The Texas Windstorm Insurance Association’s board of directors on Tuesday approved a 5 percent increase to all policyholders' premium rates that would take effect next year. But it delayed a decision on a proposal that would adjust premium rates based on the likelihood of severe storm damage in a particular area.
As the state-run insurer of last resort for Texas’ coastal residents, TWIA insures against catastrophic hurricane damage. But the organization went underwater after Hurricane Ike slammed into Texas in 2008. On top of the billions paid to fix the hurricane damage, TWIA spent millions of state dollars to pay off lawsuits related to mishandled policyholder claims after Hurricane Ike. State lawmakers restructured TWIA in the last legislative session to improve the financial structure of the organization and in doing so gave TWIA the ability to adjust premium rates based on the likelihood of risk or storm damage to an area.
As the current rate structure stands, TWIA collects about $80 million in premiums annually. Board members said the company should collect more than $250 million annually in order to fund total losses.
“If we’re fortunate enough to have no significant events over a long enough period of time, the $80 million will do it, however that’s gambling on a lot of luck,” said Alice Gannon, a board member and chairwoman of the actuarial subcommittee. “We could be slammed this year with something like the 1900 Galveston event, in which case we will not be able to pay all our claims without some other sort of legislative action.”
State Rep. Larry Taylor, R-Friendswood, co-chairman of the Joint Windstorm Insurance Legislative Oversight Board, suggested in a May 8 letter to the board of directors that before raising any rates, TWIA should rein in “out-of-control legal expenses.” He said the association should proactively review claims related to Hurricane Ike that may have been underpaid, demand professional engineer analysis for every lawsuit filed and seek new defense firms or internal counsel to handle lawsuits through mediation.
“The people of the coast cannot continue to pay for the mistakes made by TWIA management,” he wrote.
In the last two years, TWIA increased rates by 5 percent on both residential and commercial policies across all coastal areas. The year before, TWIA increased rates by 10 percent. The insurance commissioner must give final approval of the increase that was approved Tuesday.
In April, the TWIA actuarial committee approved a proposal to base next year’s rate adjustments on the risk of severe storm damage in different areas of the coast. Overall, the proposal would have increased premiums by 4.7 percent on residential properties and 1.7 percent on commercial properties.
Some areas, such as Kenedy and Kleberg counties, would see premiums reduced by 10 percent. But residents in Galveston, Harris and Calhoun counties could see their rates increase by up to 10 percent. State law permits an increase up to 10 percent as long as rates do not vary by more than 8 percent within a county.
Mike Gerik, TWIA board chairman, indicated that the proposal for such territorial rate changes is not off the table, and could be approved at a later time in addition to the 5 percent overall rate increase. If the board approves the territorial rate changes, it “would be up to the [insurance] commissioner to decide whether or not we can take that much rate,” he said.
At Tuesday’s meeting, Rep. Craig Eiland, D-Galveston, told board members that the proposed territorial rate changes do not take into account all of the factors involved in mitigating risk, such as which areas and properties meet building code standards to withstand storms. He gave the example of the Bolivar Peninsula, which would have the greatest premium increase under the proposal.
“That area is the best risk you’re going to have because of the building code environment,” said Eiland, emphasizing that Hurricane Ike already wiped out all of the buildings that did not meet building code standards, and what’s left are those that withstood the storm or were rebuilt up to code.
Other representatives of the Galveston area, including a county judge, city council member and former mayor, also spoke in opposition to the proposed territorial rate changes at the meeting. They asked the board to delay the vote until a coastal representative was sitting on the board. There is currently a vacancy on the board for a first-tier coastal county resident who must be appointed by the insurance commissioner.
Earlier this year, TWIA hired the consulting firm Merlinos and Associates to evaluate how financially sound the company is under the current rate structure. Using catastrophe modeling to estimate the likelihood of hurricane damage in various coastal areas, the firm also determined the Harris County bay and Galveston County beach were the riskiest areas for hurricane damage. The firm’s analysis also showed there’s more than a 1 in 4 chance that TWIA would not be able to cover all liabilities with current financing and TWIA may need additional funding up to $4.8 billion to cover a “1-in-100-year event.”
TWIA is also under administrative oversight by the Texas Department of Insurance, which is also considering further restructuring the organization.
“I think this restructuring is critical to TWIA’s ongoing operations so that we don’t keep digging a deeper hole for ourselves,” Insurance Commissioner Eleanor Kitzman said at Tuesday’s meeting.
TDI hired the consulting firm Alvarez and Marsal in April to evaluate possible ways to restructure or improve TWIA. Employees of the consulting firm will be onsite at TWIA next week to continue evaluating the structure of the organization.