RALEIGH — North Carolina could face a “property insurance disaster” unless it takes steps soon to shore up its coastal Beach Plan, according to a new John Locke Foundation Policy Report.
“This little-known plan imposes an enormous fiscal liability on the state,” said report author Eli Lehrer, senior fellow at the Competitive Enterprise Institute in Washington, D.C. “Intended largely to provide windstorm insurance for coastal residents unable to find coverage elsewhere, the plan has grown to exceed its mandate. It endangers the state’s fiscal future.”
The General Assembly set up a special joint select study committee to investigate the potential impact of major hurricanes on North Carolina’s insurance industry. That group has spent much of its time studying the Beach Plan. The committee meets again 2 p.m. Tuesday in Raleigh.
“Without change, the Beach Plan could result in higher insurance costs for nearly all North Carolina residents, massive withdrawal of insurance companies from the North Carolina market, and fiscal turmoil throughout the state,” Lehrer added. “The Beach Plan’s liabilities already have prompted one major company, Farmers, to withdraw from North Carolina’s insurance market, and others may follow.”
The Beach Plan is the popular name for the North Carolina Insurance Underwriting Association. The plan exists to write homeowners’ and “wind only” insurance coverage for coastal property owners who cannot find coverage in the private market, Lehrer said.
That plan has major problems, he said. “By its own accounting, the plan could not survive a once-in-six-years storm without imposing significant taxes — called assessments — on North Carolina residents and businesses,” Lehrer said. “One independent study shows North Carolina could face liabilities of up to $6.2 billion from the plan, and that figure is almost certainly low. In recent years, the Beach Plan has grown at a rate of roughly $1 billion a month, growth that shows no signs of stopping.”
This growth is not linked to the specific nature of North Carolina’s coast, Lehrer said. “Instead the Beach Plan’s growth stems from deliberate public policy decisions,” he said. “Neighboring Virginia faces a greater economic risk from hurricanes, but Virginia’s equivalent plan imposes essentially no burden on that state or its taxpayers.”
Fixing the Beach Plan’s problems requires a two-step process, Lehrer said. “First, a credible plan for change would stop the Beach Plan’s growth and stabilize it,” he said. “Then a more comprehensive reform would return the Beach Plan to its intended place as a true market of last resort for people who cannot find insurance anywhere else. Fortunately for the state, Insurance Commissioner-elect Wayne Goodwin seems committed to reform.”
Stabilization would itself require several steps, Lehrer said. “First, the Beach Plan should offer policies with higher deductibles to prevent competition with the private sector,” he said. “That means deductibles of at least 2 percent. This would mean a $4,000 deductible on a typical house with a structure value of $200,000.”
The state should also encourage private insurers to write more coverage outside of the Beach Plan and shore up the Beach Plan’s questionable tax-exempt status, Lehrer said.
Stabilization also requires higher coastal insurance rates, he said. “This can be done relatively painlessly,” Lehrer explained. “Modest increases in coastal insurance rates would likely move people out of the Beach Plan and could actually cut premiums for some of those now in the plan. Because of the way insurers offer discounts and because of limitations of the Beach Plan’s own coverage, higher private market rates might actually make it possible for some current Beach Plan customers to find better, less expensive coverage.”
Once the plan is stabilized, the General Assembly, insurance commissioner, and Beach Plan board could look at more extensive reforms, Lehrer said. “These reforms could include a merger of the Beach Plan with North Carolina’s Rate Bureau organization,” he said. “The state could also implement a ‘turndown’ requirement that would force people to seek private policies before turning to the Beach Plan.”
“North Carolina should also strengthen building codes and give insurers broad authority to charge higher rates to people who do not take sufficient steps to reinforce their homes against storms,” Lehrer added. “And the state could use tax credits to help ease the burden of higher coastal insurance rates.”
Fixing the Beach Plan will take hard work, but it should not cause significant pain to the people of North Carolina, Lehrer said. “Commissioner-elect Goodwin and the legislature should go about improving the Beach Plan as soon as possible,” he said. “The risk of inaction is severe. Failure to shore up the Beach Plan could lead to a catastrophe involving massive liabilities, higher taxes, and a dwindling availability of insurance for North Carolina residents.”
Eli Lehrer’s Policy Report, “North Carolina’s Beach Plan: Who pays for Coastal Property Insurance?” is available at the JLF Web site. For more information, please contact Lehrer at (202) 615-0586 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].