TWIA Study Recommends Lowering Agent Commissions

Among the top recommendations by a consulting firm hired by Texas insurance regulators to investigate and report on ways to restructure the state’s property insurer of last resort in coastal areas is to reduce the commission percentages for insurance agents who place properties in the wind pool.

Alvarez & Marsal Insurance Advisory Services LLC (A&M) was retained in March 2012 by the Texas Department of Insurance to explore options for restructuring the Texas Windstorm Insurance Association (TWIA), which was placed under administrative control of state regulators on 2011.

Texas Insurance Commissioner Eleanor Kitzman has said previously that TWIA’s present structure is not sustainable.

TDI’s request for proposal (RFP) issued in February sought assistance in identifying, evaluating and implementing restructuring options to reduce the exposure and improve service to policyholders.

“TWIA was supposed to be the market of last resort for the 14 coastal counties that comprise Tier 1, but that is not the case anymore,” Kitzman said when the RFP was issued. “In 2001, TWIA’s market share was 17.9 percent. In 2010, it had more than tripled to 57.2 percent and it continues to grow. … With no other significant source of funding to pay claims, this growth in exposure is an excessive burden on coastal citizens.”

Although A&M presented a number of high priority recommendations in its 108-page report, including restructuring the organization’s board to provide for more input by stakeholders and developing a formal depopulation plan, perhaps the most controversial for agents is the recommendation to lower agent commissions.

A&M explained that its evaluation of TWIA revealed, among other things, that “TWIA’s high commission rates and strong agent relationships exasperate TWIA’s role as a carrier of last resort.”

It proposed lowering agent commissions to 10 percent for new business and 7 percent for renewals, in order to “reduce agent motivation to place business” in the wind pool. Taking such action, the report said, would result in a reduction in TWIA’s overall exposure. Approval of TDI and TWIA management would be necessary to implement a lower commission structure.

The report also recommended “outsourcing underwriting, policy processing, and agency management” to a managing general agent. Such a step would not only reduce TWIA’s operating costs but would also reduce “exposure by utilizing MGA to attract and access new wind carriers and capacity,” the report said. It acknowledged that while small retail agents might benefit from such a structure, larger agencies could “be impacted by potential reduction in coverage.”

In a letter introducing the report to members of the legislative Joint Interim Committee to Study Seacoast Territory Insurance, Kitzman wrote: “The ideas presented are not exhaustive or mutually exclusive of other approaches. The report is intended to provide ideas and restructuring options that are based upon an objective assessment of TWIA’s operations under the existing statutory framework. The report does not and cannot address important public policy considerations.”

Kitzman also said TDI has no plans to immediately pursue implementation of any of the options presented in the report.

The M&A report can be accessed via TDI’s website: http://www.tdi.texas.gov/reports/documents/twiarestructure.pdf.