An open letter to State Representative Todd Hunter

Dear Representative Hunter,

My purpose in writing is to urge you to consider the risk to your constituents by letting the fate of the many policyholders of the Texas Windstorm Insurance Association rest on a flimsy regulation that is likely to be the subject of a length court challenge. I understand your position that the statutes and regulations currently in place do not adequately share the risk of catastrophic events throughout Texas. But fundamental decisions on that matter will not be resolved by the Texas legislature before the 2014 hurricane season is well underway. You are widely considered a champion of Texas coastal interests. You have a responsibility to your constituents to think this matter through very carefully. And you need to do it now.

There is a short run emergency in the TWIA funding situation on which people, like me, and, more importantly, inland legislators might well be able to reach agreement with coastal interests on a tolerable fix.  I urge you therefore to put personalities and long-standing battles aside, and work together immediately.  You will need to plead with Governor Perry to call a short and limited special session of the Texas legislature in order to do so. I am not an expert on Texas politics, but my sense is that you will need to compromise in that request and not ask for any fundamental reforms of windstorm insurance systems; you may need to compromise further and accept a plan that at least temporarily hardens what you regard as an undue burden on the Texas coast.  The alternative, however, is so bad, that you would be doing your constituents a yet worse disservice by failure to make the request.

You asked in a recent television interview on KRIS-TV that people, and my impression from the report was that I was included, stop complaining, stop criticizing and start working together constructively.  I was a bit puzzled by this statement because I have heard such offers from you before only to find that, when I accepted, your staff informed me that your busy schedule did not permit you ever actually to talk, even by phone. Perhaps they misunderstood your desires. Not meeting is, of course, your privilege. But there is no legislative session going on right now that should prevent you from meeting now either by phone, Skype or in person. Although you and I are not likely ever to agree on the structure of windstorm insurance funding in Texas, I am definitely willing to work with you and other Texas legislators any time, any place, on either trying to find intelligent compromises or, as here, preventing absolutely needless disasters from happening.

Here’s the emergency. I know that TWIA funding is a contentious minefield, but I am going to describe it in a way on which I think everyone can agree.

1. TWIA does not and will not have enough cash on hand to pay for a significant tropical cyclone hitting Corpus Christi or other densely populated parts of the Texas coast during the 2014 hurricane season.

2. TWIA’s reinsurance is unlikely to attach at low enough levels so that it, if TWIA has difficulty borrowing, the reinsurers will provide the cash necessary to pay claims.

3. TWIA’s ability to borrow money following a tropical cyclone rests on a statute that has never been used before.

4. Lenders in the past have balked when asked whether they would loan TWIA up to $1 billion in “Class 1 Bonds” when the payback mechanism for those bonds are (heightened) premium revenues from TWIA policyholders. There is thus a substantial risk that not all of the Class 1 Bonds would be salable. The failure of Class 1 Bonds to sell, prior to 2011, would have toppled the entire post-event bonding scheme developed by the Texas legislature and would leave TWIA with no cash with which to pay claims following a significant storm.

5. In 2011, the Texas legislature considered this contingency and amended Chapter 2210 of the Texas Insurance Code to add section 2210.6136. It provides a contingency plan in the event that the Class 1 Bonds are unsalable.  The idea behind section 2210.6136 is to permit Class 2 Bonds to be issued through the Texas Public Finance Authority even if the Class 1 Bonds do not sell in full and to thereby permit Class 3 Bonds, which are repaid via assessments on insurers, to be sold if need be.

6. Given the high likelihood that Class 1 Bonds will not be fully salable and given the necessity of TWIA to borrow in order to be able to pay claims following a major storm, Texas depends on section 2210.6136 being a coherent statute, the type of statute that potential lenders believe will provide a legal basis for their claims to repayment.

7. The Texas Public Finance Authority had initial difficulty understanding section 2210.6136 based on its text and met with legislative staff in order to obtain an explanation of how it worked. TPFA described its staff and advisors as “struggling with the mechanics of financing” under section 2210.6136.

8. Legislative staff explained the intent of the statute as being one under which Class 2 Bonds would be initially paid 30% from assessments on insurers and 70% via surcharges on certain coastal insurance policies but under which TWIA policyholders would be required –insofar as possible — to repay the insurers and coastal insureds up to $500 million of their bond amortization payments.

