S.B. 1700 in stark pictures

According to newspaper accounts here and here, S.B. 1700 is heading for a vote in the Texas Senate this week.  Before the Senate votes on the bill or the House Insurance Committee considers the matter, I hope they have some understanding of how radically it transfers wealth to TWIA/TRIP policyholders from people who do not have TWIA policies. I also hope legislators understand that although a $4 billion funding stack is definitely an improvement over the status quo, there is still a significant risk to the coast.  And I also hope they understand the TWIA/TRIP depopulation plan, which would in theory be a good idea, has about as much a chance of success without giant changes to TWIA and TRIP that will greatly anger coastal residents as a plan to depopulate Texas itself.

Here are some pictures that I hope aid understanding.

The Funding Stack

Here’s a picture of the TWIA funding stack for 2013 under S.B. 1700. For each element of the stack, I’ve shown who actually pays for that layer of responsibility.

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TWIA Funding Stack for 2013 under SB 1700

Distribution of expected responsibility

Here’s a pie chart based on a 10,000 year storm simulation showing how much each layer of responsibility would expect to pay under S.B. 1700. There are several features of this graph worth noting.  First, note that TWIA policyholders have paid only for the modest dark red wedge at the left and the orange baseline reinsurance at the bottom left.  That is less than half of the expected payments.  (Yes, they pay a modest portion of the coastal insured surcharges too, but we don’t know how much).  Also notice the large cherry red wedge of unfunded losses.  Although the stack goes up to $4 billion or so under this bill for 2013, and although insolvency now occurs in perhaps 1.5% of the years (26% over 20 years), when insolvency occurs, it is a huge amount of money that is unfunded.

By Layer

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Expected loss payments by layer based on 2013 stack

 By source

We can group the expected payments shown above so that we simply have expected payments by source.  Here is that graph.  Notice again that TWIA policyholders pay little more under this scheme than either Texas insurers (who will surely pass the cost on to non-coastal Texas insureds) and coastal insureds, many of whom have already paid for non-TWIA wind policies. And, again, notice the large chunk of unfunded losses that exists under S.B. 1700.

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Distribution of expected loss payments by layer responsibility under SB 1700

 By Cash Payments

There’s another way to look at S.B. 1700.  Don’t focus on the source of expected loss payments. Focus instead on source of expected cash flow.  The two are not the same because large chunks of cash flow get lost in TWIA/TRIP overhead and in paying reinsurers enormous amounts to bear risk (a subject discussed elsewhere). Here’s that pie chart.  Notice that TWIA policyholders now shoulder a considerably larger share of the load (about 2/3rds). There is still, however, a large chunk of the load picked up by Texas insurers/insureds (14%), coastal insureds (8%) and unfunded losses (9%).  The unfunded losses are a smaller chunk because the denominator for the pie chart is now larger.

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Distribution of expected cash payments for 2013 under SB 1700 by source

Political Power in TRIP

TRIP will be run by a Board of Directors appointed by the Texas Governor.  The graphic below shows the statutory composition of that board under new section 12 of S.B. 1700 (2210.102). Notice the little wedge representing non-seacoast interests.  Hopes, therefore, that the board will take steps to protect non-coastal Texans from having their wealth transfered to the coast would thus seem very optimistic.  Also notice how the southern areas of the Texas coast, which have less population and less insured property than the northern areas, have equal political power on the board.  This is not a one house (or one premium dollar) / one vote system.

