Reports Reject South Carolina Flood Pool, Endorse High Reinsurance Levels for Wind

A pair of recent government reports say that South Carolina should avoid creating a state-sponsored residual pool for flood risks while continue purchasing relatively significant amounts of private market cover for its wind pool to avoid policyholder charges in large loss years.

“[Member] insurers believe it is important that the Association maintains a high level of reinsurance coverage,” according to the report released by the South Carolina Department of Insurance (SCDOI) last week. “Relatively small assessments each year are worth the reduced uncertainty that this level of reinsurance provides.”

Both reports, which were released last month, are part of legislatively mandated reviews of South Carolina’s coastal property insurance market and the exposure of its insurer of last resort, the South Carolina Wind and Hail Underwriting Association (SCWHUA).

Despite having a significant exposure to coastal flooding — and an even greater risk since reforms to the National Flood Insurance Program (NFIP) were adopted last year — South Carolina should forgo creating a flood residual pool similar to SCWHUA, according to a report authored by  Dr. Greg Niehaus, a professor of Finance and Insurance at the University of South Carolina’s Darla Moore School of Business.

The report concluded that it “may be too early “ to consider  creating a residual market mechanism for flood insurance in South Carolina since several questions regarding the future of the market remain unanswered. Among other findings, Neihaus concluded:

  • NFIP rates are planned to increase until they reach adequate levels.
  • The private market is beginning to compete with the NFIP for policies.
  • Two national flood insurance affordability reports will be released in 2015.
  • Support for incentivizing flood risk mitigation through public policy continues to increase.

South Carolina is sixth in NFIP policy count with 190,208 policies which insure over $51 billion of property, according to the report.

In separate research, the insurance department endorsed SCWHUA’s continued purchase of relatively high levels of private market reinsurance, arguing that buying coverage 1-in-200 event level (rather than at the common 1-in-100 level) means the residual market is more likely to have enough reinsurance coverage to cover policyholders’ claims without the need for a assessments.

“Georgia is the only state whose residual market mechanism purchases reinsurance coverage beyond the level obtained by the SCWHUA” the report states. “Several of the states shown [would ] like to purchase more reinsurance but are unable to do so due to lack of funding.”

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