# Perry says special special on windstorm is “certainly possible”

Texas Governor Rick Perry told reporters at a Hurricane Preparedness Week meeting today that it was “certainly possible” that he would add windstorm insurance reform to the agenda for a special session.  He said that “we’re not going to bring it forward until we get a little closer to what I would consider to be an agreement between the disparate groups that are out there.”

Governor Perry’s desire not to waste legislator’s time on a fruitless effort is understandable, but since hurricanes are unlikely to respect this delicacy, let’s hope those groups will in fact move together swiftly, perhaps prodded along by a Governor who should not want to see vivid images of an unrepaired Texas coast featured in future political advertisements run against him.  There have, after all, been 60 tropical cyclones that have made landfall in the United States during the month of June (in the time for which statistics have been kept).  Eight have been Category 2 or higher, including Alma in 1966, which made American landfall in Florida and Audrey in 1957, which brushed the Texas border while severely damaging Louisiana.

Addendum: 4 p.m. 5/31/2013 —  Fox 26 Houston is doing a story on Governor Perry’s statement for its 5 p.m. news.  It will likely feature interviews with Senator Larry Taylor and with me. The reporter, Greg Groogan, definitely understands the issues.

Here, by the way is the Mathematica code that generated the above statistics.

atl = Import[“http://weather.unisys.com/hurricane/atlantic/tracks.atl”,

“Lines”];
Length@Flatten[
Map[StringCases[#, RegularExpression[“.+6/\\d{2}/\\d{4}.+XING=1.+”]] &,
atl]];
Column@Flatten@
Map[StringCases[#,
RegularExpression[“.+6/\\d{2}/\\d{4}.+XING=1.+SS=(2|3|4|5)”]] &, atl]

For other reports on this breaking item, look here and here.

# Troubling news: TWIA loses \$500 million in anticipated funding

The short term finances of the already shaky largest property insurer on the Texas coast took an unanticipated and significant turn for the worse Monday.  Outgoing Texas Insurance Commissioner Eleanor Kitzman rejected Monday plans of the Texas Windstorm Insurance Association to borrow \$500 million via a “Bond Anticipation Note” to help pay claims this hurricane season.  The Commissioner did not reject a plan to issue post-event bonds in the event of a significant storm this season.  As a practical matter, however, it may be difficult to persuade the market to loan money to TWIA after a storm due to peculiarities in the existing law that were not ironed out during the regular session of the Texas legislature.

The refusal to permit TWIA to borrow at this time, coupled with the announced \$135 million settlement earlier this week of most of the remaining lawsuits against TWIA arising out of Hurricane Ike, probably cuts in half the amount of cash TWIA would have immediately available to pay claims in the event of a storm this summer without having to rely on untested, legally questionable and potentially slow efforts at “post-event” borrowings.  The action leaves both the cash position and the long run finances of the troubled insurer in question.

My best guess is that without the Bond Anticipation Note (BAN), and including its Catastrophe Reserve Trust Fund (CRTF), TWIA probably has between \$400 to \$700 million in cash with which to pay claims.  That’s not much when your direct exposure is over \$75 billion, your total exposure is over \$80 billion and a Category 2 or 3 hit at a bad spot on the Texas coast could easily cause losses of over \$2 billion. The Bond Anticipation Note would have doubled the amount of cash available to pay claims.

As it stands, and as set forth below, I now believe it is not unduly pessimistic to set the odds of a TWIA insolvency this summer at 10%. If we consider two summers until the next regular legislative session, this risk roughly doubles. Given the grave effects of a TWIA insolvency on the entire Texas economy, this is way, way too high a risk.

## Cash position

To understand this, take a look a TWIA’s 2012 Annual Statement. TWIA ended 2013 with about \$430 million in cash (Assets, line 5; column 1) and total admitted assets (including the cash) of about the same amount, \$430 million. (Assets, line 28, column 3) It has agreed to pay about \$135 million in cash to settle the bulk of the Ike lawsuits. How much that will reduce the \$323 million in loss reserves (Liabilities, Surplus and Other Funds, line 1, column 1) is unclear.  Because lawsuits remain, it is unlikely to reduce those reserves down to zero.  It will, however, likely reduce TWIA’s cash position by the full \$135 million in relatively short order, depending on the details of the settlement. That would leave TWIA with just \$295 million in cash.

