Louisiana Citizens: rate suppression hinders depopulation

Maintaining non-competitive market rates is essential to Louisiana Citizens’ depopulation drive, while rate suppression in other US states will only sustain public involvement in insurance provision.

That is the word from Dave Thomas, CEO and Steve Cottrell, chief financial officer at Louisiana Citizens, addressing their most recent depopulation drive, which resulted in 12,000 policies entering the private market.

“One of the keys to depopulation is that our prices are where they are supposed to be—that they are not competitive”, says Thomas. He adds that Citizens is “statutorily required not to be competitive”, with the state-backed insurer typically adding 10 percent to market rates on a parish-by-parish basis.

As Cottrell outlines to Bermuda:Re, higher rates are the key to the sustainability of state insurance provision as a market of last resort.

“If rates are correct—in other words higher than the private market—three good things happen”, he explains. “Firstly, we incentivise people to buy insurance elsewhere where it is cheaper and available. Secondly, we make our policies much more attractive for depopulation—takeout companies typically set rates at 98 percent of ours, providing them with a small price break. And thirdly, those that stay with us pay a premium such that we can buy reinsurance to manage our way out of risk”.

This in turn reduces the state’s exposure to storm losses, says Cottrell, limiting the risk Citizens’ poses to the taxpayers of the state.

Louisiana’s approach contrasts markedly with that taken by Florida, which for political reasons has practised rate suppression at Florida Citizens. As Cottrell explains, because the Florida insurer has suppressed pricing the size of its portfolio has actually grown over time, in spite of efforts at depopulation.

“Florida Citizens pushes policies out, but thanks to the attractiveness of its rates, folks just come right back in again,” says Cottrell.

“Florida evidently wants to do the right thing, but the state is caught in a vice. They want to have fewer policies, but at the same time they want to control rates.” Until the political will to introduce sustainable pricing emerges, Florida will continue to face a challenge in depopulating.

Louisiana’s Citizens has for its part succeeded in depopulating some 75,000 policies over the past 6 years, says Cottrell, with close to none of those returning to the state-backed insurer. “Once policies are depopulated, they stay out”, thanks to a responsible and politically independent approach to rate-setting.

Not that it has been all plain sailing in Louisiana. “There have at times been some politically difficult rate increases, but no move to rate suppression”, says Cottrell.

This year’s depopulation effort off-loaded about $2 billion of wind exposure into the private market and brought the number of policies held by Louisiana Citizens down to 91,000, said Thomas, although he estimates that 75,000 policies is the likely floor of its depopulation efforts.

“The remainder belong in a market of last resort”, explains Thomas. “As such, I anticipate a slowdown in our depopulation efforts this coming year”.

Kings of cat

Addressing Louisiana Citizens’ reinsurance buying behaviour, Cottrell says that 2011 proved a watershed year for the insurer.

“That year the world of reinsurance changed. RMS 11 came out and multiplied projected coastal hurricane losses, while US federal interest rates dipped so low that pension funds increasingly turned to cat bonds to strengthen their rate of return”, says Cottrell.

This led to a marked drop in the price of cat bonds, and for the first time they were attractively priced for Citizens. Louisiana Citizens has since bought two cat bonds, said Cottrell, with the bonds now making up half of the insurer’s reinsurance coverage.

Cottrell commended the bonds as a source of diversifying coverage, and one through which Citizens has been able to lock in attractive rates.