North Carolina Bill Pushes Post-Event Finance, Catastrophe Model Changes to Avoid Reinsurance

Legislation introduced last week in the North Carolina legislature would seek to alter the state’s residual pool to shift the focus away from reinsurance purchases to post-event bonding.

The proposal would also allow multiple models to be used in rate filing, as well as requiring the models to include building codes to the North Carolina market.

“At the moment 33 cents of every premium dollar goes towards reinsurance,” says Jordan Hennessy, legislative assistant to Sen. Bill Cook, sponsor of the legislation. “The legislation seeks to build up our surplus and adopt the same financing methods used by other coastal states, such as Florida and Texas.”

The Property Insurance Fairness Act (SB 208) would create a new public agency — called the North Carolina Recovery Authority — that would would issue post-event, tax-exempt bonds following a hurricane, flood or other catastrophic loss. According to the bill’s language, bonds would be issued only if the property insurance pool was exhausted.

“The legislation does not impose any new costs on North Carolina citizens. Several other southeastern states (Florida, Texas, and Louisiana) with large coastal exposures have the ability to finance deficits in their wind pools with tax-exempt bonds,” Cook said in a prepared statement. “For example, in the aftermath of Hurricane Katrina, Louisiana’s wind pool issued post-event bonds to enhance its claims-paying ability.”

The proposal seeks to rework financing of the state’s residual coastal insurance markets: the North Carolina Joint Underwriting Association (NCJUA) and North Carolina Insurance Underwriting Association (NCIUA).

North Carolina is one of the largest largest buyers of reinsurance among the major U.S. residual markets, according to AON Benfield, and a significant issuer of pre-event catastrophe bonds. The bonds include the $500 million Parkton Re, $300 million Johnston Re and the $500 million Tar Heel Re.

A separate provision in the bill would allow for North Carolina Rate Bureau to allow private insurer to use multiple catastrophe models when applying for rate changes. In addition, any catastrophe models will need to be “specific to North Carolina risk and reflective of the North Carolina Building Code,” Cooks said in a statement.

Specific language of the bill says the any model used “  “shall be based on maximum load designs, such as maximum wind or rain loads, contained within the State Building Codes promulgated by the State Building Code Council.”

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