Consent to rate in NC: Why did my home insurance go up?

Home Insurance Loophole

If you own your home, check your bill: Half of all insurance policies in North Carolina have a loophole disclaimer that leaves the customer paying up to hundreds of dollars more per year than state officials intend. We investigated to bring you answers.

Ramone Holit doesn’t usually look at his home insurance bill very closely.

The cost to insure his three-bedroom home in the Freeland Park neighborhood in southwest Charlotte is tacked on to his mortgage payment, which eats up the majority of his income.

Like most American home owners, he makes a single payment to his lender each month to take care of his mortgage, property taxes and insurance costs.

So until recently, he’d never noticed the disclaimer on his renewal notice saying he’s paying over $300 more for home insurance than the state-approved rate.

Based on regulator approval in North Carolina, the annual premium to insure Holit’s home would be $909. Instead, his insurer charged him $1,273.

He’s one of more than 1 million North Carolina homeowners paying above state-set limits on their home insurance, according to a recent Charlotte Observer analysis.

Alongside other factors, Holit’s price hike means his annual home insurance bill has increased about 54% from two years ago.

“It jumped up,” said Holit, who has been living on a fixed income and unable to work since suffering an on-the-job head injury nearly two decades ago. “That’s the first time it’s done it by that much.”

His budget is stretched thin already: about two-thirds of his $800 monthly disability benefit goes toward the mortgage he’s been paying off for more than 30 years.

“It’s been difficult,” he told the Observer recently while sitting on the couch in his living room. “You just learn to adapt.”

In a state where homeownership is becoming increasing cost-prohibitive, insurance remains an unavoidable piece of the price. Like other states, North Carolina has a government agency — the Department of Insurance — that regulates costs and ensures homeowners are paying fair, adequate and non-discriminatory rates for their policies.

But there’s one key way insurers get around regulation.

It’s called consent to rate and it allows companies to charge homeowners more than state officials intend — as long as you give permission, often just by paying to renew your coverage.

In the Charlotte region, these types of insurance policies make up half of all those on homes, government data show, with the average affected homeowner paying around $350 more annually.

Statewide, these more-expensive policies brought in about $330 million in additional premium revenue last year for the insurers that wrote them.

Over the last decade, the practice has become more lucrative: Around half of all premium dollars companies collect from North Carolina households is derived from consent to rate policies. That’s more than double the level in 2012, according to recent research and the Observer’s analysis.

Homeowners are often surprised to see the up-charge on their policy. Insurers say it’s a linchpin of the market. At least a few in the industry say the widespread use of consent to rate may point to flaws in North Carolina’s regulatory system — though reforms may not be very good news for homeowners, either.

“My inclination is that the consumer doesn’t really know (much about it),” said David Marlett, an Appalachian State University professor who’s studied the trend. “But it’s what’s holding things together.”

The higher cost of home insurance

Homeowners insurance isn’t mandated by law for property owners in North Carolina, but most mortgage lenders require it.

There are more than 2.4 million active policies in the state, according to 2021 data.

No matter what your property value is or where you live, home insurance is getting more expensive in North Carolina, local insurers told the Observer.

The increase is driven by the same economic forces behind rising costs on everyday goods, said Michelle O’Connor, president of Charlotte-based O’Connor Insurance Associates.

Building materials are more expensive, she said. Labor shortages make repairs lengthier and more costly.

“If you had a leak in your bathroom that (once) cost you $10,000 to repair, now it’s costing you $15,000,” O’Connor said. “The insurance company has to pay it, and it has to make up the money somewhere.”

The North Carolina Rate Bureau — which represents insurers — requested the NC Department of Insurance implement a 24.5% average increase in homeowners insurance rates statewide last year.

The nonprofit bureau has legislation-granted authority to propose rates for residential property insurance. After gathering data to support a request, it files for a statewide rate increase but often settles for a significantly lower percentage.

In last year’s case, insurance Commissioner Mike Causey negotiated a 7.9% average statewide increase, which took effect this summer. Some areas, like Mecklenburg County and many parts of the coast, saw rates rise 9.9% for any policies renewed or taking effect after June 1, 2022. Others, like the western part of the state, will see an increase of only 5.9%.

It’s up to each insurance company or agent whether to price policies at or below the state max — or even above that via consent to rate.

Homeowners can likely expect those rates to go up again eventually, O’Connor said.

But customers will be spared a statewide price hike for at least a couple years. As part of the most recent negotiations, the rate bureau agreed not to seek another increase until 2024.

‘Unusual properties’

With consent to rate, insurers can effectively sidestep regulatory price limits on premiums.

Insurers can charge up to 250% of the state-approved premium for home insurance when it’s disclosed, according to a statement sent to the Observer from NC DOI spokesman Barry Smith.

On average, affected North Carolina homeowners paid $321 more for their annual coverage in 2021, according to an Observer analysis of the latest state data.

“The Department of Insurance encourages consumers to shop around with insurance companies to determine whether they are getting the best price available,” Smith said.

