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.

Two early plans emerge to reform TWIA

Over the past week, two draft plans have emerged to restructure the Texas Windstorm Insurance Agency. The first plan, a copy of which may be found here, comes from a collaboration between David Crump, a citizen with a long time interest in windstorm reform, and Dave Norman, a recent candidate for the Texas State Senate. The second plan, a copy of which may be found here, comes from Port Aransas attorney Charles Zahn, and a group called the Coastal Task Force. I’ll be examining each of these plans in the days ahead but a theme of both is to reduce the now-serious risk that TWIA policyholders will go unpaid in the event of a serious storm.

At first glance the Zahn Coastal Windstorm Plan appears to place more emphasis on subsidization of risk by non-TWIA policyholders along the coast and insurers throughout Texas (and, derivatively, their insureds). The Zahn plan also makes the state of Texas ultimately responsible for losses in excess of what TWIA can pay. So, Texas taxpayers will be subsidizing coastal risk in the event of a giant storm and Texas insureds of all sorts located far from the coast will be paying to build up a catastrophe reserve fund even if no storm occurs and helping to pay TWIA policyholders in the event a significant storm occurs. But the Zahn plan also tries to reduce the growth in TWIA exposure through hardening the coast. It calls for new residential construction to meet the WPI-8 standard and grants or credits for hardening existing structures.It also seeks to extend the protections of HB3 (which currently protects just TWIA) to all wind policies on the coast — an idea for which I may take some credit.

The Crump-Norman plan appears to place more emphasis on reducing TWIA’s exposure through benefit limitations and risk reduction by increasingly premiums significantly on buildings that do not comply with certain building codes. It does not appear to place Texas taxpayers directly on the hook in the event of a giant storm. Both plans attempt to avoid the costly reinsurance that is currently helping to gut TWIA. My guess is that there will be more plans to come.