The scary Austin American Statesman article

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

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

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

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

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

Continue reading

One way not to promote sanity

An opinion column in the Corpus Christi Caller by Nick Jiminez uses the issue of whether Insurance Commissioner should be an elected position in Texas as a vehicle for repeating bogus arguments about hurricane insurance in Texas.  Now, I don’t really have a stance on how that position should be filled — we seem to vote for an awful lot of offices here in Texas — but I do know that the points addressed in support of Mr. Jiminez’s position don’t make much sense. And I do believe that repetition of bogus arguments and this form of “messaging” is not a constructive way of addressing the serious problems facing the Texas coast.

I will list several of Mr. Jiminez’s arguments in turn and attempt to debunk them.

1. The Insurance Commissioner is unaccountable as evidenced by her inability to answer a question posed by State Rep. Todd Hunter at a hearing last month.  The question was how much the 14 coastal counties contribute to the Texas economy.  The correct answer was apparently 30% according to a study. But the question asked does not have a single “correct” answer.  To be sure, the coastal counties contribute immensely to the Texas economy, but there is not a single number that reflects this point. Moreover, I am willing to wager with Mr. Jiminez that if one were to have used the methodology employed by this study to come up with the 30% number, one would have found that the area around Dallas contributes a large percent, and similarly the area around Houston, and Austin and the Panhandle, etc. such that the total “contribution” would add up to well over 100%.  The problem, I suspect, is not with Commissioner Kitzman (or the other officials stumped by Rep. Hunter at the hearing) but with a question, that unless made far more precise, is objectionable.  Moreover, even if this Insurance Commissioner fumbled on this occasion and didn’t seek clarification of an ambiguous question posed by a good lawyer, this is hardly an argument for changing the political system.  Do you think that many of our elected officials would be able to respond on the spot to similar vague “statistical” questions?  I don’t.  Do you think that Commissioner Kitzman is unaware of the large contribution made by the coast to the Texas economy?  I don’t think so either.

Note.  I don’t begrudge Rep. Hunter making a thinly disguised argument in a legislative hearing.  I do begrudge those who would use the failure to answer an objectionable question “correctly” as a good reason to change our political system or to criticize the incumbent.

2.  Tropical cyclone insurance rates should be lower in Corpus Christi because it has not had a hurricane in 40 years.  This argument is wrong in so many ways.  First, hurricane risk is not tropical cyclone risk.  The area with 60 miles or Corpus Christi has been hit or brushed by tropical cyclones 34 times in the 140 years since records have been kept.  It gets hit by hurricanes on average once every 15 years.  TWIA and other cyclone insurers pay for high winds and named storms, not just hurricanes. As anyone who remembers Allison can say with confidence, tropical storms can be incredibly expensive events.  You can’t just ignore them. Second, the fact that Corpus Christi has been fortunate in recent years is little more likely to predict future performance well than the fact that the Astros had won four in a row on May 25, 2012, and were almost at .500.   Although it may be legitimate to claim that Corpus Christi appears to be less at risk for hurricanes than other parts of the Texas coast, it is not legitimate to cherry pick time periods and measure risk on that basis.

3. “If South Texas were a person buying car insurance, we would be getting a price break, not a huge bill as we are now.”  I won’t dispute that the bill is large, but the real issue is whether the bill is large relative to the risk.  If it were, Mr. Jiminez must explain why it is that private insurers are not beating down the door to write windstorm insurance in Nueces County.  Some vast conspiracy to not make money?  Moreover, if coastal politicians truly bought this argument, they must explain why they oppose TWIA basing its rates on geography rather than the essentially uniform rates that currently exist.

