The IBNR problem

IBNR is an acronym obscure to most but well known to those in the insurance industry.  It stands for Incurred But Not Reported and it can be the bane of insurers and insurance regulators.  It is behind some of the immediate problems facing the Texas Windstorm Insurance Association (TWIA) including its contemplation of conservatorship or receivership. That’s because Hurricane Ike, though it occurred in September 2008 and led to an assessment later that month on Texas insurers of $430 million, has ended up costing an amount which, if known at the time, likely would have justified a larger assessment.  Indeed, at least as reported by the Houston Chronicle, TWIA’s manager at the time Jim Oliver asked for an $830 million assessment  “but the board members — including several insurance company members — voted to reconvene later if further assessments are necessary.”  That reconvening to get additional money never occurred. As a result, current TWIA policyholders have effectively been paying since 2009 for losses incurred back in 2008 to the point where TWIA is now in considerable trouble even though there have been no major storms since Ike.  As discussed on this blog, TWIA is now talking publicly about conservatorship or receivership and, absent legislative intervention, entering  the 2013 hurricane season with woefully low reserves and a dubious ability to recapitalize and pay claims in the event of a significant storm.

The issue, which I don’t see explicitly on the agenda for the TWIA board meeting on March 25, 2013, is whether TWIA still has the authority to issue an assessment under the law that existed in 2008 at the time of Ike but has been substantially amended since then.  If so, that might reduce the probability of TWIA going under this summer while the legislature contemplates more serious changes. My own belief is that this is an important legal question on which I hope the TWIA board is getting paid advice from competent attorneys who are spending more than a few hours on the matter.  But, as a pretty competent attorney myself, let me offer some thoughts on the authority issue. The short version is that I do not think TWIA now has the authority to issue assessments under the old law.  Whether as a result of extremely clever legislative lobbying or just the luck of legislative drafting, in 2009 the insurance industry closed out its responsibilities under the old law. TWIA policyholders are basically left to cope with the remaining hash of Ike claims.

The key here is to understand the difference between the funding mechanism in place at the time of Ike in 2008 and the funding mechanism that the legislature put in place effective in June 2009. It’s complicated, so be patient. At the time of Ike, section 2210.058 of the Insurance Code (reprinted below) created a four tier structure for paying losses when TWIA did not have enough money in its regular accounts to pay the losses.  First, insurers throughout the state (the TWIA “members”)  would be hit for $100 million.  Second, TWIA’s catastrophe reserve fund — a special set aside account — and reinsurance would exhaust itself.  Third, insurers throughout the state would get hit with a $200 million assessment.  And, finally, if that still was not enough, insurers would be forced to pay whatever it took to pay off claims — the so-called unlimited assessment. In some sense, however, insurers mostly fronted this latter money instead of paying it outright; they recouped a good chunk of it back through credits against premium tax that they would otherwise owe.  Thus — and this was one of the major reasons for the change in the law that subsequently occurred — both insurers statewide and the State of Texas were effectively on the hook for large storms.  Insurers either had to have extra amounts of cash socked away in particularly liquid investments or had to pay to reinsure their potential assessment responsibilities.

The 81st legislature changed this arrangement and attempted to relieve both the state fisc and the insurance industry from the riskiest aspects of the prior scheme. Legally this was accomplished primarily through the addition of two new subchapters to the Texas Insurance Code: subchapters B-1 and J.  Subchapter B-1 set up tiers of post-event bonds (much discussed on this blog) that would be used to front money to TWIA policyholders with the bonds repaid over the years through assessments on TWIA policyholders, policyholders of many sorts on the coast, and, to a limited extent, property and casualty insurers in Texas. Subchapter J set up the rules for how these post-event bonds were to be issued.

If addition of Subchapters B-1 and J were all that the 81st legislature, the legal issue would be even harder.  But the legislature did more.  In section 44 of HB 4409, the Texas legislature explicitly repealed section 2210.058.  Moreover, various references in the statute to section 2210.058 were deleted. And, through repeal of sister provision 2210.059, the legislature eliminated any requirement that it be notified of any loss in tax revenue resulting from the tax credits that would potentially be triggered by an assessment. And in section 51 of the bill, it specified that the relevant provisions of the bill took effect immediately. Thus, when HB 4409 took effect in June of 2009, it appears that the authority to assess members under 2210.058 ended. The insurance industry gained its freedom — and derivatively the State of Texas protected its tax revenue — not just for future hurricanes but for hurricanes that had already occurred but whose claims were … IBNR.

