Jim Donelon

Insurance Commissioner Jim Donelon at the Press Club of Baton Rouge on Monday, Sept.16, 2019

Two regional insurance companies are facing insolvency due to Hurricane Ida losses, prompting Louisiana’s insurance commissioner to seek a government takeover and ensure policyholders get paid what they’re owed.

The shake-up will cause thousands of Louisiana residents to get kicked off their insurance policies. It's likely to extend an already tedious claims process, though policyholders whose insurers go belly-up are guaranteed up to $500,000 in payments through a safety net created by the state.

Insurance Commissioner Jim Donelon wouldn’t name the carriers at-risk, but in late October, several regional insurers had their financial stability ratings withdrawn by industry watchdogs, a red flag that liquidation is on the horizon.

On Wednesday, Donelon filed injunctions in Baton Rouge's 19th Judicial District Court against two of those carriers: State National Fire Insurance Company and Access Home Insurance Company. It’s unclear whether Donelon will attempt to rehabilitate – or simply liquidate – the companies he’s suing. But once he receives approval from the courts, Donelon can begin selling off the insurer’s assets to pay down claims.

“We’re going to put them in receivership and ultimately liquidate the companies as a result of their insolvency,” Donelon said in an interview last week.

Together, the two insurers are responsible for 1% of Louisiana’s property insurance market, taking in $20.5 million in direct premiums, according to state data.

News of the impending takeover comes days after FedNat Holding Company, the state’s fourth largest homeowners’ insurer, with $81.3 million in direct premiums, announced it would stop renewing Louisiana policies beginning in January. Its subsidiary, Maison Insurance, had its financial stability rating withdrawn on Saturday.

Another insurer, America’s Insurance Company, which receives nearly $27 million in direct premiums, lost its accreditation in October, though Donelon cannot sue to take it over because the firm isn’t domiciled in Louisiana.

Insurance companies often live or die based on the letter grade they receive from rating agencies. Most banks won’t lend money to homebuyers who don’t get insurance coverage through an “A” rated insurer. And many insurance agents won’t represent carriers that lack the sterling letter grade.

Ratings agencies review insurers’ financial information on a quarterly basis and after major disasters to determine whether they have the resources on-hand to pay out claims to policyholders.

“If a company does not meet our financial metrics, and it doesn’t look like they’re going to be able to raise additional capital, we’ll downgrade or withdraw their rating,” said Joe Petrelli, the president and founder of Demotech, the agency which revoked the insurers’ financial stability rating.

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“These insurers are headed in the wrong direction financially,” Petrelli added.

Mark Friedlander, with the Insurance Information Institute, an industry-backed trade group, put it more bluntly.

“Typically, when you see a rating withdrawn, that is a sign that a company is heading towards liquidation,” Friedlander said. “It shows the company can no longer operate in the marketplace.”

Once the court issues an liquidation order, the Louisiana Insurance Guaranty Association, or LIGA, steps in. Created by the Legislature in 1970, the private, non-profit serves as a safety net for consumers, providing up to $500,000 in payments for unpaid claims and $10,000 for premium refunds.

To fund its safety net, LIGA can assess insurers in Louisiana up to 1% annually. But that hasn’t been necessary for the last 17 years, according to the association’s executive director, John Wells.

That’s partly because Louisiana hasn’t liquidated a property insurer in more than two decades.

The latest market fluctuations are sure to reverberate in Louisiana politics for months to come as state lawmakers with frustrated constituents begin crafting proposals to hold insurers' feet to the fire. 

Donelon said that upping bad faith penalties, for example, could thrust additional carriers into insolvency, or cause them to exit the market altogether.

But Eric Holl, of Real Reform Louisiana, a non-profit that advocates for stricter insurance regulations, said the latest failures shouldn't dissuade lawmakers from enacting stronger consumer protections. 

“The idea that insurance companies can’t do business in Louisiana if they have to pay claims on time is absurd and its hostage-taking rhetoric," Holl said. "There's plenty of money to be made in selling homeowners insurance in Louisiana. Clearly, these insurers were running their business poorly."

Email Blake Paterson at bpaterson@theadvocate.com and follow him on Twitter @blakepater