Windstorm expected to be major insurance issue for Texas lawmakers

Funding for the Texas Windstorm Insurance Asso-ciation (TWIA) may not be the only insurance issue on lawmakers’ plates during the 2007 session of the Texas Legislature, but it will likely be the most high profile industry concern as insurance groups are lining up to go to bat on the issue.

In a report submitted to the Texas Legislature by the Texas Department of Insurance, regulators reported that the general health of the property and casualty insurance market in Texas is good, except along the coast.

“Hurricane Rita losses, as well as other hurricane loss experience in the Gulf Coast states, are having an effect on the affordability and availability of insurance for residential property located along the Texas Coast,” said TDI said in its Biennial Report of the Texas Department of Insurance to the 80th Texas Legislature, which was released in late December 2006.

TWIA, the insurer of last resort for property owners unable to obtain windstorm and hail coverage in 14 coastal counties, has grown significantly in recent years. TDI explained that it could easily get bigger, “Market disruptions may occur in the event of a natural catastrophe that results in financially impaired carriers and/or carriers withdrawing from certain markets. Carriers might decide to limit their exposure to future storms by withdrawing from coastal regions or ceding their wind/hail exposure to TWIA where that option is available. Should the voluntary writers decide to cede even half of their wind/hail exposure to TWIA as a result of a major storm or multiple storms, this could result in TWIA more than doubling its size.”

Still, Texas continues to attract insurers. According to TDI, 26 companies began writing in 2005 and 2006 and insurers filed 19 new homeowners products. On the downside, Texas Select Lloyds was placed into receivership in July 2006 and liquidated in August. It reported $187 million in Texas premium for 2005 and had 140,000 policyholders at the time of receivership.

TWIA challenges/solutions
James Langford of the Texas Farm Bureau Insurance Company recently addressed the media during a Southwestern Insurance Information Services-sponsored luncheon in downtown Austin, where he discussed TWIA’s challenges and proposed solutions. Last year TWIA had $160 million in losses as a result of damage caused by Hurricane Rita — a drop in a bucket compared to what the losses could have been had Rita hit Galveston, said Langford, who is a member of TWIA’s board. Ironically, while Rita made landfall near Beau-mont, the majority of Rita-related claims came from the heavily populated Galveston County, he said.

The number of structures insured by TWIA continues to grow. According to SIIS, the association had 68,756 policyholders in 2001. By the end of 2006, it had 131,199 residential and 12,800 commercial policyholders with a gross liability of more than $38 billion, nearly a 65 percent increase over its gross liability in 2000. More than 50 percent of the fund’s exposure lies in Galveston and Brazoria counties. Only a small portion of Harris County is covered by TWIA, Langford said, but a “Rita”-type event hitting Galveston/Brazoria/Harris County could potentially cause $5 billion in losses. It is estimated that TWIA’s current funding mechanisms and reserves could respond to a $1 billion storm.

Faced with the growing risk and a funding mechanism developed in the 1990s, TWIA’s board approved recommendations for changes in legislation. One recommendation is the issuance of pre- and post- event bonds to be paid for by a surcharge on P/C policies in Texas, excluding workers’ comp, medical malpractice, health and accident policies. While details of such bond issues remain to be worked out, it is expected that pre-event bond surcharges would apply only to coastal residents, while post-event bonds would be supported by assessments on policies statewide.

Inland residents and lawmakers historically have expressed reluctance to pay what they see as subsidies for those living along the coast, but insurance industry groups, including the Indepen-dent Insurance Agents of Texas, hope to educate legislators and the general public regarding the impact of a $5 billion coastal storm on the state’s general revenue.

In a recent letter to its members, IIAT — which has said TWIA funding will be one of its legislative priorities during this session — ex-plained: “TWIA will be paid by assessments against all companies writing property insurance in the state. Each company pays a share of the assessment based upon how much property premium they write in the state. These assessments paid to TWIA can be recouped by carriers with credits against their premium taxes, at the recovery rate of no more than 20 percent of the company’s assessments per year. There are two problems with this approach. The state’s general revenue could lose more than half a billion dollars a year for many years. In addition, a number of small companies would become insolvent before they could use their premium credits. Regional companies, invested heavily in the Texas property market, would be hit especially hard by the assessments.”

IIAT indicated that an economic study it commissioned and was conducted by The Perryman Group “found that the entire state is substantially dependent on the economic activity of coastal counties.” IIAT said the study will be released publicly on Jan. 30, 2007, at its Big “I” Legislative Day in Austin. IIAT told members that based on the results of the study, it supports a plan “to spread the costs of large storms over more companies and more people.”

A package of bills
One coastal area lawmaker has filed a package of bills that includes legislation aimed at disaster recovery. Among the six bills filed by State Representative Joe Deshotel (Beaumont) on Jan. 12, four relate to disaster recovery and/or would make changes to residential property insurance policies and windstorm coverage from TWIA.

“I think that it is important for us to focus on things that came up during Hurricane Rita and since. This package includes responses to both disaster issues and recovery efforts,” said Deshotel, in an announcement on the Texas House of Representatives Web site at http://www.house.state.tx.us.

Deshotel’s bills include:

• HB 579 Emergency Evacu-ation Coverage – Allows consumers the opportunity to receive an emergency evacuation daily allowance under residential property insurance policies for certain losses incurred because of compliance with an emergency evacuation order.
• HB 582 Orange County Windstorm Coverage – Would give Orange County residents the ability to receive coverage by the Texas Windstorm Insurance Association as a Tier 1 county. While filed before, this bill includes a “grandfather clause” to exempt structures built before January 2008 from a required inspection.
• HB 583 Supplemental 2-1-1 Funding – Requires that any surplus money from the Universal Service Fund go to finance the Texas Information and Referral Network (or 2-1-1), which was scaled back during the budget crisis in 2003.
• HB 584 Texas Bootstrap Program – Would expand or eliminate existing re-quirements in the program to account for cost increases, generally and in disaster zones specifically. It would tie the loan amounts to a governmental index and modify the “sweat equity” requirement.

By mid-January approximately 700 bills had been introduced in the Texas Legislature, according to Joe Woods, assistant vice president and regional manager for the Property Casualty Insurers Association of America. Around 54 would affect the insurance industry, Woods said. The total number of bills filed during the session, which ends in May 2007, is expected to be between 3,000 to 4,000.