Am I 100% certain this is correct?  No, but I am not finding any place else in any unrepealed sections of the former law that authorized insurer assessments to pay for hurricane losses. And without that statutory authority, I don’t see how the state can compel insurers to pay TWIA much of anything for losses created before 2009. Am I particularly happy about this answer? Actually not.  I was definitely not a big fan of the old law but if it had been applied the way TWIA leaders apparently wanted, we might have been in less of a mess today. Did the TWIA board breach some duty of care by issuing what turned out to be a low assessment in 2008?  Conceivably, but unless TWIA directors have $400 million lying around it may not much matter; moreover, it might well have been hard to forecast the scope and magnitude of Ike claims back then. There’s a lot of literature and disagreement on various factors that have caused Ike claims to grow. At bottom, it looks like the legislature made a choice in 2009 and Texans along the coast and, derivatively, the rest of Texas are now seeing some of the consequences of representative government in action.

Appendix

2210.058 as it stood at the time of Hurricane Ike (taken from http://www.statutes.legis.state.tx.us/StatutesByDate.aspx)

Insurance Code 2210.058 on 9/25/2008


Text of section effective until June 19, 2009

Sec. 2210.058.  PAYMENT OF EXCESS LOSSES; PREMIUM TAX CREDIT. (a) If, in any calendar year, an occurrence or series of occurrences in a catastrophe area results in insured losses and operating expenses of the association in excess of premium and other revenue of the association, the excess losses shall be paid as follows:

(1)  $100 million shall be assessed against the members of the association as provided by Subsection (b);

(2)  losses in excess of $100 million shall be paid from the catastrophe reserve trust fund established under Subchapter J and any reinsurance program established by the association;

(3)  for losses in excess of those paid under Subdivisions (1) and (2), an additional $200 million shall be assessed against the members of the association, as provided by Subsection (b); and

(4)  losses in excess of those paid under Subdivisions (1), (2), and (3) shall be assessed against members of the association, as provided by Subsection (b).

(b)  The proportion of the losses allocable to each insurer under Subsections (a)(1), (3), and (4) shall be determined in the manner used to determine each insurer’s participation in the association for the year under Section 2210.052.

(c) Expired.

(c)  An insurer may credit an amount paid in accordance with Subsection (a)(4) in a calendar year against the insurer’s premium tax under Chapter 221.  The tax credit authorized under this subsection shall be allowed at a rate not to exceed 20 percent per year for five or more successive years beginning the calendar year that the assessments under this section are paid.  The balance of payments made by the insurer and not claimed as a premium tax credit may be reflected in the books and records of the insurer as an admitted asset of the insurer for all purposes, including exhibition in an annual statement under Section 862.001.

Added by Acts 2005, 79th Leg., Ch. 727, Sec. 2, eff. April 1, 2007.

Amended by:

Acts 2007, 80th Leg., R.S., Ch. 932, Sec. 21, eff. June 15, 2007.

 

Section 44 of HB 4409

SECTION 44.  The following laws are repealed:

(1) subdivisions (5) and (12), Section 2210.003, Insurance Code;

(2) Sections 2210.058 and 2210.059, Insurance Code;

(3) Sections 2210.205 and 2210.206, Insurance Code;

(4) Sections 2210.356, 2210.360, and 2210.363, Insurance Code; and

(6) Subchapter G, Chapter 2210, Insurance Code

[Note: I have no idea what happened to paragraph (5) of Section 44.]

 

 

The Texas Legislature could seriously use an insurance think tank

So, this may be just a little bit self serving, but I really think the Texas legislature would benefit from sponsorship of an independent think tank on insurance law and regulation. I previously served as a director of the University of Houston Law Center’s Health Law and Policy Institute, which was under a modest contract with the legislature to provide briefings on issues of importance as well as provide trained interns to work with key legislators. It didn’t — and doesn’t — cost very much and, in my view, has provided the legislature with valuable service over the years.  The legislature doesn’t have a comparable research arm in the vital field of insurance law .

