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Coastal North Carolina property rate deal provokes adequacy debate

Coastal property insurance challenges are not isolated to the state of Florida, the spate of recent headlines notwithstanding.

In North Carolina, the state's insurance department billed its recent settlement of an industry property insurance filing as rejecting a "huge rate increase proposal." But the agreement, which amounts to an overall statewide hike of 4% relative to the 19.2% increase requested by the North Carolina Rate Bureau, may do little to placate industry representatives who view rates as too low and coastal interests who consider them to be too high.

Under the settlement, the regulator and the rate bureau agreed to leave dwelling fire rates unchanged across territories, but to increase extended coverage rates by 5.3% for buildings and 5.9% for contents. The latter changes range from double-digit declines for contents coverage in far western North Carolina to double-digit increases for policies covering buildings and contents in two counties located on the state's inner coastal plain.

The actuarial indications of rate need for extended coverage for buildings exceeded 100% in those counties, as well as the two territories that run along the extent of North Carolina's Atlantic coast. The original rate bureau filing capped proposed extended coverage rate changes at an increase of 30% in any territory.

"The filed rates are a reasonable step toward an adequate level," Paul Ericksen, head of the actuarial consulting practice at the Proscendian division of the Insurance Services Office, said in pre-filed testimony supporting the original filing.

The North Carolina process is unique in that the rate bureau files policy forms and rates for residential property insurance policies, including homeowners, dwelling fire and extended coverage endorsements, on behalf of its members. Individual insurers may deviate from the rates approved by the state's department of insurance, subject to regulatory approval, or by obtaining the express written consents of policyholders to charge higher premiums.

The significant and growing roles played by two residual market organizations add a further wrinkle. The North Carolina Insurance Underwriting Association, better known as the Beach Plan, writes homeowners multiperil and wind-and-hail policies, dwelling fire and certain other forms of coverage in the state's 18 coastal counties. Multiperil policies written in the Beach Plan are subject to 15% surcharges above the manual rate filed by the rate bureau; wind-and-hail coverage is subject to a 5% surcharge. The North Carolina Joint Underwriting Association-FAIR Plan writes dwelling fire and extended coverage policies outside of the Beach Plan's areas of operation.

"It is noteworthy that a very large percentage of Dwelling premium in the coastal counties goes to the residual market, rather than the voluntary companies," Matthew Berry, actuarial manager for North Carolina at Allstate Corp.'s primary insurance unit, said in pre-filed testimony.

"While the Beach Plan was statutorily set up to be the market of 'last resort,' it appears to be the market of first resort in many instances," he added.

United Services Automobile Association ranked as the largest individual writer of North Carolina dwelling extended coverage insurance, according to a rate bureau data call, with 2017 written premiums of $14.7 million. The overall market included $59.7 million in written premiums among the voluntary market entities that responded to the data call. The Beach Plan reported $43.1 million in extended coverage written premium in 2017; the Fair Plan had $46.6 million in residential extended coverage written premium that year. Dwelling extended coverage insurance is not reported in statutory filings.

Berry argued that the ultimate effect of the North Carolina regulatory system was to subsidize rates for Beach Plan policyholders, explicitly through the $1 billion assessment that residual market company can issue to voluntary market carriers who write dwelling coverage in the state and implicitly through a catastrophe recovery charge for losses in excess of $1 billion that can be assessed to the state's property insurance policyholders.

"Another way of looking at the situation is that the insurance industry and policyholders across the state are providing free reinsurance to the Beach Plan," Berry testified.

Certain coastal interests seem view the situation the other way around; that their insurance premiums are subsidizing policyholders in other parts of North Carolina, including those that have suffered hurricane losses. A Wilmington (N.C.) Star News article quoted Business Alliance for a Sound Economy CEO Tyler Newman as lamenting that a supposed lack of equity in coastal property insurance rates as he said they "are already three times higher than the inland parts of the state."

In announcing the settlement, Insurance Commissioner Mike Causey said he found the originally proposed dwelling rate increase to be "excessive."

His department has consistently pushed back against the magnitude of residential rate increases sought by the rate bureau. The rate bureau has sought double-digit increases in homeowners rates on at least five occasions since December 2008. But the state regulator agreed to overall increases of no more than 4.8% on any of those filings, including its September 2019 settlement of the rate bureau's original request for an increase of 17.4% at a statewide level of 4.0%.