Labeled[Framed@ Labeled[PieChart[{3, 1, 1, 1, 1, 1, 1}, ImageSize -> 200, ChartLegends -> Map[Pane[ Style[#, {FontSize -> 11, FontFamily -> "Swiss", LineIndent -> 0}], 216] &, {"insurance industry representatives who write \ wind/hail in first tier coastal counties", "Cameron-Kenedy-Kleberg-Willacy representative", "Aransas-Calhoun-Nueces-Refugio-San Patricio representative", "Brazoria-Chambers-Galveston-Jefferson-Matagorda-Harris \ representative", "non seacoast member", "engineer from second tier coastal county", "financial industry second tier coastal county"}], BaseStyle -> {FontSize -> 11, FontFamily -> "Swiss", LineIndent -> 0}], Map[Style[#, {FontSize -> 11, FontFamily -> "Swiss", LineIndent -> 0}] &, {"TRIP Board of Directors", "With ex-officio members: elected official from southern \ seacoast, elected official from northern seacost, elected official \ from non-seacoast"}], {Bottom, Top}], Style["Political Power in TRIP", {FontSize -> 11, FontFamily -> "Swiss", LineIndent -> 0, FontWeight -> Bold}], Top]

Board of Director membership in TRIP

The Depopulation of TWIA/TRIP

One of the concepts in SB 1700 is that TWIA/TRIP should be “depopulated” by reducing its total insured exposure (currently over $75 billion).  Great. The bill does not, however, come with a magic wand with which to accomplish this task. The only tool it provides is a club that threatens the insurance industry with a collective $200 million assessment that goes into an “exposure reduction plan fund” if the 2016 target of a 20% reduction from 2013 levels is not met.  It places insurers in a bit of a prisoners dilemma and creates a lot of litigation-fomenting administrative discretion on this point by saying that the assessment will only be levied against insurers that “as determined by the [TRIP] board of directors, has not met the member’s proportionate responsiiblity for reduction of the association’s total insureds exposure.” So, if all other insurers have started selling insurance — presumably at a major loss — on the coast using TWIA or sub-TWIA rates, the insurer who is left and refusing to sell insurance on the coast might find themselves with a very hefty bill even if they just have a modest share of the Texas property-casualty market.  And this, I take it, is the whole point behind the clever section 2210.212 of the bill.

I suspect, however, that the $200 million assessment will be unlikely to lure many insurers back to the coast.  There is going to be a first mover problem.  If very few large insurers choose to avoid the 2210.212 club by selling on the coast, then no insurer ends up paying a very large 2210.212 assessment. Question for any other lawyers (or law students) reading this entry: would it violate federal antitrust laws, as modified by the McCarran Ferguson Act, for insurers collusively to refuse to sell; would it violate Texas law?

The other point — and this is the one to which the picture below relates — is that the reduction targets are ambitious.  Although they are stated as reductions from the 2013 status quo, they will in fact be larger.  That’s because TWIA/TRIP is likely to continue growing at significant rates.  Thus, to make a 20% cut from the 2013 status quo, one needs to make perhaps a 30% cut from the 2016 expected status quo. The graph below illustrates this point by comparing 3% TWIA growth to the depopulation targets stated in section 2210.212.

 

Labeled[Show[ DateListPlot[{{"January 1, 2013", 1}, {"January 1, 2016", 1.03^3}, {"January 1, 2018", 1.03^5}, {"January 1, 2020", 1.03^7}, {"January 1, 2022", 1.03^9}, {"January 1,2024", 1.03^11}}, PlotRange -> {0, 1.4}, PlotMarkers -> Automatic, PlotStyle -> Green, FrameLabel -> {"Time", "Total Insured Exposure As Fraction of 2013"}, BaseStyle -> {FontSize -> 11, FontFamily -> "Swiss"}, Epilog -> {Arrow[{{3.6238320000000005*^9, 0.28615669133896926}, {3.6578745686249995*^9, 0.7181793832820529}}], Inset[TextCell["Assessment of $200\nmillion if not reached", GeneratedCell -> False, CellAutoOverwrite -> False, CellBaseline -> Baseline, TextAlignment -> Left], {3.588546672*^9, 0.19378500614472127}, {Left, Baseline}, Alignment -> {Left, Top}]}], DateListPlot[{{"January 1, 2013", 1}, {"January 1, 2016", 0.8}, {"January 1, 2018", 0.65}, {"January 1, 2020", 0.55}, {"January 1, 2022", 0.45}, {"January 1,2024", 0.4}}, PlotMarkers -> Automatic, PlotStyle -> Red]], Style["Natural Growth of TWIA/TRIP (green) compared to 2210.212 \ \"requirements\" (red)", {FontSize -> 11, FontFamily -> "Swiss"}] ]

