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Legislation has been introduced (House Bill 182) that would significantly improve the process of setting homeowner insurance rates and give insurance companies a new way to handle major losses in the event of a hurricane — by allowing tax-free bonds to be issued to finance losses insurers cover after a devastating storm.
HB182 comes as homeowners across the state have been facing insurance premium increases and the industry worries about repair and replacement costs and the threat of catastrophic weather-related losses.
The legislation aims at ensuring transparency and fairness in the property insurance rate-making process. Representative Chris Millis of Pender County, the primary sponsor of the bill, provided us with this thorough explanation of the problem and the legislative solutions contained in HB182. From Representative Millis:
I will briefly comment on the structure of property insurance in North Carolina in order to provide context on the problems we are facing. In our state, we have what’s called the “North Carolina Rate Bureau.” The Rate Bureau was created by the General Assembly nearly forty years ago and is comprised of all the insurance companies that are authorized to write insurance policies here (including automobile, property, and worker’s compensation).
The Rate Bureau, which represents the insurance industry, files any requests for rate increases (along with any supporting data) to the Department of Insurance for its review. The Commissioner of Insurance, who is elected statewide every four years, then has three options: 1) to rule in favor of the requested rate increase, 2) issue a scaled-back rate increase, or 3) to deny the rate increase. Currently, the Commissioner does not have the power to issue a rate decrease, even should the data warrant it.
The Commissioner’s final decision sets what’s called the “state rate” — the maximum rate consumers can be charged by an insurance company under the law. Maximum homeowner insurance rates are set for a given territory, and each territory contains one or more counties.
To complicate matters further, the law also allows for insurance companies to ask policyholders for permission to charge a rate that’s actually higher than their maximum. These “consent-to-rate” letters were initially meant as an underwriting tool, but have expanded over the years to become a way for insurance companies to raise rates in cases where they believe the maximum rate is still too low for adequate policy coverage. In other words, the insurance company thinks the policyholder is too big a risk to write a policy at their usual rates and wants more money.
Over the past decade, there have been an increasing number of requests to raise property insurance rates by the companies that comprise the Rate Bureau. Some of these requests have been granted and others have been granted at lower levels. The most recent rate increase request was denied by the Insurance Commissioner, Wayne Goodwin, this past December.
In that rate hearing (which began last October), the Rate Bureau claimed that while they had compelling data to justify a statewide 40.6% average rate increase, they would agree to scale back their request to an increase of just 25.6%.
Commissioner Goodwin didn’t buy their argument, saying that “no factors or events justified the excessive costs requested by the insurance companies.”
In fact, not only did the Department find that the insurance industry’s data didn’t justify a 40.6% increase, they said that the very same data showed that consumers should instead see a 12% decrease in their average property insurance rates. Why such different conclusions? The Department of Insurance cited a number of incidents of double counting by the Rate Bureau that included reinsurance, modeled hurricane losses, compensation of assessment risk, and imbedded contingency factors.
North Carolina homeowners saw an average 7 percent increase in 2013, but companies said they needed more after last winter’s ice storm where thousands of homes were damaged across the state. The last homeowner’s insurance rate increase took effect in 2009, when the insurance companies had sought a 19.5 percent statewide average increase, but settled for 4 percent.
While it’s hard to tell who’s right and who’s wrong when it comes to parsing this kind of high-level actuarial data (the Rate Bureau is currently appealing the Commissioner’s decision in court), there’s no question that something’s not working when the industry says that the data shows the need for a 40.6% increase, but the Department of Insurance says no — that upon review of the very same data — a 12% decrease is justified. That’s a disparity of more than 50%.
North Carolina needs some significant reforms to correct course.
While I certainly understand the desire to scrap the existing structure and start fresh, I and a number of my colleagues in the House and Senate believe that we should first employ the legislative tools available to us to reform the system before we move to fully restructure it. Allow me to describe to you some of the statutory tools provided by way of HB182.
Clarity Provisions. The legislation requires annual reporting by the insurance industry that will clearly show the amount of premiums they collect and the loss amounts they pay out. This information will allow the Department of Insurance, the insurance industry, and (most importantly) the public, to have a more transparent and streamlined view of insurance costs and coverage here in North Carolina. More information can only lead to better market decisions and to lower costs.
Commissioner Authority. As I mentioned above, the Commissioner of Insurance currently has the power to issue only a rate increase (if any) but doesn’t have the authority to issue a decrease in rates even if the data warrants it. The current structure incentivizes repeated rate increase requests; HB182 changes that dynamic, granting the Commissioner the authority to set appropriate rates (up or down) — further protecting the consumer.
Modeling Reforms. When a rate increase is requested, the Rate Bureau justifies its request in part by way of “loss modeling.” In order to estimate the exposure the insurance companies are subject to during a catastrophic event, the insurance industry employs mathematical models to paint a picture of potential exposure the industry has relative to the amount of premiums paid in by policyholders. The modeled exposure, compared to the policy premiums, also convey the liability that has to be covered by way of “reinsurance” (which we will briefly cover below). Modeling is very important to the insurance industry as well as to the policyholder.
House Bill 182 requires that more than one model be submitted in a rate filing, and that all models include input relative to North Carolina. This last phrase is very important: “all models include input relative to North Carolina.”
When developing catastrophic loss models, the intent of the legislation is to have the modelers include the building standards North Carolina residents are required to build to (as contained in The North Carolina Building Code) and the catastrophic conditions relative to our state alone (not Florida or the other Gulf States, for example).
Of course, the output of a mathematical model is only as good as the data input, and if we are building to a higher standard here in North Carolina, then we shouldn’t be paying the higher insurance premiums found in states that allow their citizens to live in homes held together with toothpicks and glue.
Bonding Authority. As discussed above, the difference between the modeled exposure and the surplus from premiums paid into the insurance pool is currently covered by “reinsurance.” Reinsurance occurs “when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone,” explains the Investopedia website. The hundreds of millions of dollars going to reinsurance each year could have a greater opportunity to go to the pool surplus if this coverage gap was not present.
In effort to better manage catastrophic risk, HB182 sets up a new bonding authority, called the North Carolina Recovery Finance Authority, that will allow the North Carolina Insurance Underwriting Association (NCIUA) pool to minimize its dependence on reinsurance and direct more resources towards building up a surplus by issuing special tax-free bonds.
This is a stand-alone bonding authority and in no way leverages, or is tethered to, state taxpayer dollars and it will use existing statutory mechanisms to cover the cost of a bond during a catastrophic event. The ability to use tax-free bonds to cover catastrophic events within the existing statutory framework is a much-needed reform.
Consent to rate. HB182 also provides clearer guidance to the insurance industry regarding those consent-to-rate letters to help better ensure that North Carolinians have a better understanding of what they are actually consenting to should they decide to sign a consent to rate letter provided by their policyholder.
HB182 is supported by both the North Carolina Association of Realtors and the North Carolina Homeowners Alliance, and it has been endorsed by Wayne Goodwin, Commissioner of the North Carolina Department of Insurance.
“Giving the Commissioner of Insurance the ability to lower rates has the potential to lower homeowner’s insurance rates for all North Carolina families,” said Emily King of the North Carolina Homeowners Alliance. “This fair and equitable bill will help North Carolina families in an economy that’s still recovering.”