Catrisk is at the Capitol!

The Senate Business and Commerce Committee has convened a hearing this morning on SB 18, the bill by Senator John Carona that would transition residential TWIA policyholders to an assigned risk program known as the Texas Property Insurance Program. We’ve discussed that bill here and here.  I’ll be testifying on the bill and trying to report on proceedings during some additional blog entries today or tomorrow.

The Committee has posted some exhibits to today’s hearing that you can find here.

Update: The Committee spent the morning focusing on a mitigation bill that appeared to have broad support EXCEPT for a provision that would have required registration of roofers.  The bad news, however, is that the discussion of SB 18 has been deferred until after the Senate meets in session.  It is not clear when that session will end. They are going strong at 12:30 pm.

Smithee bill would require TWIA to tell policyholders the truth about its solvency

John Smithee photo

John Smithee

State Representative John Smithee (R-Amarillo) has filed a bill in the state legislature  (HB 2785) that would require the Texas Windstorm Insurance Association (TWIA) to tell its policyholders on the declarations page of any policy it sells after January 1, 2014, about the limited resources available to pay claims in the event of a serious storm. The bill requires disclosure of the financial resources of TWIA, including the state of its catastrophic reserve fund and the marketability of bonds on which TWIA currently relies to pay claims for even modest tropical cyclones.  Critically, it also requires a prominent warning to policyholders right on the declarations page of the policy that the state of Texas is not obligated to come to their or TWIA’s rescue in the event that TWIA can not pay.

Needless to say, Catrisk is enthusiastic about this bill for several reasons.  First, it will enable potential insureds along the Texas coast to make intelligent decisions about the extent to which they want to try to obtain non-TWIA policies to protect them in the event of a serious storm even if those policies are more expensive.  As it stands, some TWIA policyholders may suffer from the incorrect assumption that the resources available to pay claims from policies purchased from TWIA, which currently relies on a paltry catastrophe reserve fund and a shaky structure of post-event bonds, are the same as those available from regulated private insurers, who would be put out of business if their reserves were anything near the inadequacy of TWIA’s. The misinformation suppresses demand for policies from regulated insurers and thus contributes to the self-fulfilling prophesy that the regulated market “can not do business on the coast.” Other prospective insureds, by the way, may actually have an exaggerated sense of TWIA’s instability and thus decline to purchase TWIA policies due to excessive fear. The bill, by providing the relevant facts, could help both groups of people make an informed choice.

Second, those contemplating migration or business expansion on the Texas coast will now be advised to think about whether they want to choose between going with a less expensive but flimsy insurer (TWIA), scrounging for difficult-to-obtain and often expensive wind insurance from a private insurer, or deciding that there may be better places in which to invest. This, of course, is precisely why some coastal interests, particularly those who benefit from immediate investment on the coast, oppose bills such as HR 2785. Telling people the truth about a risky product is indeed likely to drive down demand for the risky product while stimulating demand for the safer.  But getting demand for insurance products back to fair market levels, as opposed to levels inflated by subsidization and misinformation, is a good thing for Texas as a whole. Market distortion is not a zero sum game.

Third, this bill is a good idea regardless of the form in which TWIA goes forward.  Whether TWIA is transitioned out for residential policies, as proposed in the recent Carona bill, or strengthened through significant subsidies, as in the recent Hinojosa and Hunter bills, many policyholders are likely to remain in TWIA or potentially in TWIA for several years to come.  In that interim period, those policyholders should be warned of the remaining dangers posed during the transition to a system of greater solvency.  The faster and more forcefully that transition occurs, the less dire the warnings will need to be.  I am confident that Representative Smithee would be glad to include an amendment to his bill exempting TWIA from the disclosure requirements if it could show the Texas Insurance Commissioner that it would satisfy solvency requirements imposed on other Texas insurers.

At least one coastal legislator, Todd Hunter of Corpus Christi, has voiced opposition to the Smithee bill.  He did so at a hearing last year (go to go to 1:57:50 to 2:02:18 of the recording) in cross examining me about ideas similar to those found in the Smithee bill.  And he is reported today in a Corpus Christi Caller article as asking, “Why should coastal residents be the only people subject to this Miranda warning from (the association)?” Hunter asked. “Why is it not required, statewide, for all carriers?”

