Conflict of interest standards and lowering coverage limits are key to TWIA reform
AUSTIN, Texas (Nov. 1, 2012) – Reform of the Texas Windstorm Insurance Association should include tough conflict of interest standards, a roll-back of coverage for high-value properties and second homes and a phase-in of actuarial rates for all policies, R Street Texas Director Julie Drenner told members of the Joint Committee on Oversight of Windstorm Insurance.
In her testimony before the oversight panel, Drenner noted that, while TWIA was intended as an insurer-of-last-resort for coastal consumers who could not find private coverage, it now writes 62 percent of all windstorm coverage in its service area. Given that the program’s actuaries estimate there is a 1-in-27 chance that TWIA would not have enough money to cover its claims following a major storm, the danger that Texas taxpayers would be called on to bail out the program is tremendous.
Drenner noted that TWIA currently insures properties up to a maximum coverage limit of $1.8 million, more than ten times the median sale price of a home in the state. Reducing TWIA’s coverage limit to still-generous $500,000 would reduce TWIA’s total exposure by $648.8 million while impacting just 1.3% of policyholders. She also advocated ending coverage for the 51,587 second homes covered through TWIA which would reduce TWIA’s total $42.29 billion in exposure by 17%, or $7.2 billion.
“If the state hopes to shrink TWIA and return it to its place as a market of last resort, it should limit coverage to no more than $500,000,” Drenner said. “Millionaires should not be able to rely on taxpayers to provide them with insurance.”
Drenner also proposed that TWIA follow governance standards similar to those of the federal Sarbanes-Oxley Act, including prohibitions on the company’s auditors from subsequently doing business with firm in other areas, such as stock and bond issues.
She concluded by urging lawmakers avoid creating a statewide catastrophe fund similar to the Florida Hurricane Catastrophe Fund, which she deemed a “dismal failure.”
“By concentrating all risk within the borders of a single state, a Texas catastrophe fund would have to charge rates for its coverage much higher than those in the private sector in order to merely break even,” Drenner said. “If it were to function at all, a state catastrophe fund would have to systematically underprice its coverage and thereby saddle taxpayers with massive contingent liabilities.”
