Point of View

Still too much risk in the Beach Plan

August 20, 2009 

— The hurricane season is heating up, as it often does in the fall. Hurricane Bill is heading west, and while it may not make landfall, any storm conjures images in our state of Hurricane Floyd, whose 10th anniversary is noted this year.

Even as the storm season gets busier, Gov. Beverly Perdue will likely approve changes to the state's coastal insurance system that the legislature approved this session. Own a house at the beach? You continue to benefit from state-sponsored below-market insurance rates. As for the rest of us, we remain on the hook for damages to beach properties we do not own. The changes that the governor will enact do not go far enough to reduce this subsidy, which means that you and I will likely be paying for that insurance, sooner or later.

Insurance is expensive in coastal areas of North Carolina because the risk wind damage from storms is high. But the premiums insurance companies charge for insurance may not reflect the real risk of storms like Hurricanes Fran or Floyd, not to mention a megastorm like Hurricane Katrina. Indeed, some insurance companies have abandoned the homeowner's insurance market in all of North Carolina because of their exposure to coastal storm risks.

Years ago, North Carolina established a state-supported insurer known as the Beach Plan to cap insurance company liability and to make insurance affordable.

Unfortunately, these insurance systems subsidize risky development in hazard-prone areas. In a free market, the price of insurance should serve as a signal to property owners of the relative risk of building in a particular place. Yet our government makes this building more attractive; we subsidize insurance, and we build roads and utilities to support development in areas that are truly risky.

Here's the rub: that risk continues to be assumed by every North Carolinian under the new Beach Plan reforms. Many of the ideas in the law are very good, including a cap on insurance of $750,000 for homes (commercial property is capped at $3 million), and a requirement that the Beach Plan rates remain somewhat high to reflect the higher risk. This means that seaside property owners will assume some share of the risk. With only about $2.5 billion to $3 billion in resources, the Beach Plan has insured $74 billion in property. It takes little to imagine that a Fran/Floyd-sized storm could overwhelm these resources.

And when such a storm exhausts the Beach Plan's resources and the insurance companies' $1 billion cap on insurance company liability, then the insurance companies would be allowed to assess on all property insurance a 10 percent "catastrophic assessment recoupment." In other words, it's not only beachfront property owners that bear the risk -- it's everyone.

Of course, we cannot just depopulate our coastal towns. Tourism is a major industry in North Carolina, and the beaches are major attractions. And it would be grossly unfair to suddenly tell people along the beach that they cannot buy insurance after being encouraged to do so.

What we can do is limit risk and liability by coupling these changes to more intelligent land use and infrastructure decisions. We need to stop subsidizing risky developments by making developers, not the public, bear the costs of infrastructure. Developers should post a bond or provide other resources to protect property against known hazards. As it is, developers just build and then walk away from risk when a sale is complete.

We need to stop expensive and ultimately unsuccessful sand replenishment programs that simply delay the inevitable. Beach property owners must also assume higher insurance premiums and deductibles because they have voluntarily assumed the risk.

As my colleague Ellis Stanley, a former Brunswick County emergency manager, says, people and local governments have to "own the hazard," which means that they need to acknowledge it and take responsibility for mitigating it.

While the new law is an improvement in some ways, it reminds us that, when it comes to assuming risk, government policies often favor the risk takers, and make the rest of us pay the price. In today's economic climate, this sounds awfully familiar.

Thomas Birkland is the William T. Kretzer professor of public policy in the School of Public and International Affairs at N.C. State University, and is an IEI-GlaxoSmithKline faculty fellow for 2009.

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