Legislation from Collaboration

South Carolina on Track with Property Insurance Through Market-Based Approach

By Scott H. Richardson, South Carolina Director of Insurance

South Carolina, like many other states with coastal exposure, has experienced and continues to experience challenges regarding the availability and affordability of coastal property insurance. To address these issues, South Carolina enacted the Omnibus Coastal Act of 2007 on June 11. The Act provides a comprehensive market-based approach and is the result of a collaborative effort involving Gov. Mark Sanford, members of the South Carolina General Assembly, the South Carolina Department of Revenue, homebuilders, realtors, the manufactured housing industry, independent insurance agents, the South Carolina Wind and Hail Underwriting Association, and members of the insurance industry.

Specifically, the Act provides consumer initiatives that include catastrophe savings accounts, tax credits for retrofitting property, and mitigation supplies, as well as for property owners that pay “excess” premium. Insurers are also providing premium discounts for mitigation measures as well as disclosing available credits and discounts to policyholders. The Act extends the notice of cancellation and non-renewal of policies to homeowners and allows licensed insurers who write full coverage in coastal areas a 25 percent credit against the state collected premium tax. The Act also expands the Emergency Powers of the director in the event of a natural disaster, and it allows the Department to adopt standardized requirements that may be applied to insurers following an event.

To increase the awareness of the importance of mitigation, the Act includes the development of an objective wind rating system and the creation of the South Carolina Hurricane Damage Mitigation Program known as the SC Safe Home Grant Program (www.scsafehome.com). SC Safe Home provides matching grants to homeowners to retrofit properties. Grants are limited to $5,000, and low-income homeowners are eligible for the grants with no matching requirement. The grant program is funded by appropriations, premium taxes paid by the South Carolina Wind and Hail Underwriting Association, and 1 percent of state premium tax. The program began accepting applications in September 2007 and has awarded approximately $100,000 to date. The program focuses on the following mitigation measures: roof deck attachment, secondary water barrier, roof covering, brace gable-ends, reinforcement of roof-to-wall connections, opening protection, exterior doors including garage door openings, and tie-downs for manufactured and/or modular homes.

The Act also addresses the South Carolina Wind and Hail Underwriting Association allowing the director to expand the wind pool territory and create a multiple-tier rate structure. It updates the definition of insurable property and clarifies the Wind Pool as a residual market mechanism. Also, the Act allows for the addition of three consumer representatives to the Wind Pool board of directors and requires wind pool rates to be adequate and reviewed biannually. The territory was expanded May 23, 2007, and requested that the Wind Pool submit a tiered rating plan for review.

As we work to see these initiatives develop, we continue to look for additional solutions to the coastal insurance issues in our state and on a national level. At the National Association of Insurance Commissioners fall meeting this past October in Washington, D.C., I presented a possible solution to the uncertainty surrounding the allocation of damages between wind and water. As you are aware, there has been extensive litigation resulting from the property losses of Hurricane Katrina. Homeowners in Louisiana, Mississippi, and Alabama have protested what they view as inappropriate obstacles to the payment of their property damage insurance claims.

In general, private companies offer insurance against wind damage while the federal government covers damage from storm surges and other flooding through the National Flood Insurance Program. Hurricane damage is often caused by a mix of wind and water. Because the damage typically occurs in the middle of a dangerous storm, it may be difficult, if not impossible, to determine the proportional share of damage caused by one or the other. Therefore, when insurance adjusters assessed properties damaged by the storms, they were faced with the issue of allocating damages between wind (typically covered under homeowners’ policies) and flood (typically excluded under homeowners’ policies). The delays and economic uncertainty of this allocation has raised financial and legal issues for insurers, as well as homeowners and businesses along the Gulf Coast.

We believe in a standardized loss allocation system, where the cause of hurricane damage would be determined based upon extrinsic evidence. Where such determinations are impossible, preset formulas would be applied to apportion relative responsibility, with properties closer to a storm surge allocating more of the loss to flood while properties farther away would see more of the loss allocated to wind. Such a system could potentially reduce litigation costs, allow insurers to better quantify their losses and price the risk, and reduce the uncertainty that tends to drive up reinsurance costs.

Additionally, we must maintain up-to-date flood maps. As of 2005, 70 percent of the 92,222 flood maps created under the NFIP were more than 10 years old. Properties in a community subject to flood risk constantly change in response to new development, erosion, land use, and other natural factors. According to a 2005 report released by the Department of Homeland Security’s inspector general, outdated flood maps place homeowners and residents at physical and financial risk because many people living in high-risk areas do not know they are susceptible to flooding, and therefore, they may not have chosen to participate in the NFIP. Updating flood maps will allow homeowners to make better decisions about protecting property; allow communities to better manage floodplains and wetlands, flood risks, land and water resources, and disasters; and allow insurance companies to better help homeowners assess risks and calculate flood insurance premiums.

Eli Lehrer, a senior fellow at the Competitive Enterprise Institute where he directs CEI’s studies of insurance and credit markets, stated in a recent analysis titled, “South Carolina’s Omnibus Coastal Reform Legislation, Baby Steps in the Right Direction,” that the state has built a good, though not perfect, system for property insurance. There is much to learn from the state’s refusal to engage in additional rate regulation, controlled expansion of its wind pool, and emphasis on mitigation measures. I encourage discussions regarding possible long-term solutions as we and others are learning that the issues surrounding coastal property exposure are not state specific.

Posted: Monday, January 21, 2008 12:00:00 AM. Modified: Monday, January 21, 2008 3:48:14 PM.

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