9. The Texas Department of Insurance has issued draft regulations that implement the interpretation of the statute offered by legislative staff but acknowledge in the preface the the regulations that this interpretation is impossible or difficult to reconcile with the language of the statute.

10. Insurance companies in Texas will be forced to pay more in assessments under the TDI interpretation of section 2210.6136 than under a literal reading of the statute. Certain coastal insureds will also have to pay more.

11. Insurance companies may have duties to their shareholders and/or it may be in their best economic interests to challenge regulatory interpretations of statutes that are contrary to the language of the statute and require them to pay more than they would under a literal reading of the statute. Sophisticated coastal insureds and/or those advised of the situation may likewise have an incentive to bring legal challenges to regulations requiring them to pay more than they would under the statute.

11a.  This is the one point that I acknowledge might be contestable.  It is unlikely that a court would swiftly dismiss the claims of those challenging regulations that are, at best, difficult to reconcile with the language of the statute. Those challenging the claim have a significant chance of prevailing.

12. Lenders who might otherwise loan TWIA money via Class 2 Bonds will be reluctant to do so if they are aware of items 1-10 above. They will not lend if they believe there is likely to be a length court challenge to the bond payment mechanism.

13. If lenders do not lend TWIA money, TWIA will not have enough money to pay claims following a major storm. If so, there will be devastation of TWIA insureds, great derivative harm to almost everyone on the Texas coast, and significant derivative harm to others in the Texas economy. Although the strength of interests may vary, it is not in anyone’s interest that the TWIA funding stack collapse due to a legal technicality.

I have thought about this for some time.  And the only point on which I believe some might disagree is item 11a. If you really believe that the risk of a serious challenge is extremely low, then there is no emergency. If, however, you believe as I do, that the risk of a serious challenge is significant, then indeed we have an emergency. There is a really serious risk that TWIA policyholders will not be paid any time soon following a significant storm this summer.

What bothers me most is that, unlike many problems, this one is very solvable. The Texas Insurance Commissioner, Julia Rathgeber, appointed by Governor Perry, has already come up with a solution. Simply turn the language of the law into what legislative staff believe it was supposed to say. That will require almost no effort.  One simply has to relabel the regulatory provisions she has proposed as a statute, get the legislature to pass it, and get the Governor to sign it and the situation is resolved.No more emergency.  Lenders should feel way more comfortable loaning TWIA the money.

Yes, some insurers may balk at the solution. But the very fact that one thinks they might do so is a sign that they will in fact litigate if no statute is passed and the same result occurs through an ultra vires regulation. By claiming that insurers will object to a legislative change that purports merely to clarify the status quo, one essentially acknowledges that the current situation is untenable.

And you, Representative Hunter, are likely to find the Rathgeber solution a difficult pill to swallow. It does burden the coast with 70% of the bill for Class 2 bonds. Some of your more militant constituents could be angry about this.  Here is what you need to explain to them.  I am optimistic that there will be enough reasonable people on the Coast that such an explanation will be satisfactory.  You are not bargaining from a position of strength.  The law already was intended to burden the coast with 70% of the bill for Class 2 bonds.  There is nothing knew with the proposed statute.  What it is doing is making sure that something even worse does not happen: TWIA collapsing due a technical glitch and blue roofs staying on coastal homes for a very, very long time.  You can assure your constituents that you will seek a better solution during the next regular session of the legislature but that, for now, improving the language of the statute without changing its meaning is a major improvement.

There are, of course, other solutions.  You could, for example, try to flip responsibility for Class 2 Bonds such that 70% of the burden is on insurers and only 30% on the coast.  There are lots of other mechanisms for spreading the risk of windstorm farther inland. But do you really think you will reach agreement on such a significant reform during a special session when you were unable to do so last session? The one “focal point equilibrium,” the one thing on which you and inland representatives might agree is to make the statute actually say what, supposedly, various staff members said it intended.

Finally, I suppose it is possible that you believe that the rest of Texas will come in and rescue the coast if TWIA collapses and that you should not accept a solution that solidifies a current scheme that you think is fundamentally unfair.  All I can say is that this is very high risk poker. Trying to resolve TWIA funding after a major storm in some special session of the legislature is likely to stalemate and also likely to result in statutes that are actually worse for the coast than the status quo. The process is not likely to be swift and the emotional and financial stress on the coast while the matter being debated is extraordinarily ugly.

