Catastrophe losses, fraud & affiliate programs were the top causes of impairment of insurers says AM Best
By Sabrina Wilson
Published: Jun. 5, 2024 at 10:01 PM CDT|Updated: Jun. 6, 2024 at 7:13 AM CDT
NEW ORLEANS (WVUE) - It is the time of year that people living along the Gulf Coast worry about hurricanes. Insolvencies by some insurers in recent years are prompting questions about whether the insurance industry is financially prepared for this year’s hurricane season.
Following Hurricanes Laura and Ida in 2020 and 2021, respectively, a dozen insurance companies failed in Louisiana, and others ceased writing new wind and hail coverage. Florida and some other states are also wrestling with insurance issues.
FOX 8 asked Sridhar Manyem, Senior Director of Industry Research and Analytics at A.M. Best, a global credit rating agency, to weigh in, in a general sense, on the financial readiness of the insurance industry for the 2024 hurricane season.
“I think we cannot make a blanket statement about specific companies, said Manyem. “But in general, we look at the homeowners’ insurance market, and we think it is very it is overall as an industry, it’s well capitalized. Having said that, we do have a negative outlook on the homeowners’ property insurance market. Climate risk is an important factor in that negative market segment outlook that we assigned to the homeowners’ property market.”
In recent years, storms have intensified faster and caused catastrophic damage.
AM Best has been rating insurance companies’ financial strength for decades.
“Insolvency is a concern. Definitely in terms of climate risk. And we are, especially if insurance companies are not well managed, then that poses a concern to the solvency of the insurance company itself,” Manyem said.
He said that when insurers fail financially, the government often has to step in to help impacted policyholders.
“More importantly it poses a risk for the policyholders of the insurance company and the government as well, because it has to spend money in order to bail out the policyholders because the insurance company cannot fulfill the promise,” Manyem said.
TWFG Insurance branch owner Stephen Lovecchio says he is seeing some improvement in Louisiana’s insurance landscape.
“We’re starting to see some carriers come back into the market and some of our carriers that never left start to write more business,” said Lovecchio.
He said a dozen insurers are writing wind and hail policies south of I-10 and I-12.
“Twelve admitted carriers, we have a few more that are non-admitted. But if their rate is four times higher than everybody else are they really writing?” said Lovecchio.
And some of his clients are receiving slightly lower premiums.
Meanwhile, AM Best did an analysis of specific causes of ‘impairment of insurance companies’ between 2000 and 2022. The top three causes were catastrophe losses, fraud, and affiliate programs. Manyem explained what affiliate programs or managing general agents are.
“These are people who write business on behalf of the insurance companies, they might or might not have any skin in the game at all, like they might write a really risky homeowners’ insurance policy and they might pass it on to the insurance company and the insurance company is on the hook if something happens to them and in return, the insurance companies pays them a commission,” said Manyem.
He said MGAs are not regulated like insurance companies.
“There’s a lot of guardrails, if you will, when an insurance company operates. But then with a managing general agency, there’s not much regulatory guardrails, if you will, that’s around these entities,” Manyem said. “The insurance company when it fails just goes the bankrupt and the state picks up the bill while the affiliate management has already made their commissions and they are out the door and live happily ever after.”
Should there be more oversight of MGAs?
“I think maybe right now, at least it doesn’t look like there’s not much regulatory oversight on these MGAs,” said Manyem. “I would say it would be good if there was-- if stakeholders have some kind of understanding of the MGA business model and what is the relationship between the MGA and the insurance company.”
He said AM Best does its own probing, in terms of MGAs.
“When AM Best looks at an insurance company, we look at what kind of due diligence that the insurance company is doing on its MGAs. We look at what kind of incentives that the agency has in order to find profitable business, so on and so far, so we have some kind of a methodology, if you will, to look at these affiliate programs,” Manyem stated.
Lovecchio says Louisiana is being proactive in that area.
“Louisiana legislature last year passed a law that said not only could the Department of Insurance audit the actual carrier, but they can also go in and audit all the finances of the umbrella or the mother company so to speak,” he said.
Not all insurance companies are rated for their financial strength. Being rated by AM Best or another agency is voluntary, so consumers may want to check whether a company they plan to do business with has a rating.
Recently, Louisiana lawmakers passed a package of insurance reform measures that aim to make the state more attractive to insurers.
Florida is ahead of Louisiana in reforming its insurance laws.
“We are seeing the benefits, it’s too early to call it a victory. But we are seeing some benefits of those insurance reforms as we are seeing the reinsurance rates come down a little bit.” Manyem said, referring toFlorida.
Lovecchio and others hope this hurricane season defies predictions.
“So we’d like to have at least another year to get a little bit healthier and we’d like for some of these changes that we’ve put into effect through the legislature, to let them work and let us figure it out,” he said.
FOX 8 requested comment from La. Insurance Commissioner Tim Temple for this story but did not hear back from his office.
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