Natural growth of TWIA/TRIP compared to 2210.212 requirements

My final picture is of Albus Dumbledore and the most powerful wand in the universe: the Elder Wand.  I show it because, I suspect, that is what it is going to take for TRIP to actually accomplish the targets set forth in the legislation without infuriating the very political constituencies that have, with SB 1700, again kicked the fundamental problems of catastrophic risk transfer down the road.

The Elder Wand

Perhaps the only thing that will actually be able to implement the SB 1700 targets without infuriating coastal Texans

TRIP could raise premiums drastically to market rates.  That would likely reduce total insured exposure, but somehow I don’t think that is the idea in the legislation. It could refuse to take on new customers. Imagine the squeals that will produce. It could do what I have suggested for years and refuse to insure beyond some basic amount and rely on market-provided excess insurance for the rest. To do so to the extent of the targets contained in SB 1700 will likely require that excess policies kick in at about $100,000.  Again, I have doubts that his what the proponents of this legislation have in mind. Or, finally, TRIP could just realize that its impossible to reduce total insured exposure without taking steps that are going to be extremely unpopular with the very constituencies that put forth this bill. They could, instead, giggle. They could recognize that the “must” language in the bill is basically a legislative joke — a pretext for extracting in disguise another $200 million out of Texas insureds throughout the state to subsidize, yet again, coastal property, owned by poor and wealthy alike.

Breaking News: Major TWIA Bill Approved by Senate Committee

According to a reliable source, a highly amended S.B. 1700 that resembles somewhat the committee substitute HB 3622 has been voted favorably out of the Senate Business and Commerce Committee.

Here’s a link to the bill. Senate Bill 1700 approved by Business and Commerce

I’ll try to provide a detailed analysis in the next 24 hours.  The short version, however, is this bill looks like a masterpiece of special interest legislation that current TWIA policyholders on the coast should love. It gets rid of the worst problems in post-event bonds that have been around since 2011. Everyone off and on the coast should be glad that this problem is eliminated. The SB 1700 voted out of committee favorably reduces the probability of a storm that would gravely injure TWIA policyholders and, derivatively, the rest of Texas. It requires little if any sacrifice from TWIA policyholders in terms of mitigation and asks rich and poor insureds throughout Texas to subsidize property along the coast even more so than before. That subsidization continues even if the owners of coastal property are wealthy and don’t need or deserve the subsidy. But it continues extracting this money in a way that is very hard for the average insured to understand or see.  If you live off the coast, your 3% higher insurance bill won’t have a picture showing you the lovely beach home or modest coastal property you are now subsidizing more than before with your hard earned money, but you’ll be doing it nonetheless.

Also, the bill (section 2210.212) says that TWIA “must” reduce its potential exposure quite substantially both over the next few years and over the next decade.  In theory this means that TWIA will have to drop policyholders and private insurers will have to pick them up. It looks, however, as if all that “must” means is that Texas insurers, if they don’t write insurance on the coast as desired by TWIA, will have to collectively fork over $200 million.  I have serious doubts this provision means much more than that Texas insurers can look forward to passing on a $200 million bill to their non-coastal policyholders every several years — how, exactly, is Allstate supposed to compete with subsidized TWIA? —  but perhaps if Allstate (just to pick on one large insurer arbitrarily) were to sell in the least vulnerable parts of the coast, it might be able to do so at only a modest loss and avoid being hit by the stick that this bill gives TWIA.  Anyway, more on this and other interesting bill features soon.

Oh, and I almost forgot.  If this bill passes it won’t be TWIA anymore.  It will be TRIP, the Texas Residual Insurance Plan.