Of course, it’s a little more complicated.  I don’t have access to TWIA’s financial statements for the first quarter of 2013 or thereafter. TWIA has likely earned some cash since January 1, 2013. It has been earning and collecting premiums, although it has had to pay off about \$50 million on a thunderstorm in Hitchcock.  So, let’s be generous and credit TWIA with about \$120 million more in new cash. This brings a guesstimate of its cash levels back up to around \$415 million.

The problem is that not all of this cash is available to pay policyholder claims.  Some of it will be used to pay for operations, for commissions, and for other matters, including the Ike claims not resolved earlier this week.  So, I would be surprised if someone were to audit TWIA today and found it had more than \$400 million in cash available to pay claims before resort to the CRTF. I would not be surprised if the number actually came out in the \$300 million range.  And both of these figures will be reduced by \$100 million or so less if TWIA succeeds in its plan to purchase reinsurance.

So, without the hoped-for borrowings, TWIA might have had \$300 million to pay claims out of operating funds and another \$180 million out of its CRTF.  TWIA might have had a total of \$500 million.  (If the settlement came out of the CRTF rather than operations, the total would stay the same).  If the BAN had been approved, at least in the short run before TWIA had to pay the loan back, TWIA might have had \$1 billion.  Both sums are, of course, grossly inadequate to deal with the \$80 plus billion in TWIA exposure. Nonetheless, \$1 billion in cash would have left TWIA in a better short run position.

## Long run finances

Perhaps the greater impact, however, of the BAN ban is on the ability of TWIA to sell post-event bonds following a storm.  We’ve been through this matter before on this blog, but it is worth repeating because it is so very important.  The short version is, however, that there is a significant risk that very little in post-event bonds will actually be able to be sold.  And, thus, TWIA may very well have less than \$1 billion with which to pay claims even after borrowing.  I would not be surprised if it ended up with as little \$700 million.  The probability of such losses occurring this summer would be about 7-9% if this were a normal hurricane season.  If, as climate experts agree, however, this proves to be a bad hurricane season the probability of TWIA going broke and unable to pay claims fully could rise to 10-14%.

Here’s the longer version.  I, by the way, am not alone in my alarm on this matter. TWIA itself raised the issue in its submission to the Texas legislature.  the Texas Public Finance Authority (TPFA) had trouble last year trying to help TWIA borrow. And several of the pieces of proposed legislation this session would have fixed this particular problem.  But all of these bills failed during the regular session. Governor Perry has thus far resisted calls that he add windstorm insurance reform to the agenda for a special legislative session.

if there is a storm that pierces the CRTF, TWIA will need to rely on post-event Class 1 bonds.  But, unless something has changed, per the Texas Public Finance Authority they won’t sell, at least not up to \$1 billion authorized.  But if the Class 1’s don’t fully sell, then TWIA/TPFA is prohibited from selling the regular Class 2 bonds. (Section 2210.073). Instead, we go to the Class 2 Alternatives under section 2210.6136.  But if less than \$500 million of Class 1 bonds have sold — which is likely to be the case —  the first \$500 million of the  Class 2 bonds  are paid in the same problematic way as the Class 1 bonds (surcharges on TWIA policyholders).  (Section 2210.6136(b)(1)). And there is a serious question as to whether anyone will loan TWIA money on those terms. Why? Because as soon as substantial policy surcharges are issued on TWIA policies, some TWIA policyholders will either find other insurance, reduce the sizes of their policy, or simply choose to go bare.  This is particularly likely if a storm has impoverished many TWIA policyholders. And if enough TWIA policyholders reduce their premiums, the percent surcharge will need to go up to compensate in order to pay off the bonds.  But if the surcharge rate goes up, more TWIA policyholders will drop out.  And, we get into a death spiral.

But here’s the catch.  Under section 2210.6136(c), if TWIA/TPFA can’t sell every dollar of the \$1 billion in Class 2 Alternatives, then TWIA/TPFA can not issue the class 3 bonds of \$500 million.  The statute is crystal clear on this point.  And this means that TWIA has no Class 1 bonds, no Class 2 bonds, little or no Class 2 Alternative bonds and no Class 3 bonds.  The system has completely collapsed in a cascade of failures.  TWIA basically has no money beyond cash on hand, and the CRTF. That means policyholders will not be paid in full.  If the storm is bad enough, they won’t be paid even half of their legitimate claims.

