beach plan reform

8/14/2019 Beach Plan Reform

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North Carolinas Beach Plan:

Who pays for Coastal PropertyInsurance?

E L I L E H R E R

DECEMBER 2008

P O L I C Y R E P O R T


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North Carolinas Beach Plan: Who pays for CoastalProperty Insurance?

E L I L E H R E R D e c e m b e r , 2 0 0 8

3 Executive Summary

5 Fixing the North Carolina Beach Plan

5 About the Beach Plan

10 Fixing the Beach Plans Ills: Stability and Reform18 Conclusion

19 Notes

20 About the Author

The views expressed in this report are solely those o the author and do not necessarily refect those o the sta or board o the John Locke Foundation.

For more in ormation, call 919-828-3876 or visit www.JohnLocke.org.2008 by John Locke Foundation.


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N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | EXECUTIVE SUMMARY

e c s

North Carolinas little-known Beach Planimposes an enormous scal liability on the state.Intended largely to provide windstorm insurance orcoastal residents unable to nd coverage elsewhere,the Plan has grown to become one o the nationslargest entities o its type.

By its own accounting, the plan does not havethe capacity to survive a once-in-six-years stormwithout imposing signi cant taxes (called assess-ments) on North Carolina residents and businesses.One study rom an independent actuarial rmshows that North Carolina could ace liabilities o up to $6.2 billion rom the plan a gure thatsalmost certainly low. In recent years, the Beach Planhas grown at a rate o roughly $1 billion a month,growth that shows no sign o stopping.

The Beach Plans growth stems rom deliberatepublic policy decisions rather than North Carolinasphysical environment. By nearly all accounts, neigh-boring Virginia aces a greater economic risk romhurricanes than does North Carolina, but that statesequivalent plan imposes essentially no burden onthe state or its taxpayers.

The risk o special taxes assessments romthe plan could result in higher insurance costs ornearly all North Carolina residents, lead to a mas-sive withdrawal o insurance companies rom theNorth Carolina market, and cause scal turmoilthroughout the state. One major company, Farmers,already has withdrawn rom the North Carolina market because o the Beach Plans liabilities, andothers may ollow.

The Beach Plan needs change, and, ortu-nately or the state, insurance commissioner-elect Wayne Goodwin seems committed to re orm. Acredible plan or change would consist o e ort mostly undertaken by the Commissioner andBeach Plan Board to stop the Beach Plansgrowth and stabilize it. Following these stabiliza-tion e orts, the legislature, commissioner, andboard would do best to consider comprehensivere orms that would return the Beach Plan to itsintended place as a true market o last resort orpeople who cannot nd insurance anywhere else.

Stabilization would involve several steps:

Raise Beach Plan Deductibles to Stop it From Competing with the Private Sector:Current Beach Plan policies provide coveragethats more attractive than private sector cover-age. To reduce its size and liabilities, the BeachPlan should o er only policies with 2 percent (orgreater) deductibles.

Encourage Private Insurers to Write MoreCoverage Outside of the Beach Plan: Current North Carolina policy reduces or elimi-nates special taxes imposed on insurers when theywrite a air share o coverage in hurricane-proneareas. Flaws in the structure or doing this, how-ever, make it unattractive or insurers actually towrite additional coverage. Rather than imposing a signi cant delay up to two years in granting these tax reductions, the state should o er themimmediately.

Shore up the Beach Plans Tax-Exempt Status: Unlike private companies, the BeachPlan currently keeps its reserves tax ree even

though current IRS standards indicate that it cant. This leads to great uncertainty and risk.The Plan should ask the IRS or clari cation onthe treatment o its reserves, and i it receivesan un avorable response consider structuralchanges that would allow them to remain tax

ree.

Raise Rates Painlessly: Modest increases incoastal insurance rates would likely serve to movepeople out o the Beach Plan and could actually cut premiums or some o those currently in the BeachPlan. Because o the way insurers o er discountsand because o limitations o the Beach Plans owncoverage, higher private market rates might actu-ally make it possible or some current Beach Plancustomers to nd better, less expensive coverage.

Actual re orm would take more work, and, in themedium term, the legislature and Beach Plan boardmight consider several steps.


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Merge the Beach Plan into the RateBureau Organization : North Carolinas RateBureau Organization (which provides a varietyo services or the states insurance industry)does some o the same things as the Beach Plan.Merging the Beach Plan and Rate Bureau couldsave administrative costs and improve manage-ment.

Implement a Turndown Requirement for People Wanting to Take Part in theBeach Plan: Rather than letting anybody inthe Beach Plans service area purchase a policythrough it, the state should open the Beach Planonly to those who cannot nd coverage in theprivate market at any price.

Improve Building Standards ThroughStronger Codes and Higher Rates: NorthCarolina should strengthen building codes toencourage storm resistance, and, simultaneously,the commissioner should give insurers broadauthority to charge higher rates to people who donot take su cient steps to rein orce their homesagainst storms.

Transition to Overall Higher Coastal Rates Using Tax Credits: Many coastal North Carolinresidents do not pay su ciently high rates. In long run, they must pay more or insurance whmany o those inland should pay less. To acilithe transition, the state should o er tax cremodeled on those that exist in South Carolina. Tcredits should be o ered to help people o momeans who currently own homes to remain their homes. They should not serve to acilit

uture development or even those who move

North Carolinas Beach plan has exceeded mandate and endangers the states scal utuFixing it will take hard work but should not causigni cant pain to the people o North CaroliCommissioner-elect Goodwin and the legislatushould go about improving the Beach Plan as soas possible.

N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | EXECUTIVE SUMMARY


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N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | InTRodUCTIon

North Carolinas Beach Plan serves to writehomeowners and wind only coverage. It is part private/part public and has expanded at a rapidrate.

The Beach Plan has a mix o private and publiccharacteristics; the interplay o these characteristicshas signi cant consequences or the plan and thestate. The Plans own website describes its status:The Beach Plan is not a acility o the NorthCarolina State Government, but its operation is subject to review by the North Carolina Commissionero Insurance.

In many ways, the Beach Plan operates like a private insurance company. The insurance industry broadly controls the board and calls the shots asto the Beach Plans operations. It uses standard orms

rom the Insurance Services O ce or establishing its policies, uses a .org rather than .gov domainname or its web page, pays commissions to insur-ance agents, sends out claims adjusters, and bills itscustomers.3 It doesnt have to obey state purchasing

and hiring rules and has provided pro ts or purelyprivate purposes (more on that below). The BeachPlan board consists o seven representatives rom theinsurance industry, our insurance agents, and threemembers o the general public (all o them residentso coastal areas.) While the Beach Plan does not attempt to attract new business through advertising or marketing, it explicitly underprices private com-panies at times and thus competes with them.4 Inall these respects, the plan appears private.

