Why are insurance premiums are increasing in Louisiana?

Most Louisiana homeowners will soon be discovering that their homeowner insurance renewal rates will be increasing by hundreds of dollars since the previous year.  One obvious reason is natural disasters.  However, there are other factors causing home insurance premiums to soar.

Louisiana receives a lot of rainfall due to its subtropical climate, its low-lying land and proximity to the Mississippi River and the Gulf of Mexico.  Louisiana homes are also susceptible to flooding and have experienced more than two dozen flood events and hurricanes since 2000, making flood insurance mandatory for homeowners.  However, homeowner’s insurance rates have risen significantly across the nation, most especially in coastal Louisiana where homeowners are facing the highest premium bills ever.

Based on an analysis of internal policyholder data conducted, home insurance premiums increased dramatically from 2021 to 2022. 

Are natural disasters becoming more extreme?

In the past few years, the property insurance industry has experienced record payouts and financial losses due to worsening hurricane and wildfire seasons. Therefore, insurance companies are raising rates to compensate for these losses and avoid going bankrupt in the future.  In states such as Louisiana, where catastrophic hurricane events are common, the increased demand and shortened labor supply result in higher construction and labor costs.

If you live in a high-risk area in the west coast (wildfire) or the south (tornadoes and hurricanes) and your rates have increased recently,  price inflation and higher reconstruction costs will probably hit you.  There is a simple reason for companies leaving Louisiana’s market; it is too risky.

After Hurricane Katrina in 2005, Louisiana had a long, quiet period of hurricane seasons until 2020.  The homeowner’s insurance market had calmed down a bit after the challenge the state faced.  Because less damage was occurring, insurance companies could charge comparatively lower rates and maintain lower claim reserves (money spared to settle claims).

In 2020 and 2021, four destructive hurricanes occurred in a row: Laura, Delta, Zeta and Ida. Louisiana suffered damage worth $76.65 billion as a result of these storms. The damage caused by Hurricane Ida, which hit the state in late August 2021, accounted for 72%, or $55 billion worth of damage.  Seven property and casualty insurance companies were financially crippled by the rapid rise in risk levels and the massive influx of insurance claims.

The National Oceanic and Atmospheric Administration (NOAA) has predicted that the 2022 hurricane season will be stronger than average, so financially strong companies may not be able to deal with the amount of losses. Louisiana’s property insurance market is in a tailspin as another hurricane season is expected to bring high ocean temperatures that cause extra-strong storms.  Insurance companies are reconsidering their ability to write coverage in Louisiana due to the state’s risky conditions.  This is only one of the main reasons insurance companies are raising premiums.

Because of the risks in Louisiana, a few insurance companies have gone insolvent, while the remaining companies have stopped writing new business or have left the state altogether.  Insurance options for homeowners are now limited in this environment. In the aftermath of Hurricane Ida, at least seven private insurance companies collapsed or canceled their policies, and several more may follow which may cause grim implications for the state’s housing market.

Rising flood insurance rates are also affecting the state of Louisiana. Since Hurricane Katrina hit Lafourche parish in 2005, the population of residents has decreased by 10 percent. Due to environmental concerns, insurance rates in flood-prone areas have increased significantly over the past ten years, threatening the survival of the culture in the bayous. As flood risks grow, people are moving away from parishes about 60 miles southwest of New Orleans, as they are unable to afford flood insurance which can reach thousands of dollars in high-risk areas and which mortgage lenders require.

Additionally, there is a threat that tens of thousands of homeowners will be uninsured during the most challenging time of the year due to the market collapse. Because of upheavals in the property and flood insurance markets, the turmoil in Louisiana also indicates that property and insurance markets are unprepared to deal with climate-induced natural disasters.

Companies have withdrawn from or paused writing property insurance as a result. The situation is likely to worsen in the future. In the National Climate Assessment, hurricane duration, frequency and intensity have increased since the 1980s and are expected to continue to increase. The likelihood of widespread damage in Louisiana could make insurance companies wary of doing business there.

Moving forward, you’ll see a state that unfortunately remains in danger. Because of property insurance carriers leaving, Insurance Commissioner of Louisiana Jim Donelon, is hopeful that smaller insurers will fill the void left behind. A failing insurance company caused him to lose his own homeowners coverage, so he understands the issues on a personal level. "That’s tough; that’s hard," he explains. "But hopefully – with prayer – we can avoid anything like what has happened the past two years."

