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.



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



Lawsuit filed against TWIA for failure to assess fully for Ike

A policyholder of the Texas Windstorm Insurance Association has filed a lawsuit against that state-created entity and its current board of directors as a result of the failure of TWIA following Hurricane Ike to assess Texas insurers more fully under the law as it existed at the time. The lawsuit, filed in a state district court in Travis County (copy of lawsuit here), seeks a court order directing the current directors to assess TWIA member insurers for up to $600 million and to pay damages to the policyholder, Ramiro “Gamby” Gamboa of Corpus Christi, Texas. It is very unlikely, however, that the case will succeed in making any more money available for current policyholders of the deeply troubled largest insurer of windstorm risk on the Texas coast.

Mark Kincaid

Mark Kincaid

The plaintiff is represented in the action by Texas “Super-Lawyer” Mark Kincaid, a former head of the office of Public Insurance Counsel in Texas. The lawsuit is the latest in a series of steps by coastal interests, most visibly led by Corpus Christi State Representative Todd Hunter to find ways of buttressing the desperate finances of the Texas coast’s largest windstorm insurer. TWIA will likely respond to the lawsuit in the next three weeks or so. The members of the board of directors who have been sued will likely be notifying their Directors and Offices Liability Insurer of the suit, assuming TWIA procured such coverage for the current year, and requesting that they provide a legal defense to the claims. Whether or how Texas insurers who would be liable for the assessment in the event the lawsuit succeeds will intervene in the proceedings is not yet clear.

The major issue this lawsuit will face is that the statute that would have authorized TWIA to make the assessment was unquestionably repealed by the legislature in 2009. This blog has analyzed this issue extensively (see here and here) and concluded that the problem is likely insuperable. The short version is that in section 44(2) of H.B. 4409, the legislature in 2009, with knowledge that claims for Ike were still pending repealed sections 2210.058 and 2210.059, the provisions of the former law that would have authorized an assessment. That repeal without saving the right to assess for prior storms may have been foolish or it may have been part of some political deal involving insurers and coastal interests.  It may simply have been prophetic drafting by legislators who place a high value on the interests of Texas insurers. Unless some argument can be made that the repeal, if interpreted in the fashion I believe is required by section 311.031 of the Government Code, violates policyholder rights under the United States or Texas Constitution, or unless attorney Kincaid has some extremely clever argument up his sleeve, would appear to end the matter. I guess we shall see. In a formal opinion, the Texas Attorney General, Gregg Abbott, has rejected the argument made in the Gamboa complaint that there was anything unlawful about TWIA using premiums from years after Hurricane Ike to pay for claims arising out of that storm.

Conceivably, some lawsuit might have been filed against the then-directors of TWIA at the time it failed to assess for Ike fully but that claim does not appear to exist in this lawsuit nor have the right individuals been sued.  Moreover, such a lawsuit based on actions in 2008 and 2009 would now run into statute of limitations issues since the claims are based on alleged failures that took place more than four years ago. The absence of such a claim is, in some sense a pity for TWIA historians, since those directors had at least constructive knowledge that the time for an assessment was about to expire and might possibly have known that the $430 million assessment they did issue was going to prove woefully low to pay for Ike claims and would thus burden current and future policyholders. If the Gamboa lawsuit survives motions to dismiss and discovery proceeds, however, the just-filed lawsuit  may bring some of those issues to light. The Texas Attorney General has previously declined to respond to a request from State Representative Todd Hunter that the failure to assess was negligent.



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.


Waiting for Godot: TWIA style

Sometimes, watching a TWIA board meeting is like watching an absurdist French play. In Waiting for Godot, Samuel Becket presents a two hour play in which the two characters Vladimir and Estragon waste away their existence waiting endlessly for “Godot,” who is clearly never coming. Substitute an Attorney General opinion authorizing an assessment against Texas insurers for Godot and at least some TWIA board members for Vladimir and Estragon and you get an almost perfect re-interpretation of the 1950s French existentialist classic.

Offering a carrot in Waiting for Godot

To be less high-falutin’, however, when the TWIA board spend hours saying they want to “delay” consideration of an assessment in 2013 of Texas Insurers for 2008’s Hurricane Ike until the Texas Attorney General opines that they have the power to do so, they are wasting time on something that will never happen.  To begin with, contrary to a myth that seems to have received its genesis at yesterday’s board meeting, the Texas Attorney General has not been directly asked (yet) whether TWIA currently now has authority to assess insurers for Ike. Of course, the TWIA board can wile away its time on whatever diversion it chooses; we all probably do that.  But when TWIA sees its exposure growing at 4% per year, acknowledges that it is barely solvent if one counts a paltry catastrophe reserve trust fund, acknowledges that its rates are not actuarially sound, and realizes that not a single of its legislative recommendations got any traction, a focus on this pipe dream rather than a relentless look at reality looks — and is — absurd.

The TWIA board considers an assessment

The TWIA board considers an assessment

One reason the Texas Attorney General will not provide what some TWIA board members claim to await is that no one asked the Attorney General to do so. The only pending attorney general request for an opinion that relates to TWIA comes from Corpus Christi Texas House Representative Todd Hunter in RQ-1134-GA filed in July of 2013.  But that request does not ask whether TWIA has the authority to issue an assessment today under a statute that was repealed in 2009. Rather, it asks whether it would be “negligence and/or a failure of authority or responsibility of duties” for TWIA not to assess today. But, as anyone with a background in law knows, it is quite possible for TWIA to have the authority to do something and yet, in the exercise of its business judgment, not to be “negligent” or in breach of its duties not to do so. Unless, therefore, Attorney General Abbott, a current gubernatorial candidate, is eager to step into this highly politicized thicket and lose votes on the Texas coast, he can answer the questions posed without addressing the core issue of whether TWIA has authority to assess. Only if the Attorney General wants to go out of his way to find that TWIA is negligent in assessing today would he have an obligation to resolve the predicate question of whether TWIA has authority to do so.

