Insurance Commissioner-elect Wayne Goodwin has called North Carolina’s Beach Plan a “ticking time bomb.”
right. The plan, intended to provide “last resort” homeowners’
insurance coverage to people unable to find it in the private market
for homes near the ocean, has grown to the point it could lead to
drastically higher homeowners’ insurance rates for just about everyone
in North Carolina.
Some background: About 6 percent of the
state’s property owners purchase coverage through the public-private
partnership officially called the N.C. Insurance Underwriting
The Beach Plan provides coverage in 18 coastal
counties. Over the past five years, the Beach Plan has more than
doubled in size. No other comparable state-run plan has grown nearly as
Because it charges rates below those necessary to
cover its own risks, insurers would have to pay special taxes called
“assessments” to cover Beach Plan losses following a major storm and
would eventually need to pass those taxes on to policy holders.
Already, most insurers refrain from offering discounts to inland
properties in order to make up for the strong possibility of losses
from coastal properties.
If a major storm does hit, the
actuarial firm Milliman estimates that special taxes could rise as high
as $6.2 billion – more than twice the total value of all property
insurance written in North Carolina.
which insurers would pass on through higher rates for consumers, would
pose serious challenges to larger insurers and put smaller ones out of
business. And if any insurers survived, the costs would come out to
more than $1,800 per North Carolina household.
most likely, however, that insurers would simply withdraw from the
North Carolina market rather than take the risk of such massive taxes.
of the danger to their business, two sizeable insurers – Farmers and
Allstate subsidiary Encompass – have announced plans to stop writing
homeowners’ insurance in North Carolina.With fewer insurers in the
market, rates will likely go up for many homeowners next year.
a series of withdrawals could lead to a vicious cycle: as insurers stop
writing coverage in North Carolina, more people may believe that the
Beach Plan represents the best option.
A larger Beach Plan will lead to larger assessments and, in time, encourage more insurers to leave the state.
two major players, in fact, coastal county residents who live miles
from the ocean could well find that the Beach Plan is the only option
when their policies come up for renewal.
It doesn’t need to
be this way. Among its peer states in the Southeast, North Carolina
faces one of the smallest risks from hurricanes. In comparison,
Virginia faces about a third more hurricane risk than North Carolina
but covers only a handful of properties through its equivalent of the
To reduce property insurance rates for most
North Carolina and discourage unwise building along the coast, the
recipe is pretty simple: higher rates for Beach Plan participants,
higher deductibles in the Beach Plan (to encourage people to find
private market coverage), lower rates inland, and greater freedom for
private companies to set their rates based on risk.
The Beach Plan itself could also stand some management reforms.
minimum, its board should add some citizen representatives from inland
areas. The current all-coastal makeup of the board’s citizen
representatives has encouraged it to keep rates down for people living
in the most dangerous parts of the state.
Beach Plan reform
will require a willingness to take on entrenched political interests
and to adopt policies that will require some wealthy, well-connected
coastal residents to pay higher insurance rates across the board.
Goodwin understands the problems. When he takes office next month, he should make fixing the Beach Plan his first priority.
Lehrer is a senior fellow at the Competitive Enterprise Institute,
which advocates a very limited government role. He wrote the report
“Fixing the North Carolina Beach Plan” for the John Locke Foundation, a
conservative think tank in Raleigh.
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