The scary Austin American Statesman article

The Austin-American Statesman has published an article based on a July email written by Texas Insurance Commissioner Eleanor Kitzman that the newspaper obtained through a public records request.  I’ve requested a copy of the email in question but I have not received a response yet.  Here’s a link to the article.

There are at least two assertions in the article that will create concerns for many.

1. According to the Statesman, Ms. Kitzman emailed members of her senior staff that she wanted “to schedule some time next week to discuss options for funding a 3-5 year transition to market rates” for coastal counties.  The Statesman then offers two interpretations of this remark: (1) the commissioner might consider trying to force private companies to write risky coastal polices and allowing them to raise rates over the next three to five years; and (2) TWIA might need to substantially raise its own rates on customers — possibly by 45 percent or more.

2. The article purports to illustrate some perils of moving to a private market system.

“… according to a tool on the Texas Department of Insurance’s website, a TWIA policy for a $200,000 house in Nueces County costs about $1,700, while a policy on the same value house would be as much as $8,400 with a private insurer.”

I have some concerns abut the article.  First, without seeing the email (and its successors) it’s hard to read too much into the document except that Ms. Kitzman might be responsibly exploring alternatives.  It should not be heretical to consider whether the predominant form of commerce in the United States should be extended over time to the Texas coast.  And I’m not sure how the reporter is teasing the possibility of an assigned risk plan out of the quoted portion of the email.

Second the illustration in the Austin American Statesman article about insurance prices is very simplistic.  The article compares apples and oranges: a TWIA wind only policy with a policy that bundles both wind and conventional risk.  Moreover, the article presents a “worst case” — but the worst case doesn’t matter very much if the homeowner has less expensive alternatives.  So, I tried out the tool myself with a couple of scenarios.  The results are shown below.

The first scenario is for a “good risk”: a new brick home in Bishop, a part of Nueces County more distant from the water.  I looked at someone who had good credit and no claims in the past five years.  Those folks would not necessarily see their rates go up in a TWIA-less market.  Notice, for example, that a TWIA wind policy bundled with a Farmers conventional policy would cost  $1767 ($1145 TWIA + $282 conventional). But one can purchase a bundled policy from USAA for $965 or from Allied, an A+ rated carrier, for $1145, and from several others for less than $1767.

Insurance comparison scenario 1

Insurance comparison scenario 1

A second scenario is for a really “bad risk” a frame home on Padre Island.  To make matters worse, I looked at someone who had bad credit and claims in the past five years.  Those folks do need to be concerned that elimination of subsidized rates from TWIA would seriously hurt their pocketbook.  A TWIA wind policy bundled with a Farmers conventional policy would cost  $2567 ($1672 TWIA + $895 conventional). Although there is in theory a policy from Allied for $2553, most of the policies are $3400 and up, with many in the $4,000 – $6,000 range.  There is even a policy listed for $14,872 from Sentinel, although I have trouble believing anyone would purchase it.

Insurance comparison scenario 2

Insurance comparison scenario 2

A third scenario was intended to capture intermediate risk: a 1-10 year old stucco home in Calallen, Texas, a little bit off the coast.  I looked at someone who was claim free but who had only average credit. Elimination of TWIA should not result in substantial increases here.   A TWIA wind policy bundled with a Farmers conventional policy would cost  $2038 ($1672 TWIA + $366 conventional).  But there are cheaper options currently available.  A bundled policy from Allied is available for $1681 and a policy from USAA sells for $1536.  Farmers is $2217.  And, again, while there are policies listed with price tags over $4,000, that should not scare residents there if these cheaper policies are in fact available to them and provide comparable coverage.

Insurance comparison scenario 3

Insurance comparison scenario 3

Bottom line: This is precisely why, if Commissioner Kitzman did ask for a study of the effects of a transition to market rates on the coast in 3 to 5 years, she was doing a good thing.  Sticking our heads in the Texas sand or resting conclusions on chimerical fears is not a good way to make policy.

Footnote: Why is Farmers so cheap for conventional policies? Why is Allied so cheap?


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