A half-decade of growth for the North Carolina Insurance Underwriting Association could come to a catastrophic climax this week, with the impending arrival of Hurricane Florence. Packing 140 mph winds as it moves over warmer waters and heads toward a Thursday night landfall somewhere on the Carolina coast, the storm could easily deplete the roughly $3.3 billion the association has to pay claims.

Better known as the “Beach Plan,” the association is a pool of private property insurers that was created to provide windstorm coverage to residents of 18 wind-and-hail zone districts along the coast. As of 2017, it had 205,958 policies and $76.7 billion of total exposure.

While those totals represented a 5.8 percent drop from the plan’s 2016 levels, according to data from the Property Insurance Plans Services Office, the Beach Plan has more than doubled as a proportion of the state’s residential property insurance market from 3.37 percent in 2011, the year Hurricane Irene struck the state, to 7.23 percent in 2016.

Troublingly, the Beach Plan isn’t North Carolina’s only residual market insurance mechanism to expand in recent years. The North Carolina Joint Underwriting Authority, better known as the “FAIR Plan” (for “fair access to insurance requirements”) has seen similarly fast growth. The FAIR Plan, which insures property owners anywhere in the state who are unable to find coverage in the regular admitted market, has grown from 0.62 percent of the market in 2011 to 2.42 percent in 2016.

What’s notable is that this growth has come even as other major residual property insurance markets across the country have mostly been shrinking. As a point of comparison, Florida’s state-run Citizens Property Insurance Corp. wrote 14.28 percent of that state’s residential property insurance market in 2011, but as of 2016, was down to just 4.28 percent.

Though the FAIR Plan doesn’t have the concentration of exposed coastal properties that the Beach Plan does, both entities could find it challenging to pay all of the claims Florence is expected to produce. Under the FAIR Plan’s financial structure, the first $30 million of losses are paid out of retained earnings followed by a $100 million assessment layer on member companies. Should losses exceed $130 million, the plan would then tap up to $151 million of reinsurance. Any losses in excess of $281 million would have to be financed by further member company assessments, which are theoretically unlimited.

The Beach Plan has a slightly more complex financial structure, including a firm cap on its claims-paying capacity. Out of its first $1.69 billion of losses, $1.59 billion are to be paid out of retained earnings, with a $100 million reinsurance layer that kicks in at $1 billion of losses. Losses between $1.69 billion and $2.69 billion are paid out of a $1 billion member company assessment layer, followed by a $250 million reinsurance layer that kicks in above $2.69 billion.

Current law limits insurer assessments at $1 billion, regardless of whether they are levied directly on the member companies or simply collected from them. Once the association knows that it has exhausted its $2.94 billion of combined surplus, reinsurance and member assessments, it’s required to notify the state insurance commissioner, who can authorize up to $326 million of “catastrophe recovery charges” – that is, assessments levied on every residential and commercial property insurance policy in the state.

What happens if and when losses exhaust the Beach Plan’s total $3.266 billion of claims-paying capacity—as it looks possible claims from Florence might do—is something of an open question. Legislation filed in several recent sessions, including the current one, proposed to create a North Carolina Recovery Finance Authority that would be able to issue tax-exempt bonds on behalf of the plan in the event its resources were completely spent. But since those bills haven’t advanced, this could be a question the General Assembly will be asked to answer soon rather than later.

While state lawmakers are at it, it is long past time that North Carolina look to modernize its antiquated regulatory system, which is the root cause of its abnormally large residual markets in both home and auto insurance. North Carolina is the only state in the nation where personal insurance rates are still set collectively by a rate bureau – effectively, a cartel that makes true competition just about impossible.

Moving to an open, competitive insurance market where rates truly reflect risk would encourage companies to return to the coastal communities they’ve exited. It also would allow North Carolina consumers to finally have the choice and product innovation they deserve.