The rejoinder to Representative Hunter’s opposition, however, is that other Texas carriers are subject to financial solvency regulations from which TWIA is exempt and as to which TWIA would be in serious violation were it ever required to follow them. The reason TWIA policies should be stamped with bold red warning labels is the same reason that we stamp surplus lines policies in Texas with similar warnings: they are not subject to the same regulatory structure that works pretty darned well in preventing insurer insolvencies. Coastal residents are mature enough to handle the truth. Just because TWIA and State Farm both have the word “insurance” in their names does not mean that the law should treat them the same.  We don’t exempt investments in junk bonds from disclosure regulations about the risks involved just because some other forms of “investment”, such as certificates of deposit in a federally insured bank,  are not subject to as strict disclosure rules.  And, again, if equality of treatment is really the objection of some coastal legislators, an amendment exempting TWIA from disclosure in the event its financial condition would satisfy otherwise applicable solvency regulations seems a better answer than keeping TWIA policyholders in the dark under the fiction of “equal treatment.”

Note 1. The Smithee bill closely follows Recommendation #10 posted on this blog on September 10, 2012.  In “Ten fixes for TWIA: What I’m planning to say in Austin this week” I wrote as follows.

10. Require prominent disclosure to TWIA policyholders created by the financing structure in place (as modified by the reforms suggested here or otherwise enacted). This disclosure should, at a minimum, advise policyholders of the approximate probability, computed using the best historical data and contemporary models, of the risk that TWIA will become insolvent, will be impelled to increase premiums to pay off Class 1 securities and will be impelled to impose surcharges to pay off Class 2 securities. Disclosure should be made (a) on a document signed by applicants for TWIA policies (new or renewal); (b) stamped (similar to surplus lines stamping) on policies issued by TWIA; and (c) on a web site one or fewer clicks from the main TWIA page.


Note 2. The bill also echoes thoughts expressed in this blog here:

Policyholders don’t need to be scared about every unlikely event, but they have a right as adults to know of a substantial risk.  Losing your house and facing an insolvent insurer qualifies. We warn holders of surplus lines policies of lesser protections against insurer insolvency with a great big stamp on the policy.  Why not the same for an equally unguaranteed and often far riskier insurer. And while we’re warning, let’s also warn them of the potential for post-event Class 1 assessments, for which the risk is yet far higher and uniform throughout the TWIA territory.

Note 3. Although I suspect many insurance agents will not immediately embrace the Smithee bill, enlightened ones should do so.  This is because the bill should provide some protection to insurance agents who now find themselves in a difficult position.  Right now, insurance agents who don’t warn their policyholders of TWIA risks may be setting themselves up for a lawsuit.  The dangers of TWIA are so palpable that a plausible claim of negligence or intentional non-disclosure is definitely something these agents need to be concerned about in the event TWIA either can not play claims or is highly delayed in paying claims.  It is wishful thinking and ostrich-like behavior to pretend this serious risk does not exist. On the other hand, insurance agents who do warn their policyholders of TWIA risks may find business going elsewhere. The bill probably saves agents the dilemma of whether or not to tell the truth by leaving disclosure to the policy itself.



Hinojosa/Hunter file bills that buttress TWIA by forcing non-coastal property holders to pay for coastal risk

State Senator Juan “Chuy” Hinojosa (D-McAllen) and State Representative Todd Hunter (R-Corpus Christi) have filed companion bills in the State Senate (SB 1089) and State House (HB 2352) that would buttress the resources available to the Texas Windstorm Insurance Association (TWIA) to pay claims in the event of a tropical cyclone hitting the Texas coast but would do so by placing most of the burden either directly or indirectly on policyholders living away from the Texas coast.  The bill, like the current system and as heralded in recommendations of the Coastal Windstorm Task Force, would rely primarily on post-event bonding as a way of financing catastrophic risk.  But, by impelling insurers statewide and coastal policyholders to increase the size of the catastrophe reserve that pays before any bonds are issued, the bill would make it less likely that this  system of “insurance in reverse” would need to be used. The new system would come into effect in September of 2013.  It would apparently leave the current system in place for much of this hurricane season.

In a nutshell, here’s how the Hinojosa/Hunter plan works.  TWIA builds up its catastrophe reserve trust fund (a/k/a CRTF, a/k/a “cat fund”) so that it equals 1.5% of its “direct exposure” for the prior year.  (Section 2210.456). Since TWIA lists its current direct exposure at $72 billion, this means the catastrophe reserve fund is supposed to grow to at least $1.08 billion. Catrisk’s earlier modeling suggests that such a catastrophe reserve fund would be able to cover something like a 1 in 20 year storm.

