Justifying eye-popping increases in homeowner insurance rates splits the industry and its regulator.
Many North Carolina homeowners are facing sticker shock when opening the annual bill from their property insurance company.
Whether the higher charge should be 30%, 50%, 80% — or zero — is sparking debate between state regulators and the companies. A decision is likely within the next two months.
North Carolina’s insurers think homeowners should pay an average 42% more than the current rates approved by the state Department of Insurance. That request for higher rates is the industry’s first filing since 2020, a period that has been a painful experience for many insurers and property owners because of an unusual number of powerful storms, higher material costs and increased labor charges. Anyone who’s paid for a new
or repaired deck or roof knows the meaning of construction inflation.
Still, Insurance Commissioner Mike Causey contends the statewide average increase should be no more than 3%. In some regions, he says rates should be flat or cut modestly.
The industry and department argued the matter for several weeks at a hearing that started in Raleigh in October. Causey is expected to rule early this year.
The department’s “overall recommendations simply cannot be squared with what is happening in the marketplace here in North Carolina,” Mickey Spivey, a lawyer for the insurance industry, said at the hearing’s opening. “You must ask yourself whether you can possibly find credible any witness or any argument that seeks to convince you that the current rates do not need to be increased. We submit to you that the answer to that question is a resounding no.”
There’s nothing new about such tussles in North Carolina, which has used its unusual approach to ratemaking for decades. Most states let individual homeowner insurers to file new rates, then institute the change without regulatory approval. But pressure for higher rates is accelerating.
Between 1993 and 2014, N.C. insurers submitted eight rate filings. Since then, there have been four rate requests.
Commissioners historically order lower-than-requested increases, spurring industry lawsuits and eventual compromises.
But the 42% request made in early 2024 is sharply higher than previous proposals. The last request was for a 24.5% increase in 2020. Two years later, the industry and Causey agreed on a 7.9% hike.
The 42% number is an average, with the specific increase varying widely across the state, depending on storm frequency, claims experiences and other factors. Homeowners in some coastal regions are seeing average rate increases of 99%, while others are in the single-digit range.
Still, it’s a record request that is hitting homeowners across North Carolina, not just beach properties.
ADVISE AND CONSENT
While that’s the big picture, the real world situation is that insurers are charging and collecting higher rates because they have to make a profit, and the law lets them raise the fee, says Christopher Cook. He owns Winston-Salem-based Alliance Insurance Services, which employs 40 people in five locations.
About 45% of the state’s residential properties were covered by “consent-to-rate” policies in 2023. That refers to state law permitting insurers to charge as much as 25% more than the state-approved rate.
A $1,000 approved rate could lead to a $1,250 offer from Company X, for example. The homeowner can either “consent” and pay $1,250, or turn it down and find another insurer. Company X is then allowed to cancel the policy.
“While no one likes to see their insurance premiums increase, consent-to-rate is a tool that insurance companies can use to continue covering customers’ property if that property becomes too risky to cover at the base rate,” Causey said in an email response to questions. “[Consumers] may shop around to see if they can find lower rates.”
The commissioner, who was re-elected in November to his third four-year term, says he’s open to improving the consent-to-rate law if state lawmakers want to do so.
“Insurers aren’t going to take on a rate that is going to cause them to lose money,” says Cook, who is active in the Independent Insurance Agents of North Carolina, a trade association representing nearly 1,000 agencies. Unfortunately, he says, North Carolina’s insurers have collectively paid out more in claims than they have received in premiums in recent years, which justifies the rate request, he says.
The insurance industry’s case for higher rates stems from three key factors: construction inflation; higher prices charged by the mostly European-based reinsurance companies that act as a backstop for the insurance carriers; and payout ratios, which fluctuate based on the frequency and severity of storms. All three factors are showing negative trends that have reduced profit in recent years, industry officials say.
Inflation in construction prices is a big concern, with material costs for single-family homes soaring about 34% since early 2020, the American Property Casualty Insurance Association reported in 2023. Construction wages gained 20% between 2021-23, according to market researcher RS Means Data.
In North Carolina, construction costs of $300 per square foot are now common for lower-priced homes, which is double the amount eight years ago, Cook says. And the cost of repair or replacement in higher-income neighborhoods is often $500 per square foot or more, he adds. “Reconstruction cost is really driving the rate increases.”
The result of hefty premium increases is more telephone calls from policyholders asking insurance brokers for help in finding lower-cost alternatives, Cook says. Many calls come from buyers of direct-to-consumer insurers such as Geico and Progressive, which attract business through heavy ad spending.
In the current market, however, it’s often hard to find another carrier willing to offer a lower price. “The last few years have been hard on everyone and not many companies are growing their book of business,” he says.
The good news for homeowners is that solid housing demand and restricted supply has sent home values soaring in many N.C. regions. Nationally, the Zillow Home Value Index gained more than 45% between March 2019 and March 2024, while premiums for homeowners insurance increased by nearly 15%.
It appears that insurers and regulators are finding a balance, avoiding the situation in some states where, many insurances have pulled out of the market because they view the risk as exceeding any reward. Having more carriers spurs competition that gives homeowners more choices and, presumably,
better rates.
The N.C. Department of Insurance doesn’t publish a list of companies that have left the state. But Causey notes he has “not received many such notifications over the past few years. North Carolina continues to have a competitive insurance market.”
He credits the consent-to-rate approach, which he says “while far from perfect, allows insurance companies to be competitive and remain solvent in North Carolina.” ■
