Isaac and Jefferson County TWIA Exposure

No need for anything close to panic yet, but as pointed out by Eric Berger (the best writer on the subject I know) of the Houston Chronicle, there is some risk that Hurricane Isaac will make landfall near Jefferson County (Beaumont / Port Arthur). The graphic below shows one projection.

GFS forecast for Isaac as of 7 a.m. Thursday morning. (IPS MeteoStar)

What’s TWIA’s maximum exposure in Jefferson County? As of June 30, 2012, it was $8.4 billion. Now, of course no hurricane would wipe out every stick of property in the county, but if you start adding Jefferson exposure together with that of neighboring Chambers County ($1.7 billion) there is some modest cause for concern. If more projections start to indicate the Texas coast as the landfall point for Isaac, I’ll try to take a harder look at damage projections.
TWIA Statistical Report of 6/30/2012 Exhibit 5C page 1 of 9

TWIA Statistical Report of 6/30/2012 Exhibit 5C page 1 of 9

Interactively exploring TWIA funding reform

Here’s a Wolfram CDF document that let’s you explore the reforms to TWIA funding set forth in my earlier post.  To understand it, you must read this earlier blog entry. To interact with it, you will need to go to this website and download the Wolfram CDF player.  It’s easy — very similar to PDF. Once you have the plugin, you will be able to explore fully this and future interactive content. Your CDF plugin will work on this and other blogs and the Wolfram Demonstrations site. [WolframCDF source=”” CDFwidth=”740″ CDFheight=”700″ altimage=”file”]

By the way, if you want to see how to produce interactive widgets like this one in a WordPress document, take a look at this excellent and short video. And, to compare the premiums suggested by this document with those actually in use by the Texas Windstorm Insurance Association, take a look at this document and this document.

An idea for future TWIA finance

Although they may thoroughly disagree on the direction in which reform should go, almost everyone agrees has come to agree with what I predicted in 2009:  TWIA finances are in serious need of reform.  This blog entry sketches out one direction in which TWIA might proceed.  The idea here is that TWIA should, in a steady state, have enough cash on hand in its catastrophe reserve fund to pay for insured losses and operating expenses, without having to borrow, with a high probability, say 99%.  Further TWIA should have borrowing capacity to address the rare situations (say 1% of years) in which its reserves would be inadequate. Those borrowings should be repaid by some percentage of TWIA policyholders, persons living on the coast, and Texans generally, perhaps collected through the proxy of insurers doing business in Texas.

Although people can quarrel about the precise parameters in this abstract statement of the goal, I have some hope that people could agree on the concept. Government-sponsored insurance companies that don’t have the right to draw on the government fisc, ought not to be relying heavily on post-event bonding as a way of paying claims; instead they need enough money in their piggy bank just as we require of their private insurer counterparts. But what if TWIA’s catastrophe reserve fund does not meet this lofty goal?  What then?  Especially given the magnitude of the current reserve shortfall and the current economy, matters can not be corrected overnight. There should, I say, be an adjustment period during which premiums are adjusted (either upwards or, at some hypothetical future time, downwards) such that, at the end of the adjustment period, things come into balance and the catastrophe reserve fund meets the goal.

How do we operationalize this idea? Here is the beginning of a statutory draft. I’ve put in dummy statute section numbers for ease of reference. Obviously, the real section numbers would have to be revised by legislative counsel. Also, we’re probably going to have to develop a more comprehensive process for 2210.355A(b)(1) and reconcile this provision with the alternative process currently set form in 2210.355A.


(a) Definitions

(1)  The “Exceedance Function for the catastrophe year” is a function that approximates the probability that insured lossses and operating expenses in the catastrophe year will exceed a specified dollar amount. Insured losses shall be computed on a net basis after consideration of any reinsurance or other sources of recovery.

(2) The term “Loss PDF” means the probability distribution function mathematically associated with the Exceedance Function.

