Decrying the high-cost of private reinsurance, a leader in North Carolina’s legislature will introduce legislation next year to create “$1 billion catastrophe fund” backed by bonds to act as a funding mechanism for the state’s wind pools.
“We are sending almost $250 [million] each year from our wind pool offshore to reinsurance companies,” said Rep. Pat McElraft. “ I suggest instead of sending these dollars offshore, we need to set up a catastrophe fund in North Carolina backed by selling bonds to get funds if we ever had a catastrophic event that devastated our state for more than the $1 [billion].”
Any bill will need to be introduced in 2015 when the North Carolina legislature comes back in session, said McElraft, who is also vice chairman of the insurance committee and the Republican Deputy Majority Whip in North Carolina’s House of Representatives.
The proposed pool would back up the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association — collectively called the FAIR Plan — which is the state’s residual property insurance pool. North Carolina’s FAIR Plan is also one of the largest largest buyers of reinsurance among the major U.S. residual markets, purchasing $1.367 billion of coverage in excess of $1.6 billion with in four layers in 2012,
according to AON Benfield.
North Carolina is also one of the major and longer term issuers of catastrophe bonds, including the $500 million Parkton Re, $300 million Johnston Re and the $500 million Tar Heel Re.
“The issue with me is that in no decade ever have we spent more than $200 [million in claims]. If you have a hurricane of that magnitude it will be rising water creating a flood event that would totally destroy a house. Of course, our wind policy doesn’t even cover rising water,” McElraft explains. “With our strict building codes and setback laws I would not worry about a wind event creating catastrophic damage all along the coast.”
She adds that the with the FAIR Plan’s reserves currently above $1 billion the move to a state sponsored catastrophe fund makes economic sense. “ It would be a good risk for the state of North Carolina to get that $250 [million] per year in our coffers for a catastrophe fund. In [four] years we could have $1 [billion].”
This is not the first criticism of private insurance schemes in coastal U.S. states as increasingly conservative voices build their platforms for upcoming elections. Earlier this month Florida gubernatorial candidate Charlie Crist attacked what he called a reversal of recent initiative to privatize the Sunshine State’s property insurance system.
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