Philip W. Barnes, PhD -

What to do about uninsured drivers has long been a focus of public policy in Texas. Until 1981, state law implicitly recognized that liability insurance was meant to protect a person’s assets, not to guarantee that a person who damaged another while driving a car would be “financially responsible.” If a person had no assets to protect, the logical decision for that person was to go without liability insurance. And they did.  By 1981, an estimated 25-30% of people driving cars in Texas were uninsured. 

It is obviously true that folks with no assets to protect are also the least affluent among us.  If you are living paycheck to paycheck, with no assets that could be seized by a judgment, why incur the expense of liability insurance?   To protect the rest of us from losses caused by uninsured drivers, all insurance companies writing business in Texas have always offered uninsured/underinsured motorist coverage to their policyholders.  Because of the very high percentage of Texas drivers who were uninsured, most people purchased this additional protection.

This traditional function of private passenger automobile liability insurance as expressed in Texas law was changed in 1981. 

The 1981 Law

The Texas Legislature, during the administration of Governor William P. Clements, enacted the first mandatory liability insurance law in 1981. The new law required anyone driving in Texas to have proof of financial responsibility, usually in the form of a liability insurance policy providing minimum limits.  In 1986, the minimum limits were increased to 20/40/15 – or $20,000 per person and $40,000 per occurrence for bodily injuries and $15,000 per occurrence for physical damage. Effective April 1, 2008, the limits were increased to 25/50/25; and effective January 1, 2011, minimum limits will increase to 30/60/25. 

This was a fundamental change in public policy.  For the first time, the primary goal of private passenger auto liability insurance was to require drivers to be financially responsible.  And as we have seen, requiring folks to be financially responsible has proved to be a very difficult undertaking!

Changes in 1991

Although on the books, the 1981 law was largely unenforced and consequently ignored.  In 1991, the Texas Legislature during the administration of Governor Ann Richards put teeth in the law.  The statute was amended to require proof of liability insurance in order to complete certain auto related transactions, most notably the purchase of license plates and mandatory auto inspections.  This change in the law likely caused a decrease in the number of uninsured motorists, but the decrease was almost certainly less than anticipated at the time.  By 1995, Texas still had 19.1% of drivers who were uninsured[i] – a number that apparently has gone essentially unchanged – estimated at 20% — until very recently.[ii]

The 1991 law led to the widespread issue and use of “Texas Liability Insurance Cards,” issued by every company writing auto insurance in the state.  These proof of insurance cards were carried on the person or sometimes in the car to be presented anytime proof of liability insurance was required.  This antiquated system also led to widespread counterfeiting.  Every auto insurance company in Texas has experienced claims reported for policies that did not exist subsequently finding out that the “proof of insurance” was a counterfeit insurance card. 

Many consumers would purchase a policy on an installment plan, obtain proof of insurance, use the insurance card to obtain license plates or to complete other auto related transactions, and cancel the insurance when the next payment was due.  No statistics are available, but experience in the “nonstandard auto” markets suggests that a very large number of people who would be otherwise uninsured have automobile liability policies that are issued on a monthly basis.  For many people of very modest means, the choice may be to pay the rent or buy groceries or make an insurance payment.  By purchasing a monthly policy and obtaining a proof of insurance card – even if it was good only for a month – people could present the card to complete an auto related transaction, and then to let the policy lapse.

Changes in 2005

As noted above, even with the 1991 changes to put teeth in the law, its enforcement was difficult.  So in 2005, the State of Texas enacted legislation requiring the development of a new enforcement tool subsequently called TexasSure.  And the State has now implemented this program, which allows law enforcement officers and designated state users to immediately verify whether a vehicle is insured.  According to the TDI website, “the days of fraudulent or false proof of automobile insurance cards and dropping insurance coverage after receiving a valid insurance card are numbered.”[iii]

TexasSure, the state’s financial responsibility verification program, is a joint project mandated by the 79^th Texas Legislature and developed by TDI in cooperation with other state agencies. The new program relies on a database that contains the names of all insured drivers and their insurance carriers matched to the license plants and vehicle identification numbers.  Every insurance company writing business in Texas was required to develop specialized automated reporting systems that TexasSure could access to maintain its database.  This was a very time consuming and expensive undertaking for both the insurance industry and the State and its contractors. 

The program, funded with an annual $1 fee paid by all Texas drivers when renewing their vehicle registration, provides a database for police officers, state troopers and vehicle inspection stations to instantly verify whether a motorist has the minimum coverage required under state law.  

Once the new verification system is fully implemented, law enforcement officers and other state users will have real-time immediate access to insurance information on a given vehicle at their fingertips.  The insurance company of any motorist who has established financial responsibility through an automobile insurance policy, reports that information to the State.  No action is required of the motorist unless he or she is contacted.  However, each owner of an insured vehicle should verify that the Vehicle Identification Number physically showing on the vehicle is the same as that shown on both the insurance policy and the vehicle title and registration and should contact his or her insurance company if any discrepancies are noted.