TWIA Board tries to borrow $500 million and get $1.15 billion in reinsurance

The TWIA board met Friday.  I could not listen in on the meeting so my information is very limited.

Pre-Event Bonds

It appears that TWIA is going to seek $500 million in pre-event bonds for the 2013 hurricane season in order to augment its skimpy $180 million catastrophe reserve fund.  Although the total of $680 million is inadequate to address the $70 billion plus in total insured value, it is still an improvement over the $180 million that might be the only certain funding.  My AIR/RMS derived hurricane models  (CompoundPoissonDistribution[0.54, WeibullDistribution[0.42, 177000000]]) suggest this reduces the probability that TWIA will be unable to pay claims in full for hurricanes this year down from 14% to about 9%.  Yes, TWIA may be paying a high interest rate to engage in this sort of borrowing, and from what I understand the borrowing has yet to be consummated, but this is a significant step.

Reinsurance efforts

I also understand from a Rick Spruill Twitter post that TWIA is going to seek $1.15 billion in reinsurance.  What I can’t tell you right now is

  • at what level will the reinsurance attach, i.e. atop the Class 3 as I have recommended or inserted between Class 2 and Class 3 as a Guy Carpenter presentation suggested might occur
  • will the reinsurance “drop down” in the event any of the post-event bonds underlying it can not be sold; if not this reinsurance may well be worthless
  • what premium will TWIA pay for this reinsurance; TWIA in the past has paid very high rates for reinsurance that probably had higher attachment points
  • will the market in fact sell TWIA this much reinsurance; reinsurance capacity is not unlimited
  • is the reinsurance per occurrence or per year; it matters a lot if we have multiple storms
  • if per occurrence, what right of reinstatement will TWIA have and at what price

These are all very important questions in assessing the extent to which TWIA policyholders are at risk for this summer while the Texas legislature considers alternative short and long run fixes.

One additional note

Although the decrease from 14% risk of failure to a 9% risk of failure is significant, one must recognize that over a long period of time, 9% risks materialize.  There is, for example, an 85% chance that a 9% risk will materialize at some point during a 20 year period.  So, getting funds up to $680 million is a positive development, it is not by any means a long run solution.

TWIA Board to Consider 2013 Reinsurance, Bonds

With just 30 days to go before the start of hurricane season, the Board of the Texas Windstorm Insurance Association (TWIA) will meet tomorrow, Friday, May 3, 2013, in Austin to discuss issues critical to its survival.  Among the items on the agenda are purchases of reinsurance and attempts to sell both pre-event and post-event bonds.  Both of these items are likely to prove extremely difficult for TWIA to manage.  Not on the public agenda is any further consideration of having TWIA placed into receivership.

Reinsurance

Let’s look at the reinsurance issue first. TWIA will be receiving a presentation from its long time insurance broker, Guy Carpenter. You can get a copy of that presentation here. It’s a fascinating document. It rests on an awfully cheerful view of TWIA’s ability to sell post-event bonds.  That’s not a view shared by the Texas Insurance Commissioner or, for what it is worth, by me. It shows TWIA is considering a reinsurance purchase option that would help insurers but would hurt policyholders. And it exposes yet again the extent to which the never-ending need to purchase reinsurance created by the undercapitalization of TWIA, forces TWIA to pay extremely high rates for that protection. If one wanted Exhibit A for why TWIA should be substantially depopulated rather than propped up so it can expand, the material for this board meeting would not be a bad place to start.

WHY IS GUY CARPENTER ASSUMING REINSURANCE CAN ATTACH AT $2.3 BILLION?

The Guy Carpenter presentation proceeds on the dubious assumption that TWIA can sell post-event bonds and thus can attach as high as $2.3 billion in the funding stack.   Look at the following picture found on Slide 8. (You may need to click on it, which will cause it to zoom in).

