Louisiana Mulls Restructuring Insurer; Regulators Urge Caution

Published January 10, 2010

Public policy advocates and state regulators say Louisiana’s legislature should take a deliberate, skeptical look at a commission’s recommendation that the state restructure its property insurer of last resort.

The state’s Commission on Streamlining Government has suggested the state phase out the Louisiana Citizens Property Insurance Corporation and revert to the Joint Underwriting Association structure that existed in the state before 2003.

Louisiana Citizens, an agency of state government, writes property insurance for those unable to find it in the private market. A Joint Underwriting Association would also write insurance for people unable to find it elsewhere, but it is structured as a private entity that all property insurers in the state must join and help to support.

As a government agency, Citizens is exempt from some taxes a JUA would have to pay. But by virtue of being part of state government, it has greater explicit and implicit access to the state’s line of credit. In the wake of Hurricane Katrina, the state issued more than $1 billion in bonds to cover Citizens’ deficits. Surcharges on insurance policies around the state serve to pay down the bonds.

‘Big Hornswoggle’
State auditors have announced Citizens will almost certainly receive a negative audit. State Treasurer James Kennedy, the chief proponent of eliminating Citizens, was blunt in his assessment of the agency.

“I think the passage of Citizens . . . constitutes one of the biggest hornswoggles of the taxpayers of Louisiana in my lifetime,” he told the New Orleans Times-Picayune.
On the other hand, top insurance overseers, including Commissioner of Insurance James Donelon and Citizens CEO John Wortman, spoke out in the agency’ defense.

“In the long run [abolishing Citizens] would add to the state’s exposure,” Wortman told the newspaper.
A report from the Louisiana-based Pelican Institute and The Heartland Institute recommended the state carefully consider its options before acting to revise Citizens’ structure. The report says Donelon has done a good job overseeing Citizens and any revised structure should take into account the agency’s successes as well as its problems.

Equal Treatment
Among other things, the report suggests Louisiana subject any new entity to many of the same open government and ethics rules that apply to Citizens; realize that simply changing the entity’s structure probably will not solve any problems; and require any replacement for Citizens to purchase a significant amount of private reinsurance.

“The Streamlining Commission’s goal of reducing the cost of state government can be furthered by effective insurance reform. Phasing out Citizens makes sense, though it needs to be done carefully,” said Pelican Institute President Kevin Kane.

“The new insurer of last resort should not compete with private companies or put taxpayers on the hook for future bailouts. And its finances should be completely transparent.”

Eli Lehrer ([email protected]) is a senior fellow of The Heartland Institute and director of its Center on Risk, Regulation, and Markets.