(3) The term “Century Storm Reserve Adequacy” means having a catastrophe reserve fund at the start of each catastrophe year such that this fund would be able, without additional borrowing, to fully pay insured losses and operating expenses in the following catastrophe year with a 99% probability as computed using the Exceedance Function for the catastrophe year.

(4) The term “Reserve Adjustment Period” means ten years.


(1) The Association shall, prior to the start of each catastrophe year, use the best historical and scientific modeling evidence with considerations of standards in the business of catastrophe insurance, to determine the Exceedance Function and associated Loss PDF for the catastrophe year.”

(2) If, at any time, the Association finds that its catastrophe reserve fund at the start of a catastrophe year does not achieve Century Storm Reserve Adequacy,  the Association shall adjust the premiums to be charged in the following year either downwards of upwards as appropriate such that, were:

(A) such premiums to be charged for the Reserve Adjustment Period on the base of currently insured properties;

(B) insured losses and operating expenses of the Association to be for the Reserve Adjustment Period at the mean of the Loss PDF for the catastrophe year; and

(C) the Association were to earn on any reserve balances during the Reserve Adjustment Period the amount of interest for reasonably safe investments then available to the Association,

the catastrophe reserve fund at the end of Reserve Adjustment Period would achieve Century Storm Reserve Adequacy.

(c) By way of illustration, if the Exceedance Function takes on a value of 0.01 when the size of insured losses and operating expenses is a equal to 440 million dollars and the mean of the Loss PDF for the catastrophe year is equal to 223 million, the initial balance of the catastrophe reserve fund is 100 million dollars and the amount of interest for safe investments then available to the Association is equal to 2% compounded continuously, then the premiums charged for the following calendar year should be equal to $614,539,421.

And what happens, by the way, if a storm hits that exceeds the size of the catastrophe reserve fund?  Stay tuned.  I’ve got an idea there too.

How do we keep premiums low under this scheme?  Likewise, stay tuned.  Hint: think about coinsurance requirements and lower maximum policy limits.  Think about carrots to get the private insurance industry writing excess policies on the coast with ever lower attachment points.

  • Footnote for math nerds only. Anyone seeing the implicit differential equations in the model and the applications of control theory?
  • Footnote for Mathematica folks only. Here’s the program to compute the premium. Note the use of polymorphic functions.

p[\[Omega]_, \[Mu]_, q_, c_, r_, z_] :=
x /. First@
Solve[Quantile[\[Omega], q] ==
TimeValue[c, EffectiveInterest[r, 0], z] +
TimeValue[Annuity[x – \[Mu], z], EffectiveInterest[r, 0], z],
p[\[Omega]_, q_, c_, r_, z_] :=
With[{m = NExpectation[x, x \[Distributed] \[Omega]]},
p[\[Omega], \[Mu], q, c, r, z]]

  • Footnote for statutory drafters. Note the use of modular drafting such that one can change various parameters in the scheme (such as the 10 year adjustment period) without having to redraft the whole statute.

The chart TWIA isn’t sure you should see

Attached to this post is a chart prepared by TWIA for its August 7, 2012, board meeting. I didn’t make this chart up.  TWIA did. At the August board meeting, it was discussed whether this chart should be made more prominently available to the public via the internet. There was an initial suggestion that it should.  At the end of a two minute discussion, TWIA apparently decided that, instead, the information contained in the chart would be subsumed into some sort of “contingency plan narrative” that would, eventually, go on the web.  (Don’t believe me?  Listen to minutes 16:30 through 18:46 on the archived recording of the meeting). And if anyone can find that contingency plan (with or without the narrative) please let me know.

Projected Funding Structure Under Different Loss Scenarios

Exhibit for the tWIA board meeting

I don’t think the chart is too difficult to understand. The “problem” with the chart is that it is too easy to understand. The chart makes clear that TWIA faces a significant risk of insolvency. It shows that TWIA does not have enough money to pay for 1 in 100 year events and does not have enough money to pay for a modest storm plus a 1 in 60 year event occurring in the same hurricane season.

