What on earth is happening out there? Is a major hurricane churning in the Gulf and taking dead aim at Louisiana? Is the Mighty Mississippi on the verge of overflowing its levees and about to flood thousands of acres, driving hundreds of thousands from their homes? Something drastic must be up. After all, State Farm Insurance Company just raised its rates on Louisiana homeowners by as much as 20%.
Note that I said that State Farm raised its rates. In most states, insurance companies are subject to a pre-approval process wherein the insurance department determines if the increase is warranted, so that the property owner can be assured that the increase is both fair and necessary. But Louisiana is different. In the Bayou State, insurance companies are not required to get rate increases pre-approved. So the answer to the question of how come big insurance companies can stick it to homeowners, whether or not such an increase is justified, is simply this -- they do it because they can.
Back in the days when I served as Louisiana Insurance Commissioner, I worked with Texas Commissioner Bob Hunter on a variety of insurance issues affecting our respective states. Currently, he’s the Insurance Director for the Consumer Federation of America. I called him to get his view on the dramatically rising property insurance rates in Louisiana. “Puzzling,” he said. “A real outlier. Maybe a slight increase because of inflation. But such a big increase is really questionable.”
The national insurance reporting publications indicate why property insurance rates should be going down, not up. The FPN Insurance Journal reported that natural catastrophes caused less than half the damage this year compared to the past 10 year average. USA Today reports that we are experiencing one of the quietest years for hurricanes and other national disasters in many years. The Insurance Journal reported that insurance companies nationwide have seen rate reductions in the past three years.
With no major storms in recent years, “more capacity will become available and prices will start to come down,” says Shivan Subramaniam, chief executive of commercial property insurer FM Global. So all over the country, insurance rates for homeowners have stabilized and should begin to decrease. But not in Louisiana? Huh? Surrounding coastal states have just as much exposure to natural disasters as Louisiana does. But they are experiencing no huge rate increases. When there is no prior approval of rates, up they go.
Let me share a story of how effective proper regulation can be. Under the old system, the governor appointed a six member rating commission. Insurance companies had to appear before the commission and make their case for any rate increase. As insurance commissioner, I served as chairman of the commission, and then Governor Mike Foster made the appointments. The system served as a good check and balance.
State Farm asked the commission for a major increase in December, 1997. Governor Foster called me and asked that I convey to the members that he wasn’t for any rate increase, particularly as the holidays were approaching. I told the commissioners of the Governor’s concerns, but State Farm did a major lobbying job of wining and dining them. In spite of joint objections from both the Governor and me, the commission unanimously approved the State Farm rate increase. The next morning around 6:30 am my phone rang. “Jim, Mike Foster. Sorry to bother you so early, but I have one question. Did you tell my appointed commissioners of my concern that no rate increase should be given to State Farm?” I told him, yes, I had conveyed his message to each of the seven commissioners. “Thanks, that’s all I needed.”
Three hours later, Governor Foster called a press conference and fired all seven commissioners. An insurance company needs to have a fair rate in order to stay in business. But gouging the property owner without justification and some type of check and balance is not fair to the insured, and bad for economic growth in the state.
The legislature, the governor and the insurance department could learn a good lesson from the Foster years. Be fair, but don’t let rate increases take place at a company’s whim. Property owners deserve better.