The plan put forward by the Coastal Windstorm Task Force led by Charles Zahn and now endorsed by at least two Texas coastal politicians will likely cause much of the money paid out by the Texas Windstorm Insurance Agency to come not from premiums paid by TWIA insureds but from subsidies forcibly exacted from insureds throughout Texas and Texas insurers. Indeed, premiums paid by TWIA insureds may end up amounting to less than half of the money used to pay losses suffered by TWIA policyholders from tropical cyclones.
The chart below is my best understanding as to how the funding structure works.
The horizontal axis on this graph shows responsibility for each size loss potentially suffered by TWIA policyholders as the result of a tropical cyclone. The vertical axis on the graph shows the percentage of responsibility. Thus, non-TWIA policyholders in the 13 coastal counties and Harris County, which is apparently lumped in, pay for significant portions of losses less than about $2.6 billion. Insureds throughout Texas pay via premium surcharges for all losses in excess of about $4.4 billion. See the little blue rectangles? Those are the relatively small amounts that TWIA policyholders actually pay for tropical cyclone losses. The rest is paid for by people who are not necessarily TWIA insureds. They pay it regardless of whether they are — as will frequently be the case — significantly poorer than people owning homes on the coast and regardless of whether they own a home or not.
It is possible, however, that instead of a “sharing” relationship within Layers A and B, responsibility is tranched or tiered. I just can’t tell from reading the draft of the plan. In that event, responsibility looks something like this. Although the blue area of responsibility is perhaps a little larger under this variant, the majority of the responsibility chart is taken up by people and entities that will end up subsidizing insurance on the Texas coast.
Now, these charts present incomplete pictures of financial responsibility for several reasons. First, they admittedly are based on a reading of a draft plan that is not fully specified. I have requested clarification from Mr. Zahn and would love to get further information. Second, however, losses on the right side of these graphics occur far less frequently than losses on the left. Smaller hurricanes are more common than bigger ones. Fortunately, we’ve developed here, here and elsewhere the sort of modeling software that lets us compensate for this complexity and determine, after risk is taken into account, who is really paying for losses under the Coastal Windstorm Taskforce plan. I hope to be able to present that analysis in the next day or so. A preview however: it is still going to be the case that the Coastal Taskforce plan achieves solvency for TWIA only by forcing the rest of Texas to pay massive proportions — perhaps more than half — of losses suffered by Texans who live — sometimes by choice, sometimes by necessity, sometimes well, sometimes not so well — on the Texas coast.
Note: The graphics in the original version of this post contained some errors. Sorry. I have tried to correct them here.