The destructive power of legislative fantasies

While fantasies may have their place in literature or otherwise, they are an unhealthy basis on which to premise legislative hearings. By distracting legislators from the real work that needs to be done before the end of session and providing false hope to constituents who need to take real action before the start of hurricane season, they are at least as destructive as any hurricane. That’s why the Corpus Christi Caller’s account this morning of yesterday’s meeting of the Texas Senate Committee on Business and Commerce should profoundly disturb residents of the Texas coast who depend on a viable windstorm insurance system. It should equally disturb those throughout the State of Texas whose fates are intertwined with their coastal friends. The meeting unfortunately perpetuates the absurdities of the meeting of the Texas Windstorm Insurance Association board that took place on Monday in which false villains were created and the very legislators who voted for the scheme that contributes to the current deplorable state of coastal windstorm insurance attempt through distraction to escape accountability.

Let’s identify the distracting fantasies.

Fantasy 1. TWIA can escape insolvency by assessing Texas insurers in 2013 for Hurricane Ike.

We’ve been through this before on this blog but let’s do it again now that we have an idea of the opposing arguments. The statute authorizing TWIA to assess insurers under former section 2210.058 of the insurance code was repealed in 2009 by section 44(2) of HB 4409. I’ll reprint that statute at the bottom of this post so you can see for yourself. Government can’t just take people or business’ property for the purpose of enriching others, no matter how worthy the cause, based on a repealed statute.  That’s called tyranny, and it is a violation of, among other things, the same Fifth Amendment protections that prevents the state from taking your house away to pay for worthy state expenditures and the same section 17 of the Bill of Rights contained in the Texas Constitution in which our state’s belief in those same principles is enshrined.

Until Monday, I had not heard a single argument opposed to the proposition that section 2210.058 no longer justified assessments against insurers. And, until I heard the contrary arguments, I was not prepared to say with 100 percent certainty that I was correct. But in light of a letter from several state representatives submitted to the TWIA board and made public Monday and in light of Representative Eiland’s reported comments at the hearing yesterday, we now appear to know the arguments of those who would contradict this apparently evident proposition. All I can say is, “that’s your best shot?” Here’s what they are apparently saying. If there are other arguments that I am missing, bring them on.

Argument 1: The potential to assess insurers is an “obligation, or liability previously acquired, accrued, accorded, or incurred under [a repealed statute] and is thus saved from repeal by section 311.031 of the Texas Government Code.” This argument misunderstands the nature of an obligation and a liability. An obligation or liability refers to something already existing.  Thus, if State Farm did not pay an assessment already imposed prior to the repeal, HB 4409 did not eliminate the already existing powers to force State Farm to pay. But at the time when the repeal took effect, there was no “obligation,” there was no “liability” to pay an assessment based on Hurricane Ike beyond the $430 million the TWIA board did assess in 2008. The fact that TWIA might have made an assessment is no more an “obligation” or a “liability” than a tax that the legislature might have but did not impose or a penalty that a court might have but did not impose.

Argument 2: There is some sort of contractual right on the part of 2008 policyholders to an assessment. I teach contracts and I like creative arguments.  But there is no such contractual right.  I’ve looked at TWIA contracts and there is absolutely nothing in those contracts creating a right to an assessment. Zero. Would a Texas legislator please show the public a TWIA contract containing a right to an assessment.

It is particularly galling, I might add, to contend, as Representative Eiland apparently did at the hearing yesterday, that TWIA policyholders deserve such a right (even if they don’t actually have one?) because of the premium they paid. In fact, precisely because of actions by legislators such as Craig Eiland,TWIA policyholders were not asked to pay a premium that would permit their insurer to be capitalized adequately and that might have provided better protection against hurricanes such as Ike. Instead, those legislators forced TWIA policyholders to become dependent on the TWIA board — a politically constituted body significantly chosen from the insurance industry — exercising their discretion to assess Texas insurers adequately in the event of a major storm.

Now, it may (or may not) be that the TWIA board breached some sort of duty to policyholders by failing to assess. A letter sent by coastal legislators earlier this week contains a disturbing account of board inaction. Unfortunately, however, the choice not to include a right to an assessment in the contract takes the matter out of contract claims against TWIA itself and put it into the murky area of fiduciary duty claims against TWIA board members. And, with fiduciary duty rather than contract providing the source of rights, the remedies become far more limited. Yes, you can sue a board member for breach of fiduciary duty, but section 2210.106 of the Insurance Code promised those board members immunity from suit unless one can show bad faith, intentional misconduct, or gross negligence.  And even if you get over this qualified immunity hurdle, I doubt there are too many board members who have $400 million lying around, the additional amount that TWIA officials recommended be assessed to pay for Ike.