The chart depicts how TWIA would pay policyholders in two different scenarios.  The scenario on the left is one giant storm.  The scenario on the right is a small storm followed by a big storm.  In the giant storm scenario, TWIA suffers $4.5 billion in losses.  This is identified as a one in one hundred year event.  If that’s true, it happens about 10% of the time during any 10-year stretch. According to the chart, TWIA would fund be able to fund a total of $3.15 billion of the $4.5 billion loss: $300 million (green) out of premium revenue and the catastrophe reserve trust fund, $500 million (aqua) out of bond anticipation notes (later refinanced via Class 1 securities), $1 billion (turquoise) out of Class 2 securities, $500 million (gray) out of Class 3 securities, and $850 million (purple) out of reinsurance.  TWIA would have no available funds to pay the remaining $1.35 billion (yellow) of claims (and possibly loss adjustment expenses).  So, on average, policyholders would get 70 cents on each dollar that TWIA owed them.

In the small + big scenario depicted on the right, the losses from the small ( $500 million) storm are funded fully. $300 million (green) is paid out of premium revenue and the catastrophe reserve trust fund and the remaining $200 million (aqua) is paid out of bond anticipation notes (later refinanced via Class 1 securities).  But when the big $2.5 billion once every sixty years)  storm then hits in the same hurricane season, TWIA has a serious problem.  It can pay another $300 million out of bond anticipation notes, $1 billion (turquoise) out of Class 2 securities and $500 million (gray) out of Class 3 securities.  That leaves TWIA policyholders with claims from the second storm initially getting only 72 cents on every legitimate dollar of claims.  (And good luck to TWIA trying to get claimants from the first storm to pay back a portion of their claims so that both sets of policyholders are treated equally)

The source of the remaining $700 million under the small + big scenario is unclear.  If TWIA could somehow scrape up an additional $500 million (yellow), it would then arguably trigger the obligations of the reinsurance it purchased.  TWIA policyholders would ultimately be made whole in this case. But, apparently, if TWIA could not scrape up $500 million — and no one has any idea where the missing $500 million would come from —  TWIA would not be entitled to any money from the reinsurance policy for which it paid $100 million in premiums. Thus, TWIA policyholders would be stuck with, say, being paid only $144,000 on a legitimate $200,000 claim.

Footnote: Part of the problem exists because TWIA’s reinsurance is apparently “occurrence based” rather than based on aggregate losses.  Apparently such occurrence based policies are “industry standard” for reinsurance though not for catastrophe bonds.  My bet, though, is that a sophisticated reinsurance broker could negotiate with a sophisticated reinsurer for an aggregate loss trigger on reinsurance.

So, is the chart scary?  Should it be prominently displayed on the TWIA web site and by TWIA agents? Yes.  Sure, being too scared of hurricane risk a problem.  But being insufficiently scared is perhaps an even greater problem.  I would not want to be the homeowner with a destroyed house or a destroyed business holding a TWIA policy that provided “coverage” on paper, but that did not actually get me the money to rebuild. And I wouldn’t want to be the agent that sold such a policy having not disclosed by every reasonable means — including the use of charts where appropriate — the risks involved.

The source of TWIA’s $800 million in cash on hand

In a previous post, I indicated that TWIA thought it would have $800 million in cash immediately available to pay claims. I was a bit skeptical of this number. But, an article in today’s Insurance Journal, a reputable trade publication, details that the money would come $300 million (0.3 billion) from real cash on hand and $500 million (0.5 billion) from a “bond anticipation note.” The latter is basically bridge financing that one can obtain quickly. The BAN would be repaid, one assumes, from Class 1 securities that TWIA would issue shortly thereafter.