Moreover, to pretend that there might really be an affirmative answer to the authority question or that, really, the matter is quite unclear is, I fear, at best an exercise in undue politeness. For reasons I have set forth before here, here and here, this is, on reflection, not a particularly close question. The statute that gave TWIA authority to make the kind of half billion dollar assessment it came within one vote of making yesterday was repealed in 2009. It was repealed — by at least one of the legislators who yesterday urged an assessment — in favor of a system that provided a different system for financing losses after a tropical storm. It was repealed in part precisely because under the old system the Texas fisc was directly jeopardized by a TWIA assessment: insurers got to credit payments of the assessment against otherwise owing premium taxes.

It is just preposterous to think that the Texas legislature, if it wanted to prevent assessments for new storms but leave assessment authority in place for old storms would have chosen simply to repeal the old law rather than place a temporal limitation on the authority to assess. It is bizarre to think that if Texas was willing to place its continuing fisc in jeopardy for old storms but not for new, it would not have done something a little more nuanced that simply repealing the old law. It is even more peculiar to suggest, as may have been done yesterday, that Texas magically preserved the ability to assess for Ike but repealed the premium tax credit so as to preserve its fisc.  If it did so, that provision of the statute must have been written in invisible ink.  If TWIA’s lawyers are, as is claimed, actually telling board members, some of whom may not want to hear it, that the matter is ambiguous, that is a failure of courage or competence over reason.

But, actually, it was not so much parallels to Samuel Beckett that troubled me most in watching the TWIA board meeting yesterday.  It was the parallel to Franz Kafka and other writers who focus on tyranny. Here’s the most troubling quote: “I would have to support this assessment because it would be good for the policyholders and that’s who we represent and that’s basically who I’d have to be in support of.”  (1:42 to 1:43 of this recording) Sorry, but at best that is a hopelessly shallow analysis.  It might be equally “good” for the policyholder if Texas insurance agents had their homes confiscated and sold to pay for Ike losses or if Michael Dell was told he had to personally recapitalize TWIA.  Although Texas insurers may have a good deal of money and it takes a little imagination to see State Farm or Allstate as the victims of tyranny, the fact that a government-sponsored entity may “need” money for some public good is not authority to reach into the bank account of anyone — insurer, wealthy person or poor person — and simply take their money without legislative authorization. That is true even if the insurance industry “got away” with paying too low an assessment back in 2008. And, since Texas courts are likely to agree with this point, it is in fact not good for policyholders to have their money wasted paying lawyers defending an indefensible position.

Footnote 1: This is not to say that asking whether TWIA was negligent in not assessing more heavily back in 2009 is a bad question or an easy question. I adhere to my view that this is a reasonable question.  I am just saying that an answer to this question will not provide guidance on whether TWIA can legally assess today.



Todd Hunter asks a good question

Todd Hunter at a recent town hall meeting on windstorm insurance

Todd Hunter at a recent town hall meeting on windstorm insurance

There is at least one thing Representative Todd Hunter (Corpus Christi, Texas) and I agree on: I am not a member of his fan club.  This blog has frequently criticized Representative Hunter for what I regard as his misguided views on windstorm insurance.  Frankly, neither he nor I appear to appreciate each other’s “style.” But, give credit where credit is due.  He has now actually asked a very good question.

In a letter last Friday to Texas Attorney General Greg Abbott, Representative Hunter asked for an opinion stating whether a failure by the Texas Windstorm Insurance Association to assess private insurance companies fees to shore up its ability to pay claims amounts to negligence.  I raised the same issue several months ago in a prior blog post. Were the Attorney General to opine positively, it could open the door to legal action against the board of directors of TWIA or its officers during the critical 2008-2009 time period after Hurricane Ike and before HB 4409 repealed a statute under which TWIA might have issued further assessments against member insurers to shore up its finances. If it were to turn out either that any of the board members or officers has significant funds or if anyone responsible for any of their misdeeds either by operation of law or through an insurance contract has money, it could ultimately help bring some desperately needed additional funds into the largest windstorm on the Texas coast.

The problem with the preceding paragraph, however, is the number of “ifs” it contains.  First, the Texas Attorney General would need to opine positively.  I’m not saying it couldn’t happen. But he might well opine that this was a factual question on which he had no legal opinion.  He might opine that he lacked the facts on which to render an opinion.  He might remind Representative Hunter (who obviously knows this point) that negligence is not the same thing as strict liability. A realization in hindsight that the assessments were too low is not the same thing as a failure to make assessments that were plainly reasonable at the time such a decision would have been made.  Defendants in such a lawsuit would surely argue that making such an assessment and increasing the size of the Ike pie would just have made TWIA a stronger lawsuit magnet and left no more money for future claims. None of these responses would be particularly helpful to Representative Hunter.

Second, to make such a lawsuit more than a show trial or truth commission, someone needs to have actual money.  I don’t know for sure, but it would strike me as unlikely that any of the board members or officers have $400 million in assets upon which execution is practical. And while some of the large corporate entities affiliated with the board members would likely have that kind of cash, tagging the corporation for any sins of these board members will be a challenge. TWIA probably has some form of liability insurance to protect its board of directors, but until we see the policy it is hard to know what it covers or how much protection it would offer. In any event, no defendant is likely to write a check right away to the plaintiff in such a lawsuit . In any money ever comes in, it will likely be years from now — a long time for claimants against an insolvent TWIA to wait for payment that repairs their hurricane-damaged roof.

