As discussed in the previous post, Governor Rick Perry decided today not to add windstorm insurance to the agenda for a special session of the Texas legislature. Among the lesser effects of this decision is that it moots out an op-ed piece I had pending with the Austin American Statesman. Here’s what I would have said and why I have problems with the Governor’s decision.
Texas Can’t Wait Much Longer for Windstorm Insurance Reform:
By Seth J. Chandler
This hurricane season is looking very bad for property owners on the Texas Gulf Coast. That’s not just because climate experts are predicting more storms than average but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association (TWIA), is on the edge of insolvency. Unfortunately, Texas Governor Rick Perry hasn’t been able to get from “certainly possible” to an urgent “yes” in answering calls to add windstorm insurance reform to the agenda for a special session of the Texas legislature.
The problem with waiting is that TWIA is broke and its funding model is broken. As it stands there may end up being only a paltry $1 billion to pay claims. That sum is inadequate to cover the $2 billion or far higher losses that might be sustained when an insurer with $80 billion in potential exposure collides with a Category 2 or higher storm. And for every day that now goes by with no special session and no bill passed by a two thirds majority of both Houses, that’s one more day deeper into this hurricane season in which the Texas coast is at risk. Indeed, given the interdependencies in the Texas economy, an inability of TWIA to pay claims would place the entire state economy in jeopardy.
Why such little cash? As a result of dubious management, underfunding before Hurricane Ike, and 2009 legislation that cut off TWIA’s former ability to soak Texas insurers and inland policyholders for large losses, TWIA just didn’t have what it took to shrug off Hurricane Ike claims. And, given the way it currently spends money and the modern risk of hurricanes to an ever developing Texas coast, TWIA’s premiums just aren’t enough to let it escape a cycle of perpetual underfunding. The situation is sufficiently bad that the Texas Insurance Commissioner wouldn’t even let TWIA prop itself up by borrowing $500 million now, ahead of a storm.
Borrowing after a storm — the current plan — is likewise in doubt. Soundings of the market suggest little appetite to lend TWIA money based on shaky sources of repayment such as massive surcharges on TWIA policyholders. And a bug inserted into the law as the 2011 session makes things worse. The inability of TWIA to market bonds at one level is likely to prevent it from marketing bonds — even ones that might otherwise be salable — at other levels.
Texas legislators wrestled this session with numerous fixes but the result was impasse. Disagreements about how much of a subsidy inland Texans should provide TWIA insureds, coupled with the time-tested Texas tangle about damages in lawsuits against insurers, meant that few bills could escape committee and no bill actually made it to a vote.
What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast. The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors. Inland legislators must recognize that it will take some time to wean the coast off the existing system. And everyone should realize that the law about how much “extracontractual damages” victims of insurer misconduct should receive does not matter all that much when the insurer can not pay even its contractual obligations. If a long term solution can not be reached, at least bugs in the current statute can be eliminated.
Pity the Governor and Texas legislators who, after a storm leaves blue tarps on unpaid policyholders roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.