January 30, 2015

Hatteras Island Real Estate:
Insurance consent to rate letters


Looking at the title of this article, I am sure that most readers are asking, “What is a consent to rate letter?” and “Why should I be interested?” The answers to these questions are interesting, informative, and potentially disturbing.

In order to better understand the role of consent to rate letters in the world of insurance, it helps to have some background. In mid-December of last year, the North Carolina Insurance Commissioner, Wayne Goodwin, ordered a zero percent overall statewide change in homeowner insurance rates effective June 1, 2015.

The actual rates varied by geographic territory and type of insurance. In the beach areas of Dare, Currituck, and Hyde counties, the Commissioner’s decision decreased homeowner insurance rates by an average of 9 percent. The mainland areas of these counties saw an average decrease of 12 percent.

The insurance companies had requested an increase of 35 percent in the beach areas and a 10 percent increase in the mainland areas. Overall, the insurance companies had requested an average statewide rate increase of 25.6 percent.

Needless to say, the insurance industry was not pleased with the Insurance Commissioner’s decision. The North Carolina Rate Bureau, which represents 100 insurance companies selling policies in the state, has indicated that they will file an appeal of the decision with the state Court of Appeals because the companies feel that rates are inadequate to cover their potential losses. It could take up to a year before the court issues a decision. The Rate Bureau could also file a new rate request with the state Insurance Department.

The Insurance Journal reported that the Rate Bureau said that it sought the increases because of a sharp rise in anticipated repair, replacement, and rebuilding costs and the growing risk of catastrophic losses from hurricanes and other severe storms.

While the disagreement concerning homeowners' insurance rates simmers, the insurance companies are not sitting still. This is where “consent to rate” letters enter into the picture. Under North Carolina law, insurers are allowed to increase rates up to 250 percent over the North Carolina Department of Insurance approved rate if the increase is agreed to by the policyholder. The consent to rate practice essentially allows insurance companies to circumvent the Insurance Commissioner’s decision.

Here is how the consent to rate practice works.

The insurance company sends a consent to rate letter to a policyholder accompanied by a consent to rate form. In the letter, policyholders are given a choice of either agreeing to pay a higher insurance premium or risk losing their coverage, and they are given a time frame within which to respond. According to the Star News of Wilmington, N.C., one policyholder was given 10 days to decide whether to accept an increase of more than 120 percent. This is not a typical increase. Reliable sources reported that most increases have been on the 15 to 20 percent range with some as high as 50 percent.

Consent to rate letters have historically been used for higher risk policies. Now, it appears they are being used as a loophole to get around the Insurance Commissioner’s December rate decision. It is important to note that consent to rate letters are used with all types of insurance policies, not just homeowners' insurance policies.

As I understand it, consent to rate letters have been in use for some time without a lot of publicity. One estimate is that about 75 percent of policyholders in eastern North Carolina may have received a consent to rate letter at one time or another, and 40 percent of eastern North Carolina policyholders have signed consent to rate forms.

The practice has recently become a higher profile issue since it has been brought to the attention of state legislators and government officials. Last August, Goodwin said that he had already received 700 complaints so far in 2014 about consent to rate forms. There are indications that the consent to rate topic will be brought to the attention of insurance committees in the North Carolina House and Senate.

What actions should policyholders take if they receive a consent to rate letter?

First, do not ignore the letter, or your policy coverage could lapse. Then, contact your insurance agent, informing them that you have received the consent to rate letter and that you do not want to sign it. Try to get a firm estimate of what your renewal rate will be if it is not specified in the letter. Review your policy, confirming that the dwelling value accurately reflects the cost to rebuild the structure in the policy year and discuss deductible options for the policy. Adjusting the deductible amount may eliminate the insurance company’s consent to rate requirement.

Next, contact the North Carolina Insurance Department (www.ncdoi.com/contacts) and let them know about the letter you have received so they can keep informed about what is going on around the state. Finally, shop around by calling other insurance agents to see what kind of rate they may be able to offer you for the policy type in question. Another piece of good advice is to do your shopping before you receive a consent to rate letter so you won’t feel the undue pressure caused by response deadlines.

Keep in mind that once you sign the consent to rate form, it applies to all future renewals. While the immediate increase may not be too severe, it could ultimately be as high as a 250 percent increase under the law without further approval being required from the policyholder.

In all fairness, the consent to rate issue is, in some cases, not as black and white as it might initially appear. It is in the consumer’s benefit to have as many insurance companies as possible writing policies in North Carolina. Some companies have said that if they cannot charge rates that they consider to be adequate for the risks they are insuring and if they do not have consent to rate as a tool, then they will leave the state. According to Commissioner Goodwin, that would result in fewer options for the consumer and potentially higher rates.

There are calls from many stakeholders for a complete review of insurance practices and policies within the state. It will be interesting to watch how these discussions, debates, and ultimately actions play out. In the meantime, caution is the watchword for consumers.

(Information sources for this article are available upon request)

Questions and comments may be sent to Tom Hranicka at P.O. Box 280, Avon, NC 27915 or by e-mail to [email protected].
Copyright 2014 Tom & Louise Hranicka.  All rights reserved.

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