capital Goods - November 2008

A big blow a-comin’

By Scott Mooneyham
Disaster strikes. Everyone pays because of the failures of policymakers. Major companies go down the tubes. Middle-class workers mutter about a bailout of rich fat cats living the high life. The meltdown on Wall Street? No. Try a meltdown of the market for home-owners insurance in North Carolina.

The possibility of major upheaval exists because a Katrina-like storm could smack North Carolina. At the same time, a state-backed coastal insurance program appears increasingly inadequate to cover losses. Commonly called the Beach Plan and officially known as the North Carolina Insurance Underwriting Association, it began life in 1969 as an insurer of last resort along the coast. But in recent years, growing numbers of homeowners in 18 coastal counties have turned to it for coverage.

Its assets — and potential liabilities — have risen dramatically. Since 2003, value of property covered has increased from $17.8 billion to $69.8 billion. Private insurers see disaster loom- ing because they share plan profits and losses. Losses are passed on to them as assessments. It’s a formula for chaos, with companies going under or leaving the state, insurers argue. Absent calamity, private insurers would pass on losses to clients in the form of increased premiums, and it wouldn’t matter whether they lived in Manteo or Murphy. All Tar Heel homeowners would pay, no matter how distant the ocean waves and sand.

If all this sounds like sky-is-falling talk, look at what’s happened in Florida since storms devastated it in 2004 and 2005. Homeowners have faced a series of insurance assessments — some as high as 2% of their property value — as insurers declared bankruptcy or left the state. A state-backed insurance plan, like North Carolina’s Beach Plan, has become the largest underwriter in the state, with $433 billion in property exposure. The state provides its own reinsurance, assuming $28 billion in risk. Many experts see that as a pending disaster for Florida taxpayers.

Of course, at the root of complaints about the Florida and North Carolina plans is that property owners along the coast aren’t assuming adequate risk. At first blush, that doesn’t seem to be the case. Homeowners insured by the Beach Plan pay 15% above a so-called voluntary rate set by the state insurance commissioner. But there’s a catch. Those private insurers can and do charge above that voluntary rate, especially along the coast, under what’s called a consent-to-rate agreement. As a result, Beach Plan policies are cheaper for most homeowners, and many private insurers don’t bother trying to compete.

Another reason for the explosion in property covered: In 2003, the General Assembly allowed the Beach Plan to write general homeowners policies. Before, it had written only supplemental policies that covered wind damage not included in general policies written by private insurers. Beach Plan premiums and deductibles are generally lower than those of similar programs in other coastal states, while coverage limits, at $1.5 million, are generally higher. “Instead of becoming the market of last resort, it’s become the market of first resort,” says Joe Stewart, executive director of the Insurance Federation of North Carolina.

The doom and gloom isn’t just speculation. “A company has left,” he notes. “This isn’t theoretical anymore.” Los Angeles-based Farmers Insurance Group announced in August it was pulling out, leaving 40,000 customers to look for a new insurer. The company circulated a handout showing how a major storm causing $4 billion in claims from Beach Plan policies would leave it with a $48 million assessment. Its North Carolina profits in one year: $1.25 million.

The Beach Plan has $650 million in reserves to pay out claims and about $1 billion in reinsurance — it would take a Katrina or Hazel to bring the kind of assessments Farmers Insurance feared. Critics of plan changes also note that it insures more than wealthy waterfront property owners. Families living in modest homes, dozens of miles from the beach, also are affected by a rate structure that means higher premiums throughout coastal counties. They need affordable insurance. And what about major storms like Hugo in 1989 and Fran in 1996, where the state’s major metropolitan areas suffered the bulk of insured losses? Did coastal residents subsidize the insurance payouts to inland residents after those storms?

A legislative study committee is looking at all these questions now, so perhaps policymakers, at least in Raleigh, haven’t taken their eye off the ball. But they will have to make tough decisions — affecting coverage limits, deductibles or premiums — if homeowners all over the state aren’t to be stuck with the bill the next time a big, bad storm comes calling.

Scott Mooneyham is the editor of The Insider,

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