North Carolina’s woefully underfunded Beach Plan may get some relief if the state Senate doesn’t stray far from the course laid out in House Bill 1305, which passed the House by an overwhelming margin in July.
North Carolina Insurance Commissioner Wayne Goodwin said the prospect of the new legislation has not only changed the minds of some companies that were planning on leaving, but several new companies are asking to do business in the state.
Eli Lehrer, a senior fellow at the Competitive Enterprise Institute in Washington, D.C., where he directs studies of insurance and credit markets, said the insurance game is always based on a gamble.
“There’s no way to have total certainty,” he said. “What the insurance industry is asking is absolutely impossible. It’s all a matter of degrees. In general, it’s a good bill. It’s not perfect, but it will bring more competition to the state.”
The plan, also known as the Coastal Insurance Wind Pool, reduces the maximum coverage to homeowners from $1.5 million to $750,000, adds surcharges, raises coastal insurance rates, and re¬quires higher deductibles from homeowners of coastal properties should a big hurricane slam into the region.
H.B. 1305 won’t cure the problem, but it’s a start, said Lehrer.
“The House bill is workable,” he said. “It’s a step in the right direction. There’s a lot more that needs to be done. This is just a start.”
Rick Zechini, director of government affairs for the North Carolina Association of Realtors, agrees.
“Right now, it’s a really good bill,” he said. “We are interested in how the bill affects the coastal, Piedmont, and mountain regions. There has to be a balance in insurance availability and insurance affordability. Trying to figure out how to meet both of those needs is tricky, and I think the bill has done a good job of striking a balance.”
The beach plan was created 40 years ago to be the insurance of last resort for coastal property owners. But in 2003, the General Assembly expanded the plan by allowing it to provide cheaper policies for homeowners — coverage the insurance industry says is fiscally irresponsible.
The result: The plan faces a potential $65 billion deficit should a catastrophic storm, such as Hurricane Katrina, pulverize the state’s shoreline.
Before July, legislators largely ignored the problem, playing a game of political crapshoot with insurance companies and North Carolina homeowners.
At the time, they simply passed the bucks — billions of them — onto insurance writers in the state via assessments. If the Beach Plan ran out of money, the companies simply would shift their losses to unwitting homeowners.
For many years, this was the price insurance companies had to pay to do business in North Carolina.
It wasn’t until Farmer’s Insurance decided last summer to exit North Carolina, leaving 40,000 policyholders to find replacement policies, that the government’s bait-and-switch plan became apparent.
“The problem with the current system is that it’s so haphazard,” said Lynn Knauf, regional manager for the Property Casualty Insurers Association of America (PCI). “It’s been a Catch-22. One big storm and it can be wiped out. It could cause an insurance company meltdown and a statewide insurance market crisis.”
Goodwin inherited what he termed the “ticking time bomb” when he took office in January. He vowed during his campaign to defuse the problem and protect both consumers and the insurance industry.
He’s kept his promise.
“Many people have come to realize we need to address this bill now,” Goodwin said. “The longer we go, the more it’s going to cost. In this economy we need to resolve it now for both the consumers and the industry.
“The bill provides not only certainty for the insurance industry’s needs, but it also provides additional consumer protection,” he added. “It is not a perfect bill, (but) it’s a vast improvement over the status quo, and it’s starting to move us back to the market of last resort as originally intended.”
Knauf said the new legislation is long overdue. “Finally North Carolina has gotten a wake-up call,” she said. “The current system has been around 40 years, and it’s finally moving in the right direction. We don’t feel there is any more time to wait. If a hurricane ever hits, we need to be ready.”
Knauf said PCI would like to see some changes to the bill and have it pass through both chambers of the General Assembly this year.
Otherwise, the insurance industry will remain on the hook if a destructive storm hits the coast.
“There are things in the bill that are causing a lot of heartburn,” she said. “The cap is already enormous com¬pared to other hurricane-prone states. We’re glad to see they are addressing the deductible, but we wish they would have taken it a little further.”
Knauf warned the current bill won’t right all the wrongs to insurance companies wanting to do business in North Carolina.
The version of H.B. 1305 passed by the House is “not going to entice insurance companies to the state,” she said. “Right now, it’s a Band-Aid. When insurance companies have certainty, then they can calculate how much it will cost to do business in the state.”
Both Goodwin and Lehrer disagree, saying the effects of the legislation are being seen already in increased competition.
Karen Welsh is a contributor to Carolina Journal.