(See Chart 1 on page 6)

On the other hand, many aspects o the BeachPlans operation make it resemble a governmentalentity. To begin with, every insurance companythat does business in North Carolinas admittedinsurance market (the market where almost allindividuals buy their policies) must take part in theBeach Plan.5 The states elected insurance commis-sioner, urthermore, oversees its operations at alltimes and comments on it. The Beach Plan has thepower to assess tax every insurance company

North Carolinas Beach Plan is a Ticking TimeBomb.-Insurance Commissioner-Elect Wayne Goodwin

Each year, between the beginning o June andthe end o November, massive tropical windstormsthreaten the North Carolina coast. When they hit,North Carolina taxpayers may end up paying bil-lions o dollars to rebuild underinsured privatehomes and businesses. Taxpayers bear this riskbecause o an obscure, little-known entity called theNorth Carolina Insurance Underwriting Associationor, colloquially, the Beach Plan.1

This paper describes the Beach Plan and makesa case or re orming it. The paper consists o threesections: The rst describes the workings o theBeach Plan and its consequences or the state, thesecond outlines proposals to stabilize the BeachPlan, and the third ocuses on the ways in which the

state might work to re orm the plan, reduce its risks,and provide airer insurance rates to most NorthCarolina residents.

The paper reaches a simple bottom line: theBeach Plan needs to become a true provider o last resort that sells insurance only to those residentstruly unable to nd private, admitted market insur-ance anywhere else.2 It should not serve as a wayo subsidizing insurance or coastal dwellers. On theother hand, the need or an orderly and serviceabletransition does mean that certain practical consid-erations must enter into the debate: thede facto mandate that coastal residents purchase propertyinsurance will make some sort o government-sup-ported mechanism a necessity in the short term.In the long term, however, North Carolina will besa est, most secure, and most prosperous i it lets the

ree market work.

ab B c P n

f n N C n B c P n


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in the state when it cannot cover a loss based onits own reserves and reinsurance. Unlike a privatebusiness, the Beach Plan does business in only 18coastal counties and cannot write policies to peoplein other parts o the state. Although not subject toFreedom o In ormation Laws, urthermore, theBeach Plan operates more openly than most non-

public companies: its revenues and business modelare all matters o public record. Unique among the nations residual insurance markets that arent explicitly government-run, the Beach Plan holdssurplus without paying taxes on it something noprivate company could do (more on this below). Inaddition, the plans coverage has certain limits: theBeach Plan homeowners policy does not includeliability coverage or things like accidents that be allvisitors to an individuals house (most modern hom-eowners insurance does), and, o course, the wind

only coverage that makes up most o the BeachPlans business is a product that very ew privatecompanies sell.

In recent years, the plan has grown at a sig-ni cant rate. In 2004, the Beach Plan collected $99million in premiums; today, it collects $269 mil-lion. And, as its revenues have climbed, so have itsliabilities.6 In 2004, its 100-year Probable MaximumLoss (PML) stood at $1.8 billion; today, the 100-yearPML stands at $3.8 billion. To back this, the planhas a maximum o $1.5 billion in capacity only

$500 million o which is cash. (Because reinsurais structured in layers which pay out only a ter Beach Plan spends a certain amount o its omoney however, it also would have to use up allits reserves and, simultaneously, assess policiesprovide reinsurance.)

(See Chart 2 on page 7)

All this has signi cant consequences or state. A report rom the actuarial rm Milliman tthe Property and Casualty Insurers Association America commissioned paints a grim picture o likely uture or the plan.7 According to Millimancalculations:

The Beach Plan will not have more than $1billion in total reserves to pay or a storm amount thats almost surely an overestimate reasons discussed below.

Any amounts above $1.5 billion will requiassessments to member companies, and theassessments could have signi cantly detrimenconsequences or smaller insurers.

Assessments would range, according to Millimrom $343 million to $6.2 billion. In the cont

o North Carolinas overall property insuranmarket $3 billion this would be a tremendamount o money and could render any numbo companies unable to unction properly in medium term.8

N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | AboUT ThE bEACh plAn

$2,459

$895

$224 $192 $160 $133 $93 $86 $52

North Carolina has less coastal riskthan most nearby states. . .Total Coastal Exposure in Selected States(Billions of Dollarsrounded to closest billion)

Source: AIR Worldwide.

FL TX LA SC VA NC AL GA MS

Chart I


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Milliman, however, greatly overstates thereinsurance capacity, and, there ore, the speci cnumbers in its report paint a more favorable picture o the Beach Plans situation than is actually the case.

While the Beach Plan had about $560 million in cashreserves as o September 2008 slightly more thanMilliman estimated it would a ew months be ore the actual value o reinsurance it has acquired isonly a hair over $700 million, rather than $1 billion.9 The di erence exists because the current reinsur-ance contract includes reinstatement ees that arenetted out o its payouts to the Beach Plan. Thesereinstatement ees unction, or almost all intentsand purposes, in the same way that deductibles

unction with regard to personal homeowners and

automobile insurance policies.10 As a result, it appears that the Beach Plan will get

into serious trouble as soon as losses hit $1.2 billionin a season. The Beach Plan itsel estimates that a Category Four hurricane which the Beach Plansown accounting manager says is almost certain at some point in the next two decades would wipe it out altogether.11 At that level, the Plan would beginneeding to assess (tax) insurance companies, and,by the Beach Plans own estimate, the assessmentswould be at least $600 million.12

The consequences or the state could well bedrastic. In particular, massive assessments ollow-ing a major storm could well lead to a signi cant exodus o insurers rom North Carolina. One major

insurer, Farmers Insurance, already has pulled out o North Carolina and has explicitly cited ear o assess-ments.13 Speaking at a public hearing conductedby the Beach Plans study committee, FarmersExecutive Jerry Payne made it clear. We took the

orm and looked at it, and our loss would be $48million. Weve got to manage our business. That would be a type o loss that we couldnt recover,he said. Speaking with the author on a not- or-attri-bution basis, representatives o two other sizeableinsurers con rmed that they had developed plansto leave the North Carolina market i conditionswarranted. While harshly critical o certain aspectso North Carolina policy, Nationwide executiveBradley Lemmons said North Carolina has a lot o characteristics we see as avorable. In act, largecompanies like Nationwide and Farmers can stay inNorth Carolina as long as they want to without earo going out o business: Farmers is part o the ZurichFinancial Services Group that took in a total o about $48 billion in 2007.14 North Carolinas liabilities willnot bring down Zurich although ailing to manage

The percentage of risk on the coasts is thesecond lowest in the region.

Source: AIR worldwide via Prof. David Marlett, Appalachian State University.

79

3528

13 12 11 95

FL LA SC MS AL VA NC GA

Chart II


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them would likely result in signi cant consequencesor the Farmers group, which operates as an inde-

pendent business.

Smaller companies, particularly those that oper-ate only in North Carolina, may ace the biggest problems. Bob White o Alliance Mutual Insurance a small North Carolina-only company describedthem. We understand the niche were in, he says.And its a dangerous one to be in. White explainsthat a single bad assessment could draw down hisown companys reserves to the point it could nolonger borrow money or, importantly, receive a

high enough rating rom A.M. Best and Company(the primary rater o insurance company solvency)

or banks to accept its coverage. This would almost certainly drive it out o business. Nearly any com-pany that writes homeowners insurance only inNorth Carolina aces the same existential threat asAlliance Mutual.