Third, one should expect to see defenses of statutory immunity and the statute of limitations raised.  Under section 2210.106 of the Texas Insurance Code, officers and directors have at least some immunity from damage lawsuits for many forms of ordinary negligence. And the statute of limitations for breach of fiduciary duty in Texas is four years. If that statute runs from the time of the original assessment, a lawsuit now is too late.  If it runs from the date that section 44 of HB 3 was signed into law and eliminated TWIA’s former ability to assess, the deadline would appear to be July 19, 2013, leaving precious little time in which to file such suit. (Hint, hint?)

It will be interesting to see how Attorney General Abbott responds to this request.  As I have suggested, the matter is not an open and shut case and bad decisions in hindsight does not negligence make. Still, there has always been something troubling about the process and chronology here.  TWIA, over which insurers have had substantial control, making assessments against insurers that are lower than that requested by its managers and that turned out to be low all the while watching or, more troublingly yet, possibly participating in, a statute that cuts off the ability of TWIA to assess for Ike. Representative Hunter deserves credit for asking the Attorney General to take a look at the legality of actions that are in part responsible for the predicament in which TWIA and its policyholders now find themselves.

Here’s a link to the letter from Representative Hunter. AG Opinion Request

Return of the Vampire Argument

One of the amazing things about debates over the Texas Windstorm Insurance Association is the extent to which, like vampires, some arguments never die. It doesn’t matter how meritless the argument is, it doesn’t matter how thoroughly it has been beaten back in the past by logic or legislation. It just keeps being brought out of its grave when needed by advocates.  Many of these arguments are pernicious because they distract from the real issues facing Texas and because they divert attention from study of the real solutions.  They provide red meat for zealots but do absolutely nothing to solve their problems. Until, however, coastal residents drive a stake through the heart of them by driving their proponents out of office, they are likely to persist.

One of the more amazing of these vampire arguments is that the Texas Windstorm Insurance Association can make an assessment today against Texas insurers for damages caused by Hurricane Ike based on a statute that was repealed in 2009.  And yet, according to the Corpus Christi Caller, coastal legislators such as Corpus Christi’s Todd Hunter are again casting about looking for someone in authority who might believe this particular fantasy. This time the argument has been hurled at the new Teas Insurance Commissioner, Julia Rathgeber. According to a Corpus Christi Caller article of July 3, “[c]oastal lawmakers again are reaching out to Texas Insurance Commissioner Julia Rathgeber to seek about $400 million in assessments for insurance companies to help replace funds paid for claims in the wake of Hurricane Ike.”  I will be stunned if Commissioner Rathgeber does anything other than send of a polite message that she does not believe such an assessment to be possible. It hardly creates the business friendly environment that her boss, Governor Perry, desires when businesses can be threatened with arbitrarily having hundreds of millions of dollars taken away from them based on the ghost of a former statute. A swift and unambiguous “no” from the Commissioner will be at least put the vampire back in its coffin for a while and permit more serious approaches to TWIA’s insolvency to be examined.

Why do I use such strong language in denigrating the argument.  Mostly because I can read. There is no statute today authorizing assessments against TWIA member insurers unless a post-event bond has been issued.  That hasn’t happened. Government can’t just come in and take private property  — even the money of insurance companies — unless there’s a constitutional law that justifies the taking. That’s one of the things that separates us from a tyranny. So the only conceivable basis in for an assessment is the old law, former section 2210.058 of the Insurance Code, which was used back in 2008 to assess insurers for Hurricane Ike.

The problem is that this law was repealed by section 44 of H.B. 4409, which was enacted in 2009 after Hurricane Ike basically destroyed TWIA. Here it is:

Section 44 of HB 4409

SECTION 44.  The following laws are repealed:

(1) subdivisions (5) and (12), Section 2210.003, Insurance Code;

(2) Sections 2210.058 and 2210.059, Insurance Code;

(3) Sections 2210.205 and 2210.206, Insurance Code;

(4) Sections 2210.356, 2210.360, and 2210.363, Insurance Code; and

(6) Subchapter G, Chapter 2210, Insurance Code.

There it is in black and white.  I’m not sure how it could be any clearer.

So the only argument coastal legislators might have left to keep this vampire out of its coffin is that, somehow, the word “repeal” doesn’t really mean repeal. And the only sliver of hope in that regard would appear to be section 311.031 of the Government Code. It reads

Sec. 311.031.  SAVING PROVISIONS. (a) Except as provided by Subsection (b), the reenactment, revision, amendment, or repeal of a statute does not affect:…

(2)  any validation, cure, right, privilege, obligation, or liability previously acquired, accrued, accorded, or incurred under it.

I suppose the legislators’ argument is that the “assessment” was an obligation or liability previously acquired, accrued, accorded or incurred.” But this argument, which a law professor might briefly admire for its creativity, fails because the possibility that TWIA might assess insurers more for Ike is not a liability or obligation. The fact that TWIA might have made an assessment is no more an “obligation” or a “liability” than a tax that the legislature might have but did not impose or a penalty that a court might have but did not impose. Thus, if Allstate had not paid its assessment under the 2008 assessment, the fact that the statute permitting assessments was repealed would not relieve Allstate of its obligation to pay the pre-existing assessment.  It would, however, prevent TWIA from creating new liabilities for Allstate to pay.

Moreover, think about it. If the legislature wanted to preserve TWIA’s ability to assess after 2009 for storms that occurred before that time but not afterwards, you would not repeal the statute.  Instead, it would far more direct and far clearer simply to amend the statute to limit the set of storms for which assessments would be permitted.