Fantasy 2. Going into receivership would make it harder for TWIA to borrow money either before a hurricane or after a hurricane.

A lot of people at the TWIA board meeting Monday testified about the terrible problems that would be created if TWIA were thrown into receivership: sending the wrong signals, threatening continued development, threatening mortgage covenants, and threatening  the Texas economy (even national security) by challenging energy production on the Eagle Ford Shale. Unfortunately, these people have confused treatment with either symptoms or disease.  It is fine to be angry about cancer, but anger at being treated for cancer after a positive test comes back is misplaced indeed. And it’s insolvency here that is causing the problems and that is going to cause more problems. Receivership is a treatment for the disease of insolvency (here a disease caused by a combination of legislative dysfunction, human greed and fallibility, and a Category 2 hurricane that hit in a particularly vulnerable spot). In fact, although perhaps the matter could be deferred for a week or two to get plans in order, receivership makes a lot of sense. It would likely, as Representative Taylor appears to recognize, actually help most TWIA policyholders.

Here’s why.

Reason 1: Without receivership, there will be even less money available to pay claims for any hurricanes that hit this season. TWIA is being picked apart by claims for Hurricane Ike that are still pending.  Projections are that, even if no serious hurricane hits, TWIA will have even less money by the time the year ends. Thus, if Tropical Storm Barry or Hurricane Rebekah hits this season, there is going to be even less money around to pay the new claimants.  This is particularly true, if, as many fear, the recapitalization structure envisioned by the current Texas Insurance Code, is not going to work and if one of the bills pending in the legislature continues not to address issues for 2013. Those whose houses are decimated this summer by a storm are very much going to wish that someone through TWIA into receivership this spring so that 2008 policyholders and 2013 policyholders were treated more equally. So equity among TWIA claimants is one good reason for a receivership.

Reason 2: The recapitalization structure envisioned by the current Insurance Code may well  be more likely to work with a receivership than without one. Someone who lends money to TWIA now has to be concerned that their claims will be paid out of the same pot as Ike claimants or other TWIA creditors. Given TWIA’s insolvency, that is worrying. It’s likely to cause lenders to demand a particularly high rate of interest if they are willing to lend at all.  Although I am not certain of this, if Texas receivership is like federal bankruptcy, post-receivership financing even in a rehabilitation case can be separated out and given a higher priority that other claims.  That appears to be true in Texas insurance liquidation (section 443.154(j)) and I would be surprised if it were not true in a rehabilitation as well. Now, if the rehabilitation failed, such a refinancing might hurt existing (Ike) claimants of TWIA, and one can see how they might oppose a cavalier refinance on that basis, but if one wants to give TWIA some hope or making it through another hurricane season, giving new lenders some additional protection makes a lot of sense.  I don’t see how that can be done absent a receivership.

Reason 3: The parade of horribles brought forth by representatives of the coast at the hearing Monday was mostly about the problems created by insolvency, not by receivership.  Mortgage companies who have imposed covenants to maintain insurance on their borrowers don’t care as much about whether the insurer is in receivership as whether that insurer has enough money to pay claims that threaten their collateral. And, yes, workers in the Eagle Ford Shale and elsewhere will be hurt if their windstorm insurance premiums go up and their corporate employers don’t respond with higher wages, but what happens to premiums is not particularly dependent on a receivership.  It is dependent on an understanding of why TWIA went insolvent and the proposals pending in Austin to reform TWIA.

At best, the argument against receivership is thatTWIA, a so-called “residual market” carrier, was not really “insolvent” in the same way a private insurer would be if its liabilities exceeded its assets. That’s because, this point proceeds, TWIA has a statutory right to recapitalize through assessment and surcharge that other insurers do not following a major disaster.  So, it is true that, at least for a while TWIA will be able to pay its bills. But inability to pay bills is not and should not be the only basis to justify a receivership.  Another reason is equal treatment of claimants.  The recapitalization mechanism was never very solid and is now so dubious that there is a serious question whether TWIA can treat current policyholders fairly.

Fantasy 3: Resolutions of the receivership issue and assessment issue are very important.