But just because TWIA’s catastrophe reserve fund could cover a 1 in 20 year storm, does not mean that TWIA’s policyholders would be paying to cover that risk.  That’s because under the Hinojosa/Hunter plan, the catastrophe fund is financed mostly with other money.  To get from the paltry $180 million that now stands in the fund to $1.08 billion, the plan would assess  property insurers statewide, regardless of the extent to which they choose to do business on the Texas coast, 1/10 of the desired amount of the catastrophe reserve fund each year.  (Section 2210.456(c) (0.15% of the direct exposure)).  As it stands, this would amount to  $108 million per year for many years into the future. These are real assessments, not compelled loans by the insurance industry.  The  assessments are not creditable against premium taxes otherwise owed and are not supposed to be passed on — at least directly — by a premium surcharge on policyholders. It would demean the insurance industry, however, to suggest that they will not be clever enough to find a way to pass much of this cost on to policyholders.

Coastal insureds — including non-TWIA homeowner insureds and coastal residents with automobile insurance or other forms of property insurance — also pay to protect TWIA policyholders from risk. Under the Hinojosa/Hunter plan, a 3.9% premium surcharge is issued on all such policies. How much would this surcharge bring in?  Unclear. I don’t have the data, yet, particularly on automobile policies along the coast.  But we do know how much TWIA policyholders would pay on their TWIA policies to increase the protection available to them: about $17 million (0.039 x $446 million in premium taxes).  And since TWIA reports that it 62% of the coastal homeowner wind market (measured by exposure and not premiums), one can approximate that non-TWIA homeowner insureds would pay roughly $11 million.  Thus, TWIA policyholders would, at most, pay about 13% of the amount it will take to strengthen the catastrophe reserve fund that would be exclusively available to those policyholders to pay claims in the event of a tropical cyclone. If, as I suspect, non-wind homeowner policies, automobile policy premiums and other property insurance premiums along the coast are at least as large as TWIA premiums, the surcharge on TWIA policies will, at least for a few years, in fact pay perhaps just 7% of the actual cost of this portion of the risk posed by such policies.

And even this last figure of somewhere between 7 and 13% potentially understates the degree to which TWIA policies will be funding the risk they pose.  This is because under section 2210.083 of the Hinojosa/Hunter bill, when the cat fund needs to be restocked following a disaster that wipes it out, insurers doing business anywhere in the state must promptly pay, in addition to the regular shortfall assessment and in addition to whatever else they may be paying their own policyholders, half the amount of any public securities (up to $1 billion) issued to pay TWIA policy losses and, as I read section 2210.084, the entirety (up to $900 million) of additional public securities issued to pay TWIA losses.  Thus, following a serious hurricane, even more of the money used to pay for future hurricane losses will be coming from sources other than TWIA policies. Of course, the Hinojosa/Hunter bill permits insurers to “reinsure” against these potential assessments (section 2210.088), but this just means that insurers will be paying cash for the risk imposed on them by the law rather than perhaps just making an accounting entry for contingent liabilities on their books.


Layering of Protections Under Hinojosa/Hunter Bill

Layering of Protections Under Hinojosa/Hunter Bill

The Hinojosa/Hunter provides for at least three heightened layers of protection in the event of a storm that pierces the catastrophe reserve fund.  Each of the layers is provided by bonds, issued after the disaster, by the Texas Public Finance Authority. The layers (Classes A, B and C) differ primarily in their amortization periods and in the source of money used to repay the debts. Up to the first $1 billion is to be provided by Class A securities with an amortization period of 10 years.  The money to repay this debt each year — probably about 1/8 of the amount borrowed — will come from TWIA itself.  If the full $1 billion were borrowed, this would likely amount to a charge of $125 million per year for 10 years, which in turn would increase existing TWIA premiums by 25%. It is not clear whether the market would trust the ability of TWIA to actually obtain these funds, since some TWIA policyholders might be reluctant to renew with TWIA in the event such a hefty increase were imposed. The Texas Public Finance Authority has published grave doubts about the ability to market similar bonds authorized by the current law. 

Class B bonds can be issued in an amount up to $900 million and likewise must be amortized in no more than 10 years.  The source of repayment, though, is different. Although TWIA premiums could in theory be used to repay this obligation — I rather suspect they will be tied up elsewhere — the vast bulk of the funding is likely to come from yet another surcharge: this one on all premiums on coastal property insurance, including non-TWIA wind insurance, conventional coastal homeowner insurance, automobile insurance, and other forms of property insurance. The surcharge won’t be another 25% because the base is bigger.  But since it will cost $110 billion or more each year to amortize the debt, I would not be surprised to see an additional 5 to 7% surcharge.

