Some free market principles for addressing the TWIA issue

The R Street Institute has published a list of list of six principles for addressing the TWIA solvency issue.  You can find them here.  I  think you’ll find that they are pretty consistent with some of the ideas I have been advancing.  As always, however, the devil is in the details and in making a transition away from a long-standing government subsidized program upon which some people and businesses have come to depend.

The still-mysterious variation in private market penetration along the Texas coast

There’s this fact that stares you in the face as you try to figure out whether, as I have hoped, private insurers might significantly displace the system of coastal windstorm insurance in Texas currently dominated by TWIA. It’s that the private market appears to be alive and well in parts of the Texas coast. In Cameron County, for example, TWIA has only 31% of the residential market. And in Kleberg County, the figure is 27%. On the other hand in Galveston County, TWIA owns 77% of the residential market and 81% in Aransas County. What accounts for this variation? Maybe if we could figure it out, we could engineer some policies likely to induce the private market to re-enter to a greater extent throughout the coast.

I will save you the trouble of reading ahead. I didn’t find much. The variation remains pretty much of a mystery. I look forward to suggestions for further experimentation or someone who will just reveal the obvious answer.

If anyone, by the way, has data on the proportion of property or the population that is located within some distance of the actual coastline within each county, I’d be very interested in seeing that.  Maybe the reason the geographic data isn’t showing anything is that the county divisions are too coarse.  If, for example, Galveston County has a higher proportion of its population living close to the ocean than does, say, Kleberg County and if insurers don’t feel, for some reason, that they can underwrite within counties, that might provide some better explanation for the variation in private insurer participation in the Texas coastal windstorm market.

For those who care how I came by my “negative result” — just the sort of thing many academic journals tend to disdain — I offer the following brief synopsis.

If you just look at a map, no particular pattern appears.

What if we look at some data? I grabbed data on the TWIA counties I thought might possibly be relevant from the United States census. Maybe population density is important on the thought that the more dense the county, the more correlated the risk and the less private insurers would want to write there. Or maybe private insurers have greater (or lesser) marketing power in densely populated counties. I grabbed median income data on the thought that private insurers might prefer to write policies in wealthier counties. I grabbed ethnicity data on the thought that race and ethnicity often matter in modern America — not necessarily causally but because race and ethnicity end up correlating with things that matter. We end up with 14 data points and 3 dependent variables. There’s not a huge amount one can do with data sets this small, but I thought I’d give it a try.

If one does a simple-minded logit regression, one ends up with the following somewhat unusual result. With these three variables, we end up accounting for about 72% of the variation in the data, but no single variable is statistically significant, or even close.

Logit Model Fit of TWIA Market Share

We can also try something more sophisticated. Instead of just assuming a logistic linear relationship between the independent variables and the dependent one (TWIA penetration), we can ask the computer to explore a huge space of potential models and see if anything turns up. Such statistical work used to be impracticable without super computers due to the amount of computation involved and the custom programming required. It’s now eminently possible on an average desktop with software such as DataModeler from Evolved Analytics.  Although this process yields remarkable gains in understanding a system, such is not always the case.  And, for this small dataset, exploring a much larger model space leaves us with a number of models that have somewhat higher R-squared values that our logistic regression, but nothing to truly brag about and none that clearly point towards one or another of the variables in our model as being critical.

Sample results of Data Modeler predicting TWIA penetration

I thus end up saying that, for now, the mystery of varying market penetration remains unsolved.

Reducing Maximum Residential Policy Limits

I and many others have proposed that TWIA reduce the maximum policy limits on residential properties from the current $1.8 million to some substantially lower figure as a way of reducing the likelihood of post-event bonding and insolvency. Such a reform would also have the effect of reducing subsidization of individuals who have more expensive homes than the average Texan paying for the subsidy. As shown in the recently released Alvarez & Marsal report It would also bring TWIA more in line with other coastal windstorm programs such as Alabama’s $500,000 or Florida’s $1.000,000 dwelling limit.

