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Hurricane Season Has Coastal Homeowners, and Insurers, Monitoring Storm Predictions

By Jane Nicholson

BOONE–The arrival of hurricane season has coastal property owners, including those in North Carolina, monitoring this season’s storm predictions.

Forecasters predict a better than 60 percent chance that one or more major hurricanes will hit somewhere along the United States this season.

But even without landfall, increased growth in North Carolina’s coastal areas means wind damage and flooding associated with offshore storms could be very costly — costs that insurance companies may be no longer willing to shoulder.

Could the potential for catastrophic losses, such as those experienced during hurricanes Floyd, Bonnie and Fran, leave homeowners along the state’s coast without coverage?

David D. Wood, the Joseph F. Freeman Professor of Insurance at Appalachian State University, says homeowners do have an option of last resort through the N.C. Insurance Underwriting Association, commonly called the “Beach Plan,” when insurance companies decline to write policies for property along the state’s beaches and coastal areas.

Created in 1967 and modified in 1998, the Beach Plan provides a solution for protecting homeowners in the state’s coastal areas who are unable to obtain property insurance or are underinsured from losses associated with windstorms and hail.

The Beach Plan does not cover flood, which must be insured separately.

The Beach Plan writes its own policies and acts as an insurance company, but the plan is “subsidized” by all the insurance companies doing business in the state. The subsidy creates a source of money to finance property losses on the Outer Banks and windstorm losses in the mainland portion of those coastal counties. Insurance companies share any profits realized during years with limited claims, and pay assessments to cover losses when storm damage soars. Most recently, the companies have shared the losses.

Potential losses associated with hurricane and wind damage have become staggering as more and more people move to the coast and as development grows. The population in Brunswick County has grown 40 percent in the past 10 years. Currituck, Dare, New Hanover and Pender counties have experienced a 30 to 40 percent population growth.

While the growth is a boon to coastal counties’ tourism and economic base, the development can exacerbate storm losses as natural protective barriers, such as sand dunes and forests are altered or destroyed, Wood said.

Wood fears that another costly storm could eventually drive some insurance companies from the state. “The potential for loss is very great given the value of the properties that are being insured by the Beach Plan, and the hesitancy of the traditional insurance companies to write coverage for high-risk areas,” he said.

Wood suggests that state leaders look at a variety of options for financing losses associated with hurricane and windstorm losses in North Carolina to help spread the risk.

Some options are modifications to the current Beach Plan, others are alternatives to the Beach Plan.

Administrators of the Beach Plan recently raised deductibles up to $2,000 for the most expensive homes. “The deductible should be much higher, but this change will help eliminate small losses,” Wood said. “Often times when a hurricane does come through it blows off a lot of shingles and damages roofs, but doesn’t necessarily result in catastrophic damage to every property. If people choose to live in the coastal areas, they need to bear some of the burden of this exposure.”

The Beach Plan could purchase reinsurance as another option for spreading the risk of expensive claims, Wood said.

By purchasing reinsurance, the Beach Plan could spread its risk exposure to large reinsurers and in turn reduce the assessments being charged to insurance companies operating in state.

Alternatives to the Beach Plan include a reinsurance facility, similar to what is in place for insuring high-risk drivers, and a hurricane catastrophe fund.

“Both Florida and Texas have established hurricane catastrophe funds to pre-fund potential losses,” Wood said. “This can be done via bonds or other financial securities funded by investors willing to take the risk of the hurricane activity. If a fund was available to handle the extraordinary losses, insurance companies could operate knowing that there was a ceiling on what their payoff would be.”

“I do not think the Beach Plan is working as it was intended which is as a market of last resort. In many cases, it has become the only market,” Wood said.

Wood has completed research on this issue, which will be published by the CPCU (Chartered Property and Casualty Underwriter) Society.


David D. Wood, 828-262-6234

Jane Nicholson, University News, 828-262-2345