If the catastrophe reserve fund indeed bulks up to $1.08 billion and the Class A bonds are indeed marketable, the Class B bonds should cover TWIA against the 1 in 50 year storm.  For storms bigger than that, the Hinojosa/Hunter bill provides for $2.75 billion in Class C bonds.  These have an amortization period of 14 years.  They are to be paid by a surcharge on all premiums on property insurance statewide.  The rate will be about 1/10 of the amount borrowed divided by a denominator that I would love to know the value of: the amount of premiums on property insurance sold in this state. If you forced me to make an educated guess, however, I would guess that property insurance premiums in Texas are about $20 billion per year, which would put the needed surcharge at 1-2% per year for 14 years. Of course, if the amount borrowed were not the full $2.75 billion, the surcharge would be less.

There are two other sources of funds worth mentioning.  The Hinojosa/Hunter plan continues to permit TWIA to purchase reinsurance and imposes no price constraints upon their doing so.  Such reinsurance is notoriously expensive and often difficult to obtain.  There is no explicit provision or encouragement for other forms of protection such as pre-event catastrophe bonds. There are also, in theory, Class D securities that provide an unlimited amount of protection to TWIA policyholders.  The problem: no source of funds is identified to pay back the bonds. Section 2210.639 simply mentions that these borrowings could be paid by TWIA premiums (yeah, right) or “money received from any source for the purpose of repaying Class D public securities.”  In other words, no one has a clue.

There is more in the Hunter bills and the Hinojosa bill that Catrisk will try to address in the near future.  And there are some simulations we can run to get some better ideas of the relative burdens borne throughout Texas under this bill. But this should provide an explanation of the basics.


Footnote: I bet that I am going to hear the double dipping criticism of this post again.  The point of these critics is that TWIA policyholders also have conventional homeowner insurance and automobile insurance.  Thus, their burden is higher than I have reported because they get hit with a double or triple whammy.  There is some truth to this criticism.  My defenses are (a) I have tried to report data here as policy based rather than policyholder based; thus the conclusions reached here should be accurate; (b) I can;t find and no one has volunteered the data needed to make the needed computational adjustments; if I had them I could and would do so. My suspicion is that, while a few numbers would change, the themes of the Hinojosa/Hunter bills would not.  They believe coastal risk should be socialized and these bills very much reflects that philosophy.


A second look at S.B. 18


In a post yesterday, I provided some preliminary analysis of S.B. 18, a bill filed by Texas State Senator John Carona that would completely overhaul the system by which most coastal Texans transfer the risk of windstorm.  Basically, the Texas Windstorm Insurance Association (TWIA) is phased out by 2015 as an insurer of residential coastal property and replaced with an assigned risk plan, the Texas Property Insurance Program (TPIP) that will ultimately charge “market” rates and will be administered by a Managing General Agent. In the interim, TWIA finances are shored up with statewide insurance surcharges to build up the catastrophe reserve fund, potential assessments on insurers of $2 billion in the event of a storm, and actual assessments on insurers of whatever it takes to to purchase $2 billion of reinsurance. (Insurers mostly recoup any storm assessments with premium tax credits but do not recoup reinsurance assessments).  Many TWIA policyholders are somewhat protected for a few years by a requirement that TPIP market rates be phased in, with the public effectively paying for the continued subsidization via likely insurer pass throughs and further premium tax credits.


The first page of S.B. 18

The first page of S.B. 18

I did a second read this morning and found several matters on which I had not previously focused.  I suspect I and others will find more in the days ahead or find areas in which these findings need clarification or correction.

