The Texas Windstorm Insurance Association has only about $3.6 billion in claims-paying resources “under a best case scenario,” even though it could face losses of $14.2 billion from a Category 4 hurricane striking Galveston or $14.3 billion from a similar storm hitting Corpus Christi, according to the chairman of Texas’ House Insurance Committee.

State Rep. John Smithee, R-Amarillo, issued that warning in a June 18 letter to Texas Insurance Commissioner Eleanor Kitzman that sought information about any emergency plans either TWIA or the Texas Department of Insurance might have should the pool’s losses exceed its ability to pay. TWIA has been under departmental receivership since February 2011.

“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, according to Austin’s American-Statesman, adding that state law does not provide TWIA with any explicit backstop from the state.

“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.

Responding to Smithee in a June 19 statement, Kitzman reiterated the assessment she made earlier this year that TWIA is unsustainable in its current form and welcomed a legislative response to fix the situation.

As has been noted, there are circumstances under which the Texas Windstorm Insurance Association’s (TWIA) current funding options may be insufficient to pay all policyholder claims on a full and/or timely basis. This is not a new development but one that TDI has been monitoring for some time.  TWIA’s rates have been inadequate for the purchase of sufficient reinsurance that could provide greater protection to policyholders. TWIA’s current structure is simply not sustainable. TDI is currently exploring options for a more viable approach and we look forward to working with the legislature on a comprehensive solution.

TWIA’s financial condition is certainly bad, although Smithee’s figures appear to be based on maximum loss obligations. As David Crump has reported, based on figures provided by TWIA, the pool faces a probable maximum loss of about $5.3 billion should a Category 4 hurricane strike Corpus Christi and a PML of $6.4 billion for a similar storm striking Galveston.

The association — which provides coverage in 14 coastal counties — has purchased $850 million of reinsurance this year, which kicks in after the pool has incurred $2.3 billion in losses. TWIA has $100 million from premiums and other revenues, which would constitute the first layer of funding to pay any 2012 losses. It also has between $250 million and $275 million in its Catastrophe Reserve Trust Fund, and it is authorized to issue up to $2.5 billion in bonds.

Nonetheless, an actuarial analysis conducted on TWIA’s behalf by Merlinos and Associates found that if the insurer doesn’t raise rates, there is a 27% chance it would not be able to cover all of its liabilities during the 2012 hurricane season. The insurer’s board already is planning  for an overall rate increase of 5%, effective Jan. 1 of next year. At its August meeting, the association’s board will consider a proposal for a separate increase  that could see some premiums rise by as much as 10%, depending on territory.

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