Houston Chronicle publishes op-ed on TWIA problems

A protracted blue roof does not make for a happy voter

A protracted blue roof does not make for a happy voter

It’s by me.  So as not to infringe the Houston Chronicle’s copyright, I’m just going to publish an excerpt of it here.  But you can (and should!) read the whole thing by clicking on this link.

Chandler: Legislature should fix state’s storm insurance model

By Seth J. Chandler | July 6, 2013 | Updated: July 6, 2013 6:59pm

This hurricane season is looking very bad for property owners on the Texas Gulf Coast. That’s not just because climate experts are predicting more storms than average, but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association, is on the edge of insolvency. Unfortunately, Gov. Rick Perry declined to add windstorm insurance reform to the agenda of the Legislature’s first special session and isn’t likely to add it to the ongoing second.

Texas cannot wait until 2015. The governor needs to show leadership and force legislators to try to avoid a calamity even if a positive outcome and a grand fix is not a sure bet.

What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast.

The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors. Inland legislators must recognize that it will take some time to wean the coast off the existing system. And everyone should realize that the law covering how much “extracontractual damages” victims of insurer misconduct should receive does not matter much when the insurer cannot pay its contractual obligations. If a long-term solution cannot be reached, the Legislature could at least clean out bugs in the statute that could reduce the odds of an insurance disaster for a few years.

Pity the governor and legislators who, after a storm leaves blue tarps on unpaid policyholders’ roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.

Chandler is Foundation Professor of Law at the University of Houston Law Center and principal of the blog catrisk.net, which addresses catastrophic risk transfer in Texas.

 

P.S. This op-ed is indeed similar to one published a few weeks ago in the Austin American Statesman. But is was originally behind a pay wall and is now almost impossible to find. I appreciate the Statesman for consenting to the repetition.

 

 

The op-ed I just pulled

As discussed in the previous post, Governor Rick Perry decided today not to add windstorm insurance to the agenda for a special session of the Texas legislature.  Among the lesser effects of this decision is that it moots out an op-ed piece I had pending with the Austin American Statesman. Here’s what I would have said and why I have problems with the Governor’s decision.

The op-ed

Texas Can’t Wait Much Longer for Windstorm Insurance Reform:

By Seth J. Chandler

This hurricane season is looking very bad for property owners on the Texas Gulf Coast.  That’s not just because climate experts are predicting more storms than average but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association (TWIA), is on the edge of insolvency.  Unfortunately, Texas Governor Rick Perry hasn’t been able to get from “certainly possible” to an urgent “yes” in answering calls to add windstorm insurance reform to the agenda for a special session of the Texas legislature.

The problem with waiting is that TWIA is broke and its funding model is broken. As it stands there may end up being only a paltry $1 billion to pay claims. That sum is inadequate to cover the $2 billion or far higher losses that might be sustained when an insurer with $80 billion in potential exposure collides with a Category 2 or higher storm. And for every day that now goes by with no special session and no bill passed by a two thirds majority of both Houses, that’s one more day deeper into this hurricane season in which the Texas coast is at risk.  Indeed, given the interdependencies in the Texas economy, an inability of TWIA to pay claims would place the entire state economy in jeopardy.

Why such little cash?  As a result of dubious management, underfunding before Hurricane Ike, and 2009 legislation that cut off TWIA’s former ability to soak Texas insurers and inland policyholders for large losses, TWIA just didn’t have what it took to shrug off Hurricane Ike claims. And, given the way it currently spends money and the modern risk of hurricanes to an ever developing Texas coast, TWIA’s premiums just aren’t enough to let it escape a cycle of perpetual underfunding. The situation is sufficiently bad that the Texas Insurance Commissioner wouldn’t even let TWIA prop itself up by borrowing $500 million now, ahead of a storm.

Borrowing after a storm — the current plan — is likewise in doubt. Soundings of the market suggest little appetite to lend TWIA money based on shaky sources of repayment such as massive surcharges on TWIA policyholders. And a bug inserted into the law as the 2011 session makes things worse. The inability of TWIA to market bonds at one level is likely to prevent it from marketing bonds — even ones that might otherwise be salable — at other levels.