Reinsurance — assuming that TWIA can get it — will not help a lot. The reinsurance will not kick in until losses exceed the “reinsurance attachment point.”  But the reinsurance attachment point is likely to be set on the false assumption that the post-event securities will succeed.  So, for losses less than the reinsurance attachment point, the reinsurance won’t pay at all.  TWIA will be just as bankrupt as if it did not have reinsurance at all.  Actually, it will be more bankrupt because  it will have paid \$100 million in premiums.  And even if the storm is so bad that the reinsurance kicks in, there is still a gap between the top of the CRTF plus any post-event bonds and the reinsurance attachment point.  So, TWIA won’t have enough money to pay claims fully.

## Why would Commissioner Kitzman do such a thing?

I’m not privy to her reasoning or all the facts, but there are concerns we have outlined before about pre-event borrowing such as a Bond Anticipation Note.  The problem with loans is that you have to pay them back — and at interest.  Thus, in the long run, particularly if interest rates rise or if TWIA is deemed high risk and thus charged high rates even now, borrowing perpetuates your insufficient capitalization.  Whatever the benefits in the short run — and there may have been many here that incoming Commissioner Julia Rathgeber will want to examine — it is not the ideal long run solution for insurance risk. It may well be that Commissioner Kitzman refused as her final act to be complicit in the bandaiding of TWIA in the hopes that a sufficiently obvious problem would spur the Governor to call a special session and the legislature to develop a sustainable fix.  If so, let us hope that gamble proves correct.

# Julia Rathgeber named new Texas insurance commissioner

Texas Governor Rick Perry has appointed Julia Rathgeber, formerly deputy chief of staff to Lietenant Governor David Dewhurst, as new Texas Insurance Commissioner.  Commissioner Rathgeber replaces Eleanor Kitzman who failed to win confirmation from the Texas Senate.  In addition to her work for the Lieutenant Governor, she has worked at the state’s General Land Office, the Texas Natural Resource Conservation Commission and at that agency’s successor, Texas Commission on Environmental Quality. Earlier in her career, Ms. Rathgeber worked for six years as Director of the Senate Research Center under Lieutenant Governor Bob Bullock in January, 1992.  The background of Ms. Rathgeber, a 1990 graduate of the University of Texas Law School, in insurance law and regulation is unclear at this point.

Let’s hope Ms. Rathgeber’s lengthy background in Texas politics makes her a quick study.  And let’s hope she receives lots of fair minded assistance. And let’s hope she supports the suggestion of her former boss, Lieutenant Governor Dewhurst, that windstorm insurance reform be added to the agenda for a legislative special session. She takes charge, among many other responsibilities, of the Texas Windstorm Insurance Association, which oversees the largest insurer of property on the Texas coast and whose financial problems might explode if a significant tropical cyclone hits the Texas coast before significant reform occurs.

Also, we did a little web background check on Ms. Rathgeber, who now becomes a bit more of a public figure. She has been involved in Meals on Wheels, the Seton Hospital, and the Shelter for Battered Women and lists various lobbying groups as “Likes” on her Facebook page. One curious fact emerges:  although Ms. Rathgeber passed the Texas bar in 1990 upon her graduation from law school, and although no disciplinary violations are reported against her, she is currently suspended from the practice of law in Texas.  [NOTE ADDENDUM BELOW DATED May 30, 2013]  Possible reasons for this suspension are listed here. It could well be as innocent as failing to pay membership dues or failing to complete Continuing Legal Education requirements.  And, an active license may not have been necessary in her recent jobs as she likely was not representing clients.

ADDENDUM: May 30, 2013.  The Texas bar has changed the status on Ms. Rathgeber.  When I wrote what I did, it is quite true that she was listed as suspended.  But, Ms. Rathgeber is no longer listed as “suspended from the practice of law” but is now listed as “Inactive.”  I do not know whether the earlier designation represented an error by the State Bar or whether Ms. Rathgeber took appropriate steps to get an earlier suspension removed. There is absolutely nothing wrong having an “inactive” law license assuming one is not representing clients.

# Perry announces special session, but windstorm insurance not on the agenda

Texas Governor Rick Perry announced this evening that he would immediately call the Texas legislature back into special session.  The only item placed on the agenda at this time, however, is legislative districting.  Thus, the 83rd Legislature has now closed with essentially nothing being done to reform the thinly capitalized insurer of 62% of the property on the Texas coast. The Governor could add windstorm insurance to the agenda (along with other items) at a later time.