Proposed reinsurance arrangement for 2013

Proposed reinsurance arrangement for 2013

 

Notice that it presupposes that TWIA will be able to sell $2 billion worth of Class 1, Class 2  bonds and thus explores attachment at the top of the Class 2 stack.  But this is a very strange assumption to make.  First, as the Texas Public Finance Authority and the Texas Insurance Commissioner have stated, and as seems clearly correct, TWIA will not be able to sell the full $1 billion of Class 1 bonds.  And has been discussed on this blog before, the Class 2 bonds can’t sell if the Class 1 bonds don’t sell out and the Class 2 Alternative bonds have difficulties as well. So, the whole discussion of reinsurance attaching no lower than about $2.3 billion rests on what sure looks like unwarranted optimism.

Now, to be sure, TWIA’s got a document in its packet for the meeting Friday that suggests it still thinks it can sell $500 in pre-event securities, $1 billion in Class 2 public securities and $500 million in Class 3 securities.  This document appears, however, to ignore section 2210.6136 of the Texas Insurance Code, which says that Class 2 Bonds can’t be issued unless the full $1 billion of Class 1 bonds sell out.  If the Class 1 bonds don’t fully sell, then one has to resort to the Class 2 Alternative bonds.  But as I’ve pointed out before, the Class 2 Alternative bonds may be almost as dubious as the Class 1 bonds. And the Class 3 bonds legally depend on all the Class 2 or Class 2 Alternative bonds selling out.  So, again it looks to me as if TWIA is still looking at this summer with very rosy glasses or has some interpretation of the Texas Insurance Code I don’t understand.

Note 1: There is an alternative presentation on slide 13 in which Guy Carpenter explores the possibility of the reinsurance attaching at $1.7 billion, but even this is an awfully optimistic perspective on TWIA’s ability to sell post-event bonds.

Note 2: In fairness to Guy Carpenter, there is a footnote attached to the graph stating “Actual amounts of bond tranches are subject to marketability.” Yes. But unless there’s been some miraculous turn around in TWIA’s bonding ability, this seems like the main point, rather than a footnote.

Why is Guy Carpenter not having the reinsurance attach at the top of the Class 3 bonds?

If you’ve ready my blog entry on The Curious Matter of Reinsurance Attachment, you’ll know that the TWIA board has to make a crucial tradeoff in determining where any reinsurance should attach.  Inserting the reinsurance between the Class 2 and Class 3 bonds protects insurers from assessments but buys, dollar for dollar, less protection for TWIA policyholders. Inserting the reinsurance on top of the Class 3 bonds gives policyholders more protection but increases the likelihood that insurers will have to pay.

Most of the bills pending in the legislature would prohibit TWIA from doing exactly what the Guy Carpenter presentation appears to suggest: protecting insurers from having to pay back Class 3 bonds rather than maximizing policyholder protection. Given the incredibly precarious situation facing TWIA policyholders this summer — sorry insurers — but the reinsurance should attach at the highest level possible, buying the most protection for policyholders with a provision for drop down in the event the post-event bonds can’t be sold.

The pricing of reinsurance continues to be incredibly high

The Guy Carpenter proposal suggests that TWIA is again going to have to pay through the nose for reinsurance partly as a result of it never having an adequate internal catastrophe reserve trust fund.  As I’ve spoken about on many occasions, this reinsurance trap — almost like borrowing from payday lenders to address financial vulnerability — basically insures that TWIA never escapes its poverty.

How can I say this?  Look at the models AIR and RMS provide both Guy Carpenter and TWIA.  Here’s slide 6 of the presentation.

AIR and RMS risk estimates

AIR and RMS risk estimates

If one assumes that the distribution of annual losses is a Compound Poisson distribution, with the Poisson parameter being 0.54 (as found in this scholarly article) and one assumes that the underlying distribution is a Weibull with parameters 0.42 and 177,000,000, you can generate data that matches up extremely well with that found by AIR and RMS.  If you then run, say, 10,000 years of simulations using that distribution, you find that the mean losses to an insurer who writes a maximum of  $850 million worth of coverage over a $2.3 billion retention is only about $20 million.  That is 4-5 times less than what the reinsurers are apparently proposing to charge.  And, thus, the cost of having to reinsure rather than internally finance is something like $65-$75 million per year, or about 1/6 of all TWIA’s premiums. You dont, by the way, get qualitatively different results using the three parameter Weibull distribution that I’ve used on this blog before to replicate the AIR/RMS models.

