This week’s “Daily Journal” guest columnist is Eli Lehrer, senior fellow at the Competitive Enterprise Institute and author of the John Locke Foundation Policy Report, North Carolina’s Beach Plan: Who pays for coastal property insurance?
Although thoughts of hurricane season conjure up images of devastated trailer parks, fearsome storm surges, and ruined roads, North Carolina has more to worry about than just the storm damage. Even one major storm could send the state’s finances into a tailspin.
The problems stem from something called, the Beach Plan: an “insurer of last resort” for coastal residents unable to find homeowners’ insurance on the private market. A government-mandated, industry-run entity, the Beach Plan has little more than $2 billion in resources to cover a major storm that could result in bills of up to $8 billion. Its overall liability, furthermore, is growing at a rapid rate.
And the Beach Plan has no practical plan to cover the gap. Under current law, it would try to cover nearly its entire potential budget gap through special taxes on the insurance industry. National companies would take significant hits to their reserves: Farmers Insurance, then the ninth-largest carrier in the state, stopped writing homeowners’ policies in the state rather than face the possibility of the $50 million in assessments.
Smaller North Carolina-only companies would get hit harder. The assessments might leave them with insufficient reserves to pay claims. That scenario would force them out of business. A single bad storm could collapse North Carolina’s entire homeowners’ insurance market. Attracting back even a modicum of private-market homeowners’ insurance might require billions in taxpayer subsidies.
State Insurance Commissioner Wayne Goodwin has called the issue a “ticking time bomb,” and everybody who has studied it has called for change. North Carolina’s elected representatives are trying.
A bill making its way through the legislature (House Bill 1305) appears likely to fix the most glaring problems. It would end government-backed coverage for the wealthiest homeowners, limit insurance companies’ liabilities for the Beach Plan, raise rates for some consumers, expose many homeowners to risks of assessments of their own, shore up the Beach Plan’s own finances, and make modest reforms to its overall operations.
The legislature’s plan involves costs for many groups. Insurers still would have a risk of significant assessments, consumers would run the risk of higher taxes, and people in the Beach Plan would see their rates rise. On balance, however, the bill makes sense for North Carolina: it would keep private insurers in the state, secure state finances against a major storm, and might cut a few dollars off of homeowners’ insurance rates for those living inland. The higher rates, finally, should put a stop to the Beach Plan’s out-of-control growth.
The bill could use some improvements. In particular, the legislature would do well to limit the overall level of assessments. But overall, Commissioner Goodwin and the legislature deserve credit for working it out, and — if it comes to Gov. Beverly Perdue’s desk — she would do well to sign it.
That said, the bill doesn’t fix the Beach Plan’s long-term problems. This will require more work. Two steps appear to make sense.
First, individuals, insurers, and the government should do more to secure properties against storms. South Carolina, Louisiana, and, until recently, Florida all made major efforts to help people of modest means strengthen their homes. If it can find the money in a tight fiscal environment, North Carolina should do the same. The state, likewise, should step up efforts to discourage development in coastal wetlands (which provide a vital buffer against storm surge) and end any subsidies that encourage development in storm-prone areas.
Second, once the Beach Plan stops growing, the legislature should set its sights on shrinking it. Virginia faces more hurricane risk than North Carolina by just about every measure but has only a few hundred coastal homes in its equivalent of the Beach Plan. Even if a storm as big as Hurricane Katrina hit Virginia, taxpayers wouldn’t owe a penny for repairs of private homes. North Carolina should strive for a similar system.
The legislature has started to move in the right direction on the Beach Plan. It still has a long way to go.