Failure to maintain liability insurance (or other proof of financial responsibility) carries substantial potential penalties. First time offenders are subject to a fine of up to $350, plus court costs, and may be assessed additional fees. Repeat offenders face fines of up to $1,000 and a two (2) year driver license suspension.[iv]

The goal of TexasSure is to reduce the number of uninsured motorists in Texas. However, by 2009 – four years after the program was mandated — little progress had been made.  As noted earlier, by this date an estimated 20% of all Texas vehicles were still uninsured at any given time.

Additional Changes Needed:  “No Pay, No Play”

None of the “stakeholders” in TexasSure — the State of Texas, the insurance industry, and motorists who are insured — has realized the anticipated benefits of the millions of dollars invested in the new program. More aggressive enforcement is underway and the public has a much greater understanding of the importance of carrying insurance and the consequences of failing to do so! These efforts will certainly help, but are likely not enough.

Texas should enact a new “No Pay, No Play” law as another means to encourage people to buy and maintain liability insurance and to minimize the number of uninsured motorists who benefit from the liability insurance system. 

The idea is very straightforward, and has been implemented in other states, including Louisiana.  The essential language of the law could read as follows: 

“There should be no recovery for the first twenty-five thousand dollars of bodily injury and no recovery for the first twenty-five thousand dollars of property damage based on any cause or right of action arising out of a motor vehicle accident, for such injury or damages occasioned by an owner or operator of a motor vehicle involved in such accident who fails to own or maintain compulsory motor vehicle liability security.”[v] 

In Texas like many other states uninsured motorists involved in accidents often become clients of plaintiff lawyers.  The plaintiff’s bar and the contingent fee system play a very important place in American jurisprudence, providing many people access to courts and juries that could not otherwise afford them.  The plaintiff’s bar also includes lawyers who abuse the tort system, specializing in shaking down insurance companies.  And I use that term advisedly.  Texas has many “bucket shop” law firms that specialize in recruiting accident “victims,” arrange medical treatment for them – often by chiropractors – and bill the “defendant’s” insurance company.  We know many insurance companies providing a nonstandard auto insurance market that will find out about a potential claim when receiving a demand letter from a plaintiff’s lawyer, not from the company’s insured or the other party.

Most experienced insurance company claims adjusters know what the “prevailing” compensation rates may be in any area of the state.  For example, in a given part of West Texas, the prevailing rate for an alleged soft-tissue back injury from a minor collision might be “three times meds,” or three times medical treatment costs incurred. Under these assumptions, if the chiropractor’s bill were $3,000, the claim would likely settle for $9,000 – and typically the law firm takes its 40% plus expenses.  Other companies may pay no more than a given amount – say $5000 for any similar injury, and hold a hard line.  Few companies will choose to litigate these small claims.  It simply costs too much.  These “bucket shop” law firms earn that label because they process so many of these small claims.  I have personally seen examples of claim documents submitted by the same law firm using the same chiropractor where the only differences in the claims themselves were names of the alleged injured parties — their injuries, treatment expense, etc., were exactly the same!

Some areas of the state are known for juries that favor plaintiffs.  The prevailing view among company adjusters is to avoid litigation in these areas, as the risk of an adverse judgment against the defendant are much greater regardless of the merits of the law suit.  The Lower Rio Grande Valley of Texas is one of these areas, and it is also the area in Texas with the largest percentage of uninsured drivers – many of them undocumented immigrants.  As a result, many auto accidents in this part of Texas involve uninsured parties.  The “bucket shop” law firms use outside referral services to solicit accident victims as clients.  It doesn’t matter if the plaintiff is insured or not. If the defendant in the accident has insurance – that is, is obeying Texas law – a damage claim and threatened law suit is almost certainly to follow.  

I believe a “no pay, no play law” in Texas would substantially reduce the number of these claims since so many claimants are driving cars without the required liability insurance. Few plaintiff lawyers will take a personal injury case on a contingent fee basis if the plaintiff is not entitled to recover under an insurance policy.   Those who are not participating in the state’s mandatory liability insurance system by buying the required insurance should not benefit from that system, passing these costs on to all other insurance consumers in the form of higher rates. 

To the extent that the “no pay, no play law” would reduce the number of uninsured drivers, then at least the aggregate cost of the uninsured borne by all insured motorists and arising from claims of all kinds would be reduced accordingly.

[i] J. Daniel Khazzoom, “What We Know About Uninsured Motorists and How Well We Know What We know,” Resources for the Future, December 1997, page 17.

[ii] Texas Department of Insurance, Texas’ Financial Responsibility Verification Program Home Page, 11/24/09.

[iii] Ibid.

[iv] Transportation Code Chapter 708:http://www.statutes.legis.state.tx.us/Docs/TN/htm/TN.708.htm.

[v] This language is taken from the Louisiana statute, with the limits changed to be consistent with Texas minimum limits.  See http://www.legis.state.la.us/lss/lss.asp?doc=88612 for the complete text of the law.

