Insurance Commissioner tries to fix fatal bug in windstorm statute

Whether policyholders of the Texas Windstorm Insurance Association get paid following a significant storm during the coming summer of 2014 is likely to depend on a difficult legal question: whether the Texas Insurance Commissioner has the power to write regulations that clearly alter the language of a statute enacted by the Texas legislature where she believes, with reason, that the statute as written makes no economic sense.  The good news is that the new Texas Insurance Commissioner, Julia Rathgeber, agrees with an argument first propounded on this blog: there is a serious “bug” in the provisions of the Texas Insurance Code governing issuance of securities to pay for losses following a significant storm. That bug could jeopardize the entire system of post-event bonding that is supposed to cover for the shocking lack of cash TWIA, the largest windstorm insurer in Texas, actually has available to pay claims. Recognizing a problem exists is, after all, usually the first step for a cure.  It’s certainly better than pretending the problem doesn’t exist and hoping no injured party or judge will notice. The problem, however, is that it is not clear that the Commissioner, acting alone and without legislative action, has the power to cure this problem in a way that could cost other Texans considerable sums of money.

Matters would be far better if all sides in the enduring controversy over TWIA funding could agree to a minimalist statutory fix before the 2014 hurricane season begins.  The stakeholders could then then ask Governor Perry for a short special session to enact the fix as law.  The Governor might accommodate if almost all legislators agreed to the fix and the agenda were kept narrow.  Commissioner Rathgeber’s regulations contain one possible fix.  A blog entry I put forth last spring contains some others. None would “cure TWIA” — that’s a very hard problem that will likely take at least a legislative session. But at least the statutory scheme would function as well as was hoped for by the legislature. Right now it resembles a bad computer program that is about to crash from a giant bug if nature ever pushes the “Hurricane Key.” Unfortunately, for reasons that will be discussed below, it looks like getting agreement on even a simple statutory fix will be difficult.

Texas Insurance Commissioner Julia RathgeberAs a result of the Commissioner’s questionable authority to enact the changes she wants and the likelihood that a coastal resident hurt by her fix would challenge it in court (and refuse to pay in the interim), absent legislative action, it is unlikely that TWIA will have any ability swiftly to pay significant claims this summer. By “significant”, I mean those generated  by a respectable storm that causes insured losses in excess of TWIA’s cash position ($200 million to maybe $400 million) and whatever reinsurance, if any, drops down low enough to pay claims right above the cash reserve.  Lenders who just might otherwise be willing to advance TWIA money based on anticipated revenue from premium surcharges may be unwilling to do where there is no secure statutory basis for demanding at least some of the surcharges in the first place.

The problem

Let’s go through the problem that the Commissioner’s proposed regulations is intended to solve. The Commissioner actually outlines it quite well in her explanation of the proposed regulations now undergoing hearings, but I think my explanation is a bit more direct. The basic idea is that, following a tropical storm that wipes out TWIA’s cash position, TWIA can go to the borrowing market.  It can request issue three types of securities cleverly named Class 1, Class 2 and Class 3. The securities are actually issued by the Texas Public Finance Authority (TPFA), not TWIA itself. Even though TPFA issues the securities, under section 2210.615(a) of the Insurance Code they are explicitly not backed by the full faith and credit of Texas. Texas taxpayers are not on the hook to repay the borrowings if the statutory mechanism fails.

What distinguishes the three securities TWIA may issue when it runs out of money is mainly the source of repayment.  To oversimplify just a bit, Class 1 is to be repaid by TWIA policyholders through “net premium and revenue.” Class 2 is to be repaid 30% by assessments on the insurers that compose TWIA (people who write property/casualty insurance in Texas) and 70% via premium surcharges on most property insurance policies written on the Texas coast. This latter group includes not only TWIA policies but also non-TWIA homeowner or wind insurance policies, business fire insurance, personal automobile policies, and commercial automobile policies. Class 3 is to be repaid by assessments on the insurers that compose TWIA. Class 1 can be up to $1 billion. Class 2 can be up to $1 billion; and Class 3 can be up to $500 million. And the borrowings are supposed to take place in sequence.  No Class 3 before all Class 2 has been issued.  No Class 2 before all Class 1 has been issued.

There’s a big “however,” however. What happens if lenders are worried that TWIA policyholders won’t be able to pay enough in premium surcharges to amortize the loan?  In 2011, the legislature recognized this possibility and came up with a plan. You can find it in section 2210.6136 of the Texas Insurance Code, which the most recent regulatory proposal cites frequently. To the extent that the Class 1 bonds would not sell, what I have called “Class 2 Alternative” bonds can be issued. According to the statute — and this is the bug — the first $500 million (or, in some cases less) is to be repaid the same way Class 1 bonds are to be repaid: using premiums from TWIA policyholders.  The remainder of the $1 billion in Class 2 Alternative bonds are to be repaid the way ordinary Class 2 bonds are to be repaid.

