Property/casualty insurers are urging North Carolina officials to impose surcharges on policies in the state’s residual market property insurer, the Beach Plan, and take other financing and mitigation steps to stabilize the state’s coastal property insurance market.
Insurance executives told lawmakers that if steps are not taken to improve the financial standing of the Beach Plan, both taxpayers and private insurance companies will foot the bill for any shortfall, and those potentially sizable assessments could bankrupt small insurers and force carriers out of the marketplace.
Insurers and officials, including incoming Insurance Commissioner Wayne Goodwin, have expressed concern that the Beach Plan (also known as the North Carolina Insurance Underwriting Association) is growing too fast at about $1 billion in insured properties a month. At the same time, actuaries say it does not have enough surplus to pay the estimated $7 billion in claims that could result if a major storm hit the state.
The North Carolina Insurance Department has already taken some steps to shore up the residual market, according to Kristin Milam, director of public information for the department. Last month it approved some rate hikes and higher deductibles that will begin in February. For homeowners policies in the residual market, insurers can now charge a differential of from 15 to 25 percent above the approved rates. For wind only policies, the new differential is from 5 to 15 percent above approved rates.
Also, the minimum deductible on wind policies was raised from one to two percent of the damaged property’s insured value.
Finally, the NCDOI raised from $750 million to $1.1 billion the amount of surplus the Beach Plan can retain.
But insurers made their pitches for more immediate and long-term changes before a legislative committee that is charged with coming up with funding solutions and other reforms to improve insurance markets and help homeowners mitigate storm losses.
As part of its extensive 22-page plan, the Property Casualty Insurers Association of America (PCI), whose member companies write nearly $690 million or 42 percent of the state’s homeowners insurance market, called for an immediate Beach Plan policyholder surcharge to build the plan’s surplus and then, if necessary, assessments of 10 percent a year on both policyholders and insurers to fund any losses after a storm should they exceed the plan’s surplus and reinsurance.
PCI did not specify an amount for the immediate surcharges but urged that the plan be required to maintain funding adequate to handle a one in 150 year loss.
For post-loss financing in extreme loss situations, PCI said there could also be an additional emergency surcharge against all property insurance premiums in the state, not just Beach Plan policies, capped at 10 percent a year. Currently, there is no limit on what these assessments can be.
PCI also urged a hike in the Beach Plan’s minimum deductibles so that they at least equal those in the private market, with optional higher deductibles made available; a review of the territories used in rating; and a statutory requirement that Beach Plan rates not be lower than private market rates.
The PCI plan would require evidence that a property has been declined in the standard private insurance market before allowing it to be insured in the Beach Plan.
PCI also urged grant programs and tax incentives to encourage North Carolinians to make their homes more resistant to storm damage and greater transparency in the administration of the Beach Plan.
Lynn Knauf, policy director for PCI, said her group hopes its plan can serve as a “valuable roadmap for lawmakers” as they try to come up with solutions in the next legislative session.
“North Carolina has been extremely fortunate in the last year to have escaped the landfall of any major storm,” said Robert Herlong, vice president and regional manager for PCI. “Now is the time to shore up the state’s insurance system and give North Carolina homeowners the protection they deserve. There are no easy answers, but every day that we delay, the problem gets bigger.”
The Beach Plan was established in 1969 to provide windstorm coverage to coastal homeowners in the barrier islands who could not obtain it through the private market but its scope has since expanded to include 18 coastal counties and a comprehensive homeowners policy that is broader than many private sector products.
The industry says that Beach Plan coverage is sold at rates that are inadequate given the high risk of loss. They say that by providing generous coverage and low deductibles at artificially low rates, North Carolina’s “plan of last resort” has become the first choice for most coastal homeowners.
Today, the Beach Plan insures almost $70 billion worth of coastal property and has been growing by nearly $1 billion each month. Yet, the Beach Plan has the resources to pay only about $1.5 billion in damages. The Milliman report estimated that a large storm could easily inflict more than $7 billion in damages.
Another insurer group, the American Insurance Association (AIA), whose member carriers write about 28 percent of the market in the state, also urged legislators to take action.
Raymond G. Farmer, AIA Southeast regional assistant vice president, testified that, first and foremost, the Beach Plan should be reformed to return it to a true “insurer of last resort” as it was originally intended.
“It is clear that there is a misalignment when more than half the state’s coastal exposures are insured by the residual market,” said Farmer. “Most immediately, Beach Plan premiums should rise to reflect the true nature of insured exposures in the state’s coastal areas. Beach Plan premiums should be reviewed at least once annually to ensure their sufficiency, and deductibles in the plan should be increased to be at least equivalent to private market deductibles.”
He also said that the Beach Plan’s deficit and debt service funding need to be modernized if private insurance capital is to be attracted to North Carolina. “For example, other states such as Florida and Louisiana have improved the ways that post-event assessments are recouped,” said Farmer. “Both states now allow post-event assessments to be recouped via separate policyholder surcharges, rather than via the ratemaking process.” He said this change would preserve insurer capacity to write business, while the ultimate impact on the policyholder is unchanged.
“The bottom line is that the Beach Plan must begin to live within its means,” said Farmer. “This requires reasonable funding mechanisms, such as charging adequate rates and securing a private reinsurance program, before assessments can be levied on insurers and, ultimately, non coastal residents.”
AIA said lawmakers should also take this opportunity to modernize its insurance rate regulation. North Carolina is the only state with both a “personal property only” rating bureau (there are only five states with property rating bureaus of any kind) and prior approval of rates.
Finally, the AIA representative, too, urged North Carolina to more fully embrace mitigation. According to Farmer, though North Carolina has adopted relatively strong ICC building codes, it weakened wind borne debris protections in these codes. He said this should be addressed, pointing to South Carolina, which adopted mitigation tax credits and loan programs as part of its 2007 coastal legislative package.
The third major insurer trade association, National Association of Mutual Insurance Companies (NAMIC), expressed particular concern that the exponential growth of the state insurance pool for coastal coverage could wipe out many smaller private insurers in the state in urging the legislative panel to take immediate action.
“Because the Beach Plan has drifted from its market-of-last-resort mandate, this effort is a must even though North Carolina has not experienced a significant storm in recent history,” Liz Reynolds, NAMIC’s Southeast state affairs manager, wrote in a letter to the committee. “In fact, it’s best that we make changes before a catastrophe creates the chaos and devastating market effects experienced by other states.”
North Carolina has a “vibrant market of single-state insurers serving a unique purpose” but “smaller insurers are at risk because they would have to take on a greater share of the market if the Beach Plan is unable to meet its obligations,” Reynolds wrote. “And because those companies operate only in North Carolina, they do not have the option of withdrawing from the state to focus on better markets elsewhere.”
Reynolds warned that many smaller, single-state insurers in North Carolina could go out of business after a hurricane if the Beach Plan is allowed to continue growing without the financial foundation to sustain increased exposure.
“Adequate rates are a must if we are to address the steadily increasing exposure to losses. And consumers must be empowered to take responsibility for risk reduction,” she wrote.
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