States Consider South Carolina Incentive-Based Disaster Model

Chris Westfall
Chris Westfall

South Carolina’s market-based approach to risk mitigation is being eyed by lawmakers in several states as a way to address the huge financial exposure to catastrophic risk.

A combination of so-called “Catastrophe Savings Accounts,” premium incentives and insurer tax cuts passed by the Palmetto State last year could find there way into several other legislatures looking expand coverage in coastal areas.

“We are going to have to step out of the box in this one,” said North Dakota State Representative George Keiser (R) during a presentation at last Friday’s spring meeting of the National Conference of Insurance Commissioners in Washington, D.C. (NCOIL).

In 2007 South Carolina passed the Omnibus Coastal Property Insurance Reform Act which created a number of incentives for insurance companies to write policies in the state’s coastal region and for homeowners to retrofit their homes against windstorm.

Broadly, the South Carolina law allows:

Premium tax credit for licensed insurers who write full property and casualty coverage to specifically include wind and hail coverage in eligible areas.

Premium discounts, credits, rate differentials or reduction in deductibles for coastal property owners that use “mitigation techniques” to reduce loss.

Creation of so-called “Catastrophe Savings Accounts” that allow coastal homeowners set money aside, state income tax-free, to pay for qualified catastrophe expenses such as deductible expenses following a loss.

Rep. Chuck Kleckley (R-La.) said that he was particularly interested in the concept of creating savings accounts in Louisiana.

“We’ve looked at some of these options because many insurance companies have five percent deductibles,” Kleckley said. “If you get hit by a hurricane and you have a $100,000 house, you need that cash before you can access your insurance.”

Kleckley said the state was also considering using the accounts to help pay for mitigation expenses free of state tax.

Industry representatives at the hearing endorsed the concept of an incentive-based system for the states but cautioned they need to be crafted carefully.

“Fundamentally, we support the use of tax incentives for mitigation. It depends exactly on how they are implemented or executed,” said Robert Zeman of Allstate Insurance.

The reinsurance industry — along with representatives from South Carolina and Florida — attempted to include similarly mitigation incentives included in the recently enacted federal stimulus package without success, said Dennis Burke, vice president and head of state relations for the Reinsurance Association of America.

While NCOIL will continue to study expanding incentives in other states, Rep. Keiser warned it should not be sold as an answer to the overall question of coastal exposure.

“First we need to answer a critical question: what is the maximum exposure,” Keiser said. “If we begin to answer that question, then we can work with the industry and the states and offer incentives.”