There’s a lot more that is odd about the reinsurance pricing. If we think of the price as being composed partly of expected losses and partly of having to withdraw the maximum exposure from illiquid high-earning investments and place it in low return, highly liquid investments — this is the Wharton School model — the pricing only makes sense if reinsurers lose about 7.8% on their capital by having to make it particularly liquid. ((-expectedLosses + premiums)/maxExposure). Given the market right now, that’s a pretty high number.

There are a couple of explanations between the actual pricing for reinsurance and the pricing that the models would suggest.  One, which is rather scary, is that the reinsurance market is not behaving as competitively as one would like.  The other, scary for different reasons, is that the reinsurance market doesn’t trust the AIR/RMS model and thinks the risk of a major hurricane is considerably greater.  If that’s true, however, then even the dire warnings that I  and others have been sounding about TWIA are understated.

Bonds

The Bond Anticipation Note

The other main item on the agenda appears to be the issuance of bonds.  There is a a proposal from First Southwest that TWIA sell by June 27, 2013, a “Bond Anticipation Note” for $500 million that would basically be an advance on a hoped-for similar Class 1 post-event bond. First Southwest apparently believes these unrated bonds could be sold at between 4 and 6%. My own 2 cents is that if TWIA can get this loan, it should grab it.  Increasing the amount it has to pay claims from its CRTF funds of $180 million to something like $680 million will help.  And if all it has to pay is some interest, that’s a good deal. But there’s a lot to do before this money will be available to TWIA and it looks as if it is going to have go through at least the first month of the 2013 hurricane season without it.

Post-Event Bonds

There’s also apparently a resolution on the table authorizing TWIA to asks the Texas Public Finance Authority to issue post-event bonds. I’ll confess I don’t understand this one.  There haven’t been any tropical cyclones yet in Texas for 2013.  Maybe TWIA is getting this resolution done to see what can actually done for 2013?  Maybe it is an attempt to see if things are as bad as some people have been saying?

Conclusion

The TWIA board is in a very tough spot.  With fewer than 30 days to go in the legislative session and 30 days until the start of hurricane season, it doesn’t really know what its resources are to pay claims. It’s being (understandably) threatened with receivership by the Texas Insurance Commissioner. And its existing reinsurance expires on May 31, 2013, before the start of hurricane season.  If and until TWIA gets some legislative relief or is put partly out of its misery by a Texas shift to an assigned risk plan or other mechanism that deconcentrates risk, it doesn’t have many good options. My hope is that the board will have the courage to confront its moral and legal obligation to warn policyholders in the clearest possible terms of the risks that, unless powerful legislative relief swiftly occurs, their claims will not be paid fully should a significant hurricane hit this summer.

Fox 26 Stays on the Story

Greg Groogan of Fox 26

Greg Groogan of Fox 26

Fox 26 Houston news with its reporter Greg Groogan has run another story on the problems facing the Texas Windstorm Insurance Association (TWIA).  I’m quoted again in this story (accurately, just like last time).  The story very well encapsulates the problem. TWIA does not have enough money to pay claims. Coastal residents don’t want their economy hurt by paying higher insurance premiums. And Texas taxpayers and property owners not on the coast don’t want to continue to pay wind and fire premiums not just on their own house but also help subsidize wind premiums on the homes of coastal residents, many of which are more expensive than theirs.  As a result, most involved are in one of the Kubler-Ross stages of grief: (1) denial, (2) anger; (3) bargaining; (4) depression; or, possibly (5) acceptance. And I agree with the realtor quoted in the story: as it stands Texas catastrophic risk system is pretty much prayer based.

