With N.C. Insurance Commissioner Mike Causey’s recent decision to reject the proposed rate increases filed in November by the North Carolina Rate Bureau, state homeowners await the results of a July 23 hearing in Raleigh to learn by how much, if at all, their premiums might rise.

The Rate Bureau’s requested average rate hike of 18.7 percent statewide was bound to be controversial, drawing objections from realtors, homebuilders and coastal residents who feel they already pay too much for home insurance.

But what the debate really underlines is that the time has come to modernize North Carolina’s antiquated regulatory system for insurance.

Private insurance companies are showing growing reluctance to write new property insurance in the state. Since 2011, the state’s Beach Plan, which writes policies in the coastal zone, has seen its market share grow from 3.4 percent to 7.2 percent. The FAIR Plan, which serves as an insurer-of-last-resort statewide, has grown from 0.6 percent of the market to 2.4 percent over the same period.

With such large residual insurance markets, insurers who are already skittish about inadequate rates also must account for the risk that a large event like 2011’s Hurricane Irene, which forced the state’s insurers to pay out $1.18 in claims for every $1 they collected in premium, could lead to huge assessments on the entire industry. These “hurricane taxes” ultimately are passed on to consumers in the form of special charges on every insurance policy in the state.

North Carolina is the only state in the nation where personal insurance rates are still set collectively by a rate bureau. The system amounts to a cartel that discourages competition. North Carolina insurance consumers are denied innovative new product offerings and lose out on discounts they could otherwise earn for hardening their homes against storms.

The current system also turns what should be a technical evaluation of rates into a charged political issue.

For the elected insurance commissioner, the temptation to allow voter sentiments and special interest lobbying to trump dispassionate analysis is strong. That’s a big part of why homeowners insurers have only been allowed to raise rates twice in the past decade – a 4 percent hike in 2009 and a 7 percent increase in 2013.

The consequences of this outdated system are reflected in North Carolina’s failing grade in the R Street Institute’s annual Insurance Regulation Report Card, which uses objective measures to assess how well each of the 50 states discharge their duties to regulate the business of insurance.

As the Legislature prepares for the 2017 session, it must give serious consideration to reforms that would shrink the Beach Plan.

Lawmakers should consider raising the standard deductible to match private offerings, limiting participation to those consumers who truly can’t find private coverage and creating a take-out program such as the one Florida used to shrink the size of its Citizens Property Insurance Corp. from 14.3 percent of the market in 2011 to just 4.3 percent in 2016.

The North Carolina Building Code Council also is scheduled to make updates this year to the state code, which is still based on the 2009 edition of the International Residential Code.

The council should consider requiring automatic residential fire sprinklers and undoing past legislative and regulatory actions that weakened mandatory wall-bracing provisions and eliminated the requirement that permanent anchors be installed around window openings.

Such investments in mitigation could go a long way to bring down homeowners rates overall.

While these changes would help, they aren’t enough to fix what’s really wrong with homeowners insurance in North Carolina. Ultimately, the Tar Heel State will have to catch up with the other 49 states that allow market forces, not elected bureaucrats, to introduce new products and set appropriate rates.

Competition and innovation offer the path forward.

Image credit: Andrey_Popov

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