Massive storms test state and federal insurance plans
It would take a catastrophic series of events for state insurance money to go dry, but that doesn’t remove the burdens, experts warn.
Several storms similar to Hurricane Hazel in 1954 could see all state residents chipping in to pay for losses after North Carolina’s Coastal Property Insurance Pool is depleted.
The N.C. Insurance Underwriting Association provides the Coastal Property Insurance Pool, also known as the Beach Plan. It’s a pool of private property insurers intended to provide storm coverage to property in beach or coastal areas and a market of last resort for people who can’t get insurance in the private market.
The plan has more than 190,000 policies with $71.7 billion in total exposure. Before Hurricane Florence made landfall, R.J. Lehmann, senior fellow and director of finance, insurance, and trade policy for the R Street Institute, said the storm could seriously stress the Beach Plan.
“The Beach Plan may not have the resources to pay,” Lehmann said. “If it doesn’t, what it has to do is issue bonds, and those bonds are paid off with assessments. Assessments are on every policy in the state whether you’re on the beach plan or not.”
Former Insurance Commissioner Wayne Goodwin once described the Beach Plan as a ticking time bomb, but a 2009 law provided stability. House Bill 1305 granted the N.C. Department of Insurance the ability to raise home insurance rates for all residents to cover financial losses from the Beach Plan. The bill also limited assessment at $1 billion in the event of a major disaster causing a deficit.
But while the bill defused the bomb, taxpayers would still have to shoulder the cost if damage overwhelms plan reserves.
Gina Schwitzgebel, general manager of the Beach Plan, said the plan would have to exhaust several layers of finances, including at least $1.6 billion in retained earnings and $1 billion in member company assessments, before assessments on all homeowner policies are triggered.
“We have something called a catastrophe recovery charge, which is $326 million dollars. That is a one-time charge that could be assessed to policyholders,” Schwitzgebel said. “That is something we would prefer not to ever have to do is assess policyholders of the state. It really gets to be the point that it’s a phenomenal storm before it’s going to get into a policyholder type level of assessment.”
Hurricane Matthew, a devastating storm for many, didn’t come close to triggering the emergency recovery mechanism. The 2016 storm saw more than 10,000 claims, and a little more than $57 million was paid out.
While the Beach Plan is probably safe for another year, the National Flood Insurance Plan is another story. Lehmann said Hurricane Florence could add to the roughly $20.5 billion debt the National Flood Insurance Plan owes taxpayers already.
There are more than 184,000 NFIP policies in North Carolina with $33.7 billion in exposure. While it’s unlikely Hurricane Florence will completely wipe out the NFIP’s claim paying capacity, Lehmann said, it is likely to add to the existing debt.
“To come close to burning through all of the program’s resources, Florence would have to approach the record $16.3 billion the NFIP paid out in 2005 for Hurricane Katrina,” Lehmann wrote.
David Maurstad is Federal Emergency Management Agency deputy associate administrator for Insurance and Mitigation and the chief executive of the NFIP.
He told CNBC the agency is prepared to handle claims from Hurricane Florence.
“NFIP policyholders can know that we’re gonna be there to make sure they are treated fairly and receive every dollar they have coming from their NFIP policy that they purchased,” Maurstad said.
Lehmann said an extraordinary number of policies must be claimed before the NFIP runs out of money. The program, once it runs out of its own resources, has authority to borrow from the U.S. Treasury. A storm on scale with Hurricane Harvey or Superstorm Sandy could do the trick.
“The program is up for reauthorization again at the end of November,” Lehmann said. “There was legislation in the House last year that did a number of reforms but got nowhere in the Senate. We hope that a major storm will put it on the Senate’s radar, but I’m not tremendously optimistic.”
Lehmann cited the private sector. Congress could pass legislation to encourage development of the private flood insurance market, which is only now starting to emerge. In North Carolina, state lawmakers could encourage a more competitive insurance market, as well.
“We have to move to risk-based rates across the board, particularly for repetitive loss properties that only account for 2 percent of the policy but about a quarter to a third of all claims,” Lehmann said. “They should be paying risk-based rates, but in addition to that we can give incentives to do mitigation to raise their homes if necessary, or community grants given to build levees and dams to control flooding.”