The problem, as the Commissioner has recognized, is that, if the Class 1 Bonds won’t sell because lenders don’t trust TWIA policyholders to have the money to amortize the bonds, it is unlikely that they will trust “Class 2 Alternative” bonds that have exactly the same payment source. As the official explanation of the proposed regulations states, the statute has “the effect of treating class 2 public securities issued under Insurance Code §2210.6136 as class 1 public securities, which are repayable by premium and revenue assessments.

The paradox is well stated by the Commissioner:

If the association [TWIA] can issue Class 2 public securities that are to be repaid by premium, then this means the association is capable of issuing class 1 public securities. This eliminates the need for having an alternative to issue class 2 public securities when class 1 public securities.  It is not feasible to read the statute to require TPFA to issue all of the class 1 public securities it can based on the association’s net premium and other revenue, and then expect TPFA to issue additional public securities using the same funding sources simply because the name of the public security has changed.  Such a reading would render Insurance Code §2210.6136 meaningless.

The domino effect

The problem is even deeper, however, than this passage indicates. As I have previously noted and as the Commissioner’s explanation confirms: “TPFA cannot issue the class 3 public securities until after TPFA has issued $1 billion in class 2 public securities on behalf of the association for that catastrophe year.” In other words, if the Class 1 bonds fail, the Class 2 Alternative Bonds are likely to fail too.  And if the Class 2 Alternative Bonds fail, the Class 3 Bonds fail. There’s a domino effect. TWIA ends up with no cash to pay claims and no ability to borrow at all!

So, this is the disaster waiting for Texas if it does nothing.  It is the disaster the Commissioner is trying to avoid. Her proposal is effectively to rewrite section 2210.6136 of the statute and make all of the Class 2 Alternative Bonds payable the same way regular Class 2 Bonds would be repaid: 30% by assessments on the insurers that compose TWIA (people who write property/casualty insurance in Texas) and 70% via premium surcharges on most property policies written on the Texas coast.  To quote section 5.4127(a) of the proposed regulations:

(a) All Public Security Obligations and Public Security Administrative Expenses for Class 2 Public Securities issued under §5.4126 of this division (relating to Alternative for
Issuing Class 2 and Class 3 Public Securities) must be paid 30 percent from member assessments and 70 percent from premium surcharges on those Catastrophe Area insurance policies subject to premium surcharge under Insurance Code §2210.613.


The proposed regulations potentially rescue TWIA policyholders from disaster.  They provide a more plausible source of repayment and they don’t result in the Class 3 securities succumbing to the domino effect.

The Bên Tre analogy

There is only one problem.  The Commissioner has destroyed section 2210.6136 in order to save it. The law would be little different under the Commissioner’s proposal than if the legislature had never bothered with section 2210.6136 in 2011 and just kept things the way they were in 2009, except to say that Class 2 bonds can be issued first if the Class 1 bonds can’t be fully issued.  The two different subparts of section 2210.6136 elaborately specifying how each part of the money is to be repaid would appear to be unnecessary.

The legal issue

I’m not going to opine today on whether the Commissioner is within her rights in undoing a legislative enactment whose sense is indeed difficult if not outright impossible to discern. But this isn’t the somewhat simpler case of the Commissioner fixing a clearly omitted “not” in a statute or correcting some punctuation.  This is undoing an entire provision when the legislature has been alerted to the problem and has chosen to do nothing about it. Although a Texas court can choose to interpret a statute contrary to its actual words where doing so clearly fulfills the intent of the legislature, it must do so cautiously.  As set forth by the Texas Supreme Court in Presidio Independent School Dist. v. Scott, 309 S.W.3d 927 (Tex. 2010), “We thus construe the text according to its plain and common meaning unless a contrary intention is apparent from the context or unless such a construction leads to absurd results.” There are many cases, including Texas Department of Protective and Regulatory Services v. Mega Child Care, Inc., 145 S.W.3d 170 (Tex. 2004), that say about the same thing. Indeed, in my brief research I had to go back to 1898 and the case of Edwards v. Morton, 92 Tex. 152 (1898) to find a case in which the highest court found the requisite level of absurdity to exist. Perhaps there are more recent cases that some quick research did not disclose but I suspect there will not be many.

The United States Supreme Court summarizes prevailing judicial attitudes well on the subject.

