Texas Wind Pool Update
Gene Taylor's House Member Office (D-MS-04) posted a Blog Post on June 24, 2008 | 3:41 pm - Original Item - Comments (View)Major storm on coast could have big financial impact statewide
David Shieh
16 June 2008
Austin American-Statesman
16 June 2008
Austin American-Statesman
As fallout from Hurricane Katrina triggers major shifts in Texas' insurance landscape, residents across the state - including Central Texans - may find themselves saddled with tax increases and higher insurance premiums if a catastrophic storm hits.
With private insurers drastically cutting back on hurricane coverage along the Gulf Coast, coastal residents are flocking to the Texas Windstorm Insurance Association - more commonly known as the state windpool - in record numbers. As a public-private partnership that provides "last resort" coverage to coastal residents, the windpool has long relied on state money as a backstop for policy payouts. But not until now - with the windpool's liabilities nearly triple what they were when Katrina hit three years ago - has the state stood to lose so much from the arrangement.
The problem has gained attention at the Capitol. With potential losses in the billions of dollars from the state's general revenue fund, legislators worry that a major hurricane would force them to cut services or raise taxes. At the same time, consumers across the state would be hit with skyrocketing premiums by insurers scrambling to cover their losses.
"You've got a house that's burning," said state Rep. John Smithee, R-Amarillo, who spearheaded failed legislation to reform the windpool's finances in 2005 and 2007. "Nobody's putting the fire out, and it's getting worse instead of better."
At the root of the problem is the growing number of Texans in hurricane-prone counties who have been abandoned by private insurers no longer willing to cover central components of hurricane coverage: wind and hail damage.
Allstate, for example, stopped writing new wind policies in 14 counties along the Gulf Coast in March 2006 and declined to renew the 69,000 wind policies already in place starting that November.
State Farm, which together with Allstate sells the lion's share of the state's homeowners insurance policies, has stopped writing new wind policies on houses within a mile of the coast in those counties if applicants do not already have an auto policy with the company.
The exodus of private insurers, who say they worry that gigantic losses in coastal areas would threaten their ability to insure other customers , has left many coastal residents with few options, said Otie Zapp, head of an insurance consumer advocacy group in Galveston.
Zapp, who worked as an insurance agent for more than 40 years , said windpool policies are less than ideal: The coverage isn't comprehensive, the paperwork is a "nightmare" and the policies are often more expensive than private ones. But Zapp said countless locals - or at least the ones who can still afford wind coverage - have gone to the windpool, which now insures more than half of wind policyholders in the coastal counties it covers, double the amount before Katrina.
"Nobody wants the windpool," Zapp said. " But people grit their teeth and pay the money."
With that shift has come an unprecedented amount of financial strain on the windpool that is threatening to spill over to the state.
Under its financing plan, if the windpool were besieged with claims after a major hurricane, about $2.3 billion would be paid for through funding sources with few consequences for the state, windpool General Manager Jim Oliver said. Those would include premiums collected from policyholders, reinsurance policies and money collected from all insurers licensed to write property insurance in Texas, which are required by state law to be members of the windpool.
Beyond that $2.3 billion, though, the state would start to take a hit. Member insurance companies would front the money, but they would then be given tax breaks, which could drain billions of dollars from the state's general revenue fund.
Because a storm of sufficient scale has not hit Texas during the windpool's existence, Oliver said, it has never had to dip into state money. For example, Hurricane Rita, which hit in 2005, cost the windpool about $160 million - far short of the $2.3 billion threshold for state involvement. Based on the windpool's models, though, a strong Category 3 storm hitting Galveston would cost the state's general revenue fund $1.3 billion. A Katrina-level storm, equivalent to a Category 4 hitting Galveston, would set back the state fund as much as $3.7 billion.
The money lost from such a storm would force the state to raise taxes unless financing was cut to services such as education or Medicaid, said University of Houston professor Seth Chandler, a specialist in insurance law.
Simultaneously, the state would have to spend hundreds of millions to billions of dollars on reconstruction, increasing expenses and potentially inflating taxes even further, he said.
For Texans across the state, the resulting tax increases would coincide with skyrocketing insurance premiums as insurance companies scrambled to front billions of dollars in policy payouts, Chandler said. Some smaller insurance companies might be unable to come up with the money and declare bankruptcy, Chandler said, but the industrywide collapse that some legislators have warned of would be unlikely.
The problems have been hotly debated in the Legislature, but bills proposed by Smithee in 2005 and 2007 that would have shifted the financial burden off the state did not pass.
State Sen. Mike Jackson, R-La Porte, who threatened to filibuster Smithee's bill in 2007, said that legislators agreed that the state windpool's financing plan needed to be changed but that disagreements over how much of the financial burden coastal residents should be responsible for ultimately derailed the bill.
Other states have not found perfect fixes, Chandler said. Louisiana's windpool, which like Florida's puts the monetary burden on policyholders rather than the state, was left with a $954 million deficit after Hurricane Katrina. The state announced that windpool policyholders could see surcharges of up to 20 percent - on top of regular premium increases - until the deficit is paid off. In Florida, all homeowners insurance policyholders are still paying surcharges of 4 percent to 5 percent for windpool losses from the 2004 and 2005 hurricane seasons.
Hurdles aside, it seems likely that the windpool's problems will be revisited in the next legislative session in January, especially as the Texas Department of Insurance, which oversees the windpool, comes under scheduled legislative review. A preliminary report from the Sunset Advisory Commission, which conducts the periodic reviews, recommended last month that the Insurance Department reduce its oversight of the windpool, giving the windpool freedom to raise premiums to offset its rising liabilities. But those recommendations have been criticized by legislators and nonprofit groups who say that rate increases high enough to cover the windpool's liabilities would be unfair to consumers.
Meanwhile, in Galveston, where more than 20 percent of residents live below the poverty line , residents are scrambling for solutions. Though some people have complained that the state is simply subsidizing insurance for millionaires who decide to build second homes in hurricane-prone areas such as Galveston, Zapp can easily tick off the stories of locals who lead much less extravagant lives - the high school classmate who couldn't afford to insure his house, the "little old lady" whose income and insurance disappeared when her husband died.
"They call it anecdotal," Zapp said. "But, boy, is it real."
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