Now, here’s the rub. According to the Insurance Journal article (which may not be fully reflecting what was said on this point), Commissioner Eleanor Kitzman believes that, with this BAN, TWIA would have $4 billion available to pay claims. Here’s the math. $4.15 billion = $0.3 billion real cash on hand + $0.5 billion BAN + $1 billion Class 1 + $1 billion Class 2 + $0.5 billion Class 3 + $0.85 billion reinsurance. If that’s what Commissioner Kitzman said, I have concerns because it looks like the math rests on double counting. $0.5 billion of the Class 1 securities couldn’t be used to pay claimants because it would have to be used to pay off the BAN. I am pretty confident that the BAN investors wouldn’t lend the money otherwise. Plus, according to other statements made at the last TWIA board meeting, it appears that TWIA might not be able to issue successfully the full $1 billion of Class 1 securities authorized. Readers of this blog will understand why that might be. And if all this is true, TWIA doesn’t have $4.15 billion, it has $3.15 billion. Here’s why.

$3.15 billion = $0.3 billion real cash on hand + $0.5 billion BAN + $0.5 billion Class 1 – $0.5 billion used to pay off BAN + $1 billion Class 2 + $0.5 billion Class 3 + $0.85 billion (hopefully collectible) reinsurance.

I hope we never have to figure out whether the difference in accounting is material or not. In the mean time, though, it might be prudent for TWIA and TDI to clarify the numbers.

Note: since the time of this blog entry I have had some private communications that lead me to believe the “best” number — and no one knows for sure — is probably between $3.15 and $3.65 billion.  It depends in part on how much in Class 1 securities can actually be sold.

Why do coastal politicians urge low TWIA rates?

The title of this blog entry may seem a particularly dumb question. Coastal legislators, the simple answer proceeds, want the Texas Windstorm Insurance Association to keep rates low because it helps their constituents’ pocketbooks. But is that really true? Or, more precisely, under what circumstances would that be true?

The first thing to recognize is that low premiums have a somewhat different effect when they go to Allstate than when they go to TWIA. One can quite understand policyholders not wanting to pay Allstate very much money because its profits simply go for the benefit of Allstate’s shareholders. TWIA, on the other hand, has no shareholders. To the extent TWIA collects “too much” in premiums, that is extra money available to pay future claims of future coastal policyholders. Over collection by TWIA favors future coastal residents in a way that over collection by Allstate does not.

One can get at a better answer to this question by asking why TWIA insists that policyholders pay much or, indeed, anything in advance premiums at all. Since the risk of tropical cyclones is difficult to quantify, why not just have a post-disaster assessment scheme? It would work as follows: when we know how large the damages are from some hurricane relative to TWIA cash on hand (which might be zero if there were no premiums), TWIA simply “post-assesses” its policyholders to pay in that much money over some period of time. We wouldn’t need no stinkin’ models; we’d just see what happens. Take imaginary Hurricane Barry that creates claims (plus lost adjustment expenses) of $1 billion above any cash TWIA happens to have on hand. Because TWIA has about $70+ billion of property under its control, if TWIA could spread the payback period over 5 years, some back of the envelope math suggests that the consequence of this scheme would be that someone with $200,000 worth of coverage would have to pay roughly $571 per year to take care of the claims caused by Barry.

This proposed post-assessment alternative sounds pretty good. I bet many TWIA policyholders with $200,000 properties would be delighted to pay only $571 per year for tropical cyclone coverage.

Unfortunately, the proposed alternative won’t work as inexpensively as described. This baseline figure of $571 is a significant underestimate. There are two reasons: interest expenses and post-assessment shrinkage.

The interest issue is easy to understand. Few policyholders with demolished properties want to wait 5 years living in a tent or in a home decorated with blue tarp until all the assessments are collected before getting their claims paid. So, to pay for Barry, TWIA has to borrow the $1 billion. But now TWIA policyholders don’t have to just pay back $1 billion, they have to pay it back with interest. Interest expenses alone can raise the annual payback amount substantially.

There’s also a shrinkage problem. Once the price of being a TWIA policyholder jumps due to the assessment, TWIA will no longer be assessing the amount of property it did prior to the storm. Thus, to continue with our example, to compute the necessary assessment, TWIA won’t be dividing the amount of damages by the $70+ billion; the denominator will be smaller. And this means that the assessment, because it will be spread over less property, will have to be larger. But the larger assessment means that yet more people will drop out of TWIA, which means that the assessment will have to be yet larger. One can’t easily say whether and if this spiral will stop, but one can be confident that the size of the assessment will increase significantly due to both the interests costs on the loan and due to the reduced size of the TWIA pool.