Philip W. Barnes, PhD

The chances of dying in an automobile accident in 1953 was four times greater than in 2003, based on fatalities per mile driven in the United States. Better roads and medical care along with tougher drunk-driving laws have been attributed to some of this difference. But there was also considerable improvement in vehicle safety features over the 50-year period. Significant safety improvements included power brakes, front disc brakes, four-wheel antilock brake systems, radial-ply tires, penetration-resistant windshields, padded dashboards, collapsible steering columns, auto-body structures that crumple around passenger compartments, lap-and-shoulder safety belts, dual air bags and sun visors. Digital cameras, tire-pressure monitors, and computer-controlled navigation devices should further improve driving safety, among other newer technologies.

Clearly, for infants and small children, the development and required use of appropriate car seats and seat restraints has been very important.  If the data were available, I would bet anything that the chances of a child dying in an automobile accident in 1953 was more than four times greater than it is today.  In 1966, I was driving a 1953 Oldsmobile 2-door sedan – no seat belts, front seats that folded forward without releases, etc.  I put my then 18-month old daughter in a “car seat” — which was no more than an aluminum frame with a nylon seat that hung over the back of the front seat – and headed out.  The back of the front seat of the Olds moved forward and back without any kind of latch to restrain it.  My little girl likely weighed 25 pounds or so, so sitting in the “car seat” atop the front seat, she would be slung forward anytime the car stopped suddenly, with her face smashed into the dashboard.  What I didn’t understand was that the centrifugal force created by a sudden left turn would do the same thing.  I made the turn and remember now — 44 years later — the awful, sickening sound of my little girl’s face hitting the unpadded dashboard.  Blood was running from her badly cut lip, but she was otherwise unhurt.   I think perhaps we had a guardian angel in the car that day.  She could easily have been killed or seriously injured.  But she was not, and she is now the mother of seven of my grandchildren!

We really have no way of knowing how many other small children were seriously injured or killed in auto accidents before the advent of even rudimentary safety equipment.   We do know that modern child safety equipment and other design improvements to save injuries and lives.  It is highly unlikely that an accident like I described above could happen today.  Most importantly, every small child riding in a car in Texas must be in the back seat – not the front – and restrained in size-appropriate car seats.

Even with new technologies and much safer child restraints, children still die in auto accidents.  Motor vehicle crashes are the leading cause of death for children age 3 to 6 and 8 to 14. In 2007, 6,532 passenger vehicle occupants 14 and younger were involved in fatal crashes. Parents and caregivers are urged to make sure their car seats and booster seats are properly installed in their vehicles to help prevent injuries and deaths among their children.

Are you looking for a vehicle safety seat for your infant, toddler or 4-8 year old child but overwhelmed by the choices and worried about how to properly install your car seat? The illustration above shows the “4 easy steps to protect our children.”  Be sure and choose the proper car seat for your youngsters.

Philip W. Barnes, PhD

Texas is approaching the annual hurricane season.  So it is timely to look back and see what we have learned from the last major hurricane to hit the Texas coast. 

When Hurricane Ike hit the Texas coast on September 13, 2008, it caused damage of historic proportions.  In the United States, Ike was blamed for at least 195 deaths, and many more are still missing.  Due to its immense size and strength, damages from Ike in U.S. coastal and inland areas were estimated at $24 billion.  Ike was the third costliest Atlantic hurricane of all time. 

 In Galveston, by 4 p.m. on September 12, the rising storm surge began overtopping the 17-ft Galveston Seawall, which faces the Gulf of Mexico.  Waves had been crashing along the seawall earlier, from 9 a.m. Although Seawall Boulevard is elevated above the shoreline, many areas of town slope down behind the seawall to the lower elevation of Galveston Island.

On the morning of September 13, 2008, the eye of Hurricane Ike approached the upper Texas coast, making landfall at 2:10 a.m. over the east end of Galveston Island, with a high storm surge, and travelled north up Galveston Bay, along the east side of Houston.  People in low-lying areas who had not heeded evacuation orders, in single-family one- or two-story homes, were warned by the weather service that they may “face certain death” from the overnight storm surge, a statement that turned out to be true for some unable or unwilling to evacuate.  Two of the images above show the damage from Ike in the community of Gilchrist, which was largely destroyed by the hurricane, and flooding in Galveston.

Widespread flooding included downtown Galveston; water was six ft deep inside the Galveston County Courthouse, and the University of Texas Medical Branch at Galveston was flooded.  Tourist attractions on the island suffered various degrees of damage. The Lone Star Flight Museum suffered massive damage, as the storm surge washed through the airport and hangars with about 8 feet of water.  Moody Gardens — shown in one of the images above — was built with storms in mind and was able to withstand the worst of the storm.  And many of Galveston’s magnificent historical homes – those built before and around 1900, such as the home in the image above – also survived the storm, often with minimal damage. 

The damage from Hurricane Ike was dramatic and devastating.   And in reviewing examples of the range of damage the storm caused, lessons can be learned – or perhaps “learned again.”  What are some of these lessons?