A Wordle of this post

The absence of an independent research arm means that the Texas legislature sometimes flies in the dark on critical issues of insurance regulation.  Yes, staffers can get up to speed eventually, but many start as generalists, leave before achieving insurance Nirvana or, quick study notwithstanding, do not always have the technical expertise or experience needed to understand a complex field in which a mistake can have huge consequences on individuals and the economy.  The Department of Insurance, particularly in recent years, tries to be proactive but that agency is often understandably focused on the problems of the day rather than having a lot of resources to think strategically about the future. The legislature can also use assertions of advocates for clients, be they the insurance industry, chambers of commerce, consumer groups, or others with an agenda such as the Texas Public Policy Foundation. But these groups are at least somewhat constrained in the positions they can take and the agenda they promote.  And, while it is unrealistic to think that a think tank can be completely apolitical, still, having a think tank that starts with an approximation of neutrality can, I believe, be very useful.

What would such a think tank look like?  It would need to have at least one certified actuary and probably some students of actuarial science.  It would need to have at least two attorneys or faculty members with expertise in insurance law and regulation, and, again, some students to assist in research and writing.  It would probably also be well served by having expertise in the field of insurance intermediaries, accounting, finance and statistics.  All of this could, I believe, be housed within a university setting or, potentially outside one, with a budget of about $1 million per year.  The think tank could also act as a screener for those seeking the opportunity to work directly for legislators whose committee assignments include insurance.

What kind of problems could the think tank address?  The legislature could provide direction and the think tank could, as the Health Law & Policy Institute has done, provide custom research for legislators with concerns on a particular issue.  For starters, however, I believe a good look at the remedies in Texas for breach of an insurance contract would be useful, as would a study of laws regulating insurer solvency. It could examine implementation of federal health insurance programs such as Medicaid and Obamacare within Texas. The think tank might study ways in which the complexity of Texas insurance regulation with its grab bag of types of insurers each subject to different subsets of regulation might be simplified. The think tank might bring trends in other jurisdictions to the attention of the Texas legislature as well as provide it information on the effects of growing insurance regulation at the federal level. And, of course, it could think rigorously and creatively about ways of transferring catastrophic risk in Texas that keeps property insurance prices up.

Right now, to be frank, one of the only reasons I am listened to at the state legislature, is that I am one of the few “independent” voices on insurance law and regulation.  I have my own political views, to be sure, but no one pays me to say what I do.  Instead, what lets me be effective is the happy coincidence of having the time and freedom of a tenured professor, trying to stay as “objective” as I can, and having considerable accumulated expertise in insurance law and actuarial science. But my time, perhaps like others in Texas with similar inclinations, is limited.  So, while the absence of special funding does not and would not prohibit other citizens from making their voices heard on important issues of insurance law and policy, the reality is that the barriers to entry into this complex and technical area are rather high.  That’s why you may hear dozens testify on roofing regulation but far fewer come to speak with knowledge on regulatory schemes involving billions of dollars. I believe the legislature would benefit from more independent voices.  And supporting an insurance think tank here in Texas is one way to increase the chance of that happening.

Senator Carona calls for insurers to be more constructive on windstorm legislation

Far more important, frankly, than my testimony yesterday before the Texas Senate Business & Commerce Committee, was the colloquy between influential members of that committee and representatives of the insurance industry, notably Beamon Floyd, director of the Texas Coalition for Affordable Insurance Solutions (big Texas insurers such as Allstate, State Farm, Famers, USAA), and Jay Thompson of the Association of Fire and Casualty Companies of Texas.  You can watch it all here from 1:49 to 2:00 and 2:22 to 2:25 on the video of the hearing.  John Carona (R-Dallas) and chair of the committee castigates the insurance industry for acting in bad faith, dragging its heels and apparently stonewalling on the issue of TWIA reform.  While such criticism might be expected from members along the coast or from those predisposed to criticize whatever the insurance industry does, this critique

State Senator John Carona

State Senator John Carona

came directly from Senator Carona,  a man who described himself as a friend of the insurance industry and, indirectly, from Governor Rick Perry, likewise seldom confused as an insurance basher.

