Legislative Focus for Texas Windstorm Insurer: Funding, Depopulation

The Texas Windstorm Insurance Association, the state-created insurer that provides property coverage for wind and hail in 14 coastal counties and parts of Harris County, has submitted a report to the Legislature with recommendations to bolster TWIA’s operational efficiency, stabilize funding and decrease the number of properties it insures.

TWIA’s biennial report also highlights improvements the association has made since 2011 when it was placed under supervision of the Texas Department of Insurance in the aftermath of Hurricanes Dolly and Ike in 2008.

House Bill 3, which passed the Texas Legislature in a special session in the summer of 2011, called for operational changes at the insurer. Improvements made by TWIA in response to HB3 include replacing most of the management team, streamlining organizational structure, improving operational efficiencies, transforming organization culture, and increasing management controls and accountability.

Following is a summary of the 10 recommendations TWIA submitted to lawmakers in its report:

Recommendation 1

Remove the current restriction on the use of commercial paper through the Comptroller, which currently confines its use only in the event that TWIA is unable sell the full amount of Class 1 public securities.

The commercial paper program was meant to provide quick access to funds to pay claims from a catastrophic event. In 2011 the statute was changed such that the program only becomes effective when TWIA is unable to issue the full amount of allowed Class 1 public securities. TWIA believes eliminating this restriction would allow an additional option to improve liquidity and enhance its ability to pay claims in a timely manner.

Recommendation 2

Clarify the language of Sec. 2210.6136, Alternative Sources of Payment, to avoid overlap of repayment streams in the event all or some of the Class 1 public securities cannot be sold.

Currently under the statute, TWIA must pay for Class 1 public securities with collected premiums; a combination of policyholder surcharges and member insurer assessments must be used to pay for Class 2 public securities. The alternative sources of payment section inlcudes what is known as the “drop down provision.” Under the drop down provision, TWIA would repay up to $500 million of issued Class 2 securities from premiums after the initial payment from surcharges and assessments. TWIA would like to eliminate the requirement to repay the Class 2 public securities using the same revenue source required to pay Class 1 bonds. A study of other other states’ residual markets showed that bonds are paid primarily through policyholder surcharges and carrier assessments, both of which are viewed more favorably by bondholders and potential investors.

Recommendation 3

Consider a policy surcharge in lieu of premium as revenue source for Class 1 public securities in order to save TWIA policyholders money.

TWIA is required to pay Class 1 public securities from its net premium and other revenue. But TWIA also is obligated to pay operating expenses and claims from its premiums and other revenue. It recommends a dedicated revenue source such as a policy surcharge to fund bond repayment and reduce costs for policyholders.

Recommendation 4

Change the Level 2 and Level 3 funding layers to permit TWIA to use the portion of these funding layers that is made up of member insurer assessments to meet the immediate needs to pay catastrophe claims rather than using the member insurer funds to issue and repay debt.

Currently, 30 percent of Class 2 public securities, which can be issued for up to $1 billion, are to be repaid by member company assessments. Class 3 public securities can be issued for up to $500 million, a 100 percent of which is to be repaid by member company assessments. TWIA recommends instead using member company assessment dollars to pay policyholder claims. It said funds from assessments could be received within 30 days whereas the issuance of bonds could require 90 – 120 days before funds are received.

Recommendation 5

Consider adopting additional non-premium, non-reinsurance hurricane loss funding mechanisms — i.e., in addition to current funding methods — to improve TWIA finances to the point where the Association can pay claims in at least a 1/100 year event.

Up to $2.5 billion of public securities funding may be sought for a given catastrophe year in addition to TWIA premiums and other revenues, amounts in the Catastrophe Reserve Trust Fund, and any reinsurance purchased. For 2014, this combination provided funding equivalent to a 70-year event. TWIA asks to be authorized to raise additional funds in order to pay excess losses. TWIA’s review of other states’ residual markets showed that other states statutory funding mechanisms do not cap the amount of deficit funding available. TWIA suggested authorizing the sale of Class 4 public securities or tapping into the state’s Rainy Day fund, if needed, to fund a claims deficit remaining from a major catastrophe.

Recommendation 6

Provide to the TWIA Board the option to choose to go directly to the bond market for the issuance of public securities.

Currently, for TWIA to issue public securities the issuance must be approved by three state-created boards — TWIA Board, Texas Public Finance Authority Board, and the Texas Bond Review Board — as well as the insurance commissioner and the attorney general. These multiple layers of review are time consuming and impractical, and not used in other states. Other states’ residual markets may go directly to the bond market with the commissioner’s approval.

Recommendation 7A

Authorize TWIA to develop and adopt a depopulation program, subject to approval by the Commissioner, which permits the removal of policies from TWIA by private insurers through any combination of assumption reinsurance and/or offers of insurance made to TWIA policyholders at policy expiration. Adopt statutory language that makes it clear that all legal and contractual obligations under policies taken out of TWIA, whether by assumption reinsurance or at policy expiration, are obligations of the insurer assuming or taking the policy out of TWIA as of the effective date of the assumption, take-out or removal of the policy, even if TWIA continues to provide some services to the policy until it is renewed on the take-out insurer’s policy.

TWIA also recommended that lawmakers boost private insurer depopulation efforts by extending TWIA’s HB 3 claim protections, such as limitations on when claims may be brought to suit and the extent of damages that may be awarded, to private insurers willing to take policies out of the association.

Recommendation 7B

In order to increase the effectiveness of TWIA’s depopulation programs, specify that insureds who receive a voluntary market offer for windstorm coverage are ineligible for coverage from TWIA provided that the offer includes comparable coverage and a premium within statutorily set parameters (e.g., no more than a certain percentage higher than the comparable TWIA premium). In addition, specify that if the offer is provided by a surplus lines carrier, the surplus lines carrier must have at least a minimum A7 rating from A.M. Best.

Applicants for TWIA coverage are required to make a “diligent effort” to obtain property insurance through the voluntary market, but one declination from an insurer writing property insurance, including windstorm and hail coverage, in the first tier coastal counties can fulfill that effort requirement. Because a single declination is easily obtained in the coastal region, policies are placed into TWIA for competitive reasons — such as cheaper premiums — even if private market insurers were willing to write a particular policy. TWIA recommends making insureds who receive an offer from a voluntary market insurer ineligible for a TWIA policy if the offer includes substantially equivalent coverage. To prevent overly large premium increases, lawmakers could consider making mandatory TWIA ineligibility apply only if the offer is within a statutorily set parameter, such as no more than 15 percent higher than TWIA’s quoted premium.

Recommendation 8

Consider requiring mandatory use of windstorm resistance standards in the designated catastrophe area and authorizing sufficient means for the counties to enforce these codes.

Reducing property vulnerability and magnitude of loss through mandatory enhanced building codes would lower TWIA’s probable maximum losses and increase interest among private market insurers to insure coastal structures. TWIA could also offer premium discounts for structures built in compliance with the new code. Ample resources and local authority to enforce the codes would be needed.

Recommendation 9

Extend the current WPI-8 waiver program for residential property with an insured value of less than $200,000 through Dec. 31, 2017, in order to give homeowners additional time to make any required improvements.

Extending the building code compliance certificate, or WP1-8, waiver program would provide TWIA policyholders more time to plan and save for any improvements needed to obtain a WPI-8 or qualify for the Alternative Eligibility Program.

Recommendation 10

Consider requiring WPI-8 in all circumstances of new construction, structural reconstruction, or structural repair consistent with existing WPI-8 inspection requirements for properties located within the 14 coastal counties and other TWIA eligible coverage areas.