Well Designed and Constructed Buildings

 First, we know that buildings can be built to withstand very high winds and high surging water.  The design and construction of Moody Gardens is an excellent example of the use of sophisticated design and building materials in anticipating hurricane events and thus minimizing their impact, including the impact of a storm as strong as Ike.  Without a doubt, today’s computer assisted design techniques and other computer-based analytics are invaluable in the assistance they can provide architects, engineers, and constructors in helping assure that buildings of all kinds will withstand high sustained winds.

 In the simplest form, beach cabins built on piers are another example.  These structures, which are found along virtually any populated beach area and for which examples are shown in an illustration above, are built with the first floor or living area 8 to 10 feet off the ground.  The ground level space may be open permitting rising water from a storm surge to flow beneath the building.  If enclosed, the ground level space typically is encased with walls that will give way to the storm without jeopardizing the structural integrity of the building itself.  The upper stores can be designed and built of materials that can withstand high winds, and the orientation of the building on the lot coupled with design features can minimize wind damage.  Can structures such as these withstand every storm, no matter how strong?  Of course not.  But it is certain that structures such as these have a better chance of surviving most hurricanes.

 Even homes built long before computer assisted design techniques were available reflect the logical thinking and experience of their architects and builders.  I have two acquaintances who had family and friends that owned historic homes in the City of Galveston.  These homes were described as located near the historic downtown area but away from the sea wall.  They were both built around the turn of the century, two story structures with high ceilings and cupolas, which were common to that era.  These homes were in the path of Ike and their owners were among the thousands of Galveston residents who evacuated the island.  They returned days later fearing the worst, having seen images of homes on Bolivar peninsula totally destroyed, some washed away to the foundation, and similar damage to many modern homes and buildings in the center of the city.  To their great relief, both families returned to their historic homes and found literally no damage!  In one of the homes, a windowpane in an upper story was broken.  That was all.  

 One might argue that if every home and building on Galveston Island had been built to comparable standards, the property loss on the island would have been greatly reduced.  That is almost certainly true.   While it may be unrealistic as a practical matter to expect every structure to comply with state-of-the art building standards, this idea would be a noble goal. 

 Local (and state) building codes are an obvious and important tool.    We really know a great deal about what works and doesn’t – as the recent Galveston experience suggests.  However, we often lack the political will to make it happen.  Building codes and code enforcement are examples.   While Texas cities have the authority to impose and enforce building codes, Texas county governments do not.  So in most unincorporated areas, there is minimal local government influence over what and how things are built.  The State of Texas has imposed by law certain building requirements for coastal properties insured by the Texas Windstorm Insurance Association.   The appropriate promulgation and uniform enforcement of building standards recognized independently as wind resistant certainly reduce the risk of hurricane loss.  

 Of course, individual property owners may choose to build to standards higher than the minimum required by law or ordinance in order to reduce the risk of hurricane loss.  I would bet that the construction standards met by Moody Gardens exceeded the minimum building standards enforced on Galveston Island! 

Pricing Insurance to the Risk

 What is the role of property insurance in all of this?  We know that the insurance industry has the technology and expertise to price any insurable risk, and to do so efficiently. While the inspection of a property by an experienced appraiser is always preferred, a great deal of information is available electronically – and more every day. Satellite technology has brought sophisticated imagery easily within reach of most insurance companies.  And with more information, the insurance company can continually refine its underwriting and rating systems.  Property insurance companies today have the technical ability to differentiate among risks in pricing based on very accurate evaluation of the risks themselves.  Accordingly, public policy should require insurance companies to compete for all risks, without exception, including those in coastal areas.  Only if conventional insurance is not available at any price should public policy provide for a market of last resort.  

In Texas, the insured losses from Hurricane Ike experienced in Galveston were borne largely by the Texas Windstorm Insurance Association (TWIA).  While Texas has a healthy file and use system for policy forms and rates, insurance companies have no incentive to compete for risks in areas served by TWIA simply because TWIA offers rates that are not adequate to pay forecasted losses. As a result, no risk served by TWIA pays a proper premium for its exposure. The voluntary market cannot compete and remain profitable, no matter how sophisticated it’s underwriting and rating systems.  This is the result of a deliberate and misguided public policy. 

Philip W. Barnes, PhD

Texas law should be changed to require the board of directors of TWIA to file for approval the rate recommended by its actuaries; this is a moral obligation the board owes its customers, its members, and to the Commissioner of Insurance.

The item published in this space last week focused on the Texas Windstorm Insurance Association (TWIA) and the continuing subsidies its operation provides for coastal property owners.  That article highlighted the history of the organization and recent changes made by the new law passed by the last Texas legislature and signed by the Governor. The new law made significant improvements, especially in the mechanisms provided TWIA to finance its losses.  However, the very fact mechanisms for financing losses are required – other than premiums collected – show the continuing recognition that TWIA provides a subsidy for coastal property owners.  In that sense, little has changed since 1971 when the organization was established. 