  1. This particular bill does not appear to touch TWIA’s ability to sell policies that cover property other than residences (either owned or tenanted). Thus, unless I am missing something or there is a companion bill ahead, it appears TWIA will persist as an insurer that offers coastal businesses and government windstorm coverage for commercial structures. and public buildings. Currently, since “non-dwellings” comprise just 1/6 of TWIA’s exposure, such a reduction in the exposure of TWIA would likely make a buttressed catastrophe reserve fund, $2 billion in potential storm assessments, and $2 billion in reinsurance fully adequate to pay the remaining TWIA policyholders even in the worst cases — a welcome change from the status quo. The mandatory migration described in sections 2210.212 and 2210.213 speaks in terms of “residential structures” and “dwellings.” The provisions governing liability limits and deductibles in section 2210.507 likewise speak about residential properties.
  2. The bill does away with the system of post-event bonding that exists under the current law and whose functionality has been called into serious question.  Section 3 of the bill amends section 2210.056 to eliminate the ability of TWIA to use its assets to pay obligations incurred under Subchapter B-1, which is where the authority to actually repay bonds appears. Various other provisions of the bill likewise delete references to the post-event bonding program.
  3. Even during the transition period, TWIA will not be adjusting as many claims on future storms as it is currently required to do. Instead of keeping TWIA on perpetual standby for large scale adjusting requirements following a storm, the bill piggybacks on the claims adjusting stables of the major insurers and requires them to adjust claims on TWIA losses after June 1, 2013 acting as agents for TWIA. (Section 2210.5725).  If a private insurer covers a coastal homeowner for fire but a hurricane damages that homeowner’s residence, it appears as if the private insurer must adjust the claim unless — and I believe this would be quite unusual — that particular insurer provides windstorm coverage on 90% or more of the policies it writes on the coast. Otherwise, I assume TWIA continues to adjust the claim.
  4. It is not clear to me if and how the private insurers get paid for undertaking this expensive obligation or whether this is going to be just a cost of writing conventional property insurance along the coast.  If the latter, be prepared for attempts at rate increases by the private insurers or reduced willingness to sell even conventional policies in that area. I suppose insurers could also recoup these costs if they offered windstorm coverage in addition to conventional coverage.
  5. One upside for undertaking claims adjustment on behalf of TWIA is that, under the Carona bill, private insurers doing so will gain the protections of existing section 2210.014 of the Insurance Code, which protects TWIA from lawsuits brought by policyholders (or other private entities) under the unfair trade practices provision of Chapter 541 of the Insurance Code, which provides for treble damages, and Chapter 542 of the Insurance Code, which imposes penalty interest of 18% for statutorily described delays in claims adjusting. Private insurers adjusting claims on behalf of TWIA also gain the protections of existing section 2210.572 of the Insurance Code, which provides more favorable to them than the otherwise existing substantive and procedural rules in Texas for breach of contract and bad faith claims against an insurer.  Presumably, although it is not clearly stated in the draft Carona bill, they also gain the protections of the rest of Subchapter L-1 of the Insurance Code to which section 2210.572 makes reference. For an earlier discussion of this point, look here.
  6. The Managing General Agent, who basically runs the new insurance program, is neither elected nor appointed in the traditional sense.  Rather the MGA is awarded a contract to run the new TPIP for a period of up to five years. Section 2214.151. There is not much detail in the Carona bill on how the award of this contract is to be made.


Bill filed to migrate Texas coastal insurance to an assigned risk plan

Texas State Senator John Carona has filed an 83-page bill (S.B. 18) that would completely overhaul the system by which most coastal Texans transfer the risk of windstorm.  Under the existing system, most coastal insureds get their windstorm insurance through the Texas Windstorm Insurance Association (TWIA), a state-created entity which has (correctly) been found unsustainable by the current Texas Insurance Commissioner Eleanor Kitzman.  The Carona bill, a copy of which may be found here (Corona SB 18 TWIA), rapidly transitions TWIA to an assigned risk plan, the Texas Property Insurance Program (TPIP), under which Texas insurers would be impelled to take on coastal risk.

Catrisk will be doing a much more thorough analysis of this important bill in the days ahead, but here are some key points on a quick read. Clearly, this bill was drafted by professionals.  It’s intricate and covers a lot of ground. There is a lot to digest.  So, I hope I don’t make too many errors in saying this.

