IRS Backs ‘Tax Exempt’ Status for La. Insurer of Last Resort, Says AIA

July 15, 2004

The Louisiana Citizens Property Insurance Corporation, the state’s insurer of last resort, received IRS approval for status as a “tax exempt” organization, according to the American Insurance Association (AIA).

The Louisiana Citizens Property Insurance Corporation (Citizens), the combined state-created entity of the Coastal and FAIR Plans, was created last year by the legislature to create a market of last resort for property insurance in Louisiana to help stabilize the homeowners insurance market.

“AIA played a key role in drafting the Citizens legislation to ensure the organization’s ability to meet the IRS standard for tax exempt status,” John Marlow, AIA assistant vice president, Southwest Region, said. “The goal was to allow Citizens to accumulate reserves with a tax-exempt status, thereby enhancing the claims-paying capacity for a catastrophic event. This would help to further stabilize the homeowners insurance market.”

Major components of the new corporation include the following:

• The new corporation is authorized to keep some of its revenue – tax free – to build up a “rainy day” fund from which claims could be paid after a natural disaster.
• If a major disaster hits and the reserve fund does not cover all of the damages, bonds can be issued to pay claims, and private insurance companies – which now face one large assessment for their share of those claims – can spread out the payments that would be made to pay off the bonds. Those payments can be passed on to the companies’ customers in the form of a surcharge.
• Safeguards have been instituted to keep the Coastal and FAIR Plans from becoming competitive with private insurers (e.g., the plans’ premiums in each parish must be 10 percent higher than the average rate charged by the private company charging the highest rate in the parish).
• The state is not financially responsible for the new corporation that will run the Coastal and FAIR Plans.

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