The Texas Windstorm Insurance Association (TWIA), the state-created residual market that provides windstorm insurance policies in 14 designated coastal counties, suffers from “fundamental flaws” in the agency’s design, according to a scathing report by the Texas Sunset Commission.
In Texas, many state agencies are subject to periodic “sunset” review and must be periodically renewed by the Legislature. To assist in this process, the Sunset Commission reviews each agency’s purpose and performance, and can make recommendations for changes and updates to its governing statutes.
It’s rare for an agency not to be renewed at all, but the need for legislative reaffirmation creates an opportunity to make reforms that otherwise could get lost in the bustle of the legislative schedule. And while TWIA isn’t required to go through the full sunset process, the commission can review its operations, as it did earlier this month in a report that detailed association’s dire financial state.
The report’s main bullet points won’t be news to anyone who has been paying attention. TWIA was originally created to serve as an “insurer of last resort,” to provide windstorm insurance to those who cannot find it on the open market. To achieve this goal, TWIA offers policies at rates significantly lower in aggregate than what would be needed to pay probable maximum losses. As a result, TWIA has faced persistent financial difficulties. Despite some improvements to its financial position during a lull in storm activity following 2008’s Hurricane Ike, last year’s Hurricane Harvey once again underlined the agency’s fiscally unsound position.
The report lists a variety of legislative changes that would make TWIA function better, including a more streamlined “takeout” process for private insurers, like those that have been executed successfully in states like Florida and Louisiana. But its core conclusion is that the Legislature faces a choice between whether to “[c]ontinue TWIA as an insurer of last resort or continue TWIA as an insurance company reliant primarily on premium funding.”
On one level it’s hard to argue with this. There are, however, some ways to split the difference. The Legislature could, for example, restrict eligibility for TWIA to properties valued at less than $500,000 or require properties to meet certain building code requirements to mitigate the potential for storm damage if they want to continue to enjoy TWIA coverage. The association also could go a long way toward removing incentives to develop in risky areas by making new construction in the coastal zone ineligible for TWIA coverage.
TWIA also has had some luck using reinsurance as a risk-management strategy. Altogether, TWIA placed $2.6 billion of reinsurance in 2018, up 24 percent from last year. Back in April, TWIA came to market with a proposed $300 million catastrophe bond – the fourth in its Alamo Re Ltd. series – and after a few weeks of shopping around had upped the offer to $400 million, at a coupon that was 13 percent less costly than originally projected. Market conditions still seem favorable for TWIA to leverage the global reinsurance market to lay off even more of its risk.
In any event, the Sunset Commission’s report underscores that TWIA’s problems are not going away. Whether the Legislature decides to mend TWIA or to end it, it must act soon, before the next storm hits.