  1. Starting in January of 2014 (or as soon as the TPIP gets off the ground), the TPIP clearinghouse will make existing TWIA policies up for grabs by existing insurers.  It looks as though existing Texas property and casualty insurers can prevent TWIA from forming a contract with a coastal insureds if they agree to take on the risk for the same terms as TWIA and a premium that is not more than 110% of the TWIA premium.  (Section 2210.211(g))I would initially expect this program to permit Texas insurers to cherry pick off the properties currently insured by TWIA but that are actually somewhat farther from the coast than other TWIA policies.
  2. TWIA policy limits are going down and deductibles going up.  If I read section 2210.507 correctly, after TPIP gets off the ground, TWIA policy limits on residences will max out at $500,000 (down a lot from the $1.something million that now exists) and deductibles will be at least 5%. Also, the bill will prevent some of the water v. wind disputes that have occurred recently by requiring that property in Zone V of the National Flood Insurance program must have flood insurance. (2214.251(a)(2)).
  3. After April 2015, TWIA won’t write policies on any residences that it wasn’t already insuring: renewals only. (section 2210.212(1)).  And it looks as if the new entity, the TPIP clearinghouse, will have a right of first refusal on these renewals. (section 2210.213). See also very similar provisions in 2211.1515, et. seq.
  4. After October 2015, TWIA won’t be writing policies on residences, period.  No renewals, no new policies. (section 2210.212(2))
  5. Rates on policies written through TPIP are ultimately going to be market rates. Under 2214.402, “the rating classes, territories, and method used to determine the market rate must be designed in a manner to ensure that the the assigned program rating manual is as compatible as possible with the voluntary market’s rating method.” Territorial rating appears to be quite permissible (i.e. truly coastal properties may pay rates different than slightly inland coastal properties). The one constraint is that insurers can not break up zip codes. (Section 2214.402(f)). The bill provides for hearings — won’t those be fun! — before the Texas Insurance Commissioner who gets to approve or disapprove the rate calculation method proposed by the Managing General Agent who is going to be running the TPIP. (Section 2214.404).
  6. There are, however, transition rules that will protect some TWIA insureds from the market for a while.  For existing TWIA insureds with residences worth less than $250,000 with contents worth less than $80,000, there is some protection. (Section 2214.456). The period of transition protection depends on the value of the property.  Basically, it is at most 10 years for property worth less than $100,000, at most 5 years for property worth $100,000-$150,000, and at most three years for property worth $150,000-250,000.  (2214.456(c)(2)). Property worth more than $250,000 is not eligible for transition protection. The actual period of transition may be less if the difference between market rates and pre-existing TWIA rates is not that large.
  7. By way of example, if TWIA rates are X and market rates are 1.3X, a dwelling with a value of $140,000 would see rates go up 6% every year for 5 years until the rates increased 30%.  If TWIA rates are X and market rates are 1.4X, a dwelling with a value of $200,000 would see rates go up 13.3% per year for three years until the rates increased 40%.
  8. And who is going to eat the difference between the market rate and the transition rate that these policyholders pay?  It looks like Texas insureds and the state.  Under section 2214.458 of the bill, an insurer “may include a provision in its residential property insurance rates to recoup up to 50% of the transition premiums not collected by the insurer in the previous calendar year.”  Moreover, the insurer is entitled to take as a credit against otherwise owed premium taxes, the remaining 50% of the shortfall between the market premiums that it would otherwise be receiving and the transition premiums that it does receive.
  9. TPIP policies will have maximum limits of $1 million for dwellings, and 40% of that amount for personal property. TPIP policies will have deductibles of 3% for dwellings and the greater of $1,500 or 3% for condominium and tenant policies.  (Section 2214.602)
  10. Insurers throughout Texas and insureds throughout Texas are going to pay in several ways to bail out TWIA.  This may be a necessary evil, but is going to cost. It won’t be done through things that are called “taxes,” but it is going to take money out of the hands of non-coastal Texans and their insurers.
  11. First, Texas insurers are going to be required to force their insureds — even if they live in Amarillo, Childress, Waco or Texarkana — to pay a special surcharge from January 2014 through September 2016 not just on homeowner insurance but on all forms of property and casualty insurance, including automobile insurance (Section 2210.4521). For property in the areas covered by TWIA, the surcharge is 5%.  Elsewhere it is 1%. That money is going to go to shore up the catastrophe reserve fund.
  12. It looks like we are going back to the old system of insurer assessment as a way of fronting money to bail out current TWIA if we get hit with a significant storm that exhausts the catastrophe reserve fund (even as shored up). I say “fronting” and not “paying” because the new bill also restores the premium tax credits under which insurers get to credit against premium tax they would otherwise owe, 20% per year for five years of the assessments that they pay. (Section 2210.0561(e)). So, for at least a while, it’s really the Texas taxpayer or beneficiaries of Texas tax dollars that will be paying for a lot of coastal insurance risk.   Section 2210.0561(c) of the bill says that member insurers — that’s TWIA lingo for insurers selling property/casualty insurance in Texas — will be liable for up to $2 billion in assessments in excess of the rather catastrophe reserve trust fund that is now rather puny but that may grow through the assessment scheme described above. After that, reinsurance, pays for losses.  After that, who knows.  If, however, TWIA depopulates, as is projected, the expected exposure of these “member insurers” and reinsurers will rapidly decline.
  13. Insurers throughout Texas have to pay to buy reinsurance for TWIA to give its policyholders additional protection.  $2 billion of reinsurance.  (Section 2210.453). Apparently this requirement exists regardless of the price reinsurers want to pay (which may not be the best bargaining position from which to start).  I guess we should assume that insurers will figure out a way to pass this cost (which might be at least $100 million) on to their insureds throughout Texas.
  14. The TPIP is going to be run by a Managing General Agent that is going to have a lot of authority.  The MGA may also have a lot of protection against members of the public who want to know how it is running its operation.  Under 2214.153 of the Carona bill, “information, analyses, programs or data acquired or created by the [MGA] … are property of the state” and, critically, “exempt from public disclosure under Chapter 552 of the Government Code.”