As we will discuss in greater length this week, the failure of Governor Perry, at least for now, to call the legislature back into special session on this issue, means that insureds of the Texas Windstorm Insurance Association are at serious risk of not having claims paid fully in the event of a significant storm.  And, with potentially vigorous hurricane season upon us, such a risk could materialize sooner rather than later.

The end of the legislative session also apparently means that Eleanor Kitzman is no longer Texas Insurance Commissioner.  We will need to see what the Governor does with that post and how the new appointee will tackle the persistent problems of TWIA and the issue of whether to place it in receivership.

# Texas House, Senate agree on minor windstorm reform bill

Texas Governor Rick Perry

A bill that modestly affects future eligibility for insurance sold by the Texas Windstorm Insurance Association has now passed the Texas Senate and the Texas House and should be heading to Texas Governor Rick Perry for signature.  S.B. 1702 extends until 2015 the time by which owners of some property that does not comply fully with usual TWIA building standards must obtain “alternative certification.”  Property that has non-compliant roofing, exterior openings and exterior wall coverings may thus gain a reprieve. It also appears to provide, however, that after 2015 property worth more than \$250,000 must meet regular certification requirements rather than alternative certification.

The bill, my reconstruction of which is contained in this earlier post, appears to trade somewhat greater TWIA losses in the short run against the possibility of loss reduction in the future.  This is so because under existing law alternative certification would have been required as early as August 30, 2013. By relaxing the time in which non-compliant property must at least obtain alternative certification, the bill would appear to increase slightly TWIA’s exposure to tropical cyclone losses over the next few years at a time when, by all accounts, TWIA’s finances are in very poor condition. If TWIA survives until 2015, however, its exposure to losses thereafter may be somewhat limited since property valued at \$250,000 or greater will need to come into full compliance. Either way, however, the effect of S.B. 1702 is likely to be small and should not be confused by anyone with significant reform of this very troubled insurance program.  With the regular session of the 83rd Legislature coming to a close on Monday, however, S.B. 1702 appears to be all that has been accomplished.

We await seeing if Governor Rick Perry adds windstorm insurance reform to the agenda for a special session as his Lieutenant Governor, David Dewhurst, has, in addition to others, now suggested.

Lieutenant Governor David Dewhurst

# Just what we don’t need: an especially active hurricane season

Evidently the risk of blue tarps on people’s houses for long periods of time as they wait to collect from an insolvent Texas Windstorm Insurance Association following a moderate or severe tropical cyclone this summer or next has not been enough to motivate the Texas legislature to do anything serious about the problem during its regular session. Here’s one more piece of evidence, the new 2013 Atlantic Hurricane Forecast, suggesting that this failure to act leaves the Texas coast in grave danger and the rest of Texas at serious risk.  It strengthens calls for Governor Rick Perry to add windstorm reform to the agenda for a special session.

The National Oceanic and Atmospheric Administration’s Climate Prediction Center today joined other scientists (here and here) in predicting a worse than average hurricane season. They write:

This combination of climate factors historically produces above-normal Atlantic hurricane seasons. The 2013 hurricane season could see activity comparable to some of the very active seasons since 1995. Based on the current and expected conditions, combined with model forecasts, we estimate a 70% probability for each of the following ranges of activity during 2013:

• 13-20 Named Storms
• 7-11 Hurricanes
• 3-6 Major Hurricanes
• Accumulated Cyclone Energy (ACE) range of 120%-205%

The seasonal activity is expected to fall within these ranges in 70% of seasons with similar climate conditions and uncertainties to those expected this year. These ranges do not represent the total possible ranges of activity seen in past similar years.

Note that the expected ranges are centered well above the official NHC 1981-2010 seasonal averages of 12 named storms, 6 hurricanes, and 3 major hurricanes.

If, by the way, we assume a 50% higher number of tropical storms this year than average, the risk of TWIA becoming insolvent if it has \$1 billion (after limited success selling post-event bonds) with which to pay claims goes from roughly 7% this year to roughly 10% this year. If we assume, as the most optimistic people do, that TWIA might have access to \$3.5 billion (after successful post-event bond sales and some reinsurance), the risk of insolvency goes from roughly 2% to roughly 3%. All of these numbers are too high for comfort.

