Donelon: Large companies aren’t eager to help depopulate Louisiana’s insurer of last resort

Insurance agents race to find new coverage before a 63% Citizens rate hike takes effect
Insurance Commissioner Jim Donelon says some of the highest-rated home insurers are not always...
Insurance Commissioner Jim Donelon says some of the highest-rated home insurers are not always interested in writing policies in Louisiana.(Source: WVUE)
Published: Nov. 22, 2022 at 7:23 PM CST
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NEW ORLEANS (WVUE) - Stephen Lovecchio, a branch owner of TWFG Insurance, is working to get clients moved from Louisiana Citizens, the state’s insurer of last resort.

“The Louisiana Citizens hike in Orleans Parish is very, very large,” he said. “Not as bad in Jefferson Parish, but it’s very, very big in New Orleans. We’ve just gotten the rates for Orleans Parish: Our $7,000 premiums will be $13,000, so we are aggressively trying to move our people.”

Citizens inherited over 100,000 policies after insurance company failures. Come January, a 63 percent rate hike goes into effect for Citizens’ residential policyholders.

Louisiana Insurance Commissioner Jim Donelon says the number of insurers that have withdrawn from the state is not known.

“A total of eight companies that failed,” he said. “How many have withdrawn? We don’t know, because most that withdraw just stop writing and don’t start writing again.”

A NOLA.com report said state insurance regulators were desperate to move people out of Citizens and “were lenient in how they interpreted” a rule created by state lawmakers that says insurers need a letter grade of B+ or better from the rating firm A.M. Best, or its equivalent, to take over policies from Citizens.

“I will disagree with that,” Donelon said.

He says he attends meetings held by the Citizens board of directors.

“All of that is considered by the board of Citizens, and by myself, giving my input and advice,” Donelon said. “We have been in total agreement throughout the process that, yes, these are not top-of-the-line, giant national companies that want to take these policies out. It’s generally small, regional companies doing coastal state exposure.

He said none of the companies had below a “C” rating.

“All of them had a Demotech ‘A-Exceptional’ rating at the time that they participated in the program,” Donelon said.

Demotech is a financial analysis and rating firm. Donelon said it is often difficult for smaller insurers to get rated by A.M. Best, which is seen as the gold standard in terms of ratings.

“We would love for all of these companies participating to have the highest rating available, an A.M. Best A+ rating,” Donelon said. “There are very few of those, and not any of them are interested in taking policies out of Citizens. And the rating given to a company is just one of the criteria used to determine the health of a company.

“They have to meet a risk-based capital requirement, a minimum capital, and surplus requirement, they have to have a review of their reinsurance buy to make sure that it’s adequate for the risk that they’re taking on. All of that is part of the solvency review, not just this one letter grade of evaluation by these handful of rating agencies.”

Lovecchio says the A.M. Best rating is hard to come by for smaller insurers.

“Yes, A.M. Best is really not good with our state-specific carriers and smaller regional carriers,” he said. “Somebody just does automobiles or somebody just does homeowners in Mississippi, they’re not going to get an A.M. Best rating, because it costs too much for them to get it. And A.M. Best likes to deal with national carriers, anyway.”

Jeff Mango, Managing Director of A.M. Best responded by saying, “AM Best rates many companies of all sizes, lines of business and geographic location. In fact, approximately 40% of the US companies that AM Best rates have less than $50 million in surplus, therefore, AM Best does not just deal with national carriers. As for ratings costing companies too much, I would categorize that as a misconception.”

Donelon said newer companies face challenges, too.

“One of the obstacles that companies face, in particular, new companies is they can’t get an A.M. Best rating without what they call seasoning, the seasoning requirement, meeting the seasoning requirement which says you’ve got to be in business for five or more years,” said Donelon. “It’s easy for State Farm and Allstate to get an A.M. Best rating: not so easy for a company doing business just in Louisiana or in Florida.”.

Mango of A.M. Best takes issues with Donelon’s comment as well.

“AM Best respectfully disagrees with Commissioner Donelon’s comments that new companies can’t get an AM Best rating. AM Best has been rating start-up companies for over twenty years, and our publicly disclosed methodology titled “Rating New Company Formations” discusses how we rate new company formations. AM Best does not have a requirement for companies to be in business for five or more years in order to get rated.

Insurance companies also buy insurance, which is called re-insurance, but that market is having problems.

“The reinsurance market comes out of Europe, and specifically England,” Lovecchio said. “Problem with England is the pound is now dollar-for-dollar, where it used to be $2.20. The investments that everybody’s made are down 20-30 percent, and they’ve had large losses in the United States.”

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