[StBernard] LRA Releases Study Analyzing Cost and Impact of State Hurricane Catastrophe Fund

[Westley Annis]

LRA Releases Study Analyzing Cost and Impact of State Hurricane Catastrophe Fund 

BATON ROUGE, La. (March 28, 2007) - The Louisiana Recovery Authority (LRA) today released an independent actuarial analysis of the structural options, cost and impact of a hurricane catastrophe fund in the post-2005 Louisiana insurance market. The report was designed to serve as a tool for policymakers to make decisions on whether and how to design the fund by providing capacity calculations for the fund, financing sources and options, and evaluating the benefits and limitations of several optional structural components of the fund. 

The report evaluated the pros and cons of a range of design factors and considered: 
- The maximum financial capacity that a fund can support 
- The size and likelihood of potential hurricane losses to the state
- The cost (i.e., annual premium and potential assessments) of the fund
- The fairest way to allocate the costs of the fund to the policyholders and the citizens of the state

"Never before have we seen an independent evaluation of whether a catastrophe fund makes sense for Louisiana," said LRA Board Member Sean Reilly. "That is why we are proud to provide this comprehensive, detailed analysis to help resolve that uncertainty. Today marks the beginning of a great public debate on behalf of all Louisiana policyholders. Considering the insurance climate we are grappling with in post-Katrina and Rita Louisiana, we owe it to ourselves to examine every option at our disposal to ensure we are better prepared for future disasters."

The catastrophe fund study included different types of properties covered, including residential and commercial, and the effect of increased costs of rebuilding post disaster. The study also examined when the fund would take effect in response to the level of primary industry losses. Finally, the report analyzed the types of insurance lines eligible for assessment to support state bonding capacity in the event that fund losses exceed available cash, start-up capital contributed at the fund's creation and loss modeling assumptions used to calculate premiums.

The above factors are individual design options available to policymakers that will collectively determine the capacity, costs and benefits of a catastrophe fund.

To serve as the basis for evaluation of those options, the study outlined a base case scenario for the catastrophe fund with $1.25 billion in capacity that is based on several structural assumptions:
- The fund covers residential and commercial-residential properties statewide
- The layer takes effect after the first $1.25 billion in primary industry losses
- The reinsurance layer covers 90% of eligible losses
- The state provides an initial capital contribution of $100 million
- Post-storm assessments, if necessary, are placed on the following statewide lines of business: fire, allied lines, homeowners multiple peril, and commercial multiple peril (non-liability)

The analysis evaluated eleven additional scenarios using the criteria listed above to calculate the impact of a variety of design options on important factors like fund capacity and the probability that the fund will be tapped. The models also examined the possibility that losses will exceed cash reserves in the fund, triggering the need for state bonds to be supported by assessments on policyholders.

Capital for the catastrophe fund could be generated through several possible sources of financing:
- An initial capital contribution from the state, plus additional annual contributions if called for in the fund design;
- Annual premiums contributed by primary insurers supported by the fund
- Investment income generated on cash reserves in the fund
- Post-event state bonds supported by assessments on a variety of insurance lines statewide

The study, sponsored with private funds by the LRA Support Foundation, is an update of a 2003 catastrophe fund analysis completed by Paragon for the Louisiana Department of Insurance. That edition was updated based on the effects of highly active 2004 and 2005 hurricane seasons. 

Paragon, headquartered in Minneapolis, MN, has been the lead and lone actuarial services provider and fund administrator since the inception of the Florida Hurricane Catastrophe Fund. 

The complete report can be downloaded at: 
http://lra.louisiana.gov/assets/%5CParagonFinal032707.pdf 
<http://lra.louisiana.gov/assets/%5CParagonFinal032707.pdf> 

Hurricanes Katrina and Rita devastated South Louisiana, claiming 1,464 lives, destroying more than 200,000 homes and 18,000 businesses. The Louisiana Recovery Authority (LRA) is the planning and coordinating body that was created in the aftermath of these storms by Governor Kathleen Babineaux Blanco to lead one of the most extensive rebuilding efforts in the world. The LRA is a 33-member body which is coordinating across jurisdictions, supporting community recovery and resurgence, ensuring integrity and effectiveness, and planning for the recovery and rebuilding of Louisiana.

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