As I indicated in a somewhat similar open letter to Governor Perry this past week, I know that you can not trust me on critical item 11a. But you are a lawyer and you certainly know lots of open minded lawyers.  You also know, I suspect, lots of insurance representatives.  Ask them if they believe the regulation enacted by the Texas Insurance Commissioner on which the TWIA funding stack depends is unlikely to be challenged in court.  Ask them if they believe such challenges would survive, for example, a motion to dismiss. Or go find institutional lenders.  See if they would be willing to lend if they got wind that insurers or some coastal interests might challenge the pay back mechanism.  If all you get are assurances that the University of Houston professor is off his rocker or just scaring people, then, fine, ignore me.  I am sincerely sorry for what would be a false alarm.  My strong suspicion, however, is that these people are going to tell you that I have a serious point.

One way or another you need — right now, before hurricane season hits full swing — to be assured that lenders will loan TWIA funds on Class 2 Bonds when the Class 1 Bonds can’t issue.  Maybe there are ways of getting this other than a special session of the legislature. I am not sure what these methods would be.  But until you have that, as a champion of the Texas coast, you need to be on the front lines, making common cause with whomever you can, saying that this provision of the law needs to be fixed by the Texas legislature right now.

 

Disclaimer

The views expressed here are my own and do not necessarily reflect those of the University of Houston.

 

 

An Open Letter to Governor Perry

The following is a copy of a letter I am sending today to Governor Rick Perry.

Dear Governor Perry,

I am Seth J. Chandler, a 24-year resident of Harris County, Texas, and Foundation Professor of Law at the University of Houston specializing in insurance law.  I am also the author of the blog Texas Windstorm: The law and finance of insuring catastrophic risk in Texas (http://catrisk.net).  I have testified on numerous occasions before the Texas legislature on regulation of windstorm risk and finance. I have also served on your Texas Health Care Policy Council under the leadership of Tony Gilman.

I am writing to alert you of a serious and urgent problem that has come to light with the funding scheme for the Texas Windstorm Insurance Association. I urge you to call a Special Session of the Texas legislature to address it immediately.  I believe that you can properly confine the agenda so that even legislators who often disagree on TWIA matters can come together to fix this particular problem. If the problem is not resolved, there is a significant probability that, following even a modest tropical storm hit on a densely populated area of the Texas coast such as Galveston or Corpus Christi, the Texas Windstorm Insurance Association would not be able to pay claims in a timely way. TWIA might have grave difficulty ever paying them.  Substantial delay in payment or non-payment of claims by the largest insurer on the Texas Coast would be a needless disaster for the entire Texas economy and would likely result in a special legislative session anyway, but in the worst possible circumstances.

The problem, in a nutshell, is section 2210.6136 of the Texas Insurance Code, which addresses how “Class 2 Bonds” issued to pay TWIA claims are to be paid back. The current Insurance Commissioner Julia Rathgeber, former Commissioner Eleanor Kitzman, the Texas Public Finance Authority and others all agree that the provision is confusing and poorly drafted.  Indeed, I know of no one who thinks that section 2210.6136 is clear.  Everyone I know who has looked at the statute says that, if interpreted as it was written, it creates an unworkable plan to pay back Class 2 Bonds.

The issue is whether the Texas Insurance Commissioner has now crafted a fix to section 2210.6136 via regulation that will stand up in an inevitable legal challenge.  I believe the answer is “no.” Commissioner Rathgeber has developed a sensible idea in her regulation that might prove the foundation for future legislative action. But her regulation is, as I believe she admits on pages 10-13 of the January 28, 2014, submission of the draft, contrary to the language of the statute.  The evidence I have seen that would justify a court in interpreting the statute contrary to its language is weak. There is thus a substantial risk that, without legislative ratification, her interpretation of the existing statute will be found an invalid exercise of law-making power and struck down by the courts. Both Texas insurers subject to a heightened assessment from TWIA and, for example, automobile insurance policyholders on the Texas coast would have standing to challenge the regulation and the extra payments they would make as a result. And even if her interpretation were ultimately to be sustained by a Court, a challenge would likely have sufficient merit to avoid early dismissal. It would likely take at least a year to resolve through the judicial system and appeals.  The specter of litigation will deter needed lenders from extending up to $1 billion in credit via Class 2 Bonds that TWIA would need to pay a major claim. In the mean time, blue roofs would cover the Texas coast as a result of unpaid claims.