P.S. Houston Chronicle: anybody home?

The “Committee Substitute” to H.B. 3622 is a very different animal

I have now received a copy of the “Committee Substitute” to H.B. 3622 (CSHB 3622 Bill Text). This committee substitute house bill is a very different animal than the original H.B. 3622.

Changes to the Funding Structure in the Committee Substitute House Bill

Here are the changes to the funding structure that I note.

1. Under original H.B. 3622 (and the status quo), Class 2 post-events would be repaid 70% by coastal insureds via premium surcharges and 30% by insurers by assessment. The maximum amount of Class 2 bonds was $1 billion.  Now, the insurers are simply supposed to pay 30% of the bill up front via assessment and coastal insureds are supposed to repay up to $700 million in borrowings through premium surcharges.

2. TWIA is required, apparently no matter what the price and no matter what its financial condition, to purchase a base level minimum of $1 billion in reinsurance at the top of its stack.  I would be pleasantly surprised if such reinsurance could be purchased for less than $100 million. This is so because of the low attachment point  for the reinsurance that will now exist in light of the depleted Catastrophe Reserve Trust Fund, the fact that the mandate puts TWIA over a barrel, and the historic pricing evidence. Standing alone, this reinsurance requirement should, however, bring the height of the stack for 2013 to about $2.98 billion ($180 million in CRTF, $800 million in assessment on insurers ($300 million interest free loan repaid by Texas through premium tax credits and $500 million true payment), $300 million in Class 2 assessments on insurers, $700 million in Class 2 post-event bonds paid for by coastal policyholders, and $1 billion in reinsurance)

3. If the catastrophe reserve fund has less than $1 billion in it, TWIA is required to purchase additional reinsurance so that the total height of its stack is the probable maximum loss for a 1 in 75 year storm.  By my calculations this will be a stack of roughly $3.7 billion. This provision thus requires TWIA to buy an additional $700 million in reinsurance. I would expect this extra level of reinsurance to cost between 50 and 70% of the cost of the first layer. Why so much?  Much of the premium for reinsurance is to pay the reinsurer for having to actually have ready access to its maximum exposure.  Moreover, the purchase of the first $1 billion will have shrunk limited global reinsurance capacity,

4. If the catastrophe reserve fund has more than $1 billion it, TWIA is required to purchase additional reinsurance so that the total height of its stack is the probable maximum loss for a 1 in 100 year storm.  By my calculations, this will be a stack of roughly $4.4 billion. If the CRTF has $1 billion, then the height of the stack with baseline reinsurance will be about $3.8 billion (see note below). TWIA will thus be required to purchase $600 million in additional reinsurance. I would expect this extra level of reinsurance to cost between 40 and 60% of the cost of the first layer.  Why?  Again, much of the premium for reinsurance is to pay the reinsurer for having to actually have ready access to its maximum exposure. And, again, there is not an unlimited supply of catastrophe reinsurance money.    The purchase of the first $1 billion will have shrunk limited global reinsurance capacity

5. The cost of the baseline reinsurance is borne by TWIA policyholders.  The cost of additional reinsurance, however, is borne by insurers in Texas, who will presumably figure out a way to pass the cost on. This, I now understand, is what insurance lobbyist Floyd Beamon was complaining about at the hearing yesterday.

Visualizations of the Funding Stack in the Committee Substitute House Bill

Here are some pictures of what the TWIA stack would look like under the Committee Substitute to H.B. 3622. Clearly there is a lot of “Piggy Pink” in these pictures — the color code for Texas insurers — and not very much “Teal Blue” — the color code for TWIA insureds. You’ll also notice some ‘Burnt Orange,” which, apologies to other Texas schools in advance, is the color code for the Texas fisc.  I hope to be able to post a more detailed analysis later today. My interim suspicion is that the Committee Substitute significantly decreases the risk of insolvency below that of the original bill (look at the last graph in this post). It does so, however, by forcing insurers to endure a far greater amount of what is euphemistically called “lift.”  In plain English, TWIA is yet again propped up for yet further expansion by using other people’s money. But at least it is made somewhat solvent for the near future and the reliance on the worst of the post-event bonds is eliminated.