The only comfort one can obtain from this forecast of the 2013 Atlantic hurricane season is that it could, of course, be wrong.  Hurricane predictions, particular this far in advance, are not the most reliable forecasts out there.  NOAA has taken this into account, however, by saying that there is only a 70% chance that its forecast will be right.  Still, a 70% (or, technically greater) chance that we will have a greater than average number of Atlantic hurricanes this year, when TWIA, even with the most cheery assumptions, is still underfunded, should make one’s stomach churn as if in sympathy with the future waters of the Gulf.

My thanks to Houston Chronicle blogger extraordinaire, SciGuy Eric Berger, for bringing this news to my attention.

# Minor TWIA Bill Might Make It Through This Session

A bill making minor changes to the exposure of the Texas Windstorm Insurance Association passed the Texas House yesterday 134-11.  Before S.B. 1702 can become law, however, it will need to be reconciled in the closing days of the session with the substantially different version that passed the Senate last month.  Following amendments from Representatives Craig Eiland (Galveston) and John Smithee (Amarillo), the House version of the bill takes two actions with respect to Texas coastal building codes and insurance.  One of the provisions might increase TWIA’s claims in a tropical cyclone. The other might reduce it.

S.B. 1702 as amended in the House on motion of outgoing Galveston Representative Craig Eiland extends the time some coastal property owners with property that does not comply fully with building code standards a reprieve from somewhat tougher building standards until 2015.  Thus, for two more years during which TWIA’s reserves, even measured in the most optimistic way, are inadequate to pay for large storms, the House has apparently voted to actually increase TWIA’s exposure to risk.  This increase in exposure occurs because the premium surcharges on the these high risk properties are limited by the combinations of sections 2210.260(f) and 2210.259(a) of the Texas Insurance Code to 15%.  This value is likely insufficient to match the additional risk posed by these non-compliant properties.

A second provision of S.B. 1702 as amended in the House, however, one added by House Insurance Committee Chair John Smithee of Amarillo, might have a counterbalancing effect on TWIA exposure. It would condition eligibility for TWIA insurance after 2015 for homes and other property with values over \$250,000 on compliance with stricter TWIA building standards. “Alternative certification” would not be available. There is no estimate that I have seen of the number or value of such properties that are currently insured by TWIA but out of compliance.

Based on my reading of the House Journal (pp. 3830-31), here’s the House version of the statute.

SECTION____.  Section 2210.260(d), Insurance Code, is amended to read as follows: (d)  Except as provided by Sections 2210.251(d), (e), and (f), a person who has an insurable interest in a residential structure that is insured by the association as of August 31, 2012, but for which the person has not obtained a certificate of compliance under Section 2210.251(g), must obtain an alternative certification under this section before the association, on or after August 31,  2015, may renew coverage for the structure.

SECTION ____. Subchapter F, Chapter 2210, Insurance Code, is amendedby adding Section 2210.2581 to read as follows:   Sec. 2210.2581. MANDATORY COMPLIANCE WITH BUILDING STANDARDS; CERTAIN STRUCTURES. Notwithstanding Section 2210.251, Section 2210.258, or any other provision of this chapter, after December 31, 2015, the association may not issue or renew insurance coverage under this chapter for a structure with an insurable value of \$250,000 or more unless the structure complies with the applicable building code standards, as set forth in the plan of operation.

Although this bill may have some effect on individual TWIA policyholders, it is unlikely to have any significant effect on the ability of TWIA to pay claims following a major storm.  Absent a special session of the Texas legislature, it now looks as if that issue will need to await the 84th legislature two years hence in order to be addressed.  And whether S.B. 1702 passes or not, coastal Texas property holders will be at serious risk in the interim.

# Senator Taylor calls for special session to address windstorm risk

Texas State Senator Larry Taylor

In the wake of the death of his bill that would have substantially reformed windstorm insurance along the Texas Gulf Coast, Texas State Senator Larry Taylor is calling on Texas Governor Rick Perry to put windstorm insurance on the agenda for a special session of the Texas legislature this summer.  Since there are indications that Governor Perry may call a special session to address other issues such as redistricting, guns on college campuses, and, possibly, the little matter of the budget, the question is whether Governor Perry would add windstorm reform to the agenda.

