The time bomb has been defused for now, but it still could detonate. That’s the word from state Insurance Commissioner Wayne Goodwin concerning the North Carolina Beach Plan after Hurricane Irene tore through North Carolina earlier this month.

As a result of wind damage from the storm, an estimated $177 million to $200 million could be siphoned from the N.C. Beach Plan, which has a reserve of $600 million. “The last few weeks I’ve been on the coast by land and air,” Goodwin said. “Hurricane Irene was an epic storm that hit the state. It had an impact on the beach plan, but because of the passing of House Bill 1305 in August 2009 it’s been able to withstand the storm’s impact. [Irene] caused a dent in the beach plan resources and reserves, but the state could withstand another major storm or a series of smaller storms if need be.”

That’s quite a change in tone for Goodwin. He called the beach plan, also known as the “Coastal Insurance Wind Pool,” a “ticking time bomb” a little more than two years ago.

Goodwin became concerned about the perfect storm brewing on the horizon as he witnessed insurance companies exiting the entire state in record numbers over the plan, which was underfunded by an estimated $65 billion at the time.

The North Carolina Beach Plan was created in 1969 as a supplemental insurance of last resort; however, the General Assembly modified the plan in 2003, letting it provide cheaper policies for homeowners. The new, low-cost option put insurance companies directly in the path of a financial storm, as it quickly became the first choice for coverage by policyholders.

Companies felt they would be stuck with up to $70 billion in recovery claims and go bankrupt if a category 3, 4, or 5 hurricane hit the coast, so a number of them stopped writing new policies anywhere in the state. Goodwin began meeting with business owners, bankers, insurance companies, and legislators in early 2009 to develop the new legislation.

“I strongly supported the law, that the beach plan should purchase reinsurance for the ‘big one,’” he said. “We had a lot of oars in the water and a lot of stakeholders working on this. We took it to the legislative session and although it took many months, we got it passed. Now, if an epic storm should blow through all the resources, then we should be covered. It’s a large reason the beach plan has been able to sustain itself after Hurricane Irene.”

The new law limits assessments on the state’s insurers at $1 billion in the case of a catastrophic coastal storm. If the damage is worse than that, Goodwin said, the residents of the state will have to pick up the rest of the tab.

Not only has the new law stabilized the plan, Goodwin said a good number of insurance companies have returned to do business in the state. “We were effectively able to stop the exodus of insurance companies,” he said. “And the insurance rates are leveling off.”

Stuart Powell, vice president of insurance operations and technical affairs for the Independent Insurance Agents of North Carolina, said his group feels the beach plan is more stable since H.B. 1305 passed. “It was something to be worried about, but, they shored up the cash and reinsurance position of the plan,” he said. “We are considerably better off than we were even three or four years ago. With Hurricane Irene we were able to sustain a pretty good hit and we are not reeling from it.”

Thomas Birkland, professor of public policy at the William T. Kretzer School of Public and International Affairs at N.C. State University, said that although the beach plan is working, beach property owners should have to assume the liability for their property.

“You have a right to develop and use your property any way you want, but you also deserve the right to assume the risk,” he said. “Why should other people assume the risk for your beach house? That’s your risk.”

Birkland said while the beach plan provides cheaper insurance to homeowners along the ocean, it also means people of modest income inland will have to subsidize the property at the beach if a massive storm hits a large enough portion of the coastline.

If a property owner assumes more risk by building in a certain area, Birkland said the insurance to protect that investment should cost more.

“How much should those living inland be expected to do?” Birkland asked. “Let the insurance market find its level on the private level, not through the state run beach plan. Get rid of the beach plan and make homeowners and insurance companies assume the high risk.”

Goodwin said tapping residents inland would be a “last resort.” He said the storm would have to cause more damage than Hurricane Hazel in 1954. A storm that severe could impose a recovery charge of up to 10 percent on homeowners’ premiums. “This could not be or should not be a permanent increase,” Goodwin said. “The charge would decrease as soon as it is paid off. I am adamant about this and other protections.”

Not everyone is satisfied with the current plan. Sen. Harry Brown, R-Onslow, said he is going to chair a study on the North Carolina Beach Plan beginning in October. He said the plan has pitted the 20 coastal counties against the 80 inland counties.

“If you are going to rate insurance based on the county a person lives in, then there has to be some fairness about it,” Brown said. “This is a legitimate argument. If you choose to live right on the beach the rate should be higher, but not for the whole county or state. There is a shared risk to a point, but we’ve gone beyond that.”

Brown said annual premium on the policy for his inland home has risen from $1,600 to $3,800 since H.B. 1305 was enacted. “I don’t live on the beach and I had no personal claim on the damage caused by Hurricane Irene,” he said. “It’s not fair for people who live inland that never have had claims of any kind. I know it’s a tough issue, but we have to sit down and look at this and come up with something that is fair to everyone.”

Brown also said he is concerned that the insurance commissioner has the power to sign off on rate increases without any way for the public to challenge the decision.

Goodwin is uneasy that the beach plan remains an ongoing issue with lawmakers. “If they undo the changes of the law, then that would relight the fuse of the ticking time bomb again,” he said. “That would be a calamity.”

Karen Welsh is a contributor to Carolina Journal.