Opinion-Editorial: "Ensure protections for Texas"

Austin American Statesman
By Beaman Floyd
June 29, 2007

With hurricane season underway, the potential danger for Texas and its 367-mile shoreline is never far from mind. Hurricanes Katrina and Rita's ferocious winds affected not only coastal areas, but budgets, lives and businesses across the state.

The Texas Windstorm Insurance Association (TWIA) - backed by public and private funding - provides Texas' coastal residents and businesses with wind and hail coverage when it is not available in the private marketplace. By now, many Texans have heard that TWIA is woefully underfunded.

The state-created fund, originally intended as an insurer of last resort for coastal properties, has the capacity to fund $1.03 billion in insured losses. However, a worst-case scenario for a catastrophic storm traveling up the Houston Ship Channel could result in losses of $8 billion to $10 billion.

Some people on the coast say a storm that depleted all of TWIA's funding wouldn't be so bad, because the association's funding structure calls for unlimited assessments of funding - or fees - to be taken from insurance companies across the state to make up for the shortcomings.

Sounds great, right? Not so fast.

First, insurance companies will have to come up with cash up front to pay the assessments levied by TWIA while also trying to pay the claims of their own customers.

Assessments by TWIA could bankrupt many companies just when their customers need them most. Such bankruptcies are terribly costly to policyholders, other insurers and the state.

When an insurance company becomes insolvent, the responsibility of paying its assessment is shared among the surviving companies, which hurts their ability to pay their customers' claims.

Second, Texas law provides that the insurance companies will recoup the assessments from premium tax credits against the state's general-revenue fund.

In 2005, property and casualty insurance companies paid $472 million in premium taxes. That's almost $500 million a year out of the state's general fund, year after year, until the assessment is repaid.

Since procedural wrangling at the end of the legislative session killed a proposal to fix TWIA, the TWIA board is considering measures to prop up TWIA and protect Texans and the general revenue of the state.

Recently, the board voted to authorize the purchase of reinsurance to protect the Texas coast in the event of a natural disaster. The board is right to recommend reinsurance because it's the only thing that stands between a major hurricane and the general revenue of Texas. Critics of the move seem to be guided by a strategy of simply hoping a hurricane won't strike Texas.

The board similarly purchased reinsurance in 2006 to be prepared for a storm in which the probable maximum loss was $1 billion. This year, the board is trying to ensure that TWIA is prepared for such a storm by purchasing even more reinsurance because, with continued development in coastal areas, the probable maximum loss has doubled.

Though TWIA is authorizing more funds for reinsurance this year, the per unit cost of reinsurance is actually lower than it was in 2006. So, though the board intends to spend more for the increased coverage, reinsurance is less expensive than it was last year.

With two hurricane seasons facing us before the next regular session of the Legislature, the TWIA board is smart to recommend reinsurance - the only option standing between a major hurricane and a major hit on Texas' budget or taxpayers.

Beaman Floyd is executive director of Texas Coalition for Affordable Insurance Solutions.