I have outlined my legal opinion in more detail on my blog catrisk.net.  You can see the most relevant entries at http://catrisk.net/documents-show-texas-agencies-aware-serious-problems-post-event-bonding/, and http://catrisk.net/texas-insurance-commissioner-trying-fix-fatal-bug-windstorm-statute/, and in an op-ed in the Houston Chronicle available here http://www.chron.com/opinion/outlook/article/Commentary-Windstorm-insurance-has-Texas-in-5315395.php.

I understand that, just based on a letter from a professor you do not know, you cannot call a Special Session of the legislature. I implore you, however, to trust me enough to seek urgent clarification from the Attorney General or from others qualified to provide legal advice.  If they say I am wrong and the Texas Insurance Commissioner’s fix is so clearly lawful that the risk of disruptive litigation is minimal, then great.  If they say that the problem can be resolved by other forms of non-legislative action, such as a formal letter from the Attorney General validating the Texas Insurance Commissioner’s action, good; let such a letter issue promptly. If not, however, I would urge you to call a Special Session before hurricane season starts again. I believe Commissioner Rathgeber’s regulations could be adapted swiftly and easily into a statute so that the matter could be resolved in a few days. Although coastal interests and inland interests do not always mesh on TWIA funding issues, it is in absolutely no one’s interest that TWIA fail due to a drafting problem.  I am thus optimistic that legislative leaders in the area such as Senators John Carona and Larry Taylor and Representatives John Smithee and Todd Hunter might be able to work cooperatively on this limited issue. Other issues involving TWIA on which consensus is less likely can be handled through more regular process.

I remain happy to work with your staff, the Texas Insurance Commissioner, legislators and their staff to do anything I can to help explain the issue and suggest resolutions. My other credentials are attached to this letter.

Sincerely yours,

Seth J. Chandler

Please note.  The views expressed here are my own and do not necessarily reflect those of the University of Houston.

 

Third special session, but still no windstorm insurance reform on the agenda

Texas Governor Rick Perry called a third special session of the Texas legislature yesterday to address transportation issues in Texas but did not add windstorm insurance to the agenda items. In his statement explaining the special session for transportation, Governor Perry wrote, “Inaction is a Washington-style attempt to kick a can down the road – but everybody in Texas knows we’re rapidly running out of roads to kick that can down.” Unfortunately, this assertion applies equally well to windstorm insurance reform.  As set forth repeatedly on this blog and in the press, the failure to address this issue right now and reform the currently broken system leaves coastal residents at serious risk and threatens the state economy.

Alas.

Houston Chronicle publishes op-ed on TWIA problems

A protracted blue roof does not make for a happy voter

A protracted blue roof does not make for a happy voter

It’s by me.  So as not to infringe the Houston Chronicle’s copyright, I’m just going to publish an excerpt of it here.  But you can (and should!) read the whole thing by clicking on this link.

Chandler: Legislature should fix state’s storm insurance model

By Seth J. Chandler | July 6, 2013 | Updated: July 6, 2013 6:59pm

This hurricane season is looking very bad for property owners on the Texas Gulf Coast. That’s not just because climate experts are predicting more storms than average, but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association, is on the edge of insolvency. Unfortunately, Gov. Rick Perry declined to add windstorm insurance reform to the agenda of the Legislature’s first special session and isn’t likely to add it to the ongoing second.

Texas cannot wait until 2015. The governor needs to show leadership and force legislators to try to avoid a calamity even if a positive outcome and a grand fix is not a sure bet.

What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast.

The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors. Inland legislators must recognize that it will take some time to wean the coast off the existing system. And everyone should realize that the law covering how much “extracontractual damages” victims of insurer misconduct should receive does not matter much when the insurer cannot pay its contractual obligations. If a long-term solution cannot be reached, the Legislature could at least clean out bugs in the statute that could reduce the odds of an insurance disaster for a few years.

Pity the governor and legislators who, after a storm leaves blue tarps on unpaid policyholders’ roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.

Chandler is Foundation Professor of Law at the University of Houston Law Center and principal of the blog catrisk.net, which addresses catastrophic risk transfer in Texas.