But, a legitimate question is how much value would this reform really create?  The case for the reform is somewhat stronger if it would reduce TWIA exposure by, say, 20% than if it would do so by just 1%.  One statistic advanced by Representative Craig Eiland (D. Galveston) is to note that only 1% of residences insured by TWIA are valued at over $1 million.  This statistic needs to be augmented, however, by an appreciation that the more valuable the residence, the more it contributes towards the risks of TWIA.  All residences should not count alike.

Data provided by TWIA permits a first stab at a better answer.  I’ve presented it in the chart below. It shows that reducing limits to $1 million for residences will have only a 1% effect on TWIA’s total insured value.  Somewhat disappointing. If we’re serious about cutting TWIA exposure, we have to dig deeper.  Going to $500,000 gets about a 5% reduction in total residential insured value.  A reduction to $250,000 (the federal flood limit) creates the big gain, reducing TWIA’s residential TIV by 29%.

TWIA exposure reduction chart

TWIA exposure reduction chart

A few more points.

1. Just because the reduction is smaller than ideal does not mean we should not do it.  Every little bit helps.  And, as I have said ad nauseum, the economic and moral case for subsidizing expensive beach homes seems rather small. It’s all the more so where we condition the continued reduction in maximum policy limits, as I have proposed, on a finding that excess insurance is available.

2. For actuarial math nerds only! The figures I’ve put up, although the best I can do with the data I have, are still not ultimately what one would want.  What really needs to be done by organizations such as AIR, RMS and others that have better access to the underlying storm data, is to determine the effect of right-censoring the loss distribution on homes on the overall distribution of losses faced by TWIA after a correlative premium reduction is taken into account.  One can then use the survival function of the transformed aggregate insured loss distribution to recompute the probability of TWIA needing to resort to various classes of securities and its risk of insolvency. My guess is that the relationship is somewhat sublinear because losses to the left of the censor point are more common than losses to the right. So, even though I am showing a healthy 29% reduction in TIV from a $250,000 cap, that will likely not reduce of TWIA insolvency by 29%.  If you asked me for a wild guess, I’d guess 15%. That’s still good. Every little bit helps.

3. The data here is one reason I really like coinsurance as a way of limiting TWIA exposure.  (See suggestion # 2 of my 10 point proposal here).  It has a more direct effect than right-censoring individual loss distributions, makes it less necessary for people to purchase multiple insurance policies, and may result in greater mitigation.

4.  In the spirit of transparency, I’m posting the spreadsheet that underlies this analysis here, along with a Mathematica notebook used to conduct the analysis.

Residential Dwellings spreadsheet

PDF of Mathematica notebook showing reduction in TIV from cap on maximum policy limits

Coming across as “negative”

This past week, I was chided by State Representative Todd Hunter as having “come off negative to the coast.”  I didn’t have a chance in the crowded hearing room with a three minute time limit to respond then and there, so let me try now.

I do not think I am negative at all to the Texas coast.  I actually like the coast.  I go down to Galveston a few times a year with my family and enjoy the sand and water.  (I could do without the traffic between Houston and Galveston, but that’s another story.) I have friends who live on the coast.  Some were badly hurt by Hurricane Ike. I feel badly about that and I feel badly about their insurance situation.  I’ve enjoyed bird watching and photography both in Winnie and Port Aransas. Perhaps it’s my lack of perception, but people on the coast don’t strike me as much different than other Texans with whom I generally get along just fine.  So, if the issue is some sort of personal bias against the coast or some dislike of its geography or scenery, that’s just utterly, totally not true.

I suspect, however, that’s not what was meant.  I suspect what was meant was that I haven’t supported the coast in getting a lot of help from other Texans or the Texas government in dealing with its insurance situation. I haven’t demonized the insurance industry as the cause of the problems. And I haven’t expressed a lot of sympathy for the predicament in which coastal residents find themselves.  I think I can fix one of the problems, but probably not the others.

Sympathy.  I do sympathize with the insurance situation of people on the coast.  I don’t like the fact that many of them, particularly the less wealthy, have to pay high prices for insurance.  I sure wish hurricanes weren’t a correlated risk of low frequency events that pushes prices higher.