Another wrinkle, which has received littleconsideration, makes the entire situation evenless certain. Until recently, the Beach Plan couldhave likely spread the pain by issuing multi-yearbonds in order to pay o its debt. While the totalpayments as a result would be somewhat higher,companies, particularly smaller ones, would be in

much better shape in the short term. The ability topay o bonds over a period o years would likelyimprove the balance sheets or large insurers andmake the di erence between survival and collapse

or smaller companies. The recent collapse o municipal bond markets, however, makes it veryunlikely that the Beach Plan could sell any signi cant amount o bonds. Other similar entities including Florida Citizens Property Insurance Corporationand Floridas Hurricane Catastrophe Fund havebeen unable to sell the amounts o bonds they have

wanted to; indeed, even Connecticuts AAA-ratpension und bonds ailed to nd buyers durthe all o 2008.15 The result is that the assessmenwould almost certainly have to be paid immediate

rather than spread over time. Even a $55 millioassessment which the Beach Plan considers liwithin the next six years would have signiconsequences or the states insurance industry aits consumers.16

Its important to note, in this context, ththe collapse o insurers would have consequen

ar beyond their executives and stockholders: insance consumers would immediately pay more, taxwould rise, and insurance could become impossibto obtain. To begin with, any assessments levion insurers would represent a cost o doing buness in North Carolina. Even i companies did npass them on directly via a surcharge, an insurancommissioner would have to recognize these coand allow them to work their way into rates. I commissioner did not, the insurers would simpleave the state, thus cutting coverage or NoCarolina residents. I insurers collapsed, likewresponsibility or their claims would end up in hands o the North Carolina Insurance GuarantAssociation, which would place taxes on all propeand casualty insurance policies in the state in ordto pay the claims. In this sort o situation lassessments, insurer collapses it would becovery di cult to attract private insurers into the stA Beach Plan that had run out o money could wrcoverage only through additional assessments, anat some point, a plan that relied only on assessiother policies would draw extra scrutiny rom leers. Each policy that the Beach Plan writes is a polthat it cannot assess. Seeking to avoid assessmeninsurers would fee inland North Carolina as weThe result could well prove a catastrophe: massiliabilities, higher taxes, and no insurance or NoCarolina residents.

Without quick, serious change in the way that tBeach Plan works, in short, North Carolina will a property insurance disaster. Large companies w

ollow Farmers out o state, and small companiessimply go bankrupt. Property insurance will becomunavailable, and more and more people will have join the Beach Plan. As the Beach Plans own abi


Its important to note, in this context,

that the collapse of insurers would have consequences far beyond their executives and stockholders: insurance consumers

would immediately pay more, taxes would rise, and insurance could become

impossible to obtain.


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to assess decreases (it cant, a ter all, gain anything by assessing itsel ), it will eventually have to turn togeneral state revenues to pay o its bills. And NorthCarolina taxpayers all over the state will end up

paying o the damaged property o coastal residents.Even without the worst-case possible scenario, thepossibility o assessments added to bills will, at mini-mum, raise prices or everyone in the state.

Fortunately or North Carolina, the systemsproblems stem rom fawed regulatory, manage-ment, and legal decisions rather than the statesphysical geography or built environment. NorthCarolina isnot a particularly hurricane-prone state.In act, only one coastal state in the Southeast Georgia has less coastal exposure than NorthCarolina, and several states that havent had a hur-ricane strike anytime recently (Massachusetts, NewYork, and Connecticut) actually have more coastalexposure than North Carolina.17 Likewise, stateswith miniscule state-supported coastal insurancemarkets states like Virginia and Alabama actu-

ally have more coastal exposure in dollar volumeand/or percentage o total real estate than NorthCarolina. Some aspects o North Carolinas system,indeed, are simply nonsensical.

(See Chart 3 below)

Nor, or that matter, are North Carolinascoastal counties particularly in need o support onsocial equity grounds. Like all other coastal states,indeed, North Carolinas coastal counties actuallyhave higher average household incomes than thoseinland.18

The xes, urthermore, may not cause much painto the state in the aggregate. The current system,indeed, almost certainly increases insurance rates inthe eastern portion o the state and many westerncounties while o ering small discounts to peopleliving in coastal areas. A series o commonsensere orms, many o which dont even require thelegislature to act, can do a great deal to stabilizethe system.


23

14

6

2.5 .5 .2

But the residual wind market is one of Americas largest.Percentage of Total Property In Residual Market:

FL LA NC SC KY GA VASource: PCI, Authors Research

Chart III


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10

Any e ort to x the Beach Plan will have to takeplace in two steps: stabilizing the plan and re orm-ing it. Stability would consist o ending (or at least slowing) the Beach Plans growth, increasing itscapacity to pay claims, and improving its structure.Re orm o the Beach Plan would consist o e ortsthat undamentally change its structure, reduceliabilities signi cantly, and allow market orces toplay the leading role in disciplining North Carolinasproperty insurance environment.

Its impossible to envision any sort o undamen-tal re orm without e orts to stabilize the Beach Plan.

So long as the Beach Plan continues to grow at itscurrent rate, add liabilities, and scare away privatecompanies, it appears impossible even to oreseeany realistic possibility o an operating strategy that would result in the Beach Plan being phased out.Thus, re orm would begin the process.

staBilizatioNNorth Carolinas unusually power ul insurance

commissioners position and the nature o theinsurance regulatory system both make re orm rela-

tively easy. Insurance Commissioner-elect WayGoodwin has shown a commitment and interein xing the Beach Plan. Without disturbing ao the undamentals o North Carolinas insursystem even those aspects that ree-market acates might nd problematic the commissioand Beach Plan board can make signi cant, usechanges in the structure o the plan that would puon stable ooting. Goodwin has suggested he wato do just that.

Although Goodwin is yet to announce a speciagenda he wants to wait or a report rom a s

commission it seems that our changes that wstabilize the Beach Plan appear possible without alegislative action: product-o ering re orm withBeach plan, instant recognition or insurers tchoose to write more coastal coverage (thus encoaging the writing o more coastal coverage), greopenness in Beach Plan operations, and the approvo modest coastal rate increases or private iners. (As discussed below, the approval o increamight actually cut rates or many coastal residenA discussion o these recommendations ollow

N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | FIXIng ThE bEACh plAnS IIIS: STAbIlITY And REFoRM

f n B c P n i : s b n r

6%8%

17% 18%

38%*The Beach Plan grew at a rapid pace between2004 and 2007Growth in Liability, Selected States

Source: Dan Sutter, University of Texas Pan-American * The statistic for South Carolina is not directly comparable to theothers because South Carolina more than doubled the areas eligible for its wind pool and all other states remained static.

FLMS TX NC SC

Chart IV


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reCommeNdatioN: offer 2 aNd 3PerCeNt of-home- value deduCt-iBles (or greater) as the BeaChPlaNs oNly oPtioN.

