Louisiana's Home Insurance Market Struggles in the Face of Hurricane Risk

Louisiana is a state of many faces. From the haunting bayous to the lively streets of New Orleans, Louisiana has an appeal that few states can match. But Louisiana’s position along the Gulf Coast and the low-lying areas along its southern border makes it particularly vulnerable to hurricane damage. Because of the risk of storm damage, the state’s home insurance market is facing challenges.

Bankrate investigated the situation and spoke with several insurance experts to understand what’s happening and how it impacts Louisiana homeowners. Here are the key insights.

Insolvency of Home Insurance Companies

Several property and casualty home insurance companies have been declared insolvent since August 2020, and more could soon follow. This leaves homeowners with fewer options for insurance coverage. Even Louisiana's "last-resort" insurer, Citizens, which already charges higher rates than the private market, is implementing a staggering 63 percent rate increase starting on January 1, 2023. This situation makes it increasingly difficult for homeowners to find affordable coverage.

Hurricane Risk

The insurance crisis in Louisiana is driven by excessive property claim losses from hurricanes. Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute, explains: "The insurance crisis in Louisiana is driven by excessive property claim losses from hurricanes, which had devastating effects for small, regional home insurers that were under-capitalized."

Jim Donelon, the Commissioner of Insurance for the State of Louisiana, spoke with Bankrate about the current situation. “We are challenged, no question about it,” he says. “There is a very hard market out there to get coverage.”

In the past, the home insurance market may have been able to charge comparatively lower rates and maintain lower claims reserves because there was less damage happening. But 2020 and 2021 brought four devastating hurricanes in a row — Laura, Delta, Zeta, and Ida. These four storms caused $76.65 billion of damage in Louisiana, with Hurricane Ida accounting for 72 percent, or $55 billion in damage. The rapid increase in risk level, not to mention the massive influx of claims, was enough to financially cripple at least six property and casualty insurance companies.

Even companies that were fiscally strong enough to withstand the barrage of losses may not be willing or able to handle another hurricane season. Donelon notes, "This has resulted in companies withdrawing or pausing their writing in our property insurance market." And it's likely to get worse. According to the National Climate Assessment, hurricanes have increased in duration, frequency and intensity since the 1980s and are predicted to continue getting stronger. As the risk of widespread damage increases, it may be more likely that home insurance companies will hesitate to do business in Louisiana.

Reinsurance Costs

Louisiana’s home insurance market operates, in large part, based on reinsurance. Reinsurance is a type of insurance coverage that your insurance company purchases to protect itself from the financial risk of claims. Essentially, reinsurance means the less-risky areas of the world are helping to subsidize the ability of insurance companies to operate in more risk-prone areas.

But reinsurance costs money, and like many other types of coverage, the cost for coverage is rising. Insurance companies are paying more for reinsurance due to the increasing frequency of natural disasters worldwide. Donelon confirmed that reinsurance rates are rising and that insurance companies will likely pass on some of that cost to policyholders in the form of higher rates.

What is being done to curb the crisis?

While all of this sounds scary — and it’s certainly far from ideal — Louisiana is taking action that will hopefully stabilize the market. The Louisiana Legislature recently passed a bill granting $45 million to help restore the struggling market. Lee Ann Alexander