But I also sympathize because they are the victims of a misguided government program which, every year it continues, tends to make the situation worse. I sympathize because they are the victims of changing climate and changing science over which they have little control. And I sympathize because I fear they are subject to manipulation by politicians who often take a short run view.

Government programs that displace the private market over a long perod of time — such as TWIA — have a tendency to be very hard to get rid of.  Exhibit A might be the hearing this week. That’s because people come to rely on them. So, when TWIA has rates well below what a market would charge, and it has them over long periods of time, it encourages development on the coast.  It encourages people to build businesses and houses, and larger businesses on the coast. They do so because they believe that the government program will continue — or because they just focus, as many of us do all the time, on the short run.  The result, however, is that we now have more property than a market would create facing a large risk of loss.  And that market is filled with nice people and nice children and worthy small businesses and important big businesses and schools. We have hopes and dreams struggling to succeed in the community that government helped create.

And then what happens?  Precisely because the government is selling cheap insurance, the private industry won’t compete. The physical and intellectual infrastructure to sell private insurance on the coast decays. Sure, maybe there are other reasons, but you need to do a lot of work on me to persuade me that insurers are colluding — for no apparent reason — in just refusing to write insurance on the coast.  Maybe one or two irrational insurers has an undue fear of writing risk on the coast.  But insurers compete all the time on what constitutes good business.  And reinsurers seem remarkably able to do business on the coast in a market where the price is unregulated. Surely, if TWIA weren’t in the way for years selling insurance at rates that could not be actuarially justified and that relied on other insurers and government picking up the ultimate tab, or if insurers hadn’t been fearful of the Texas Department of Insurance, which lives in a political universe, vetoing actuarially realistic rates that take time and money to develop, a large chunk of private insurers would be on the coast. Government thus converts what might have been the temporary evacuation of scared insurers from the Texas coast following Hurricane Celia into a permanent exodus.

And then it gets worse.  We have global warming and climate science and Katrina and cheap computer modeling so that it’s now believed that the hurricane risk on the coast is far greater than that which history alone would reveal. So, now we’ve trapped people.  We’ve erected communities and predicated lives on premises that no longer seem to hold. The insurance industry, if it was ever coming back, is more scared than ever.

None of this was the fault of the people on the coast.  They couldn’t have forecast that people would no longer believe that historic evidence on hurricane frequency and severity would no longer be believed fully applicable.  So, when people who are paying for an ever greater subsidy start saying, “party’s over,” I sympathize very much with their situation.

But …

Laws and government can not run on sympathy alone. And the truth is if we don’t have serious reforms, the problems are only going to get worse.  It is going to resemble exactly what Commissioner Kitzman described this past week as “rearranging the deck chairs on the Titanic.” So, what I’m afraid of is that after I smile and smile and express my personal sympathies,” I’m going to advance policy positions that people on the coast, many of whom have been misled for decades, still aren’t going to like.

In a future blog entry, I’ll continue to set forth my recipe for progress. It starts, however, with honesty. The good people on the coast have to acknowledge that, however faultless they may be, there are issues with asking other people to pay for their insurance needs. The people on the coast have to acknowledge that, although their choices may be constrained and difficult, they, like all of us, make choices about where and how to invest. The people on the coast have to acknowledge the inconvenient truth that the best climate models and damage models predict far greater risk than those in the past, even in areas of Texas that haven’t suffered a serious hit for a while. And the people on the coast have to acknowledge that continued subsidization and continued allocation of scarce resources on that basis can only make the problem worse. Personal attacks, as have been made, on people who tell the truth as they see it doesn’t help the process. In return, I’ll acknowledge a desire to limit the pain in a transition to a fairer, more efficient and sustainable approach.


Why TWIA policyholders should be warned of the insolvency risk, even in Corpus Christi

One of the proposals I have made is that TWIA policyholders be warned of the risk of insolvency and the risk of post-event assessments.  At yesterday’s hearing, Representative Todd Hunter indicated that such a warning was not needed and might needlessly scare policyholders or lenders.  If you go to 1:57:50 to 2:02:18 of the recording of the hearing, you can hear the exchange.