Footnote here. There is another way to run an assessment scheme: don’t assess future policies; assess policies in place at the time the disaster struck. Such a method avoids shrinkage as I’ve described it, but it creates another problem: collection. Instead of just cancelling policies that don’t pay assessment, TWIA now has to actually track down over a period of many years former policyholders some of whom just will not have the money to pay what is due. That’s expensive and will not yield a 100% recovery rate. And, as I read the Texas statute, it’s not what’s contemplated in the event of a large storm. Anyway, whether done by assessments on future or in-place policies, post-assessment has problems.

I don’t think it’s unreasonable to believe that for something like Hurricane Barry, interest and shrinkage would raise the post-assessment by about 25% over its baseline cost. But no one knows this number with any certainty. And this means that there is a substantial risk that the scheme won’t work or, that conservative lenders, will worry that it won’t work and will accordingly charge very high interest rates. Indeed, TWIA appears to have discovered that, although the Texas statute will let it borrow $1 billion following a disaster to be repaid with policyholder assessments, the market appears willing only to lend $500,000. So, post-assessment schemes are risky.

There’s an additional problem, however. And, this one is a killer. I just provided an example with a $1 billion Hurricane Barry. If we start increasing the size of the storm to, say $2 billion (over cash on hand) hypothetical Hurricane Tanya (or we add another smaller hurricane in the year such as $1 billion hypothetical Chantal), the shrinkage problem starts to grow. Indeed, with a more serious storm such as Tanya (or Barry + Chantal), there is a significant risk of a death spiral in which there are not enough TWIA policyholders left to repay the assessment.

What this means is that a sensible insurance scheme has to balance at least two factors: you don’t want insureds paying too much because — well — that’s money out of the hands of insureds and doing so could needlessly depress the coastal economy. On the other hand, you don’t want insureds paying too little because that creates the risk of a storm large enough to plunge any assessment scheme into a death spiral.

So, what an intelligent discussion of this issue needs to do is to discuss a balance of these two problems with actuarial and climate science in mind. By focusing only on the over-collection issue, certain coastal legislators are sadly distorting and deterring an intelligent political debate. The consequence of this distortion could be quite serious for coastal residents. They may find that the assessment scheme they counted on to help TWIA pay for losses just does not work. They will then need to come begging to the state or Uncle Sam for a bailout. Indeed, that is precisely what the latest actuarial study engaged by TWIA/TDI predicts will occur a substantial percentage of the time if coastal premiums are not raised substantially.

Now, what I could imagine a coastal politician saying in response to this blog (I do hope they read it — and read it all the way to the exciting end), is that the post-assessment problem is overstated because the Texas statute limits the size of assessments that can be made. Moreover, they might say, TWIA does not depend exclusively on policyholder assessments to pay for tropical cyclones that cause damages in excess of cash on hand. And, to some extent, this rebuttal is true. But, if we break it down, what the politicians are really saying then is that small premiums aren’t a problem because they expect someone else to pick up the pieces if a big storm hits. That is, TWIA policyholders aren’t to be treated like ordinary policyholders who are in serious difficulty if their insurer (predictably) goes insolvent after charging too low premiums; TWIA policyholders stand in a privileged position relative to other Texans.

I have a lot of problems with this rebuttal. First, there is still a problem because, as I have pointed out at some length, the other sources (limited assessments on non-TWIA coastal policies; limited assessment on Texas insurers) will not yield enough cash to pay fully for losses incurred after serious storms in the densely populated parts of the Texas coast. Even the coastal politicians now appear to recognize this fact but poo-poo what they believe is a 1.5% annual risk of this occurring. But even if there were zero risk of a TWIA default, the rebuttal rests on the dubious premise that coastal residents are entitled to some special privilege that the rest of Texas does not enjoy.