Now, perhaps the strategy of coastal legislators such as Todd Hunter is to keep asking Commissioner Rathgeber for lots of things in the hopes that she will, as a compromise, give them the one thing that might possibly make sense, a pre-event bond. But, really,  pre-event bonds should rise or fall on their own merits. Granting them or not should not depend on legislators asking for things that are plainly illegal, such as confiscating the property of insurers.

I understand why coastal legislators are upset.  Their strategies in the 83rd legislature failed. It is, despite the protestations of some to the contrary who want to pro-development illusion that the band can keep playing on, a “crisis situation.” Although they are not the only parties at fault, these legislators have contributed to the horrible risk now confronting their constituents. And Governor Perry has thus far resisted calling a special session of the legislature to repair the damage. These legislators likely will (and should) be held responsible by their constituents if a tropical cyclone bankrupts TWIA. And, they are right that, with the benefit of hindsight, TWIA policyholders would be better off if TWIA had issued a greater assessment for Ike while its statutory authority to do so was still in force.

The bottom line, however, is that TWIA did not make an extra assessment for Ike and the time to have done so has long run out. And even if the 1% chance materialized that a court would ultimately order insurers to pay based on a new Ike assessment, the lengthy court fight involved would delay receipt of funds well into the next legislative session.  Honestly, all that bringing this vampire argument out of the coffin again accomplishes is to diminish the credibility of those who will need every ounce of it if they are persuade fellow legislators to engage in sensible, needed reform of the Texas Windstorm Insurance Association.

Texas Insurance Commissioner Eleanor Kitzman Confirmation in Doubt

Eleanor Kitzman

Eleanor Kitzman

Serious doubt exists today as to whether Texas Insurance Commissioner Eleanor Kitzman will be confirmed by the Texas Senate.  Her name does not appear on the list of nominees set for confirmation today and today appears to be the last day on which this committee will meet.  If so, and if, as I suspect, this is a response to her actions regarding windstorm insurance in Texas, this is a major loss for Texas. I would urge the legislature to reverse course. I would urge Governor Rick Perry and other leaders to speak up and support their choice.

But before voting to confirm someone with years of experience in insurance regulation and regarded highly enough nationally to head the critical Financial Regulations Standards and Accreditation Committee of the National Association of Insurance Commissioners (NAIC), legislators should at least examine the alleged marks against her.

The Rap Sheet

Count 1: Aggravated truth Telling

On or about June of 2012, Commissioner Eleanor Kitzman responded to a request from state Rep. John Smithee, R-Amarillo, by stating that the Texas Windstorm Insurance Association would be unable to pay claims fully if some Category 4 or higher hurricanes hit. This utterance challenged the prevailing wisdom that everything was fine with TWIA. It challenged the cultivated illusion that investors could regard collateral or property insured by TWIA as having the same degree of security as property and collateral insured by other Texas insurers. It threatened growth on the coast.

For this heresy, Commissioner Kitzman was welcomed back to Texas by Representative J.M. Lozano, R-Kingsville, with a request that she be investigated byTexas Attorney General Greg Abbott for breaking Texas law. And what law might it be that criminalizes speaking the truth? Lozano said her letter may have made a “misleading representation regarding the financial condition of an insurer” or somehow violated a state pledge not to impair collection of assessments on bonds that TWIA might issue following a major hurricane. Needless to say, the investigation requested by Representative Lozano, if one was ever done by our more level headed attorney general, went absolutely nowhere because Kitzman’s speech had violated no law and done no wrong.

Commissioner Kitzman compounded this alleged wrongdoing by then saying in her response to Chairman Smithee that, if TWIA did become insolvent, the state of Texas was under no legal obligation to make up for the resulting unpaid claims of TWIA policyholders.  Never mind the fact that absolutely no one has cited any legal authority saying that Texas has an obligation to pay such debts any more than obligations to guarantee other unpaid obligations throughout the state.  Never mind the fact that the Texas Property and Casualty Insurance Guaranty Association statute makes clear that it does not provide protection — at all — for government-created insurers. Never mind that Commissioner Kitzman is an experienced attorney and expert in insurance regulation who can read as well as anyone else and find no law creating such an obligation on the part of the State of Texas. Never mind, even, when I tell you as a professor of insurance law at a respected university that there is no such legal obligation. Commissioner Kitzman again disrupted the illusion that it was no more risky to invest on the coast of Texas than it might be to invest in El Paso or Dallas or San Antonio. And that, in certain parts of Texas, is apparently a crime or, if not, the basis for refusing to confirm an otherwise eminently qualified individual for a critical regulatory post.

But, of course, it goes beyond daring to question the assumption of security along the Texas coast or doing so just one time.

Count 2: Threatening A Trial Lawyer with reduction of fees

On or about March of 2013, Commissioner Kitzman asked the TWIA board to consider placing TWIA in receivership, the Texas equivalent of bankruptcy, following its filing of an annual report that showed that it was insolvent. Let us make clear what the consequences of such an act might be.

TWIA has been a boon to trial lawyers along the Gulf Coast.  In part because of extremely dubious adjusting practices by the Windstorm Association and, perhaps in part for other reasons, attorneys along the Texas coast have made hundreds of millions of dollars on contingency fees arising out of breach of contract, bad faith and statutory claims  against TWIA.  I am not, please note, saying there is anything wrong with this. Insurers do on occasion misbehave, perhaps particularly so, when they have not been properly capitalized. There need to be deterrents against exploitation of policyholders and there is nothing wrong with lawyers advocating zealously on behalf of their clients. And, in the interests of full disclosure, I worked at one time as an expert on behalf of one of those very plaintiffs firms evaluating what appeared to me to be inappropriate use of statistical evidence by TWIA in adjusting claims.