Consent to rate laws were designed to offer insurers flexibility, Marlett said, so companies could still offer coverage to properties that “don’t quite fit the mold.”

“You’re always going to have unusual properties,” he said. “It gives both parties flexibility when you have a somewhat unique risk.”

While the percentage of homeowner policies with consent to rate charges has been relatively flat in North Carolina in the past four years, the impact has grown. Those “unusual” policies now account for about half of all premiums paid in the state.

In 2010, the first year that data was collected, about 23% of premiums paid on residential property coverage in North Carolina came from consent to rate policies. In 2021, that number was 49.3%.

It’s a unique trend to North Carolina, Marlett said, though other states have similar laws on the books. He co-authored a 2020 analysis of state insurance data that found that, from 2010 to 2017, consent to rate usage in the state increased “dramatically,” while in other states it was “virtually nil.”

“The risk has increased, and the (state) approved rates have not necessarily increased at the same pace,” he said. “Consent to rate lets companies keep up with what they view as appropriate.”

Signaling consent

One key part of consent to rate law changed in 2018.

Prior to that law taking effect, if insurers wanted to charge more than the regulatory limit, they were required to send a letter and get the policyholder’s signature before implementing the increase.

The issue, however, was that customers weren’t sending back those signed forms, said Joshua Lipstone, vice president at Lipstone Insurance Group in Cary.

“So often we would attempt to contact clients about signing, and they would either not respond or they didn’t want to,” he said. “But if they weren’t diligent about obtaining other coverage, then they would go without.”

It happened in some policyholders inadvertently losing coverage, he said, or making payments on policies the insurance company couldn’t yet put into effect.

The new law removed that signature requirement. Instead, consumers signal their “consent” to a new, higher rate by making a payment.

And instead of a standalone letter detailing the rate, insurers must make a bolded disclaimer on a renewal notice.

But some consumers don’t notice it. Take Nick Clift, 69, a former banker who’s lived in a yellow two-story house about a mile from Lake Wylie for more than 30 years.

He’s insured his home with the same company for most of that time, but just noticed the consent to rate disclosure on this year’s policy renewal letter. His insurance company charged him about $450 above the maximum regulatory premium for his home insurance.

“I was sort of surprised,” Clift told the Observer. “It seems to me there’s a process here that’s missing.”

Many consumers aren’t familiar with consent to rate or how it affects their premium, according to Don Harris, a Wilmington real estate agent and chairman of the NC Homeowners Alliance.

It’s one of those things that flies under the radar,” Harris said. “But not knowing about it is not a good thing for property owners.”

Keeping a competitive market

Industry experts argue consent to rate is a key part of North Carolina’s insurance market.

At the end of the day, insurers are businesses with a bottom line to protect, O’Connor said. They have to charge what keeps their books balanced.

“They’re not going to operate in the red. They’re not even going to operate anywhere close to the red,” she said. “Insurers have to make a profit or they’re not going to do business in this state.”

That’s happened in other parts of the country, she said, and it hurts homeowners by leaving them with fewer options for coverage.

Marlett agreed, saying the consent to rate option gives companies “the flexibility to stay in the market.” He believes the recent uptick in consent to rate policies may be due to a slow-moving regulatory system.

North Carolina is the only state with an independent rating bureau. Marlett noted that makes for a complex rate approval process that keeps premium costs “pretty highly regulated in the state.”

“If the rates were at a higher level, the companies wouldn’t need to use consent to rate (as much),” he said. “I don’t view it as a bad thing. I think it’s a necessary thing, given our regulatory system.”

The state Department of Insurance did not respond to a question from the Observer asking if an increase in consent to rate policies over the last decade indicated a disconnect between DOI rate increases and insurer’s analysis of risk to residential properties.

‘I would never think to ask’

And for homeowners like Holit, it leaves them with a policy price hike they don’t quite understand — or even catch before “consenting” via payment.

“I just knew it went up,” he said. He hadn’t thought to look for a reason for the increase.

It’s getting a little harder to be a homeowner in Freeland Park, a neighborhood of a few dozen modest homes in the development hotspot some are starting to call “LoSo.” Property taxes are increasing. New construction is closing in on all sides. Holit sometimes gets a dozen calls a day asking to sell his property.

Holit’s sister, Anita Zarey, lives down the street. She’s been organizing the neighborhood and working to help longstanding residents hold on to their homes. Since learning about consent to rate laws, she’s been reaching out to neighbors to tell them to check their policies.

She admits she never thought to check her bill for something like a consent to rate disclosure. But for someone like her and her neighbors, a higher premium feels like one more way to make owning a home a little harder.

“I would never think to ask, ‘How come you’re charging me more than what (the state) allows?” she said. “I think that’s how all of us are – we leave it to someone else. And we can get burned.”

This story was originally published September 21, 2022 5:00 AM.

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Hannah Lang covers banking, finance and economic equity for The Charlotte Observer. Her work has appeared in The Wall Street Journal, the Triangle Business Journal and the Greensboro News & Record. She studied business journalism at the University of North Carolina at Chapel Hill and grew up in the same town as her alma mater.

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