The homeowners insurance rate increase disagreement between the North Carolina Department of Insurance (NCDOI) and the insurance industry is not over.
The North Carolina Rate Bureau (NCRB), which files rates with NCDOI on behalf of insurers writing in the state, is calling foul on a recent court of appeals decision agreeing with the state insurance commissioner’s rejection of a nearly 25 percent homeowners insurance rate increase. NCRB now wants to take its fight to the North Carolina Supreme Court.
The case refers to Insurance Commissioner Wayne Goodwin’s rejection of the bureau’s 2014 homeowners insurance rate filing that called for 24.9 percent increase. NCRB sought the increase on behalf of nearly 100 companies selling homeowners policies in the state. Insurers said at the time the increase was needed to cover expectations of a sharp rise in projected repair and replacement costs and the growing risk of catastrophic losses.
Commissioner Wayne Goodwin, however, disagreed with NCRB’s assessment, saying he found “no factors or events justified the excessive costs required by the insurance companies.” He instead ordered an average rate change of 0.0 percent on homeowners policies beginning in June 2015.
NCRB appealed his decision to the State Court of Appeals in Jan. 2014, but the court sided with Goodwin in August.
“The order reflects a careful, thoughtful, and thorough consideration of the evidence,” Judge J. Douglas McCullough wrote for the three-judge panel in its ruling, as reported by The Associated Press.
In its Sept. 6 request for discretionary review, NCRB says the appeals court erred in siding with Goodwin. NCRB says the appeals court’s ruling violates the constitutional mandate under the “takings clause” of the Fifth Amendment and the “due process clause” of the Fourteenth Amendment that a “regulated firm is entitled to an opportunity to earn a rate of return commensurate with the level of profit demanded by the investment market on business ventures of comparable risk…”
NCRB maintains that the rate increase requested back in 2014 on homeowners insurance policies is necessary for insurers to maintain the “cost of equity,” which is the prospective return that investors can expect to earn in the marketplace on investments of comparable risk.
“A regulated industry is entitled to earn a profit equivalent to the returns demanded by industries of comparable risk. In North Carolina, homeowners insurance is a regulated industry. North Carolina homeowners insurers are thus entitled to have rates set that allow them the opportunity to earn such a profit,” NCRB said in its review request. “Accordingly, insurance ratemaking procedures must ascertain the rate of return demanded by investors in industries of comparable risk, and the Commissioner must set an underwriting profit that will allow homeowners insurers to earn that rate of return.”
In reaction to Goodwin’s rate rejection, a number of homeowners insurers have since issued policies to customers with “consent-to-rate” provisions in order to set rates to what they say is necessary for them to continue providing coverage. Insurers are authorized to write at rates above the approved NCRB rates if they receive a written consent-to-rate from the policyholder.
According to the NCRB, the number of consent-to-rate policies has proliferated since the rate rejection and now comprises more than a third of homeowners policies in the state. NCRB also contends that the state’s residual market, or market of last resort that is typically only utilized by those in coastal communities who cannot get coverage from the private market, has also increased exponentially in recent years.
“In an otherwise competitive marketplace, where approximately 95 homeowners insurers write homeowners coverage in North Carolina, the fact that 40% percent to 70 percent of policies in beach and coastal counties are written in the residual ‘market of last resort’ and as many as one-third of homeowners policies are being written pursuant to consent to rate procedures is compelling evidence that homeowners insurers are unable to earn a reasonable profit at the rates approved by the Commissioner,” NCRB said.
Insurers said the rate increases were necessary for them to continue offering coverage in the state and make a profit that would satisfy their cost of equity. However, Goodwin’s rate rejection and subsequent order to set rates with an average of no increase only allowed for a 7.6 percent return of net worth for insurers – significantly below the 9.1 percent to 12.8 percent net worth range that insurers said was necessary for them to meet their obligations.
“[The 7.6 percent] profit [is] clearly below the minimum constitutional standard such that the ordered rates are confiscatory, amounting to a regulatory taking under the Fifth Amendment of the United States Constitution,” NCRB contested in its request for review. “The Court of Appeals’ judgment disapproving the filed underwriting profit provision and affirming the Commissioner’s ordered profit provision is in violation of the United States Constitution and should be reviewed and reversed by this Court.”
Goodwin respnded to NCRB’s request for review on Sept. 21, expressing frustration that NCRB is continuing the rate fight, saying “I rejected the insurance industry’s proposed rate increase because I felt it was unjust and the Court of Appeals upheld my decision.
“I am disappointed the insurance industry has decided to not only ignore but actively challenge my attempts to protect consumers regarding homeowner’s insurance rates,” said Goodwin.
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