Receivership is an issue, but it is not the main issue. It will just determine at the margin how current and future TWIA claimants get paid and may have some effect on solvency this summer.  Even an assessment of another $400 million or $500 million to fully pay for Ike, though it would help current TWIA claimants, will do little to fix the most fundamental problems with that entity, which include its perpetual undercapitalization and the instability and unfairness of its funding mechanisms. Even with an assessment and with or without a receivership, the current law means that TWIA is running a very substantial risk of going insolvent this year from another serious storm. Or, in plain English, if you own property on the coast and it is hit by a tropical cyclone this summer, there is a troubling chance TWIA will not actually be able to pay what it owes you and you may have trouble rebuilding.

The main issue is how to address windstorm insurance on the coast both for the coming hurricane season and thereafter. There are two serious proposals before the legislature. One basically proposes depopulating TWIA and moving toward a market-based system backstopped by an assigned risk plan for those areas in which the market fails to provide insurance close to some affordability threshhold. Under this system, although people across Texas very definitely help, coastal policyholders bare most the burden of the risk posed to their property. Coastal propertyholders get the benefits of owning real estate near the Texas coast, but they also pay for it. The second proposal continues to force people — poor people and rich people alike, Amarillo residents, El Paso residents and Nacogdoches residents — to subsidize risk along the coast even more than has been done before. While this system at least reduces the risk of a hurricane leaving insureds with claims only against an insolvent insurer, it sends bad signals to the development market and, gallingly, frequently transfers money from the poor to the wealthy. I have my own views on how that debate should come out but respect the view of others.  I just wish it was that debate that was preoccupying the Texas legislature and not a judicial remedy for addressing the existing insolvency.

Here’s what Representative Craig Eiland reportedly said yesterday:

“I see no way you could ever say that’s there no assessment authority with TWIA based on the contractual rights the 2008 policyholders have for the premium they paid for the coverage they purchased,” he said. “Why are we dancing around the question? If we go into receivership the judge is going to assess the companies and have an answer. Why are we not trying to have an answer? Before you make the decision that we cannot assess, how about go assess and find out the final answer.”

 

Text of section 44 of HB 4409 (found here)

 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.

Live Blog of the TWIA Meeting of March 25, 2013

I appear to have a good feed from the TWIA meeting. Right now, it just says, “waiting for presentation.”  So, if the TWIA servers hold up under what I expect will be a heavier-than-usual load and I can successfully navigate a new live blogging plug in for WordPress, I should be able to comment on this meeting as it goes on.

15.00

So, nothing happened on windstorm insurance on the floor of the Texas Senate today.  The one thing perhaps everyone could agree on is that time is running out to change anything in this regular session of the 83rd Legislature.

12.40

They are recessing until 2:15.  The Senate Business and Commerce meeting will have a meeting at Chairman Carona’s desk during the recess.  I have no idea what they will discuss.

Unfortunately, my day job is likely to prevent me from keeping even half an eye on the Senate for the next several hours, so you are all on your own for a bit.

12.20

Might be oyster and shrimp lunch time because nothing has happened on the Senate floor for quite some time.  Oh, wait. They just started up again.  But they are just reading and referring House bills to Senate committees.

11.58

Senate back considering bills, but not (yet) S.B. 1700.  The current one, on toll road conversion, is generating some actual comment.

11.31

They are into announcements rather than bill consideration.  But the chair indicates there may be additional bills to be heard today.

11.20

Senator Royce West certainly gets his colleagues’ attention by saying he was adding billion to the cost of a bill on digitizing filings in civil lawsuits.  Just kidding.

10.51

Senator Larry Taylor, sponsor of SB 1700, is now speaking, but not on Windstorm Insurance. Instead, he is talking about CSSB 1560 involving easements.

10.49

Chair says, “Members, that concludes the morning call.” Looks as if they are now taking up substantive bills.

Screenshot_5_15_13_11_46_AM

10.40

Oyster and shrimp lunch for legislators being discussed.  No Windstorm bill yet.

11.42

Senate recesses until 11 a.m. Wednesday, May 15, 2013.  Still no S.B. 1700.

11.22

Reading and referring various bills to committees.  Does this mean voting on bills out of committee is over for today?

11.03

Actual debate on the floor. Not about windstorm insurance but about the right to marry.  And not about gay marriage but about photo identification. Should one need photo identification as a prerequisite to marriage?

10.44

Not that it has anything to do with windstorm insurance, but an interesting bill for insurance junkies on subrogation rights and the “make whole doctrine”.  H.B. 1869.  I’ll have to read it.

