The oil and gas industry's nerve center near the open Gulf in Port Fourchon will be particularly at risk when a major storm hits. The region has become increasingly exposed to the threat of flooding, storm surges and wind damage because of coastal erosion. Not only could a storm surge cause significant damage, but the port facilities are linked to the mainland by a two-lane road that likely will be washed out in a big storm.
(PHOTO BY ELLIS LUCIA / The Times-Picayune)

Louisiana's insurance difficulties are part of a larger problem shadowing the south Louisiana economy: There is more to lose and there are more ways to lose it than ever before.

More people, buildings, industrial sites and infrastructure sit in potential paths of destruction, and those paths are widening thanks to sinking and erosion.

"We are continuing to lose land, and each acre, each square mile lost increases the risk of significant damage during a storm," said engineer Peter Smith of the firm Waldemar S. Nelson, who is directing a study on the economic impact of erosion and storm hazards for the Army Corps of Engineers that will be completed next year.

In the New Orleans area, meanwhile, levees protect against smaller storms but can trap the floodwaters from large storms and create almost unimaginable -- and unimaginably expensive -- damage.

Louisiana hasn't seen a storm with damage in the billions of dollars since Hurricane Betsy in 1965. But the companies operating in the state face a sometimes perverse logic: If the odds favor something bad occurring in the future, it costs money in the present.

As waters have advanced, south Louisiana has begun to feel a growing economic pinch from higher insurance premiums, home-building costs and public and private outlays to try to hurricane-proof everything from roads to oil and gas facilities.

The economic dynamic is complex. In the short run, some spending may stimulate the local economy. But the geological forces eroding the Mississippi River delta cannot be stopped. As costs rise, governments, businesses and individuals may ultimately have to weigh whether to keep spending or to give up.

Risk in south Louisiana varies depending on location. Towns in the marshes such as Cocodrie often flood but are small and don't rack up large-scale damage. However, a storm that floods the east bank of Orleans and Jefferson parishes, trapping water inside the levees, would cause damage on a scale unseen in the United States. Other places, such as St. Bernard or St. Charles parishes, fall somewhere between those extremes.

A 1998 report on Louisiana's insurance risks estimated the potential insured damage from a catastrophic storm at $27 billion for just homeowner's and auto insurance, excluding flood damage and industrial and infrastructure losses sure to make up a large part of the cost. New Orleans insurance executive Woody Crews says a catastrophic flood in New Orleans and Jefferson Parish would result in $100 billion to $150 billion in damage, seven times the amount spent so far on the war in Afghanistan.

A generation ago or longer, those numbers would have been substantially lower. But today cities and towns sprawl over wider areas. More businesses and more infrastructure are in place. East Jefferson, a semirural area when a hurricane flooded it in September 1947, is now a densely populated suburb.

"In 1965, Betsy cost $5 million to State Farm," Stephenson said. "Projections looking at the same storm say it would cost us $1 billion today because there has been a huge proliferation of building on the same land, and the value of the land and what's on it has increased dramatically."

Rising insurance costs are the most obvious result of these trends. Two main sources of insurance are available: The federal government offers flood insurance through private companies, which themselves cover wind and other storm-related damage.

Keeping roads passable and homes dry is a constant battle for state, local and federal officials. Here, St. Charles Parish officials and the National Guard hastily constructed a 2-foot levee to keep floodwaters from Tropical Storm Frances away from homes on Up the Bayou Road in Des Allemands in September 1998.
(PHOTO BY THOM SCOTT / The Times-Picayune)

After Hurricane Andrew in 1992 stunned the insurance industry with unexpected 11-figure losses, insurance companies gradually restructured the way they cover coastal areas. Part of the effort is making sure they have sufficient resources to cover a catastrophe. They now use a combination of more readily available, but sometimes expensive, reinsurance coverage, risk-based securities and other ways of spreading the costs of the added risk.

A key element of the changes was to stop giving a break to coastal areas, which had for years enjoyed rates subsidized by less-disaster-prone customers elsewhere in the country. Until Andrew, companies used crude estimates of potential storm damage based on their payouts from previous years.

"Using historical data does not give a good estimate of what our exposure is," said Jeff McCarty, a State Farm actuary. "At most we have 20 years of data, and during that period there has been a lot of exposure increase. It has also been something of a lull period for storms."

So companies contracted with computer modelers to develop sophisticated programs to map risk in coastal areas. One program, called EQECAT, uses 120 years of storm data to estimate the risk of hurricane-force winds hitting a given area. It then calculates the potential damage to insured properties, along with income from premiums and the costs of reinsurance, to get an estimate of annual claims for insurance companies in the long run.

The numbers run significantly higher than they did using older methods, insurers say, and have led to higher rates and deductibles, and sometimes have prompted companies to pull out of affected areas.

In Louisiana, private insurance coverage is retreating as waters rise. Sixteen companies now offer coverage south of I-10, compared with 60 before Andrew, according to acting state Insurance Commissioner Robert Wooley. Louisiana's costs put it near the top in terms of insurance premiums in the nation.

Rising insurance costs for homeowners in Louisiana's coastal areas have outpaced the rest of the state by 20 percent to 30 percent over the past decade, state Department of Insurance actuary Richard Piazza said. The biggest single change is in the deductible. Formerly a fixed amount, deductibles are now typically 2 percent to 5 percent of the value of the home, though that can be avoided if a customer pays higher premiums.

In Rapides Parish in central Louisiana, State Farm's insurance premium on a $100,000 home with a $500 deductible would be about $880 depending on individual circumstances, Stephenson said. But in Jefferson Parish south of the Intracoastal Waterway, the cost is almost double: $1,633 annually. Even in protected suburban areas, it's $1,046.

Federal flood insurance can add another $375 to $1,500 for a $100,000 single-family home, depending on whether it is in a flood hazard zone, putting total bills well over $2,000 annually. The U.S. average for homeowner's insurance is currently $533, according to the Insurance Information Institute.

The situation has put the state in a vicious cycle: The more risk there is, the higher rates go and the fewer companies there are willing to offer coverage. The fewer companies there are, the less competition there is to keep rates lower.

The state's own public insurance plans for homeowners -- intended as a last resort for those unable to get coverage elsewhere -- have ballooned from 0.4 percent of the market pre-Andrew to approximately 6 percent this year, Piazza said, because of rising costs and companies pulling out. Officials are looking at raising rates to get that percentage down again and now spend much of their time trying to persuade more companies to write policies in coastal areas, Wooley said.

"In Louisiana we're starting to run into an availability problem, especially below I-10," Wooley said.

In the past month, for example, one of a half-dozen Lloyd’s of London syndicates offering insurance in the state pulled out of the homeowner's market in the area, leaving hundreds of homeowners scrambling to find new coverage.