 

P.S. This op-ed is indeed similar to one published a few weeks ago in the Austin American Statesman. But is was originally behind a pay wall and is now almost impossible to find. I appreciate the Statesman for consenting to the repetition.

 

 

Smithee’s urgent warning to Governor Perry

I’ve decided that Representative John Smithee’s letter of May 29, 2013, to Texas Governor Rick Perry is of sufficient importance that I should just simply reprint it right here. It contains an urgent warning that TWIA is likely to have a $1 billion gap and will not be able to pay claims promptly for even a low severity storm.  No links to click.  Just read it.

John Smithee warns Governor Perry that TWIA likely has a $1 billion gap and will not be able to pay claims promptly for even a low severity storm

John Smithee warns Governor Perry that TWIA likely has a $1 billion gap and will not be able to pay claims promptly for even a low severity storm

If you want to understand why John Smithee is saying this, read entries in this blog such as this one and this one.

House Insurance Committee to hold special hearing today on TWIA finances

The House Insurance Committee will meet this morning (June 17, 2013) to “hear invited testimony relating to the current financial condition of the Texas Windstorm Insurance Association.” Here’s the link you need to watch the hearing live. http://www.house.state.tx.us/video-audio/

The decision to hold a special hearing comes in the wake of the decision of Texas Governor Rick Perry not to add windstorm reform to the agenda of the special session and the failure of the legislature to pass any significant legislation reforming the finances of the troubled windstorm insurer.  We have now learned that House Insurance Committee Chairman, Rep. John Smithee, had added his name to a plea to Governor Perry to add windstorm insurance reform to the agenda.  In a letter of May 29, 2013, and published here (for the first time, I believe), he said that what he regarded as a “prudent and sound decision” by outgoing Texas Insurance Commissioner Eleanor Kitzman to disapprove $500 million in loans via a Bond Anticipation Note (BAN) to TWIA “raises significant concerns regarding TWIA” and presented a $1 billion gap in TWIA’s finance structure.” Smithee further wrote:

“Without availability of the $500 million BAN, there appears to be a legitimate concern regarding TWIA’s liquidity to pay losses in the 30-90 days following a 2013 storm of even low to moderate severity.”

 

As this blog has indicated on many occasions, the problem, however, goes even beyond liquidity.  As will likely be discussed at today’s hearing, there is a serious question as to whether TWIA, under the current finance structure, will in fact ever be able to get significantly more than the piddly amount of cash it now has on hand in order to pay claims following a storm of moderate severity.

Here’s a copy of the full Smithee letter. It is the most stark assessment to date by a legislator of the serious problem facing Texas.

Smithee Governor TWIA call

 

The op-ed I just pulled

As discussed in the previous post, Governor Rick Perry decided today not to add windstorm insurance to the agenda for a special session of the Texas legislature.  Among the lesser effects of this decision is that it moots out an op-ed piece I had pending with the Austin American Statesman. Here’s what I would have said and why I have problems with the Governor’s decision.

The op-ed

Texas Can’t Wait Much Longer for Windstorm Insurance Reform:

By Seth J. Chandler

This hurricane season is looking very bad for property owners on the Texas Gulf Coast.  That’s not just because climate experts are predicting more storms than average but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association (TWIA), is on the edge of insolvency.  Unfortunately, Texas Governor Rick Perry hasn’t been able to get from “certainly possible” to an urgent “yes” in answering calls to add windstorm insurance reform to the agenda for a special session of the Texas legislature.

The problem with waiting is that TWIA is broke and its funding model is broken. As it stands there may end up being only a paltry $1 billion to pay claims. That sum is inadequate to cover the $2 billion or far higher losses that might be sustained when an insurer with $80 billion in potential exposure collides with a Category 2 or higher storm. And for every day that now goes by with no special session and no bill passed by a two thirds majority of both Houses, that’s one more day deeper into this hurricane season in which the Texas coast is at risk.  Indeed, given the interdependencies in the Texas economy, an inability of TWIA to pay claims would place the entire state economy in jeopardy.

