residential properties in the southeast Louisiana region insured through Citizens. For instance, a $100,000 value house had a premium of $2,531; a house valued at $140,000 had a premium of $3,256 per year; and clients who owned a house in Metairie valued at $500,000 had to pay a whopping $7,115 a year in annual premiums. Before the storms, Ellis pointed out, that same half-million dollar house probably paid about $2,500 a year in premiums.

Ellis said he expects some of the new carriers coming in, like Occidental, GeoVera and ASI, will likely try to price their coverage a certain number of percentage points below Citizens’ rates.

“To me the next step in the cycle is to have more traditional carriers come in say, ‘if these pioneers… can make a go of this at these rates that are inflated because of Katrina, we can make it too,'” Ellis said.

GeoVera Specialty Insurance hopes to capture a share of the homeowners market in Louisiana for residences valued in the $100,000 to $500,000 range. GeoVera, which has long history of writing personal lines properties in catastrophe exposed areas, entered the state on a nonadmitted basis.

“Louisiana was a logical extension for us as we did business in Florida and Alabama for a number of years,” says GeoVera Specialty CEO Kevin Nish. “The insurance commissioner reached out and invited us to participate in his market on a nonadmitted basis and we analyzed the market and decided we could enter it on a profitable basis.”

Nish said the company doesn’t have a goal or expectation as to market share in, but it is writing in areas south of I-10 and I-12.

“Being a nonadmitted company you’re there at the invitation of the department,” Nish said. “But we have the Best rating and the capital to grow as much as the Louisiana market welcomes us to.”

As to pricing, Nish said there are “areas where our policies will be less than Citizens and some will be more. If you try to average out what we’ve written so far we might be at or just slightly below a typical Citizens rate.”

Donelon said he expects the population of Citizens’ book of business to be reduced by around 20 percent through the incentive program and with the new carriers that are coming in on their own.

“We have 170,000 policies total in Citizens,” Donelon said. “We expect by June 1st 35,000 to move into the private sector out of Citizens. If that happens, that will bring us down to the policy count of Citizens one year before Katrina hit — 135,000. Is that the low water mark? I hope not. … My predecessor was aggressively marketing our market out of state and had lowered it by 10,000 from a year before Katrina to Katrina. It was down to 125[000] when Katrina hit.”

After the Mold Crisis

It could be said the Texas homeowners market hit rock bottom after the mold crisis six or seven years ago. As a whole, the market has recovered since then, in large part because of regulatory reforms enacted by the state legislature in 2003 that allowed companies flexibility of rate and form and ushered in a well-received file-and-use rating system.

But the coastal areas are as problematic as they always, the 2005 hurricanes just exacerbated the problems. And many are concerned about the growth of TWIA, which is the insurer of last resort for wind and hail in 14 coastal counties and in parts of Harris County, and its ability to handle claims should a Katrina-like hurricane hit areas like Galveston or Houston.

Texas State Representative John Smithee of Amarillo, which is about as far from the coast as you can get and still be in Texas, calls the coastal situation “the 850 pound gorilla.” At a public policy forum in January, Smithee, chairman of the House Insurance Committee, said the threat of hurricanes and the potential assessments to insurance companies if damages exceed the amount TWIA can access via reserves and reinsurance “is a barrier to the market by new companies. It’s very difficult to start a new insurance company in Texas. … But I would say the biggest single impediment to the free market in Texas has been the hurricane situation.”

Clyde Neal, Jr., who owns the Clyde Neal Insurance Agency in Angleton, Texas — about 15 miles from the coast — wouldn’t disagree.

“Soon after 2005 things went crazy and insurance carriers that weren’t already tightening up and restricting their windstorm writings all of a sudden … were cutting back what they wrote and not taking on new business. Prices immediately started going up,” Neal said.

“Last year was a mild season, loss wise. There was some activity but all the companies made money. So now what we’re seeing is some companies have had time to think through their windstorm strategy and analyze where they’re over-exposed on the coast and where they still have some room.”

He said some insurers are adding property with wind, but “most are still trying to minimize their exposure and otherwise taking on any additional exposure. I think there’s more activity in the second tier areas and even third tier areas where companies can’t refuse to write windstorm coverage because it can’t be forced into the windstorm pool.”

Neal explained that before the 2005 storms insurers were flocking to the suburban markets in fast-growing Southwest Houston. “Companies were writing as much of it as they could,” Neal said, “as fast as they could at low prices.” Now, they realize they were overexposed to windstorm issues and “are raising deductibles and pricing there to help lessen their exposure in those areas,” he said.

“At the same time, some of the small carriers and some of the new carriers in the market are trying to write more business. … But some of these carriers are not rated by A.M. Best and as an agent it’s difficult to know how strong their financial picture really is.”

Neal said about 65 percent of his residential properties have wind and hail covered by TWIA. He offered a comparison of premiums for properties located inside the city limits of Angleton or Lake Jackson in Brazoria County. One risk, valued at $119,000, had an annual premium of $1,407, with $430 for a regular homeowners policy and $977 for TWIA wind coverage. A $158,000 valued home with wind included in the homeowners policy had a premium of $2,492. A home valued at $306,000 had an annual premium of $3,439, with a split of $922 for the homeowners policy and $2,517 for TWIA.

New Potential

One company that sees potential in the Texas market and is looking to expand its writing on the coast and elsewhere is MetLife Auto & Home. Although the insurer has been writing homeowners policies in Texas, it has concentrated on the Dallas-Fort Worth metro area. Now, says Sue Breden, Texas state manager for MetLife, the company sees “a lot of opportunity in Texas because we are not represented in many of the markets in Texas.”

Breden explained that currently MetLife writes about a half of 1 percent of the Texas market. She said the company did not have a specific goal in terms of market share but added they have lots of room for expansion. The company is offering a variety of coverages options and demographically they are looking to insure properties across the board.

“Obviously we are concerned about remaining profitable so we are going to be following our underwriting guidelines and looking for risks that have a potential for profit,” Breden said.

Topics Catastrophe Carriers Texas Louisiana Property Hurricane Homeowners