Once Again, Texas Lawmakers Asked to Do Something about Windstorm Insurer
What to do about Texas’ wind insurer of last resort? That’s the question being asked again of Texas lawmakers in advance of the coming legislative session.
In a surprise visit to a Senate Business & Commerce Committee hearing in early September, Lt. Gov. David Dewhurst asked committee members to look into phasing out the Texas Windstorm Insurance Association, which is considered by many to be unsustainable.
Dewhurst believes that if Texas is hit with severe hurricanes in a single year, the state could be on the hook for the billions of dollars in claims, according to a recent Associated Press report.
Following Hurricane Celia in 1970, many private insurers ceased writing property along the Texas coast. In response, the Legislature in 1971 created TWIA as the windstorm and hail insurer of last resort for coastal counties.
TWIA currently has more than 270,000 policies representing around $77 billion in insurance coverage, according to a statement released by Dewhurst’s office.
“I’m sure most Texans have no idea the State of Texas not only has windstorm liability of up to $77 billion, but worse, has become a direct competitor to private-sector insurance companies, disrupting market-driven pricing and undermining TWIA’s financial health. Should Texas, God forbid, endure two targeted Category 5 hurricanes in a single year, the impact on the state budget from claims on TWIA’s $77 billion in coverage could be devastating,” Dewhurst said in the statement.
Dewhurst charged the committee to explore ways to move policies out of TWIA into the commercial market. He said a plausible scenario for the association “could include phasing it out.”
He acknowledged that moving TWIA policies to the private market could result in “rate shock” for policyholders and suggested the process should occur “over time.”
The association said in a statement it will help lawmakers in any way it can in considering windstorm insurance options for policyholders along the Texas coast, according to an Associated Press report.
Mark Hanna, a spokesman for the Insurance Council of Texas, told the AP that insurance carriers would be willing to work with the state in looking at windstorm coverage.
“The regular market is all for coming in and taking over … but it has to do with rates and having competitive rates,” Hanna said. “They can’t even compete with TWIA rates. That’s been a problem all along.”
State Rep. John Smithee, chairman of the Texas House insurance committee, said he agrees in principle with Dewhurst.
“TWIA, in its current state, is not a sustainable organization,” he told the AP.
If lawmakers do undertake legislation to eliminate or replace TWIA, Dewhurst won’t be there to usher it through the legislative process. He was defeated in the Republican primary by state Sen. Dan Patrick, so Dewhurst is not up for re-election in November.
Past Attempts
The Texas Legislature meets every two years and will commence the next session in January 2015.
Dismantling TWIA is not a new suggestion. The idea has come up in every legislative session following Hurricane Ike in 2008.
During the 2013 legislative session, several legislative proposals were batted around that would have drastically changed the structure and/or funding for the association. Another would have eliminated the state’s FAIR plan, as well as TWIA’s residential exposures by creating a statewide assigned risk plan.
Then-Insurance Commissioner Eleanor Kitzman voiced the opinion that TWIA’s funding structure is unsustainable.
“If TWIA were any other company it would have been shut down a long time ago,” Kitzman said at the time. “But it’s not any other company and it was never intended to be.”
In 2011, lawmakers failed in attempts to overhaul TWIA during the regular session and were called back for a special session to deal with the issue. A TWIA bill was passed in special session that instituted reforms — mostly claims-related — but did not come close to doing away with the association. Among other things, HB 3 required claims be filed within one year of an event, streamlined the dispute resolution process and clarified that bonds can be issued only once per calendar year.
At the end of the 2009 legislative session, lawmakers passed HB 4409, which established five levels of funding for TWIA. In addition to drawing on premium collections and the CRTF, the bill created the ability for the association to issue various levels of catastrophe bonds tied to certain benchmarks.
Building Surplus
Relatively calm hurricane seasons over the past several years, including this one so far, have helped to shore up TWIA finances from the beating they took from Hurricane Ike, and to a lesser extent Hurricane Dolly in 2008, and subsequent Ike-centered litigation.
At the end of May TWIA was anticipating that it would be able to access between $3.5 billion and $3.75 billion for the current hurricane season, which began June 1. That funding would include TWIA’s cash on hand, the catastrophe reserve trust fund (CRTF) — around $216 million, $900 million in traditional reinsurance and $400 million from a catastrophe bond, the issuance of $1.5 billion in class 2 and class 3 bonds, if needed, and the possible issue of pre-event class 1 bonds.
TWIA was reported to have offered $500 million in unrated municipal debt in mid-September to help carry it through until the end of November, which is considered to be the culmination hurricane season.
In recent years TWIA has experienced fairly flat exposure growth, but between 2005 and 2012 its loss exposure increased by around 319 percent — from $23.26 billion to $74.17 billion, and its policy count grew by approximately 243 percent — from 109,693 to 266,726, according to the Texas Windstorm Insurance Association Clearinghouse Feasibility Study released earlier this year.
Even so, the association is working on a plan to depopulate. The idea would be to establish a voluntary coastal wind insurance portal, or clearinghouse, that would allow qualified interested parties to register with the association and access the underwriting information for TWIA insured properties to determine whether or not they want to write the business.
At a May 21 board meeting Polak explained that the proposed clearinghouse would be “simply a data repository — a facilitator to aggregate the data necessary for carriers to make a determination if business we are currently writing is something that they could write on a profitable basis.”
The idea has been met with some skepticism from insurers who insist that they can’t compete with TWIA’s rates and independent insurance producers who are concerned that the consumer’s ability to choose or retain their preferred agent might be jeopardized under the clearinghouse plan.