An old maxim in the property and casualty insurance business holds that “there are no bad risks, only bad rates.”  And that old saying is fundamentally true.  It is difficult to conceive of any insurable risk that the worldwide property and casualty industry would not underwrite if it could collect an adequate premium.  Actuaries – while the butt of an endless number of jokes – are very, very good at their jobs.  The problem is that an “adequate rate” for any given risk is often very high.  Why?  Rates are high because the risk presents an actuarial probability of high losses. 

We know that hurricanes will hit the Texas coast.  We have a long record of them. Without the threat of hurricanes, the risk along the Texas coast would be no greater than the risk of loss in many inland areas of South Texas!  But in the hurricane prone areas, the risk of loss is simply much greater.    Thus, an “adequate rate” must account for the probability of hurricane losses, thereby enabling the insuring entity – i.e., TWIA – to collect enough premiums to pay its losses directly and through the purchase of reinsurance.   

We know that, given our history, most of the hurricanes on the Texas coast occur after June 1 and before October 1 – even though the hurricane season begins in May and ends in November.   Actuaries have very sophisticated models that can predict the path and estimate the damage storms may cause.   So the actuaries’ advice should guide the decisions of the board of directors of TWIA as it files for rate changes.  In my view, the law should be amended to require the TWIA board to file for approval rates recommended by its actuaries.  Experience shows that the board is all too often reluctant to step up to this obligation, since any proposed increase in rates – no matter how justified – is always politically unpopular. 

Despite changes in the law in 2009, prior approval for TWIA rates remains a concern because it may not allow for the TWIA board to set adequate rates based on the risk being undertaken.  According to a report by the Insurance Council of Texas, during a TWIA hearing on rates in June 2009, actuarial testimony supported rate increases of 19% for commercial property and 26% for residential.  The TWIA board, however, ultimately voted for only a 10% increase likely due to its concern that the commissioner would not approve an increase greater than 10%.    Thus, the TWIA board abandoned its responsibility to file for adequate rates.  Rather, in an act of extraordinary hubris, the TWIA board chose to take a “political” position and filed for a lower, presumably more acceptable rate.  So the subsidy continued …

The only acceptable public policy objective of the TWIA – or any other residual market, for that matter – is to provide necessary insurance in the event the private market cannot do so, for whatever reason.  Frankly, I cannot conceive of a likely circumstance where the private insurance market will not meet the property and casualty insurance requirements of most if not all risks in coastal counties, if they can charge adequate rates.  Obviously, if the TWIA “competes” with the private market by charging an unsound rate requiring subsidies – which it certainly does now – TWIA will take business from the voluntary market, and this is inappropriate. 

If TWIA were to have an actuarially sound rate in place – an adequate rate – and ceased to be, in fact, a “preferred market” for many customers, the number of properties inured by TWIA would decline immediately.  That would be adequate evidence that TWIA is performing like an insurer of last resort and fulfilling its only legitimate public policy purpose. 

Philip W. Barnes, PhD

 Most Texans are unaware of the subsidy they provide for property owners along the Texas coast whose property is insured by the Texas Windstorm Insurance Association (TWIA).   As the article below suggests, TWIA has never had adequate rates to cover its losses, as demonstrated by the assessments required to pay claims as a result of Hurricanes Dolly and Ike in 2008.  The “reform” legislation passed in 2009 designed to stabilize TWIA’s funding structure may actually impede its ability to charge adequate rates.

 As long as TWIA rates remain inadequate, all homeowners in Texas not covered by TWIA are providing a subsidy for eligible property owners along the Texas coast.

 The following review of the history of TWIA and the description of the “reform” law was taken largely from a report prepared by the Insurance Council of Texas in response to passage of the new law.  However, the opinions expressed are those of this author and should not be attributed to ITC or any other organization. 

 History of TWIA

 The Texas Legislature established the Texas Catastrophe Property Insurance Association  (now TWIA) in 1971 in the aftermath of Hurricane Celia that struck Corpus Christi.  In response to a shortage of property insurance along the Texas Gulf Coast, the Association was created to provide windstorm and hail coverage to individuals and businesses who could not otherwise obtain insurance in the voluntary market.  Property insurers operating in Texas are required by law to be members of TWIA and pay for all losses not covered by TWIA funds, reinsurance and the Catastrophe Reserve Trust Fund (CRTF).  The State Board of Insurance originally designated the 14 counties along the Texas coast as a catastrophe area eligible for TWIA insurance.  Subsequently, in the 1990’s, the Commissioner of Insurance designated portions of the cities of Seabrook and La Porte were as catastrophe areas.  Morgan’s Point was considered for designation effective June 1, 1996. 

 The rates charged for TWIA policies are set by the Texas Department of Insurance (TDI) and historically have been inadequate to cover prospective losses based on credible modeling, and thus require backup funding mechanisms.  The rating structure has changed over the years, from originally distinguishing between inland and beach rates, rates based on the benchmark rates for residential insurance, and ultimately rates filed annually with the TDI.  Because of the inadequate funding, the cumulative effect of two major storms devastating the Texas coastline in 2008 caused both Texas insurance companies and citizens statewide to pay to cover these losses.  Hurricanes Dolly and Ike in 2008 depleted all funds available to TWIA. 

