For the past decade North Carolina has faced the grim prospect of a hurricane so enormous and destructive that residents in every county of the state would be on the hook financially for the recovery.
Residents statewide could be charged for hurricane damage that didn’t touch their homes, under a 2009 state law created as a safeguard against increasingly violent windstorms that could obliterate the runaway development along the state’s coastline. That year the legislature said the N.C. Department of Insurance can authorize raising home insurance rates for all residents by as much as 10 percent to cover financial losses for the state’s Coastal Property Insurance Pool.
The 50-year-old pool is the insurer-of-last-resort that accounts for half the property insurance revenue from the state’s 18 coastal counties. The pool currently covers nearly 192,000 properties, valued at $71.7 billion. It is one of the four biggest insurers of its type in the country, similar in size to pools in Texas and Massachusetts and about half the size of Florida’s Citizens Property Insurance Corp.
But triggering the emergency payment mechanism would take an extraordinary sequence of catastrophes, possibly two back-to-back monster storms, said Wayne Goodwin, the state’s Insurance Commissioner from 2008 to 2016. Goodwin was involved in crafting the 2009 law to prepare the state for what he called a “ticking time bomb.”
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Hurricane Matthew, which soaked North Carolina in 2016, didn’t come close to the Coastal Property Insurance Pool’s financial tipping point. And neither will Hurricane Florence, said Gina Schwitzgebel, general manager of the N.C. Joint Underwriting Association, which administers the coastal insurance pool.
Matthew cost the coastal pool $56.9 million for 10,747 claims, she said, and about 90 percent of the claims were paid out within 60 days. The vast majority of Matthew’s damage came from flooding, a natural disaster that is insured separately through a federal program that is not regulated by North Carolina authorities.
Hurricane Florence appears to be following a similar pattern, Raymond Evans, general manager of the N.C. Rate Bureau, which handles rate filings for property and auto insurers.
“There is substantial damage but it’s not the wholesale structural damage we were thinking when this thing was out in the Atlantic,” Evans said. “As with Matthew, this is going to be much more of a flood and water event than a wind event.”
Initial estimates for damage caused by Hurricane Florence will be discussed by the Joint Underwriting Association’s board of directors in a closed meeting this Wednesday. But computer models and early reports indicate that Florence won’t strain the pool’s available reserves.
“I have several modeling firms that have already sent us loss projections,” Schwitzgebel said. “I have meteorology reports from multiple companies -- reinsurance, brokers, air models, RMS [risk management solutions] models.”
The North Carolina coastal pool could cover $2.94 billion in claims with current reserves and reinsurance programs, she said. And under the 2009 law, it could issue about $4 billion in catastrophe bonds to pay off damage exceeding its current capacity. It would be able to repay the bondholders by assessing property policy holders throughout the state.
The Joint Underwriting Association has run computer models to project the potential damage if historical hurricanes were to unleash their fury on today’s developed oceanfronts and coastal communities.
The most destructive storm would be Hurricane Hazel, the Category 4 storm from 1954, which today would cause $2 billion in damage to properties insured by North Carolina’s coastal pool. Next in line would be Hurricane Donna, the Category 2 storm from 1960 that would cost the coastal pool $1.1 billion in claims today, the computer models show.
Those property losses are in line with the 2017 damage wrought by Hurricane Harvey in Texas, Schwitzgebel said. The Category 4 storm caused $1.6 billion in losses for 76,000 claims to the Texas Wind Pool, the insurer-of-last-resort in that state that insures dwellings commercial insurers consider too risky.
Goodwin, the former state insurance commissioner, said there is a remote possibility of an unprecedented hurricane season that would bust the bank for the Coastal Property Insurance Pool. Goodwin said the odds are going to get greater over time as global warming intensifies, sea levels rise and storms become more destructive.
“Can Armaggedon happen where we get two Hazels in the same year?” Schwitzgebel said. “That’s what you’re looking at.”