And, here, we get to the core of the issue. After you put all the smokescreen rhetoric aside, what certain coastal politicians are really saying is that the coast is indeed special. But why? Yes, many find the coast lovely, but so too do many find the Texas Hill Country or even the stark beauty of the northern panhandle with its silos, vistas and hints of ancient vulcanism. Yet neither Kerrville nor Dumas insureds have the benefit of getting full insurance on their $200,000 property while paying the premiums sufficient to cover only a policy with a $50,000 limit. If the preference for the coast is based on aesthetics, then let us be explicit and subsidize coastal beauty. Yes, the coast contributes to the Texas economy. But so does Houston, so does Dallas, so does El Paso, so does Stephenville and so does Dalhart and Childress and Texarkana. Dollars are dollars. Should Galveston residents assume the risks posed by locating property in Dallas because Dallas contributes greatly to all of us here in Texas?

So, in my opinion, the “coast contributes” justification is completely bogus.

Are coastal residents disproportionately afflicted by some imperfection in the insurance market from which the rest of Texas is exempt? Might that justify the privilege? I see no evidence of any special, irrational animus towards the Texas coast on the part of the insurance industry. Greedy insurers would as much enjoy profiting from coastal consumers as they do profiting from those in Stephenville. Why, if they could do so at a rate they thought profitable, would insurers collectively sit back and let a government entity take over the coastal insurance business? The fact that many (and not all) companies won’t write on the coast is more easily explained by the low prices of its publicly subsidized competitor — TWIA — or by feared regulatory price constraints than by some vast conspiracy. The most likely reason prices are high on the coast is because risks there are particularly uncertain and particularly correlated and because stockpiling the requisite cash to pay for large claims is expensive.

Now, is it the “fault” of a Galveston policyholder that they live in a place subject to uncertain, correlated risk? No. There is no moral failing. Is it a “choice?” That depends. For some, such as the owner of a second home, quite probably. Moreover, even for a first home, people choose to have a million dollar home rather than a $500,000 home. For others, however, less so. The current scheme in Texas, however, treats TWIA insureds as special regardless of the degree to which their ownership of property is a choice. In general, it’s a good idea for insurance prices to reflect risk accurately because that, in the long run, encourages intelligent investment decisions. Societies that subsidize risky activities for long periods of time end up with more risky activities and become, as the pandering of some coastal politician suggests, addicted to them at great expense to the rest of society.

The better rebuttal — and the one I actually hope starts to gain prominence — is that giving TWIA lots of money has enabled it to waste money purchasing incredibly expensive reinsurance in a market whose competitiveness is open to question. Because reinsurance has cost TWIA something like six times the actuarial value of the risk it assumes, policyholders would do better, this argument proceeds, for TWIA to charge less in premiums or to charge the same in premiums, pray for a few good years, and to stockpile the extra funds. This argument, by the way, has some support in the recent report of TWIA’s actuarial consultants. But, if wasting money on reinsurance is the issue, the better solution is to restrict TWIA’s discretion in using its funds for this purpose. TWIA could, after all, buy reinsurance even if premiums were reduced. Now, how exactly to intelligently restrict TWIA’s discretion in reinsurance purchasing is the subject for another day. In the mean time, however, the purported advocates of coastal policyholders had best be very careful lest their concerted advocacy in support of what they wish for, lower premiums, succeeds and a large insurer has insufficient resources to pay claim as a result. Pity the coastal politician seeking another term after they deprived the insurer of residents in their districts the resources that insurer needed to pay claims fully.

Quick blog entry on the TWIA meeting of August 6, 2012

I managed to watch most of the TWIA board meeting this morning. Thanks to TWIA for providing this additional form of access to its proceedings. I’m just going to do a quick bullet point list here of matters I found interesting. I’ll try to return to each of these in the days ahead.