Here’s why a special session matters.  In a special session, there is no “blocker bill.”  This is a provision in the Texas Senate that makes it difficult/impossible for a bill to get to the floor during a regular session unless it has 2/3 support. Thus, the votes that apparently were sufficient to block Senator Taylor from getting his S.B. 1700 before the legislature during this session, will likely not be enough to prevent it from making it to a vote in a special session.  It is still the case, however, that to take effect immediately — as opposed to sometime late in the 2013 hurricane season — whatever legislation is approved will need a 2/3 vote from both chambers.

I agree with Senator Taylor that Governor Perry should place the issue of windstorm reform before a special session of the Texas legislature.

Having applauded Senator Taylor for recognizing a serious threat to his constituents from existing law, let me make clear that Senator Taylor and I do not agree on the merits of his particular bill, S.B. 1700.  Although I acknowledge that the status quo is so bad that even a bad bill might be an improvement, there is much to dislike in S.B. 1700. And so, if he gets his way, I am likely to continue to urge that S.B. 1700 be scrapped in favor of better ideas or substantially modified.

Senator Taylor and I also do not agree, I think, on the magnitude of the financial problems facing TWIA.  He ended his press release with the breezy assurance that he felt confident that losses from future storms will be covered. That is kind of a strange statement from someone simultaneously saying we need a special session of the legislature to deal with an urgent problem.  If losses will be paid, what is the rush? And so, while I understand fully the importance of a prominent elected official not generated unwarranted panic in policyholders, there is a countervailing interest in being truthful about the risks that exist here.  There’s an even stronger interest in reducing those risks if possible.

For the reasons I have set forth on this blog over the past few months, I believe the TWIA situation, is far worse than Senator Taylor asserts in his press release, closer to what would justify Senator Taylor in calling for a special session of the legislature and, actually, far worse than he and many others may realize. The legal structure on which TWIA would rely to recapitalize itself following a major storm and which would be needed to pay claims even somewhat promptly is, as TWIA itself acknowledged in a plea for reform legislation, extremely fragile.

There is a substantial risk that TWIA would not be able to raise more than \$1 billion in post-event bonds and cash on hand to pay claims in a storm this summer; and the risk of a \$1 billion in losses this summer is between 5 and 7%.  If we take three summers as the relevant time period — because that’s when a bill from the 84th legislature might well take effect — we are talking about a risk of 14-19% of having blue roofs on the coast and no money to do repairs. One way to think about this is that we are, quite literally, playing Russian Roulette with the Texas economy for the next few years.  The odds are about the same: 1 in 6.

The status quo creates too high a risk of a human-engineered disaster along the Texas coast and, derivatively, for the Texas economy.

## Bottom Line

There are, as I have pointed out, modifications of S.B. 1700 that could make it a bandaid for Texas for the next two years.  That would be an OK idea.  There are, as I have noted, alternative schemes such as an assigned risk plan that provided adequate returns to insurers that would be a more promising structural solution for the long run. What Governor  Perry I hope becomes immediately educated about by legislators up and down the State of Texas, however, is the disaster looming if a major storm hits before the next legislative session and the insurer that covers 62% of all property there doesn’t even have close to enough money to pay for windstorm losses.  Governor Perry should be motivated to take those lessons seriously if he wants to remain a popular figure in Texas or elsewhere in the United States.  And those legislators should be mighty motivated to plea because voters will otherwise look to them as the people that failed to act and left the Texas coastal economy in shambles when they knew of a clear and present danger.

# Texas Insurance Commissioner Eleanor Kitzman Confirmation in Doubt

Eleanor Kitzman

Serious doubt exists today as to whether Texas Insurance Commissioner Eleanor Kitzman will be confirmed by the Texas Senate.  Her name does not appear on the list of nominees set for confirmation today and today appears to be the last day on which this committee will meet.  If so, and if, as I suspect, this is a response to her actions regarding windstorm insurance in Texas, this is a major loss for Texas. I would urge the legislature to reverse course. I would urge Governor Rick Perry and other leaders to speak up and support their choice.

But before voting to confirm someone with years of experience in insurance regulation and regarded highly enough nationally to head the critical Financial Regulations Standards and Accreditation Committee of the National Association of Insurance Commissioners (NAIC), legislators should at least examine the alleged marks against her.

## The Rap Sheet

### Count 1: Aggravated truth Telling

On or about June of 2012, Commissioner Eleanor Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit. This utterance challenged the prevailing wisdom that everything was fine with TWIA. It challenged the cultivated illusion that investors could regard collateral or property insured by TWIA as having the same degree of security as property and collateral insured by other Texas insurers. It threatened growth on the coast.