10.35

Now calling bills for review.  So the procedure seems to be

1) Suspend regular order of business so that the bill can be considered “out of order”; Vote on this.

2) Floor amendments offered and voted on.

3) Move passage to third reading.

4) Motion to suspend the 3 day delay between second and third reading

5) Third reading of bill (just caption)

6) Motion for final passage.  Roll call vote.

10.09

Session begins.

10.01

Upbeat music now playing heralding the possible start of session.  Also, please note that due to some issue with my liveblogging software, the time stamps are an hour off.  So, if this says 10:02 I believe it means 11:02.

09.58

Nothing happening.  Various people milling around.  No sound, but I am hoping that is because the microphones are off rather than any issues with my Internet feed.

13.35

Motion to adjourn until tomorrow. Passes.  So no S.B. 1700 today. #SB1700 #TWIA

13.34

Motions being heard to suspend Senate rules to permit announcements of urgent committee meetings.  No sign of S.B. 1700.

13.31

I get the sense that if you watched this Internet broadcast for a few days you might actually understand Senate procedure pretty well.

13.26

Wow, things move fast once they get to the Senate floor.  My sense is that everything is negotiated out ahead of time off the floor.  Still no sign of S.B. 1700.  We are hearing reading and referral of various bills.

16.09

The TWIA board today decided not to decide whether to consent to a receivership, tabling the idea until its May meeting.  That leaves the ball back in the court of Texas Insurance Commissioner Eleanor Kitzman, who can try to throw TWIA into receivership without TWIA’s consent.

A symbolic representation of the actions of TWIA's board today

A pictographic representation of the actions of TWIA’s board today

This is also the end of the live blog experiment.  It went well until my feed went out.  Next on the agenda, hearings in Austin on SB 1089 that would “fix” TWIA by placing more of the burden on people who don’t have real estate on the coast.

14.50

Alas, I must deal with reality and stop watching the blank screen.  If they’re still on when I return, I’ll live blog some more.  Otherwise, we’ll skip the play by play and go to some analysis at the end of the day.  Thanks for viewing.

14.24

While we’ve been waiting, I got a phone call from another attorney who had evidently been retained to examine the possibility of TWIA making an assessment under the old law.  Looks like that attorney, examining the issue independently, was likewise extremely dubious about making an assessment under 2210.058. #twia. Lots of hurt, but I still don’t see any cavalry coming over the hill.

14.21

No longer getting the error message and the little timer at the bottom says 2:25, so maybe my feed is back but they are still speaking to their attorneys.  Would not be surprised if this took a lot of discussion since they will basically be consenting to putting themselves out of business. #twia

14.07

Just got a tweet saying they are still in closed session.  So there is some hope that the video feed will emerge from what may be mere hibernation.  I am also advised that the audience has, quite literally, been left in the cold. #overairconditioning #twia

14.00

Still no connection to the TWIA video server.

13.45

I fear I have lost my feed of the meeting. Getting the mysterious Error 0-3222 message.

13.39

One of the matters brought up by Greg Smith of the Coastal Task Force was whether TWIA was being treated equivalently to the Texas FAIR plan, a sister government-sponsored insurance company. He contended, I believe, that the FAIR plan was likewise insolvent but was not being put into receivership.  This issue was also brought up by TWIA with TDI, but the TDI representative said she did not know if the FAIR plan was insolvent.

So, although I can’t find a 2012 financial statement on the Web for the FAIR plan (hmm?), I can find a 2011 financial. It apparently shows that the FAIR plan was million in the red. It may be, however, that TDI thought that the FAIR plan could work its way out of this negative position.  Whether that occurred, I don’t know either.

Oh. Seeing some action on the video screen for the meeting.

13.29

I just posted an excerpt of the letter from Rep. Deshotel. I now see, by the way, that the letter was signed by State Representatives Joe Deshotel (District 22), Craig Eiland (District 23), Abel Herrero (District 34), Todd Hunter (District 32), Eddie Lucio III (District 38) and Allan Ritter (District 21). This is the only thing even close to a legal argument I have found explaining how TWIA could recapitalize and avoid receivership by assessing insurers under the old statute. But, as the letter concedes, former Commissioner Geeslin did not actually say that TWIA could assess the insurance industry under the old law (although he does, I agree, come close to doing so).  But this is what good old Latin-liking lawyers call an “ipse dixit.”  That’s the fancy term for, “because I said so.”  It’s not a legal argument.  There is no evidence that former Commissioner Geeslin confronted section 44(2) of HB 4409 and had a theory for how the word “repeal” does not mean exactly what it says.  Section 2210.058 of the old law was the provision that permitted insurer assessments — and that statute was repealed four years ago in HB 4409.