Courts have sometimes exercised a high degree of ingenuity in the effort to find justification for wrenching from the words of a statute a meaning which literally they did not bear in order to escape consequences thought to be absurd or to entail great hardship. But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter. Monson v. Chester, 22 Pick. (Mass.) 385, 387. It is not enough merely that hard and objectionable or absurd consequences, which probably were not within the contemplation of the framers, are produced by an act of legislation. Laws enacted with good intention, when put to the test, frequently, and to the surprise of the lawmaker himself, turn out to be mischievous, absurd, or otherwise objectionable. But in such case the remedy lies with the lawmaking authority, and not with the courts.

Crooks v. Harrelson, 282 U.S. 55 (1930) (Sutherland, J.)

Clearly, what is good for the judiciary is probably good for the Insurance Commissioner as well. Commissioner Rathgeber no matter how outstanding her intentions and no matter how irksome her opposition will have an uphill battle defending her reconstruction of the statute governing the Texas Windstorm Insurance Association. She will surely face hostile judges when, contrary to the literal language of the statute, she seeks to impose an additional surcharge on some coastal Texas homeowner with insurance on a run down car who never bought a TWIA policy and indeed doesn’t even have a home to insure.

Residents of the coast have apparently caught on (see here, here and here) that the proposed regulatory change theoretically hurts them.  Under the statute as written, even if there were more than $1 billion in losses awaiting payment, insureds on the coast would be responsible for only 70% of about $500 million.  With the regulatory change, they are responsible for 70% of up to $1 billion.  So, basically, the non-TWIA insureds on the coast are objecting to helping their TWIA friends on the coast because they don’t think it’s their responsibility.


In a world of perfect political information, we might now see a battle between coastal residents, the non-TWIA policyholders battling the Commissioner’s proposal while the TWIA policyholders support it.  To date, however, such a lack of “coastal solidarity” has emerged.  And it is not clear what the alternative is. Where do political figures whipping up opposition to the Rathgeber plan think the money is going to come from if the Commissioner’s regulations are struck down, the goofy statute upheld as written, and TWIA finds itself following a significant storm with no money in the till? Surely they are still not marketing the elaborate fantasy that the current TWIA board can now assess insurers more money to pay for Hurricane Ike in 2008. If they really cared about the coast, they might agree to defer a fight about the perfect way to fund TWIA for a bit, and agree to a statutory fix that at least got rid of a fatal bug in the existing law which, if triggered, will devastate TWIA policyholders to be sure, but also those on the coast and off it who depend on a vibrant coastal economy.


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.


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.

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


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.

Thanks, Andrea, for heading East while we dither

So, the season’s first tropical cyclone has formed, Andrea.  Fortunately for Texas, the computer models appear in agreement that this one is heading to poor old Florida.  And a good thing too for Texas.  Because, while Governor Perry considers whether to add windstorm reform to the agenda for a special session of the Texas legislature and its members possibly see if they could get close enough to an agreement to make such a session fruitful, Mother Nature is not waiting.  So, could we treat Andrea as a shot over the bow? This year’s tropical storm season has gotten off a bright and early start.

Weather Underground Map of Andrea

Tropical Storm Andrea: Apparently not headed for Texas



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[“”, 

   Map[StringCases[#, RegularExpression[“.+6/\\d{2}/\\d{4}.+XING=1.+”]] &,
     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.


Minor TWIA Bill Might Make It Through This Session

A bill making minor changes to the exposure of the Texas Windstorm Insurance Association passed the Texas House yesterday 134-11.  Before S.B. 1702 can become law, however, it will need to be reconciled in the closing days of the session with the substantially different version that passed the Senate last month.  Following amendments from Representatives Craig Eiland (Galveston) and John Smithee (Amarillo), the House version of the bill takes two actions with respect to Texas coastal building codes and insurance.  One of the provisions might increase TWIA’s claims in a tropical cyclone. The other might reduce it.

S.B. 1702 as amended in the House on motion of outgoing Galveston Representative Craig Eiland extends the time some coastal property owners with property that does not comply fully with building code standards a reprieve from somewhat tougher building standards until 2015.  Thus, for two more years during which TWIA’s reserves, even measured in the most optimistic way, are inadequate to pay for large storms, the House has apparently voted to actually increase TWIA’s exposure to risk.  This increase in exposure occurs because the premium surcharges on the these high risk properties are limited by the combinations of sections 2210.260(f) and 2210.259(a) of the Texas Insurance Code to 15%.  This value is likely insufficient to match the additional risk posed by these non-compliant properties.

