The Texas Windstorm Insurance Association (TWIA) has dropped an initial $4.2 billion estimate of losses from Hurricane Ike to about $2.7 billion. Nevertheless, it remains more than the $2.07 billion TWIA had available to pay claims. The difference will be paid by insurers, who in return get premium tax credits that put all taxpayers on the hook for the excess damages. The tally for Ike’s damage is not final, as less than 10% of claims have been processed.

Whether the losses are revised higher or lower, TWIA’s funding mechanism – a combination of reinsurance, the Catastrophe Reserve Trust Fund, and assessments against TWIA’s members (i.e. insurers) – is inadequate to ensure that its reserves can cover the losses from major storms. As I’ve written repeatedly, the Legislature must address TWIA’s funding system in the coming session. If not, Texas’ taxpayers will remain liable for storm losses that should be covered by TWIA.

The Foundation suggests a few simple measures that would put TWIA on sounder financial footing.

(1) Implement a file-and-use system for TWIA rates. This would allow TWIA members to get rates to the windstorm insurance market more quickly, as they would no longer have to haggle with the commissioner prior to using the rates. Price competition and insurance availability would increase. And besides, consumers and capital markets should be the ones to determine the propriety of rates.

(2) Make TWIA a true provider of last resort by specifying that TWIA coverage is available only if an applicant cannot obtain coverage in the private marketplace. By clarifying its purpose, TWIA will be able to offer more realistic and actuarially sound rates, reduce exposure, and encourage customers to explore the non-governmental market.

(3) Eliminate many of the rate-setting requirements related to windstorm insurance, including those that specify the precise experience data that must be considered and the requirement that rates must be uniform throughout the first-tier coastal counties. Burdensome regulations keep insurers from setting actuarially sound rates most efficiently. Heavy-handed statutory requirements add time and expense to the rate-setting process, both of which ultimately harm ratepayers.

– Drew Thornley