Now, the more interesting question — one also raised by some of the public comment —  is whether the State Representatives are trying to set up some kind of lawsuit against someone for failure to assess adequately while the old law was in effect.  Such a lawsuit, however, is problematic in that, even if it prevails, which would likely be an uphill struggle, how is anyone going to pay a judgment?  Moreover, I suspect TWIA board members will find at least qualified immunity from suit, will be able to argue that they thought the assessment was adequate, and will question standing and duties.  Don’t count on such a lawsuit fixing TWIA ever — and certainly not in the short run. And short, in this context, means at least three hurricane seasons’ worth.

13.18

The Deshotel letter key paragraph

The Deshotel letter key paragraph

13.15

So, let’s go to the halftime report.

We need to separate out the harm caused by TWIA being insolvent from TWIA being put into receivership.  TWIA’s insolvency is a real problem in that it means, if the accountants are correct, that TWIA does not have enough money to pay claims and that it does not anticipate enough money to do so through the end of this year even if there is no significant storm. It is just fascinating that this singular fact does not appear to bother any of the speakers from the coast who came to the hearing today. Instead, the focus is on receivership.  Why? Do they think that grab law, which is the alternative to receivership, is an improvement?

The best arguments against receivership were that it might hurt the ability to obtain a Bond Anticipation Note secured by the potential for Class 1 securities being issued and that it might possibly hurt issuance of Class 2 and 3 securities. But the empirical evidence on this point is awfully thin.  It is not clear that a BAN could be issued anyway or that a post-petition receivership would hurt rather than help short term bond creditors.

The other thing that I think is clear is that the TDI Commissioner is going to act swiftly here.  She has a first mover advantage and does not need the TWIA board’s cooperation. TWIA’s board can cooperate, which might matters go more swiftly and less expensively, or it can make some short term political hay by opposition.  But what would it really accomplish except make some people who have demonized the incumbent insurance commissioner feel better in the short run?

The other matter I wonder about is seeing this as just one move in the Austin chess game about how TWIA is going to be restructured or depopulated.  Does the fact that it is in receivership help the argument to move towards an assigned risk plan as in HB 18? And maybe that is what this is all about.  If TWIA has “failed,” then the case for propping it up may look weaker and the case for going to something significantly different, a market oriented assigned risk plan may look stronger.

And, by the way, we are now on minute 10 of the 5 minute break.

13.04

TWIA goes into a closed session at 2:05. Apparently just a 5 minute break.  Except that in my experience one should add a zero to declared break times.   Anyway, we are done with Round 1.

13.03

TDI: Why is receivership in best interests in policyholders. TWIA does not have enough assets to pay its liabilities. Current claimants may not get claims paid fully. Make sure that actual damages being sustained are given priority. [Over what? Extra-contractuals?]

TDI: We are ready to move quickly in court. But stakeholders can have input through court process. File your plan and set a hearing.  At TDI, we try to be ready for all scenarios. [i.e. they are writing a plan]/

 

13.00

TWIA: Who is this rehabilitator? Why does TDI think that the rehabilitator can do a better job than this board.

TDI: Insurance Commissioner appointed as receiver but a competitive bid to find a manager. We can get someone on an interim emergency basis.  There are better statutory remedies in receivership. [Like not pay claims in full!]

12.58

TDI: Rehabilitation stays and centralizes lawsuits [just like federal bankruptcy].

TWIA: What can we assume with Class 1 bonds in designing reinsurance program. Looks encouraging that we can get a 0 million BAN to help reinsurance. But receivership would make that harder said the TPFA folks [I think I have this comment correctly] TPFA said it had offer from Bank of America, though at a higher price tag. [This is an important issue]

TDI: We would be moving in and out quickly. TDI  has concerns about ability to issue BAN anyway given negative surplus. [Darned straight].

12.55

TWIA: Effect on mortgages and covenants

TDI: Freddie and Fannie accept residual market insurance.  Ratings relate to private insurers.  [So is she saying all is well with mortgagees].

TWIA: What about residual markets in rehab.

TDI: Can’t predict what they would do. They have had conversations.

12.53

TWIA: Why now?

TDI: 4th quarter statement. Additional litigation that created a negative surplus. And no realistic opportunity to earn its way out. Rehabilitation would not inhibit vital reform measures on the table.

