Plan Meant to Lower La. Citizens Rates Wins Panel’s Approval

The Louisiana House of Representatives Insurance Committee approved a plan meant to lower homeowners rates charged by Louisiana’s state-backed insurer, despite warnings that it will backfire and exacerbate the state’s property insurance problems.

Legislation to allow the Citizens Property Insurance Corp. to lower some of its rates sparked hours of debate, partly because the idea requires predicting the future for Louisiana’s insurance market if Citizens – a government-backed insurer – is allowed to compete freely with private insurers.

The House Insurance Committee voted to approve the bill by Rep. Jean-Paul Morrell. Most Republicans on the panel opposed the measure. Democrats supported it.

However, the Citizens issue was muddied by the release of an audit report from Legislative Auditor Steve Theriot saying the company routinely breaks state law – by setting its rates too low, potentially scaring off private insurers in a post-hurricane market that’s already starved for property insurance.

“It is important that Citizens’ rates do not compete with the rates of private insurance companies because competition could cause private companies to withdraw from the property insurance market in Louisiana,” the report said.

The Legislature created Citizens in 2003 as a publicly backed firm that does not compete with private firms: it provides insurance at artificially high prices to homeowners who can’t find it on the private market. The company is required by law to price itself out of the private market by calculating the average rate charged by private firms in a parish, then charging an additional 10 percent.

But the report said Citizens has failed to mark up its rates sufficiently to put it 10 percent over the market average – and sometimes undercuts the private firms that the company supposedly does not compete with.

The rate-setting problems persist, the audit said, for four reasons: Citizens uses outdated hurricane models, acts too slowly in assessing private firms’ rates and fails to adjust its rates annually, as required by law.

Citizens’ new CEO, John Wortman, hired a month ago, testified before the insurance panel and agreed that the problems exist. Wortman said he would follow the recommendations from Theriot’s office on how to fix them.

Morrell’s bill, meanwhile, was intended to fix a problem reported by homeowners in south Louisiana parishes for whom Citizens is the only option, as private firms have stopped writing new policies in the region since the 2005 hurricanes.

Those homeowners wonder why, without any private competition, Citizens still hikes its rates by 10 percent. Morrell and other lawmakers said the situation is unfair.

“You go to find insurance and every single insurer in the state of Louisiana turns you down. At the end of the day, you’re stuck in Citizens,” said Morrell, D-New Orleans, who has a Citizens homeowners policy.

Morrell’s bill would call on the state Department of Insurance to analyze markets in which Citizens has no competition. The department would then have the power to allow the company to eliminate the 10-percent markup.

Opposed to the measure are the department’s chief, Insurance Commissioner Jim Donelon, and private insurance companies.

Donelon said the long-term effect of the plan would be to worsen Louisiana’s property insurance crisis, raise rates, reduce competition and deepen state government’s involvement in the insurance business. He said the plan would also increase the number of Louisiana homeowners forced to go to Citizens for insurance, because private insurers would be less willing to write policies in south Louisiana.

“This is definitely a step in the wrong direction,” Donelon said.

Donelon conceded that the system increases already high bills for south Louisiana homeowners, but said the free market will correct the problem in time – if the 10-percent markup remains.

The insurance committee’s 9-8 vote sent the bill to the House floor for further debate.

Voting for the measure were Reps. John Anders, D-Vidalia; Rick Farrar, D-Pineville; Robert Faucheaux, D-LaPlace; Terrell Harris, D-Marrero; Troy Hebert, D-Jeanerette; Thomas McVea, R-Jackson; Morrell; Cedric Richmond, D-New Orleans; and Gary Smith, D-Norco.

Voting against were Reps. Shirley Bowler, R-Harahan; Dale Erdey, R-Livingston; Ronnie Johns, R-Sulphur; Charles Kleckley, R-Lake Charles; Dan “Blade” Morrish, R-Jennings; Steve Scalise, R-Metairie; Joseph Toomy, R-Gretna; Mike Walsworth, R-West Monroe.

Rep. Karen Carter, D-New Orleans, the chairwoman, did not vote. Jim Tucker, R-Terrytown, was not present.

On the Net: House Bill 528 is posted at http://legis.state.la.us