It looks like the Texas Coast and the rest of Texas is going to have to live with the deeply troubled public insurance scheme now in place for windstorm risk along the Texas coast. That’s because Texas Governor Rick Perry announced today that he will not be adding any more items to the agenda for a special session of the Texas legislature. His decision, coupled with the inability of the Texas legislature to agree on any sort of reform, has the potential to wreak havoc. There is a major risk — best estimated at about 20% — that the largest insurer on the Texas coast, the Texas Windstorm Insurance Association, will fail at some point during the 2013 and 2014 hurricane seasons. Such a failure would leave policyholders with unpaid claims and consequent difficulty undertaking repairs. It would force the rest of Texas to choose between an expensive bailout that could have been avoided or forcing people on the Coast to reap the consequences of decisions sown by their political leaders that they failed vigorously enough to oppose in a sensible way.
CBS news in Dallas provides the following explanation of the decision.
Governor Rick Perry said Thursday he won’t be adding any more items to the special legislative session, noting that with just 12 days to go, there’s too little time left for lawmakers to handle a larger workload. *** Originally, the agenda only included approving new voting maps for congressional and legislative elections. But Perry this week added passing funding for major transportation infrastructure projects, mandatory life sentences for teens convicted of murder and even the thorny issue of further restricting abortion in Texas to the agenda. “I think everything that can be added to the call has been added to the call from the standpoint of a timing issue,” he said after signing the so-called “Merry Christmas Bill,” which sailed through the Legislature and protects the rights of students and teachers to use religious greetings and symbols in public schools statewide.
This is not the post in which to assess blame, though I promise one is coming. It is, instead, a time for sadness and reflection. What is wrong with our state and our leadership that we can not manage to fix a relatively basic problem?
Premium Finance Issues
It won’t take a major storm for the repercussions of today’s decision to be felt. Already there are mutterings and possibly action among some insurance premium finance companies that they will not loan people money to purchase TWIA policies. The finance companies don’t want to get stuck with unpaid claims for premium refunds in the event TWIA is placed into insolvency proceedings.
Although the band may play on for a little while longer, lenders along the coast are also going to face a difficult reality. Sober lenders will likely start taking a serious look at the extent to which they want to lend money on the basis of collateral (homes, businesses) that are insured on TWIA paper but that be little more than a pile of unrepaired sticks and an expensive claim in state receivership proceedings following a significant storm. And, with the failure of legislative action to correct the problem, new Texas Insurance Commissioner Julia Rathgeber will face difficult decisions. She has to decide whether to place TWIA right now into some sort of insolvency proceedings so that its limited funds are not further siphoned off. She also has to decide whether to reverse the decision of her predecessor to deny TWIA the ability to borrow money to raise cash.
And there is yet another consequence lilkely to be felt soon. When you are uninsured or incompletely insured, it does not take an actual loss to cause great stress. Informed people, particularly in the densely populated areas of the Texas coast such as Galveston where the affects of a TWIA insolvency are most likely to be felt, are going to lose a lot of sleep this summer. The glimmer of hope that things would get fixed either during the regular legislative session or during a special session has just evaporated. Now, every time something enters the Gulf of Mexico, our friends on the coast with TWIA policies have to worry not just about the emotional and financial losses that inevitably come from storm loss. They also have to be concerned about the significant possibility that their losses may not be as insured as they hoped. They have to worry that they may be living under a blue tarp (or worse) for a very long time.
Is there a ray of hope?
Only a sliver. It was important that TWIA got reinsurance that attached at a low value. That appears to have happened. But that (still expensive) reinsurance will do limited good if TWIA can’t sell its bonds after a storm to raise cash. If not, there will be a large gap between TWIA cash and the reinsurance. Maybe we will learn something about that possibility soon. One of the many problems with post-event bonds as a vehicle for catastrophic risk transfer, however, is that you can’t tell for sure whether you will have enough money to pay claims until those dark days following the catastrophe.