Firm Releases Study of Possible La. ‘Catastrophe Fund’

A private firm has released its study of how Louisiana would operate a “catastrophe fund,” one of several ideas lawmakers are considering to help ease the state’s property insurance crisis.

The study outlined a hypothetical “cat fund” that would provide reinsurance to the insurers that have homeowners policies along the coast. Insurers in Louisiana buy reinsurance to cover their own losses in a hurricane or tropical storm.

Spikes in the price of insurance companies’ reinsurance bills are one reason homeowners’ insurance rates have risen in Louisiana since the 2005 hurricanes. Supporters believe that creating a cat fund would help lower homeowners’ insurance bills, by providing lower-cost reinsurance.

Louisiana lawmakers are expected to use the study, by Minneapolis-based Paragon Strategic Solutions Inc., as a guideline when they consider whether to introduce legislation this year to create a catastrophe fund. Paragon administers the cat fund created in Florida after Hurricane Andrew hit that state in 1993.

In the study’s scenario, the fund would start with $100 million in state money. Its reinsurance would kick in after $1.25 billion in industry losses, covering 90 percent of eligible losses.

Gov. Kathleen Blanco has set aside $100 million to cover insurance issues in her budget proposal, but has not taken a public position on the cat fund idea.

Insurance Commissioner Jim Donelon has said he is skeptical about whether a cat fund would help lower insurance rates. Setting up a cat fund this year would also appear to conflict with a separate plan of Donelon’s: He wants to use the $100 million to create a fund that would provide financial incentives to insurance companies for writing policies in hurricane-prone areas.

Paragon received about $60,000 from the Louisiana Recovery Authority’s Support Foundation to produce the study, which was an updated version of a report the company did in 2003 for the Louisiana Department of Insurance. The company made no recommendations on whether the state should create such a fund.