Current Beach Plan o erings include deductiblesas low as $1,000. This makes almost no sense. To theextent a public obligation to provide coastal insur-ance exists at all, it seems obvious that the capacityshould not compete with the private sector. In act,doing so is arguably illegal under North CarolinasMoorehead Act (which orbids the government

rom competing with the private sector) in any case.Insurance Commissioner-elect Goodwin tells theauthor that he avors a 2 percent deductible or theBeach Plan. This makes sense. Many insurers o er

2 or 3 percent deductibles as the highest option.Raising deductibles or insurance will reduce theliabilities or the Beach Plan, cut its operating costs(since it wont have to adjust claims as o ten), andencourage some customers to seek out coverage inthe private sector.

A 2 percent deductible is equivalent to a $4,000deductible on a typical house with a structure valueo $200,000.19 Repairs in this range, although not cheap, are the sort o things new roo s, HVACsystems, and carpeting that nearly all homeownersmake at some time. Every homeowner can reason-ably expect to pay these types o expenses, and itsdi cult to see why the taxpayers should have anobligation to take on an implicit liability rom themwhen they result rom storm damage rather thansomething else. A policy with a 2 percent deduct-ible may reduce the ability o someone to recoverdamage or a ew broken windows but will have just about the same utility in rebuilding an entirelydestroyed house, satis ying bank lenders, and doing everything a homeowners insurance policy needsto do. At the margin, it will also reduce the overallliability o the plan and, by reducing its need toadjust claims, cut its administrative overhead evenmore.

Depending on market demand, the plan might alsoo er other, high-deductible options to homeownerswho want lower rates. In particular, administra-tors might consider 3 and 5 percent deductiblesas options and provide appropriate discounts orhomeowners who select them. Doing so would

reduce plan liabilities, cut premiums, and, at themargin, encourage residents to nd coverage in theprivate market.

reCommeNdatioN: Create a meCha-Nism to reCogNize iNsurers iN-Creased Coastal Coverage immedi-ately.

A faw in current North Carolina law makes it very unattractive or companies, particularly smallerones, to cover more properties in hurricane-proneareas. Like nearly all other states with wind pools,North Carolina allows insurers to write their wayout o the wind pool by o ering more coveragevoluntarily. In other words, a company can avoid

the special taxes assessments that the wind poolimposes by writing coverage in heavily wind-proneareas on their own.

A series o mathematical ormulas determine a companys assessment or the wind pool. It works likethis: a company that holds a 10 percent share o thestate market and writes only 5 percent o the coveragein wind pool-eligible areas receives an assessment (a special tax) to pay a portion o the wind pools claims

ollowing a major storm. I the company decides towithdraw rom the coast altogether, this assessment will double. I , on the other hand, the company writeshomeowners policies or 10 percent o all coastalproperties, it will not have to pay an assessment at all.This policy serves to encourage all companies, evensmall ones, to write at least some coverage on thecoast but, at the same time, punishes any companythat decides not to do so.The system or determining the assessments, how-ever, has a deep faw. In North Carolina, companiesdont get credit or writing coverage until theyear after they write it. Its just the way the ormswork, explains Dascheil Propes, a ormer DeputyDirector o the Insurance Department. Thats what the basis is.

This makes it very unattractive or any companyto write more coastal coverage. A company that greatly increased the number o coastal policies it wrote in a year that a major hurricane hit would haveto pay all the claims it receivesand an assessment a special tax based on the number o policiesit wrote be ore. We just cant do it, says Alliance



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Mutuals White. Even i we wanted to, the rating agencies wouldnt let us. A single bad season, andwed be wiped out altogether.

The logistical hurdles o collecting in ormation

rom companies in real time appear relativelylow. The North Carolina Department o Insurancecould simply develop a system that lets companiesreport new coastal coverage as they write it and,thus, have their assessments reduced as soon asthey issue a binder obligating them to provide thecoverage. Some sa eguards to prevent gaming thesystem might be needed. But, at minimum, Goodwinshould ask his sta to study the possibility o granting instant credits or coastal coverage.

I it proves impractical to track coverage in real

time, the state instead might consider creating a system that allows companies to receive general-purpose tax credits against wind pool assessments.A company that wrote a air share o wind poolcoverage in a given year but is unable to get credit against its wind pool assessments might insteadreceive a tax credit against other taxes it pays. It might be most logical to o er the credit against the premium taxes that the state assesses to pay

or insurance regulation and contribute to generalrevenue. This, or all intents and purposes, means

that the states general und would end up o ering a potential, modest, one-year subsidy to companiesthat agree to take on more coastal risk. This isnt anideal situation since it would result in odd distor-tions and asks taxpayers rom the state as a wholeto assist the coastal insurance situation. (Texas haslong o ered credits or its own version o the BeachPlan: the Texas Wind Insurance Association.20) Still,as this system reduces the overall size o the BeachPlan, and since the credits would last or only oneyear, it exposes taxpayers to only a minimal risk.

O ering such credits would save money or copolicyholders. Right now, at least some insurancompanies hold back on writing new coastal pocies because they know that they will ace a dou

exposure or one year. Since companies haveo er a lower price to lure customers away romBeach Plan, increased private coverage will samoney or North Carolina residents.

Whatever happens, Insurance Commissioneelect Goodwin should strive to nd a way to remothe perverse incentive structure currently impliin North Carolinas Beach Plan and, thereby, savmoney or taxpayers and coastal residents.

reCommeNdatioN: shore uP theBeaCh Pla Ns tax-exemPt status

North Carolinas Beach Plan currently operatunder the principle that its better to ask orgiventhan permission when it comes to dealing with treserves it carries over rom year to year. We maa decision that we would do this [without] a chanin law, said Beach Plan counsel Robert Paschduring a public hearing on the Beach Plan. Sin2005, the Beach Plan has retained its yearly surpwithout paying taxes on it or returning it to membcompanies.21 To obtain tax- ree status, other stamade their residual markets into corporate-style goernment bureaus that are exempt rom both taxand some o the strictures hiring and purcharules that bind government bureaucracies. Tcurrent structure o the Beach Plan, however, himportant di erences rom residual market pin several other states Cali ornia, Louisiana,Florida where the IRS has clearly ruled that various residual insurance markets are tax-exemgovernment unctions. In particular, the NorCarolina Beach Plan has a board made up mostlyrepresentatives rom private industry insurersinsurance agents while these states have boamade up mostly o political appointees.

Quite simply, the Beach Plan needs claritEither Commissioner-elect Goodwin or the Planboard should ask the IRS to review the Beach Plastructure and determine i it owes taxes. I it dthen the Plan will have to pay the taxes and accethe decreased reserves. The current orgivenrather than permission model simply cant endur


A company that greatly increased the number of coastal policies it wrote in a year that a major hurricane hit would

have to pay all the claims it receives and an assessment a special tax

based on the number of policies it wrote before.


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1

Since most North Carolina residents live away from the coast, at least some

people on the Beach Plan board should live away from the coast as well.

