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Surplus up, exposure down for NC coastal insurer of last resort

Retained earnings and member assessments would represent the primary means by which North Carolina's coastal and beach property insurer of last resort would address catastrophe-related claims should Hurricane Florence impact the Tar Heel State.

Surplus at the North Carolina Insurance Underwriting Association, or NCIUA, has grown while its residential and commercial exposure has declined, leading to a reinsurance program for the 2018 hurricane season that transfers a relatively small amount of exposure beyond the association and its member companies.

The National Hurricane Center's forecast cone for Florence's center as of 11 a.m. ET on Sept. 10 suggested possible landfall for Florence anywhere from North Carolina's Outer Banks through southern parts of the South Carolina coastline. It has been 22 years since a major hurricane, which is defined as a storm of Category 3 or higher, made landfall in North Carolina.

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Founded in 1969 and formerly known as the Beach Plan, the NCIUA provides insurance coverage to beach and coastal property owners who otherwise would be unable to purchase it in the private market. Most of the insurers authorized to write property insurance in North Carolina are members of the NCIUA, and they are required to participate in non-recoupable assessments that the association may levy in the aftermath of a significant catastrophe.

The NCIUA's 2018 reinsurance program, which took effect May 1, includes $350 million in excess-of-loss reinsurance coverage for a 1-in-100-year probable maximum loss of $2.94 billion as estimated based on exposure as of Nov. 1, 2017. The association's reinsurance program for the 2017 hurricane season, which was based on an estimated 100-year probable maximum loss of $3.06 billion, included aggregate excess-of-loss coverage of $760 million.

The 2018 program relies upon retained earnings to cover the first $1 billion of losses. A blended average of output from AIR Worldwide and RMS hurricane and severe storm models used by the association estimates that a loss of that magnitude would represent an event with a 25-year return period.

A reinsurance layer would provide $100 million of coverage in excess of an annual aggregate loss of $1 billion. Retained earnings would then provide another $590 million of coverage. Member company assessments would kick in after that layer, which would represent an estimated 45-year probable maximum loss. Another excess-of-loss layer would then provide $250 million of coverage above an aggregate loss of $2.69 billion up to the 100-year probable maximum loss.

The size of the assessments for member insurers is effectively proportional to their relative market shares across various property insurance lines. The largest association members as determined by the respective weights of their voting rights through year-end 2018 are the groups led by State Farm Mutual Automobile Insurance Co., Nationwide Mutual Insurance Co., North Carolina Farm Bureau Mutual Insurance Co., United Services Automobile Association and Allstate Corp. North Carolina Farm Bureau Mutual incorporates the potential for assessments into its reinsurance program, which for 2018 provides protection approaching a 250-year probable maximum loss.

The reinsurance program for the North Carolina Joint Underwriting Association-FAIR Plan, an association similarly structured to serve as the insurer of last resort for properties outside of the state's beach areas, includes $151 million of coverage for losses in excess of a $130 million retention to be funded by member assessments and retained earnings. Member assessments would cover losses in excess of $281 million.

In contrast, the NCIUA structure provides the ability for the association to issue post-event bonds to address losses reinsurance, retentions and assessments. The bonds would be financed by a catastrophe recovery charge of as much as $326 million to be applied to various types of property insurance coverages at the time of renewal or issuance.

Member assessments would have kicked in for events with lower return periods during the past two hurricane seasons, given that the association's surplus was lower and its total exposure was higher in developments that continued a multiyear trend.

The NCIUA reported a surplus of nearly $1.69 billion as of June 30, up from $1.42 billion on the same date in 2017. During that 12-month stretch, its aggregate residential and commercial exposure declined to $73.91 billion from $78.50 billion. Approximately 37.3% of that exposure came from New Hanover and Brunswick counties, the southernmost counties along the North Carolina coast.

Hurricane Irene, which made landfall near Cape Lookout, N.C., in August 2011 as a Category 1 storm, and Hurricane Matthew, which skirted the North Carolina coast in October 2016, rank as the NCIUA's costliest catastrophes this decade based on total paid losses.

But the current forecast track of Florence could lead to damage that easily surpasses the less than $200 million in combined losses attributable to those storms. The AIR and RMS models estimate losses for the NCIUA in excess of $300 million for a hurricane with a return period of as few as 10 years.