Why such little cash?  As a result of dubious management, underfunding before Hurricane Ike, and 2009 legislation that cut off TWIA’s former ability to soak Texas insurers and inland policyholders for large losses, TWIA just didn’t have what it took to shrug off Hurricane Ike claims. And, given the way it currently spends money and the modern risk of hurricanes to an ever developing Texas coast, TWIA’s premiums just aren’t enough to let it escape a cycle of perpetual underfunding. The situation is sufficiently bad that the Texas Insurance Commissioner wouldn’t even let TWIA prop itself up by borrowing $500 million now, ahead of a storm.

Borrowing after a storm — the current plan — is likewise in doubt. Soundings of the market suggest little appetite to lend TWIA money based on shaky sources of repayment such as massive surcharges on TWIA policyholders. And a bug inserted into the law as the 2011 session makes things worse. The inability of TWIA to market bonds at one level is likely to prevent it from marketing bonds — even ones that might otherwise be salable — at other levels.

Texas legislators wrestled this session with numerous fixes but the result was impasse. Disagreements about how much of a subsidy inland Texans should provide TWIA insureds, coupled with the time-tested Texas tangle about damages in lawsuits against insurers, meant that few bills could escape committee and no bill actually made it to a vote.

What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast. The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors.  Inland legislators must recognize that it will take some time to wean the coast off the existing system.  And everyone should realize that the law about how much “extracontractual damages” victims of insurer misconduct should receive does not matter all that much when the insurer can not pay even its contractual obligations. If a long term solution can not be reached, at least bugs in the current statute can be eliminated.

Pity the Governor and Texas legislators who, after a storm leaves blue tarps on unpaid policyholders roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.

 

Perry to Coast: No Special Session on Windstorm

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.

Lending Issues

 

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.

Psychological Issues

 

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.

Perry says special special on windstorm is “certainly possible”

Texas Governor Rick Perry told reporters at a Hurricane Preparedness Week meeting today that it was “certainly possible” that he would add windstorm insurance reform to the agenda for a special session.  He said that “we’re not going to bring it forward until we get a little closer to what I would consider to be an agreement between the disparate groups that are out there.”

Governor Perry’s desire not to waste legislator’s time on a fruitless effort is understandable, but since hurricanes are unlikely to respect this delicacy, let’s hope those groups will in fact move together swiftly, perhaps prodded along by a Governor who should not want to see vivid images of an unrepaired Texas coast featured in future political advertisements run against him.  There have, after all, been 60 tropical cyclones that have made landfall in the United States during the month of June (in the time for which statistics have been kept).  Eight have been Category 2 or higher, including Alma in 1966, which made American landfall in Florida and Audrey in 1957, which brushed the Texas border while severely damaging Louisiana.

Addendum: 4 p.m. 5/31/2013 —  Fox 26 Houston is doing a story on Governor Perry’s statement for its 5 p.m. news.  It will likely feature interviews with Senator Larry Taylor and with me. The reporter, Greg Groogan, definitely understands the issues.

Here, by the way is the Mathematica code that generated the above statistics.

atl = Import[“http://weather.unisys.com/hurricane/atlantic/tracks.atl”, 

   “Lines”];
Length@Flatten[
   Map[StringCases[#, RegularExpression[“.+6/\\d{2}/\\d{4}.+XING=1.+”]] &,
    atl]];
Column@Flatten@
  Map[StringCases[#,
     RegularExpression[“.+6/\\d{2}/\\d{4}.+XING=1.+SS=(2|3|4|5)”]] &, atl]

For other reports on this breaking item, look here and here.

 

 

 

Perry announces special session, but windstorm insurance not on the agenda

Texas Governor Rick Perry announced this evening that he would immediately call the Texas legislature back into special session.  The only item placed on the agenda at this time, however, is legislative districting.  Thus, the 83rd Legislature has now closed with essentially nothing being done to reform the thinly capitalized insurer of 62% of the property on the Texas coast. The Governor could add windstorm insurance to the agenda (along with other items) at a later time.

As we will discuss in greater length this week, the failure of Governor Perry, at least for now, to call the legislature back into special session on this issue, means that insureds of the Texas Windstorm Insurance Association are at serious risk of not having claims paid fully in the event of a significant storm.  And, with potentially vigorous hurricane season upon us, such a risk could materialize sooner rather than later.

The end of the legislative session also apparently means that Eleanor Kitzman is no longer Texas Insurance Commissioner.  We will need to see what the Governor does with that post and how the new appointee will tackle the persistent problems of TWIA and the issue of whether to place it in receivership.