Unfortunately, for those that call Louisiana home and are homeowners, you may have started to notice that the insurance premiums in Louisiana have gone up. This is primarily because of the storm patterns and inclement weather that are common and the sheer number of hurricanes.

These hurricanes cause serious damage and increase premiums year over year.   For example, the homeowner’s insurance rates rose more than most of the rest of the United States in 2021. Louisiana has one of the highest premiums across the nation.

How high is the insurance already?

Louisiana is 45% higher than the national average currently.  This again, primarily comes from how many claims are filed every year in Louisiana. Since there is a high chance of a claim, insurance companies are calculating this into their premiums and thus the consistent premium hike. The average rate was only under 2% in 2020, showing that insurance companies are no longer willing to take risks without paying out.

Those that have already had a claim on their insurance can sometimes easily see their rates increase an additional 20%!  Rates usually go up from 7-10% after the first claim and then go up with each subsequent claim. This is, of course, based on how big the previous claim was and the number of claims that were originally made on the insurance policy.  Be prepared to pay a higher premium in every case based on your location. 

Coverage A, which is the primary insurance that protects the structure of your home, will increase at the same rate after each claim, since the stormy weather will certainly affect the design of your home. This trend will continue to tick upward which means homeowners need to consider this while moving forward. 

What about the age of a home?

The newer the home, the better your premiums will be because it will most likely be built to current building codes,  built using storm-resistant materials or at the very least, will not have any claims made against it.  Consequently, these new construction homes can receive, at times, a third of the average premium discount off their homeowners insurance. In addition, if they combine this discount with their car insurance and other policies, it could also end up providing a deeper discount.

What role does my credit score play?

Remember that the average homeowner’s insurance in Louisiana was just over $2,000 per year. This is based on the consumer with better than average credit. Since Louisiana is considered one of the states with the lowest credit ratings (bottom five overall credit score average), there might be a compounding effect on your homeowners insurance.

When you add into the mix the above-average pricing as well as having any prior claims on it, the insurance premium could be almost unaffordable. It can be an extra $1,000 per year easily in many cases, with those that have lower than average credit.

The first thing  you need to do is to work on your credit report immediately. You get a free one every year from each of the three major credit reporting agencies.  It will show what determines your credit score as well as your actual credit score.   Major factors that can affect your credit score are your current debt to total debt ratio (such as how near you are to your limits), the number of hard inquiries on your credit report (when you are applying for new credit or even getting insurance in some cases), your payment history (are you paying everything on time as agreed upon with creditors) and your overall credit history age.

This last one simply takes time and is a good strategy as it is to try to keep your oldest credit account open for as long as possible, as it will help to improve your credit age and then your score.

Your credit score will always be a major factor in everything related to finances, from getting the best rates on your mortgages and personal loans to getting your insurance premiums to be significantly lower. It can also help to ensure you can even get some quality banking accounts that may be out of reach if the credit history is too poor.

Why are property insurers “leaving” the state?

Insurance companies are leaving the state.  Even with imposing constant increases in premiums; the massive claims payouts have left companies unable to operate.  Many look at an insurance company and think “vast profits”, but in actuality, with the amount of claims payouts, many of them become insolvent.

Hurricanes Laura, Delta, and Zeta made property insurance companies pay out over $10 billion in payments for damage related to these storms.  Hurricane Ida, one of the deadliest hurricanes in the past decade, single-handedly exceeded $13 billion in claims payout alone. This proved to be too much for many insurers and they had to “pull out” of the state of Louisiana.

This left many homeowners without insurance in the interim, as other insurance companies tried to take the burden off these homeowners and continued to insure them. Yet it wasn’t always a smooth transition, leaving homeowners without insurance for a period that would risk no compensation or claims if anything were to happen to their homes, hurricane or not.

Why isn’t Reinsurance enough?

A common practice in the insurance industry between different insurance companies was the practice of reinsurance. In short, this happens to diversify the risk between various insurance companies, where one insurance company buys several policies from other insurance companies. It is like a secondary market that benefits the buyer with additional insurance premiums and helps the original insurer in the event of a major disaster and needing to pay the entire remuneration to the policyholders.

While in theory, this feels like an ideal option, because of so many back-to-back seasons of terrible storm seasons and with the recent Hurricane Ida disaster; the insurance companies within the state are taking a second look before considering offering reinsurance plans. Unfortunately, this leaves those holding insurance policies with no safety the next time there needs to be a payout for these devastating storms.

There have even been talks about how some insurance companies that are based in Louisiana and other high-risk areas are starting to redline these insurance policies simply because of the historical implications that payouts will need to be made and carrier insolvency could happen due to the number of claims being filed.