TWIA: Impact on reinsurance purchase? And post-event bonds?

TDI: Receivership can definitely create challenges. We will get a plan on file very quickly. Receivers can purchase reinsurance. The goal would be to get out of rehabilitation quickly. [Don’t bet on this occurring]. Work with bond market and see what we could do. [Vague]

 

12.51

TWIA: What happens to this board if TDI puts TWIA in receivership?

TDI: Board would be suspended and the rehabilitator would operate with the power of the Board. Board could be reconstituted after emergence.

TWIA: We’ve been in administrative oversight.  We have limited authority. Why the need for this board to consent?

TDI: Things move quicker when there is consent. If rehabilitation were consented to, there would be less disruption. On the same day, the AG can go to court, enter a rehabilitation application and enter a rehabilitation order almost simultaneously. We would soon have a rehabilitation plan. Fears would be quelled. If we have a contest, there will be more uncertainty and delay. At TDI, lack of disruption is important.

TWIA: A lot of the testimony we have heard today about nervousness of bankers etc. — at least there would be a plan to take care of it.

TDI: Yes.

12.48

TDI: Being back to zero balance would be enough to get it out of receivership.

TDI (Jamie Walker). Based on projections for TWIA income there will still be negative surplus at the end of this year.  And this is in case there are no “hiccups” [like a hailstorm?].

TWIA: Is the FAIR plan insolvent? It too has a negative surplus.

TDI: I don’t know.

12.46

TDI: Rates would be continued under the current statute, unless laws are specifically changed.  [TDI being very careful and lawyerly in its answers.  Lawyerly used as a positive adjective here].

TWIA: What would be the standard to get TWIA out of rehabilitation given that TWIA is not generally supposed to have surplus.

TDI: TWIA is not required to have an excess of surplus. TDI lawyer specifying basis for receivership. Insufficient assets, not an inability to pay bills.

12.43

TWIA: that paints a pretty rosy picture.  What other states did you look at?

TDI: More than 25 states have this law.  Modeled it after NAIC act.

TDI: Rehab has not been used in the residual market before.

TDI: Process depends on specific case. If something were to happen, we would move very expeditiously. Move to rehabilitation. Rehab order by the court. Rehabilitator would file a rehab plan within one year, but it could be done in a matter of days. How were claims going to be paid and what the process would be.

12.41

TDI has no specific comment, but available to answer questions.

TWIA Board now asking questions. Receivership has a stigma. Could TDI  talk through pros and cons of receivership?

TDI: Two types of receivership. Rehabilitation and liquidation. Rehab akin to a Chapter 11 in bankruptcy. Purpose is to revitalize an insurer so it can go into the marketplace. Company can pay claims, issue policies, without market disruption.

12.38

Public comment over. Moving on. Consideration of following topics: Review options for addressing financial condition of Association.  Including receivership. Notes representation from TDI.

12.37

Eddie Cabazos — Item on agenda to go into closed session. Is that not a violation of the open meeting act? [No.]

Answer — The Open Meetings law requires final action to be taken in open session. but advice of counsel can cause a closed session.

12.35

Tom Tagliabue, Government relations person for the City of Corpus Christi. Also opposed to receivership.

12.35

Joe Vega, Mayor of City of Port Isabel [again apologies for misspelling of names].  Will hurt small businesses.

Mr. William Goldsten, Corpus Christi — Negative economic impacts to engineering and construction profession along the Gulf Coast. [You know, these are probably all fine people, but that is not the issue.  The issue is whether receivership is the best way to address TWIA insolvency.  The fact that the legislature is in session is relevant, but not dispositive.  Grab law is the alternative to receivership.  Receivership is really a code word for insolvency.  In law school, we call this argumentative technique, “fighting the hypothetical] It will create chaos along the coast. #twia. Reduce the discrimination against the coast.

12.31

Eric Sandberg, Texas Banker’s Association — We need to have viable insurance in place, particularly from a regulatory standpoint.

12.30

Eric Sanburg, Texas Banker’s Association — skipped

David Garza, Cameron County.  [Ever get the sense this might be a bit one-sided presentation of commentary?  Looks like the coast, whose ox appears gored, has gotten its political act together whereas diffuse other constituencies have not]. Receivership is not the answer.  Let the legislature do its job. If we don’t get adequate results from this legislative session, do what it takes to make us solvent.  Our bankers and mortgage holders are nervous. [Let alone homeowners and businesses!]