An assigned risk solution?

The Corpus Christi Caller and its intrepid reporter Rick Spruill report as follows this morning (this is an edited version of the article):

A plan to effectively abolish the Texas Windstorm Insurance Association in favor of placing coastal homeowners in an assigned risk pool, managed by a third party and overseen by the Texas Department of Insurance, is working its way around the Capitol in Austin.


The plan to abolish the association was offered by the four public members of a joint legislative committee established in 2011 to study windstorm insurance issues. It favors requiring private insurers to again write wind and hailstorm policies in coastal counties and follows closely the recommendations made by key insurance experts, including Texas Insurance Commissioner Eleanor Kitzman.

While coastal windstorm insurance experts welcome any plan calling for stronger building codes, the assigned risk scenario may struggle to gain traction in the halls of the state Capitol, said one member of the Coastal Windstorm Task Force.


Task force member Greg Smith said attracting private industry back to the coast through assigned risk would lead to exponential increases in coastal windstorm policy rates in the coming decade.


Smith said while assigned risk has worked well for workman’s compensation and health insurance lines of business, it is a poor fit for residential policies in a catastrophe zone.


He said insurance executives have told him placing residential homes into an assigned risk pool would be “beyond destructive” to the Texas homeowner’s insurance market.


For large companies that write billions in homeowner’s business in Texas, being forced into an assigned scenario in proportion to the amount of business they write in the rest of the state could mean multiple billions in additional exposure.


That would, in turn, put pressure on those companies to keep enough cash on hand — a central requirement under Texas insurance law — to cover those claims.

Instead of dumping residential properties that private insurance companies will not insure into the Texas Windstorm Insurance Association pool, the plan would allow a property for which the homeowner or the homeowner’s agent cannot obtain a reasonable quote to be temporarily assigned to a private carrier, for 30 days.

During that time the policy would be placed in an online exchange in which all carriers operating in Texas can bid. If the policy is not picked up through the competitive bid process, the assigned carrier becomes the permanent underwriter.


The process would be managed by a third-party clearinghouse working under contract with the Texas Department of Insurance.


Rates would be allowed to adjust, most likely upward, over a three- to eight-year period to get more in line with the private market.


Carriers that post losses because of assigned polices would be eligible for reimbursements from the state.


I’ll be discussing this idea more fully in the days ahead, but this is a major development.

I hope taxpayer money is not being used to fund a private group’s lobbying

Today’s Corpus Christi Caller has an interesting article detailing the efforts of the private Coastal Windstorm Task Force to obtain $30,000 from the city of Corpus Christi to fund an actuarial review of their proposal to revise funding for the Texas Windstorm Insurance Association.  I have mixed feelings about this.  On the one hand, I applaud the efforts to the Task Force to get an actuarial review of their proposal.  I’ve done an analysis already (without special compensation) but there is surely room for company. And although perhaps the analysis should have been done before or at least at the same time as the proposal was released, better late than never. Moreover, If the City of Corpus Christi itself wants to commission an independent actuarial study that examines a variety of reforms of TWIA and that process is subject to regular administrative processes that protect the public, such as Open Records laws, fine.  Getting more actuarial science involved in this debate would be very healthy.

On the other hand, I have great concerns if taxpayer money were to be used to help a private entity lobby Austin.  I don’t know whether it is lawful for city or county government to pay for a private entity to have research done for it. I also do not know whether it is lawful for city or county government, as apparently been done, to pay the travel expenses of a private group so that it may lobby (see note below). Lawful or not, however, it is surely is not a great idea.  There may, for example, be residents of Corpus Christi who do not support the Coastal Task Force plan or the aims of its chamber of commerce.  Why should government taxing authority be used to coerce these people into paying for other people’s research and speech? Moreover, if it is the Chamber of Commerce or the Coastal Task Force that commissions the study, what controls will there be on the communications between the Task Force and its hired actuary?  What if the actuary comes back with an analysis that the Task Force does not like?  Will the Task Force be able to prevent release of that information or to massage it through processes that independent examiners (such as journalists or other Texas citizens) can not see?

I respect the right of a city to pay to have important legislation studied.  But that research needs to be conducted through a transparent process with actuaries insulated from political pressure.  It should not be insulated from public scrutiny or subject to inappropriate steering by paying a private group — one not without its own resources — to do the study for it.