A second provision of S.B. 1702 as amended in the House, however, one added by House Insurance Committee Chair John Smithee of Amarillo, might have a counterbalancing effect on TWIA exposure. It would condition eligibility for TWIA insurance after 2015 for homes and other property with values over $250,000 on compliance with stricter TWIA building standards. “Alternative certification” would not be available. There is no estimate that I have seen of the number or value of such properties that are currently insured by TWIA but out of compliance.

Based on my reading of the House Journal (pp. 3830-31), here’s the House version of the statute.

SECTION____.  Section 2210.260(d), Insurance Code, is amended to read as follows: (d)  Except as provided by Sections 2210.251(d), (e), and (f), a person who has an insurable interest in a residential structure that is insured by the association as of August 31, 2012, but for which the person has not obtained a certificate of compliance under Section 2210.251(g), must obtain an alternative certification under this section before the association, on or after August 31,  2015, may renew coverage for the structure.


SECTION ____. Subchapter F, Chapter 2210, Insurance Code, is amendedby adding Section 2210.2581 to read as follows:   Sec. 2210.2581. MANDATORY COMPLIANCE WITH BUILDING STANDARDS; CERTAIN STRUCTURES. Notwithstanding Section 2210.251, Section 2210.258, or any other provision of this chapter, after December 31, 2015, the association may not issue or renew insurance coverage under this chapter for a structure with an insurable value of $250,000 or more unless the structure complies with the applicable building code standards, as set forth in the plan of operation.

Although this bill may have some effect on individual TWIA policyholders, it is unlikely to have any significant effect on the ability of TWIA to pay claims following a major storm.  Absent a special session of the Texas legislature, it now looks as if that issue will need to await the 84th legislature two years hence in order to be addressed.  And whether S.B. 1702 passes or not, coastal Texas property holders will be at serious risk in the interim.

Senator Taylor calls for special session to address windstorm risk

Larry Taylor

Texas State Senator Larry Taylor

In the wake of the death of his bill that would have substantially reformed windstorm insurance along the Texas Gulf Coast, Texas State Senator Larry Taylor is calling on Texas Governor Rick Perry to put windstorm insurance on the agenda for a special session of the Texas legislature this summer.  Since there are indications that Governor Perry may call a special session to address other issues such as redistricting, guns on college campuses, and, possibly, the little matter of the budget, the question is whether Governor Perry would add windstorm reform to the agenda.

Here’s why a special session matters.  In a special session, there is no “blocker bill.”  This is a provision in the Texas Senate that makes it difficult/impossible for a bill to get to the floor during a regular session unless it has 2/3 support. Thus, the votes that apparently were sufficient to block Senator Taylor from getting his S.B. 1700 before the legislature during this session, will likely not be enough to prevent it from making it to a vote in a special session.  It is still the case, however, that to take effect immediately — as opposed to sometime late in the 2013 hurricane season — whatever legislation is approved will need a 2/3 vote from both chambers.

I agree with Senator Taylor that Governor Perry should place the issue of windstorm reform before a special session of the Texas legislature.

Having applauded Senator Taylor for recognizing a serious threat to his constituents from existing law, let me make clear that Senator Taylor and I do not agree on the merits of his particular bill, S.B. 1700.  Although I acknowledge that the status quo is so bad that even a bad bill might be an improvement, there is much to dislike in S.B. 1700. And so, if he gets his way, I am likely to continue to urge that S.B. 1700 be scrapped in favor of better ideas or substantially modified.

Senator Taylor and I also do not agree, I think, on the magnitude of the financial problems facing TWIA.  He ended his press release with the breezy assurance that he felt confident that losses from future storms will be covered. That is kind of a strange statement from someone simultaneously saying we need a special session of the legislature to deal with an urgent problem.  If losses will be paid, what is the rush? And so, while I understand fully the importance of a prominent elected official not generated unwarranted panic in policyholders, there is a countervailing interest in being truthful about the risks that exist here.  There’s an even stronger interest in reducing those risks if possible.

For the reasons I have set forth on this blog over the past few months, I believe the TWIA situation, is far worse than Senator Taylor asserts in his press release, closer to what would justify Senator Taylor in calling for a special session of the legislature and, actually, far worse than he and many others may realize. The legal structure on which TWIA would rely to recapitalize itself following a major storm and which would be needed to pay claims even somewhat promptly is, as TWIA itself acknowledged in a plea for reform legislation, extremely fragile.

There is a substantial risk that TWIA would not be able to raise more than $1 billion in post-event bonds and cash on hand to pay claims in a storm this summer; and the risk of a $1 billion in losses this summer is between 5 and 7%.  If we take three summers as the relevant time period — because that’s when a bill from the 84th legislature might well take effect — we are talking about a risk of 14-19% of having blue roofs on the coast and no money to do repairs. One way to think about this is that we are, quite literally, playing Russian Roulette with the Texas economy for the next few years.  The odds are about the same: 1 in 6.

