Fox 26 Houston Story on TWIA Tonight

Fox-26 Houston (KRIV) is doing a story for their 5 p.m. news today, April 25, 2013, on the problems facing the Texas Windstorm Insurance Association. I was interviewed in connection with the story. Although I spent much of the time engaging the special insurance mythology of the Texas coast, my hope is that this story brings attention to the immediate problems facing both coastal Texans and the rest of the state this summer.  I am very glad at least one Houston media outlet is covering this urgent issue. The legislature may well need some prodding in order to act before the current session expires in 32 days.

Here’s a link to the story.

Unfortunately, it looks like the reporter got an earful of the usual from some coastal residents before interviewing me.  He heard, for example, the myth of how the coast subsidizes the rest of Texas’ hailstorms and tornados so it’s only fair that the rest of Texas subsidizes coastal windstorms.  This is wrong in so many ways. First, Texas does not relieve Northern Texans from paying for the full cost of homeowner insurance by establishing a state-created insurer and saying that, when that insurer runs short, it can hit up people other than policyholders to pay claims and recapitalize the insurer. If and when Texas does this, I’m willing to listen with greater attentiveness to the “we are all in this together” song. For now, I regard it as a guise for geographic wealth redistribution that frequently hurts the poor. Second, while it is true that Texas insurers pay out over the long run a lot in hail and tornado claims, it’s also true that the denominator — the value of property insured along non-coastal Texas — is a lot bigger than the value of property insured along the coast.  So the risk of hail and tornados is not the same as the risk of tropical cyclones. It is less. Third, Texas insurers are permitted by the Insurance Code (544.003(b)) to price on the basis of geographic risk, provided they can establish it is real.  I am aware of no evidence indicating that Texas insurers have not taken advantage of that opportunity and have failed to charge northern Texans a fair risk for the special risks they pose by virtue of the somewhat higher risk of hail and tornados in those regions relative to coastal Texas.  I have never yet seen an actual relevant number from any proponent of the cross subsidization myth.

The reporter also heard the usual comments about how the coast is some exaggerated percentage of the Texas economy. If the only purpose of this remark is to urge legislators to find a good solution to the problems of catastrophe insurance along the Texas coast, I agree 100 per cent.  And the fact that they exaggerate the numbers a little bit might count as a white lie. Usually, however, these utterances with exaggerated percentages are instead justification for continued subsidization — a system, by the way, that has not worked out very well for the coast.

Of course the coast is important to the Texas economy.  No one I know is saying anything to the contrary.  And lest there be any doubt, I agree that the Texas coast is very important to the Texas economy. That’s just another reason that getting its property insurance market in good shape is all the more important.  But first of all to say that it is 40% or 50% of the Texas economy because 40 or 50% of business is indirectly tied to the coast is not the right measure.  Once we start using indirect ties, the total percentages are going to add to way more than 100%. I venture to say that 50% of the Texas economy is tied directly or indirectly to Dallas, and another 50% to Houston and another 40% to Austin and another 40% to San Antonio, and so forth.  But so what? The fact that we are all interdependent is simply not a logical argument that one part of that interdependent system should subsidize another. Probably 100% of the Texas economy is tied to Texas cities. Does that mean that rural folk should subsidize my urban homeowner insurance?

Here are the points I tried to make.  They will be familiar to readers of this blog. I have spoken with this reporter before on other insurance topics and he does a good and fair job whittling down longer comments to the limits of television news.  So, I hope some of them survive.

  • TWIA has just $180 million left in its Catastrophe Reserve Trust Fund. It was thought as recently as a few months ago that TWIA would have access to at least $3 billion with which to pay claims. The issue was whether $3 billion was too little.  But after looking at the financial environment and taking a close look at the TWIA finance law, including a possible bug, there is now serious doubt that there will be much more available to pay policyholders than the $180 million in the Catastrophe Reserve Fund.

  • The state is not legally obligated to pay claims if TWIA is insolvent.  If there is a large storm this summer, there is a serious risk that TWIA policyholders will get only pennies on the dollar.

    • What can TWIA policyholders do?

  • (1) Extreme vigilance in protecting their homes.  There are lots of mitigation steps that can be taken, particularly with older homes.  Some need to be taken right now.  Others can be taken if a storm approaches.  But act as if you have a huge copay on your policy

  • (2) Some TWIA policyholders may have alternatives.  It may be more expensive.  Consider whether you want to pay more but sleep better this summer

  • (3) Urge your legislators to treat this problem seriously.  32 days left in session.  Bills pending that address the issue. There is both a short run problem and a long run problem.

     

 

An assigned risk solution?

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

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

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

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

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

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

 

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

Corpus Christi Caller details TWIA solvency problems

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

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

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

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

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

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

Some coastal politicians endorse Coastal Task Force Plan

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

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

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

More start to question subsidized insurance and coastal welfare

Today’s New York Times features a provocative article that ends up focusing on Dauphin Island off the Gulf coast of Alabama on the wisdom of using tens of billions of tax dollars to subsidize coastal reconstruction in the aftermath of storms.  Recommended reading, particularly the discussion of the little-heralded Stafford Act, which subsidizes reconstruction of government buildings.

Dauphin Island

The “A” marker shows Dauphin Island in the Gulf of Mexico off the Alabama coast

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?

Bonds so dubious, Texas won’t even try to get them rated

People need to read with great care the document posted in the last email from the Texas Public Finance Agency.  I’m reprinting it below for convenience. Basically what it says is that the bond market is dubious about the ability of the Texas Windstorm Insurance Agency to pay back the $500 million it borrowed recently and, as a result, the interest rate TWIA pays will go up. The outlook is so bleak that Texas isn’t apparently even going to waste money in a futile gesture to try to get the bonds rated. The resulting increase in the interest rate isn’t in and of itself a gigantic problem — unless, of course, a surprise storm means TWIA doesn’t have the cash next summer to pay it back in full (in which event the interest rate on $500 million jumps to 8%.)

What is a huge problem, however, is the growing evidence that TWIA will be hard pressed to borrow under the existing statutory scheme the money it will need to pay back claims following a major storm.  Just to repeat, no ability to borrow, no ability to pay claims, at least not in full.  That means many households and businesses on the Texas coast who were banking on TWIA will not be able to rebuild and may not be able to pay their mortgages. If first line bondholders are demanding 8%, what higher rate are second and third line bondholders likely to demand following a storm? Conceivably the market will have more confidence in Class 3 assessments because those are paid by insurers, but I doubt they will feel any better about Class 2 assessments paid mostly by coastal policyholders than they do about the Class 1 bonds, which the market apparently does not regard as investment grade.

And those with cash are going to be able to put the squeeze on TWIA following a storm.  That’s because an additional consequence of an inability to borrow is that TWIA won’t be able to access the large reinsurance policy it spent $100 million on this year.  The reinsurance contract is written so that it doesn’t matter if TWIA is liable to pay its policyholders.  Ours, like most reinsurance policies, is an indemnity policy.  The reinsurers don’t pay until TWIA pays.  But if TWIA can’t borrow then TWIA can’t pay.  So, unless TWIA is willing to kiss a $100 million premium goodbye, it’s going to have to take what the unfeeling bond market offers.

So maybe some coastal politicians are right that we don’t need to worry much about all this because, after all, the odds of a serious storm hitting the Texas coast are just as remote as, why, a hurricane hitting New York City.  On the other hand …

A scary document from the Texas Public Finance Agency

A scary document from the Texas Public Finance Agency

Thanks again to David Crump who has brought this document to my attention.

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.

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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.”

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