4. “Electing a commissioner would allow the poor and low-income voters, who often can’t afford steep windstorm rates, to have a say in who sets insurance rates.”  This point has some merit, but I have serious doubts it would help the Texas coast.  A lot of the poor and low-income voters about whom Mr. Jiminez appears concerned do not live on the coast.  They are currently subsidizing coastal residents — many of whom have houses far more valuable than theirs and owned by people who are considerably more wealthy — by letting  rich and poor on the coast alike purchase coverage at rates that do not reflect actuarial reality.  And the more expensive the house, the greater that subsidy. It is those poor about whom Mr. Jiminez claims concern who will end up paying parts of the assessments and surcharges to pay for claims suffered by rich and poor TWIA policyholders.  So, I’m not so sure the poor of El Paso and Dallas and, yes, Amarillo, will be eager in an election to vote for the candidate who pledges to continue the sort of subsidies for the coast that now exist.

All of that might explain why, in the end, Mr. Jiminez kills his own straw man  — is there a serious push to make the position elective?  He concedes that “[t]he real focus of an effort to bring some sanity to coastal insurance rates ought to be the next Texas Legislature, not fighting to get the insurance commissioner on the ballot.”  On this point, I probably agree, although I guess I wonder why one would then embark on a long rhetorical journey so hostile to the current Commissioner.  But sanity will not be made more likely by use of coastal newspapers to advance arguments that, no matter how frequently repeated, just do not hold water.

Reducing Maximum Residential Policy Limits

I and many others have proposed that TWIA reduce the maximum policy limits on residential properties from the current $1.8 million to some substantially lower figure as a way of reducing the likelihood of post-event bonding and insolvency. Such a reform would also have the effect of reducing subsidization of individuals who have more expensive homes than the average Texan paying for the subsidy. As shown in the recently released Alvarez & Marsal report It would also bring TWIA more in line with other coastal windstorm programs such as Alabama’s $500,000 or Florida’s $1.000,000 dwelling limit.

But, a legitimate question is how much value would this reform really create?  The case for the reform is somewhat stronger if it would reduce TWIA exposure by, say, 20% than if it would do so by just 1%.  One statistic advanced by Representative Craig Eiland (D. Galveston) is to note that only 1% of residences insured by TWIA are valued at over $1 million.  This statistic needs to be augmented, however, by an appreciation that the more valuable the residence, the more it contributes towards the risks of TWIA.  All residences should not count alike.

Data provided by TWIA permits a first stab at a better answer.  I’ve presented it in the chart below. It shows that reducing limits to $1 million for residences will have only a 1% effect on TWIA’s total insured value.  Somewhat disappointing. If we’re serious about cutting TWIA exposure, we have to dig deeper.  Going to $500,000 gets about a 5% reduction in total residential insured value.  A reduction to $250,000 (the federal flood limit) creates the big gain, reducing TWIA’s residential TIV by 29%.

TWIA exposure reduction chart

TWIA exposure reduction chart

A few more points.

1. Just because the reduction is smaller than ideal does not mean we should not do it.  Every little bit helps.  And, as I have said ad nauseum, the economic and moral case for subsidizing expensive beach homes seems rather small. It’s all the more so where we condition the continued reduction in maximum policy limits, as I have proposed, on a finding that excess insurance is available.

2. For actuarial math nerds only! The figures I’ve put up, although the best I can do with the data I have, are still not ultimately what one would want.  What really needs to be done by organizations such as AIR, RMS and others that have better access to the underlying storm data, is to determine the effect of right-censoring the loss distribution on homes on the overall distribution of losses faced by TWIA after a correlative premium reduction is taken into account.  One can then use the survival function of the transformed aggregate insured loss distribution to recompute the probability of TWIA needing to resort to various classes of securities and its risk of insolvency. My guess is that the relationship is somewhat sublinear because losses to the left of the censor point are more common than losses to the right. So, even though I am showing a healthy 29% reduction in TIV from a $250,000 cap, that will likely not reduce of TWIA insolvency by 29%.  If you asked me for a wild guess, I’d guess 15%. That’s still good. Every little bit helps.

