Ida insolvencies continue, as Florida runs out of road: ALIRT

Property insurers on the hurricane exposed coast of the United States are increasingly at-risk of failure due to “solvency-threatening storms”, with the latest insolvency being Lighthouse in Louisiana, but Florida continues to be the most challenged state.

Lighthouse Property Insurance Corporation (LPIC) and subsidiary Lighthouse Excalibur Insurance Company (LEIC) became the fourth property insurer in Louisiana to go out of business in the last week, as the Louisiana Department of Insurance took action again in the wake of a period of hurricane landfalls and losses.

Coastal challenges in Louisiana have been delivered by a spate of hurricanes and tropical storms, with reinsurance exhausted and capital depleted, the four insurers that have failed stood little chance of survival.

The impacts of hurricanes Laura, Delta and Zeta in 2020, which cost insurers operating in Louisiana $10.6 billion, followed by Hurricane Ida, which is estimated to cost insurers in the state between $10 billion and $15 billion, as well as increasing labor and materials prices caused by the hurricanes and high inflation, are all blamed for causing the four insurers to exhaust their reinsurance coverage and run out of money.

“Losing a fourth insurer to the unprecedented 2020 and 2021 hurricane seasons is unfortunate, but I’m proud of how effectively we have managed the insolvencies so far,” Louisiana Insurance Commissioner Donelon said. “For the first three failed insurers, we were able to quickly find an insurer to take over their policies on the same terms and conditions policyholders had under the failed companies, and I’m hopeful we will do the same for Lighthouse policyholders. Meanwhile, LIGA has shown it is capable and ready to handle paying up to $500,000 of the failed insurers’ remaining claims.”

Lighthouse Property Insurance Corporation had around 30,000 policies in-force and some 16,000 hurricane Ida-related claims, covering around 3.27% of the Louisiana homeowners insurance market at the end of 2021.

A receiver has been appointed by the courts and in-force policies may now be transferred to another insurer.

With reinsurance costs expected to rise again for coastal property insurers, especially in hurricane exposed and loss affected areas such as Louisiana, as well as in the most-challenged state of Florida, the most thinly capitalised insurers are facing a particularly challenging few months ahead.

Principal analyst David Paul from ALIRT explained that the failure of Lighthouse is “yet one more indication that small property insurers focused on southeastern states face problematic odds.”

“This used to be a Florida issue – and LPIC was certainly exposed to Florida through its merger with Prepared Insurance Company two years ago – but it’s become clear that property insurers along the entire Gulf Coast are exposed to solvency-threatening storms. Hurricane Ida alone has now caused insolvencies at four insurers likely already weakened by a series of Greek-letter hurricanes that pounded the state in 2020,” Paul added.

Like many other primary property carriers, LPIC “bet big” on coastal property risks in states like Florida and Louisiana, but Paul believes the writing was on the wall in as his firms ALIRT Score had showed a steady downward trend for the insurer since 2017.

Florida remains ground-zero for insurance failures though, as the most challenged marketplace even without a major hurricane landfall in the last season.

Paul said that ALIRT has counted some 20 Florida domestic homeowners insurance specialists that have failed in the last fifteen years out of a cohort of roughly 80, giving a failure rate of 25%.

Providing his take on Florida’s insurance market challenges, Paul said, “Where does the fault lie? Well, geography certainly doesn’t help, but other culprits include government interference in the market (depress rates and then offer cheap reinsurance and surplus support for start-ups), an aggressive trial bar that seems to fight every attempt to address the problem legislatively, and – more recently – a well-oiled assignment of benefits racket.

“The unique nature of the market has drawn in entrepreneurs who are able to set up virtual insurers, access instant premium via Citizen take-outs, and make money on the back-end via MGA fees. But artificially depressed insurance rates always seem to have the final say and now even the entrepreneurs seem to be staying away (with very few start-ups over the past several years).”

As we explained earlier this week, Florida’s challenges persist and some say the property insurance market is “in collapse”.

With no guarantees any legislative changes could be enacted before this year’s 2022 Atlantic hurricane season, while hurricane season forecasts suggest another active year with elevated landfall potential, plus a hardening reinsurance renewal fast-approaching, the challenges look set to persist.

All of which leads Paul to warn that, “Florida has been kicking the can down the road on its property insurance market for the past thirty years. It may now be running out of road.”

The push for a special legislative session for Florida property insurance reforms continues, with Senators gaining bi-partisan support for their efforts, but still no guarantees and time running short.