"Beach Plan" insurance needs to do no further harm

by R. J. Lehmann, Editor-in-chief of R. Street Institute, May 13, 2015.

When he was speaker of the North Carolina House of Representatives, now-U.S. Sen. Sen. Thom Tillis was fond of pointing to "the conservative revolution" that has taken hold in Raleigh over the past four years. But there remains one area where official state policy creates the opposite of a free market: insurance.

North Carolina was one of just two states to score an "F" (California was the other) in the annual report card we at the R Street Institute compile comparing how well states regulate their insurance markets. But a bill approved May 7 by the state House Finance Committee, and expected to be taken up this week by the full House, could make matters even worse.

The measure, H. 182, would create a new state agency, the North Carolina Recovery Finance Authority, whose purpose would be to issue tax-exempt municipal revenue bonds on behalf of the North Carolina Insurance Underwriting Association. Better known as the "Beach Plan," the association provides taxpayer-backed coverage to residents of 18 wind-and-hail zone districts along the coast.

The Beach Plan already has the power to borrow money after a major storm. Those funds paid off over time through "hurricane taxes" that are assessed on all policies, coastal and inland, for years to come. H. 182 would make it even easier for the plan to shirk its responsibility to ensure it has enough resources, through its own surplus and by transferring risk to the reinsurance and catastrophe bond markets, to make good on all of its obligations.

Proponents of the measure are clear about their goal, which is to lower costs for coastal real estate developers by shifting risk from the private reinsurance market to North Carolina taxpayers. Willo Kelly of the Outer Banks Homebuilders Association and Outer Banks Board of Realtors recently was quoted as touting that the bill would "eliminate or reduce the need for reinsurance."

For its part, the Beach Plan leadership has responsibly insisted that it retain autonomy to make its own decisions regarding reinsurance and its overall financial health.  Among their concerns is that, unlike the plan's own premiums and surplus, reinsurance can be structured to pay out for more than one storm in a season. Alas, given the motivations of the bill's sponsors, such choices might indeed be subject to political pressure.

Another reason to be concerned is that North Carolina's two state-run residual property insurance pools are once again growing rapidly. The FAIR Plan, which serves mostly lower-income residents, saw its market share more than double from 0.6 percent in 2011 to 1.4 percent in 2013. The Beach Plan spiked from 3.4 percent of the market in 2011 to 5.1 percent in 2013.

The proper response to these developments is to move to an open, competitive insurance market where rates truly reflect risk. This bill proposes the opposite, increasing the elected insurance commissioner's authority to order rate rollbacks and to reject certain insurance catastrophe models.

The plan is modeled closely on what my state, Florida, did with creation of the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp. This is decidedly not a good model to follow. Instead of spreading risk around the globe, which is the purpose of insurance, it concentrates it in one small area. My fellow Floridians just recently finally stopped paying the hurricane taxes imposed following storms that struck a decade ago.

Ironically, North Carolina is looking to copy the Florida model just as the Sunshine State has been looking to reverse its mistakes. With all the strides North Carolina has already made in areas conservatives take seriously, it's time to apply that same approach to insurance, and most importantly, do no further harm.

R.J. Lehmann is editor-in-chief and Senior Fellow of the R Street Institute in Washington, D.C.. He lives in Gulfport, Fla.