3. The data here is one reason I really like coinsurance as a way of limiting TWIA exposure.  (See suggestion # 2 of my 10 point proposal here).  It has a more direct effect than right-censoring individual loss distributions, makes it less necessary for people to purchase multiple insurance policies, and may result in greater mitigation.

4.  In the spirit of transparency, I’m posting the spreadsheet that underlies this analysis here, along with a Mathematica notebook used to conduct the analysis.

Residential Dwellings spreadsheet

PDF of Mathematica notebook showing reduction in TIV from cap on maximum policy limits

Coming across as “negative”

This past week, I was chided by State Representative Todd Hunter as having “come off negative to the coast.”  I didn’t have a chance in the crowded hearing room with a three minute time limit to respond then and there, so let me try now.

I do not think I am negative at all to the Texas coast.  I actually like the coast.  I go down to Galveston a few times a year with my family and enjoy the sand and water.  (I could do without the traffic between Houston and Galveston, but that’s another story.) I have friends who live on the coast.  Some were badly hurt by Hurricane Ike. I feel badly about that and I feel badly about their insurance situation.  I’ve enjoyed bird watching and photography both in Winnie and Port Aransas. Perhaps it’s my lack of perception, but people on the coast don’t strike me as much different than other Texans with whom I generally get along just fine.  So, if the issue is some sort of personal bias against the coast or some dislike of its geography or scenery, that’s just utterly, totally not true.

I suspect, however, that’s not what was meant.  I suspect what was meant was that I haven’t supported the coast in getting a lot of help from other Texans or the Texas government in dealing with its insurance situation. I haven’t demonized the insurance industry as the cause of the problems. And I haven’t expressed a lot of sympathy for the predicament in which coastal residents find themselves.  I think I can fix one of the problems, but probably not the others.

Sympathy.  I do sympathize with the insurance situation of people on the coast.  I don’t like the fact that many of them, particularly the less wealthy, have to pay high prices for insurance.  I sure wish hurricanes weren’t a correlated risk of low frequency events that pushes prices higher.

But I also sympathize because they are the victims of a misguided government program which, every year it continues, tends to make the situation worse. I sympathize because they are the victims of changing climate and changing science over which they have little control. And I sympathize because I fear they are subject to manipulation by politicians who often take a short run view.

Government programs that displace the private market over a long perod of time — such as TWIA — have a tendency to be very hard to get rid of.  Exhibit A might be the hearing this week. That’s because people come to rely on them. So, when TWIA has rates well below what a market would charge, and it has them over long periods of time, it encourages development on the coast.  It encourages people to build businesses and houses, and larger businesses on the coast. They do so because they believe that the government program will continue — or because they just focus, as many of us do all the time, on the short run.  The result, however, is that we now have more property than a market would create facing a large risk of loss.  And that market is filled with nice people and nice children and worthy small businesses and important big businesses and schools. We have hopes and dreams struggling to succeed in the community that government helped create.

And then what happens?  Precisely because the government is selling cheap insurance, the private industry won’t compete. The physical and intellectual infrastructure to sell private insurance on the coast decays. Sure, maybe there are other reasons, but you need to do a lot of work on me to persuade me that insurers are colluding — for no apparent reason — in just refusing to write insurance on the coast.  Maybe one or two irrational insurers has an undue fear of writing risk on the coast.  But insurers compete all the time on what constitutes good business.  And reinsurers seem remarkably able to do business on the coast in a market where the price is unregulated. Surely, if TWIA weren’t in the way for years selling insurance at rates that could not be actuarially justified and that relied on other insurers and government picking up the ultimate tab, or if insurers hadn’t been fearful of the Texas Department of Insurance, which lives in a political universe, vetoing actuarially realistic rates that take time and money to develop, a large chunk of private insurers would be on the coast. Government thus converts what might have been the temporary evacuation of scared insurers from the Texas coast following Hurricane Celia into a permanent exodus.

