With Texas windstorm insurance, what you don’t pay for, you won’t get
Take Texas windstorm insurance. The state-run Texas Windstorm Insurance Association provides cut-rate insurance against wind damage from hurricanes and other storms. While originally justified as a provider of last resort for families and businesses who couldn’t get insurance in the private market, TWIA now covers approximately 60 percent of residents in a 14-county Texas coastal region.
But TWIA’s artificially low insurance rates come at a cost. Without actuarially sound rates, TWIA risks being unable to pay out claims when Texas is next hit by a major storm. Such concerns aren’t hypothetical. In 2013, TWIA briefly considered going into receivership in order to stem the tide of claims made after 2008’s Hurricane Ike. Since then, TWIA has considered a number of alternatives to help put the insurer on a firmer financial footing. And even though TWIA’s financial position has improved somewhat, it still has $77 billion in liability.
Inevitably, when an organization like TWIA doesn’t charge enough to meet its liabilities, it has to find the money from somewhere else. Recently, the Texas Department of Insurance issued rules providing for a surcharge on property and auto insurance policies in the coastal region if other sources of funding for TWIA are exhausted.
The new rules have drawn criticism from coastal residents, on grounds that the surcharge would apply only in the 14-county coastal region, rather than in the whole state. Yet it’s hard to see why residents of Lubbock should be required to subsidize windstorm insurance for folks with beachfront property along the Gulf Coast. The real problem with the surcharge is not that it applies to too few people, but that it applies to too many. Under the rules, coastal residents who maintain private windstorm insurance would end up paying to bail out TWIA along with everyone else.
The Business and Commerce Committee of the Texas Senate is currently looking at ways to reform TWIA. Instead of using indirect and complicated mechanisms to shift costs around, TWIA’s funding problem should be solved by resetting premium rates on an actuarially sound basis. That will help to restore not only TWIA’s long-run viability, but also its status as a true provider of last resort. Artificially low insurance rates may seem appealing, but ultimately, the only way for Texans to ensure that windstorm insurance will be there for them when they need it is for them to pay for it.