As hurricane Irene puts coastal carolina in her sights the coastal insurance plans in North and South Carolina are prepared to absorb what may be their first major losses in years.
According to experts, both plans appear to be capable of handling whatever losses Hurricane Irene may cause, the Insurance Journal reports.
The North Carolina Insurance Underwriting Association and South Carolina Windstorm and Hail Underwriting Association are mechanisms to pool and spread the risk of property damage. Designed to be markets of last resort, their main function is to provide homeowners’ insurance in those areas where the private market will not due to the high-risk of hurricane damage.
Hundreds of thousands of home and business owners rely on the coverage in North Carolina. The so-called Beach Plan has 183,000 policyholders located in 18 counties including the state’s famous barrier islands. It has $60 billion in residential exposure and $9 billion in commercial coverage with a probable maximum loss from a one-in-100 year storm hovering around $3.4 billion.
Beach Plan officials said the association has $774 million surplus, which combined with private reinsurance and $1 billion pre-event bonds, gives it $4 billion in claims paying ability. The $4 billion is a marked improvement for the pool, which just a few years ago was targeted for having inadequate resources. The improvements are extraordinary, its hoped they do not have to be.
Hurricane Katrina and Andrew Comparisons
Hurricane Andrew, in 1992, cost approximately $21 billion in insured losses (in today's dollars), whereas estimates from the insurance industry for 2005's Hurricane Katrina has reached approximately $60 billion in insured losses (including flood damage). The storm could ultimately cost the Gulf Coast states as much as an estimated $125 billion.
2009 Reforms
In 2009, state lawmakers enacted a series of changes, starting with allowing the plan to retain its surplus from year to year.
Based on that law change, in January, North Carolina Insurance Commissioner Wayne Goodwin ordered the windpool to retain some $16 million in surplus it generated in 2009, instead of giving it back to member companies. Perhaps that surplus will prove valuable soon.
As an extra backstop, lawmakers capped the industry’s total liability to $1 billion and enacted a provision that would allow the insurance commissioner to impose a statewide surcharge of up to 10 percent annually on all property owners in the event the windpool exhausts all its other resources.
The windpool is now as solvent as it has ever been. “The windpool can now absorb losses of up to $4 billion and it has never lost $1 billion,” he said. “That doesn’t mean it can’t, but the chances are considerably less.” Again, look back at the 2011 spring tornado losses and this may be n important backstop.
The windpool coverage for policyholders around the state still face a risk, however small, since the plan is only as viable as the hurricane seasons allow it to be. “We can handle a typical storm,” he said. “But if there is a Katrina or four or five hurricanes, then all bets are off," Goodwin said.
The 2009 reforms also limited the plan’s coverage limits to $750,000 on residential properties and $3 million on commercial properties. It also called for its wind-only homeowners policy rates to be at least five percent higher than private insurers’ rates and its multi-peril homeowners policies to be 15 percent higher than the private market.
South Carolina Market
In South Carolina, officials are also casting a wary eye toward Irene, which could be the first major hurricane to affect the state since Hurricane Floyd brushed by the state in 1999 causing some $60 million in total insured losses.
The South Carolina Windstorm and Hail Underwriting Association, also commonly referred to as the Beach Plan, currently has 48,000 policies in force, representing $18 billion in exposure.
Beach Plan Chief Operating Officer David Leadbitter said the plan has $1.5 billion in claims paying ability in the event of major losses, which more than covers its probable maximum loss for a one-in-100 year or one-in-250 year storm.
Participating insurers are responsible for the first $10 million in losses, with the remainder being covered through private insurance. In the unlikely chance that the plan losses exceed the $1.5 billion mark, insurers would be assessed, but they could recoup this amount if they choose as part of their annual rate filing.
The Beach Plan was created by private insurers in 1971, when the state mandated that all homeowners carry wind coverage, as a means to pool the risk from widespread wind damage. In 2007, state lawmakers expanded its coverage area into two zones, with Zone one encompassing most of the state’s barrier islands and Zone 2, which covers more inland regions.
Since then, 13 new companies have entered the state market including a large block of surplus lines insurers that have provided coverage to high-end homes and commercial risks, again providing a valuable backstop in a market that can ber disastrous.
Earlier this year, the state’s Department of Insurance approved a statewide average 9.8 percent rate hike based on rising reinsurance prices and changes in the loss projections calculated by computer models. The new rates take effect September 1.