 

TWIA Stack Under HBCS 3622 for various CRTF values

TWIA Stack Under HBCS 3622 for various CRTF values

 

 

H.B. 3622: the hearing yesterday. And is it getting worse?

Here’s a link to the House Insurance Committee hearing of April 30, 2013. My extensive fan network can skip to minute 10 and watch until minute 26 as I take on the Bonnen Brothers and discuss H.B. 3622 with the rest of the committee. Actually, it’s worth watching the whole thing, particularly the dance around the issue of whether H.B. 3622 mandates “actuarially sound rates.”  Answer: it does not.

Dennis Bonnen

Dennis Bonnen

Greg Bonnen

Greg Bonnen

 

 

 

 

 

 

A few quick observations:

  • Unconfirmed, but there is apparently a major change in H.B. 3622 that makes the bill worse than I thought.  In fact, if what I am hearing is true, I might now answer the question posed to me by Representative Greg Bonnen yesterday somewhat differently about which was better, his bill, which I did not like, or the status quo, which I also do not like.  If it is true, as I heard after the meeting, and as Beamon Floyd, a lobbyist for major Texas insurers suggested during his testimony, that a modified version of the bill relieves TWIA policyholders from the obligation of actually paying for the reinsurance that protects them but foists that $100 millionish burden onto insurers statewide, that makes H.B. 3622 even more problematic. If that’s true — and I hope to find out later today — my better answer might then be: “I can’t say: they are both awful in different ways. The status quo is awful because it does not create a high enough stack to protect TWIA policyholders from insolvency. HB 3622 is awful because it makes non-coastal residents pay even more of the burden of insuring on the coast and thereby sends even worse signals about development patterns and hurts the poor off the coast even more.”
  • It is apparently very common practice in the Texas legislature for there to be proposed changes to a bill — a “Committee Substitute” that are not posted to the otherwise wonderful Texas legislative website.  As a result, “outsiders” such as me find themselves testifying about provisions that have either been replaced or supplemented.  Apparently, one can usually get the committee substitute by asking the bill proponent, but it might enhance democracy — and make testimony more relevant — if these substitutes were available electronically or in some regularized procedure.
  • I think I now understand Representative Craig Eiland’s ideas on trying to assess insurers for Hurricane Ike.  He doesn’t want to assess under the old law.  What he seems to suggest is a new law that would assess insurers for anything up to $600 million “for Ike” and to justify that assessment on grounds that the insurers “escaped” that responsibility under the old law when TWIA messed up and failed to assess adequately.  It’s an interesting idea and I too am troubled by the failure to assess under the old law. It is partly responsible for the current deficiency in the Catastrophe Reserve Trust Fund. But it is not an idea without legal risks. Although the ex post facto clause of the United States Constitution applies only to retroactive imposition of criminal liabilityHarisiades v. Shaughnessy, 342 U.S. 580, 594 (1952), that rule has some qualifications (Burgess v. Salmon, 97 U.S. (7 Otto) 381, 384 (1878)). Moreover, although what Representative Eiland is proposing isn’t quite a classical taking, it is a little disturbing.  The idea of taking money, even if for the public good, not as a condition of continuing to have an insurance business in Texas but as punishment for having previously done business in Texas and legally escaping what some wanted you to pay, may come close to constitutional prohibitions.  Make that assessment heavy enough and its relation to prior conduct or past legislative advocacy for the repeal of the old assessment law clear enough, and it might inspire the insurance industry to go out and find a good lawyer.
  • The Bonnen Brothers are both clearly intelligent people.  The absence of bombast in their tone is refreshing.

There will be more later today or tomorrow on the whole TWIA situation. Stay tuned as we head into the homestretch.