Insurers’ Study Warns on North Carolina Beach Plan Deficit

The Property Casualty Insurers Association of America unveiled results of an independent report which found that the North Carolina Insurance Underwriting Association, a.k.a. the Beach Plan, is not financially prepared to weather a major storm.

PCI commissioned Milliman Inc. to conduct the actuarial analysis to provide lawmakers, consumers and insurers with an objective tool for implementing long-term solutions in the state’s precarious property insurance system.

Milliman actuary, Nancy Watkins, presented study findings to the Joint Select Study Committee on the Potential Impact of Major Hurricanes on the North Carolina Insurance Industry on Oct. 16. A principal and consulting actuary for Milliman, Watkins authored “Beach Plan Deficit: Cost to Policyholders and Taxpayers.”

According to the Milliman report, the Beach Plan has no more than $1.5 billion available to pay for hurricane losses. However, a large storm could likely cost more than $ 7 billion, leaving a $6.2 billion deficit and affecting the Plan’s ability to pay claims.

“If a major storm hits and the Beach Plan does not have the ability to pay its claims, all homeowners across the state suffer,” Robert Herlong, vice president and regional manager for PCI, said.

The North Carolina Beach Plan was established to serve as a state fund to provide property insurance coverage for coastal homeowners in the barrier islands who could not obtain coverage for windstorm damage from the private market. The Plan has since expanded to include 18 coastal counties and offers a comprehensive homeowners policy that provides broad coverage and low deductibles at rates far below what actuaries maintain to be appropriately matched to risk. North Carolina’s “plan of last resort” has become the first and only choice for coverage for many coastal homeowners.

The Beach Plan currently insures nearly $70 billion worth of property and is growing its exposure at a rate of about $1 billion per month, according to PCI.

“The current trend is evidence that the Beach Plan has turned into the market of first choice for many coastal property owners,” said Herlong.

Watkins said the state’s current property insurance system could result in unintended consequences that may be harmful to all North Carolina consumers, the state’s economy and future economic development.

“It is important that public policymakers understand the implications of the current structure,” Watkins said.

Under the current system, if the Beach Plan does not have sufficient surplus, private insurance companies will be forced to pay for the difference in the form of assessments.

“We are concerned that private insurers will be subjected to assessments that will be much more than their annual premium. This would likely result in some smaller insurers facing bankruptcy and other insurers being forced to reconsider their ability to do business in North Carolina. This also leads to affordability and availability problems for insurance consumers in all areas of the state,” said Herlong.

PCI said it hopes to work with the study committee and state policymakers in preparation for the 2009 Legislative session.

“We think that the first step is for all stakeholders to take an earnest look at the system. We want to seek a balanced approach that benefits all North Carolina residents over the long term,” said Herlong.

The study committee was established by the North Carolina General Assembly during the 2008 Legislative Session and was tasked with making policy recommendations for 2009.

“We urge the Beach Plan to help us seek solutions to protect the state of North Carolina but taking a realistic look at the capacity of the Beach Plan is the first step,” Herlong said. “This is a unique opportunity for North Carolina to better plan for the future before a storm — rather than after the fact and prevent the kind of devastation that was experienced by other coastal states which were not prepared.”

The Milliman study found that the Beach Plan is unprepared to weather even one severe storm.

Beach Plan rates are kept artificially low, endangering the financial health of the state insurer and discouraging the private market from writing policies on the coast, according to the study. The Beach Plan’s own independent actuaries said Beach Plan rates would need to be increased by 76 percent to reach an appropriate level to cover its losses and expenses.

The Milliman study found that artificially low rates attract more homeowners into the Beach Plan, increasing the state insurer’s exposure without adequately adding to the plan’s surplus. This forces private insurers out of the market, as they cannot compete with the Beach Plan’s inadequate rates. The artificially low rates also encourage future development in storm-prone regions, raising the risk of higher losses from future storms, which will in turn increase the likelihood of larger future assessments and ultimately the premiums charged to North Carolina consumers.

Milliman reported that the under-funded Beach Plan threatens the availability and affordability of property insurance for all policyholders — a statewide problem. Potential assessments are very difficult for insurers to estimate and plan for, and if insurers find their calculated risk of assessments to be too high, they could decide to leave the state rather than gamble with their financial well being.

Source: Property Casualty Insurers Association of America