Caught between higher premiums or losing coverage, more and more are opting to sign “consent-to-rate” letters that allow insurers to raise rates by up to 250 percent.
And it’s perfectly legal.
In order to protect consumers considered too risky for coverage, the state’s consent-to-rate law allows insurers to boost rates above the maximum allowed by N.C. Commissioner Wayne Goodwin – if the policy holder agrees. According to the law, the rate of homeowners insurance “shall be presumed reasonable if it does not exceed 250 percent of the rate that would be charged without consent to rate.”
It’s an option insurers use to cover the perceived risk of large claims.
According to the N.C. Department of Insurance, the percentage of homeowners insurance policies in North Carolina written on a consent-to-rate basis rose to 30 percent in 2013 from 23 percent in 2010. Those on the coast remained at 26 percent in the same time period, while consent-to-rate policies on beachfront properties fell to 39 percent of the insurance pool from 41 percent in 2010.
The N.C. Rate Bureau, a nonprofit board created by the General Assembly to provide services and support for insurers involved with automobile, property and workers’ compensation in the state, filed for an average statewide hike of more than 25 percent early last year. If it had been approved, rates would have gone up as much as 35 percent in some beach and coastal areas and as little as 3.1 percent in Yadkin County.
After a public comment period and hearing, Goodwin last December ordered no change in rates.
“After considering all of the evidence and data available, I have determined that no factors or events justified the excessive rates requested by the insurance companies,” Goodwin said at the time of his decision. The bureau, which has filed an appeal, disagrees.
“They are the regulator and we are the regulated,” said Ray Evans, general manager of the rate bureau. “Our job is to promulgate rates based on methodologies,” he said, such as using the forecasted inflation rate, a home’s location and construction, existing claims and storm history.
Goodwin, he said, has a totally different mindset, and his decisions are subject to voter approval. “Their job is protecting the consumer. That’s not part of our deal.”
The most recent rate increases went into effect in July 2013 after Goodwin settled with insurers on a 7 percent average increase after the companies had requested more than 17 percent.
Insurance, Evans says, is about “subsidizing someone else to take a risk.” To illustrate this, he said the 93 percent of homeowners who don’t make a claim cover the costs of the five to seven percent who do.
“All of us pay for the losses of a few,” he said. While insurance companies can predict the number of claims they’ll have on common occurrences such as house fires and dog bites, they cannot prognosticate weather-related damages such as those caused by Hurricane Katrina. Premiums need to cover the risk of such future events, Evans said.
The question is, “What if it hit today?” Evans said.
Meanwhile, he said, insurers have to compensate for shortfalls in the Coastal Property Insurance Pool, formerly known as the Beach Plan. Created in 1969 by the N.C. General Assembly, it is designed as a “market of last resort” for wind and hail damage to coastal properties.
Should a major storm hit the 18 coastal counties under the plan, the pool would pay on claims out of its surplus, Evans said. The pool had a $929 million surplus in September 2014, according to the latest Coastal Property Insurance Pool balance sheet posted on the agency’s Web site. Insurance companies in North Carolina would be liable for the next $1 billion in payments. Reinsurers, and, if necessary, policyholders across the state, would be on the hook for covering remaining claims.
The rate bureau’s filing for a a more than 25 percent increase last year is not outlandish, Evans said. The time it takes to resolve a request, he said, hinders insurers from keeping up with market conditions. That causes them to play catch-up each time they apply for an increase. Ideally, Evans said, the bureau would like to file for incremental increases of 1.5 percent a year.
When the bureau filed for a rate increase last year, significant hikes were submitted for counties not along the coast, such as 35 percent in Cabarrus and Rowan; nearly 30 percent in Iredell; and nearly 27 percent in Gaston. In Charlotte, insurers asked for a rate increase of 17 percent.
Paying for risk
Inland communities tend to pay much lower premiums, Evans said. A double-digit increase in their premiums would be lower in terms of dollars spent than it would be for someone on the coast.
“It’s a much more manageable increase,” he said.
The average annual N.C. insurance premium paid in 2012 was $927, according to the latest figures from the National Insurance Commission.
In the traditionally weather-related high-risk states of Louisiana, Texas and Florida, those figures were $1,742, $1,661 and $2,084, respectively. Estimates of the average premium is an imperfect measure of the relative “price” of insurance due to wide variations in hazards, economic conditions and real estate values from state to state, the commission says.
Meanwhile, N.C. homeowners continue to get consent-to-rate letters, with media outlets reporting requests for increases of more than 100 percent. But according to Evans, most of the time insurers request an increase of between 7 percent and 15 percent. Reports of companies seeking markups of 100 percent or more are difficult to explain, he said.
“My guess is there’s a whole lot more to the story than just somebody’s going to raise rates by 100 percent.”
The important thing to remember, says N.C. Department of Insurance spokesperson Kerry Hall, is that insurers can’t raise premiums if policyholders don’t agree. As for the threat of losing coverage, consumers are subject to the vagaries of the marketplace.
“It is within their (insurance companies) rights not to renew policies,” Hall said.
Her advice: “Call your insurance agent and shop around.”