12.27

Foster Edwards, the Corpus Christi Chamber of Commerce. CCCofC has been working with TWIA staff for years. A “bonehead idea, frankly.” Expressed well in letter on page E4 of packet, signed by four state representatives. [Is this the Deshotel letter that I just posted to this blog.]

12.24

Mr. Perkins with the Coastal Windstorm Taskforce: Mayor of Ingleside. We speak with one voice in opposition to go into receivership.  Again the argument that assessments are available.  [Has it occurred to anyone to actually read the statute?]  Development will be hurt. [Maybe industry could pay people extra to help purchase insurance?] Let the legislature do its job. Create a transition from TWIA to some other entity but not an instant effect on the market.

12.22

Charlie Zahn, Coastal Windstorm Taskforce: Close to matching up bills for final consideration by Senate. [Really?]  Legislative process needs to take care of this issue. Receivership implies TWIA does not have the ability to pay its bills in the future. You don’t have the basis for receivership. Trust fund in place.  You have the ability to assess. [HOW??] We are a viable entity. #twia. Already had a negative impact on Texas coast, including banks. [Probably true] Can they continue to provide mortgage loans. [Yes, a legitimate concern.  But is it receivership that is causing the problem or the insolvency.]

12.18

Greg Smith, Coastal Taskforce: Question of solvency should be judged as a residual carrier, not as a private insurer.  There are other residual carriers that are much worse off than TWIA.  National Flood, New Jersey FAIR Plan and Louisiana FAIR plan are worse off. Yet no question about their solvency. Will send messages to other carriers across the nation.  Rating agencies say you don’t have to have positive surplus.  [The everyone is doing it defense?]

12.16

Anne Vaughan, Port Aransas Chamber of Commerce [my apologies for any misspelled names]. Oppose what is “nothing more than an insane idea.” [Why is it insane to put an insolvent entity into receivership? Kubler-Ross stages of grief comes to mind. Denial. Anger] Has unconfirmed Commissioner of Insurance thought this through? TWIA is our only source of insurance. [But if it were not, one would never know if TWIA premiums were too low]

12.13

TWIA board member distinguishing between comments of TWIA and comments of TDI.

12.12

Joe McComb of Nueces County: Precinct 4.  The fun part of Nueces County. I do know people are concerned about coverage.  If they’ve got TWIA, they’ve shopped coverage and they have no alternative.  Worried that the decision has been made. [Yup]  Give legislature 60 days to solve this problem.  Good part of having a crisis is that the legislature is in session.  Place faith in elected officials. It will take 60-120 days to implement receivership anyway.  [Most persuasive speaker so far].

12.09

Keith McMullen with Port Aransas: Mayor of Port Aransas. Please don’t pursue receivership. Don’t case doubt on insurance market on the coast. Already created nervousness.

12.08

Schlitterbahn Waterpark representative speaks:  How will receivership impact existing contracts with lenders and vendors? TWIA receivership creates uncertainty that will chill business. [True, but what is the alternative if TWIA is insolvent? — SJC]. Before TWIA placed in receivership, other funding alternatives should be explored. [Like what? Assessments?]  My editorial comments are in brackets.

12.06

Jim Rich of Beaumont Chamber of Commerce: Very concerned about receivership. Notes importance of coast to economy. Wants a legislative solution. Let the legislative process work.  [But what if nothing happens? — SJC]

12.03

Public comment limited to 3 minutes with a timer. No more than 30 minutes to public comment period before moving to the rest of the agenda.

12.01

Calling roll

11.59

If you can see this it is a part of Rep. Deshotel’s letter.   It’s the first inkling of any legal theory behind the idea that TWIA can still asess for Ike.  Don’t expect insurers to buy it.geeslin assessment theory

11.55

Meeting is beginning.  One can see people milling on the video.

11.53

Channel 12 News (Beaumont) reports that State Representative Joe Deshotel has issued a press release opposing placement into receivership. Add him to the list of people whom I believe are mistaken on the law.  Here’s what he says in his letter:

If the Board would simply follow the law in place for these 2008 policies by assessing the insurance companies and moving the premium money to the Trust Fund, which currently has 8 million, TWIA would have over 5 million, which is hundreds of millions more (50%) than the Trust Fund has ever had!

11.50

Rick Spruill of the Corpus Christi Caller posted a preview of today’s meeting about 20 minutes ago.