 Given the size of the losses due to Dolly and Ike, member insurers were assessed $530 million and ultimately will have to recoup some portion of this through premium tax credits.  These tax credits deplete the state’s general revenue fund and thus the assessments actually lessen the state’s available budget funds, thereby affecting all Texas citizens, not just those along the coast.  In addition to the assessments and tax credits, TWIA had no remaining funds after the storm, and the insurance industry faced more assessments in the event of a storm in 2009 and beyond.  Eventually without a new funding mechanism, and with more storms, insurers faced a financially untenable situation with the windstorm funding structure.

 The “Reform” Law

 In 2009, the legislature passed HB4409 changing the funding structure for TWIA and other significant reforms for the windstorm insurance program. 

 The new law helped to eliminate the two parts of the former funding mechanism, “unlimited” assessments to the insurance industry and tax credits for industry assessments, which could deplete the “general revenue fund” of the State.  In addition, the law authorizes the TWIA to purchase reinsurance but during the legislative session, the discussion among legislators was that TWIA should decline to purchase reinsurance.  The “legislative intent” appeared to be to accrue the premium savings in the CRTF to rebuild this reserve fund rather than use the funds for reinsurance coverage.  TWIA chose not to purchase reinsurance in 2009.

 The new law’s funding structure provides payment for losses up to $2.5 billion, which is a 50-year storm level. If TWIA losses exceed $2.5 billion in a calendar year, the law does not provide for additional funding and thus losses above $2.5 billion are “unfunded.”  For example, a 100-year storm is projected to have losses of $3.6 billion.   As TWIA liability exposures continue to increase and depending upon the storm’s severity and location of the damage, a $5 billion storm loss remains a possibility.  If this were to happen, the likely scenario is that the Texas Legislature would be called into a Special Session to debate, among other issues, the funding of the TWIA in the event of any loss above $2.5 billion.  It is likely that the legislature would either find other options for relief, such as the state’s “Rainy Day” fund, to help TWIA pay losses, or look for budget appropriation options.  Regardless of the form taken, such appropriations would constitute additional, very substantial subsidies to property owners served by TWIA. 

 Rate Adequacy

 Rates in TWIA have been reduced significantly (up to 75% in 1991) over the years, especially for risks located on barrier islands.  The rates charged for TWIA policies should be commensurate with the risk.  The new law requires TWIA to file rates with TDI but they can use the rate if the increase is 5% or less and no rate class is increased greater than 10%.  The commissioner has to approve any rate change greater than the file and use limits.  The TWIA has to make an annual rate filing by August 15.  Unlike prior TWIA statutes, TWIA is allowed to use catastrophe modeling in its rate filing.

 Despite these changes, prior approval for TWIA rates remains a concern because it may not allow for the TWIA board to set adequate rates based on the risk being undertaken.  For example, during TWIA’s hearing on rates in June 2009, actuarial testimony supported rate increases of 19% for commercial property and 26% for residential.  The TWIA board, however, ultimately voted for only a 10% increase likely due to their concern that the commissioner would not approve an increase greater than 10%.

 The TWIA board should always file for approval the rate recommended by its actuaries; this is a moral obligation the TWIA board owes to its insureds, its members, and to the commissioner. Artificially low rates prevent TWIA from ensuring availability of reserves to pay for losses, discourage other property and casualty insurers from offering coverage along the Texas coast, and create the demand for continued subsidies.    

* * * * * * * * * *

 I have seen no evidence that TWIA is needed to meet the insurance requirements of property owners along the Texas coast.   Its proponents have successfully argued that in the absence of TWIA property insurance rates would “be too high” or that insurance would not be available at any cost, and yet there is little independent evidence that this would be so.   Without TWIA, insurance companies would compete for the TWIA business, and the market would set rates.  Common sense suggests that rates would indeed be higher, and perhaps substantially so.  So what? 

 Increasing the cost of property insurance would likely have absolutely no impact on the demand for housing and commercial construction along any coastal area.  The Texas coast is extraordinarily beautiful, and people are understandably attracted to it – witness the growth of these areas.  Obviously, the Gulf itself provides added value to all properties along the coast.  These property owners simply should pay their own way.  Why should the rest of us be compelled to subsidize the property insurance costs of those who choose to live and do business there?  

Philip W. Barnes, PhD

In 2009, the Texas Legislature passed and the governor signed into law new requirements that young drivers must meet in order to obtain a driver’s license. As always with requirements of this kind, the public policy objective is to increase the probability that young people will be safer drivers than they might otherwise have been.

Applicants for a driver’s license in Texas between the ages of 18 and 24 now must complete an approved driver education course and a driving skills test to get a license. According to the Texas Department of Public Safety (DPS), applicants must submit a certificate proving that they have successfully completed a driver education course approved by the Texas Education Agency (TEA). After obtaining a certificate showing proof of completing an approved course, the applicant will not have to take the written highway signs and traffic laws written test. However, they will have to pass the standard driving skills part of the test administered by DPS.

