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Coastal Insurance Reforms a Good Start

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Coastal Insurance Reforms a Good Start

When he took office at the beginning the year, Insurance Commissioner Wayne Goodwin set his sights on North Carolina’s broken coastal insurance system.  Now the legislature—with Goodwin’s guidance—has agreed to a plan that will fix the system’s most serious problems.  The new coastal insurance system makes sense for the state and greatly reduces the chances of an all-out insurance collapse. But it’s only a start.

Still, what has happened is a near miracle since, at this time last year, the state faced the real possibility of a mass exodus from its homeowners’ insurance market. The problem stemmed from the state’s Beach Plan: a government-mandated, industry run mechanism originally set up to provide limited, high-cost coverage for coastal residents unable to get it elsewhere. The Plan had grown to an unsustainable size. While neighboring Virginia—which has far more total insured value along its coast than North Carolina-- forced only a few hundred homeowners to join its own equivalent of the Beach Plan, North Carolina’s plan writes coverage for almost one state homeowner in 20. Although it has to charge a lot for coverage, the Beach Plan still doesn’t take in enough to cover its expected losses were a major hurricane to hit. Following a big storm, the Beach Plan, under state law, would have had to charge special taxes—assessments—to every insurer in the state. The assessments, due all at once, would have devastated the industry. Larger insurers would have taken major profit hits and left the state. Smaller, North Carolina-only insurers might well have drained their operating reserves, become insolvent, and gone out of business.  Tens of thousands of North Carolina residents could have lost homeowners insurance altogether.

Last summer, Farmers’ Insurance, then the state’s number eight carrier, withdrew from the market rather than face the risk of these assessments.   Among industry insiders, furthermore, it was an open secret that at least one other large company had prepared a plan to withdraw from the state during 2009 if the situation did not improve.
Now it has. The reforms raise rates in the Beach Plan, reduce the risk of assessments, and encourage more private competition. Already, it seems to be working: one insurer has announced its intention to enter the state and Goodwin tells me that another is on its way. The great bulk of North Carolina residents who live inland, furthermore, should see modest rate decreases (or at least, smaller-than-expected increases) as a result of decreased implicit cross subsidies for coastal residents.  

Nonetheless, the reforms are only a start. When they look at coastal insurance in future years, Commissioner Goodwin and the legislature should consider at least three other steps.

First, as rates rise in coastal areas, the state should help incumbent homeowners of modest means to retrofit their houses. People who have lived in coastal areas a long time, own their homes, and can’t afford higher premiums should receive help—property tax credits probably make the most sense—to install storm shutters, roof tie-downs, and other adaptations that make their homes safer.

Second, the state should continue to revisit the Beach Plan’s management. Although the risk of market-wrecking assessments has gone down significantly, it still exists. In the long term, the North Carolina Beach Plan should aim for a tiny, well-managed true “market of last resort” similar to the one that exists in Virginia.  Taxpayers shouldn’t pay for coastal risk.  

Finally, the state needs to revisit the way it sets insurance rates. Right now, the state follows a system—once common, now unique to North Carolina—where an industry run “Rate Bureau” negotiates an overall rate plan with the insurance commissioner and individual insurers then file their own prices on top of it. This system imposes administrative costs that work their way into insurance rates and tends to discourage creative new products. At minimum, North Carolina should make insurers do rate filings entirely on their own and remove the red tape around smaller decreases and increases in their insurance rates.    

Commissioner Goodwin and the legislature deserve a lot of credit for their reforms. The state is better off for them. But it’s only a start.