A North Carolina joint legislative study committee began hearings on Sept. 30 regarding the financial health of the state’s Insurance Underwriting Association, a.k.a. the Beach Plan.
The Joint Select Study Committee on the Potential Impact of Major Hurricanes on the North Carolina Insurance Industry held its first public meeting to begin examining the Beach Plan and the ability of the state’s insurance system to handle a large storm.
Insurer trade groups see the committee’s establishment as a positive step in dealing with the potential of statewide assessments on insureds when the next major storm hits North Carolina.
Robert Herlong, vice president and regional manager for the Property Casualty Insurers Association of America, said insurers are concerned that North Carolina’s current property insurance system is not prepared for a major storm.
“We want to prevent a serious problem that could spell financial disaster for the state and its citizens,” Herlong said. “The Legislature has taken an important first step by convening this study committee. This study committee creates an opportunity for consumers, public policymakers and insurers to examine the current market conditions and work together toward strengthening the state and protecting homeowners.”
Herlong said PCI commissioned a study to examine the financial capacity of the Beach Plan and how this will affect insurers and consumers.
“It is critical for the state to obtain an accurate assessment of the effect that a major hurricane could have on the Beach Plan and the insurance marketplace,” Herlong said. “North Carolina residents need predictability when it comes to their property insurance bill and the threat of future insurer assessments only adds uncertainty for everyone.”
Raymond G. Farmer, American Insurance Association assistant vice president, Southeast Region, said the North Carolina Beach Plan is one major hurricane away from financial disaster.
“After a major storm there would likely be significant assessments on private insurers, and the only option for recouping those assessments is through the rate-making process,” Farmer said. “Depending on the size of the storm, that scenario could put the health of the private market at risk, not to mention that non-coastal residents will be subsidizing the coast.”
According to risk modeling firm AIR Worldwide, North Carolina has $133 billion in insured coastal exposure, representing 9 percent of the state’s total insured value. The Beach Plan’s insured exposure now exceeds over half of the state’s entire coastal exposure: $69.8 billion as of June, with over 153,000 policies in force, and a probable maximum loss of almost $4 billion, but with reserves and reinsurance totaling only $2.5 billion.
The Beach Plan, has experienced unprecedented growth in recent years in both its insured exposure and policy count throughout the 18-county coastal area it covers.
The program was created nearly 40 years ago to provide wind damage insurance to homeowners on North Carolina’s barrier islands who couldn’t obtain coverage on the open market.
Lee Dunn, the plan’s assistant general manager, told the committee the program is prepared to meet $2.4 billion in claims from the up to 170,000 coastal properties it covers, using $500 million in cash reserves as well as reinsurance.
But it also would require insurance companies to be charged hundreds of millions of dollars in assessments, which often get passed along to policyholders outside of the 18-county area. More assessments would be necessary for larger storms, which worries the industry.
Farmers Insurance, the ninth largest insurer in North Carolina, said in August it was pulling out of the homeowners’ market because of the potential assessments.
The committee could recommend that all coastal premiums be raised to encourage companies to write more private homeowners’ and wind-damage insurance policies for consumers and reduce pressure on the Beach Plan.
The Beach Plan charges 15 percent above what regular insurers offer, so higher premiums would provide an incentive for traditional insurers to write policies while providing more revenues to the Beach Plan.
State Rep. Bonner Stiller, D-Brunswick, said rates already are too high and blamed the industry for pulling out of coastal markets while continuing to write policies inland even though hurricanes cause damage there too.
Stiller recalled how his father was quoted $621 for regular homeowners’ insurance but $2,432 for the additional hurricane coverage.
The coastal premiums are “just crushing folks that have been long-term residents,” he said.
But data presented by the Beach Plan show that North Carolina’s hurricane insurance premium rates are among the lowest when compared to other Southeastern states with similar plans.
“I don’t have a lot of sympathy for the guy with the million-dollar home who has to pay a little more insurance,” said Rep. Bruce Goforth, D-Buncombe.
The committee also is likely to examine whether improving building codes or encouraging preparedness can minimize damage when a big storm hits the coast.
Sources: Property Casualty Insurers Association of America
American Insurance Association
The Associated Press contributed to this article
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