As of May 1, 2010, the classroom phase of a driver education course is at least 32 hours, which cannot be completed in less than 16 days. The in-car phase consists of 7 hours of behind-the-wheel driving, 7 hours of in-car observation, and an additional 20 hours of behind-the-wheel driving - of which 10 hours must be done at night. The additional 20 hours of behind-the-wheel driving will be monitored by the parent or guardian and are not required to be provided by a licensed driver education school. However, the hours must be completed in the presence of an adult who holds a valid license, is 21 or older, has at least one year of driving experience, and occupying the seat next to the driver.

It should be noted that a driving safety course or drug and alcohol driving awareness program are not acceptable as driver education courses. There are three ways that teenagers can obtain the necessary certificate. By courses provided by licensed driver training schools, by approved driver education courses provided by public schools and by approved “parent taught” driver education courses.

The Driver Training Division regulates commercial (licensed) schools and can provide information on the driver education programs provided through them. You can view a list of the commercial DE schools at www.tea.state.tx.us/drive/activede.html. If you have a question about commercial driving schools, you may contact one a specialists at (512) 936-6777 or by fax at (512) 936-6799.

Public schools, education service centers, colleges, and universities may offer driver education programs. You can view a listing of the public schools that have DE programs at www.tea.state.tx.us/drive/publicde.html. Contact TEA at (512) 463-9574 for further information.

DPS is responsible for the parent taught driver education program. Parents or legal guardians with an interest in that program may contact the DPS Parent Taught Office in Austin at (512) 424-5623 or (512) 424-5624. You may visit their website at www.txdps.state.tx.us.

Philip W. Barnes, PhD

The Great Debate in our country over the new health care reform law continues unabated. And it is interesting to note that both the thoughtful advocates for the new law and its some of its critics are right, at least in part. Clearly, the advocates are correct: the new law when fully implemented will be a dramatic and improvement over the current costly and inefficient system - many more people will have insurance to meet medical expenses and badly needed reforms of the insurance industry are most welcome. However, the critics are correct when they argue that not enough is done in the new law to contain costs over time nor was enough done to assure that the nation will have an adequate number of physicians, other health care providers, and clinical and other facilities to meet our growing demand. Indeed, I would argue that the shortage of primary care physicians coupled with the fee based reimbursement system for compensating medical providers are the fundamental problems, affecting every dimension of health care from availability to cost.

I am offering the following ideas for consideration with the following caveats: the ideas are neither original nor based on any systematic research, although I believe ample data are available to substantiate (and refine) the basic premises.

1. The United States must have a nationwide national health service - let’s call it the U.S. National Health Service (“NHS”), for lack of a better term. The NHS would operate a network of local primary care clinics and hospitals in communities so that every American would have reasonable access to basic health care. NHS would exist parallel to the current health care institutions, both public and private. (This could be an expansion and redefinition of the current National Health Service Corps and the system of community health clinics, which have long served rural and inner city areas.)

2. As envisioned here, NHS would provide services primarily on an outpatient basis. These would include diagnostic testing, early intervention and risk assessment, preventive care and screening, examinations, diagnosis and treatment of common physical and mental conditions, prescribing and managing medication, counseling, well-baby care, and continuing care and management of chronic conditions. NHS could also provide day-surgery services - including dentistry — for procedures when overnight stays are not required. NHS would not likely provide acute care services or those requiring medical specialties, although it could emerge as the principal “gatekeeper” in referring its patients on for additional treatment. What is fundamentally important: NHS would have no financial interest in extending its care or referring a patient to others.

3. The cost of operating the NHS network would be underwritten by the national government; all doctors, nurses and other staff would be employees of the government. Only when the costs are known can the cost of providing primary care be broken down to its essential components: the hourly cost of the attending physician plus the cost of other staff, diagnostic equipment, and facilities. Assume the NHS physician earns compensation of $200,000 a year - a reasonable perhaps even generous wage today for a general practitioner. Assume further that all other costs required to support the physician in delivering services approximate $400,000 a year. Thus, the fully loaded cost of providing and supporting each general practitioner would approximate $600,000 a year, or $300 an hour over a 2,000-hour period. This number is important both for estimating the cost of the total system as well as its cost recovery methodology. Once established, the NHS could determine the actual fully loaded cost of service per physician hour each year, and publish it as the basis for all patient billing.

4. The network itself should be built as quickly as possible, but would likely take several years to provide reasonable access for all Americans. If the cost per physician is $600,000, and we decide we need 20,000 physicians in the network, then the direct cost of medical services would $12.0 billion a year (in today’s dollars) when fully developed - a modest amount when compared with the current and projected cost of our current system. In addition, the total cost must include the cost of central administration, which is estimated at $1.5 billion, or 13% of direct expense. (The 2011 budget request for the VA reflects about 6% of the total authorization for departmental administration. A portion of the NHS administration budget would be given over to finance medical education.)