There is indeed a a balance between warning people about risk and unduly scaring people.  And there is a wealth of evidence showing people aren’t very good at assessing infrequent risks.  But, to my mind, the exchange missed the point in several ways.

1.  Even though there may have been but one storm in a simulated 10,000 years that resulted in (a) a hit on Corpus Christi that (b) bankrupted TWIA, that is not the most relevant risk.  The more relevant risk — even from a selfish Corpus-Christi-only perspective —  is the probability that there will be a hit somewhere on the Texas coast that disables TWIA from paying claims to people in Corpus Christi either that year or in subsequent years.  And there, the relevant annual risk is probably at least 1 in 60.

2.  Why?  First, hurricanes can and do cluster.  So, when a significant strike in Freeport wipes out TWIA that means that even a little tropical storm or category 1 that hits Corpus the same year will leave no money in the TWIA piggybank from which to pay claims.  Second, when a significant strike wipes out TWIA that means that even a modest hurricane that hits Corpus in subsequent years will be very, very difficult to finance.  TWIA won’t have a catastrophe reserve fund, it won’t be realistic to surcharge TWIA policyholders a second time, and the bond market is unlikely to accept a second round of post-event bonding.  All that TWIA will have is a little buffer of premium revenues.

3. I believe that’s what TWIA head John Polak was attempting to communicate/spar with Representative Hunter but didn’t do the clearest job of it when put on the spot.

4.  So, is the risk of a Corpus Christi being the holder of a claim against an insolvent TWIA less than the risk of a Galveston policyholder?  Yes.  But the risk IS NOT 1 in 10,000.  It is much higher.

5. Should TWIA warn policyholders? At least until TWIA is fixed, I think it definitely should.  Policyholders don’t need to be scared about every unlikely event, but they have a right as adults to know of a substantial risk.  Losing your house and facing an insolvent insurer qualifies. We warn holders of surplus lines policies of lesser protections against insurer insolvency with a great big stamp on the policy.  Why not the same for an equally unguaranteed and often far riskier insurer. And while we’re warning, let’s also warn them of the potential for post-event Class 1 assessments, for which the risk is yet far higher and uniform throughout the TWIA territory.

6. Practice pointer for insurance agents and their error & omissions insurers: consider disclosing the risk (and requiring disclosure) even if there is currently no regulatory obligation that you do so. With all the risk information floating about, do you really want a jury facing a plaintiff with a lost house being your test care for silence?

7. The better question, I think, is the utility of the warning.  As the Public Insurance Counsel Deeia Beck queried at the hearing, what are you supposed to do once you are warned?  If my hopes are realized, we will have set up an environment in which persons on the coast do have private alternatives to TWIA.  If they know that the Allstate policy costs 10% more but is more likely to pay, maybe they will opt for Allstate and TWIA will be voluntarily depopulated without government coercion.  And, if those now-warned persons realize they don’t have a choice, maybe they will wake up, realize that the current system, though providing some benefit, is actually victimizing them.  Maybe they’ll stop listening to those who offer false comfort now and demand a market or alternative that provides better protection.

Oh, please. The “but the coast is poor” argument for subsidized windstorm rates

One of the arguments I heard repeatedly at yesterday’s hearing of the Joint Interim Committee on Seacoast Territory Insurance is that the coast isn’t a bunch of rich people with fancy beach homes.  Rather, the mean income on the Texas coast is in fact lower than the mean income in the rest of Texas.

a large beach house in Galveston

An elegant home in Galveston

Let’s stipulate that this is true. On average, the Texas coast may well be poorer than the rest of Texas.  Many parts of it may have a higher proportion of minorities. But of what import should mean or median incomes be in considering the finances of the Texas Windstorm Insurance Association?  TWIA does not “means-test” in deciding who gets its subsidized insurance.   Instead, wealthy and poor alike receive the benefits of TWIA subsidies.  In fact, wealthy TWIA homeowners  receive a far larger subsidy than poor TWIA homeowners. I bet not too many of them are minorities. So while it is the case that someone with a $80,000 house in Willacy County living on a $35,000 income gets a subsidy, it’s also the case that the person with an $80,000 home in Nacogdoches living on a $30,000 income there ends up subsidizing the person with a $1.2 million house in Galveston living (possibly in Houston) on a $300,000 income.  Indeed, just to rub sand in my point, the $1.2 million Galveston estate might be a second home. Where’ s the justice in that?

