Insurance Dragon Ready to Breath Fire

Although Louisiana is not the only state that has to face the issue, the lingering effects of Hurricanes Katrina and Rita and the overall mood of the general populace is about to force the issue.

Hurricane Katrina wiped out an excessive amount of housing stock on the east coast of Louisiana when she blew thru in late August 2005. Three weeks later, Hurricane Rita did the same to the west coast. Since those two storms, the process of repairing or rebuilding homes has moved at a snails pace. Besides the lack of funding to repair or rebuild, many residents are also facing the issue of not being able to renew their homeowners insurance policy.

All of the insurance companies have stopped writing new policies within the coastal parishes of Louisiana and many have stopped renewing existing policies. This is forcing many homeowners to the La. Citizens Plan, a quasi state-run insurance company of last resort.

As the insurance company of last resort, since the two hurricanes struck Louisiana, Citizens has become the company of only resort. As to be expected, this has homeowners and potential homeowners exasperated since Citizens is forced, by law, to charge 10% more than the other insurance carriers. How can Citizens realistically charge 10% more when the other companies have abandoned the market?

Political columnist John Maginnis wrote recently about the upcoming mood change in the State Capital regarding insurance.

Baton Rouge has long been a safe haven for insurance companies. They would get a token fight from the state Insurance Rating Commission who would deny rate hikes. The state legislature stopped most of those fights when it allowed companies to raise premiums 10% without going to the Rating Commission for approval. Before that change, which occurred before the hurricanes, what little bit of pushing back the Rating Commission would do was often nullified by the companies threatening to go to court for the increase, at which point the Rating Commission would capitulate.

As Mr. Maginnis stated in his column, since the storm there have been one regular session and three special sessions of the legislature along with an election for Commissioner of Insurance. All of that time and effort has resulted in nothing more than rhetoric towards the insurance industry.

With the next regular session due to start on April 30, 2007 and the citizenry mouthing off to their elected leaders, it is expected that some type of insurance reform will take place.

Mr. Maginnis mentions two items to look for, the dissolving of the Rating Commission and to allow insurance companies to set different deductibles for different areas of the state.

These two items are backed by a coalition called the Council to Insure Louisiana, a group comprised of insurance companies, bankers, Realtors, contractors, engineers, car dealers, and petro-chemical firms.

On the surface, the two proposals look like good ideas. Why the State of Louisiana has an Insurance Rating Commission that only slows down the inevitable rate hike when no other state has one doesn't make since? The ability to set different deductibles depending upon the location in the state makes a lot of sense also.

However, and this is where the populist in me pops out, I do not think insurance companies should be able to cherry pick who they want to cover. Should they want to write a policy in one Louisiana neighborhood, they need to offer to write that same policy in every Louisiana policy. I also believe that if they offer one line of insurance within the state, they need to offer every line that they offer to other states. Why should they be allowed to make billions in profits in one line while dumping all of the riskier lines to the tax payers?

(If you look at the story linked above, insurance companies recorded a $44.8 billion profit after paying all claims. This means they were able to maintain their rates and still make money after paying off claims. This story was published back in April 2006. Ten months later, State Farm lost a suit regarding a Hurricane Katrina claim in Mississippi that included $2.5 million in punitive damages. Several weeks later they announced a settlement with the Mississippi State Attorney General resolving another 639 lawsuits for roughly $80 million. Take this out and insurance companies are still raking in over $40 billion in profits. Here is a look at that number in perspective: $40,000,000,000,000. In contrast, the Louisiana State budget for the 2007 fiscal year is $26.7 billion, just over half of the profits made by the insurance industry.)

When you look at the big picture, the insurance companies are claiming they need to make these profits to satisfy their shareholders on Wall Street and that is where the problem lies. I am all in favor of the stock market and capitalism, but there does come a point where I think people are getting too greedy.

Every desk on Wall Street, along with financial planners and stock brokers every where should have a little plague with the following quote from Malcolm Forbes in the inaugural issue of Forbes Magazine back in September 1917:

The purpose of business is to create happiness,
not to pile up millions.