North, South Carolina Coastal Insurance Plans Ready for Hurricane Irene

Caught square in the path of Irene, the first major hurricane of the season, the coastal insurance plans in North and South Carolina are prepared to absorb what may be their first major losses in years.

Both plans appear to be capable of handling whatever losses Hurricane Irene may cause.

The North Carolina Insurance Underwriting Association and South Carolina Windstorm and Hail Underwriting Association are mechanisms to pool and spread the risk of property damage. Designed to be markets of last resort, their main function is to provide homeowners’ insurance in those areas where the private market will not due to the high-risk of hurricane damage.

In North Carolina, the so-called Beach Plan has 183,000 policyholders located in 18 counties including the state’s barrier islands. It has $60 billion in residential exposure and $9 billion in commercial coverage with a probable maximum loss from a one-in-100 year storm hovering around $3.4 billion.

Beach Plan officials said the association has $774 million surplus, which combined with private reinsurance and $1 billion pre-event bonds, gives it $4 billion in claims paying ability. The $4 billion is a marked improvement for the pool, which just a few years ago was targeted for having inadequate resources.

Formed by private insurers in the early 1990s, the plan kept little money on hand and instead relied on member insurance companies to cover any losses. Conversely, in years when the plan actually made money, those funds were repaid to insurers in the form of dividends.

Stuart Powell, vice president for insurance operations for the 800-member Independent Insurance Agents of North Carolina, said under that arrangement, “insurers were basically reinsuring themselves for free.”

However, that made agencies, such as A.M. Best and Moody’s nervous because the extent of the industry’s liability was unknown. Also, state officials were concerned that those same companies might not be able to pay if they suffered heavy losses on their own.

In 2009, state lawmakers enacted a series of changes, starting with allowing the plan to retain its surplus from year to year.

Based on that law change, in January, North Carolina Insurance Commissioner Wayne Goodwin ordered the windpool to retain some $16 million in surplus it generated in 2009, instead of giving it back to member companies.

Additionally, lawmakers capped the industry’s total liability to $1 billion and enacted a provision that would allow the insurance commissioner to impose a statewide surcharge of up to 10 percent annually on all property owners in the event the windpool exhausts all its other resources.

Powell, who was part of the effort to craft that legislation, said the windpool is now as solvent as it has ever been. “The windpool can now absorb losses of up to $4 billion and it has never lost $1 billion,” he said. “That doesn’t mean it can’t, but the chances are considerable less.”

He cautioned, however, that policyholders around the state still face a risk, however small, since the plan is only as viable as the hurricane seasons allow it to be. “We can handle a typical storm,” he said. “But if there is a Katrina or four or five hurricanes, then all bets are off.”

The 2009 reforms also limited the plan’s coverage limits to $750,000 on residential properties and $3 million on commercial properties. It also called for its wind-only homeowners policy rates to be at least five percent higher than private insurers’ rates and its multi-peril homeowners policies to be 15 percent higher than the private market.

In South Carolina, officials are also casting a wary eye toward Irene, which could be the first major hurricane to affect the state since Hurricane Floyd brushed by the state in 1999 causing some $60 million in total insured losses.

The South Carolina Windstorm and Hail Underwriting Association, also commonly referred to as the Beach Plan, currently has 48,000 policies in force, representing $18 billion in exposure.

Beach Plan Chief Operating Officer David Leadbitter said the plan has $1.5 billion in claims paying ability in the event of major losses, which more than covers its probable maximum loss for a one-in-100 year or one-in-250 year storm.

Participating insurers are responsible for the first $10 million in losses, with the remainder being covered through private insurance. In the unlikely chance that the plan losses exceed the $1.5 billion mark, insurers would be assessed, but they could recoup this amount if they choose as part of their annual rate filing.

“We’ve been in the reinsurance market for 25 years and have good relationships that allow us to get good prices and the capacity we need,” said South Carolina’s Leadbitter.

Leadbitter said that so far member companies have been silent when it comes to any potential losses, especially given the industry’s low retention and the possibility of their own losses. “They worry about us least of all,” he said.

The Beach Plan was created by private insurers in 1971, when the state mandated that all homeowners carry wind coverage, as a means to pool the risk from widespread wind damage. In 2007, state lawmakers expanded its coverage area into two zones, with Zone one encompassing most of the state’s barrier islands and Zone 2, which covers more inland regions.

Since then, 13 new companies have entered the state market including a large block of surplus lines insurers that have provided coverage to high-end homes and commercial risks.

Earlier this year, the state’s Department of Insurance approved a statewide average 9.8 percent rate hike based on rising reinsurance prices and changes in the loss projections calculated by computer models. The new rates take effect September 1.