11.46

In theory, you should also be able to follow this blog on Twitter using the hashtag #twia

11.40

Here some issues I expect to hear discussed at the meeting:

1) Is TWIA really as insolvent as its annual statement asserts (i.e. 3 million in the hole).  There are occasionally discretionary choices that get made in insurance accounting.  And there are occasionally mistakes.  Does anyone have a credible argument that TWIA is not seriously insolvent?

2) Assuming TWIA is insolvent, what, if anything, is the real alternative to a receivership?  When an entity is insolvent, as TWIA apparently is, that means some creditors can not be paid in full. If you fail to create an orderly process to pay claims, it means that the entity gets taken apart piecemeal and that different creditors are randomly (or systematically) treated worse than they should be. This is why we have insolvency law and (in most instances) bankruptcy law. Why should TWIA be treated differently?

3) Is there any authority as several coastal politicians have maintained to help TWIA out by assessing insurers for losses attributable to Hurricane Ike?  This blog has repeatedly maintained here, here and here that there is no such legal authority and that the old legal authority, section 2210.058 of the Insurance Code, was repealed in 2009.  Let’s see if there is anything more than denial or bluster behind the claim that TWIA can assess insurers without there being a new storm that would justify the issuance of public securities?

Catrisk will try to live blog the TWIA meeting on March 25, 2013

I’m going to try to live blog the meeting of the Texas Windstorm Insurance Association scheduled for 1 p.m. in Austin.  I’ll be doing it remotely since my day job is going to prevent me from traveling to the site of the meeting.  So, if my Internet connection holds up and the TWIA server stays strong, I’ll be providing “instant analysis,” with all its advantages and pitfalls tomorrow.  A first for me and this blog.

Here’s the agenda for the meeting.

 

 

Breaking News: TWIA likely to go into rehabilitation

The Texas Department of Insurance has released a FAQ setting forth what will happen in the event that TWIA is placed into rehabilitation.  Insurance regulators don’t — and shouldn’t — issue unsettling documents like this unless the threat is very real and very imminent.  I’m attaching a plain text version of the document to the end of this post (after the break). I’ve done a tiny bit of formatting to accommodate the blog format.  You can see the original version in PDF format here. Things are moving very fast.  I’ll have some comments on what is going on, but for now I just wanted to apprise interested people of this important development.

Key quotes from the FAQ

  • The Annual Statement shows that, based on additional litigation filed in 2012, TWIA is now insolvent. TWIA’s liabilities exceed its assets by $183 million. Allowing TWIA to continue to operate in this condition could place new policyholders in jeopardy, and could further threaten the current policyholders.
  • “If TWIA’s funds are insufficient to pay all existing claims, it may be necessary for the Rehabilitator to make partial payments on a pro rata basis.”
  • “The hold on claims payments would not apply to losses stemming from storms occurring after TWIA was placed in Rehabilitation.”
  • “TWIA does not currently have any outstanding pre-event public securities.”
  • 18. Would Rehabilitation affect the availability of mortgages in areas covered by TWIA? Rehabilitation would not change TWIA’s ability to issue new policies, renew policies, or fulfill its obligations under current policies. [Note that the question is not actually answered — SJC]

 

Continue reading

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.]

 

 

TWIA board to consider receivership

An agenda posted recently by the Texas Windstorm Insurance Association for its meeting on March 25, 2013, in Austin, Texas shows that the state-chartered insurer will at least be considering options consistent with those of insurers who are insolvent or whose solvency is threatened.  Item 2A of the agenda reads: “Review options for addressing the current financial condition of the Association and alternatives including supervision, conservation and rehabilitation in receivership”

Several points worth noting before I head off to a meeting:

1.  This does not mean that TWIA is insolvent.  It does suggest, however, that its board is taking seriously the financial straits in which the insurer now lies.

2. One has to assume this mention of conservation and rehabilitation in receivership was not done casually.  Its authors must understand that, however responsible it may be to consider these very options, just saying it in a public document has significant repercussions.

 

[Update: 3/21/2013.  The Corpus Christi Caller, which seems to be the only Texas newspaper not asleep at the switch on this issue, has a story today discussing this matter and reaction among some on the coast.]

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.

 

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.”

The latest information on post-event bonding issues

David Crump [1], one of the clearer thinkers on catastrophe insurance in Texas has done some excellent work in getting information on the ability of Texas to sell post event bonds — and the likelihood that we would have to do so following a signifiant storm.  I’m reprinting his email below, putting the document from the Texas Public Finance Agency at the bottom of this post, and providing access right here to the response TWIA provided to Mr. Crump’s public information request.  Good work, Mr. Crump!

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