Fla. and La. must borrow millions to pay insurance claims

By Thomas Frank | 05/02/2023 06:32 AM EDT

The emergency borrowing has drawn attention to nonprofit insurance associations that are created by states to pay claims of insolvent insurers.

Stew Segura salvages what he can from his Lake Charles, La., store after it was destroyed by Hurricane Laura in August 2020.

Stew Segura salvages what he can from his Lake Charles, La., store after it was destroyed by Hurricane Laura in August 2020. Joe Raedle/Getty Images

The Gulf Coast insurance crisis has hit a new low as two state-chartered insurance associations are being forced to borrow hundreds of millions of dollars for the first time in three decades to pay the hurricane claims of insolvent insurers.

Borrowing in Florida and Louisiana could reach a combined $1.35 billion and will be repaid largely by insurance policyholders across each state through premium increases or surcharges that will last for years.

The emergency financial maneuver is the latest illustration of the collapsing property insurance market along the Gulf Coast following a series of destructive storms and a torrent of lawsuits. More than a dozen insurers have become insolvent, leading to soaring premiums and the cancellation of hundreds of thousands of homeowners’ policies.


“We’re currently in the midst of an insurance crisis,” Louisiana Insurance Commissioner Jim Donelon said at a recent news briefing. The crisis is “largely as a result of hurricane activity in our state the last couple of years,” he said.

The most recent financial blow was triggered by Hurricane Ian. Damages from the Category 4 storm plunged a large regional insurance company into failure, leading it to cancel tens of thousands of homeowners’ policies as hurricane season approaches and leaving millions of dollars in unpaid claims.

The emergency borrowing in Florida and Louisiana has drawn attention to little-known nonprofit insurance associations that are created by states to pay claims of insolvent insurers. The associations are authorized to collect money by assessing insurance companies in their state a payment that is usually limited to 1 percent of the total premiums they collect.

But in Florida and Louisiana, the unpaid claims became so costly that the assessments were insufficient and the associations had to borrow hundreds of millions of dollars at significant interest rates.

“This is an extraordinary event for us,” said John Wells, executive director of the Louisiana association, known as the Louisiana Insurance Guaranty Association. “What everybody has to come to terms with is how much it takes to cover catastrophic losses.”

“With climate change, the big question is: How much do these catastrophes cost, and how is that going to be funded?” Wells added.

The Louisiana association borrowed $600 million to pay hurricane claims — the first time it has borrowed money since 1989.

The Florida Insurance Guaranty Association announced plans in April to borrow up to $750 million to pay claims from Hurricane Ian. The association last borrowed money in 1992 after Hurricane Andrew demolished large parts of South Florida.

The borrowing will cost hundreds of millions of dollars in interest payments and will be repaid by assessments that last a decade or longer. Insurance companies generally recoup assessments through increased premiums, surcharges or state tax credits.

“One way to look at it is, the system is working like it’s supposed to,” Wells said, noting that the Louisiana Legislature had authorized the association to borrow money to pay claims.

Louisiana will pay $275 million in interest until the money is repaid in 2038, financial records show.

The borrowing and assessments illustrate how the financial impact of disasters is spreading to unscathed areas as climate change intensifies storms, flooding and wildfire.

Most of the unpaid claims in Florida and Louisiana were filed by coastal residents. But the claims will be paid by residents across each state through higher premiums and on a range of policies beyond homeowners’ insurance, including automobile coverage and theft coverage.

“The bill will be paid by not just homeowners but by others,” said Shahid Hamid, a finance professor and insurance expert at Florida International University.

Legislators and officials in both states have taken steps recently to strengthen their insurance markets and reverse the tide of insurance companies that are canceling policies and leaving the region.

But insurance analysts warn that additional Gulf Coast insurers could become insolvent before hurricane season starts June 1, said Mark Friedlander, spokesperson for the industry-funded Insurance Information Institute.

Analysts cite the rising costs of reinsurance, a type of coverage that insurers buy to pay catastrophic claims. Reinsurance costs could double this year in Florida, Friedlander said.

“The Florida and Louisiana property insurance markets remain the most volatile in the U.S.,” Friedlander said. Residents are facing “soaring premiums and few options” for property insurance, he said.

Reinsurance costs are rising because of increasing damage worldwide — from flooding in Africa, Asia and Europe to wildfires in Australia and Russia. Reinsurance companies operate on a global scale and cover damages across the planet.

“Reinsurance costs are related to not just hurricane risk but to all the different kind of risk around the world,” said Hamid, the professor. “Anything that happens in the world will affect premiums in Florida.”

The borrowing also exposes the long-standing fragility of the Gulf Coast insurance market and its inability to cover the growing damage caused by hurricanes.

Two storms that gained only brief national attention — Hurricane Laura in 2020 and Hurricane Ida in 2021 — generated an estimated $23 billion in insurance claims in Louisiana, according to the state Department of Insurance. That’s almost as much as Hurricane Katrina, which generated $25 billion in claims in Louisiana when it struck in 2005.

“Ida was more storm than everybody was expecting,” said Wells of the Louisiana association.

The figures do not include payments for flood damage, which is paid for through policies that are separate from standard homeowners’ coverage. Much of the damage from Katrina was caused by flooding.

In Florida, state officials say insurer insolvencies are due largely to the costs of litigating lawsuits filed by policyholders challenging insurance payments. Gov. Ron DeSantis (R) signed legislation in December aimed at curbing the number of lawsuits.

“Florida’s most recent crisis had some roots in severe storm losses, but was driven into crisis by litigation,” said Robert Hartwig, director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business.

But the insurer that recently became insolvent — Florida-based United Property & Casualty — blamed Hurricane Ian.

The insurer’s holding company, United Insurance Holding Corp., recently reported losing $470 million in 2022 — a huge jump from losses of $58 million in 2021. The company said the increase in losses was “primarily driven” by Hurricane Ian, which drained its reserves.

Hartwig worries that state officials will try to roll back insurance premiums to “please their constituents” but said such a move would “damage the ability of insurers to operate in that state.”

“I can say with confidence that Florida’s most recent crisis will not be its last,” Hartwig said.