A modest house in Laguna Vista

A modest house in Laguna Vista

So, when people who advance the “but the coast is poor” argument join me in advocating lowering the TWIA policy limits or placing other means-based limits on TWIA eligibility and stop saying — “but it will only save a few percent” — I’ll feel a lot better about a redistributive argument in favor of TWIA subsidies. A windstorm insurance policy that focused on poverty (or ethnicity) would look a heck of a lot different than the current system.  So, until we get to fundamental TWIA reform — one that might begin with the administratively trivial step of lowering maximum limits —  you’ll forgive me if I think justifications of anything resembling the current system based on the relative poverty of the coast  should be met with “Oh, please!”

P.S. I’d feel those folks were being yet more consistent if their arguments in favor of income and wealth redistribution weren’t curiously focused on windstorm insurance.

P.P.S. It’s those poor, by the way, who are going to be most hurt when TWIA goes insolvent or has to issue post-event assessments after a large storm.


Footnote: I did some research tonight on wealth in the TWIA counties.  Probably I should not have stipulated that the TWIA counties are materially poorer than the rest of the Texas, although they are no wealthier.  The population weighted mean of median household income in those counties (excluding Harris, which is only partly TWIA) is about $46,824.  For the rest of Texas, the median household income is $49,646.  So, the TWIA counties are a little poorer, but, on balance, not much.  The two exceptions, by the way are Cameron County and Willacy County, both of which are indeed quite poor.  Chambers and Galveston Counties have median incomes well above the Texas median.

The Big Hearing in Austin

There is so much to talk about!  In fact, so much, that I’m just going to provide links tonight and save more extensive blogging for the next few days.

1. The Joint Interim Committee to Study Seacoast Territory Insurance held a four hour hearing in Austin today to discuss major reforms of TWIA.  Leading figures were TDI Commissioner Eleanor Kitzman and TWIA chief John Polak.  I testified briefly along with about 30 others. Corpus Christi State Representative Todd Hunter questioned who had invited me (Governor Perry’s office) and stated displeasure with what he regarded as a negative approach in my July op-ed, honoring me with a dramatic reading of that work’s final sentence. Other active legislators involved in the discussions included Craig Eiland and Juan Hinojosa.  Although a consensus on how to proceed was not reached, perhaps all could agree that debate and discussion was vigorous?

2.  If you asked me what the “headline” of the hearing was, it was the consensus among the witnesses that TWIA is really, really broken.  Kitzman, Polak and the Office of Public Insurance Counsel all agree that the organization is not actuarially sound. I fear we may be heading for a “health care” third rail, however, in which all agree that the system is broken but prefer it as second best over all but their favorite competing system.  The idea of a statewide cat risk pool appears to have some traction among some constituencies.

3.  Here are some links to press accounts of the hearing.  Corpus Christi Caller; Texas Tribune; Houston Chronicle (AP).  It’s possible you can watch a video of the hearing by clicking on this link.  My segment is from 2:28 to 2:36.  (You can get it to work on Macs by downloading an old copy of Real Audio from

4.  Last Friday, the Texas Department of Insurance released the Alvarez & Marsal report, a $350,000+ study of ways in which TWIA could be reformed.  This is a document with which all sides in the discussion will need to grapple.

5.  An interesting comparison of the Texas windstorm insurance market with those of other coastal states was produced.  Here’s a link to this informative report.  Again, I’m not sure we want to emulate every feature of these other state systems, but they provide some ideas and norms.