Texas legislators wrestled this session with numerous fixes but the result was impasse. Disagreements about how much of a subsidy inland Texans should provide TWIA insureds, coupled with the time-tested Texas tangle about damages in lawsuits against insurers, meant that few bills could escape committee and no bill actually made it to a vote.

What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast. The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors.  Inland legislators must recognize that it will take some time to wean the coast off the existing system.  And everyone should realize that the law about how much “extracontractual damages” victims of insurer misconduct should receive does not matter all that much when the insurer can not pay even its contractual obligations. If a long term solution can not be reached, at least bugs in the current statute can be eliminated.

Pity the Governor and Texas legislators who, after a storm leaves blue tarps on unpaid policyholders roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.

 

Retreating from the Beach: Easier Said Than Done

There’s an Op-Ed from Professor Orrin H. Pikey in the November 15, 2012 New York Times. Here’s some “fair use” of that article.

We Need to Retreat From the Beach

By ORRIN H. PILKEY

Durham, N.C.

AS ocean waters warm, the Northeast is likely to face more Sandy-like storms. And as sea levels continue to rise, the surges of these future storms will be higher and even more deadly. We can’t stop these powerful storms. But we can reduce the deaths and damage they cause.

Hurricane Sandy’s immense power, which destroyed or damaged thousands of homes, actually pushed the footprints of the barrier islands along the South Shore of Long Island and the Jersey Shore landward as the storm carried precious beach sand out to deep waters or swept it across the islands. This process of barrier-island migration toward the mainland has gone on for 10,000 years.

Yet there is already a push to rebuild homes close to the beach and bring back the shorelines to where they were. The federal government encourages this: there will be billions available to replace roads, pipelines and other infrastructure and to clean up storm debris, provide security and emergency housing. Claims to the National Flood Insurance Program could reach $7 billion. And the Army Corps of Engineers will be ready to mobilize its sand-pumping dredges, dump trucks and bulldozers to rebuild beaches washed away time and again.

But this “let’s come back stronger and better” attitude, though empowering, is the wrong approach to the increasing hazard of living close to the rising sea. Disaster will strike again. We should not simply replace all lost property and infrastructure. Instead, we need to take account of rising sea levels, intensifying storms and continuing shoreline erosion.

This is not the time for a solution based purely on engineering. The Army Corps undoubtedly will be heavily involved. But as New Jersey and New York move forward, officials should seek advice from oceanographers, coastal geologists, coastal and construction engineers and others who understand the future of rising seas and their impact on barrier islands. We need more resilient development, to be sure. But we also need to begin to retreat from the ocean’s edge.

 

I agree with much of what it has to say. But …

Continue reading

NFIP: And you think Texas has problems?

Take a look at the National Flood Insurance Program and the havoc Category 1 Sandy wreaked on its finances.  While there are differences between NFIP and TWIA, fundamentally the issue is government subsidized insurance encouraging inefficient development in catastrophe prone areas and then, precisely because of inadequate premiums, having inadequate assets to pay off policyholders.  Here are some worthwhile articles: Property Casualty 360Washington Post editorialInsurance JournalWired. And a fun YouTube video: best line “We don’t have special car insurance for Lindsay Lohan.”

Lindsay Lohan: whose car insurance is not government subsidized

Lindsay Lohan: whose car insurance is not government subsidized

Amazing how easy it is to see in hindsight precisely the sort of problems we are warning about here.

Tuckerton, New Jersey -- who insured these properties -- and why?

Tuckerton, New Jersey — who insured these properties?

A B+ for Loren Steffy

Loren Steffy, a blogger for the Houston Chronicle has an interesting entry today.  You can read it here.  

He gets a B+.  He’s right on the following points:

1.  The Texas Windstorm Insurance Association should be warning policyholders that they may be subject to assessment in the event of a significant storm and that TWIA may not be able to pay claims fully in the event of a major hurricane.  That way policyholders would be able to make better choices about (a) whether to invest in coastal property in Texas and (b) about whether to go with TWIA or to purchase, where available, an often-more-expensive-but-possibly-more-secure policy from a private insurer.