What happens if my insurance carrier becomes insolvent?

As has already happened in the state of Louisiana, some insurance carriers may have to make so many payouts that they become insolvent. This means that they have been deemed not possible to be rehabilitated and are so far past bankruptcy that there is a chance the insurance policyholder may not be able to get their claim. There are several ways this can happen and some fail-safes are in place to get a policyholder their money. First, in Louisiana, there is the Louisiana Insurance Guaranty Association (LIGA) that may help to be able to pay off the claims depending on the amount. At the same time, when the local government deems that there is no way for the company to meet its obligations, it will start to sell the local company assets and strive to liquidate these items to help pay off those claims.

There is also the possibility that there is a cash reserve with the insurance company that is specifically used when it reaches this type of carrier insolvency. So, it may be enough to pay out all or, at the least, partial amounts of the claims to try to help the policyholders before the company closes.

As previously mentioned,  there is the possibility that the policy may transfer to another insurance company that will take over the burden of trying to process the filed claim and getting the proper claims funded where possible. This final option is the one that seems to be happening more often in Louisiana, as it seems there are some insurance companies already following their predecessors that went out of business.

When working with an at-risk insurance company, be prepared to have the whole policy void with no refund of premium payments already made while at the same time budgeting for the fact that the user would need to pay fully out of pocket for the damage the storms have caused. Although we’ll discuss many strategies on how to reduce your premium payments, this is a perfect example of where having a larger deductible makes sense. Although the holder may end up paying more upfront to hit the deductible minimum, it also means spending less per month and saving up the funds. If the insurance company goes out of business, then at the least, the savings have been growing, and the deductible doesn’t matter.

At the same time, it doesn’t seem as if many new insurance companies are coming into the state to try to support the high demand for homeowner insurance needs due to the disastrous hurricane season. Some may consider taking legal actions at the same time, but that may prove to be anything but a sensible move. After all, the lawyers will charge a fee and there may be no place to try to get the money for the claim when the original insurance company simply leaves no more funds to be able to take if the case is won.

It simply means the few remaining insurance companies will have to manage all the claims out there, which will most definitely raise the insurance premiums by similar amounts over the next few years. This will not stop until more insurance companies are coming in and becoming competitors and more homeowners get insurance policies to reduce the overall risk burden for the insurance companies.

What role do Reinsurance Costs play?

Reinsurance plays a significant role in Louisiana’s home insurance market. Insurance companies buy reinsurance to protect themselves against financial risks associated with claims. By reinsurance, insurance companies can operate in more risky areas due to subsidized operations in less-risky areas. However, the cost of reinsurance is just like the cost of any other policy of insurance. Natural disasters are becoming more common throughout the world, resulting in insurance companies paying more for reinsurance.

Jim Donelon, the Louisiana Insurance Commissioner, confirmed that reinsurance rates are rising, and insurance companies will likely pass some of those costs on to policyholders. Due to the increased intensity and frequency of extreme weather events, such as major hurricanes, Louisiana has become a more costly state for insurance carriers. Considering the hurricane season of 2019-2020 alone, Louisiana homeowners faced significant rate hikes in 2021 and 2022.

Why is marketing hardening on the rise?

The final factor to consider with all these insurance issues in Louisiana is that while inflation does not directly affect the insurance market, there is something similar in the insurance market called market hardening. This is where insurance premiums tend to go up, but no increased benefits exist.

As many would assume, if they’re paying more, it must mean that there are more benefits to the overall insurance plan. Sadly, because of the prominent number of claims across the state and the data telling insurance companies that they will most likely need to do a payout, those premiums exist to help cover those costs.

In addition, there is a possibility that the benefits could go in the reverse direction, meaning the terms of the insurance policy are reduced. Some may see that they need to pay a higher premium and end up getting less coverage since the aggregate calculation has forced insurance companies to compensate for the risk versus the number of payouts combined with the total number of insurance policyholders.

Why does high-cost coverage cost more?

Higher coverage costs more. But repair and rebuilding aren’t the only costs covered. Homeowners insurance covers the home, additional structures, personal property, loss of use, liabilities and medical costs. Your mortgage lender mandates some coverage amounts and this added coverage will raise your costs.

Dwelling: This includes your home’s structure. A $250,000 house needs $250,000 in dwelling coverage, and a $150,000 house needs $150,000. A $250,000 property costs more to buy and insure because your insurer will have to pay more if it is damaged.

