North Carolina Property Insurance Reform Law Comes Up Short

North Carolina’s property market problems are well known but thus far answers remain elusive even after lawmakers approved a bill that does little more than what one industry expert said, “just stuck more fingers in the dike.”

Despite having what critics say is an antiquated process for setting rates, a burgeoning residential market, and a lack of public input on rates, industry onlookers and consumer groups walked away largely empty-handed from this year’s legislative session.

“I wouldn’t call this a substantial piece of legislation,” said Stuart Powell, vice president of insurance operations for the Independent Insurance Agents of North Carolina. “It nibbles at the edges of the issues, but doesn’t deal with the heart of them.”

Signed into law by Gov. Bev Perdue last week, the new law attempts to address the way rates are set in North Carolina, a process that differs from those of other states.

Under the rating law all property insurers send their information to the North Carolina Rate Bureau, which then develops a loss cost rate for use by all insurers. Each insurer is then allowed to slightly adjust rates based on expenses and other factors. The insurance commissioner can then agree or disagree with the rate recommendation.

The new law attempts to give the insurance commissioner the authority to set rates as long as they fall in between the range of existing rates and what the Rate Bureau recommends. The law for the first time also calls for a factor to reflect the cost of reinsurance that can include historical loss data and the use of a computer model.

The catch is that the Rate Bureau only uses one model, which critics say could skew the rates people pay, especially along the state’s coast line.

“We presently use the AIR model,” Sue Taylor, director of insurance operations at the Rate Bureau. “That is not to say that in the future we may not use another model.”

Kathleen Riely, government affairs director for the Wilmington Association of Realtors, said the model skews the data so that homeowners living along the coast unfairly have to pay higher rates. She said that Texas and Florida use multiple models when setting rates to ensure that rates are more equitable.

“Why are we using one model?” Riely said. “Why are we not coming up with a blended model that would best be used for North Carolina?”

For agent and insurer groups, the computer model debate is just a symptom of North Carolina’s antiquated rating system. From their point of view, the fact that one entity sets the rates for the industry stymies the ability of insurers to respond to market conditions.

George Teague, representing the Property Casualty Insurers Association, said eventually the state is going to have to change the rating system. However, he acknowledged that it will be an uphill climb.

“Under any change there will be winners and losers. Some rates will go up and some down,” said Teague, “But this is a very political environment.”

In the new legislative measure, consumer groups did eke out a small win that will make all property insurance rate filings open to the public and allow the public 30 days to submit comments. Under the previous law, the public was only allowed to make public comments in the event the insurance commissioner decided to hold a public hearing on the rate filing, something that has not been done in years.

Still, consumer groups are not placated. They have been pressing for years for the creation of some mechanism such as a citizens insurance board to give residents a role in rate-setting as opposed to the process being confined to the Rate Bureau and insurance commissioner.

“Where is the third entity to overlook rates?” asked Reily. “We are the only coastal state without a consumer advocate.”

Lawmakers made an attempt to placate certain residents in the eastern portion of the state who have been vocal in their opposition to higher rates. For the first time under the new law, insurers will be able to develop a homeowners policy that covers all perils minus damage from windstorm and or hail. This will essentially allow homeowners who own their homes to self-insure against hurricane losses.

As part of that provision, insurers must include with the policy a statement in 16-point font a warning to homeowners that their policy doesn’t cover those risks and that they should contact their agent to discuss their options.

Even with the caveat, however, agent groups are wary of the policies, which they say could leave them open to liability claims.

“You are going to have three or four clients who are going to say they never understood me and then turn around and sue me,” said Powell. “We see the same problem when it comes to flood coverage where agents are sued because they supposedly were not told they needed the coverage.”

Teague agreed with Powell, saying the ex-wind policies could create more trouble than they are worth, both from the point of view of agents and insurers.

“You’re going to have people coming back after a hurricane and saying, ‘I thought I had coverage,’” said Teague.

The new law also calls for the Rate Bureau and Department of Insurance to conduct a study on the current geographic rating territories. Currently, the territories are drawn up by a Rate Bureau committee and reflect a number of factors including the likelihood of damage from a major hurricane and other natural disasters. The new law specifies that the territories treat all properties within an area the same when it comes to risk and charge rates that are actuarially sound and not unfairly discriminatory.

“The territories have not changed in several years,” said Taylor. “We just want to make sure they are equitable.”