One of the proposals I have made is that TWIA policyholders be warned of the risk of insolvency and the risk of post-event assessments. At yesterday’s hearing, Representative Todd Hunter indicated that such a warning was not needed and might needlessly scare policyholders or lenders. If you go to 1:57:50 to 2:02:18 of the recording of the hearing, you can hear the exchange.
There is indeed a a balance between warning people about risk and unduly scaring people. And there is a wealth of evidence showing people aren’t very good at assessing infrequent risks. But, to my mind, the exchange missed the point in several ways.
1. Even though there may have been but one storm in a simulated 10,000 years that resulted in (a) a hit on Corpus Christi that (b) bankrupted TWIA, that is not the most relevant risk. The more relevant risk — even from a selfish Corpus-Christi-only perspective — is the probability that there will be a hit somewhere on the Texas coast that disables TWIA from paying claims to people in Corpus Christi either that year or in subsequent years. And there, the relevant annual risk is probably at least 1 in 60.
2. Why? First, hurricanes can and do cluster. So, when a significant strike in Freeport wipes out TWIA that means that even a little tropical storm or category 1 that hits Corpus the same year will leave no money in the TWIA piggybank from which to pay claims. Second, when a significant strike wipes out TWIA that means that even a modest hurricane that hits Corpus in subsequent years will be very, very difficult to finance. TWIA won’t have a catastrophe reserve fund, it won’t be realistic to surcharge TWIA policyholders a second time, and the bond market is unlikely to accept a second round of post-event bonding. All that TWIA will have is a little buffer of premium revenues.
3. I believe that’s what TWIA head John Polak was attempting to communicate/spar with Representative Hunter but didn’t do the clearest job of it when put on the spot.
4. So, is the risk of a Corpus Christi being the holder of a claim against an insolvent TWIA less than the risk of a Galveston policyholder? Yes. But the risk IS NOT 1 in 10,000. It is much higher.
5. Should TWIA warn policyholders? At least until TWIA is fixed, I think it definitely should. 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.
6. Practice pointer for insurance agents and their error & omissions insurers: consider disclosing the risk (and requiring disclosure) even if there is currently no regulatory obligation that you do so. With all the risk information floating about, do you really want a jury facing a plaintiff with a lost house being your test care for silence?
7. The better question, I think, is the utility of the warning. As the Public Insurance Counsel Deeia Beck queried at the hearing, what are you supposed to do once you are warned? If my hopes are realized, we will have set up an environment in which persons on the coast do have private alternatives to TWIA. If they know that the Allstate policy costs 10% more but is more likely to pay, maybe they will opt for Allstate and TWIA will be voluntarily depopulated without government coercion. And, if those now-warned persons realize they don’t have a choice, maybe they will wake up, realize that the current system, though providing some benefit, is actually victimizing them. Maybe they’ll stop listening to those who offer false comfort now and demand a market or alternative that provides better protection.