And then it gets worse.  We have global warming and climate science and Katrina and cheap computer modeling so that it’s now believed that the hurricane risk on the coast is far greater than that which history alone would reveal. So, now we’ve trapped people.  We’ve erected communities and predicated lives on premises that no longer seem to hold. The insurance industry, if it was ever coming back, is more scared than ever.

None of this was the fault of the people on the coast.  They couldn’t have forecast that people would no longer believe that historic evidence on hurricane frequency and severity would no longer be believed fully applicable.  So, when people who are paying for an ever greater subsidy start saying, “party’s over,” I sympathize very much with their situation.

But …

Laws and government can not run on sympathy alone. And the truth is if we don’t have serious reforms, the problems are only going to get worse.  It is going to resemble exactly what Commissioner Kitzman described this past week as “rearranging the deck chairs on the Titanic.” So, what I’m afraid of is that after I smile and smile and express my personal sympathies,” I’m going to advance policy positions that people on the coast, many of whom have been misled for decades, still aren’t going to like.

In a future blog entry, I’ll continue to set forth my recipe for progress. It starts, however, with honesty. The good people on the coast have to acknowledge that, however faultless they may be, there are issues with asking other people to pay for their insurance needs. The people on the coast have to acknowledge that, although their choices may be constrained and difficult, they, like all of us, make choices about where and how to invest. The people on the coast have to acknowledge the inconvenient truth that the best climate models and damage models predict far greater risk than those in the past, even in areas of Texas that haven’t suffered a serious hit for a while. And the people on the coast have to acknowledge that continued subsidization and continued allocation of scarce resources on that basis can only make the problem worse. Personal attacks, as have been made, on people who tell the truth as they see it doesn’t help the process. In return, I’ll acknowledge a desire to limit the pain in a transition to a fairer, more efficient and sustainable approach.


Oh, please. The “but the coast is poor” argument for subsidized windstorm rates

One of the arguments I heard repeatedly at yesterday’s hearing of the Joint Interim Committee on Seacoast Territory Insurance is that the coast isn’t a bunch of rich people with fancy beach homes.  Rather, the mean income on the Texas coast is in fact lower than the mean income in the rest of Texas.

a large beach house in Galveston

An elegant home in Galveston

Let’s stipulate that this is true. On average, the Texas coast may well be poorer than the rest of Texas.  Many parts of it may have a higher proportion of minorities. But of what import should mean or median incomes be in considering the finances of the Texas Windstorm Insurance Association?  TWIA does not “means-test” in deciding who gets its subsidized insurance.   Instead, wealthy and poor alike receive the benefits of TWIA subsidies.  In fact, wealthy TWIA homeowners  receive a far larger subsidy than poor TWIA homeowners. I bet not too many of them are minorities. So while it is the case that someone with a $80,000 house in Willacy County living on a $35,000 income gets a subsidy, it’s also the case that the person with an $80,000 home in Nacogdoches living on a $30,000 income there ends up subsidizing the person with a $1.2 million house in Galveston living (possibly in Houston) on a $300,000 income.  Indeed, just to rub sand in my point, the $1.2 million Galveston estate might be a second home. Where’ s the justice in that?

A modest house in Laguna Vista

A modest house in Laguna Vista

So, when people who advance the “but the coast is poor” argument join me in advocating lowering the TWIA policy limits or placing other means-based limits on TWIA eligibility and stop saying — “but it will only save a few percent” — I’ll feel a lot better about a redistributive argument in favor of TWIA subsidies. A windstorm insurance policy that focused on poverty (or ethnicity) would look a heck of a lot different than the current system.  So, until we get to fundamental TWIA reform — one that might begin with the administratively trivial step of lowering maximum limits —  you’ll forgive me if I think justifications of anything resembling the current system based on the relative poverty of the coast  should be met with “Oh, please!”

P.S. I’d feel those folks were being yet more consistent if their arguments in favor of income and wealth redistribution weren’t curiously focused on windstorm insurance.