Ten fixes for TWIA: What I’m planning to say in Austin this week

I’ve been invited by the Governor’s office to testify this Wednesday in Austin before the The Joint Interim Committee to Study Seacoast Territory Insurance. Thoughtfully, they scheduled the hearing for a day I don’t teach class. Here’s what I’m planning on saying (along with the written supplementation).  By the way, if any readers have constructive suggestions on changes, please send them to me at  And if anyone wants to attend the hearing, it’s in room E1.016 in the Capitol Extension at 10:30 a.m.

Hello, my name is Seth J. Chandler. I’m a professor of law at the University of Houston Law Center and Director of its Program on Law and Computation. I have studied the current Texas Windstorm Insurance Association funding mechanisms in depth for over five years, outlined Texas windstorm insurance issues in various op-eds and have my own blog on the topic before you, The views here are my own.

Continuing with the current system of windstorm finance or merely tweaking it engineers a disaster waiting to happen. The 15% or so risk of TWIA insolvency over a ten year period, should leave every Texas legislator sleepless. The 50% risk over that time-frame that TWIA will need to resort to untested post-event bondings and surcharges or assessments is likewise disturbing. Endless reliance on costly reinsurance effectively traps TWIA in a cycle of inadequate capitalization.

But to leap from those woes to a new large government bureaucracy that socializes and further politicizes large segments of the insurance business is premature at best. The key idea now being floated surcharges all property and casualty policies in Texas (including auto, homeowner, business liability) some percentage of the premium to cover claims generated by a catastrophe. I don’t have details yet, but such a triggering catastrophe would likely be defined by insured claims from some single occurrence exceeding some amount. Now, if this scheme were consistent with the rest of the Texas insurance code, which permits geographic rating where actuarially justified, it might have some virtue as a risk diversification mechanism. But the key part of the proposal I have seen throws actuarial justification out the window. It insists that the surcharge rate should not depend — not even within some bounds — on the location of the property or the insured. So, even though insureds in Laredo or Huntsville or Garland might have a risk of making a defined catastrophe claim with only 1/10 an expected value as frequently as those in Galveston or Corpus Christi or Beaumont, all of them would be charged alike.

As many wiser than I have noted, “there is no greater inequality than the equal treatment of unequals.” Why is it just to permit high-risk and wealthy property owners in one part of Texas to get subsidized insurance paid for by low-risk and less wealthy property owners in other parts of the state? But, unfairness aside, there are problems with the proposal. Such a scheme enlists government to divert private resources to the riskiest parts of the state and thereby exacerbates future catastrophe losses. It will, unless there is, as I fear, an “individual mandate,” result in lower take-up rates in catastrophe-sparse regions than in catastrophe prone ones, which will further drive up surcharges and threaten a death spiral. And who here can contemplate the bureaucracy necessary to define occurrences and catastrophes, to determine when payments should be made from the state cat pool rather than conventional markets, to fund and monitor funding of a state-wide cat pool, and to prohibit insurers selling in catastrophe-sparse areas from undercutting the pool price?

So, before we kill TWIA and transition into the unknown perils of more government regulation and bureaucracy, I suggest we test more thoroughly whether and how the private insurance market will perform when the seacoast playing field is leveled. I do not share the article of faith among some that the private market will never work there. I say that faith has not been tested for decades because the playing field has been badly tilted. TWIA charges rates that protect against only a portion of the risk posed by its policyholders whereas we insist that private insurers charge rates sufficient to cover the entire risk. I would love to see Allstate come in to Commissioner Kitzman’s office and ask to continue selling policies in Texas when the odds of it failing over the next 10 years were acknowledged to be 15%. TWIA now gets special protection from lawsuits for improper claims handling. TWIA doesn’t do what I think most sensible insurers would do when we know that stronger building practices significantly reduce expected losses: charge modest coinsurance, particularly for claims in excess of actual cash value, but possibly waive coinsurance upon proof of extraordinary effort. Finally TWIA fails to do what we would require of private insurers: prominently disclose to policyholders the special insolvency, assessment and surcharge risks posed by its current funding structure.