The key point, however, is that there are still a number of Ike claims pending.  In receivership, those claims might not be paid in full. They would have to be treated with at least some regard to future claims against an insolvent insurer. But, if those claims were not paid in full, not only would the claimants perhaps not receive perfect justice but the attorneys representing those claimants would likely suffer a commensurate reduction in their percentage interests (contingency fees) in the lawsuits. Both of those possibilities — a threat to people one has come to care about and a loss to one’s own pocketbook in the process — can make good people mad. And when those people also make hefty contributions to political campaigns, that’s almost a crime in Texas.

Moreover, consider the threat to the illusion of security compounded by going public with the idea that TWIA was insolvent, that future claimants might need to be treated fairly, and that TWIA might need to be placed into receivership.  Other Commissioners might have swept that issue under the rug or concocted ways to extract more money out of inland Texans to pay for future claims.  But not Commissioner Kitzman. By even uttering the word “receivership,” she compounded her earlier threat to the cultivated illusion of security that has fueled the addiction to continued development along the vulnerable Texas coast. Never mind that receivership might actually help TWIA recapitalize itself — indeed that is a major purpose of receivership — the public confirmation of TWIA’s desperate straits might make other lenders reluctant to lend and developers reluctant to develop on the strength of a TWIA policy.

Plea for Relief

There are, of course, other issues with Commissioner Kitzman’s tenure. Her views on balance billing rules in health insurance have stirred up controversy. And, because to my knowledge no public hearings were ever held on her appointment, we don’t know if there are issues pertaining to managerial competence or other matters. This is not a full accounting of her pros and cons.

From what I can see, however, Commissioner Kitzman has been an open and fair individual — yes one with a free market bent that one would have thought might have sold well in Texas.  She participated in creative efforts that did not constitute toadying to powerful private insurers to deconcentrate the risk now held in TWIA and get those insurers to start shouldering some of the windstorm risk but at fair prices. She’s presided over the growth in an outstanding web site that provides excellent information to consumers. She has been generous with her time to me, appearing in my insurance law class this fall to speak forthrightly with students. She’s been a leading figure nationally in insurance regulation.

I hope the Texas Senate somehow changes course and confirms her.  If not, I hope Governor Rick Perry figures out a way the State of Texas can continue to benefit from her expertise.  And, above all, I hope that legislators realize that shooting the messenger does nothing to protect the Texas coast or attract talent to critical fields in our state.


A simulation of H.B. 2352 and S.B. 1089

H.B. 2352, a bill to reform the Texas Windstorm Insurance Association (TWIA) from Corpus Christi Representative Todd Hunter, is scheduled for hearing in the Insurance Committee of the Texas House this Tuesday afternoon at 2 p.m. I do not know yet if my teaching obligations will permit me to travel to Austin and testify, but if they do, here is about what I will say. It’s based on a Mathematica simulation of 100 sets of 100 years of storms and draws on work I’ve discussed here, herehere and here.

My name is Seth Chandler. I am a law professor at the University of Houston Law Center and author of the blog, which addresses the law and finance of catastrophic risk with a focus on Texas. The views expressed here are my own and do not necessarily reflect those of the University of Houston.

I have attempted to simulate the effects of H.B. 2352 and its companion bill S.B. 1089. The details of that simulation, including the source code, are available in the written submission made to the committee and available at Basically, I have run 100 100 year storm simulations using models calibrated to mimic those used by AIR and RMS, the two leading modeling companies on which TWIA has relied. Should members of the committee or staff have any questions on the technical details of the model or how variants of the law would affect the conclusons here, I am willing to try to assist.

Based on that research I find that over the initial 20 years of H.B. 2352 with a runoff, and assuming TWIA does not purchase reinsurance, TWIA policyholder premiums will cover about 68% of the losses suffered during that time period. The remaining losses will be paid 6% from replenishment of the catastrophe reserve fund, 8% from class A bonds, 5% from class B bonds, and 9% from class C bonds. Troublingly, 4% of the losses have no identified source of funding. If one assumes instead that TWIA purchases reinsurance at the top of the bonding stack in an amount equal to 1.4% of its direct exposure, as it has done in the past, TWIA policyholder premiums and reinsurance paid for by TWIA policyholder premiums cover a total of 61% of losses suffering during that time period. The remaining losses will be paid 8% from replenishment of the catastrophe reserve fund, 10% from class A bonds, 6% from Class B bonds, and 11% from class C bonds. The percent of losses that have no identified source of funding has decreased, but still rests at 3%. These numbers are, of necessity approximate, and they indeed vary based on a variety of assumptions that need to be made. I have not had the luxury of a large amount of time in which to refine the analysis. In general, however, I believe they accurately reflect the benefits and burdens of H.B. 2352 and S.B. 1089.

This simulation attempts to quantify the benefits and risks to TWIA policyholders created by H.B. 2352 as well as the burden it places on those not receiving direct benefit from TWIA policies. Personally, I do not like what occurs if H.B. 2352 were used to prop up a $72 billion TWIA. The concentration of correlated risk in that entity inevitably makes it an expensive proposition in which the organization either pays exorbitant prices to reinsurers or continues to run the risk of an inadequate stack of protection against larger storm. I believe there is much to the idea of significantly depopulating TWIA with an assigned risk plan or similar mechanism that decorrelates the risk by forced pooling with non-windstorm risk throughout Texas.

If, however, you want to persist with a large propped up TWIA but want to avoid otherwise inevitable biennial fights, it is crucial that the bonding limits contained in this bill with respect to Class A, B and C securities be stated not as absolute numbers, $1 billion, $900 million, $2.75 billion but, as you have wisely done in this bill with the CRTF, percentages of some measure of overall risk to the pool, perhaps direct exposure. Without this modification, the risk grows of storms overwhelming TWIA’s bonding capacity.

