Navigating North Carolina’s home insurance affordability crisis

By Dr. Hope Thompson

Home insurance isn’t something that people think about until disaster strikes. But for many North Carolinians, insurance is front-of-mind as climbing premium prices strain household budgets. This month, homeowners’ premiums increase another 7.5% (part of a two-year increase negotiated in 2024). These follow a 2022 increase of 7.9%.

To slow rate increases, we must understand and address what is driving them. The problem is bigger than any insurance company or regulator. So is the solution.

Climate-related risk is now the primary cause of increasing insurance premiums. Insurance markets are responding to the increased cost of providing insurance for homes not built to withstand the current and future risks of wind, wildfire and other hazards, and the rising cost of repairs. Since 2018, North Carolina has endured more than 40 disasters that at each cost more than $1 billion, causing widespread damage and destabilizing local economies.

The cost of coverage is increasing. Research also shows that rising insurance rates have exceeded these costs, and insurers are making record profits despite the losses. Over the past several decades, the share of premiums paid out in claims has fallen. Recent analysis shows that for every $1 collected in premiums, only $0.62 is paid out in claims.

North Carolina’s use of consent-to-rate (CTR), which allows insurers to charge up to 250% above negotiated base rates for risky properties, has increased from roughly 20% in 2012 to over 55%. The expanded use of CTR is a signal that insurers believe base rates are too low. But widespread use undermines the rate-setting process, and people often aren’t aware that they are paying elevated rates. Adding to the affordability challenges, North Carolinians with low credit scores pay more than double for insurance compared to policyholders with high credit for similar properties.

Given the complexities, efforts to address rising insurance prices require a broad strategy that extends well beyond periodic rate negotiations.

Any serious strategy must prioritize aggressive risk reduction. Investing in effective hazard mitigation strategies reduces the likelihood and severity of damages. The North Carolina Insurance Underwriting Association (NCIUA), the insurer of last resort on the coast, has helped over 21,000 homeowners upgrade to stronger, storm-resistant FORTIFIED roofs through grants. These risk-reducing investments are a win-win for homeowners and the insurer. Lawmakers can extend these programs to private policyholders by allocating premium taxes they already collect towards cost-effective hazard mitigation grants and low-interest loans.

Additionally, new construction must be built to better withstand current and future risks. North Carolina has some of the country’s weakest building codes, making homes more vulnerable to damages from disasters, and costlier to insure. In 2023, the General Assembly froze the adoption of new, stronger building codes until 2031, locking in a weaker, outdated version of the International Residential Code.

A recently proposed bill offers solutions that complement risk reduction. It would prohibit the use of credit scores in rate setting, and develop a plan for reducing reliance on CTR, restoring its original purpose of enabling insurance coverage for exceptionally risky properties. It would also require insurers to inform homeowners of the reasoning behind their CTR premium and possible actions to reduce their risk and lower their rate.

Keeping insurance available and affordable will require a multipronged strategy. A narrow focus on keeping base rates down may provide temporary relief, but will ultimately fail to deliver sustainable results. State leaders need to proactively invest in strategies to reduce physical risk, such as stronger building codes and hazard mitigation investments.

Preventative measures come with upfront costs, but North Carolinians are becoming too familiar with the costs of inaction.

Dr. Hope Thompson is an expert on climate adaptation with the Natural Resources Defense Council. She previously worked with FEMA on strategic policy guidance for disaster resilience programs. A Durham native, Dr. Thompson received her bachelor’s degree from UNC-Chapel Hill, and a PhD in policy and economics from the University of Michigan.