H.B. 2352, a bill to reform the Texas Windstorm Insurance Association (TWIA) from Corpus Christi Representative Todd Hunter, is scheduled for hearing in the Insurance Committee of the Texas House this Tuesday afternoon at 2 p.m. I do not know yet if my teaching obligations will permit me to travel to Austin and testify, but if they do, here is about what I will say. It’s based on a Mathematica simulation of 100 sets of 100 years of storms and draws on work I’ve discussed here, here, here and here.
My name is Seth Chandler. I am a law professor at the University of Houston Law Center and author of the blog catrisk.net, which addresses the law and finance of catastrophic risk with a focus on Texas. The views expressed here are my own and do not necessarily reflect those of the University of Houston.
I have attempted to simulate the effects of H.B. 2352 and its companion bill S.B. 1089. The details of that simulation, including the source code, are available in the written submission made to the committee and available at catrisk.net. Basically, I have run 100 100 year storm simulations using models calibrated to mimic those used by AIR and RMS, the two leading modeling companies on which TWIA has relied. Should members of the committee or staff have any questions on the technical details of the model or how variants of the law would affect the conclusons here, I am willing to try to assist.
Based on that research I find that over the initial 20 years of H.B. 2352 with a runoff, and assuming TWIA does not purchase reinsurance, TWIA policyholder premiums will cover about 68% of the losses suffered during that time period. The remaining losses will be paid 6% from replenishment of the catastrophe reserve fund, 8% from class A bonds, 5% from class B bonds, and 9% from class C bonds. Troublingly, 4% of the losses have no identified source of funding. If one assumes instead that TWIA purchases reinsurance at the top of the bonding stack in an amount equal to 1.4% of its direct exposure, as it has done in the past, TWIA policyholder premiums and reinsurance paid for by TWIA policyholder premiums cover a total of 61% of losses suffering during that time period. The remaining losses will be paid 8% from replenishment of the catastrophe reserve fund, 10% from class A bonds, 6% from Class B bonds, and 11% from class C bonds. The percent of losses that have no identified source of funding has decreased, but still rests at 3%. These numbers are, of necessity approximate, and they indeed vary based on a variety of assumptions that need to be made. I have not had the luxury of a large amount of time in which to refine the analysis. In general, however, I believe they accurately reflect the benefits and burdens of H.B. 2352 and S.B. 1089.
This simulation attempts to quantify the benefits and risks to TWIA policyholders created by H.B. 2352 as well as the burden it places on those not receiving direct benefit from TWIA policies. Personally, I do not like what occurs if H.B. 2352 were used to prop up a $72 billion TWIA. The concentration of correlated risk in that entity inevitably makes it an expensive proposition in which the organization either pays exorbitant prices to reinsurers or continues to run the risk of an inadequate stack of protection against larger storm. I believe there is much to the idea of significantly depopulating TWIA with an assigned risk plan or similar mechanism that decorrelates the risk by forced pooling with non-windstorm risk throughout Texas.
If, however, you want to persist with a large propped up TWIA but want to avoid otherwise inevitable biennial fights, it is crucial that the bonding limits contained in this bill with respect to Class A, B and C securities be stated not as absolute numbers, $1 billion, $900 million, $2.75 billion but, as you have wisely done in this bill with the CRTF, percentages of some measure of overall risk to the pool, perhaps direct exposure. Without this modification, the risk grows of storms overwhelming TWIA’s bonding capacity.
Finally, for reasons I have outlined elsewhere I persist in my view that wealthy people on the coast receive subsidized property insurance from poor people away from the coast. This bill continues that inequity although it masks the subsidization by terming what amounts to regional and statewide property taxes as premium surcharges or assessments on insurers. I would thus suggest that the bulking up of the CRTF that takes place in the early years of the HR 2352 plan be made less by non-TWIA policyholders on the coast and assessments on insurers, but more heavily by TWIA policyholders themselves, who will, notwithstanding the benefit that each part of Texas bestows on the other, be the primary beneficiaries of the CRTF protection.
I’m showing below a condensed version CDF on which this analysis depends. You can get the full version here. If you don’t see anything substantive, you need to download the free CDF player so that you can interact within your browser with the model I have created.
[WolframCDF source=”http://catrisk.net/wp-content/uploads/2013/04/HB-2352-Analysis.cdf” CDFwidth=”600″ CDFheight=”1600″ altimage=”http://catrisk.net/wp-content/uploads/2013/04/overview-getplayer_off.png”]
Some further caveats and comments
- I am fully aware that this work done on short notice by an individual and not one certified as an actuary, though I do believe I have the skills to produce what I have done. As I have written elsewhere, the Texas legislature should seriously consider establishing an insurance think tank to help it with issues like this.
- The premiums in this model are static. There is some possibility that as the size of the catastrophe reserve fund grows and TWIA is better able to handle storms without resort to post-event bonding, the premiums could decline.
- The basic problem with TWIA is that its risk is correlated. If it were decorrelated, the premiums policyholders pay would likely be adequate to cover its losses and no cross subsidization would be needed. The problem is that TWIA needs to build up its catastrophe reserve fund to the point where it is no longer dependent on the risks of post-event bonding or the expense of reinsurance. Until it does this, a system that bundles up correlated risk is going to remain either really expensive or run a risk of insolvency.