P.P.S. It’s those poor, by the way, who are going to be most hurt when TWIA goes insolvent or has to issue post-event assessments after a large storm.


Footnote: I did some research tonight on wealth in the TWIA counties.  Probably I should not have stipulated that the TWIA counties are materially poorer than the rest of the Texas, although they are no wealthier.  The population weighted mean of median household income in those counties (excluding Harris, which is only partly TWIA) is about $46,824.  For the rest of Texas, the median household income is $49,646.  So, the TWIA counties are a little poorer, but, on balance, not much.  The two exceptions, by the way are Cameron County and Willacy County, both of which are indeed quite poor.  Chambers and Galveston Counties have median incomes well above the Texas median.

The Big Hearing in Austin

There is so much to talk about!  In fact, so much, that I’m just going to provide links tonight and save more extensive blogging for the next few days.

1. The Joint Interim Committee to Study Seacoast Territory Insurance held a four hour hearing in Austin today to discuss major reforms of TWIA.  Leading figures were TDI Commissioner Eleanor Kitzman and TWIA chief John Polak.  I testified briefly along with about 30 others. Corpus Christi State Representative Todd Hunter questioned who had invited me (Governor Perry’s office) and stated displeasure with what he regarded as a negative approach in my July op-ed, honoring me with a dramatic reading of that work’s final sentence. Other active legislators involved in the discussions included Craig Eiland and Juan Hinojosa.  Although a consensus on how to proceed was not reached, perhaps all could agree that debate and discussion was vigorous?

2.  If you asked me what the “headline” of the hearing was, it was the consensus among the witnesses that TWIA is really, really broken.  Kitzman, Polak and the Office of Public Insurance Counsel all agree that the organization is not actuarially sound. I fear we may be heading for a “health care” third rail, however, in which all agree that the system is broken but prefer it as second best over all but their favorite competing system.  The idea of a statewide cat risk pool appears to have some traction among some constituencies.

3.  Here are some links to press accounts of the hearing.  Corpus Christi Caller; Texas Tribune; Houston Chronicle (AP).  It’s possible you can watch a video of the hearing by clicking on this link.  My segment is from 2:28 to 2:36.  (You can get it to work on Macs by downloading an old copy of Real Audio from

4.  Last Friday, the Texas Department of Insurance released the Alvarez & Marsal report, a $350,000+ study of ways in which TWIA could be reformed.  This is a document with which all sides in the discussion will need to grapple.

5.  An interesting comparison of the Texas windstorm insurance market with those of other coastal states was produced.  Here’s a link to this informative report.  Again, I’m not sure we want to emulate every feature of these other state systems, but they provide some ideas and norms.

Ten fixes for TWIA: What I’m planning to say in Austin this week

I’ve been invited by the Governor’s office to testify this Wednesday in Austin before the The Joint Interim Committee to Study Seacoast Territory Insurance. Thoughtfully, they scheduled the hearing for a day I don’t teach class. Here’s what I’m planning on saying (along with the written supplementation).  By the way, if any readers have constructive suggestions on changes, please send them to me at  And if anyone wants to attend the hearing, it’s in room E1.016 in the Capitol Extension at 10:30 a.m.

Hello, my name is Seth J. Chandler. I’m a professor of law at the University of Houston Law Center and Director of its Program on Law and Computation. I have studied the current Texas Windstorm Insurance Association funding mechanisms in depth for over five years, outlined Texas windstorm insurance issues in various op-eds and have my own blog on the topic before you, The views here are my own.

Continuing with the current system of windstorm finance or merely tweaking it engineers a disaster waiting to happen. The 15% or so risk of TWIA insolvency over a ten year period, should leave every Texas legislator sleepless. The 50% risk over that time-frame that TWIA will need to resort to untested post-event bondings and surcharges or assessments is likewise disturbing. Endless reliance on costly reinsurance effectively traps TWIA in a cycle of inadequate capitalization.