I the Beach Plan were suddenly ordered to paytaxes something the IRS could do at any time it would have to surrender hundreds o millions o dollars worth o reserves, signi cantly reducing its

ability to survive even a minor storm.I the IRS decides that the Beach Plan must pay

taxes, then the Plan may wish to consider a changein structure that would place it under rmer politicalcontrol. While this would clari y the Beach Planstax-exempt status, however, it would also strengthenthe de acto presumption that the state would bailout the Beach Plan i it were to get into trouble. (Theassumption very likely already exists.) Allowing poli-ticians to appoint more members o the Beach Planboard would also increase the chances that politicalleaders might appoint unquali ed cronies to theboard and allow the plan to become mismanaged.

Three sa eguards, however, could avoid thesepotential problems and retain the Plans tax-exempt status. First, it would make sense to divvy up respon-sibility or appointing the board. Giving separateappointments to the insurance commissioner,governor, and majority and minority leadershipo both houses o the legislature could make surethat no single ideology or political leaning gets toomuch representation. Second, i the board needs tobe revised, it should include some inland represen-tatives. All o the current citizens representativeson the board and, indeed, all o the North Carolina residents on the board, either come rom coastalareas or have heavy interests there. Since most North Carolina residents live away rom the coast,at least some people on the Beach Plan board shouldlive away rom the coast as well. Finally, a prepon-derance o politically appointed members brought onto the board should have pro essional experience

in the insurance industry or a record o scholarshipand advocacy about insurance-related issues. Thiswould prevent politicians rom appointing unquali-

ed riends and donors to the board.

Moving toward a politically appointed board orthe Beach Plan is not necessarily desirable. But it may well prove necessary to retain the tax-exempt status and avoid urther destabilizing activities.Whatever happens, the state would do best to askpermission rather than waiting or orgiveness that may never come.

reCommeNdatioN: faCili tate m od-est rate iNCre ases im mediately(WhiCh WouldNt a Ctually iN-Crease rates for most Primary

homeoWNers.)Goodwin would also do well to encourage

insurers to submit modest coastal rate increasesthrough the Rate Bureau, particularly becauseincreasing rates in certain ways actually could savemoney and improve service or homeowners. Thesemodest rate increases could take place without any

undamental change to the process o setting insur-ance rates in North Carolina and without causing any shocks to North Carolina homeowners. Noregrets increases in rates appear possible or three

reasons: insurance company structure, the BeachPlans own limitations, and economies o scale.

In general, insurers nd it advantageousto sell multiple products to the same customer.

Insurance consumers that keep retirement invest-ments and li e insurance, homeowners, and autoinsurance polices with the same company will likelyreceive a variety o discounts. In general, thesediscounts show up in the orm o lower automobileinsurance rates (since auto insurance is generally themost pro table product.) Consumers that participatein the Beach Plan, however, give up potentially valu-able discounts on other products. Even i they paymore or homeowners insurance rom the private

sector, consumers total cost o insurance might welldecline i they get discounts on other products romthe same company.

Just as importantly, the Beach Plans cover-age just isnt that good: its limited and providespoor service. In particular, even the completehomeowners policy rom the Beach Plan excludesliability coverage: homeowners whose dog bites a guest can ace a lawsuit or the limits o the guestsinjuries unless they purchase an additional policy.Also, the private insurance industry, quite simply, is



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Essentially, reform would focus on turning the Plan into a true market of last resort that would provide coverage

only for people who honestly cannot find it anywhere else.

better equipped to provide service than the BeachPlan. Because the Beach Plan has a reasonably smallpool o customers and, between storms, handles very

ew claims, it cannot maintain a large ull-time sta

o adjusters, a major call center, or anything else.We simply cant be big enough to provide reallygood service ollowing a storm, admits Jim Oliver,the head o Texas equivalent o the Beach Plan,the Texas Wind Insurance Association. It just isnt possible.

Thus, Commissioner-elect Goodwin might alsoconsider immediately allowing even more rating

reedom or second homes. Even i he did not,second homeowners might well pay higher ratesimmediately even i increases kept insurance

costs stable (or cut them) or primary homeowners.Second homeowners are sometimes out-o -stateresidents who dont vote at all in North Carolina and might not vote or North Carolinas insurancecommissioner. Even those who live in state may votenear home and thus dont deal much with coastallegislators. Electoral concerns, o course, still play a role or such homeowners particularly since manyprovide vital tax revenues to the communities wherethey live but the consequences o raising theirinsurance rates may be smaller than those involvedin raising rates or ull-time homeowners.

The steps outlined above would, at minimum,

end the Beach Plans explosive growth. But they donot solve the Plans problems. Without additionalundamental changes, North Carolina will still

retain a larger residual wind market than its coastalexposure justi es.

reformE orts to re orm the Beach Plan, nonethe-

less, must ollow e orts to stabilize it. So long asthe Beach Plan continues growing at least at itsbillion-dollar-per-month rate, true re orm will

prove politically impossible, since more and mopeople will continue clamoring to get into the PlaEssentially, re orm would ocus on turning the Pinto a true market o last resort that would prov

coverage only or people who honestly cannot it anywhere else. It would involve comprehensichanges to the Beach Plans administrative structueligibility or coverage, and the setting o ratethe private market. In the end, a private or mostprivate market or coastal coverage would emer

reCommeNdatioN: merge the BeaChPlaN With the rate Bureau

Re orming the Beach Plan would start wsigni cant changes to its structure. In particular

would make sense to do what many in the insuranindustry have suggested none in public merge the Beach Plan into the existing Rate Bureorganization while simultaneously limiting the rano coverage that the Beach Plan writes. Currenthe North Carolina Rate Bureau organization (poplarly called the Rate Bureau) runs the Rate Bure(which serves as the industrys collective voicerate hearings), the insurance guarantee und (whprovides a mechanism or paying a portion o pcyholder claims i a company becomes insolve

and the Reinsurance Facility (which runs NorCarolinas largest-in-the-country auto insuranresidual market.) Nothing in statute actually requithe three organizations to co-locate or share intlocking administrative structures, but the economo scale appear to make all o them more e cAlthough the Reinsurance Facility has signi ccosts or North Carolina, it is essentially stable is extremely unlikely to require a bailout. Becauthey share services, urthermore, they cost less. Tcompanies that participate in the Rate Bureau a

largely the same ones with a ew exceptions participate in the Beach Plan.

Just about everyone involved with the NorCarolina insurance industry agrees that the BeaPlan would do better olded into the Rate Burebut none would speak on the record. Its leadeship but I am not going to go there, says oindustry insider. Quite simply, its not clear whthe Beach Plan has grown so quickly, strayed so

rom its mission as an insurer o last resort, or



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1N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | FIXIng ThE bEACh plAnS IIIS: STAbIlITY And REFoRM

The Virginia Model

n rt Car i a mi t aim eve tua y t eu wit a system s met i ike t e c asta i sur-a ce system i its ei r t t e n rt . Vir i iac siste t y t sGoverning ma azi es re rt car

t e est ver e states, a t e e i te ema a eme t its w resi ua i sura ce market art t e FAIR a s ws a etter veraway t r vi e c vera e r e e w ca t etit e sew ere.22 n rt Car i a a s as a FAIR (Fair Access t I sura ce Requireme ts) a , a itsa mi istere a wit t e beac p a . like a

t er FAIR a s, t e n rt Car i a a Vir i iaFAIR a s ar se w e maj r i surers wit rew

r m ma y ur a areas wi civi is r er it e 1960s.

o t e sur ace, Vir i ia actua y as reater risks t a n rt Car i a. Vir i ia, i act, asa ut $30 i i m re i c asta ex sure t an rt Car i a.23 likewise, 11 erce t Vir i iast ta ex sure exists t e c asts as se t 9

erce t n rt Car i as. Vir i ias FAIR a ,ikewise, writes a um er -c asta risks i

i er-city areas. (n rt Car i as a writes t eserisks t r u a se arate a t at s ares ma a e-me t wit t e beac p a .)

