The coming hurricane season poses exceptional risk for Texas, mostly to persons and businesses insured by the Texas Windstorm Insurance Association but also among those who will end up picking up the pieces after a major storm. The most recent data shows that going into the 2013 hurricane season, which is less than three months away, the Texas Windstorm Insurance Association has about $180 million in cash available from which to pay claims, access to $1 billion through issuance of Class 2 securities and access to $500 million through Class 3 securities. There is some possibility of additional funds if TWIA can market its Class 1 securities or obtain another “bond anticipation note” as it did in 2012. This would give it another $500 million. And, if TWIA can afford to purchase reinsurance, it might — just might — be able to squeeze out $1 billion more on top of the stack. Thus, the best case is that TWIA’s stack will be $3.18 billion. A more realistic assessment is that TWIA’s stack with which to pay claims will be $2.68 billion. And a pessimistic assessment is that the stack will be a scant $1.68 billion, perhaps even less if the catastrophe fund keeps bleeding from Ike claims or the Class 2 bonds prove difficult to market. The major bill pending in the Texas legislature, S.B. 18, has many virtues but in its present form does nothing to change these computations for most of the 2013 hurricane season.
The problem is that the risk of losses greater than this amount in 2013 are considerable. No one knows the exact probabilities, but based on my modeling, which is in turn based on TWIA’s commissioned studies from experts, the probability of losses to TWIA that are greater than its funding stack range from about 2% on the most optimistic views about the funding stack to 4% on the more pessimistic views about the funding stack. Those are about the same probabilities as the risk of death in the coming year for your average 67 to 75 year old. It’s roughly the same probability of flipping five heads in a row.
It could be even worse. David Crump noted in response to an earlier version of this post that we may not even have Class 2 securities because, as a result of the 2011 legislation (section 2210.6136), if the Class 1 securities don’t sell, the first $500 million of Class 2 securities appear to rely on the same funding method as the failed Class 1 securities. (Who thought of that?) Only after that do we get to the more reliable method of surcharges on all coastal property insurance and an assessment on insurers. I certainly hope David is wrong in his estimation of the Class 2 securities but, on mature reflection, he has a point. So, we need to add an additional category of gloom: “Crump gloomy.” And, if he’s right there is about an 8% chance that the top of the TWIA stack will be lower than the amount of the claims. That is very scary indeed.
If the losses are greater than the funding stack, TWIA policyholders are likely not to be paid in full, and certainly not in a timely way. If, for example an average Category 4 storm were to hit Corpus Christi the damages would be about $4 billion. (EMail of March 14, 2013 from Jennifer Armstrong of TWIA to David Crump). Policyholders in that part of the coast would thus be paid between 17 cents and 80 cents on the dollar, leaving many unable to rebuild well. If a 3% deductible is going to lead to “blue roofs,” as was suggested by opponents of such an idea at the hearing of the Senate Business and Commerce committee earlier this week (because policyholders won’t be able to find the money to rebuild), consider what an effective 20% – 83% deductible is going to do.
Even losses in 2013 smaller than the full stack are going to cause trouble for TWIA. A smaller storm in 2013, say, a half-Ike, could wipe out the catastrophe reserve fund and the Class 2 securities. This means there would be just a very, very small stack to protect TWIA for 2014 and beyond. The only good news is that legislation pending in the Texas legislature does try to address those later hurricane seasons.
There are several ways the situation could be improved for the coming 2013 hurricane season. First, TWIA could attempt to make another assessment under the pre-2009 law to cover Ike losses that have continued to drain the catastrophe reserve fund. (Clearly TWIA does not have authority to make such assessments for post 2009 storms). It appears, at least with the benefit of hindsight, that the $430 million assessment that occurred following 2008 Ike was inadequate to cover TWIA’s responsibility for Ike after the litigation dust has settled. But whether TWIA has the legal authority to do this — and don’t expect the insurance industry to take any such supplemental assessment sitting down — is still not clear. And I would not be surprised to see any litigation on this topic take considerably longer than the hurricane season to get resolved.
Second, the legislature could develop an alternate funding source for the Class 1 bonds for just the coming season. Indeed, not that I would ever suggest such a thing, but given the somewhat desperate situation that exists, the insurance industry might acquiesce to this burden in exchange for relief from some of the responsibility it is supposed to bear under S.B. 18 for hurricane risk in 2014 and forward. The insurance industry could, for example, bear assessment risk or partial assessment risk for the Class 1 securities that now appear unmarketable since investors understandably mistrust whether TWIA policyholders will stick around and pay the huge surcharges that will be required to pay off the bonds.
Third, the legislature could actually raise explicit taxes [laughter] to pay for reinsurance that might reduce the risk. Or maybe it could use some of the Texas budget surplus to pay? While this will rightly gall Texas taxpayers, particularly once the reinsurers smell blood in the water and charge accordingly, it may still be a prettier picture than picking up the pieces after TWIA goes insolvent.
Fourth, and this may be what coastal residents are counting on, is to just wait and see and try to bail out TWIA policyholders after the fact when a big hurricane strikes. This will be galling to all. It will be galling to those on the coast because the fight to get such relief will be slow and tough. It will be galling to those away on the coast because the taxes that will need to be imposed either directly or indirectly to pay for the losses will be high. The taxes will be the engineered result of problematic legislation passed in 2009 and the steadfast refusal of some on the coast to accept financial responsibility for the true risk of hurricanes there. There is, of course, Uncle Sam, but somehow I would not count on Washington to be as generous following 2013 hurricane Chantal that devastates red Texas as it was to residents of the bluer northeast following Superstorm Sandy. Besides, with the sequestration and all, it does not appear Washington is going to be eager to spend money on much of anything.
This leaves Texans with prayer as the final alternative. If, however, as many suspect, God helps those who helps themselves, it might be a good investment to deal in a more secular way, right now, with the 2013 risk.
Note: My thanks to David Crump for (1) making the public records request that generated the most recent information on this point; (2) sharing it with me; and (3) pointing out that my original post may have actually been too optimistic.