Insurance crisis could reshape Lafayette’s economy

Building covered in construction tarps
A law office along the Evangeline Thruway in the middle of hurricane damage repairs. Disaster claims have driven insurers from Louisiana. Photo by Travis Gauthier

Louisiana’s homeowners insurance crisis has made headlines as “the worst homeowners insurance market we have seen since hurricanes Katrina and Rita,” in the words of Insurance Commissioner Jim Donelon.

Homeowners across the state are feeling the pinch of rising costs and fewer options as the state recovers from a pair of devastating hurricane seasons that saw 11 insurance companies reach financial insolvency, pushed 11 more to withdraw from the state and led others to halt new business here.

The impact, tightening commercial and residential development, could upend the local economy and, in turn, crimp funding for local government. In Lafayette, where homeowners’ reliance on the state’s insurer of last resort more than doubled last year, the collapsing insurance market creates friction with a boom in the southern parts of the parish, which saw blockbuster growth over the last 10 years.

That threat transcends the private sector, particularly in areas like Lafayette, where local tax revenues for decades have been bolstered by economic growth rather than regularly increasing tax rates. 

Property tax revenue for Lafayette Consolidated Government grew by almost 30% in the decade between 2012 and 2021 even as millage rates remained basically flat. 

A potential decline in that growth adds another layer of concern to the insurance crisis, says Parish Councilman Josh Carlson, who is hosting Louisiana’s insurance commissioner for a town hall meeting at City-Parish Hall at 6 p.m. on Feb. 23.

“As the economy goes down, that’s going to affect local property tax and local sales tax revenue,” Carlson says. “That’s the risk that we see right now … I think we need to understand that while we have been riding the wave for a while, this might be the beginning of a downturn in the economy as a whole. And we need to be able to plan and prepare for that accordingly.”

Higher costs to build, buy and insure property are slowing builders’ ability to contribute to local economies with new development. That in turn puts a squeeze on the businesses that lease the facilities. 

Those challenges threaten to chill local economies by limiting the future growth of various business sectors and slowing construction work, which accounts for 7% of jobs in Lafayette Parish, according to LEDA. Add that to higher homeowners insurance rates for residents, and the potential for an economic slump becomes clear.

“Big picture, we’re certainly looking at an economy that is under stress,” says Dr. Stephen Barnes, director of the Kathleen Babineaux Blanco Public Policy Center and associate professor of economics at UL Lafayette. 

“We’ve got persistently high inflation supported by strong consumer spending and the Federal Reserve raising interest rates to try to cool things off,” Barnes says. “So when we look at something like increasing homeowners insurance rates … that is a big enough line item in a household budget that it does come back to the broader story of ‘Where are we with inflation and cooling the economy without pushing it into a painful recession?’”

Homeowners’ issues have made headlines, with thousands across the state losing insurance or paying dearly for new policies, but the state’s insurance crisis hasn’t spared commercial property owners and developers, who are also facing rising costs and a dwindling selection of insurance providers this year.

“Any commercial property owner — whether they own industrial, office or retail — if they’ve renewed their property insurance, I think they’ve seen at least a one-third [increase] up to a doubling of their premiums,” says Steven Hebert, president and CEO of Billeaud Companies. “That’s what I’m hearing, and that’s what our company definitely has experienced.”

This year’s substantial premium increases have come even after steady jumps in prior years, says Adam Loftin, vice president of development for Teal Realty & Development. He pointed to a 30% hike this year for insurance on a building the company owns in Youngsville as one example.

“That’s after probably a 12-15% increase last year. So, in the last few years, it’s gone up almost 50%,” Loftin says. “That really just starts to crimp your margins, and makes it a lot harder to operate existing buildings and then obviously to justify anything new.”

Insurance is also becoming harder to find for commercial properties, as 46 companies have opted not to renew existing commercial policies, not write new policies south of I-10 or no longer provide wind coverage in Louisiana, according to a May 2022 survey by the Independent Insurance Agents and Brokers of Louisiana.

“We’re seeing ourselves that you can’t really shop for these things because there’s only a handful of companies that will actually write policies on commercial properties like ours. A very small number,” Loftin says. “So, you really just have to kind of sit back and take it. There’s not a lot of options to do otherwise.”

Those challenges have combined with high construction costs and raised interest rates for a “kind of triple whammy,” Loftin says, that has chilled both new construction and transaction markets. 

According to Loftin, sticker shock on the premium for one property in Baton Rouge caused the whole deal to fall through: “We thought we had a pretty healthy assumption for what the insurance costs were going to be, and right at the last minute — thankfully, before we made a final offer — the estimate came back, and it was double the healthy estimate that we had,” he says. “We’re trying to get used to it. And every time you think that you have your mind around it, it’s an even bigger increase than you’re expecting.”

But there is optimism to be found in Lafayette’s future, despite concerns nationally about a recession, says Hebert, as development in the area has been strong coming off its recovery from the COVID-19 pandemic. “The market is very good. Prices are going up for everybody, and the insurance cost is a really, really big deal, but I’d rather be doing it in this market than the market we had a couple of years ago,” he says. “That was very difficult, and there was a lot of vacancy. We’re [now] well above our pre-COVID occupancy rates, so I’m really confident about the market.”