Vir i ia, wever, as rastica y ewer iciesi its eac a equiva e t, a t e ses risk t t e tax ayers. Eve i a Katri a- ike ce-i -250-year st rm were t it Vir i ia, tax ayersa i surers w u we t e a maximum $16 mi i a ut $2 er Vir i ia resi e t.24 (Amaj r 100-year st rm a muc m re ike y eve t

w u t require a si e ime assessme ts.)T e Vir i ia a writes y a ut $15 mi i

i t ta remiums. U ique am t e ati sc asta r erty i sura ce a s, t e Vir i ia aas actua y s ru k ver t e ast tw years as its

icy ers ave u c vera e i t e rivatemarket. 25

Esse tia y, t e a r vi es tra sit ry c v-era e r e e w e ui e y ca t i ite sew ere a ur es t em t m ve quick y.We wa t t e u ate t e a . We t wa t

e e t a ar u , sai lee a nye, t ea s a mi istrat r, s eaki at a c ere ce

hi t hea Is a . but t e a es t skim service. We ee t s e m ey t r vi e

service r e e w ca t f i sura cea yw ere e se. Were t i t wi awar s r savi $10,000 y uyi a c m uter system t at

es t w rk.

g ma a eme t a e, wever, es tex ai w y t e Vir i ia m e succee s. I stea ,Vir i ias success as as muc t wit t e i sur-a ce e artme ts wi i ess t et t e rivatemarket w rk. Esse tia y, Vir i ia i surers cac ar e w atever rates risks i t e state justi y aca sim y f e a use t eir rates rat er t a

avi t issue t em t r u a rate ureau asu mit t em t a ri r-a r va r cess.26 T isa s makes a maj r i ere ce.

A t u t eres r a y ee r n rtCar i a t c y every eature Vir i ias a s,n rt Car i a as a t t ear r m its e era

ri ci es. It is fsca y s u , ses t reat tt e states tax ayers, a r vi es service t

t se w rea y t ave a t er c ice.

it has so little capacity to pay its claims. Other stateshave avoided similar problems North Carolina hasencountered. A merged Beach Plan which stillmight have its own board could operate moree ciently and better than the current Beach Plan.

reCommeNdatioN: imPose a flex-iBle turNdoWN requiremeNt forthe BeaCh PlaN

The Beach Plan should never write coverage tothose who can nd insurance in the private market. It


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1 N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | FIXIng ThE bEACh plAnS IIIS: STAbIlITY And REFoRM

should never underprice the market or o er a prod-uct thats more attractive than the private market.Currently, its coverage costs less and, in some cases,proves more attractive than what exists in the private

market. Given that insurers and agents control thepreponderance o board seats on the Beach Planboard, it seems very unclear at minimum whyand how this has happened. To prevent the BeachPlan rom becoming a competitor with the privatemarket in the uture, North Carolina should makesure that the plan takes its provider o last resortmandate seriously. In the long run, the simplest wayto do this is to increase the rates that the plan charges.In the medium term, however, the legislature or theBeach Plans own board should consider imple-

menting a turndown rule that would allow onlyindividuals who have looked or private insuranceto purchase insurance rom the Beach Plan.

Under such a rule, individuals would haveto present evidence that private companies wereunwilling to write them insurance be ore being eligible or insurance through the Beach Plan. ThePlan might require 2 or 3 turndowns privateinsurers unwilling to write coverage at any price be ore allowing people to partake in its coverage.Rather than immediately raising the Beach Plansrates, this would serve to encourage people who canget better coverage elsewhere to leave the BeachPlan on a voluntary basis. Some people currently inthe Beach Plan might also simply nd that privatemarket coverage suited them better.

Requiring turndowns will run into some opposi-tion because agents, not without reason, would dis-like a turndown mandate. Such a mandate createsextra work in having to seek additional quotes with-out earning additional commissions or agents.

The best and airest solution would be to couplethe turndown mandate with a modest across-the-board 1 percent increase in Beach Plan premiumson top o whatever other increases might be justi-

ed. Such an increase would do three things. First,it would compensate agents or the extra work inobtaining turndowns or their customers. (Theadditional commission cant be too generous, how-ever, because otherwise it would create an incentive

or agents to steer customers toward the Beach Plan.)Agents who re er customers to the Beach Plan a ter

getting turndowns would receive this ull 1 perc(or more) as an additional commission. Seconwhile it would not improve the Beach Plans sstatus, the additional commission would, at t

margins, encourage people to seek private coveragFinally, the additional ee could provide an outagents: i its absolutely clear that no private insuwill write a given property, an agent can simpsubmit it directly to the Beach Plan and earn a stadard commission with the Beach Plan keeping tadditional 1 percent to strengthen its reserves.

reCommeNdatioN: eNCourageBetter BuildiNg through higherstaNdards aNd iNsuraNCe rates

Building stronger buildings, all other things beequal, will make North Carolina more resistant storms. Homeowners that rein orce their propties to withstand Category Four hurricanes woneed to trouble the Beach Plan or, or that mattany private insurer. To upgrade buildings in NorCarolina, the state legislature should considactions that would increase building standardwhile the insurance commissioner should allow rate standards that make building quality a majconsideration.

Increasing standards will help a great deActuarial calculations, indeed, show that di eroo , shutter, and gable designs can justi y premdiscounts up to 86 percent on insurance polici(although insurers would, in general, oppose the laest premium discounts).27 Better standards or neconstruction in coastal areas make sense even i tincrease the cost o new homes. In act, stronger sdards may make the most sense particularly i thedo this. More expensive housing in disaster-proareas, all other things being equal, will discourapeople rom living in these areas who do not hathe nancial resources to deal with disasters.

No building codes, no matter how well they prmote coastal sa ety or how enlightened they prowill make much o a di erence or a long timereason is simple: the states housing stock turns overy slowly. The Census Bureau nds that NorCarolina which has grown aster than the natiaverage has added about 120,000 new residea year since 2000. Many o the new residents w


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1N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | FIXIng ThE bEACh plAnS IIIS: STAbIlITY And REFoRM

live away rom the coast (many o the states astest growing counties arent on the coast), and many willrent housing in large complexes insured through thestates lightly regulated and commercial insurance

system. Already, a combination o environmental,mitigation, and insurance mandates make coastaldevelopment less attractive than development elsewhere. Tighter standards will not do a lot toimprove things or the overwhelming majority o North Carolina residents who live in housing that new building standards wont touch. Quite simply,revised building codes apply only to new structures.O ten, urthermore, it proves nearly as expensive toretro t an existing structure to current codes than tobuild a better, stronger structure rom scratch. Thus,

its likely that a large percentage o housing willnever be retro tted. Although orward-looking building codes have an important role to play, they will taketime to have any consequences. There ore, the stateand its residents would do best to ocus on e orts that will encourage retro tting o existing houses.