The problem, basically, is that the insurance industry is resisting a bill that would likely compel it to shoulder more expense for risk along the Texas coast than it does now, even if it can pass many of those expenses on, but it hasn’t been bold enough thus far to come forward at this stage of the legislative process with support for specific solutions to the short and long term problems facing TWIA and its insureds. Nor has the industry publicly (or otherwise, to my knowledge) to date presented facts showing the extent of the burden that would be created by the assigned risk plan embodied in SB 18. This silence places legislators such as Senator Carona in a difficult position. They do not wish to create crushing burdens on the insurance industry that will make insurance in Texas yet more expensive or difficult to obtain, particularly in their districts, but they are also not willing to create a situation in which a significant storm forces an insurer for which they bear responsibility to undergo a difficult forced recapitalization or, worse, leaves it unable to pay claims promptly and fully. My sense is that Senator Carona and perhaps others felt much the way I do when confronted with a student, even one who has done well in the past, who is long on generalized rhetoric but doesn’t show that they have actually done the needed homework.

Here’s what I bet Senator Carona and others would like to see. With respect to all of these numbers, it would be best if they came from certified actuaries using contemporary storm models and it would be helpful if the figures were provided in both absolute dollars and as a percentage of industry premium revenue.  Some of these numbers may well be difficult to develop, but if figures could be brought forth even on an order of magnitude basis, it might separate out real threats to the Texas insurance industry from reflexive rhetoric.

Numbers Relevant to SB 18

(a) Evidence as to the expected costs of the 2210.0561 potential for assessment; this figure might be either a measure of expected losses or an explanation of why this assessment responsibility needs to be reinsured along with the costs thereof.

(b) Evidence as to the costs of the 2210.0561 assessment to help TWIA buy up to $2 billion in reinsurance. My wild guess is that we are looking at $150 million per year in the immediate future but ramping down substantially as the take out in the assigned risk plan decreases the expected amount reinsurers would pay

(c) Evidence as to what it will cost to set up and maintain a clearinghouse that will migrate coastal residents, and perhaps others, either into a private take-out policy or into the assigned risk pool.  Perhaps I am naive, but I believe the clearinghouse could be operated for less than $10 million per year.

(d) Evidence as to what the shortfall between “market rates” and transition premiums will cost insurers AFTER premium tax credits and recoupment are taken into account.

(e) At least an order of magnitude guess as to what it will cost, net of premiums, to write policies on the riskiest policies as to which SB 18 caps the premium at 25% higher than market. Such an estimate will require at least three figures: (1) an estimate of how many policies there will be in this category; (2) an estimate of actual expected losses among the purchasers; and, importantly, (3) an estimate of the incremental costs of capital that insurers need to stockpile in order to bear this correlated risk.

(f) An estimate of the cost of servicing TWIA policyholders even for windstorm claims pursuant to section 2210.5725 of the bill.

I also suspect Senator Carona and others in the legislature would like to see at least a bargaining position from the insurance industry on how much of these costs should be transferred either to TWIA policyholders or more directly to statewide insureds.

Numbers Relevant to An Alternative Plan

For any alternative plan submitted by the insurance industry, we ought to see numbers on the following:

(a) what are the rates that will be paid for risks currently covered by TWIA policies

(b) how will it address the 2013 hurricane season — the Carona bill is weak here

(c) how does it get the stack of protection up to an amount sufficient to cover at least a 1 in 100 years storm, preferably a 1 in 500 years storm

(d) who bears the financial burden of such a stack

So, I know this is a lot of work and there isn’t much time in which to do it.  But my sense is that one outcome of yesterday’s hearing is going to be a greater sense of urgency on many sides from those who will try to scuttle the assigned risk alternative.

P.S. For those who would rather (or also) like to see my testimony, you can find it at 1:36 to 1:44 of the hearing.

Testimony on S.B. 18

Here’s my written testimony on S.B. 18 and related matters provided at the Senate Business & Commerce Committee today.  My oral testimony was basically a shortened version of this along with some interesting colloquy with Senators Taylor, Lucio and Carona.

