The Texas Windstorm Insurance Association could be raising premium rates soon — and for the time first, adjusting policyholder premiums depending on the likelihood of severe storms or hurricane damage in specific areas.
This morning, a TWIA actuarial committee passed a recommendation to the TWIA board to increase rates by 4.7 percent overall, and adjust rates territorially to help the semi-state run insurance company cover all its liabilities.
The TWIA board is “not going to be rubber stamping our recommendation,” said the committee chair, Alice Gannon. She assured the two coastal residents on the committee who voted against the rate increase that board members would iron out details and discuss the rate change at length.
TWIA is the insurer of last resort for Texas coastal residents who otherwise can't find insurance in the private market to cover severe storm and hurricane damage. Lawmakers reorganized the financial structure of TWIA in the 2011 special legislative session to prevent future troubles; the agency is still being hit with lawsuits from policyholders upset over how claims were handled after Hurricane Ike hit in 2008.
To determine whether the rates paid by coastal Texans and other forms of back-up insurance would suffice to cover all of TWIA’s liabilities in case of an emergency, TWIA contracted the consulting firm Merlinos and Associates in January to conduct an actuarial analysis. According to the firm’s analysis, under extreme circumstances, TWIA could potentially cover liabilities up to $3.79 billion. That includes an estimated $427 million in premiums, $9 million in other company income, and $2.5 billion in potential bonds authorized by the Legislature — money that would have to be repaid.
Additional funding mechanisms to cover a “1-in-100 year event” that could cost up to $4.8 billion were unknown.
Overall, the firm determined that there is a 73 percent chance that TWIA will have a surplus at the end of this summer's hurricane season if the agency doesn't increase premium rates. In other words, there’s more than a one in four chance that TWIA would not be able to cover all liabilities with the current financing.
Under the committee’s recommendation, policyholders in less storm-prone areas could see their rates drop, but the majority of them would have a premium rate increase. The territorial adjustments to rates would be based on a model that combines historical data on where hurricanes have hit with meteorologists' projects on where hurricanes are likely to hit in the future. Rates can vary by 8 percent at most, according to new rules Texas lawmakers passed last session.
If the TWIA board approves the recommendation, it must also be approved by the Texas Department of Insurance. Representatives from the department told the committee on Friday that Insurance Commissioner Eleanor Kitzman would likely approve a rate increase.
Members of the committee indicated on Friday that lawmakers are divided on a rate increase — but suggested that without the change, TWIA could be in danger of not covering all of its liability.
Wallace Goodman, for example, said he worried raising rates in some regions would encourage some policyholders to leave TWIA, leaving it with less money to cover claims.
But Gannon said if policyholders leave because they can find coverage elsewhere, that's a positive — TWIA only exists to fill the hole in coastal insurance coverage created by private market forces. “You’re losing more losses than you are premium,” she said.
In the last two years, TWIA increased rates by five percent on both residential and commercial policies across all coastal areas. The year before, TWIA increased rates by 10 percent.
On Friday, the committee also recommended that TWIA authorize staff to work with the Texas Public Finance Authority to procure $500 million in bonds, which eventually will have to be repaid with policyholder premiums or by assessing additional funds from policyholders. That money could be used to help cover coastal residents’ insurance claims in the event of a catastrophic hurricane this season.
“This way we’ve got the $500 million. We can start paying the claims with that $500 million from day one,” said Gannon.
Representatives from the finance authority, a state agency that helps other agencies acquire financing, recommended that the board sell $500 million in bonds before hurricane season, because there is no guarantee that banks would be willing to finance bonds after a catastrophic event. The interest rates and availability of buyers would be subject to the market at that time.
“Let’s say we had another Ike, just to pick a very possible event, and had a $2.5 billion loss,” said Gannon. “We would be in a situation almost certainly of a large [premium rate] increase being required, unless there’s some sort of legislative action to do some other kind of funding.”
Click these links for more information on how lawmakers reformed TWIA and the claims process during the 2011 legislative session, and the amount the state paid for lawsuits and damages following Hurricane Ike.