MOREHEAD CITY — A coastal advocacy group fighting for insurance reform says last week’s announcement of a negotiated settlement on dwelling policy rate hikes reveals more problems with the way North Carolina regulates the industry, particularly when it comes to public comment and disclosure.
“This is a flawed process,” Willo Kelly, president of NC-20, a lobbying group representing the interests of 20 coastal counties, told the News-Times on Thursday.
Ms. Kelly said higher rates will cause economic harm, especially in coastal communities. But officials at the N.C. Department of Insurance said the settlement agreement saved coastal areas from more severe and immediate rate hikes.
NCDOI announced Tuesday it had reached an agreement with the N.C. Rate Bureau, related to its request for a statewide increase of fire and extended coverage rates for dwelling policies. The new rates will apply to new and renewal policies effective March 1, 2013.
The General Assembly created the Rate Bureau in 1977 to represent insurance companies doing business in the state.
Dwelling policies are written on homes that are other than full-time owner occupied, such as rental properties, second homes or others that for reasons such as age, construction type or condition fail to qualify for homeowners’ policies. The extended coverage portion of the policy generally covers damage caused by wind, hail, fire, smoke, riot, civil commotion, and aircraft and vehicle damage.
The last rate increase for dwelling insurance went into effect in 2006.
Insurance Commissioner Wayne Goodwin’s settlement with the insurance companies allows for a statewide average increase of 13.2 percent for dwelling fire and extended coverage policies, phased in over a three-year period.
But the actual amount of the increase varies by territory and coastal areas will see larger increases.
In Carteret County, the settlement calls for first-year increases effective in 2013 of 15.6 percent for Bogue Banks and 15.2 percent for the mainland.
The 8.3-percent increase scheduled for 2014 is on top of the increase from 2013, resulting in a total 24.5-percent increase from current rates.
In 2015 rates will increase by another 3.4 percent of the 2014 rates. That equals a roughly 29-percent hike at the end of three years, compared to the current rates for Carteret County.
(Editor's note: The N.C. Department of Insurance said Monday that the above figures are correct for extended coverage but do not reflect the decrease in the fire portion of the rate change. For Carteret County, the overall net increase is 25.9 percent for the beach and 20.4 percent for the rest of the county as of March 2015.)
In some territories, including Bogue Banks, insured property owners will pay more under the settled rates than the N.C. Rate Bureau’s filed rates. According to filing documents, the current rates for a frame dwelling valued at $50,000 and contents at $10,000; insured under the DP-1 policy with fire and extended coverage, a $250 deductible, Protection Class 5 on the beach in Carteret County total $582 per year.
Under the rates as filed by the N.C. Rate Bureau, the total increases to $729. Under the settled rates as of March 1, 2015, the total increases higher still to $733.
Mainland county property owners will pay less under the settled rates than the Rate Bureau’s requested rates – $496 instead of $516 – for the same values and coverage as the previous example. Those property owners pay $419 per year under the current rates.
Meanwhile, property owners in Charlotte, with the same values and coverage, will see a slight decrease under the settled rates, from $198 per year to $193 as of March 1, 2015. The Rate Bureau had sought an increase to $206 for those insured property owners.
Raleigh and Durham, Winston-Salem and Greensboro and other inland areas will see similar reductions in the 2015 rates from current rates.
Ms. Kelly said the disparity is striking, especially considering that western and central North Carolina have in recent years been victims of the state’s largest wind and hail losses – perils covered under the extended coverage portion of dwelling policies.
Ms. Kelly said the increases in Carteret and other eastern counties will negatively impact the coastal economy.
“It will affect the rental market, and homeowners with rental properties will have to absorb the costs or pass them along in some fashion,” she said.
Ms. Kelly said the public deserves to know the details on why NCDOI ultimately sided with the Rate Bureau on the increases.
“He (Insurance Commissioner Goodwin) gave them what they wanted and the argument was that he wanted to get more companies writing coverage. Where’s the documentation that shows how he came up with those rates? We don’t have any access to that information,” Ms. Kelly said. “I think the question now is to ask the Department of Insurance how this settlement was reached.”
NCDOI Director of Public Information Kerry Hall said Friday the settlement, by definition, was a compromise with both the Rate Bureau and the department forced to make concessions.
“Neither side got everything they wanted,” she said.
The process began in January 2011 when the Rate Bureau requested an overall statewide average increase of 20.5 percent, varying by coverage and territory, to be effective May 1 of this year.
A public comment period was held Jan. 4-31 of that year and more than 850 public comments on the filing were submitted.
On Feb. 21, 2011, Commissioner Goodwin issued a notice of hearing for the rate filing. That hearing began July 25, 2011, and ended Oct. 25, 2011.
On Dec. 9, 2011, Mr. Goodwin issued an order granting an overall 7.3-percent rate decrease for the fire portion and denied the Rate Bureau’s request to increase extended coverage rates. The Rate Bureau then appealed the commissioner’s order to the State Court of Appeals.
In May, the statewide average rate decrease of 7.3 percent for the fire portion of dwelling insurance policies went into effect. No rate changes were implemented for the extended coverage portion as appeals procedures continued.
