AIA Offers Coastal Reform Agenda to N.C. Group

The American Insurance Association has urged North Carolina legislators to take comprehensive action to reform the state’s Beach Plan in order to avoid a financial disaster for the state’s entire property insurance market in the event of a major hurricane.

Raymond Farmer, AIA Southeast Regional assistant vice president, in testimony prepared for submission to the Beach Plan’s legislative study committee stated that, first and foremost, the Beach Plan should be reformed to return it to a true “insurer of last resort” as it was originally intended.

“It is clear that there is a misalignment when more than half the state’s coastal exposures are insured by the residual market,” said Farmer. “Most immediately, Beach Plan premiums should rise to reflect the true nature of insured exposures in the state’s coastal areas. Beach Plan premiums should be reviewed at least once annually to ensure their sufficiency, and deductibles in the plan should be increased to be at least equivalent to private market deductibles.”

According to Farmer, failure to reduce the attractiveness of the residual market to consumers will result in its continued growth while also discouraging private insurance capital from competing more aggressively for customers. And when the Beach Plan runs a deficit, it will ultimately be borne by all policyholders throughout the state.

Related to this concern, the Beach Plan’s deficit and debt service funding also need to be modernized if private insurance capital is to be attracted to North Carolina.

“For example, other states such as Florida and Louisiana have improved the ways that post-event assessments are recouped,” said Farmer. “Both states now allow post-event assessments to be recouped via separate policyholder surcharges, rather than via the ratemaking process.” This change would preserve insurer capacity to write business, while the ultimate impact on the policyholder is unchanged.

“The bottom line is that the Beach Plan must begin to live within its means,” said Farmer. "This requires reasonable funding mechanisms, such as charging adequate rates and securing a private reinsurance program, before assessments can be levied on insurers and, ultimately, non coastal residents.”

Of importance beyond the Beach Plan, AIA urges North Carolina to also modernize its insurance rate regulation. North Carolina is the only state with both a “personal property only” rating bureau (there are only 5 states with property rating bureaus of any kind) and prior approval of rates. Adopting a more modern approach can only benefit North Carolina’s homeowners and property owners. Finally, North Carolina can more fully embrace mitigation.

According to Farmer, though North Carolina has adopted relatively strong ICC building codes, it weakened wind borne debris protections in these codes. This should be addressed. South Carolina adopted a variety of market-based mitigation incentives (for example, tax credits and loan programs) as part of its 2007 coastal legislative package. These approaches should be strongly considered here as well.

AIA members wrote roughly $1 billion in total property insurance premiums in North Carolina last year, representing over 28% of the market.