North Carolina Insurance Reforms Fall Short

North Carolina lawmakers approved a bill with some changes to the property insurance system but, as one industry expert said, in so doing lawmakers “just stuck more fingers in the dike.”

Despite what critics say is an antiquated process for setting rates, a burgeoning residential market, and a lack of public input on rates, industry and consumer groups walked away largely empty-handed from this year’s legislative session.

“I wouldn’t call this a substantial piece of legislation,” said Stuart Powell, vice president for the Independent Insurance Agents of North Carolina. “It nibbles at the edges of the issues, but doesn’t deal with the heart of them.”

Signed into law by Gov. Bev Perdue, the new law attempts to address the unique way rates are set in the state. Under the rating law all property insurers send their information to the North Carolina Rate Bureau, which then develops a loss cost rate for use by all insurers. Each insurer is then allowed to slightly adjust rates based on expenses and other factors. The insurance commissioner can then agree or disagree with the insurer’s rate recommendation.

The new law gives the commissioner authority to set rates as long as they fall in between the range of existing rates and what the Rate Bureau recommends. The law also calls for a factor to reflect the cost of reinsurance that can include historical loss data and the use of a computer model.

The catch is that the Rate Bureau only uses one model, which critics say could skew the rates people pay, especially along the state’s coast.

“We presently use the AIR model,” said Sue Taylor, director of insurance operations at the Rate Bureau. “That is not to say that in the future we may not use another model.”

Kathleen Riely, government affairs director for the Wilmington Association of Realtors, said the model skews the data so that coastal homeowners pay higher rates. She said that Texas and Florida use multiple models to ensure that rates are more equitable.

“Why are we using one model?” Riely said. “Why are we not coming up with a blended model that would best be used for North Carolina?”

For agent and insurer groups, the computer model debate is just a symptom of the outdated rating system under which one entity rather than the marketplace sets the rates.

George Teague, representing the Property Casualty Insurers Association, said eventually the state is going to have to change the rating system. However, he acknowledged that it will be an uphill climb.

“Under any change there will be winners and losers. Some rates will go up and some down,” said Teague, “But this is a very political environment.”

Consumer groups did eke out a small win as the new law makes all property insurance rate filings open to the public and gives the public 30 days to comment. Under the previous law, the public was only allowed to comment if the commissioner held a public hearing on the filing, something that has not been done in years.

Still, consumer groups are not satisfied. They have been pressing for years for the creation of some mechanism such as a citizen insurance board to give residents more of a voice.

“Where is the third entity to overlook rates?” asked Reily. “We are the only coastal state without a consumer advocate.”

Lawmakers attempted to placate certain residents in the eastern portion of the state who have been vocal in their opposition to higher rates. For the first time under the new law, insurers will be able to develop a homeowners policy that covers all perils minus damage from windstorm and or hail. Thus homeowners who own their homes will be able to self-insure against hurricane losses.

As part of that provision, insurers must include with the policy a statement in 16-point font a warning to homeowners that their policy doesn’t cover those risks and that they should contact their agent to discuss their options.

Even with the caveat, however, agent groups are wary of the policies, which they say could leave them open to liability claims.

“You are going to have three or four clients who are going to say they never understood me and then turn around and sue me,” said Powell. “We see the same problem when it comes to flood coverage where agents are sued because they supposedly were not told they needed the coverage.”

Teague agreed with Powell, saying the ex-wind policies could create more trouble than they are worth. “You’re going to have people coming back after a hurricane and saying, ‘I thought I had coverage,'” said Teague.