Insurance policyholders across the entire state should brace for troubled waters ahead. The reason? The North Carolina Beach Plan, the state levy that insures coastal homes across the state, is under-funded by more than $65 billion.
Also known as the “Coastal Insurance Wind Pool,” the program was created in 1969 as a supplemental insurance of last resort. However, in 2003 the General Assembly approved the plan to write economically priced homeowners’ policies, quickly making it the first choice of coverage for most coastal residents.
As a result, the properties covered through the program skyrocketed from $18 billion to $70 billion in a few years. Experts agree the plan could collapse under a surge of claims if a major hurricane hits the state’s seaboard.
‘A ticking time bomb’
N.C. Department of Insurance Commissioner Wayne Goodwin, who inherited the problem when he took office earlier this year, said the program is an explosion waiting to happen. “The North Carolina Beach Plan remains a ticking time bomb until sufficient targeted reform is made,” he said. “It is the number one issue of my administration.”
The aftereffects of Hurricanes Katrina and Ike forced insurance companies to crunch the numbers and do the math. The bleak forecast was that the wind pool has only a small fraction of the funds in reserves. This has led some companies to pull their entire coverage from the state.
That has Goodwin concerned. “If recent and certain future reforms of the Beach Plan are not allowed to return the Beach Plan to being the long-intended (by statute) market of last resort, then private carriers might continue to leave North Carolina, and then that would harm all consumers,” he said.
“That’s unacceptable. My dual goals are to protect consumers and protect the solvency of insurance institutions. The two goals are inter-related and interdependent. We must meet the dual goals of consumer protection and ensuring a solvent insurance market.”
Tom Marshall, lecturer of risk management and insurance at the University of North Carolina at Charlotte, said it’s both a difficult and painful situation to deal with, especially in a major recession. He agrees, however, that Goodwin and the legislative study commission need to deal with it or suffer the consequences.
“With only a $500 million to $700 million surplus, one hurricane has the potential of wiping out the wind pool. Right now, the North Carolina Beach Plan can only pay out $2 billion max with reinsurance and cash on hand. If we have a $4 billion storm, everything would run out, and the companies would have to turn to assessments. The insurance companies can run the numbers and know what their assessments will be. A few companies have simply thrown up their hands and have already exited the state.”
Companies plan ahead
Remaining insurance companies have taken proactive measures to stem the tide of potential doom. Property Casualty Insurers of America (PCI) hired San Francisco-based Milliman Principal and Consulting actuary Nancy Watkins as a “neutral unbiased explainer” to assess the issue.
Similar to Goodwin, she found that the state’s coastal homeowner policies have “exploded” by a rate of $1 billion a month and that the state is unprepared to handle a major hurricane if one slams into the coastline.
“It has really ballooned,” she said. “PCI had a concern that the beach plan was potentially devastating to the state and the insurers in the state. What I found was that under various scenarios the beach plan’s funds would be exhausted.”
PCI public affairs manager Jessica Hanson said Watkins’ findings conclusively show the insurance market is in jeopardy. She said the company has worked hard to come up with meaningful strategies, but she warned that it will take a holistic approach, including raising rates, building stronger homes, and hardening existing homes, to fix the problem.
She said PCI presented its findings before the legislative coastal insurance study commission in December. She said PCI will keep working on the issues until the plan is solvent.
“We believe we can go into this (2009 legislative) session and make some changes and change the direction it is going,” Hanson said. “North Carolina always has a hurricane lurking. It takes only one storm to disrupt an entire state, so it’s better to work on this now before it’s too late.
“We’ve all seen what happened in Mississippi, Texas, and Louisiana. Texas still hasn’t had claims paid from Hurricane Ike. There’s been a lot of pain as a result of that. Millions of dollars haven’t been paid. We want to come up with a solution to protect both coastal homeowners and inland residents. We’ve been working with the legislative select committee to provide information. We want them to have these tools and policy proposals.”
Marshall said it is imperative for the Department of Insurance to create a stable wind pool to deal with potentially devastating storms in the future. He said coastal residents should expect higher deductibles and steady rate increases.
“It’s not hard for insurance companies to prove their need for the rate increase,” he said. “The surcharge and increase in deductibles are greater on the coast than their western counterpart.”
Opposition on the coast
Coastal communities across eastern North Carolina disagree. They have filed lawsuits and pushed for legislation to stem the tide of rising costs to policyholders.
Dare County Attorney Robert Outten said the rate increases, which took effect Feb. 1, are a blatant attempt to push policyholders away from the beach plan.
“[Former North Carolina Insurance Commissioner Jim Long] added a 10 percent surcharge to everyone’s homeowner policy, trying to run people out of the Beach Plan into traditional homeowner’s policies,” he said. “The problem is, there are no insurance companies writing those polices. They are pushing people into paying 10 percent more for no good reason at all.”
Outten said Long also raised their deductible from 1 percent to 2 percent on the value of the home and raised the coastal rates for fire and theft insurance, even though there is no greater risk of those dangers.
“None of it makes any sense,” he said. “It’s a huge problem in all the eastern North Carolina counties. There were no public meetings and no transparency in the decision-making process. They need to redress the issue. The claims history does not support the rise in rates and deductibles. There is no rhyme or reason where this is concerned.
“There’s a perception that the rest of the people are subsidizing rich coastal-owning people, but most are rural, low-income. These rate increases apply to some of the poorest people with the lowest incomes in the state that live in Tier 1 counties. This needs to be fair and equitable for everybody. We want to understand it. And, when we do, we’ll be fine with it.”
Marshall said the “sticker shock” of rising insurance rates along the coast can be expected. However, he said residents don’t have much of a choice.
“A rate increase is justified,” he said. “What the North Carolina insurance department is thinking is that they need to get the rates up a little at a time and not all at once so the insurance companies won’t stop writing policies in the state. The lawsuit is to put a moratorium on the rate increase. From my perspective, they don’t have a chance to win. It seems unlikely the court would overrule the state agency who is the expert in the matter. They have the authority to set effective rates and dates. It seems to me it is very remote that a group of people could win that.”
Karen Welsh is a contributor to Carolina Journal.