The Homeowners Insurance Rate Hearing finally began last week in Raleigh after being threatened by the North Carolina state Insurance Commissioner Goodwin back in January. It was pretty clear that unless the Rate Bureau and the member insurers withdrew the request, there would be a hearing. Since the leadership of the Rate Bureau believes its data shows rates to be “substantially inadequate,” the filing was not withdrawn. The Rate Bureau faces an uphill battle because insurers bear the burden of proving that the proposed rates are not excessive, inadequate, or unfairly discriminatory.
In addition, the eventual ruling will be made by the hearing officer, who is Wayne Goodwin. Given the previous statements and political downside with the voters, it would be surprising if he ruled against the Department of Insurance and in favor of the Rate Bureau. Goodwin is an experienced politician and is certainly well aware that approving such a large rate increase would make him an easy target in the next election.
The hearings are time consuming, expensive, and a seldom used component of the rather unique property insurance rate approval system for in North Carolina. If the rate increase request is denied as expected, insurers will decide to insure fewer homes. Insurers do have limited resources and they will strategically allocate where they can get the best return. They will insure fewer homes in North Carolina and focus on insuring properties in other states.
This is actually already happening and the evidence is the rapidly increasing number of property owners being insured through as the state “markets of last resorts” (the Beach Plan and FAIR Plan). These are the markets for homeowners with no other options. The expansion of the Beach Plan and FAIR Plan is concerning because following a severe hurricane, the non-coastal residents could be required to pay additional premium surcharges to fund the bailout of plans.
In addition, the insurers that choose to continue to sell coverage can simply step over the decision by the hearing officer by requiring the consumer to sign a Consent to Rate form. When the consumer signs the form, insurers are allowed to use rates up to 250% of current approved rates. The use of Consent to Rate is already happening on an unprecedented scale and there is little the Department of Insurance has been able do about it. Without the option to use the Consent to Rate forms, insurers would likely stop providing coverage at all.
So if the increase is denied and the rates remain capped at current levels, the lowest risk property owners (excellent credit score, no prior losses, not close to the coast) will probably be fine. Their exposure is commensurate with the rate ceiling. However, the property owners with a higher level of risk will either be required to sign a Consent to Rate form, or be directed into either Beach or FAIR plan.
Rather than going through this costly and time consuming hearing, time could be better spent by all parties by focusing on finding solutions to the property insurance crisis. There is no single solution, but several examples of possible improvements include the following:
- The Rate Bureau should make annual filings of smaller increments. As an example, it would be easier on the consumer to face annual increases around 5%, rather than 25% request once every five years. It is also easier politically on the regulators.
- If hearings are necessary, the hearing officer should be an independent, impartial judge. Regardless of whether the hearing is balanced, the optics of having the Insurance Commissioner as the hearing officer just doesn’t give the appearance of a fair trial.
- Allow the competitive market to function and set actuarially sound rates. This will discourage development in risk-prone regions which makes both economic and environmental sense. It will also reduce the subsidization of those risk prone areas by other state residents. There should be a glide path approach of gradual rate increases so that the consumers have time to adjust. Long run this is the best solution.
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