The Texas Senate Business and Commerce Committee discusses S.B. 18

The Texas Senate Business and Commerce Committee discusses S.B. 18

I am Seth J. Chandler, a professor of law at the University of Houston Law Center and writer for the blog catrisk.net, which deals with the law and finance of catastrophic risk in Texas.  The views here and on catrisk.net are my own and do not necessarily represent those of the University of Houston.

Texas insurance regulation should meet at least three major demands. We must be sure that the entities bearing risk actually have clear resources following a disaster to timely pay claims. (2) Insurance underwriting and pricing must send the proper signals to property and business development markets both on the coast and elsewhere in Texas. (3) Any transition from the status quo should temper the need to move urgently with the kindness involved in protecting the reliance interests of those who invested under the long existing prior system.  I have attempted over the past week to study SB 18 along with competing bills filed by Senators Hinojosa (SB 1089) and Representative Hunter (HB 2352).  I am advised that there is a committee substitute filed or about to be filed for SB 18 but, from my brief review, the changes made therein does not change the thrust of my testimony.

In my view, SB 18, though not perfect, is a positive framework for beginning to meet these demands. It is superior on solvency and market signaling grounds to the Hinojosa/Hunter proposal and to the status quo. Though it deals with the problem urgently, it reflects kindness by having the rest of the state provide at least nine benefits to TWIA and its policyholders. (See Appendix 1.)

The primary concept of SB 18 is to move Texas away from an addictive system in which protection from tropical cyclone risk is concentrated in a highly subsidized and highly correlated pool run by a state-chartered insurer. The subsidization, accomplished through requiring TWIA policyholders to pay fully only for the lower layers of catastrophic risk, kind of like billing a homeowner as if its home was worth only a fraction of its declared value, sends improper signals to property and business markets throughout the state. It treats poor property insureds away from the coast worse than both poor and wealthy property insureds along the coast.  The system now withholds explicit warning to policyholders, particularly those in Galveston County, as to the risks of TWIA’s undercapitalization. It relies on an untested system of post-event bonds limited in amount and inadequate to pay for large storms that will be paid for substantially by non-coastal Texans.

The concentration of correlated risk inherent in TWIA has trapped that agency into choosing each year between two bad alternatives. It can run a risk of insolvency in the current year by not purchasing reinsurance. Or it can perpetuate its poverty by paying huge sums to reinsurers whose prices reflect the need to stockpile liquid capital and consensus views on modern risk of hurricanes.

How would I describe SB 18 in a minute or two?  I would say it provides all Texans not otherwise unable to meet general underwriting standards the opportunity to purchase unfragmented homeowner insurance, including coverage for windstorm, from real insurers.  They do so at rates no more than 25% higher than that of a fine-grained estimate of the market price for similar coverage.  It reduces the high costs of correlated risk and assures solvency by forcibly grafting coastal tropical cyclone risk onto the diversified stock of conventional and other catastrophic risk held by private insurers whose solvency is highly regulated.  It ultimately stops giving special treatment to residential TWIA policyholder’s problem of high and intensely correlated risk. Instead it transitions them, with some interim rate relief effectively paid for by the state and non-coastal Texans, into a private primary or excess market that may have room to flourish once the subsidized market of TWIA is removed. And if that market does not develop, they are protected by a state created assigned risk program with capped prices in which the monitored resources of private insurers will actually pay them in the event of claims. It leaves TWIA in place but in sufficiently shrunken form so that reinsurance may be affordable and a system of assessments are manageable for the private market. Under SB 18, and as set forth further in Appendix 1 to my written testimony, non-coastal Texans will still very much pay either directly or indirectly to help their friends on the coast, whom I hope appreciate the consideration.  But they will do so via a system that stands a greater chance of actually being helpful in time of need and that likely does so at lower overall cost.

Its leading current competitor, the Hinojosa and Hunter bills are premised on coastal exceptionalism and a demand for coastal development.  They attempt to use benefits undoubtedly provided by the Texas coast but qualitatively little different from the benefits provided by the economies in each of your home districts, as a reason for the rest of the state to subsidize — perhaps even more than the status quo — the purchase of windstorm insurance along the coast.  They perpetuate the sending of bad signals to the development market. They leave the problems created by risk concentration essentially untouched. They leaves the interest rate risk attached to funding by post-event bonds in place.  They appear to finance the first layer of post-event bonds by large surcharges on whoever is left in the TWIA pool following a large disaster —  an idea the bond market appears to reject. Yes, the bills do build a bigger catastrophic reserve fund to insulate policyholders from those risks, but the money to do so comes mostly from policies other than those that will benefit from the enhanced cat fund.