Prices or insurance provide the best in orma-tion in the aggregate as to how to do this best.Few insurers will give large discounts or any given mitigation (its simply too chancy), but many willgive discounts or comprehensive e orts to improvea given house. To encourage this, Commissioner-elect Goodwin would do well to grant insurers broadlatitude in granting discounts or mitigation and asa necessary converse raising prices or houses that dont meet standards. Rather than trying to orce theupgrade o houses, which is very di cult anyway,the insurance department should encourage insurersto send price signals as to the most desirable waysto rein orce housing against storms.

reCommeNdatioN: traNsitioN tosigNifiCaNtly higher Private mar-ket rates for Coastal ProPertiesvia tax Credits modeled oN southCaroliNas

Putting the Beach Plan on solid ooting in thelong term will require higher rates or many o thosewho live in coastal areas. By one means or another,the state should approve these rates. Because o thecontroversy it is likely to arouse, in act, the statescurrent prior-approval rate-setting system may

serve as a use ul mechanism or allowing insurers,consumer advocates, and regulators to air the need

or higher rates in public.

Following e orts to rede ne the wind pool as a true market o last resort, the Rate Bureau shouldpropose and Commissioner-elect Goodwin shouldapprove a rate plan that reduces homeownersinsurance rates in Western North Carolina, holdsthem more or less steady in most o Eastern NorthCarolina, and raises them signi cantly in coastalcounties. Such a plan, most likely, would keep thetotal amount o premiums paid by North Carolina residents roughly the same (a ter adjusting or costsexternal to the insurance industry itsel ), while pro-viding rate cuts to most o the states population.Nonetheless, the people paying higher rates wouldsee signi cant increases doubling in some cases.And, or people o modest means, this could provequite un air, as well as politically unpalatable.

To nd a solution, the legislature would do wellto look south. South Carolina as part o a planthat increased the size o its wind pool while raising its rates o ered a series o tax credits to ease thepain or residents. Under South Carolinas tax plans,residents can put money in disaster savings accountstax ree, claim credits against state income taxes (upto $1,250) when overall insurance premiums exceed5 percent o household income, receive grants orretro tting homes against hurricanes, and deduct the sales tax paid on materials used or retro tting.28 These grants which apply only to people withmodest incomes, only on homes with reasonablylow values (less than $300,000 or the structure),and only to primary residences help much o thestates population handle higher premiums whilesimultaneously making sure that everyone who livesin a risky area pays a little more.

The particulars o South Carolinas plan dont necessarily need to nd exact imitation in NorthCarolina. For example, the disaster savings accounts,although a good idea in theory, prove a rather cum-bersome way to save people a rather small amount o money. In North Carolina, a household earning the state median income o $55,000 would realize a bene t o only $250 i it set aside $4,000 in a disastersavings account.29 (Wealthy amilies would actually


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1 N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | ConClUSIon

C nc n

This paper has described the North Carolina Beach Plan and outlined the risks it poses to the

state. It argues that these risks are severe and couldwell result in signi cant scal problems or all oralmost all North Carolina residents and that, inthe long run, the state should move toward policiesthat stabilize the Beach Plan and then reduce itssize signi cantly. In the long run, North Carolina should look to turn the Beach Plan into a trueresidual market that provides insurance only orpeople unable to nd any private company to sellthem insurance.

Getting to a better system will prove imposible until the Beach Plan stops growing, a

Commissioner-elect Goodwin seems committedimproving the Beach Plans operations. Althoucoastal residents will eventually pay higher insance premiums, it is unlikely that North Carolinaoverall costs or insurance will rise signi cantly. correct re orms, implemented in the correct ordcan relieve the state o the Beach Plans burdemake its residents sa er, and make North Carolia better place to live. Real solutions exist. The stneeds to implement them.

bene t more.) Likewise, the tax credits may not always help those who need it the most: a coupleliving o o Social Security and a modest pensionin a paid-o house a ew miles rom the shore might

pay a $1,200 yearly premium and nd that the taxcredit covers it in ull. A amily o our living a bit closer to the shore and earning a slightly above-median income o $65,000 but paying $3,600 a year or homeowners insurance would nd onlymodest help rom the tax credit.

Devising a speci c plan or tax credits will taketrial and error, but, in general, the legislature woulddo well to ollow three principles: means testing,limited eligibility, and simplicity.

First, any tax credit or grant thats o ered shouldocus on people o modest means. Many people have

strived and saved their entire lives to buy a home.They shouldnt have to deal with massive overnight increases in insurance premiums because o changesin a state regulatory structure. Thus, the legislaturewould do well to limit a tax credit to people withincome below the state medianand who own houseswith assessed values below the median in theircounties. (The latter provision will deny tax creditsto well-o retirees who may have modest year-to-

year incomes.) Means testing will also serve to makethe tax credits larger or those who quali y or themwithout requiring a tax increase or program cuts.

Second, the legislature should ocus tax creon people who already live in hurricane-prone arerather than newcomers. The legislature should otax credits to ease the transition or people who l

in harms way, rather than encouraging more peopto move into hurricane-prone areas. People whbuy in Beach Plan-eligible areas a ter the date tax credits go into orce shouldnt have the abilityclaim the tax credits. Only people who already liin hurricane-prone areas should be able to claim ttax credits. Newcomers should expect to pay highrates or insurance.30

Finally, the legislature should strive or simtax credits. Although good in many ways, the SouCarolina plan has proven di cult or many residto take part in because it has so many di erparts and so many paperwork requirements. NorCarolina would do well to make things simpler.might be best, or example, to ocus on o eringone tax credit and letting people use it or eithmitigation e orts that make their house sa esimply to o set insurwance premiums.

A higher rate plan or coastal residents maksense in the medium term. But making it politicapractical will very likely require some tax credits a

tax relie to dull the pain or coastal residents. Inlong run, however, those who live in dangerous areshould simply pay more or insurance.


