The North Carolina Legislature mandated a committee to study the North Carolina Insurance Underwriting Association’s (Beach Plan) ability to respond financially to a significant hurricane landfall.
State Rep. Bruce Goforth, D-Asheville, co-chair of the House Insurance Committee, said the committee plans its first meeting around the end of September. The committee consists of at least one representative each from the Department of Insurance, the Beach Plan, the North Carolina Joint Underwriting Association, the North Carolina Rate Bureau and at least one member representing a national insurer, one representing a regional insurer and one member representing a domestic insurer.
Required to report its findings and recommendations to the General Assembly no later than Feb. 1, 2009, the committee will look at the potential impact of category 3, category 4 and category 5 hurricanes on the North Carolina insurance market.
Specific issues to be addressed include the ability of the Beach Plan and the North Carolina Joint Underwriting Association to pay claims, reinsurance purchases by the Beach Plan and the NCJUA, other potential financing options, assessments on the private market and options for recovery of assessments by the private market.
The committee will also look at residual market experience and assessment structures in other states as a basis for comparison, land use issues, mitigation issues, and may consider any other factors deemed relevant by the appointed study committee representatives.
Joe Stewart, executive director of the Insurance Federation of North Carolina, said a storm that depletes the reserves of the Beach Plan — the state’s insurance pool for wind coverage at the coast — would result in massive charges to insurance companies and an almost certain rate increase for homeowners across the state.
The state’s Beach Plan needs to charge rates that more closely match the risk of coastal properties, and it needs to build reserves so that it is prepared for a catastrophe, Stewart said. Despite projected risks of severe hurricanes, developers are building more high-end developments and gated communities at the coast — in the known paths of hurricanes, he added.
The Beach Plan provides coverage for wind damage in 18 coastal counties but every company that offers homeowners’ insurance in the state has obligations to the plan, even if the company doesn’t cover property at the coast, Stewart said.
Rep. Goforth said the Beach Plan is not state-run or even state-backed. However, the state does mandate statewide assessments if the Plan’s reserves cannot support catastrophic claims that occur in the 18 counties, he pointed out.
Stewart says the Beach Plan has roughly $650 million in reserves — enough, when combined with its current reinsurance arrangements, to pay as much as $2.5 billion in losses.
“But that’s not nearly enough to cover the destruction a major storm could inflict on $75 billion worth of coastal property that the Beach Plan insures,” Stewart added. “If the plan exhausts those resources, it would make assessments against insurance companies to recover its losses. Those assessments would lead to higher homeowners’ rates statewide and potentially drive smaller insurers into bankruptcy, even if they don’t insure so much as a doghouse at the coast.”
Stewart said insurers welcome the state study and they encourage legislators and the insurance commissioner to return the Beach Plan to its intended role as a safety net.
Insurance Federation members believe prices in the Beach Plan should more closely match the risk.
“Homeowners’ rates in inland areas are already higher than they need to be so that coastal property owners pay less than they otherwise would,” Stewart said. “The Beach Plan’s prices should be adequate to build sufficient reserves and buy reinsurance to address the catastrophic losses the plan will inevitably face.”
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