For this heresy, Commissioner Kitzman was welcomed back to Texas by Representative J.M. Lozano, R-Kingsville, with a request that she be investigated byTexas Attorney General Greg Abbott for breaking Texas law. And what law might it be that criminalizes speaking the truth? Lozano said her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane. Needless to say, the investigation requested by Representative Lozano, if one was ever done by our more level headed attorney general, went absolutely nowhere because Kitzman’s speech had violated no law and done no wrong.

Commissioner Kitzman compounded this alleged wrongdoing by then saying in her response to Chairman Smithee that, if TWIA did become insolvent, the state of Texas was under no legal obligation to make up for the resulting unpaid claims of TWIA policyholders.  Never mind the fact that absolutely no one has cited any legal authority saying that Texas has an obligation to pay such debts any more than obligations to guarantee other unpaid obligations throughout the state.  Never mind the fact that the Texas Property and Casualty Insurance Guaranty Association statute makes clear that it does not provide protection — at all — for government-created insurers. Never mind that Commissioner Kitzman is an experienced attorney and expert in insurance regulation who can read as well as anyone else and find no law creating such an obligation on the part of the State of Texas. Never mind, even, when I tell you as a professor of insurance law at a respected university that there is no such legal obligation. Commissioner Kitzman again disrupted the illusion that it was no more risky to invest on the coast of Texas than it might be to invest in El Paso or Dallas or San Antonio. And that, in certain parts of Texas, is apparently a crime or, if not, the basis for refusing to confirm an otherwise eminently qualified individual for a critical regulatory post.

But, of course, it goes beyond daring to question the assumption of security along the Texas coast or doing so just one time.

### Count 2: Threatening A Trial Lawyer with reduction of fees

On or about March of 2013, Commissioner Kitzman asked the TWIA board to consider placing TWIA in receivership, the Texas equivalent of bankruptcy, following its filing of an annual report that showed that it was insolvent. Let us make clear what the consequences of such an act might be.

TWIA has been a boon to trial lawyers along the Gulf Coast.  In part because of extremely dubious adjusting practices by the Windstorm Association and, perhaps in part for other reasons, attorneys along the Texas coast have made hundreds of millions of dollars on contingency fees arising out of breach of contract, bad faith and statutory claims  against TWIA.  I am not, please note, saying there is anything wrong with this. Insurers do on occasion misbehave, perhaps particularly so, when they have not been properly capitalized. There need to be deterrents against exploitation of policyholders and there is nothing wrong with lawyers advocating zealously on behalf of their clients. And, in the interests of full disclosure, I worked at one time as an expert on behalf of one of those very plaintiffs firms evaluating what appeared to me to be inappropriate use of statistical evidence by TWIA in adjusting claims.

The key point, however, is that there are still a number of Ike claims pending.  In receivership, those claims might not be paid in full. They would have to be treated with at least some regard to future claims against an insolvent insurer. But, if those claims were not paid in full, not only would the claimants perhaps not receive perfect justice but the attorneys representing those claimants would likely suffer a commensurate reduction in their percentage interests (contingency fees) in the lawsuits. Both of those possibilities — a threat to people one has come to care about and a loss to one’s own pocketbook in the process — can make good people mad. And when those people also make hefty contributions to political campaigns, that’s almost a crime in Texas.

Moreover, consider the threat to the illusion of security compounded by going public with the idea that TWIA was insolvent, that future claimants might need to be treated fairly, and that TWIA might need to be placed into receivership.  Other Commissioners might have swept that issue under the rug or concocted ways to extract more money out of inland Texans to pay for future claims.  But not Commissioner Kitzman. By even uttering the word “receivership,” she compounded her earlier threat to the cultivated illusion of security that has fueled the addiction to continued development along the vulnerable Texas coast. Never mind that receivership might actually help TWIA recapitalize itself — indeed that is a major purpose of receivership — the public confirmation of TWIA’s desperate straits might make other lenders reluctant to lend and developers reluctant to develop on the strength of a TWIA policy.

## Plea for Relief

There are, of course, other issues with Commissioner Kitzman’s tenure. Her views on balance billing rules in health insurance have stirred up controversy. And, because to my knowledge no public hearings were ever held on her appointment, we don’t know if there are issues pertaining to managerial competence or other matters. This is not a full accounting of her pros and cons.