Basically, I want Texas to transition to a market for windstorm insurance on the coast that is only different insofar as truly necessary from the market for property insurance generally. I want an expanded but monitored private market, with a level playing field and greater information to seacoast policyholders. The key to the proposal is a downwards shift in the absolute magnitude of risks faced by TWIA and a program that builds reserves within a smaller TWIA. Such a move will reduce the risk of post-event financing or the disaster of insolvency. The idea is to do so, however, in a way that protects basic insurance for coastal insureds, including those in the densely populated counties, and not to leave them in the lurch in the event, even with a level playing field, private insurance still will not do business on our coast. To those ends I have attached to my written testimony ten immediately doable and specific proposals that I believe you should study as part of your work plan.

Four of those specifics here. Lower the TWIA maximum policy limits so long as excess insurers come in to fill the void, which I believe they will if given underwriting freedom. Insist that TWIA not sell policies without at least modest coinsurance. Require policy premiums that, over a ten year period, build TWIA reserves to a level where it would take more than a 1 in 100 year storm to deplete them. Increase Class 3 assessments so that they would cover up to a 1 in 500 year storm.

Thank you for listening. Please read my expanded testimony involving all ten ideas and bookmark my blog,

Ten Specific Proposals

  1. Reduce over a period of two years the maximum applicable policy limit for TWIA policies on residences. That limit should be reduced to $1 million for policies issued or renewed after May 31, 2013 and, subject to the certification described below, $500,000 (or the Federal Flood Limit, whichever is lower) for policies issued or renewed after May 31, 2014. The latter ceiling shall be in effect each year if and only if the Texas Department of Insurance certifies after an appropriate hearing that excess insurance was generally available at actuarially sound rates in the territory covered by TWIA during the preceding policy year for amounts in excess of the TWIA policy limits for the preceding year. Otherwise the maximum policy limit should revert to $1 million. Take proportional measures for non-residential properties.
  2. Prohibit TWIA from issuing or renewing policies after May 31, 2013, unless those policies contain, in addition to a deductible, a coinsurance requirement of not less than 5% on claims payments up to actual cash value and not less than 10% on payments in excess of actual cash value, provided that TWIA shall have discretion to waive such coinsurance where the property owner provides evidence that its insured property meets the strictest building codes adopted by any state for coastal property.
  3. Prohibit TWIA from entering into reinsurance arrangements in which the actuarial value of the risk transferred to the gross reinsurance premium is less than 20%. This computation should be made by TWIA actuaries using the best available historical evidence and contemporary models.
  4. Maximally protect TWIA policyholders by prohibiting TWIA from entering into reinsurance arrangements for each catastrophe year with an attachment point lower than the sum of (a) its projected catastrophe reserve fund, and (b) the amount TWIA believes it can raise using Class 1 Securities, Class 2 Securities and Class 3 Securities.
  5. Subject TWIA to the same geographic rating restrictions that other Texas insurers face pursuant to Chapter 544.002 of the Texas insurance code and clarify that it is equally protected by Chapter 544.053.
  6. Subject TWIA to the same provisions regarding suit, statute of limitations, and extra-contractual damages as other insurers doing business in the seacoast territory. This could be done either by eliminating TWIA’s current preferences or by according insurers selling primary or excess insurance in the seacoast territory the same preferences as TWIA, provided their policy form is substantially similar to that used by TWIA.
  7. Set premiums and adjust the catastrophe reserve fund in accord with the concepts set forth in “An Idea for TWIA Finance” (, which basically calls for a reserve trajectory that hits 1 in 100 year adequacy within a ten year adjustment period. Factor in all the reforms set forth here (or otherwise enacted) in making this computation.
  8. Upon a certification from the Texas Department of Insurance at the start of each catastrophe year and based on the best available historical evidence and contemporary models, adjust the maximum amount of Class 3 securities that can be sold (and, correlatively, the maximum assessments on insurers) such that, after consideration of the catastrophe reserve fund, Class 1 securities, Class 2 securities Class 3 securities and any reinsurance or similar sources, the estimated risk of TWIA lacking funds to fully pay claims in the following catastrophe year is less than 1 in 500.
  9. To the extent of any inability to accomplish #8, and insofar as feasible, require TWIA to adjust premiums, based the best available historical evidence and contemporary models to take into account the probability, based on the geographic location(s) of the property insured, that TWIA would be unable pay claims fully during the following catastrophe year.
  10. Require prominent disclosure to TWIA policyholders created by the financing structure in place (as modified by the reforms suggested here or otherwise enacted). This disclosure should, at a minimum, advise policyholders of the approximate probability, computed using the best historical data and contemporary models, of the risk that TWIA will become insolvent, will be impelled to increase premiums to pay off Class 1 securities and will be impelled to impose surcharges to pay off Class 2 securities. Disclosure should be made (a) on a document signed by applicants for TWIA policies (new or renewal); (b) stamped (similar to surplus lines stamping) on policies issued by TWIA; and (c) on a web site one or fewer clicks from the main TWIA page.