The status quo creates too high a risk of a human-engineered disaster along the Texas coast and, derivatively, for the Texas economy.

Bottom Line

There are, as I have pointed out, modifications of S.B. 1700 that could make it a bandaid for Texas for the next two years.  That would be an OK idea.  There are, as I have noted, alternative schemes such as an assigned risk plan that provided adequate returns to insurers that would be a more promising structural solution for the long run. What Governor  Perry I hope becomes immediately educated about by legislators up and down the State of Texas, however, is the disaster looming if a major storm hits before the next legislative session and the insurer that covers 62% of all property there doesn’t even have close to enough money to pay for windstorm losses.  Governor Perry should be motivated to take those lessons seriously if he wants to remain a popular figure in Texas or elsewhere in the United States.  And those legislators should be mighty motivated to plea because voters will otherwise look to them as the people that failed to act and left the Texas coastal economy in shambles when they knew of a clear and present danger.


S.B. 1700 dead; Texas coast in grave danger

Senator Larry Taylor, sponsor of S.B. 1700, the only significant bill on windstorm reform to get through a legislative committee and at least have the chance of being approved, announced this evening that his efforts to get his bill passed have been frustrated by the Texas Trial Lawyers’ Association and the attorney with the largest share of the Ike cases, Steve Mostyn. I did not agree with much in S.B. 1700. It had many problems. But if this means that there will be no reform this legislative session of dysfunctional Texas insurance against tropical cyclones, I agree very much with Senator Taylor that this is a sad day indeed.

Here’s a copy of his press release.

Larry Taylor press release conceding defeat

Larry Taylor press release

There will be time in the next few days to discuss why certain trial lawyers may have objected to the bill but, from my perspective, the important is not whether the trial lawyers have a legitimate concern or whether, indeed, their objections are the only cause of the bill’s defeat.  Why, for example, did Steve Mostyn oppose it if the offensive provision had been removed? In some sense, however, this really doesn’t matter. The important issue is what on earth is Texas going to do about hurricane insurance until the 84th legislature two hurricane seasons from now.


There is, I suppose, a remote chance that the House could pass some minimalist bill that fixed the worst parts of the current scheme and try to ram it through the Senate.  I sure hope that happens. But I am not certain that there is the requisite level of support for such a scheme nor am I sure that there is time.  I do recall Representative John Smithee, chair of the House Insurance Committee, saying at a hearing that he did have a bill filed that had little content but that could be used as kind of an all purpose vehicle for TWIA reform.  But, again, I have doubts that there is the will or the time to get something passed before the end of the regular session.

There is also, I suppose, the possibility that Governor Rick Perry would add windstorm finance to a special legislative session.  But I have heard no rumor that such is contemplated.  And there is, I suppose, the possibility, that Texas is just counting on using its rainy day fund to pay for what could be a very rainy day on the coast of Texas this summer or next.  But I do not know whether such a use would be countenanced by the political powers or, since this is partly a self-inflicted wound, whether it should be used in that fashion.

What now?

And so, to my amazement, Texas is apparently choosing to to face the 2013 hurricane season — and perhaps the 2014 hurricane season too – with 62% of the property on the coast insured against tropical cyclones by an insurer that has been called insolvent by the Texas Insurance Commissioner, Eleanor Kitzman. The insurer has at in its Catastrophe Reserve Trust Fund at best 1/20th of the amount it should have if it wants to self-fund claims and has very doubtful ability to recapitalize itself in a significant way using post-event bonds.

As I told Fox TV today in a part that didn’t make the air this means two things for people on the coast. (1) People with insurance from the Texas Windstorm Insurance Association need to shop very aggressively for alternative forms of windstorm insurance.  They can’t just go to Allstate and State Farm and the usual suspects There are many insurers in Texas.  Many won’t write on the coast.  But maybe some of them will.  Even if it costs more, it may well be worth the peace of mind if and when a storm brews in the Gulf of Mexico this summer.  (2) People and businesses with TWIA policies should behave as if their policies have upwards of 30% coinsurance. That means taking every imaginable step both now to get their properties as resistant to hurricane damage as possible and to take every last minute precaution to reduce loss if a storm comes.

For my part, I’m going to keep watch on the extent to which TWIA succeeds in increasing its capitalization through a Bond Anticipation Note and through reinsurance.  I’ll try to dig further into the ability of TWIA to sell post-event bonds. And I’ll keep watch to see if any legislative cavalry is coming over the hill.  Right now, however, all is very silent in this calm before the storm.