All North Carolina Homeowners Could Pay If Insurers, Beach Plan Fall Short

Every insured homeowner in North Carolina could shoulder the cost of rebuilding if a massive hurricane hits under a deal taking shape in the Legislature.

The legislation (HB1305), expected to be detailed in a House committee this Thursday, aims to fix the Beach Plan, which insures 170,000 properties valued at nearly $74 billion in 18 coastal counties, according to the plan’s quarterly financial statement. The Beach Plan has the resources to cover just a fraction of the coverage it has committed to pay.

The bill would cap at $1.2 billion the amount of the Beach Plan’s underfunded promises that insurance companies would pick up. After the Beach Plan spent what it has available and insurance companies reached their limit, the obligations would shift to all property owners.

The measure would allow insurance premiums to rise by up 10 percent on every residential and commercial property to pay the Beach Plan’s claims after a massive hurricane or tough storm season.

“This is shifting the cost of insurance coverage from coastal residents to the remainder of the state,” said David Marlett, chairman of Appalachian State University’s Department of Finance, Banking, and Insurance.

Less than two months ago, coastal residents were hit with insurance premium increases of up to 30 percent.

The proposed legislation, which was provided to The Associated Press by Rep. Hugh Holliman, D-Davidson, who leads the Democratic House majority, says insurance companies would pick up costs that can’t be covered by the Beach Plan. The extra costs would be divided among the companies according to how much business insurance they do in North Carolina. That would be in addition to paying off their own policy holders and could be passed on to their paying customers.

There is now no limit on the pricetag insurers could face, and several have warned they would scale back their business or quit North Carolina altogether without a cap on their liability.

Marlett analyzed the Beach Plan’s financial condition while he was a member of a legislative study committee that proposed a series of remedies in January. The surcharge was not part of the panel’s recommendations, but several other suggestions are contained in the proposed legislation, such as cutting the maximum property value for a Beach Plan residential policy from $1.5 million to $750,000.

The Beach Plan’s administrators did not return calls seeking comment. Marlett estimates that the catastrophic surcharge would not begin hitting property owners statewide unless damage claims top about $3 billion.

There is a 1 percent chance that storms causing that much damage could hit North Carolina in any given year, according to Milliman Inc., an actuarial and consulting firm hired by the Property Casualty Insurers Association to assess the Beach Plan’s finances.

Hurricane Andrew caused $15.5 billion in insured losses after it struck southern Florida in 1992, causing insurance company bankruptcies and started the spiral of costlier coastal property insurance.

Louisiana, Florida and Mississippi are among the hurricane-prone states that have similar broad-based surcharges to pay for catastrophic hurricane damage, said Lynn Knauf, a spokeswoman for the Property Casualty Insurers of America, an industry trade association.

Insurance companies say the Beach Plan has kept its rates too low for too long, drawing business from their companies while also failing to stock up its surplus before disaster strikes.

“Without fixing the underlying problem, we can talk all day about how much a big storm would cost and where the money would come from,” Knauf said.

Some insurance companies have dropped North Carolina customers out of fear of having to cover the Beach Plan’s losses.

“I’d say the current system’s not working. It needs to be fixed or we’re going to lose insurers in the state,” Marlett said. “If the coastal residents are not going to be paying adequate rates, this is the best you can hope for.’

Topics Catastrophe Carriers Legislation North Carolina Property Hurricane Homeowners