But to leap from those woes to a new large government bureaucracy that socializes and further politicizes large segments of the insurance business is premature at best. The key idea now being floated surcharges all property and casualty policies in Texas (including auto, homeowner, business liability) some percentage of the premium to cover claims generated by a catastrophe. I don’t have details yet, but such a triggering catastrophe would likely be defined by insured claims from some single occurrence exceeding some amount. Now, if this scheme were consistent with the rest of the Texas insurance code, which permits geographic rating where actuarially justified, it might have some virtue as a risk diversification mechanism. But the key part of the proposal I have seen throws actuarial justification out the window. It insists that the surcharge rate should not depend — not even within some bounds — on the location of the property or the insured. So, even though insureds in Laredo or Huntsville or Garland might have a risk of making a defined catastrophe claim with only 1/10 an expected value as frequently as those in Galveston or Corpus Christi or Beaumont, all of them would be charged alike.

As many wiser than I have noted, “there is no greater inequality than the equal treatment of unequals.” Why is it just to permit high-risk and wealthy property owners in one part of Texas to get subsidized insurance paid for by low-risk and less wealthy property owners in other parts of the state? But, unfairness aside, there are problems with the proposal. Such a scheme enlists government to divert private resources to the riskiest parts of the state and thereby exacerbates future catastrophe losses. It will, unless there is, as I fear, an “individual mandate,” result in lower take-up rates in catastrophe-sparse regions than in catastrophe prone ones, which will further drive up surcharges and threaten a death spiral. And who here can contemplate the bureaucracy necessary to define occurrences and catastrophes, to determine when payments should be made from the state cat pool rather than conventional markets, to fund and monitor funding of a state-wide cat pool, and to prohibit insurers selling in catastrophe-sparse areas from undercutting the pool price?

So, before we kill TWIA and transition into the unknown perils of more government regulation and bureaucracy, I suggest we test more thoroughly whether and how the private insurance market will perform when the seacoast playing field is leveled. I do not share the article of faith among some that the private market will never work there. I say that faith has not been tested for decades because the playing field has been badly tilted. TWIA charges rates that protect against only a portion of the risk posed by its policyholders whereas we insist that private insurers charge rates sufficient to cover the entire risk. I would love to see Allstate come in to Commissioner Kitzman’s office and ask to continue selling policies in Texas when the odds of it failing over the next 10 years were acknowledged to be 15%. TWIA now gets special protection from lawsuits for improper claims handling. TWIA doesn’t do what I think most sensible insurers would do when we know that stronger building practices significantly reduce expected losses: charge modest coinsurance, particularly for claims in excess of actual cash value, but possibly waive coinsurance upon proof of extraordinary effort. Finally TWIA fails to do what we would require of private insurers: prominently disclose to policyholders the special insolvency, assessment and surcharge risks posed by its current funding structure.

Basically, I want Texas to transition to a market for windstorm insurance on the coast that is only different insofar as truly necessary from the market for property insurance generally. I want an expanded but monitored private market, with a level playing field and greater information to seacoast policyholders. The key to the proposal is a downwards shift in the absolute magnitude of risks faced by TWIA and a program that builds reserves within a smaller TWIA. Such a move will reduce the risk of post-event financing or the disaster of insolvency. The idea is to do so, however, in a way that protects basic insurance for coastal insureds, including those in the densely populated counties, and not to leave them in the lurch in the event, even with a level playing field, private insurance still will not do business on our coast. To those ends I have attached to my written testimony ten immediately doable and specific proposals that I believe you should study as part of your work plan.

Four of those specifics here. Lower the TWIA maximum policy limits so long as excess insurers come in to fill the void, which I believe they will if given underwriting freedom. Insist that TWIA not sell policies without at least modest coinsurance. Require policy premiums that, over a ten year period, build TWIA reserves to a level where it would take more than a 1 in 100 year storm to deplete them. Increase Class 3 assessments so that they would cover up to a 1 in 500 year storm.