Finally, for reasons I have outlined elsewhere I persist in my view that wealthy people on the coast receive subsidized property insurance from poor people away from the coast. This bill continues that inequity although it masks the subsidization by terming what amounts to regional and statewide property taxes as premium surcharges or assessments on insurers. I would thus suggest that the bulking up of the CRTF that takes place in the early years of the HR 2352 plan be made less by non-TWIA policyholders on the coast and assessments on insurers, but more heavily by TWIA policyholders themselves, who will, notwithstanding the benefit that each part of Texas bestows on the other, be the primary beneficiaries of the CRTF protection.


I’m showing below a condensed version CDF on which this analysis depends.  You can get the full version here. If you don’t see anything substantive, you need to download the free CDF player so that you can interact within your browser with the model I have created.

[WolframCDF source=”” CDFwidth=”600″ CDFheight=”1600″ altimage=””]

Some further caveats and comments

  1. I am fully aware that this work done on short notice by an individual and not one certified as an actuary, though I do believe I have the skills to produce what I have done. As I have written elsewhere, the Texas legislature should seriously consider establishing an insurance think tank to help it with issues like this.
  2. The premiums in this model are static.  There is some possibility that as the size of the catastrophe reserve fund grows and TWIA is better able to handle storms without resort to post-event bonding, the premiums could decline.
  3. The basic problem with TWIA is that its risk is correlated.  If it were decorrelated, the premiums policyholders pay would likely be adequate to cover its losses and no cross subsidization would be needed.  The problem is that TWIA needs to build up its catastrophe reserve fund to the point where it is no longer dependent on the risks of post-event bonding or the expense of reinsurance.  Until it does this, a system that bundles up correlated risk is going to remain either really expensive or run a risk of insolvency.


Smithee bill would require TWIA to tell policyholders the truth about its solvency

John Smithee photo

John Smithee

State Representative John Smithee (R-Amarillo) has filed a bill in the state legislature  (HB 2785) that would require the Texas Windstorm Insurance Association (TWIA) to tell its policyholders on the declarations page of any policy it sells after January 1, 2014, about the limited resources available to pay claims in the event of a serious storm. The bill requires disclosure of the financial resources of TWIA, including the state of its catastrophic reserve fund and the marketability of bonds on which TWIA currently relies to pay claims for even modest tropical cyclones.  Critically, it also requires a prominent warning to policyholders right on the declarations page of the policy that the state of Texas is not obligated to come to their or TWIA’s rescue in the event that TWIA can not pay.

Needless to say, Catrisk is enthusiastic about this bill for several reasons.  First, it will enable potential insureds along the Texas coast to make intelligent decisions about the extent to which they want to try to obtain non-TWIA policies to protect them in the event of a serious storm even if those policies are more expensive.  As it stands, some TWIA policyholders may suffer from the incorrect assumption that the resources available to pay claims from policies purchased from TWIA, which currently relies on a paltry catastrophe reserve fund and a shaky structure of post-event bonds, are the same as those available from regulated private insurers, who would be put out of business if their reserves were anything near the inadequacy of TWIA’s. The misinformation suppresses demand for policies from regulated insurers and thus contributes to the self-fulfilling prophesy that the regulated market “can not do business on the coast.” Other prospective insureds, by the way, may actually have an exaggerated sense of TWIA’s instability and thus decline to purchase TWIA policies due to excessive fear. The bill, by providing the relevant facts, could help both groups of people make an informed choice.

Second, those contemplating migration or business expansion on the Texas coast will now be advised to think about whether they want to choose between going with a less expensive but flimsy insurer (TWIA), scrounging for difficult-to-obtain and often expensive wind insurance from a private insurer, or deciding that there may be better places in which to invest. This, of course, is precisely why some coastal interests, particularly those who benefit from immediate investment on the coast, oppose bills such as HR 2785. Telling people the truth about a risky product is indeed likely to drive down demand for the risky product while stimulating demand for the safer.  But getting demand for insurance products back to fair market levels, as opposed to levels inflated by subsidization and misinformation, is a good thing for Texas as a whole. Market distortion is not a zero sum game.

Third, this bill is a good idea regardless of the form in which TWIA goes forward.  Whether TWIA is transitioned out for residential policies, as proposed in the recent Carona bill, or strengthened through significant subsidies, as in the recent Hinojosa and Hunter bills, many policyholders are likely to remain in TWIA or potentially in TWIA for several years to come.  In that interim period, those policyholders should be warned of the remaining dangers posed during the transition to a system of greater solvency.  The faster and more forcefully that transition occurs, the less dire the warnings will need to be.  I am confident that Representative Smithee would be glad to include an amendment to his bill exempting TWIA from the disclosure requirements if it could show the Texas Insurance Commissioner that it would satisfy solvency requirements imposed on other Texas insurers.

At least one coastal legislator, Todd Hunter of Corpus Christi, has voiced opposition to the Smithee bill.  He did so at a hearing last year (go to go to 1:57:50 to 2:02:18 of the recording) in cross examining me about ideas similar to those found in the Smithee bill.  And he is reported today in a Corpus Christi Caller article as asking, “Why should coastal residents be the only people subject to this Miranda warning from (the association)?” Hunter asked. “Why is it not required, statewide, for all carriers?”

