According to N. C. Insurance Commissioner Wayne Goodwin, such legislation, if passed, will put the entire state in jeopardy of an insurance availability crisis - leading to less competition and higher rates for everyone.
The North Carolina Insurance Underwriting Association (Beach Plan) was created by the N.C. General Assembly 40 years ago to provide supplementary wind and hail coverage for property owners on the barrier islands, who were often refused such coverage from standard insurance companies due to high storm exposure. The plan has since expanded to offer homeowner’s and wind/hail insurance for residential and business properties in 18 coastal counties.
While the plan was created and is regulated by the state, it is not a state entity but an association of independent companies acting as one. All property and casualty insurance companies that do business in North Carolina write and fund the plan - and share any losses or profits.
According to Goodwin, the plan was designed as a last resort, offering coverage at a higher than standard rate to those who would otherwise not have it. Beach Plan rates are now lower than standard, and it has become the insurer of first resort on the N.C. coast.
In 2007, the plan provided the Department of Insurance with an actuarial report assessing that their rates were 76 percent inadequate. Officials say the plan is financially unprepared to pay for the potential losses of a major storm.
“The rates for the beach and coastal areas did not keep up with the costs of rebuilding and replacing those properties, and the Beach Plan itself didn’t expect the value of property to increase so dramatically on the coast,” said Goodwin.
“If the adjustments approved by my predecessor (Jim Long) are frozen and we have an active storm season, the way the (Beach Plan) wind pool is set up is that insurance companies would bear the burden of any deficit,” said Goodwin.
That liability is what officials say could eventually jeopardize competition.
The possible Beach Plan deficit that could result from one major storm has been quoted at as high as $6.2 billion. The potential for such a loss could make North Carolina an unattractive place for insurance companies to do business. They could pull out, go elsewhere, and leave consumers with fewer options.
Pat Molamphy, an agent with Nationwide Insurance in Rockingham, explained how that works.
“Last year Nationwide headquarters in Columbus, Ohio, took in $500 million in premiums from North Carolina. If their projected return (amount left after paying claims and operations) on that is 5 percent, that’s $25 million (from North Carolina). But they are looking at a potential $1 billion assessment (their share of Beach Plan deficit) that they could not get back in higher rates.
“Some of these companies are deciding to pull out of these states because they are not willing to have that potential loss out there.”
Molamphy pointed to Farmer’s Insurance pulling out North Carolina last year, and State Farm’s recent choice to leave the state of Florida because they could not get the premiums that they felt would adequately compensate them for their risks.
The same thing happened in Louisiana after Hurricane Katrina.
“What we need to do is follow the law, and the law says the beach plan needs to be a market of last resort,” said Goodwin. “Rates have to be adjusted to where they are not less than those of the private market. The private market has indicated that if they are able to be competitive then they will be able to write more policies on the coast.”
Under former Commissioner Long, the DOI approved the Beach Plan’s request to raise rates and deductibles in November with changes going into effect on Feb. 1, 2009. The increase included an average raise of Beach Plan homeowner’s surcharges from 15 percent to 25 percent; a wind/hail increase to 15 percent from 5 percent; and an allowance for increased deductibles based on property value.
Senate Bill 6 and House Bill 26 are written to exclude primary homeowner’s policies from the Beach Plan increases until 2011.
In December, the DOI settled with the N.C. Rate Bureau (an industry representative) to approve an overall average statewide increase of 4.05 percent for homeowner’s insurance, effective May 1, 2009. The Bureau had originally requested a 19.5 percent average increase, and the DOI negotiated them down.
According to the DOI, Richmond County will only be affected by a 4 percent increase. Most of the non-coastal counties saw minimal premium increases, or even lowered premiums.
Coastal homeowners will end up paying more because of their risk assessment. Lawmakers from the region are also trying to freeze that “double whammy” with Senate Bill 6 and House Bill 26.
Goodwin said these actions must be taken to save the state from the looming financial woes of decreased competition in the long term.
“We have had changes in the availability of insurance already. If you have less choice, you’re going to have higher rates. To get the most affordable and accessible insurance for everyone we must have a competitive, solvent and regulated market.”
The increases were all calculated based on risk factors in the given area.
“Depending on where you live you have different types of risk and exposure. A house in Ellerbe will have a different type of storm exposure than say, a house on Bald Head Island.”
Former Richmond County resident Gordon Davis, Jr., said he is looking at “sinfully wrong” increases. He now owns and sells property as a Realtor and resident of both Brunswick County and Bald Head Island.
“When my policy renews in Brunswick County on the mainland side, it’s going up 29.8 percent and not only that , but if there’s a problem and I went to file a claim then my deductible will be 2 percent of value of my property - which instead of $1,000, would be $10,000.”
Davis said a 5 percent deductible has been placed on the property that he owns on Bald Head Island, which means he will have to pay up to $35,000 in damages before the insurance company will pay out.
“Who can just write a check for $35,000? I know they have to raise rates, I understand, but do they have to hit the home run all in one year?”
According to Davis, the proposed increases will ruin what was once a sound investment in coastal property as potential buyers look elsewhere for vacation homes, and it will really hurt retirees and the middle class by adding to the financial strain that these groups already face.
“This isn’t about the millionaires. The one that’s gonna get hurt is the guy that lives in the double wide manufactured home out on a piece of land that his daddy gave him in the Green Swamp - and now he’s been laid off from his job. It’s the couple that worked their whole lives so they could retire at the beach, and now they’re on a fixed income and their 401k went down the tubes with the stock market. Now slap them with a 30 percent increase and a deductible nobody can meet,” said Davis.
Davis thinks something “smells like skunk.”
“Long signed this on a Friday - his last day in office. I don’t know what his motive or incentive was, but Wayne has inherited this business and he needs to see what he can do. He needs to investigate and get all the facts.
“They (insurers) say they can’t afford it, but what company can afford it right now? What homeowner can afford it? Somebody needs to say ‘You can’t afford it? Show me your numbers.’”
Molamphy doesn’t deny the harsh reality that coastal residents face, but the question is “where is the money going to come from?” A stay on increases won’t make that question go away. It won’t fix the trouble that could eventually hit property owners across North Carolina.
“I understand. Really, I do. Not only does it hurt them (coastal homeowners) by having to pay higher premiums, but it hurts economic development, construction, everything. But at the end of the day, the fact is that the risk is down there. You have to have solvent insurers or it defeats the purpose of having insurance.”
Molamphy said that Goodwin is stepping up to the plate and addressing a “political hot potato.”
“Politicians in coastal counties are looking out for their constituents, who don’t want to pay higher rates, then you have the politicians in the other 80 counties that don’t want to have to pay higher rates to compensate for the Beach Plan, and the insurance companies are looking at the risk in North Carolina.
“The exposure is there and it needs to be addressed. Wayne is tackling a very hard subject that has been neglected for a long time.”
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