5. Most physicians in private practice work in 15 to 20 minute periods - some average less than 15 minutes with each patient. For our purposes, let’s assume that the NHS physician would average 3 patients an hour. On that basis, each physician could accommodate at least 6,000 patient visits a year. If the system had 20,000 physicians deployed, they could collectively see and provide the equivalent of 120 million people with one office visit each year.

6. The simple math used in this presentation produces a simple equation: each 20-minutes of a physician’s time costs $100 in direct expenses. Some procedures will take several 20-minute units of time - day surgeries, for example. Most will require less time. Some will require extensive diagnostic testing, others will not. The total direct cost of the system - doctors, nurses, staff, equipment, and facilities - are ultimately expressed in an average cost per physician hour - in this case, $300 per hour. (Of course, NHS could be directed to recover its “departmental administration” expense as well, which would add approximately $39 to each physician hour.)

7. NHS should bill its patients or the patient’s insurance provider on a means-tested basis at $100 for each 20-minutes or $300 per physician hour - regardless of the number or types of tests or procedures that may be required. The rate should be the same. The means test could also be simple, based upon annual income. For example, an individual or family with an income that is at or above the median income for a particular area would pay, say, 100% of the cost either out of pocket or billed to an insurance provider. In the same manner, a Medicaid or Medicare patient might pay a minimal or perhaps no co-pay for any services provided by the NHS. Private insurance, Medicaid or Medicare would reimburse NHS for the actual cost of providing these services on a physician-hour basis - not by the type of procedure or test involved or other complex reimbursement formulae. (This fundamental change in the reimbursement system for providing services through the NHS could potentially save all insurance funds - Medicaid, Medicare, and private insurance - billions of dollars a year.) All collections from any source - patients or third party payers - should be held in trust and used to reduce the appropriations required to support the NHS for the following year . In effect, Medicare and Medicaid dollars spent through NHS would be “recycled” for payment of more effective, less costly medical care.

8. Many resources are available that could be utilized by NHS to minimize the actual costs incurred. Most notably, the NHS should be given and required to use the Veterans Administration (VA) patient care information systems for maintaining all patient records, and it should be given access to the VA’s treatment protocols. This would immediately eliminate the cost of acquiring or building a new patient information system, while providing universal portability of information across the entire NHS network - a huge benefit for patients and doctors. (Moreover, the accumulation of information about what actually works and does not work from throughout the network would be of immense importance as the basis of statistical analysis to guide the evolution of new treatment protocols.) The NHS should use its purchasing power to negotiate favorable costs for everything from diagnostic equipment to pharmaceuticals. And many American communities have underutilized facilities - including clinical and hospital facilities - that might be acquired by NHS as its network expands.

9. Where would the doctors come from? First, I believe a sizeable number of practicing physicians today would welcome the opportunity to simply practice medicine, free from the pressures of managing a fee-based practice, if provided fair compensation. So the NHS could begin with a core of physicians drawn from those currently practicing, adding to those each year in part from new doctors. Today, the U.S. produces about 25,000 new doctors a year. Current estimates are that the nation will need to increase that number up to 35,000 or so each year to keep up with demands of an aging population. The NHS could facilitate this process while encouraging physicians to become general practitioners rather than specialists. The NHS should offer to pay the student debt accumulated in medical school for new physicians in return for a five-year commitment of service to NHS - at the NHS going compensation rate. (The average physician graduates from medical school with a debt approximating $120,000; the departmental administration budget discussed above includes about $600 million a year for financing the debt of 5,000 new doctors each year.) At the end of their commitment, some of the physicians may choose to move on to specializations, others into fee-based practice. Many, I believe, could find a rewarding career as part of the NHS network.

If and when an organization like NHS is in place, it would offer substantial “cost/benefits” to the American people. I am sure a good health care economist could develop reliable estimates from available data. However, we can say with some certainty that the following benefits would occur:

· Virtually all Americans would have access for the first time to affordable, efficient basic health care, with all of the attendant immediate and long-term socioeconomic benefits.

· Means testing would make NHS available to all Americans without subsidizing those with the ability to pay.

· Utilization of NHS would substantially reduce the cost of care reimbursed by Medicare and Medicaid and other third party payers.

· Overtime, Medicare and Medicaid could become more true insurance funds - i.e., funds designed to pay for the unexpected and often catastrophic events, not the predictable costs involved in routine health care services.

· Utilization of NHS would reduce the cost of emergency care now provided by state and local governments.

· No one would be required to use NHS. However, NHS would be competition for the private fee-based system, which would be healthy for both.

American government today finances over 50 percent of the cost of American’s health care - and it does so inefficiently by any standard. We are simply not getting our money’s worth. The new law will reduce the deficit over time, but not as efficiently as it might have. A single-payer system - Medicare for everyone - would certainly provide universal coverage, minimize overhead costs, and slow the rate of growth in total system expenses. However, no system of insurance can address the underlying issues of fee- and procedure-based services and the national shortage of physicians committed to the general practice of medicine. For a relatively modest investment - regardless of how we organize our public or private funded insurance programs — something like NHS could make a very substantial impact in addressing these fundamental problems in America’s health care system.