Texas‘ primary coastal windstorm insurance provider might not be able to pay claims if a major hurricane hit the coast, and a leading state lawmaker wants residents to be aware of the consequences they would face if a disaster occurred.
State Rep. John Smithee, chairman of the House Insurance Committee, sent a letter Monday to Texas Insurance Commissioner Eleanor Kitzman about the precarious position of the Texas Windstorm Insurance Association, a quasi-governmental organization that acts as the property insurer of last resort for individuals and businesses unable to obtain coverage on the private market. It is commonly referred to by its initials, TWIA.
A “number of circumstances occurring over the past 18 months have resulted in a current financial condition of TWIA that is much worse than any of us had anticipated,” Smithee, R-Amarillo, wrote in his letter.
Smithee said the situation stems from a few factors: ongoing litigation costs connected to 2008’s Hurricane Ike; continued failure to adequately address rates, which are too low; a dearth of re-insurance; and a weak bond market that could make it difficult to sell bonds to help finance the association.
TWIA’s own records indicate that potential losses resulting from a Category 4 hurricane striking the Texas coast could cost billions more than could be paid by the association, Smithee warned.
Kitzman wasn’t available for comment.
TWIA is an independently operated association of insurers overseen by the Texas Department of Insurance. It provides insurance to people in 14 counties who couldn’t otherwise get coverage because of hurricane exposure. The association largely is paid for through premiums and debt. But in the event of a storm, assessments are paid by insurance companies, though the Legislature has limited the amount that could be assessed.
In his letter, Smithee said if a Category 4 storm slammed Galveston, the cost could reach $14.2 billion. If a similar-sized storm hit Corpus Christi, the amount could be $14.3 billion.
Smithee said TWIA couldn’t come close to covering damage of that magnitude, though he said it should be able to cover losses from a storm like Hurricane Ike, which he said cost the association about $2.2 billion.
Even “under a best case scenario, TWIA will have only approximately a little over $3.6 billion in resources to pay losses that could exceed $14.3 billion,” he wrote.
David Crump, a private citizen and insurance professional who has studied TWIA, said documents show that a storm doing $14.3 billion in damage is a remote possibility. “Their modeling indicates that it could happen, but it is such a low probability,” said Crump, who shared the data he collected with Smithee.
Realistically, he said, TWIA could be about $3 billion short if a Category 4 storm hit Galveston.
In Smithee’s letter, he asked Kitzman if she was aware of any emergency plan developed by the Texas Department of Insurance or by TWIA to be put into place if losses from a storm exceed the money available.
Smithee also asked if TWIA policyholders have been told that the insurer might not have sufficient resources to pay claims.
“It would seem only fair that policyholders should be made aware of the precise risk they are taking in purchasing insurance from TWIA,” Smithee wrote.
Additionally, Smithee asked Kitzman, who was appointed by Gov. Rick Perry last summer, if TWIA policyholders have been informed that the State of Texas has no obligation to help pay claims that cannot be paid by TWIA.
“In fact, in light of the State’s current budget situation, it is likely the Legislature would not have sufficient revenue available to pay claims even if a majority of legislators wanted to do so,” Smithee wrote.
Last year, John Polak, who was interim general manager of TWIA, said the association was healthier than it had been in a while. The association had purchased a reinsurance policy, and it had maintained the ability to buy bonds to help pay for possible damage.
TWIA’s solvency could also be bolstered by private insurers that can be charged assessments on past storms such as Hurricane Ike. But the fear some critics have with assessments is they could lead to higher premiums for policyholders in noncoastal areas.
By Tim Eaton
Published: 8:54 p.m. Monday, June 18, 2012