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 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 and force them out of business. A single bad storm could collapse of North Carolina’s entire homeowners’ insurance market and attracting back even a modicum of private market homeowners’ insurance might require billions in taxpayer subsidies.
Insurance commissioner Wayne Goodwin has called the issue a “ticking time bomb” and everybody who has studied it has called for change. And North Carolina’s elected representatives are trying. A bill making its way through the General Assembly — it passed the House Tuesday and will go to the Senate for consideration — appears likely to fix the most glaring problems. It would end government-backed coverage for the wealthiest home owners, limit insurance companies’ liabilities for 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 will still have a risk of significant assessments, consumers run the risk of higher taxes, and people in the Beach Plan will see their rates rise. On balance, however, the bill makes sense for North Carolina: it will 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 in inland.
The higher rates, finally, should put a stop to the Beach Plan’s out of control growth. 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 have all made major efforts to help people of modest means strengthen their make 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 site 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 a repair of private homes. North Carolina should strive for a similar system.
The legislature has begun to move in the right direction on the Beach Plan. But it still has a long way to go.
Eli Lehrer directs the Washington, D.C.-based Competitive Enterprise Institute’s studies of insurance and credit markets.