The rejoinder to Representative Hunter’s opposition, however, is that other Texas carriers are subject to financial solvency regulations from which TWIA is exempt and as to which TWIA would be in serious violation were it ever required to follow them. The reason TWIA policies should be stamped with bold red warning labels is the same reason that we stamp surplus lines policies in Texas with similar warnings: they are not subject to the same regulatory structure that works pretty darned well in preventing insurer insolvencies. Coastal residents are mature enough to handle the truth. Just because TWIA and State Farm both have the word “insurance” in their names does not mean that the law should treat them the same.  We don’t exempt investments in junk bonds from disclosure regulations about the risks involved just because some other forms of “investment”, such as certificates of deposit in a federally insured bank,  are not subject to as strict disclosure rules.  And, again, if equality of treatment is really the objection of some coastal legislators, an amendment exempting TWIA from disclosure in the event its financial condition would satisfy otherwise applicable solvency regulations seems a better answer than keeping TWIA policyholders in the dark under the fiction of “equal treatment.”

Note 1. The Smithee bill closely follows Recommendation #10 posted on this blog on September 10, 2012.  In “Ten fixes for TWIA: What I’m planning to say in Austin this week” I wrote as follows.

10. Require prominent disclosure to TWIA policyholders created by the financing structure in place (as modified by the reforms suggested here or otherwise enacted). This disclosure should, at a minimum, advise policyholders of the approximate probability, computed using the best historical data and contemporary models, of the risk that TWIA will become insolvent, will be impelled to increase premiums to pay off Class 1 securities and will be impelled to impose surcharges to pay off Class 2 securities. Disclosure should be made (a) on a document signed by applicants for TWIA policies (new or renewal); (b) stamped (similar to surplus lines stamping) on policies issued by TWIA; and (c) on a web site one or fewer clicks from the main TWIA page.


Note 2. The bill also echoes thoughts expressed in this blog here:

Policyholders don’t need to be scared about every unlikely event, but they have a right as adults to know of a substantial risk.  Losing your house and facing an insolvent insurer qualifies. We warn holders of surplus lines policies of lesser protections against insurer insolvency with a great big stamp on the policy.  Why not the same for an equally unguaranteed and often far riskier insurer. And while we’re warning, let’s also warn them of the potential for post-event Class 1 assessments, for which the risk is yet far higher and uniform throughout the TWIA territory.

Note 3. Although I suspect many insurance agents will not immediately embrace the Smithee bill, enlightened ones should do so.  This is because the bill should provide some protection to insurance agents who now find themselves in a difficult position.  Right now, insurance agents who don’t warn their policyholders of TWIA risks may be setting themselves up for a lawsuit.  The dangers of TWIA are so palpable that a plausible claim of negligence or intentional non-disclosure is definitely something these agents need to be concerned about in the event TWIA either can not play claims or is highly delayed in paying claims.  It is wishful thinking and ostrich-like behavior to pretend this serious risk does not exist. On the other hand, insurance agents who do warn their policyholders of TWIA risks may find business going elsewhere. The bill probably saves agents the dilemma of whether or not to tell the truth by leaving disclosure to the policy itself.



Hinojosa/Hunter file bills that buttress TWIA by forcing non-coastal property holders to pay for coastal risk

State Senator Juan “Chuy” Hinojosa (D-McAllen) and State Representative Todd Hunter (R-Corpus Christi) have filed companion bills in the State Senate (SB 1089) and State House (HB 2352) that would buttress the resources available to the Texas Windstorm Insurance Association (TWIA) to pay claims in the event of a tropical cyclone hitting the Texas coast but would do so by placing most of the burden either directly or indirectly on policyholders living away from the Texas coast.  The bill, like the current system and as heralded in recommendations of the Coastal Windstorm Task Force, would rely primarily on post-event bonding as a way of financing catastrophic risk.  But, by impelling insurers statewide and coastal policyholders to increase the size of the catastrophe reserve that pays before any bonds are issued, the bill would make it less likely that this  system of “insurance in reverse” would need to be used. The new system would come into effect in September of 2013.  It would apparently leave the current system in place for much of this hurricane season.

In a nutshell, here’s how the Hinojosa/Hunter plan works.  TWIA builds up its catastrophe reserve trust fund (a/k/a CRTF, a/k/a “cat fund”) so that it equals 1.5% of its “direct exposure” for the prior year.  (Section 2210.456). Since TWIA lists its current direct exposure at $72 billion, this means the catastrophe reserve fund is supposed to grow to at least $1.08 billion. Catrisk’s earlier modeling suggests that such a catastrophe reserve fund would be able to cover something like a 1 in 20 year storm.

But just because TWIA’s catastrophe reserve fund could cover a 1 in 20 year storm, does not mean that TWIA’s policyholders would be paying to cover that risk.  That’s because under the Hinojosa/Hunter plan, the catastrophe fund is financed mostly with other money.  To get from the paltry $180 million that now stands in the fund to $1.08 billion, the plan would assess  property insurers statewide, regardless of the extent to which they choose to do business on the Texas coast, 1/10 of the desired amount of the catastrophe reserve fund each year.  (Section 2210.456(c) (0.15% of the direct exposure)).  As it stands, this would amount to  $108 million per year for many years into the future. These are real assessments, not compelled loans by the insurance industry.  The  assessments are not creditable against premium taxes otherwise owed and are not supposed to be passed on — at least directly — by a premium surcharge on policyholders. It would demean the insurance industry, however, to suggest that they will not be clever enough to find a way to pass much of this cost on to policyholders.

