NC Beach Plan Insurance solution is sought

Posted by Benji Riggins on January 26, 2010 under Insurance News | Be the First to Comment

When it comes to government-created insurance, the state health plan isn’t the only entity facing trouble.

An attempt to fix an ailing coastal insurance plan made steps through the North Carolina House of Representatives this week as HB 1305: “Beach Plan Changes” passed the insurance committee Tuesday and moved on to finance.

“Over the last six months, my office, legislators, business owners and homeowners across the state have been working furiously to find an acceptable compromise so that we could avoid a statewide insurance crisis,” said North Carolina Commissioner of Insurance Wayne Goodwin. “It is vital that North Carolina pass meaningful legislation this session before the next hurricane or series of hurricanes hits.”

The North Carolina Insurance Underwriting Association (Beach Plan) was created by the 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-risk storm exposure.

The plan has since expanded to offer homeowner’s and wind/hail insurance for residential and business properties in 18 coastal counties,

The plan was created and is regulated by the state, but it is not a state entity. It’s an association of independent companies acting as one.

Currently, 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. But Beach Plan rates became lower than those of the voluntary market — 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 seriously unprepared to pay for the potential losses of a major storm.

If HB 1305 passes, those insured under the plan will pay higher premiums – and maximum coverage will be reduced from $1.5 million to $750,000.

But home owners across the state will be affected if a major storm costs the plan more than it has in the bank. The legislation enables member companies to tack up to 10 percent onto their customer’s bills in the form of a “catastrophic assessment recoupment” — but only if damages get up to around $2.4 billion.

A pivotal part of the bill relates to the tipping point at which private insurance companies can start passing the burden along, which has currently been set to $1 billion. The insurance industry originally wanted the threshold to be $100 million.

Department of Insurance spokesperson Kristin Milam explained the concept with a hypothetical scenario:

“If we had a major storm tomorrow, like a Hazel-type storm, the Beach Plan would use two-thirds of its $800 million surplus to pay claims; they would have to hold some back in case we get other storms throughout the year,” said Milam. “If the plan paid the first $600 million, then the member companies would have to chip in the next $600 million to get to the $1.2 billion reinsurance attachment point. If it goes beyond $1.2 billion in reinsurance, (the plan) would have to assess the member companies again.”

And the member companies would then assess their members with what has been called a 10 percent “surcharge.” But Goodwin said that’s not correct. A surcharge comes after the fact. A catastrophic assessment recoupment is a proactive measure.

“Other states have been reactive, and that has led to extraordinary insurance rate increases in those states,” Goodwin said. “By being proactive, North Carolina will provide consumers and the industry with certainty and have a much more stable and competitive insurance market.”

Officials say that if insurance companies don’t know how much they will be liable for and if they will be adequately compensated, they’re liable to pull their business out of North Carolina — like State Farm recently did in Florida.

“Florida presented a unique set of circumstances,” said State Farm Spokesman Russ Dubisky. “Right now, State Farm is committed to our business in North Carolina. State Farm sees HB 1305 as an incremental step in the right direction. Eventually, we hope to see the Beach Plan become independently solvent by building its reserves, purchasing adequate reinsurance, and truly acting as the market of last resort.”

That’s another important piece of the legislation. Let’s say there are no major storms this year, and the Beach Plan makes a profit. Under HB 1305, member companies will no longer get to take their share of that profit. It will go straight into the Beach Plan surplus and build over time.

“The more money that the beach Plan has in the bank, the larger the storm or series of storms it can handle without turning to its member companies, and subsequently, policyholders,” said Goodwin in a speech to the Insurance Committee on June 25.

“And, as you all know, no one piece of legislation is perfect and this bill certainly is not perfect. But legislation, particularly involving complex subjects, is often about compromise.”

by Olivia Webb