Coast Strongly Influences Louisiana, Texas Property Markets

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 the 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.

The Louisiana Senate recently approved a bill that would extend the incentive program for a third round of applications. The bill was sent to the House for consideration.

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.

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 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 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 overexposed on the coast and where they still have some room.”

Neal 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.

Editor’s note: The above is an edited version of this story. The complete version appears in the April 21, 2008, edition of Insurance Journal – South Central.

Topics Catastrophe Carriers Texas Louisiana Property Hurricane Homeowners