February 22, 2008
The Times-Picayune has published the results from a Louisiana market conduct exam outlining the troubles Citizens Property Insurance Corp. (the states third largest insurer) had in paying Katrina claims in 2005. The Louisiana Department of Insurance selected Citizens for an exam because it had the highest ratio of complaints to market-share of any company in the state.
Louisiana’s findings:
Citizens switched from using Audubon Insurance Co. , which had run the predecessor Fair and Coastal programs since their inception in 1970 using a proprietary computer system, to Bankers Insurance Co. , First Premium Insurance Co. and the MacNeill Group in 2005.
Litigation over the award of the contract delayed the implementation of a new computer system for Citizens until Oct. 1, 2005. Problems with that new computer system, combined with the fact that the three new companies contracted to run the insurance plan were not yet in place, left Citizens ill-prepared to handle claims.
Citizens Response:
It didn’t have the money.
After paying all policyholders in the hurricane-affected areas $1,500 in emergency cash advances and beginning work on claims, the company found itself strapped for cash. The program ultimately issued $1 billion in bonds to raise money, but the process took time.
What really happened (not part of the official investigation):
In response to lack of funds, Citizens adjusters started using every delay tactic is the books: undervalue losses, deny coverage, the insurer run around, the multiple adjustments.
Anything except tell the truth, we got no jack to pay you with. What do you think we are, an insurance company?
IMHO, Citizens should have had a much better disaster response plan in place. Hadn’t they anticipated a hurricane hitting Louisiana? It has happened before.
Here’s actuary 101 & disaster preparedness 102 :
- Realise your insurance system doesn’t have anywhere near the resources to pay for a major hurricane.
- Prepare your adjusters; tell them to tell people you’ll need a few months to make good on your promises.
- Give people realistic estimates of damages and the best service you can while you issue bonds and beg the Federal & State governments for money.
In the meantime, think of a realistic way to build a reserve large enough to pay for the next hurricane. BTW, there will be another hurricane.
