Another confusing graphic from TWIA

At yesterday’s hearing of the House Insurance Committee, leadership of the Texas Windstorm Insurance Agency presented a packet of three graphics to the members.  These graphics joined a crucial presentation created for today’s meeting of TWIA’s board of directors that falsely identified how post-event bonds would be paid off under existing law. Together, it presents a picture of an insurer less interested in forthrightly informing legislators than in trying to preserve its troubled existence.

As discussed in blog entries yesterday, the first two of the graphics presented yesterday to the House Insurance Committee were highly confusing if not downright misleading.  The first graphic, which purported to project TWIA going from insolvent to a positive surplus position over the next two years simply assumed away the possibility of any large claims being made against TWIA. What insurer can’t improve its position when no large claims are filed? There would be little need for solvency regulation if insurers never incurred large claims.

The second graphic presented yesterday purported to show that TWIA could pay off the borrowing of $500 million it wants to make in that its underwriting profit was greater than its debt service.  Again, however, TWIA simply assumed that it would not have any large claims that would deplete its profit.  Lots of people who borrow too much on their credit cards might have been able to pay them off it nothing else had happened.  Problem is, stuff happens.  And then, the borrower can’t pay.

Today, I want to tackle the third graphic submitted to the House Insurance Committee by TWIA.  It appears to continue what may be a pattern of misleading visual information.  Here’s the picture.

TWIA's stack size with misleading information on 2008 and failure to adjust for exposure

TWIA’s stack size with misleading information on 2008 and failure to adjust for exposure

Let’s look at that left hand bar, the one for 2008.  It would appear to show that TWIA had only a $2.1 billion stack for that year.  I believe legislators were supposed to gain comfort from the fact that the stack for 2013, with or without $500 million in pre-event borrowings known as a BAN (bond anticipation note) is actually higher than that amount.

But the stack appeared to be only $2.1 billion for 2008 because TWIA staff had simply not counted the leading source of protection for TWIA that existed at that time. TWIA’s graph simply deleted the key fact: TWIA had the ability to make unlimited assessments against the insurance industry.  TWIA thus had essentially a 100% guaranty of being able to pay claims. A proper picture would have had another gray bar extending high above the purple one showing this ability to assess. The gray bar would be just like the $230 million one it made lower in the stack.  It would be just like the one I am confident TWIA would have stuck over the 2013 stack if such an ability existed today.  I can think of absolutely no good reason why this bar should have been eliminated from the graphic.

Now, it is true that TWIA disclosed in a fine print footnote to the graphic “unlimited additional funding available via reimbursable assessments.”  Do you see it?  Look after the semi-colon in the first line at the bottom. But, again, that’s relegating the central point to a footnote and leaving the big graphic in a highly misleading condition.

I’ve got two other problems, by the way, with the graphic.

Stack size is best measured relative to exposure

Comparisons of stack size can be misleading without taking exposure into consideration.  A stack of $2.7 billion might be just fine if TWIA had exposure of $20 billion whereas a bigger stack of $3.5 billion might be inadequate if TWIA had exposure of $80 billion.  Once we do this, the picture becomes a little less cheery.  In 2008, for example, when TWIA’s stack was essentially unlimited, TWIA direct exposure was $64 billion. Today, it is about $75 billion. To have a $2.1 billion stack in 2008, is roughly the same as having a $2.46 billion stack today.

There is no apparent reason to have ignored Hurricane Dolly payments

I do not understand why TWIA excluded money paid for Hurricane Dolly from the 2008 stack.  That would have made it a little higher.  I suppose the purpose was to contrast preparedness for Ike with preparedness for today’s storms.  Again, though, that seems a peculiar choice. In assessing TWIA’s ability to pay claims, a more relevant comparator is stack size at the start of hurricane season. Had TWIA done this properly the stack in 2008 — the year of Ike — would have been much higher even without consideration of TWIA’s ability at the time to make unlimited assessments.




