Insurer’s Pullback Raises Worries About NC Beach Plan

Published February 12, 2010

The recent decision by State Farm Insurance to drop 1,650 coastal insurance policies on North Carolina’s Barrier Islands has reignited a familiar debate. With the cost of insuring high-risk coastal homes rising and many insurers leaving the market, will the state’s Beach Fund be able to hold up in the event of a major hurricane?

State Farm’s pullback came despite efforts by the state government in recent months to improve North Carolina’s property and casualty insurance market.

“In 2009 the [North Carolina Department of Insurance] heard from many industry groups and companies that were concerned about the potential assessment exposure they faced should the Beach Plan face major claims payouts associated with a large storm,” said Kristin Milam, public information director for the North Carolina Department of Insurance.

Assessment Caps
“House Bill 1305 addressed their uncertainty and changed the assessment structure for companies and policyholders,” she added. “The bill capped insurance companies’ assessments at $1 billion annually.”

Milam says the recent reforms under House Bill 1305 should go a long way toward shoring up the state’s beach plan without overburdening the private market with assessments for higher premiums in the event of a major storm.

She said the legislation “was a consensus bill that provided the industry the certainty they needed to plan for potential Beach Plan assessments and the Beach Plan the authority to retain its surplus, which will go a long way in allowing the agency to stand on its own feet should a storm or series of storms hit North Carolina’s coast.”

Reforms Suggested
Eli Lehrer, director of the Center on Risk, Regulation, and Markets at The Heartland Institute, argues the state needs to do more. In a report for the North Carolina-based John Locke Foundation, Lehrer makes two recommendations for the North Carolina Beach Fund.

“First, individuals, insurers, and the government should do more to secure properties against storms. South Carolina, Louisiana, and, until recently, Florida have all made major efforts to help people of modest means strengthen their homes. . . . The state, likewise, should step up efforts to discourage development in coastal wetlands—which provide a vital buffer against storm surges—and end any subsidies that encourage development in storm-prone areas.”

Lehrer also advocates scaling back the state’s Beach Plan.

“Virginia faces more hurricane risk than North Carolina by just about every measure but has only a few hundred coastal homes in its equivalent of the Beach Plan,” wrote Lehrer. “Even if a storm as big as Hurricane Katrina hit Virginia, taxpayers wouldn’t owe a penny for a repair of private homes. North Carolina should strive for a similar system.”

High Risks
According to Russ Dubisky, spokesman for State Farm Insurance Company of North Carolina, the company decided to drop the Barrier Island policies in January because of the high risk they posed, risk that was often passed on to safer homes inland.

“In order to preserve the financial strength that allows us to fulfill our obligations to policyholders, we made the difficult decision to manage our exposure in these catastrophe-prone areas,” Dubisky told Cape Fear Business News.

State business groups have criticized State Farm’s decision to reduce its Barrier Islands business, arguing the company’s withdrawal makes the state’s Beach Plan the only realistic alternative.

“This recent action by State Farm is a step in the wrong direction and undermines the progress made during the last session. Now these 1,600 policyholders have been put into a situation where the only probable option is the Beach Plan/Coastal Property Insurance Pool,” said Donna Girardot, CEO of the Business Alliance for a Sound Economy (BASE), in a press statement.

Some property owners can expect to see significant increases in their insurance premiums, she said, because they probably will have to get coverage through non-admitted carriers such as Lloyd’s of London. Non-admitted insurers are not licensed or regulated in states where they write business. They usually provide coverage that cannot be obtained through licensed carriers.

Mathew Glans ([email protected]) is a legislative specialist in financial services at The Heartland Institute.

Internet Info

“North Carolina’s Beach Plan: Who Pays for Coastal Property Insurance”: