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.
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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?