Continue reading

To fix the TWIA mess, focus on the fundamentals

This op-ed is reprinted from the Houston Chronicle

To fix TWIA mess, focus on the fundamentals
By Seth J. Chandler
Updated 06:52 p.m., Friday, July 27, 2012

Texas has been spared a major tropical storm so far this hurricane season, but that doesn’t diminish the fact that the state is woefully unprepared to deal with potential losses. If a significant fraction of possible Category 4 or Category 5 hurricanes were to strike, the Texas Windstorm Insurance Association (TWIA) would not be able to fully pay claims in Harris, Galveston, Brazoria and possibly other Texas counties. Since 2009, neither the state of Texas nor insurers in Texas are legally responsible to make up the shortfall. In 2013, let’s hope the Legislature stops rearranging deck chairs on the Titanic and explores more fundamental reform.

It’s not just a major hurricane problem or a Galveston problem. Right now, TWIA will not be able to pay with cash on hand or reinsurance funds many claims throughout Texas – not just the most densely populated counties – in the event of a serious storm. Instead, TWIA will be forced to borrow a limited sum, possibly at high rates, to pay the claims. The state will then have to impose significant surcharges on various forms of insurance over a number of years to pay the loans back. Running insurance in reverse and forcing policyholders to pay higher premiums just when they have been hit with losses is seldom a recipe for economic stability.

Unfortunately, as many coastal states are learning, there is no easy solution to this problem. Even those who like the free market must admit past difficulties in providing complete insurance along the coast for windstorm at rates that homeowners and businesses find tolerable. Special and explicit government subsidization of more complete windstorm insurance for the coast has its own financial costs, political problems and moral shortcomings. And the underinsurance engineered into the current law, coupled with some disguised subsidization, leaves Texas insureds at serious risk, particularly in the more densely developed areas of our coast.

The problem is tough because insurance works best where risks are known and uncorrelated. The fact that A has a fender bender with his car in Galveston County provides no information as to the likelihood that neighbor B will have an accident with her car at the same time. So auto insurance works well. Uncorrelated risk means that insurers do not have to stockpile a lot of liquid capital in order to pay expected claims. Something known in mathematics as the law of large numbers makes it unlikely that the amount of revenue an automobile insurer takes in won’t be enough to pay claims.

Windstorm risk along the Texas coast, by contrast, involves correlated risk with uncertain magnitudes. The fact that A’s house in Galveston is blown down by a hurricane informs greatly the likelihood that neighbor B’s house will be similarly destroyed. When insured risks are correlated, insurers and reinsurers have to stockpile lots of safe, liquid assets in order to pay claims in timely fashion. And keeping assets under the mattress hurts insurers and reinsurers in providing a decent return to their shareholders.

There are fundamental ways of addressing high magnitude, correlated risk that can be more successful. One solution is to reduce the magnitude of correlated risks. There is an awful lot of research showing that we can lessen the damage hurricanes cause through hardening: very tough building codes and other infrastructure improvements. A hardened site in Galveston, after all, is currently considered safe enough to house the smallpox virus. Burying power lines allows people to return to their homes sooner, which reduces the losses from a storm. Limiting publicly subsidized insurance plans to lower levels of coverage and requiring individuals to obtain private insurance for the excess also reduces the magnitude of correlated risk held by government plans. Lessening the economic consequences of hurricanes could attract private insurers back to the Texas coast, make state schemes less expensive, and make people feel more secure. The biggest bang for the buck will come from hardening the densely populated counties.

A second approach is to try to decorrelate the risks. Texas could pool its windstorm risk with California’s earthquake risk, Washington state’s volcano risk or windstorm risk from another region. Alternatively, Texas could pool its risk in, say, 2013 together with its risks in 2014 and 2015 by requiring coastal residents who purchase insurance from TWIA to commit to three-year contracts. There are many challenges with each of these plans, but given the absolute magnitude of the issue, even modest gains are worth exploring.

And the third approach is, frankly, to develop a greater tolerance for the high rates that come with insuring correlated risk. Hardening the coast and looking for opportunities to pool our catastrophe risks with uncorrelated catastrophes will help. But Texans on our coast need to let it sink in that they are holding property that is unavoidably expensive to insure and budget for the higher premiums that result. And their legislators who deny this reality do their constituents no service by leaving them catastrophically underinsured.

