Hurricane Dorian's potential landfall along the North Carolina coast would come as residential property insurers ongoing efforts to achieve rate adequacy in the region could prove a day late and a dollar short.
Wind-related losses from the storm are likely to fall to the two North Carolina residual market entities whose underwriting results and surplus suffered in 2018 from losses caused by Hurricane Florence, which made landfall near Wrightsville Beach. The residual markets account for most of the residential property business immediately along the Atlantic coast, a development that some market participants attribute to their inability to charge actuarially sound rates.
The North Carolina Rate Bureau, the entity that files rates on the industry's behalf, submitted a filing in December 2018 for an overall rate increase of 17.4% on a statewide basis for the homeowners line only two months after companies implemented a much lesser hike that was the byproduct of an April 2018 settlement with the North Carolina Department of Insurance.
While the rate bureau sought an Oct. 1 effective date for the most-recent rate increase for both new and renewal business, North Carolina Insurance Commissioner Mike Causey delayed a public hearing on the filing to Oct. 2 from a previously scheduled date of Sept. 4, as he alleged that the filing suffered from a "pervasive lack of documentation, explanation and justification" and, as such, appeared to propose rates that were "excessive and unfairly discriminatory."
Statewide increase
The rate bureau sought a 18.7% statewide increase in its 2017 filing as a result of rising weather-related losses, but settled with the regulator on a 4.8% average increase, subject to a cap of 5.5%. Causey described the lower rate hike as an outcome that would keep the state's insurance companies financially sound while minimizing the impact on coastal residents.
The latest filing shows actuarially indicated rate level changes of 26.8% on a statewide basis for owner-occupied homeowners policies; the rate bureau requested a hike of 18.0%, overall, for that category of business. But the amount of the indications, which did not incorporate Florence-related claims, vary widely by territory, up to more than 90% in the two areas directly along the Atlantic.
The rate bureau also submitted a filing in August to raise statewide rates on dwelling policies by an average of 19.2%, effective July 1, 2020.
North Carolina Farm Bureau Mutual Insurance Co., the state's second-largest homeowners insurer behind only the group led by State Farm Mutual Automobile Insurance Co., said in its most recent annual statement that property insurance rates in the eastern part of the state "still have major issues." While the company considered the 4.8% homeowners rate increase to represent "a step in the right direction," it argued that the hike was "not sufficient to make rates adequate throughout the state."
'Many risks'
Given the current environment, the company said that there are "many risks we cannot justify covering under current prices" and, as a result, may end up in one of the two residual markets. The North Carolina Insurance Underwriting Association, which is commonly known as the Beach Plan, writes homeowners and certain other types of coverage in 18 coastal counties. The North Carolina Joint Underwriting Association-FAIR Plan writes dwelling fire and extended coverage outside of a statutorily defined "beach" area.
"These plans were intended to be markets of last resort but in practice they are the primary market for many consumers," North Carolina Farm Bureau Mutual said in the annual statement. Data reported by the North Carolina Rate Bureau indicated that the Beach Plan's market share in the two primary territories bordering the Atlantic was approximately 70% in 2016.
"This is a symptom of a strained insurance market where prices are inadequate versus the risks that are presented," North Carolina Farm Bureau Mutual said.
Direct losses
The company estimated that its direct losses from Florence, including a FAIR Plan assessment, totaled about $235 million. Its net loss on the storm, however, was below $50 million after the impact of reinsurance. As the company noted, many Florence-related losses were uninsured given that they were the result of flooding. U.S. property and casualty insurers, overall, generated a direct incurred loss ratio on multiperil insurance business in North Carolina of 94.4% in 2018, up from 47.1% in 2017 and the highest such result in seven years.
The Beach Plan was not nearly as fortunate. According to audited 2018 financial statements posted on its website, the Beach Plan's surplus plunged to $601.5 million at year-end 2018 from $1.54 billion a year earlier as a $997.5 million net underwriting loss caused an overall net loss of $962.5 million. Through March 31, the Beach Plan reported $1.06 billion in paid losses related to Florence with another $52.4 million in claims outstanding. It had been since 2011 that the Beach Plan had reported an underwriting loss in a fiscal year.
The FAIR Plan, meanwhile, reported a full-year 2018 underwriting loss of $121.7 million and a net loss of $120.7 million. That compared with positive results of $11.7 million and $12.7 million in 2017. Its surplus plunged to $7.2 million at year-end 2018 from $19 million 12 months earlier. Florence-related losses paid and outstanding at the FAIR Plan totaled $182.8 million through March 31.
The FAIR Plan assessed member insurers $108 million as a result of Florence's impact. The Beach Plan is authorized to make member assessments of up to $1 billion per calendar year to the extent its losses and expenses exceed available surplus.