Structures: This protects sheds and fences from covered perils. Standard other structures coverage is 10% of your home’s dwelling coverage and may be non-negotiable, thus homeowners with more dwelling coverage will pay extra for other structures coverage.

Owned Personal Property: Personal property coverage is optional for homeowners and covers damaged furniture and electronics.  Keep a list of your valuable items. The more valuables you insure, the higher your premiums.

Loss of Use: The coverage pays for additional living expenses if a covered risk damages or destroys your house and you must temporarily move out. Standard loss of use coverage is 20% of your dwelling coverage, but you can reduce or increase it to lower or raise your premiums.

Liability: Liability coverage pays for medical claims, property damage, and legal fees if you are accountable for an accident. If someone is hurt on your property or you damage someone else’s property, your homeowners insurance can help pay for the losses. Standard coverage is $100,000 per claim, but you can raise it to $500,000. If you need $1 million or more, buy an umbrella policy.

Medical expenses: Medical payments coverage pays for on-premises injuries. Increasing or decreasing coverage limits won’t significantly affect your premiums.
The more extensive your insurance, the more it will cost. Depending on your specific needs, you may want to get supplemental insurance in addition to or instead of homeowner’s insurance. If you reside in a high-risk location for natural disasters like earthquakes and floods and still want house insurance, you’ll likely need to buy additional coverage. According to a poll that Consumer Reports conducted, hailstorms are the number one cause of property damage that leads to insurance claims. Hail damage may result in an additional cost being assessed.

Why does making a claim result in a 3 to 30 percent homeowners insurance increase?

After making a claim, your insurance premiums will increase. After filing a claim, your homeowners insurance premiums may increase because your insurer may conclude that you are at a higher risk for future claims. This is especially true for insurance claims that involve things like flooding, dog bites, and burglary. Property insurance proactively increases your premium to account for the possibility of yet another claim payout.

Insurance premium hikes following claims are situational, as previously indicated. Some claims influence insurance premiums more than others. If you fit into any of the following categories, you can anticipate a rate increase after filing a claim:

Bad weather is common where you live.

Your neighborhood has a high crime rate.

In the past, you have tried to file claims for damages.

You are the owner of a property that has been the subject of multiple insurance claims.

You’ve submitted multiple claims throughout the years.

If you submit a liability claim instead of a property damage claim, your rate will likely increase. Liability claims increase the likelihood of being sued. Both you and your insurance carrier are taking on many extra risks if a legal dispute ends up in court and a settlement is reached.

Depending on the nature of your claim and the number of claims you’ve filed in the past, you could notice a rise anywhere from nine percent (9%) to twenty percent (20%) for each claim.

Why does my credit history affect my insurance rates?

Your homeowners insurance rate can go up or down depending on how you use credit. When determining premiums, insurance companies are permitted in certain jurisdictions to consider a customer’s "insurance score”, which is derived from their credit history. Your insurance score is different from your credit score and based on some of the same characteristics, like the amount of debt you have and your payment history. It is possible to raise your insurance score by using the same strategies that you would use to raise your credit score, such as ensuring that all your credit card bills are paid on time.

Insurance scores, which measure your statistical likelihood of claiming, are another factor that determines your home insurance rates. In addition to your credit score, insurance companies also consider your claims history when determining your insurance score.

The lower your insurance score, the higher your premiums will be, so if your credit took a hit or if you filed a claim or two within the last year, your homeowners insurance will rise.

How does the cost of my home and rebuilding it affect my insuraance rate?

There is a direct correlation between the value of a home and the cost to insure it. Many of your premium dollars will go toward paying to restore or rebuild your house. The average NAIC price for the most prevalent type of homeowner’s insurance policy varies by coverage quantity, as highlighted in recent research by the National Association of Insurance Commissioners.

To estimate how much it will cost to rebuild or repair a house, we need to know how much a typical house in the area costs to build. The home’s construction, architectural style, whether it was built to the homeowner’s specifications, and the presence of unique elements like fireplaces are all considerations.

Does the location of my home impact my homeowner insurance costs?

One of the most significant elements in establishing the cost of homeowners insurance is the location of the risk. Data from the National Association of Insurance Commissioners shows that in 2021, Louisiana residents paid an average of $3,967 for their premiums, which is nearly three times the amount that Oregon homeowners ($659) paid.

One reason for this astonishing imbalance include natural disasters such as hurricanes, wreaking havoc on coastal regions like Louisiana and Florida and forcing insurers to pay billions of dollars in damages.