Note:  The Caller article states: “[Corpus Christi Chamber of Commerce President and CEO Foster] Edwards said other coastal communities have committed funds to help the task force that has incurred thousands of dollars in costs traveling to meetings throughout South Texas and as far away as Dallas.”

Study shows Coastal Taskforce Plan requires more than 50% subsidization

The Coastal Taskforce Plan recently endorsed by several coastal politicians would require people other than TWIA policyholders massively to subsidize TWIA — perhaps paying more than 60% of expected losses from tropical cyclones. That is the result of a study I have conducted using hurricane modeling software. As shown in the pie chart below, the study shows that only about 38% of the payouts come from TWIA premiums. The rest comes 26% from Texas insurers, 21% from policyholders of all sorts in 13 coastal counties and Harris County, 8% from insureds located throughout Texas and 7% from the State of Texas itself. These figures are based on running a 10,000 year storm simulation based on data created by leading hurricane modeler AIR and obtained through a public records request.  The figures are also based on my best understanding of the way in which the Coastal Taskforce plan would operate, although certain aspects of the plan remain unclear and additional clarification would help.

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones (Sharing)

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Who pays for hurricane losses under the Coastal Windstorm Task Force plan?

The plan put forward by the Coastal Windstorm Task Force led by Charles Zahn  and now endorsed by at least two Texas coastal politicians will likely cause much of the money paid out by the Texas Windstorm Insurance Agency to come not from premiums paid by TWIA insureds but from subsidies forcibly exacted from insureds throughout Texas and Texas insurers. Indeed, premiums paid by TWIA insureds may end up amounting to less than half of the money used to pay losses suffered by TWIA policyholders from tropical cyclones.

The chart below is my best understanding as to how the funding structure works.

Coastal Task Force Responsibility Chart Assuming Sharing within Layers

Coastal Task Force Responsibility Chart Assuming Sharing within Layers

The horizontal axis on this graph shows responsibility for each size loss potentially suffered by TWIA  policyholders as the result of a tropical cyclone. The vertical axis on the graph shows the percentage of responsibility.  Thus, non-TWIA policyholders in the 13 coastal counties and Harris County, which is apparently lumped in, pay for significant portions of losses less than about $2.6 billion. Insureds throughout Texas pay via premium surcharges for all losses in excess of about $4.4 billion.  See the little blue rectangles? Those are the relatively small amounts that TWIA policyholders actually pay for tropical cyclone losses. The rest is paid for by people who are not necessarily TWIA insureds. They pay it regardless of whether they are — as will frequently be the case — significantly poorer than people owning homes on the coast and regardless of whether they own a home or not.

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Some coastal politicians endorse Coastal Task Force Plan

A news story in The Brownsville Herald today indicates that some coastal politicians are lining up behind the plan released recently by the Coastal Task Force and Port Aransas attorney Charles Zahn to improve the solvency of TWIA by forcing Texans away from the coast to pay substantial parts of serious losses caused by larger tropical cyclones. Under the plan, the Catastrophe Reserve Fund will be infused with cash partly from existing premiums of TWIA policyholders but also (1) via surcharges on insurance premiums paid (on a variety of insurance policies) by non-TWIA policyholders throughout 14 “coastal” counties and (2) assessments on the Texas insurance industry that will likely be passed on one way or another to Texas insureds. Losses in excess of the Catastrophe Reserve Fund will be paid for by post-event bonds that will be repaid partly by TWIA policyholders but, again, substantially, by entities that TWIA does not insure: policyholders of all sorts in the 14 “coastal” counties, Texas insurers, who will likely figure out a way to pass costs on to their insureds, and, ultimately through a premium surcharge on insureds across Texas, including those hundreds of miles from the coast. The State of Texas will itself be financially responsible for paying TWIA policyholders for the most catastrophic hurricanes, though no funding source is identified for these payments.

The most telling quote comes from State Representative Todd Hunter out of Corpus Christi. He is quoted as telling his coastal audience: “It’s wrong to set up a hurricane system that only you pay for.” Some people, of course, would say just the opposite.

The reason, by the way, that I have put “coastal” in quotes is that TWIA really insures only 13 counties that lie on the Gulf of Mexico. The 14th “coastal county” is the presumably the non-coastal, but giant, Harris County (home of Houston). Residents of the southern portions of Harris County are eligible for insurance from TWIA. But surcharging policies in Harris County hugely increases the amount of TWIA funding that comes from people with no eligibility to purchase TWIA policies and correlatively decreases the responsibility TWIA coastal insureds take for the risks posed to their property from tropical cyclones.