There are questions I have about SB 18 and important implementation details about which I have reservations.  I set more of them out in Appendix 2 to my written testimony. Chief among them  (1) I want the immensely powerful Managing General Agent of the TPIP subject to Chapter 552 of the government code.  (2) I want, as you should too, numbers from full time professional actuaries about the burden of the bill on Texas insurers, non-coastal insureds and coastal insureds.  The concept at the core of SB 18, however, of an assigned risk pool with rates ceiling by a multiple of market rates, coupled with transition relief for TWIA residential policyholders, represents a welcome advance beyond conceptualizing the best form of bandaid to put on system that may be fatally infected.

Seth Chandler before the Texas Senate Business and Commerce Committee

Seth Chandler before the Texas Senate Business and Commerce Committee

Appendix 1: Ways in which non-coastal Texans will continue to subsidize the coast under SB 18

  1. Subjects insurers statewide (“TWIA members”) to front $2 billion for an assessment in the event TWIA does not have enough money to pay claims. (2210.0561).  The State of Texas and taxpayers ultimately pay the bill via premium tax credits.
  2. Insurers statewide (“TWIA members”) pay each year for a $2 billion reinsurance policy for the benefit of TWIA and its policyholders (2210.0561)
  3. Assessment on insurers statewide (“TWIA members”) to pay to establish, maintain and administer a clearinghouse that will significantly service coastal residents. (2210.103 and 2210.104)
  4. Surcharge for up to 33 months of 1% on policyholders outside of the “catastrophe area”) (the coast) on most forms of property/casualty insurance including homeowner policies and automobile policies. Proceeds from the surcharge go to build up a catastrophe trust fund used exclusively for the benefit of TWIA policyholders. Section 2210.4521.
  5. Surcharge for up to 33 months of 5% on non-TWIA policyholders in the “catastrophe area”) (the coast) on most forms of property/casualty insurance including homeowner policies and automobile policies. Proceeds from the surcharge go to build up a catastrophe trust fund used exclusively for the benefit of TWIA policyholders. Section 2210.4521.
  6. Insurers receiving less than assigned risk premiums due to transition relief for TWIA policyholders authorized to include a provision in their residential property insurance rates to recoup up to 50% of the shortfall.  Policyholders statewide thus likely to pay to keep rates low for coastal policyholders formerly insured by TWIA. (Section 2214.458).
  7. State of Texas and/or taxpayers pay for the same transition relief for TWIA policyholders by giving insurers a premium tax credit for 50% of the shortfall each year.
  8. Insurers obliged to write policies for no more than 25% above “market” for certain policyholders on the coast and elsewhere even where doing so costs more than 25% above market due to correlation of risk and limitations on permissible underwriting criteria.  This cost borne directly by insurers and indirectly by insureds statewide.  Section 2214.406
  9. Insurers writing policies on the coast with wind exclusions apparently compelled to adjust windstorm claims without compensation. Section 2210.5725.

Appendix 2: Questions and reservations about the bill.

