Study shows Coastal Taskforce Plan requires more than 50% subsidization

The Coastal Taskforce Plan recently endorsed by several coastal politicians would require people other than TWIA policyholders massively to subsidize TWIA — perhaps paying more than 60% of expected losses from tropical cyclones. That is the result of a study I have conducted using hurricane modeling software. As shown in the pie chart below, the study shows that only about 38% of the payouts come from TWIA premiums. The rest comes 26% from Texas insurers, 21% from policyholders of all sorts in 13 coastal counties and Harris County, 8% from insureds located throughout Texas and 7% from the State of Texas itself. These figures are based on running a 10,000 year storm simulation based on data created by leading hurricane modeler AIR and obtained through a public records request.  The figures are also based on my best understanding of the way in which the Coastal Taskforce plan would operate, although certain aspects of the plan remain unclear and additional clarification would help.

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones (Sharing)

As mentioned in an earlier post, however, there is an alternative understanding of the way the Coastal Taskforce plan would operate. The issue relates to whether responsibility within the specified layers is “shared” or “tranched.” The pie chart below assumes that responsibility is tranched. As one can see, however, the results are not significantly different. There is perhaps even more massive subsidization. Only about 37% of the payouts come from TWIA premiums. The rest comes 29% from Texas insurers, 20% from policyholders of all sorts in 13 coastal counties and Harris County, 8% from insureds located throughout Texas and 7% from the State of Texas itself.

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones

Expected Distribution of Sources for TWIA Payouts Due to Losses from Tropical Cyclones (Tranching)

Technical Notes

The distribution used to simulate the storms is obtained through using the following Mathematica code: MixtureDistribution[{0.3747, 1 – 0.3747}, {WeibullDistribution[0.475721, 3.21196*10^8], TransformedDistribution[0, x \[Distributed] UniformDistribution[]]}]. This means that tropical cyclones occur in 37.47% of years and that in years when tropical cyclones occur, the damage they cause is modeled by a Weibull Distribution with the parameters set forth in the code.  As shown below, that distribution models very tightly the results produced by the AIR simulation.

Comparison of AIR Histogram with estimated Weibull Distribution

Comparison of AIR Histogram with estimated Weibull Distribution

Recognizing that some people believe the simulations done by groups such as AIR exaggerate the damages caused by tropical cyclones — although others believe they may well understate them — I also ran the simulation with each annual loss reduced by 25%.  This simulation showed that TWIA policyholders still only picked up 41% of the losses caused by tropical cyclones, with the 13+1 other “coastal” counties picking up 21%, Texas insurers paying 26%, statewide Texas insureds paying 6% and the state itself paying 6%.

Addendum of 12/27/2012

It has been noted in a newspaper article in the Corpus Christi Caller that my conclusions in this blog entry do not take into account the “double dip” that TWIA policyholders will face because they (a) likely have non-wind policies that will be subject to a surcharge and (b) likely have automobile policies.  As I have acknowledged in a blog entry today, this is a legitimate concern. The problem, however, is that the Coastal Taskforce plan does not contain enough detail on the types of policies that would be subject to the surcharge.  One needs this data — along with information on the amount of such policies held by TWIA policyholders — to quantify the consequences of this complication.  Still, once one takes this complication into account, TWIA policyholders would likely pay somewhat more than stated here due to their dual capacities.  My intuition, however, is that this complication will not alter the fundamental conclusions set forth here.

3 thoughts on “Study shows Coastal Taskforce Plan requires more than 50% subsidization

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