Growing Market of Last Resort

The Ferguson riots and resulting damage are a sad reminder of the race riots in the 1960s.  Once the rioting and destruction subsides, the difficult process of rebuilding begins.  Following the riots in the 1960s, property owners in urban regions had trouble obtaining financing to rebuild due to the lack of insurance.  Insurance companies were reluctant to provide the coverage based on the high level of risk and threat of future losses.  As a result, the communities were not sustainable and unable to recover.  President Johnson worked with Congress to enact the Urban Property Protection and Reinsurance Act of 1968, authorizing the establishment of Fair Access to Insurance Requirements (FAIR Plans).

North Carolina, like most but not all states, created a FAIR plan to serve as a market of last resort and satisfy the mortgage lender insurance requirements.  The coverage offered by the FAIR plans is typically less comprehensive that that offered by insurance companies, but it does at least provide some basic protection.

The North Carolina FAIR Plan was created in 1969 by the General Assembly and is technically called the Joint Underwriting Association (NCJUA).  Although the Assembly originally created the FAIR plan to address the insurability of property in urban areas, the mission has been broadened to include all of North Carolina (except the beach area).  The beach area is covered by the other North Carolina market of last resort commonly called the “Beach Plan.”  The Beach and FAIR plan are jointly managed, although the Beach Plan typically overshadows the FAIR plan due it is much greater exposure.  That being said, the FAIR plan is now starting to generate greater interest.

In the last few years, the number of residential properties insured through the FAIR plan has roughly doubled to over 126,000 policies.  The total value of that residential property went from $4.6 billion in 2012 to $11.4 billion in 2014.  Why are we seeing so many North Carolina property owners being forced to seek coverage in the market of last resort?  Why aren’t insurance companies willing to provide the coverage?  I believe it is because insurers are becoming more selective in response to rate levels that they perceive as inadequate.

Rate caps are put in place by the Department of Insurance in an effort to make insurance more affordable. Although this certainly sounds good, the reality is that if the insurers think the caps are too low, they have to make a difficult decision.  First, they could provide the coverage and possibly lose money.  Second, they try to circumvent the caps by asking the property owner to consent to a higher rate.  Third, the insurers choose not offer the coverage to many property owners and only insure the lowest risk properties.  The third option is consistent with the rapid increase in property owners being left with only the FAIR plan as an option.

FAIR plans have been around for nearly four decades.  They continue to have a role for insuring some high risk property owners who live in unusually hazardous areas.  The rapid growth we are seeing in North Carolina though is cause for concern because the growth in not due to riots or other disasters, but instead is an indication that insurers are choosing not to provide coverage at the regulated rate levels.

David C. Marlett, Professor in the Department of Finance, Banking and Insurance at Appalachian State University, and a senior fellow at the American Consumer Institute

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