Thank you for listening. Please read my expanded testimony involving all ten ideas and bookmark my blog,

Ten Specific Proposals

  1. Reduce over a period of two years the maximum applicable policy limit for TWIA policies on residences. That limit should be reduced to $1 million for policies issued or renewed after May 31, 2013 and, subject to the certification described below, $500,000 (or the Federal Flood Limit, whichever is lower) for policies issued or renewed after May 31, 2014. The latter ceiling shall be in effect each year if and only if the Texas Department of Insurance certifies after an appropriate hearing that excess insurance was generally available at actuarially sound rates in the territory covered by TWIA during the preceding policy year for amounts in excess of the TWIA policy limits for the preceding year. Otherwise the maximum policy limit should revert to $1 million. Take proportional measures for non-residential properties.
  2. Prohibit TWIA from issuing or renewing policies after May 31, 2013, unless those policies contain, in addition to a deductible, a coinsurance requirement of not less than 5% on claims payments up to actual cash value and not less than 10% on payments in excess of actual cash value, provided that TWIA shall have discretion to waive such coinsurance where the property owner provides evidence that its insured property meets the strictest building codes adopted by any state for coastal property.
  3. Prohibit TWIA from entering into reinsurance arrangements in which the actuarial value of the risk transferred to the gross reinsurance premium is less than 20%. This computation should be made by TWIA actuaries using the best available historical evidence and contemporary models.
  4. Maximally protect TWIA policyholders by prohibiting TWIA from entering into reinsurance arrangements for each catastrophe year with an attachment point lower than the sum of (a) its projected catastrophe reserve fund, and (b) the amount TWIA believes it can raise using Class 1 Securities, Class 2 Securities and Class 3 Securities.
  5. Subject TWIA to the same geographic rating restrictions that other Texas insurers face pursuant to Chapter 544.002 of the Texas insurance code and clarify that it is equally protected by Chapter 544.053.
  6. Subject TWIA to the same provisions regarding suit, statute of limitations, and extra-contractual damages as other insurers doing business in the seacoast territory. This could be done either by eliminating TWIA’s current preferences or by according insurers selling primary or excess insurance in the seacoast territory the same preferences as TWIA, provided their policy form is substantially similar to that used by TWIA.
  7. Set premiums and adjust the catastrophe reserve fund in accord with the concepts set forth in “An Idea for TWIA Finance” (, which basically calls for a reserve trajectory that hits 1 in 100 year adequacy within a ten year adjustment period. Factor in all the reforms set forth here (or otherwise enacted) in making this computation.
  8. Upon a certification from the Texas Department of Insurance at the start of each catastrophe year and based on the best available historical evidence and contemporary models, adjust the maximum amount of Class 3 securities that can be sold (and, correlatively, the maximum assessments on insurers) such that, after consideration of the catastrophe reserve fund, Class 1 securities, Class 2 securities Class 3 securities and any reinsurance or similar sources, the estimated risk of TWIA lacking funds to fully pay claims in the following catastrophe year is less than 1 in 500.
  9. To the extent of any inability to accomplish #8, and insofar as feasible, require TWIA to adjust premiums, based the best available historical evidence and contemporary models to take into account the probability, based on the geographic location(s) of the property insured, that TWIA would be unable pay claims fully during the following catastrophe year.
  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.

Quick blog entry on the TWIA meeting of August 6, 2012

I managed to watch most of the TWIA board meeting this morning. Thanks to TWIA for providing this additional form of access to its proceedings. I’m just going to do a quick bullet point list here of matters I found interesting. I’ll try to return to each of these in the days ahead.