TWIA leadership further confuses House Insurance Committee

Associated Press reports are successfully repeating the message the Texas Windstorm Insurance Association leadership sought to convey at today’s special meeting of the House Insurance Committee: “Coastal Group Expects Surplus” is the headline, for example, that the Houston Chronicle attaches to the AP report.  Unfortunately for TWIA policyholders or any legislators misled by today’s presentation, the surplus scenario is essentially a picture of the best possible world in which no significant storms affect the largest windstorm insurer on the Texas coast.  Thus, while the graphic is not false, all it really does is confirm that insurance companies, even ones with premiums that do not reflect risk, make money  if they never have any large claims. It is not, however, an accurate depiction of reality.

Here’s the happy picture that TWIA wants the world to see. Surplus goes in a predictable linear way from that troublesome negative (red) $183 million in the fourth quarter of 2012 to a cheerier (blue) positive $211 million by the fourth quarter of 2014. That’s the picture presented by TWIA lawyer David Durden, TWIA chief actuary James Murphy and Pete Gise, TWIA’s comptroller at yesterday’s special meeting of the House Insurance Committee.  It is a picture that will make unquestioning TWIA policyholders breathe a sigh of relief, lessen pressure to reform TWIA, forestall efforts to place the insolvent insurer into receivership and let those who profit from the band playing on continue to do so for a time.

A misleading projection of TWIA finances

A misleading projection of TWIA finances

But look carefully at the fine print in the foonotes for this graphic. “Surplus amounts include operational expenses, non-catastrophe losses, projected changes in Ike reserves, and state sales tax refunds.”  What’s not included?  TWIA doesn’t say in the graphic, but I can tell you.  What TWIA does not include is the main thing TWIA was set up to handle and for which it needs catastrophe reserves: large losses from tropical cyclones.  (I’m also not sure they are taking account of reinsurance premiums, which now consume more than 20% of TWIA premiums). In other words, TWIA could have shown roughly the same “projected” increase in surplus  in any year it chose, ranging from the year before Hurricane Ike to the year before Hurricane Alicia. And TWIA would have been equally misleading in doing so.

And what is the probability that over the next two hurricane seasons TWIA will incur no tropical cyclone expenses. Assuming we have normal hurricane seasons over the next two years– which itself is rather optimistic given the unanimous forecasts of weather experts — the probability is about 1/3. Even with the most optimistic estimates of Texas hurricane frequency, the probability that the TWIA graph accurately projects reality is less than half. So, yes, less than half the time, the graphic produced by TWIA might be accurate.

The majority of the time, however, the TWIA graphic will be wrong. And some of the time it will be seriously wrong. This is exactly why every actuary who has consulted for TWIA or TDI in recent times has noted that TWIA takes in too little revenue relative to expenses to sustain a surplus. On average, in any two year period during which TWIA suffers a significant loss (i.e. a loss greater than $50 million), the average total loss during that time period is well over $500 million. Such losses would in fact significantly increase the deficit TWIA now suffers from. This is based on the Compound Poisson Distribution discussed on this blog as a way of modeling annual losses to TWIA and emulating the sophisticated work of state-of-the-art storm modelers such as AIR and RMS.  The Mathematica code proving this point is shown at the bottom of this post.

When we actually take possible storm losses into account, the two year position of TWIA is likely to be worse or no better than it is today.

I’ve tried in this blog to stay away from accusations of bad faith.  People have honest disagreements and different values.  And I have had respect for people doing what must be difficult work at an insurer with little money.  And this graphic did, after all, have a footnote from which one knowledgable in the area might recognize that the graphic was missing critical information. And TWIA did disclose at the hearing — after a lengthy exposition of the graphic — that their graphic assumes no storm losses.  But to me it is like presenting a graphic projecting how well the Astros are likely to do this year based on how they do during their best periods without taking into account the fact that they also suffer a lot of losing streaks. It is, at best, an insulting partial truth, one that I hope reporters,  legislators and, tomorrow, the TWIA Board of Directors, are smart enough to see through.

The code

Mean[Total /@Map[Max[# – 50000000, 0] &,

DeleteCases[Partition[RandomVariate[CompoundPoissonDistribution[0.54,WeibullDistribution[0.42, 177000000]], 10000], 2, 1], {0,

0}], {2}]]