1. TWIA has shifted its reinsurance strategy. Instead of a reinsurance attachment point that lay between Class 2 and Class 3 securities, TWIA has now put reinsurance at the top of the stack. It’s also managed to purchase more reinsurance by doing so, notwithstanding a “hardening” of the reinsurance market. This means more protection for policyholders in the densely populated counties but it also means that Texas insurers writing in Lubbock, Dallas, and other non-coastal areas plus non-TWIA policyholders on the coast will bear more of the burden of a large storm by having to repay bonds.

2. One issue TWIA better think long and hard about now that it has placed reinsurance at the top of the stack is how it is going to collect that reinsurance. Traditionally, reinsurers require the insurer to pay the claims first and then to seek reimbursement. But, before this reinsurance will kick in, TWIA will have exhausted its statutory borrowing capabilities of Class 1, 2 and 3 securities. So, does that mean TWIA will have to wait years collecting premiums hopefully in excess of receipts before it can actually get the reinsurance money? How much would it cost TWIA to negotiate a waiver of the indemnity nature of the arrangement? If it’s not a lot, I’d pay!

3. There was talk about how, with $800 million in cash available (source?), TWIA would have months before it would need to raise money from Class 2 and Class 3 securities. I know I’m the gloomy sort, but I have concerns about whether (a) $800 million is enough cash-on-hand for a major storm and (b) whether a few months will be sufficient to raise the extra funding.

4. Uh oh. I learned today that TWIA doesn’t think it can actually raise the $1 billion in Class 1 securities it is authorized to issue following a significant storm. It may only be able to raise half of that. Why? Well, they didn’t say but I assume it is because the market is leery of the ability of TWIA policyholders to actually pay back that money via future increases to their policies. Some TWIA policyholders will likely drop out (or have had their insurable property eliminated). On the one hand, I will confess to deriving some satisfaction from having been proven right that the $1 billion in Class 1 securities was very iffy money On the other hand, it is kind of horrifying to discover that TWIA’s ability to raise money is even more limited that previously asserted.

5. TWIA is evidently going to consider whether to ask the legislature to reduce the maximum policy limit from about $1.8 million for a residential structure down to a lower number. Some board members noted that there was private insurance coverage available for such risks and that other government coastal insurers were not so generous. Representative Craig Eiland from Galveston objected saying that such exposures constituted a small part of the TWIA portfolio and that no one would build large homes on the coast if they couldn’t get TWIA insurance. I’ve advocated in the past that, so long as TWIA policyholders are being subsidized by the rest of the state, that subsidy should not extend to very expensive properties, particularly if private excess insurance is available.

6. TWIA has formed a 10-12 member legislative committee chaired by Mike O’Malley to make recommendations to TWIA regarding recommendations TWIA should make to the Texas legislature on reform. The committee will apparently focus — as it should — on finance issues. Two items of note: only six of the committee members will be TWIA board members. One of the members will be a private advocacy group, the Coastal Coalition. I’m not sure why this advocacy group, which I believe is now renamed the “Don’t Kill The Texas Coast” group gets a privileged position. There was also a discussion of voting rights on the committee. I’m not sure this was resolved, but it strikes me as bizarre that TWIA would delegate voting authority to people not charged with the responsibilities of board members.

P.S. Just fixed a typo in paragraph. It said “not” but it mean “now.” Big difference. Sorry.

TWIA meeting happening now; you can watch it in action

9:03 am Central time August 7, 2012. Just go to and click on the right side where it says “click here to watch the broadcast.” Here’s the agenda for the meeting.

Interesting points from the meeting thus far. TWIA apparently does not a complete “contingency plan” in place yet to deal with how to make partial payments to policyholders when it does not have enough cash on hand. That’s a little scary. TWIA is not sure how it is going to collect on its reinsurance given that reinsurance operates on an “indemnity basis,” meaning that TWIA has to pay out first and then get reimbursed from the reinsurer. An interesting and difficult issue. Where is TWIA getting the money from in order to get reimbursed? Could TWIA negotiate a waiver of the “indemnity aspect” of the reinsurance contract? Did it try?