Insurers seek bond measures for Texas catastrophe fund
Taking a cue from the Scout motto “Be Prepared,” a group of insurers is recommending legislation that would allow for generating funds to help pay for the reconstruction of the Texas coast should a powerful storm like last year’s Hurricane Katrina hit heavily populated coastal areas. The group wants the Texas Legislature to pass bonding measures for a Texas Catastrophe Fund before the 2006 hurricane season begins.
The legislature is expected to meet this spring in a special session to deal once again with the dual issues of school finance and property tax reform. Members of the Association of Fire And Casualty Companies of Texas (AFACT) want lawmakers to take up the issue of the cat bonds as well.
Greg Vanek, vice president of AFACT and president of National Lloyds Insurance Company, said the Texas Windstorm Insurance Association, the insurer of last resort for wind and hail for coastal residents and businesses, is severely under funded and would not be able to handle the financial consequences of a major catastrophe.
Funding for TWIA now stands at $1.3 billion; the group wants to push the catastrophe fund up to at least the $3 billion mark.
The issue of under funding is “very important to small insurers in the state,” Vanek told Insurance Journal. “We are very concerned about the growing exposure in the windstorm pool and that it’s not going backwards, it’s going forward, it’s increasing. What would have happened to us if [Hurricane] Rita had hit Galveston, where there are 35,000 plus policyholders in the wind pool? What would the assessment have been to everyone in Texas that writes homeowners insurance? How would we have dealt with that, coupled with the fact the storm would have continued on and hit a populated area like Harris County? That in itself could have been a total disaster for the industry.”
The bond “initiative is consistent with we call sound insurance principles of planning for the future,” said Jay Thompson, an attorney with the law firm of Thompson, Coe, Cousins & Irons. He explained that in order for the state to be prepared for a catastrophe it must have the mechanism in place to raise money to respond. With a sufficiently funded cat fund, if a major catastrophe strikes the Texas coast, Thompson said, “there will be money to pay claims to allow people to rebuild their homes and businesses.”
TWIA provides coverage in the 14 counties along the Texas coast, including a portion of Harris County. It currently provides nearly $25 billion in coverage for Texas coastal property. With a rapidly growing population building more homes and businesses along the coast, TWIA continues to expand.
James Langford, vice president of the Texas Farm Bureau Insurance Companies, said the initiative is similar to what has been established in Florida, which has used bonds effectively to respond to catastrophes there. Langford, an AFACT member who serves on TWIA’s Board of Directors, said that initially “a two percent surcharge on all property and casualty policies sold along the Texas coast,” would help pay for the bonds. “To increase the cat funding up to $3 billion, an additional half of one percent surcharge would be levied after a catastrophe on all property and casualty policies in Texas with the exception of workers’ comp and medical malpractice.”
A bond proposal was introduced in the 2005 Texas legislative session as part of a more comprehensive bill that dealt with rating issues at TWIA, among other things. Langford said the bonds were not a contentious issue with lawmakers, but the proposal failed because they could not agree on the rating components of the bill. AFACT believes that by separating the bond proposal from rating issues it has a better chance of success.
Through assessments to TWIA, private insurers “are having to be the banker and come up with the cash. That could affect the entire state,” Thompson said. If companies don’t have the cash to pay for losses in the pool they become insolvent, “and people in the other parts of the state are negatively impacted because their company has gone under,” he said.