Actuarially Sound Rates Remain Elusive Along Texas Gulf Coast

Insurance company interests have long held that the Texas Windstorm Insurance Association charges rates that are not actuarially sound for the risks it insures, making it impossible for private insurers to compete for business in the areas TWIA serves.

Those critics now have an ally in the U.S. Government Accountability Office, which said TWIA – the insurer of last resort for wind coverage for homes and businesses along the Texas coast – charges “premium rates [that] do not fully reflect the risk of loss and would likely need to increase by 20 to 35 percent in order to do so.”

In a recent report to Congress on state-backed natural catastrophe insurance, the GAO said that because TWIA’s “rates do not fully reflect the risk of loss, and are therefore lower than rates the private market would charge, the program could discourage private market participation.”

That is the reality, agreed state Rep. Kelly Hancock of Ft. Worth. The additional “reality is TWIA is never going to be actuarially sound. That’s the reason why private companies won’t write” along the coast, Hancock said during a forum on windstorm insurance issues. “It doesn’t make financial sense.”

TWIA was commissioned by the state legislature in 1971. By the time Hurricanes Dolly and Ike hit Texas in 2008, TWIA’s catastrophe trust fund had grown to $480 million, according to TWIA actuary Jim Murphy, speaking at the forum hosted by the Texas Public Policy Foundation. But TWIA paid out $285 million in claims from Dolly, which made landfall in near Brownsville in July, and the insurer racked up another $1.8 billion in claims from Ike, which hit near Galveston in September 2008.

Through reinsurance and the trust fund, TWIA was able to handle the claims, but the trust fund was wiped out. TWIA had to start building up the reserves from scratch in 2009, Murphy said. Legislators that year changed TWIA’s funding structure, not only to help the company’s ability to pay claims going forward but to encourage private insurance companies to re-enter the market.

Insurance companies previously were on the hook for unlimited assessments for TWIA losses with limited ability to recoup the assessments from policyholders, the GAO noted in its report. The unlimited assessments were a big unknown and all property insurers were subject to them. The carriers pushed hard for an assessment cap.

The 2009 legislation created a three-tiered structure for issuing post-event bonds, up to a cap of $2.5 billion. The first layer – $1 billion – would be paid with assessments to TWIA policyholders. The second $1 billion would be paid with a 70/30 split of assessments on all Texas property policies – 70 percent of the assessments would go to coastal policyholders, and the remaining would apply to inland policyholders. Assessments to property insurers operating in Texas would cover the remaining amount up to $500 million.

“How TWIA losses would be funded if a storm caused more than $2.5 billion in losses for TWIA is not clear,” according to the GAO report. It’s also unclear in the current financial environment if the first $1 billion in post-event bonds could be sold, Murphy said. However, there would not likely be a problem selling the second two levels of bonds if they are needed, he added.

After Ike, state lawmakers gave TWIA the choice between building up its reserves again or buying reinsurance, Murphy said. Legislators indicated they preferred that TWIA build up the trust fund, so that’s what the insurer began doing.

TWIA has positioned itself put between $150 million to $200 million a year in the trust fund. “So it’s not as bad as it looks at least in the long term,” Murphy said. The problem, he said, is the short term. “There’s no way of funding a major event this year or next year.”

Other Changes

State Rep. Solomon Ortiz Jr. of Corpus Christi, who also spoke at the June 16 forum in Austin, noted that while premiums may not be actuarially sound, the insurer’s rates have been on the rise. “TWIA’s rates have increased in the last four years,” he said. “Just recently 12 percent and there’s probably another 5 percent increase coming here soon.”

TWIA offers a 15 percent premium discount to policyholders who mitigate their property against wind losses. To qualify for the discount, policyholders must obtain a windstorm certificate from an authorized inspector. According to the GAO, however, the mitigation discount program could serve to encourage property owners to forgo or reduce mitigation efforts, because TWIA’s rates remain lower than private market rates.

Many of Ortiz’s constituents who live in older homes actually see the discount as a 15 percent rate increase because it’s almost impossible to obtain a certificate for older structures. “What happens if you don’t have that certificate and you’ve never had it for 20 or 30 years? Try and find an inspector to inspect your house and give you that certificate,” Ortiz said. “It’s not going to happen. They essentially would have to destroy part of the home to make sure it qualifies.”

Are Reforms Working?

It’s too early to tell how well TWIA reforms from 2009 are working, Ortiz said.

TWIA’s policy count increased from 68,756 policyholders in 2001 to 232,000 in 2008, according to Hancock. “That’s 55 percent of the Gulf Coast region which is now insured by the state of Texas.”

Ortiz said the policy count seems to be stabilizing. “Private insurers have pretty much shed the policies they wanted to get rid of,” he said.

“Many have said that the private market has been unstable because of the unlimited assessments,” Ortiz said. “Hopefully with the reforms that have been made insurers will re-enter the market. Have we seen that? Not necessarily. This is a big concern and we hope over time some of these companies will re-enter the market.”

Hancock, who describes himself as a free market advocate and a small business owner, said in his “ideal world, a pure free market world, the responsibility for compensating employees so they could afford an actuarially sound insurance policy along the coast would rest with the employers, the businesses.”

He acknowledged that’s not going to happen. “I have yet to find a large company who’s willing to subsidize their employee payment” to the extent that employees could afford to pay rates that would allow private insurance companies to write policies along the coast that are actuarially sound, he said

While Hancock maintained that he is not “a fan of subsidizing coastal insurance,” the “reality is the coast is the economic engine of the state,” he said. “It is vitally important to the state of Texas.”

Ortiz said more time is needed to see whether recent changes will make a difference. But he was skeptical that there will ever be an ultimate solution.

“Will the windstorm issue ever be settled? I seriously doubt it,” Ortiz said.