Your locality and zip code within a state also plays a role in determining the cost of homeowners insurance.  City dwellers might expect to pay more for homeowners insurance than those in more rural locations, as the cost of a home is higher in urban areas.

Does the age of my home affect my homeowner insurance costs?

A burst pipe or roof leak is one of the most common causes of insurance claims. The cost of these types of homeowners insurance claims is also among the highest. At renewal, if your insurance company finds that you need new plumbing or your roof needs replacing, it may increase your rates to account for the high risk of claims. Because of this, your premium could either go up or your policy may be nonrenewed.

What is an "attractive nuisance" and how does it affect my homeowner insurance costs?

Since swimming pools, trampolines and even house pets attract children to your property, insurance companies consider them "attractive nuisances." To compensate for the higher probability of expensive liability claims, your insurance company may increase your rates if you add a pool to your home or get a new four-legged friend.

How is inflation affecting my homeowner insurance costs?

To make matters worse, the price of goods has been steadily increasing, leading to smaller budgets, even though insurance needs to be a priority. While the cost of insurance thankfully has not risen due to inflation; it still appears that way in some cases.

Homeowners insurance is necessary in many cases and cannot be avoided. This fact puts less money into savings, which is a huge risk factor for many families who may be living paycheck to paycheck.

On top of that, it is common with this type of inflation rate and interest rate hikes to combat this inflation which then tends to lead to a recession. This can have an immense economic impact on many that are struggling to pay the bare necessities for the overall home budget, including their insurance premium. While this is only an indicator and not a guarantee that the U.S. economy is headed in this direction, it still is something to consider for any homeowner in Louisiana currently.

If your roof needs to be replaced or you recently filed a claim, your insurer may raise your rates due to something within your control. However, the reality is that home insurance premiums are increasing everywhere due to the surge in labor and construction costs over the next two years due to supply chain issues and record inflation.

You are charged based on how much dwelling coverage you have in your policy. Dwelling coverage pays to rebuild your home if it is damaged or destroyed. Homeowners require more significant dwelling coverage limits due to the rising cost of rebuilding due to inflation. The outlook is even more grim in areas already prone to natural disasters. These factors have led to a rise in home insurance rates.

How does rising material costs affect my homeowner insurance rates?

If a home is damaged or destroyed, the cost to repair or rebuild it is another important factor when pricing homeowners coverage. The following factors have contributed significantly to the rise of these costs:

– There is an increase in demand for home renovations in general.

– New construction demand is generally increasing.

– Global and domestic supply chain disruptions.

Due to these factors, most building materials are in short supply and expensive, which can cause your premium to go up significantly.

What is 10% Surplus Contribution and how does it affect my rates?

Surplus refers to the additional cash that insurance companies are required to keep on hand if the premiums are insufficient to pay losses. Consider "surplus" to be the same thing as the savings account that an insurance provider maintains.

What is "Carrier Insolvency" and how does it affect my rates?

Carrier Insolvency is another factor to affect the overall cost of homeowners insurance. Insolvent carrier refers to a carrier that has been declared insolvent, or unable to pay debts owed.  In addition, the insolvent carrier can also refer to a carrier as bankrupt. 

Things that impact your policy and ways you can save!

 

Average % Premium Difference

 

 

Average % Premium Difference

Having 1 Prior Claim in the Last 5 years

20%

 

Coverage C going from 0% to 70%

40%

Having 2+ Prior Claims in the last 5 years

39%

 

Coverage D going from 10% to 30%

8%

Poor Credit vs Good Credit from 601 vs. 750

28%

 

Roof Valuation going from Actual Cash Value to Replacement Cost

3%

Construction of Home – Frame vs Any Other

14%

 

E-Policy Discount

$10

Age of Insured Difference 32 vs. 66

4%

 

Hip Roof Discount

9%

Age of home pre 1950 vs. 2008

14%

 

Fire Alarm Discount

1%

New Roof Installed within the last 5 years

14%

 

Sprinkler System Discount

2%

Roof Material of home being wood vs. metal

16%

 

Burglar Alarm Discount

2%

Children in Home Surcharge

2%

 

Package Policy (None vs. flood)

1%

Smoker Surcharge

7%

 

New Home Purchase Discount 

3%

Wood Burning Stove Surcharge

2%

 

Having a Umbrella policy for the home Discount

6%

Open Water Surcharge

9%

 

Accredited Builder Discount

3%

Coverage A with a $50,000 Increase

12%

 

Married Discount

3%

Coverage A going from $100,000 to $300,000

90%

 

Having Secured Community Discount

3%

Coverage B going from 2% to 20%

12%