1. TWIA has shifted its reinsurance strategy. Instead of a reinsurance attachment point that lay between Class 2 and Class 3 securities, TWIA has now put reinsurance at the top of the stack. It’s also managed to purchase more reinsurance by doing so, notwithstanding a “hardening” of the reinsurance market. This means more protection for policyholders in the densely populated counties but it also means that Texas insurers writing in Lubbock, Dallas, and other non-coastal areas plus non-TWIA policyholders on the coast will bear more of the burden of a large storm by having to repay bonds.

2. One issue TWIA better think long and hard about now that it has placed reinsurance at the top of the stack is how it is going to collect that reinsurance. Traditionally, reinsurers require the insurer to pay the claims first and then to seek reimbursement. But, before this reinsurance will kick in, TWIA will have exhausted its statutory borrowing capabilities of Class 1, 2 and 3 securities. So, does that mean TWIA will have to wait years collecting premiums hopefully in excess of receipts before it can actually get the reinsurance money? How much would it cost TWIA to negotiate a waiver of the indemnity nature of the arrangement? If it’s not a lot, I’d pay!

3. There was talk about how, with $800 million in cash available (source?), TWIA would have months before it would need to raise money from Class 2 and Class 3 securities. I know I’m the gloomy sort, but I have concerns about whether (a) $800 million is enough cash-on-hand for a major storm and (b) whether a few months will be sufficient to raise the extra funding.

4. Uh oh. I learned today that TWIA doesn’t think it can actually raise the $1 billion in Class 1 securities it is authorized to issue following a significant storm. It may only be able to raise half of that. Why? Well, they didn’t say but I assume it is because the market is leery of the ability of TWIA policyholders to actually pay back that money via future increases to their policies. Some TWIA policyholders will likely drop out (or have had their insurable property eliminated). On the one hand, I will confess to deriving some satisfaction from having been proven right that the $1 billion in Class 1 securities was very iffy money On the other hand, it is kind of horrifying to discover that TWIA’s ability to raise money is even more limited that previously asserted.

5. TWIA is evidently going to consider whether to ask the legislature to reduce the maximum policy limit from about $1.8 million for a residential structure down to a lower number. Some board members noted that there was private insurance coverage available for such risks and that other government coastal insurers were not so generous. Representative Craig Eiland from Galveston objected saying that such exposures constituted a small part of the TWIA portfolio and that no one would build large homes on the coast if they couldn’t get TWIA insurance. I’ve advocated in the past that, so long as TWIA policyholders are being subsidized by the rest of the state, that subsidy should not extend to very expensive properties, particularly if private excess insurance is available.

6. TWIA has formed a 10-12 member legislative committee chaired by Mike O’Malley to make recommendations to TWIA regarding recommendations TWIA should make to the Texas legislature on reform. The committee will apparently focus — as it should — on finance issues. Two items of note: only six of the committee members will be TWIA board members. One of the members will be a private advocacy group, the Coastal Coalition. I’m not sure why this advocacy group, which I believe is now renamed the “Don’t Kill The Texas Coast” group gets a privileged position. There was also a discussion of voting rights on the committee. I’m not sure this was resolved, but it strikes me as bizarre that TWIA would delegate voting authority to people not charged with the responsibilities of board members.

P.S. Just fixed a typo in paragraph. It said “not” but it mean “now.” Big difference. Sorry.

TWIA meeting happening now; you can watch it in action

9:03 am Central time August 7, 2012. Just go to and click on the right side where it says “click here to watch the broadcast.” Here’s the agenda for the meeting.

Interesting points from the meeting thus far. TWIA apparently does not a complete “contingency plan” in place yet to deal with how to make partial payments to policyholders when it does not have enough cash on hand. That’s a little scary. TWIA is not sure how it is going to collect on its reinsurance given that reinsurance operates on an “indemnity basis,” meaning that TWIA has to pay out first and then get reimbursed from the reinsurer. An interesting and difficult issue. Where is TWIA getting the money from in order to get reimbursed? Could TWIA negotiate a waiver of the “indemnity aspect” of the reinsurance contract? Did it try?