Local insurance hikes will be steep

Local insurance hikes will be steepTHIBODAUX – Insurance-rate hikes for Louisiana Citizens policy holders will be much higher in most parts of Lafourche and Terrebonne parishes than the 7 percent statewide average.

Set to go into effect April 1, premium increases for policyholders with Louisiana’s insurer of last resort will be 22 percent for Terrebonne Parish residents north of the Gulf Intracoastal Waterway and 33 percent south of the Intracoastal Waterway.

In Lafourche, Citizens’ customers south of the Intracoastal will see a 32 percent increase. The only local area falling below the state average will be in Lafourche north of the Intracoastal. Policy holders there will see a 6 percent increase.

The 7 percent average increase statewide is the outcome of a settlement between the state Department of Insurance and Citizens, It falls below the hike proposed by Citizens in October.

Projected to produce $15.3 million of additional revenue for Citizens, a state-sponsored insurer, the 7 percent change is part of a plan to ensure its premiums stay above the offerings of private companies.

The intent is to move policyholders away from the state-sponsored program and to a private insurer, according to Insurance Commissioner Jim Donelon.

Citizens primarily provides homeowner coverage for people who can’t find it elsewhere.

The rate hike proposed in October, approved by a 4-3 vote of Citizen0’s board members, meant Lafourche and Terrebonne customers were looking at increases as high as 43 percent in some coastal regions.

But the estimate used to compute the increase wasn’t on par with actuarial standards and was tossed, Donelon said.

The department must choose the higher of two homeowner premium estimates, in accordance with a state’s law intent on encouraging private competitions. One is based on surveying companies about their rates, and the other is based on a formula evaluating risk.

Donelon said he took the market estimate, which was lower, after staff members noted the other estimate included unaudited data.

The April hikes, which will come when policies are renewed, could be just one of two increases this year.

April’s increase is a 2008 rate adjustment, necessary because John Wortman, chief executive of Citizens, wants to avoid risking a delay for the 2009 rate analysis.

Citizens will begin that rate analysis between April and June, so policies renewing in the fall could experience the 2008 and 2009 spike at the same time.

AIG Canadian Arm May Be Sold in Days, Consultant Says

Jan. 9 (Bloomberg) -- American International Group Inc., the insurer rescued by the U.S. government, will probably sell its Canadian life insurance unit in the next few days, with the Desjardins Group among potential bidders, said a consultant who has advised AIG.

The sale “could be today, but I would suggest in the next 10 days or so,” said Byren Innes, a senior vice president with Toronto-based NewLink Group Inc., a management consulting firm. “The sale was expected to close by the end of December, but it’s dragged on a little bit.”

AIG, once the world’s biggest insurer by assets, is selling businesses to repay a $60 billion loan that’s part of the U.S. government’s rescue package. The units on the auction block include a jet-leasing company and life insurance divisions from the U.S. to Japan.

Potential buyers include Desjardins, Canada’s biggest credit union, Innes said today. Montreal-based Desjardins offers individual and group life and health insurance and runs brokerage and lending operations, primarily in the French-speaking province of Quebec. The AIG purchase would add to the firm’s distribution network outside Quebec.

AIG sells products including life and health insurance in Canada, according to its Web site. Peter McCarthy, chief executive officer of the Toronto-based AIG Life Insurance Co. of Canada, didn’t return a call seeking comment.

Desjardins spokeswoman Isabelle Truchon declined to comment, as did David Monfried, an AIG spokesman in New York.

To contact the reporters on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

Flawed Deposit Insurance Programs Need Reform, Banking Expert Says

Government insurance programs that safeguard bank deposits should be reformed to ease taxpayers’ undue stake in propping up the nation’s banking system, according to research by a University of Illinois finance professor.
George Pennacchi says the Federal Deposit Insurance Corp., created during the Great Depression to halt bank runs, is supposed to protect savings through premiums paid by banks, but is effectively subsidized by the U.S. Treasury, putting tax dollars at too much risk.

“We have a system where when things get bad, taxpayers end up being forced to pay for bank failures, not just the FDIC,” Pennacchi said.

Proof that deposit insurance has grown overly generous has surfaced amid a global economic meltdown, he said, with investment firms such as Goldman Sachs and insurance giant Hartford Financial becoming banks to get access to insured deposits.

“One of the reasons why that’s so, and I think this has been a long-standing problem, is that government has tended to subsidize deposit insurance, sort of through a back door,” Pennacchi said. “The savings and loan crisis is an example. Instead of premiums paid by thrifts covering the losses, about $124 billion came from taxpayers.”

He proposes reforms in a research paper that will be presented this month at an economic conference sponsored by the American Enterprise Institute, a conservative-leaning, Washington-based think tank that seeks to influence public policy.

One reform, Pennacchi said, is veering away from an approach that provides nearly unlimited government financial backing when large institutions such as Bear Sterns are on the brink of failure. The government, he says, deems some banks “too big to fail,” with so many connections to other financial markets that failure could net a disastrous domino effect.

But he says the problem can be addressed without leaving taxpayers on the hook. He proposes a central clearinghouse requiring banks to put up collateral in derivative trading that would cover potential losses if one of the parties fails.

“That would get rid of the too-big-to-fail problem and is done all the time with exchange-traded derivatives,” Pennacchi said. “If you trade on the Chicago Mercantile Exchange, there’s a clearinghouse that requires both parties to put up collateral, so if one of them fails it doesn’t cause a loss for their trading partners.”

He says the FDIC should also reform premiums for deposit insurance that have historically been artificially low, covering only average losses and heightening risks of a taxpayer bailout in the event of widespread bank failures.

A move toward rates charged for similar, private-market insurance, such as credit-default swaps, would likely yield significant premium increases, roughly doubling current rates, Pennacchi said.

“But I think that’s the minimum that needs to be charged to protect taxpayers and prevent the government safety net from expanding even more,” he said.

Pennacchi also advocates either abandoning a dedicated deposit insurance fund, managing the program through the treasury instead, or creating a swap market that would level out banks’ premiums.

He says banks could lock in deposit insurance costs through a premium swap market, rather than paying higher premiums when bank failures rise and receiving rebates on premiums when failures are low. The swap market would be similar to interest rate swaps, transferring risk to investors outside of the banking industry.

“If there’s any reform that would be easy to do it would be to create this premium swap, which would lead to more stability for banks because they wouldn’t face high premiums in bad years when they’re least able to pay,” Pennacchi said.

His research will appear in a book that will be published this year by the American Enterprise Institute. The book will focus on government guarantee programs ranging from the FDIC to crop and terrorism insurance.

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