  1.  A spreadsheet or similar document should be developed by experienced actuaries that estimates each of the costs identified in Appendix 1 with recognition that such estimates will, of necessity, often be rough.
  2.  Section 2214.352 of the bill would permit Texans to obtain coverage for tropical cyclone or wildfire within 72 hours of application. This poses a serious adverse selection risk since modern wildfire and tropical cyclone forecasting often provides good estimates of heightened risk more than 72 hours beforehand.  Suggested change: change 72 hours to 168 hours (one week).
  3.  Section 2214.105 and 2214.153 exempt the Managing General Agent from Chapter 552 of the Government Code.  This exemption is inconsistent with the quasi-governmental power over issues of statewide importance provided to the MGA and hinders accountability.  Suggested change: either leave the matter to court interpretation or make the matters described subject to Chapter 552 of the Government Code, which itself contains numerous protections.
  4.  Section 2210.453 requires TWIA to purchase $2 billion in reinsurance even after TWIA is largely depopulated. This number may actually be excessive and forcing TWIA to use reinsurance as a risk transfer mechanism gives too much bargaining power to reinsurers as opposed to alternative methods of catastrophic risk finance such as pre-event catastrophe bonds. This may have been changed in the revised bill that was filed very recently.  If not … Suggested change: Amend subsection (b) of proposed 2210.453 to place the cap on the risk stack at an amount determined sufficient by the Insurance Commissioner to cover TWIA against a 1 in 1000 year storm or $5 billion, whichever is lower and change “reinsurance” to “reinsurance or its equivalent.”
  5.  Section 2210.5725 requires insurers providing conventional coverage to holders of a TWIA policy to adjust claims even for wind losses excluded by their policies. Suggested change: Clarify how, if at all, insurers are to compensated for the additional costs of such an adjustment.
  6.  How does one reconcile Section 2210.211’s  mandatory migration migration of TWIA’s policies to similar but non-identical coverage with various prohibitions against state-induced breaches of contract?  Suggested change: require TWIA to insert into all policies an incorporation of its right to terminate under 2210.211.
  7. Do the limitations in section 2210.507 on maximum limits and minimum deductibles on TWIA policies issued after January 1, 2014, apply just to policies on new properties or do they also apply to renewals of existing TWIA policies?  Suggested change: clarify.
  8. What procedures are available to challenge a determination under section 2214.501 by an assigned risk insurer that an insured structure does not meet building code standards set forth in the TPIP plan of operation and that the policyholder is thus subject to a surcharge?  What constraints exist on the amount of the surcharge the insurer can impose? Suggested change: clarify.

 

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.

Corpus Christi Caller details TWIA solvency problems

There’s a worthwhile article in the Corpus Christi Caller written by Rick Spruill. It addresses both the serious funding problem faced by TWIA today and the solutions being developed by coastal legislators and some coastal interest groups.  The article relies extensively from some of the blog entries here at http://catrisk.net, including ones here and here.

I’ve sent an e-mail to Mr. Spruill on the article and want to post that email here.

I agree that this (http://m.caller.com/news/2012/dec/26/texas-windstorm-insurance-association-could-face/) is an intelligent and important article.  Moreover, even though it contains some criticism of what I have said on http://catrisk.net, it is a balanced presentation.  Two comments, neither of which reflect negatively on Mr. Spruill’s article:

1)  I don’t think Todd Hunter’s comment that Chandler “wants TWIA policyholders to pay for everything ” is quite right.  I want TWIA policyholders to pay for a much larger proportion of the losses their insurer is likely to pay and for that coverage to either be real (i.e. backed up by viable financial structures) or for very clear warnings given by TWIA and TDI to policyholders about the probabilities and consequences of TWIA insolvency.  Although in concept I agree that TWIA policyholders should pay for TWIA risks — I understand that there will be a period of transition required. But the direction of the transition should be towards the assumption of responsibility, not towards shirking it.  I would not be averse, for example, to some sort of grants or subsidized credit being made available, for example, for hardening coastal properties (“mitigation”) and would much rather see money from people other than TWIA policyholders going to reduce the scope of the risk rather than used to bail them out after a fairly foreseeable disaster occurs. I agree that our Texas economy is all interconnected and that if the coast were to suffer a hurricane in which a substantial number of policyholders had large claims against an insolvent insurer, it would hardly be only the coast that suffered.

2) The article is correct  that my computations do not take account of the double dip that TWIA policyholders with automobiles (and non-wind policies) would incur. I don’t have the data that would permit quantification of this complication in part because the Zahn Coastal Taskforce plan is not explicit enough about what sort of insurance would be subject to surcharge. I wish I did have the data. If anyone (like TDI) does have relevant data and would share it, I’d be happy to revise my conclusions.  And I will add a caveat to the existing posts reflecting this matter.  I do not think, however, that inclusion of this complication will alter the fundamental conclusions of my analysis.

Best wishes to all for a happy, healthy and hopefully hurricane-free New Year.