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1N o r t h C a r o l i N a s B e a C h P l a N :

W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | EndnoTES

N

1 North Carolina Insurance Underwriting Association.What is the BEACH [sic] Plan in North Carolina, http://

www.ncjua-nciua.org/html/about-nciua.htm, 2008.2 Admitted Market insurance is the type o insurance that nearly all individuals buy. Its orms are regulated by stategovernments, and state governments attempt to monitorthe solvency o companies that write it. In most states,

urthermore, government plays a role in setting the ratesthat consumers pay. Other types o insurance the excess and surplus markets exist, but, or most indi-viduals, they do not provide practical alternatives.3 North Carolina Insurance Underwriting Association, 2008.4 Ibid. Most people wanting to buy insurance on theirproperties can sometimes get broader coverage o ten at a better price in the regular competitive market. The

other government insurer that requently underpricesthe private market is Florida Citizens Property Insur-ance Corporation. The Cali ornia Earthquake Authorityovertly markets its product as well, but, unlike Florida Citizens and the North Carolina Beach Plan, almost noprivate-market, admitted carriers compete with it.5 North Carolina Insurance Underwriting Association, 2008.6 North Carolina Insurance Underwriting Association.Facts And Statistics, 2008, http://www.ncjua-nciua.org/.7 Nancy P. Watkins and Max H. Mindel. Analysis o theNorth Carolina Beach Plan or Property Casualty InsurersAssociation o America, October 10, 2008, Milliman.8 Ibid, 2.

9 David Marlett. Presentation toSelect Study Committee on the Potential Impact of Major Hurricanes on the North Carolina Insurance Industry: NCJUA/NCIUA Reinsurance Structure,Effective May 1, 2008,10 Some reinsurance contracts may allow insured individ-uals and corporations to avoid paying the reinstatement

ees. Doing so, however, would mean giving up coverage.In limited cases such as a hurricane that struck veryclose to the expiration o a reinsurance contract its pos-sible that the Beach Plan might do this.11 Alvin Ashworth, Accounting Manager, North Carolina Insurance Underwriting Association. Presentation to

Joint Select Committee on the potential impact o majorhurricanes on the North Carolina Insurance Industry.October 16, 2008.12 Ibid.13 Arthur Postal. Farmers to Pull out o N.C. Homeown-ers Market, National Underwriter Online News Service,August 14, 2008.14 Zurich Financial Services. Annual Report: 2007, www.zurich.com.15 Associated Press. Nappier says pension und sound,October 6, 2008, and Beatrice Garcia. Economy TakesToll on Hurricane Catastrophe Fund, inThe Miami Her- ald , October 16, 2008.16 Alvin Ashworth, Accounting Manager, North Carolina

Insurance Underwriting Association. Presentation to Joint Select Committee on the potential impact o major

hurricanes on the North Carolina Insurance Industry.October 16, 2008.17 Insurance In ormation Institute et al. Coastline at Risk, http://www.air-worldwide.com/_public/images/pd /AIR2008_Coastline_at_Risk.pd ?src=email, June 11,2008. David Marlett directed me to this source.18 Daniel Sutter. Ensuring Disaster: State InsuranceRegulation, Coastal Development, and Hurricanes, TheMercatus Center, August 24, 2007.19 Note that the sale prices and assessed values o homeswill always be higher than the structure value becausethe sale price includes the value o the land, location, andaccess to amenities that may impact the value.20

Texas Department o Insurance. Hurricane Ike Fact Sheet: TWIA, http://www.tdi.state.tx.us/consumer/storms/documents/wind actsheet.pd .21 North Carolina Insurance Underwriting Association.Presentation to Joint Select Committee on the potentialimpact o major hurricanes on the North Carolina Insur-ance Industry. October 16, 2008.22 Governing Magazine. Grading the States 08: Virgin-ia, http://www.governing.com/gpp/2008/va.htm.23 AIR Worldwide and iii presentation at Insurance Sym-posium in Boone, N.C.http://www.air-worldwide.com/_public/images/pd /AIR2008_Coastline_at_Risk.pd ?src=email.24 Virginia Property Insurance Association. Total InForce Premium (VPIA.org).25 Ibid.26 Virginia State Corporation Commission, Bureau o Insurance. Rate and Form Filings Review, http://scc.virginia.gov/division/boi/webpages/reviewrates.htm.27 Donald T. Hornstein. Mitigation: Sustainably Linking the Beach Plan and the Coast, Presentation to the Joint Select Committee on the Potential Impact o Hurricaneson the North Carolina Insurance Industry, November 18,2008.28 Eli Lehrer. South Carolinas Omnibus Coastal Insurance Reform Legislation: Baby Steps in the Right Direction , TheCompetitive Enterprise Institute, 2007, 10-11.29 Income gures provided by the Bureau o the Census.The amily is assumed to be taxed at the 7.75 percent rate.Although the money would be less accessible or immedi-ate purposes, putting the same money into an IRA or401(k) plan would realize a bene t o nearly $1,000.30 To some extent, the higher insurance rates will bepriced into the value o the houses. All other things be-ing equal, a higher insurance premium will reduce theamount that people can pay or a home mortgage andthere ore the value o the house. The legislature might also consider extending some sort o tax relie to peoplewho sell their houses at lower-than-expected prices.


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ab J n l c f n n

The John Locke Foundation is a nonpro t, nonpartisan policy institute based in Raleigh. Its mis

is to develop and promote solutions to the states most critical challenges. The Locke Foundation seetrans orm state and local government through the principles o competition, innovation, personal reand personal responsibility in order to strike a better balance between the public sector and private instions o amily, aith, community, and enterprise.

To pursue these goals, the Locke Foundation operates a number o programs and services to proin ormation and observations to legislators, policymakers, business executives, citizen activists, civcommunity leaders, and the news media. These services and programs include the oundations monewspaper, Carolina Journal; its daily news service, CarolinaJournal.com; its weekly e-newsletter, Car Journal Weekly Report; its quarterly newsletter, The Locke Letter; and regular events, con erencesresearch reports on important topics acing state and local governments.

The Foundation is a 501(c)(3) public charity, tax-exempt education oundation and is unded rom voluntary contributions rom individuals, corporations, and charitable oundations. It ws oun

1990. For more in ormation visit www.JohnLocke.org.

ab a

Eli Lehrer is a senior ellow at the Competitive Enterprise Institute where he directs CEIs studinsurance and credit markets. Prior to joining CEI, Lehrer worked as speechwriter to United States Se

Majority Leader Bill Frist (R.-Tenn.).He has previously worked as a manager in the Unisys Corporations Homeland Security PractSenior Editor o The American Enterprise magazine, and as a ellow or the Heritage Foundation. Hspoken at Yale and George Washington Universities. He holds a B.A. (Cum Laude) rom Cornell Univeand a M.A. (with honors) rom The Johns Hopkins University where his Masters thesis ocused Federal Emergency Management Agency and Flood Insurance.

His work has appeared in the New York Times, Washington Post, USA Today, Washington TimWeekly Standard, National Review, The Public Interest, Salon.com, and dozens o other publicatLehrer lives in Oak Hill, Virginia with his wife Kari and son Andrew.

N o r t h C a r o l i N a s B e a C h P l a N :W h o P a y s f o r C o a s t a l P r o P e r t y i N s u r a N C e ? | AboUT ThE AUThoR


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To prejudge other mens notions before we have looked into them is not to show their darkness

but to put out our own eyes. john locke (16321704)

A u thor , t wo t r eAt i ses o f G o v e r n m e n t An d f undAmentAl c ons t i tu t ions o f c Arol inA

200 West Morgan St.Raleigh, NC 27601V: 919-828-3876F: 919-821-5117www.johnlocke.org

beach plan reform

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