The curious case of Corpus Christi

Today’s Corpus Christi Caller has an interesting article that purports to show a special immunity of the Corpus Christi area to hurricane risk, which is said to be no more than that facing New York City. The article is based on a report from NOAA published since 2010 and apparently brought to the recent attention of Todd Hunter, Corpus Christi’s state representative. It’s based on data from 1887 forwards that attempts to calibrate the comparative risk of landfall both within Texas and throughout the Gulf and Eastern Seaboard.

Here’s the key picture which, though not shown in the report, appears to underlie the article’s conclusions and quotations.

Return periods of Atlantic hurricanes

Return periods of Atlantic hurricanes by county

See the blue 19 next to Corpus Christi and the blue 20 next to New York City. This is supposed to show that the risk of hurricanes in those two regions are similar: one every 19 or 20 years a hurricane will strike within 50 miles. And see the orange 9s next to Galveston and Brazoria counties. That is supposed to show that the risk of hurricanes in those two regions are greater, once every 9 years.

The evidence gets a bit more complicated, however, if one looks at the next picture in the NOAA document, one not mentioned in the Caller article. It shows the history of major hurricanes based on historic evidence from 1887 to 2010. Although the coastal bend (33-40 years) still comes out better than the east Texas coast (25-26 years), the ratio isn’t as great as for all hurricanes. Moreover, the comparison with New York City now fails. The Big Apple gets hit only once every 68 years.

Major hurricane return periods

Return period for major Atlantic hurricanes by county

So, what are we to make of all this? I would say not too much. What the NOAA report lacks is any notion of statistical significance that would make it particularly useful in drawing fine grained distinctions between areas of the Texas coast. It might just be that what the pictures show is significantly good and bad luck. Drawn from a sample of just 130 years or so, one might expect to see distributions of return periods that varied from county to county. Perhaps some trends might be observable, such as greater strike frequency in Florida than Texas, but what the report lacks is a “p-value,” the probability that one would see variations in the data as large as those exhibited in the graphics simply as a matter of chance. I’m not faulting NOAA for this; it would be very hard to develop such a statistic and it was purporting to capture historic evidence only. Moreover, our climate is dynamic. Storm tracks and storm frequency can change as a result of global weather phenomenon. Thus, while one should not ignore historic data, you have to be very careful about projecting it into the future or using it to make highly specific projections.

So, should the report be ignored? No. Perhaps curious atmospheric features (jet stream placement) and geographic features such as the placement of Cuba indeed give Corpus Christi a little shield. And if Corpus Christi wants to argue on that basis for lower rates for southwest coastal Texas and higher rates for the eastern Texas coast, I wouldn’t be mightily opposed. Somehow, however, I don’t think that’s where coastal Texas wants to go in the upcoming legislative session. Recognition of large differences based on geography in catastrophe risk isn’t the best basis on which to plead risk socialization and rate uniformity. (More on that point soon!)