From what I can see, however, Commissioner Kitzman has been an open and fair individual — yes one with a free market bent that one would have thought might have sold well in Texas.  She participated in creative efforts that did not constitute toadying to powerful private insurers to deconcentrate the risk now held in TWIA and get those insurers to start shouldering some of the windstorm risk but at fair prices. She’s presided over the growth in an outstanding web site that provides excellent information to consumers. She has been generous with her time to me, appearing in my insurance law class this fall to speak forthrightly with students. She’s been a leading figure nationally in insurance regulation.

I hope the Texas Senate somehow changes course and confirms her.  If not, I hope Governor Rick Perry figures out a way the State of Texas can continue to benefit from her expertise.  And, above all, I hope that legislators realize that shooting the messenger does nothing to protect the Texas coast or attract talent to critical fields in our state.

# S.B. 1700 dead; Texas coast in grave danger

Senator Larry Taylor, sponsor of S.B. 1700, the only significant bill on windstorm reform to get through a legislative committee and at least have the chance of being approved, announced this evening that his efforts to get his bill passed have been frustrated by the Texas Trial Lawyers’ Association and the attorney with the largest share of the Ike cases, Steve Mostyn. I did not agree with much in S.B. 1700. It had many problems. But if this means that there will be no reform this legislative session of dysfunctional Texas insurance against tropical cyclones, I agree very much with Senator Taylor that this is a sad day indeed.

Here’s a copy of his press release.

Larry Taylor press release

There will be time in the next few days to discuss why certain trial lawyers may have objected to the bill but, from my perspective, the important is not whether the trial lawyers have a legitimate concern or whether, indeed, their objections are the only cause of the bill’s defeat.  Why, for example, did Steve Mostyn oppose it if the offensive provision had been removed? In some sense, however, this really doesn’t matter. The important issue is what on earth is Texas going to do about hurricane insurance until the 84th legislature two hurricane seasons from now.

## Miracles?

There is, I suppose, a remote chance that the House could pass some minimalist bill that fixed the worst parts of the current scheme and try to ram it through the Senate.  I sure hope that happens. But I am not certain that there is the requisite level of support for such a scheme nor am I sure that there is time.  I do recall Representative John Smithee, chair of the House Insurance Committee, saying at a hearing that he did have a bill filed that had little content but that could be used as kind of an all purpose vehicle for TWIA reform.  But, again, I have doubts that there is the will or the time to get something passed before the end of the regular session.

There is also, I suppose, the possibility that Governor Rick Perry would add windstorm finance to a special legislative session.  But I have heard no rumor that such is contemplated.  And there is, I suppose, the possibility, that Texas is just counting on using its rainy day fund to pay for what could be a very rainy day on the coast of Texas this summer or next.  But I do not know whether such a use would be countenanced by the political powers or, since this is partly a self-inflicted wound, whether it should be used in that fashion.

## What now?

And so, to my amazement, Texas is apparently choosing to to face the 2013 hurricane season — and perhaps the 2014 hurricane season too – with 62% of the property on the coast insured against tropical cyclones by an insurer that has been called insolvent by the Texas Insurance Commissioner, Eleanor Kitzman. The insurer has at in its Catastrophe Reserve Trust Fund at best 1/20th of the amount it should have if it wants to self-fund claims and has very doubtful ability to recapitalize itself in a significant way using post-event bonds.

As I told Fox TV today in a part that didn’t make the air this means two things for people on the coast. (1) People with insurance from the Texas Windstorm Insurance Association need to shop very aggressively for alternative forms of windstorm insurance.  They can’t just go to Allstate and State Farm and the usual suspects There are many insurers in Texas.  Many won’t write on the coast.  But maybe some of them will.  Even if it costs more, it may well be worth the peace of mind if and when a storm brews in the Gulf of Mexico this summer.  (2) People and businesses with TWIA policies should behave as if their policies have upwards of 30% coinsurance. That means taking every imaginable step both now to get their properties as resistant to hurricane damage as possible and to take every last minute precaution to reduce loss if a storm comes.

For my part, I’m going to keep watch on the extent to which TWIA succeeds in increasing its capitalization through a Bond Anticipation Note and through reinsurance.  I’ll try to dig further into the ability of TWIA to sell post-event bonds. And I’ll keep watch to see if any legislative cavalry is coming over the hill.  Right now, however, all is very silent in this calm before the storm.