Overview of Catastrophe Funding Sources and Assessments
As the residual market mechanism for property insurance in the state, LA Citizens provides insurance for those entitled to, but unable to, obtain property insurance in the voluntary market. To ensure the viability of the residual market in times of catastrophe, state law grants LA Citizens the authority to assess companies when either the FAIR Plan or the Coastal Plan incurs a deficit for the plan year.
Existing Cash and Investments
In the normal course of business, LA Citizens utilizes its cash to pay claims, liquidating investments as necessary to meet demands. This “first line of defense” is no different in the event of a catastrophe.
Each year in accord with its Plan of Operations, LA Citizens buys reinsurance to supplement its claims-paying capacity in the event of a catastrophe. The amount purchased and the specific structure of the reinsurance program may vary year to year according to a number of business factors. As an example, the reinsurance structure for 2007 is shown below. Under the 2007 structure, in the event of a catastrophe LA Citizens would pay the first $100 million of losses. After that, reinsurance would cover 90 cents of each dollar over the next $400 million of losses.
event of a plan year deficit in either the FAIR or Coastal Plan, LA Citizens may
declare a Regular Assessment in an amount up to 10% of industry premium for the
assessable lines of business.
Companies writing those lines must remit the amount of the assessment to
LA Citizens, and may then subsequently choose to recoup that amount from their
policyholders over the course of the next year. (Policyholders may, in turn, claim that
amount as a credit against their
If the plan year deficit in either the FAIR or Coastal Plan exceeds the amount that can be recovered through Regular Assessments, LA Citizens may fund the remaining deficit by issuing revenue assessment bonds in the capital markets. LA Citizens then declares Emergency Assessments each year to provide debt service on the bonds until they are retired. Companies writing assessable lines must surcharge their policyholders in the percentage established annually by LA Citizens, and must remit amounts collected to the bond trustee on a quarterly basis. LA Citizens surcharges its policyholders the same percentages and also remits those amounts to the bond trustee. (As in the case of Regular Assessments, policyholders may claim amounts paid as a credit against state income taxes.)
The hurricanes of 2005 were so catastrophic that LA Citizens issued $978 million in Revenue Assessment Bonds to cover its deficit. Emergency Assessments to pay off those Bonds began in 2007 and will continue until 2025. If collections on assessments exceed bond requirements, that excess may be used to reduce future assessment percentages or may be used to retire the bonds before maturity. The graph below shows the projected Emergency Assessment percent projections as of 9/07.