Once upon a time, most Louisianans insured their homes with a traditional behemoth, a giant of the industry, like State Farm, Allstate, Farmers or USAA.
No more. Today, a sizable share of Louisiana homeowners now buy their insurance from small, undercapitalized and often unproven companies that lack the huge reserves to protect them when catastrophe strikes.
In some cases, these smaller firms never hire employees or even set foot in the state. Many are so small that they can’t afford to hire agents, buy property or gather the data that would help establish the local expertise needed to write policies.
Instead, they outsource their operations to third-party administrators, known as managing general agents. While not new, the practice has grown increasingly common in Louisiana after most of the major insurance carriers abandoned the state in the wake of Hurricane Katrina.
Pre-Katrina, the 10 largest Louisiana carriers held more than 70% of the market. Last year, it was 54%. Of the large firms, only State Farm, with roughly a quarter of the state market, holds a commanding share.
Those numbers reflect how home insurance often works now in Louisiana: Investors from all over the country have been able to start insurance businesses here, without having to actually handle the nuts and bolts of running an insurance company.
In the years without major storms, investors may draw dividends from the millions in premiums written by their firms. But when catastrophic hurricanes arrive, these companies are far less likely to have the cash or reinsurance needed to pay the crush of claims that follow.
Their liability is generally limited. Once a company is declared insolvent, its remaining assets are liquidated, and whatever can’t be paid from those proceeds becomes the responsibility of the Louisiana Insurance Guaranty Association.
“If there is a catastrophe, (they say) ‘We’ll have to fold up shop,’” said Tyler Leverty, a professor of risk and insurance at the University of Wisconsin. “But at least we had all of those good years.”
Louisiana has seen it happen, with 11 home insurance companies writing business in the state going insolvent after Hurricane Laura in 2020 and Hurricane Ida in 2021.
The back-to-back years of Category 4 catastrophes resulted in more than 800,000 overall claims — a huge burden on small companies primarily selling policies in Louisiana.
But state Insurance Commissioner Jim Donelon said some of the failed companies showed signs of greediness, placing profits over protecting property. Specifically, he has criticized them for not buying enough reinsurance, a backstop that’s designed to help pay claims when major disasters hit.
“I do believe the failed companies failed because the owners tried to go cheap on their reinsurance buys, maximize their profits and rolled snake eyes when Ida came through,” Donelon said.
Together, the failed companies held more than 184,000 policies, at least 13% of Louisiana’s home insurance market and nearly one policy for every four claims filed from the 2020 and 2021 storms.
It’s difficult to say exactly how many Louisiana insurance companies fit the profile of what one analyst described as “fractional” insurance companies, ones that are smaller, have less money and tend to specialize in riskier property.
The Louisiana Department of Insurance doesn’t keep track of which companies outsource their operations, which can be an indicator of those that are undercapitalized.
As of last year, companies that used managing general agents had at least 20% of the market in Louisiana, according to an analysis by Martin Grace, a professor of risk management at Temple University.
In 2005, Grace estimates, the share of the market represented by such companies was less than 1%.
The shift isn’t necessarily a cause for concern, said Jeff Albright, chief executive officer of Independent Insurance Agents and Brokers of Louisiana. And with its coastal stock of extremely at-risk property, the state should welcome any well-meaning company willing to write policies there, he added.
“We’re going to get some rich entrepreneur from Florida or some other place who sees a profit opportunity to deploy their capital to write insurance in Louisiana,” Albright said.
He echoed comments from other observers who noted that all industries — not just insurance — are flush with investors who play passive roles in the companies they own. When it comes to home insurance, Albright said, “If they do it properly, that’s a good thing, not a bad thing.”
Still, Albright thinks Louisiana needs to entice some of the big insurance firms to start writing policies here again, something he thinks will require loosening some regulations.
“If we give them more flexibility and they can see an opportunity to make money over the long term, they may want to come back,” he said.
“The primary thing is price regulation. Most people’s gut reaction is, ‘We can’t just let insurance companies charge whatever they want. But if you can’t write the price you want, what’s your alternative? Your alternative is to not write policies in Louisiana.”
The ‘Florida Model’
The result today is a Louisiana market that more closely resembles Florida, a similarly hurricane-prone coastal state that’s dominated by small or upstart home insurance companies that outsource their operations.
“It’s referred to as the ‘Florida Model,’” Donelon said. Many Louisiana companies got their start in Florida. Or, they’re incorporated in Florida or another state and hire a Louisiana-based MGA to write policies here.
“We’re very dependent on those small, Florida-based regional insurance carriers,” Donelon said. He added that Florida relies on them more, with that state’s largest carriers holding just a quarter of the market.
Five of the 11 companies writing business in Louisiana that went belly-up were from out of state, including four from Florida.
With no Louisiana office, no Louisiana employees, no physical footprint of any kind in the state, that makes it far easier to abandon ship, or close up shop, when companies run out of luck, Leverty said.
“There’s a lot more expedience,” Leverty said. “If I were a regulator, I would want them to have some physical assets and skin in the game, because hopefully that creates some more permanency.”