Ms. Hall said that as the dwelling issue was moving through the N.C. Court of Appeals it became apparent that there was too great a risk the much higher rate increases requested by the insurance companies would go into effect if NCDOI lost the case.
“The court case hinged on a procedural argument related to one decades-old case. Had the insurance companies prevailed, there would be a much greater financial impact on policyholders than what could be achieved through a settlement,” she said.
In settlement negotiations, Commissioner Goodwin and NCDOI sought to minimize the impact on policyholders by fighting for a smaller overall increase and for the increase to be spread over a three-year period.
In year one, 2013, the settled rate changes vary by territory. In years two and three, all territories across the state experience the same settled rate increase. Also, as a result of this settlement, the insurance companies cannot request another dwelling insurance rate increase until after 2015.
As for the increased rates on the coast, NCDOI said in years where there is little to no hurricane activity, the coastal counties generally may incur losses in proportion to their population. However, coastal territories are much more at risk of hurricanes than the rest of the state, and when there is a hurricane, there are huge increases in losses.
It’s not that hurricanes never cause damage inland, Ms. Hall said, but the likelihood and severity are generally much less.
Data from the dwelling hearing last year indicated that in a year or years when hurricanes have hit the state, the coast accounts for significantly more losses in relation to its population than areas inland, according to the department.
“A hurricane causing damage in Charlotte might cause a high dollar amount of damage or generate a high number of claims, but keep in mind, the population density of Charlotte is much higher than in the coastal territories and, again, there is much smaller likelihood of hurricanes causing significant damage inland. Both of these factors make covering that area less of a risk to insurance companies,” Ms. Hall said.
Another big driver in coastal insurance rates is the cost of reinsurance. In order to plan for hurricane losses, insurance companies purchase reinsurance to ensure they have funds available to pay for a big storm like Hurricane Andrew in 1992, which caused a number of insurers to go under or nearly go under.
Reinsurance is very expensive, NCDOI said, and the cost is built back into the rates.
Both the probability of hurricane damage and the cost of reinsurance are borne most heavily by the coastal regions because those regions are the biggest source of potential risk for the companies, according to the department.
According to the original filing for a rate change, the insurance companies presented data they said would justify increases of 145 percent and 124 percent for Carteret County’s beach and mainland areas, respectively. But the Rate Bureau asked for only a 25-percent increase.
“This shows how inadequate the insurance companies perceive the rates to be,” Ms. Hall said.
The settlement on dwelling rates does not affect or relate to the Rate Bureau’s recent request for increased homeowners’ insurance rates for owner-occupied homes. But Ms. Kelly said the action could set a worrisome precedent.
“We’re worried that this is going to be a precursor to how NCDOI will handle the homeowners’ insurance rate filing,” Ms. Kelly said.
Ms. Hall said such concerns are unfounded. She said each rate filing is handled on a case-by-case basis.
The results of reform
On July 12, Gov. Bev Perdue signed into law a measure that gave the insurance commissioner new power to negotiate or settle on a revised rate with the Rate Bureau and opened the ratemaking process to public scrutiny, if only somewhat.
Senate Bill 836, “Improve Property Insurance Rate Making,” required the Department of Insurance to accept public comment on all property insurance rate filings and gave the insurance commissioner the power to specify an appropriate rate level or levels between the current rate and the filed rate. But the public input and disclosure part of the new law apparently doesn’t apply to the rate-negotiation and settlement process.
“At least now there’s some public participation and transparency is improved, but when we get to the process of the settlement agreement, then we’ve gone back in time,” Ms. Kelly said.
She said state lawmakers should consider doing away with the Rate Bureau altogether to help bring more transparency to the way rates are set or negotiated.
“There are concerns about even having a rate bureau. Some people refer to it as a price-fixing mechanism. Some people argue that it’s collusion at its worst. We need to look at what other states are doing,” Ms. Kelly said.
The department said the settlement was intended to head off the Rate Bureau’s legal challenge that, if it continued to fight in court, would increase the risk dwelling policyholders would receive much larger increases, particularly on the coast.
Mr. Goodwin said in recent years, more and more insurance companies had dropped or refused to offer dwelling policies.
“Genuine concerns about insurance availability were also a factor in arriving at this settlement,” Mr. Goodwin said last week.
Ms. Kelly said that didn’t make sense to her because most companies are placing wind coverage in coastal areas through the state’s insurance pool known as the Beach Plan. Insurance companies were “cherry picking” only the most desirable properties to insure directly, she said.
She said news of the settlement Tuesday came as a surprise to her and NC-20 is continuing to review the decision.
NC-20 has long criticized the state’s process for setting insurance rates as discriminatory against coastal counties, which it says lack the political clout of more densely populated urban areas in other parts of the state.
“I was quite surprised by the settlement agreement because the original rate filing was almost a fraudulent document. It included methodologies that are illegal, the rates were found to be excessive and the profit methodology did not comply with statutory requirements. This was a document that justified everything we (at NC-20) have been saying for the last three years. I thought a new filing would be required,” she said.
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