Chandler is Foundation Professor of Law at the University of Houston Law Center, former co-director of its Health Law and Policy Institute and director of its Program on Law and Computation.

The Op Ed on TWIA run by the Austin American Statesman

This op ed was run by the Austin American Statesman on July 10.  I am reprinting it here.

Leaving denser coastal counties out to dry if major windstorms strike

Seth J.Chandler, Special Contributor

Published: 7:11 p.m. Tuesday, July 10, 2012

 

The biggest windstorm in Texas so far this summer has been generated not by the warm waters of the tropics but by the courage of Texas Insurance Commissioner Eleanor Kitzman.

In June, Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit.

The state-created operation provides insurance against tropical storms and hurricanes on $72 billion worth of property owned by 259,000 people living on the Texas coast.

Kitzman further said the law did not require the State of Texas to rescue either an insolvent TWIA or Texas homeowners and businesses left with incompletely paid claims.

For this statement, Kitzman has been vilified by some coastal media outlets and by some coastal politicians, culminating in a call this week by state Rep. J.M. Lozano, R-Kingsville, for Texas Attorney General Greg Abbott to investigate her for breaking Texas law.

What was Kitzman’s possible crime? Lozano says her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane.

Kitzman’s real crime was daring to tell the truth to people who do not want to be confronted, now that hurricane season has started again, with the consequences of an irresponsible decision. In summer 2009, the Texas Legislature, to much praise, did fix a flaw in the old system of insulating Texas coastal residents from the cruelties of the private insurance market.

The Legislature saved Texas insurers, even ones not writing insurance near the coast, from the potential of unlimited assessments to pay for a major hurricane. But in doing so, it deliberately chose to reject a competing plan that would have forced TWIA to use actuarially sound rates and that took modern science on global warming into account.

The state Legislature instead used two sleights of hand in 2009 to make the tough medicine go down.The first was to keep current premiums lower by running insurance in reverse. Rather than forcing TWIA to collect enough premiums now to have cash on hand in the event of a major hurricane, the legislators chose to rely on “post-event bonding” vehicles called Class 1, 2 and 3 Securities.

Texas insurers will raise premiums and not just on windstorm insurance and not just on the coast after a hurricane, when people would already be hurting, to pay for these classes of securities that it assumes it will be able to sell following a major storm.

Texas’ second trick was to choose not to insure fully against the costliest hurricanes, such as a Category 4 or 5 hitting Galveston County. As TWIA itself puts the matter, “currently, there is no funding for TWIA losses in excess of Class 3 public securities” or about $3.6 billion.

The Texas Legislature saved money the same way you could if you insured your $8,000 or your $32,000 car for a maximum of $8,000 loss with the thought that fender-benders are frequent, but really catastrophic events seldom happen.

Such a system would indeed lower your premiums, and it might fully protect the less expensive car. And, if all went well, such a policy might even protect the more expensive car. But it still places your expensive car at risk.

Whether consciously or not, in 2009 the less-propertied Texas coastal counties, such as Kleberg and San Patricio, from which Lozano hails, hornswoggled the rest of the state into accepting a system that probably can pay even their major claims fully (like totaling the $8,000 car) but left the more propertied coastal counties, Galveston and Brazoria, at risk for major claims or totals.

So, if we’re shooting messenger, Kitzman, for telling Texas the truth about its underfunded public windstorm insurance system or, possibly worse, for promoting its restructuring, shoot me, too.

I declare again, as a law professor who has studied TWIA’s statutes and its finances for many years: The Texas Windstorm Insurance Association does not have the financial capacity to pay claims fully in the event a major hurricane strikes a property-rich Texas county and neither the state nor anyone else is under any current legal obligation to make up the difference.

Perhaps you should shoot me first because, unburdened by whatever political constraints may keep Commissioner Kitzman more polite, I further declare that the coastal counties, having deliberately chosen to underinsure and reap the benefits of lower premiums, have no moral claims on Texas, either.

Chandler is Foundation Professor of Law at the University of Houston Law Center and director of its Program on Law and Computation; schandler@uh.edu.