Coastal insureds — including non-TWIA homeowner insureds and coastal residents with automobile insurance or other forms of property insurance — also pay to protect TWIA policyholders from risk. Under the Hinojosa/Hunter plan, a 3.9% premium surcharge is issued on all such policies. How much would this surcharge bring in?  Unclear. I don’t have the data, yet, particularly on automobile policies along the coast.  But we do know how much TWIA policyholders would pay on their TWIA policies to increase the protection available to them: about $17 million (0.039 x $446 million in premium taxes).  And since TWIA reports that it 62% of the coastal homeowner wind market (measured by exposure and not premiums), one can approximate that non-TWIA homeowner insureds would pay roughly $11 million.  Thus, TWIA policyholders would, at most, pay about 13% of the amount it will take to strengthen the catastrophe reserve fund that would be exclusively available to those policyholders to pay claims in the event of a tropical cyclone. If, as I suspect, non-wind homeowner policies, automobile policy premiums and other property insurance premiums along the coast are at least as large as TWIA premiums, the surcharge on TWIA policies will, at least for a few years, in fact pay perhaps just 7% of the actual cost of this portion of the risk posed by such policies.

And even this last figure of somewhere between 7 and 13% potentially understates the degree to which TWIA policies will be funding the risk they pose.  This is because under section 2210.083 of the Hinojosa/Hunter bill, when the cat fund needs to be restocked following a disaster that wipes it out, insurers doing business anywhere in the state must promptly pay, in addition to the regular shortfall assessment and in addition to whatever else they may be paying their own policyholders, half the amount of any public securities (up to $1 billion) issued to pay TWIA policy losses and, as I read section 2210.084, the entirety (up to $900 million) of additional public securities issued to pay TWIA losses.  Thus, following a serious hurricane, even more of the money used to pay for future hurricane losses will be coming from sources other than TWIA policies. Of course, the Hinojosa/Hunter bill permits insurers to “reinsure” against these potential assessments (section 2210.088), but this just means that insurers will be paying cash for the risk imposed on them by the law rather than perhaps just making an accounting entry for contingent liabilities on their books.


Layering of Protections Under Hinojosa/Hunter Bill

Layering of Protections Under Hinojosa/Hunter Bill

The Hinojosa/Hunter provides for at least three heightened layers of protection in the event of a storm that pierces the catastrophe reserve fund.  Each of the layers is provided by bonds, issued after the disaster, by the Texas Public Finance Authority. The layers (Classes A, B and C) differ primarily in their amortization periods and in the source of money used to repay the debts. Up to the first $1 billion is to be provided by Class A securities with an amortization period of 10 years.  The money to repay this debt each year — probably about 1/8 of the amount borrowed — will come from TWIA itself.  If the full $1 billion were borrowed, this would likely amount to a charge of $125 million per year for 10 years, which in turn would increase existing TWIA premiums by 25%. It is not clear whether the market would trust the ability of TWIA to actually obtain these funds, since some TWIA policyholders might be reluctant to renew with TWIA in the event such a hefty increase were imposed. The Texas Public Finance Authority has published grave doubts about the ability to market similar bonds authorized by the current law. 

Class B bonds can be issued in an amount up to $900 million and likewise must be amortized in no more than 10 years.  The source of repayment, though, is different. Although TWIA premiums could in theory be used to repay this obligation — I rather suspect they will be tied up elsewhere — the vast bulk of the funding is likely to come from yet another surcharge: this one on all premiums on coastal property insurance, including non-TWIA wind insurance, conventional coastal homeowner insurance, automobile insurance, and other forms of property insurance. The surcharge won’t be another 25% because the base is bigger.  But since it will cost $110 billion or more each year to amortize the debt, I would not be surprised to see an additional 5 to 7% surcharge.

If the catastrophe reserve fund indeed bulks up to $1.08 billion and the Class A bonds are indeed marketable, the Class B bonds should cover TWIA against the 1 in 50 year storm.  For storms bigger than that, the Hinojosa/Hunter bill provides for $2.75 billion in Class C bonds.  These have an amortization period of 14 years.  They are to be paid by a surcharge on all premiums on property insurance statewide.  The rate will be about 1/10 of the amount borrowed divided by a denominator that I would love to know the value of: the amount of premiums on property insurance sold in this state. If you forced me to make an educated guess, however, I would guess that property insurance premiums in Texas are about $20 billion per year, which would put the needed surcharge at 1-2% per year for 14 years. Of course, if the amount borrowed were not the full $2.75 billion, the surcharge would be less.

There are two other sources of funds worth mentioning.  The Hinojosa/Hunter plan continues to permit TWIA to purchase reinsurance and imposes no price constraints upon their doing so.  Such reinsurance is notoriously expensive and often difficult to obtain.  There is no explicit provision or encouragement for other forms of protection such as pre-event catastrophe bonds. There are also, in theory, Class D securities that provide an unlimited amount of protection to TWIA policyholders.  The problem: no source of funds is identified to pay back the bonds. Section 2210.639 simply mentions that these borrowings could be paid by TWIA premiums (yeah, right) or “money received from any source for the purpose of repaying Class D public securities.”  In other words, no one has a clue.

There is more in the Hunter bills and the Hinojosa bill that Catrisk will try to address in the near future.  And there are some simulations we can run to get some better ideas of the relative burdens borne throughout Texas under this bill. But this should provide an explanation of the basics.


Footnote: I bet that I am going to hear the double dipping criticism of this post again.  The point of these critics is that TWIA policyholders also have conventional homeowner insurance and automobile insurance.  Thus, their burden is higher than I have reported because they get hit with a double or triple whammy.  There is some truth to this criticism.  My defenses are (a) I have tried to report data here as policy based rather than policyholder based; thus the conclusions reached here should be accurate; (b) I can;t find and no one has volunteered the data needed to make the needed computational adjustments; if I had them I could and would do so. My suspicion is that, while a few numbers would change, the themes of the Hinojosa/Hunter bills would not.  They believe coastal risk should be socialized and these bills very much reflects that philosophy.