The Texas Windstorm Insurance Association: Challenges and solutions

The 2006 hurricane season is looming and the insurance industry already sees dark clouds on the horizon. The Texas Windstorm Insurance Association is considerably under-funded in the event a major hurricane makes landfall in Galveston or Corpus Christi. Last year TWIA had a $138 million deficit as a result of losses caused by Hurricane Rita; that would be a drop in the bucket had the storm hit Galveston.

The number of structures insured by TWIA is growing. In 2001 the association had 68,756 policyholders. Currently this insurer of last resort has 101,000 residential and 10,000 commercial policyholders in 14 coastal counties and a portion of Harris County.

In 1992 TWIA had about $5 billion exposure in these counties. At the end of March 2006 their exposure was $27 billion.

TWIA has $1.3 billion in funding, but a hurricane causing $4 – $5 billion in losses along the Texas coast would result in a shortfall, which would have to be made up by the State of Texas.

Under the current TWIA funding mechanism, once the insurance companies have paid their initial assessments, the Catastrophe Reserve Fund has been depleted and the reinsurance that TWIA has purchased has been used, any remaining losses would be paid by unlimited assessments on insurance companies.

These unlimited assessments affect the state’s general revenue because the insurance companies that pay them are allowed premium tax credits for the next five years. Simply stated, the state would not not collect premium taxes and would lose funds necessary to operate.

TWIA’s funding mechanism was developed in the early 1990s when the association had about one-fifth the exposure they have today. By comparison, TWIA currently has an exposure of $10.3 billion in Galveston County alone.

The TWIA Board has approved recommendations for changes in legislation which call for issuing $800 million in pre- and post-event bonds to be paid for by a surcharge on property and casualty policies in Texas, excluding workers’ compensation, medical malpractice, and health and accident policies. This improved funding arrangement requires the approval of the legislature, which will not meet in regular session until January 2007. TWIA will go through another storm season before funding solutions are considered unless its issues are considered in this year’s special legislative session.

Dr. William Gray of Colorado State University has predicted that 2006 will see nine hurricanes and 17 named storms. The number of hurricanes in an average year is 5.9 and 9.6 for named storms. Finding a resolution to the funding of TWIA and reducing reinsurance costs are matters of extreme importance.

Jerry Johns is president of Southwestern Insurance Information Service, an Austin, Texas-based non-profit insurance trade association.