"Windstorm failure is bad for taxpayers"

The following is an excerpt from a May 31, 2007 Galveston County Daily News article.

By Laura Elder
May 31, 2007

Lawmakers' failure to shore up funding for a last-resort windstorm-insurance program puts all taxpayers on the hook should a catastrophic storm strike the Texas coast, insurers say.

After months of debate and untold amounts of lobbying money, groups came closer than ever to agreeing about reforming the Texas Windstorm Insurance Association; but, in the end, nothing changed.

Coastal lawmakers refused to support House Bill 2960, authored by Rep. John Smithee, R-Amarillo.

Compromise between the House and Senate versions of the bill appeared possible just days before the Legislature adjourned Monday.

Both versions of the bill would have boosted funding for the windstorm pool to the tune of $6 billion through increased premiums and bonds.

But coastal lawmakers and consumer advocates said the House version placed unacceptable burdens on coastal consumers.

Nevertheless, the 80th legislative session marked the first time that opposing interests have almost reached an accord on reform of the state's windstorm association.

"We were close, but no cigar," said Mark Hanna, spokesman for the Insurance Council of Texas.

"It's really an unfortunate occasion, to tell you the truth, because of all the hard work and effort and tremendous amounts of man hours put into trying to come up with a solution," Hanna said.

"I think everybody was looking forward to just having something on the books, some type of legislation passed. It just wouldn't happen."

Lee Otis Zapp Jr., of the consumer advocacy group Galveston Windstorm Action Committee, said agreed that having no funding solution for the windstorm association wasn't the desired outcome.

"But it's better than the last choice available," Zapp said.

Had Smithee accepted a Senate substitute version of his own bill, the issue would have been resolved. If blame is to go around, it should be directed at Smithee, Zapp said.

"He rejected it and he kind of cut off the last chance for a bill we thought was livable."

Most people involved agreed that the association, upon which more than 166,000 policyholders depend, needs more funding. The debate centered on who should bear the costs of the bonds.

Last week, a conference-committee of five senators and five representatives couldn't resolve their differences. Coastal lawmakers and conference committee members Rep. Craig Eiland, D-Galveston, Sen. Kyle Janek, R-Houston, Sen. Mike Jackson, R-La Porte and Rep. Larry Taylor, R-Friendswood, wouldn't sign off on a final version of the bill.

The windstorm pool has about $1.03 billion in funding.

If a major storm this season made a direct hit on a heavily-populated coastal city such as Galveston, the pool could be wiped out and all Texas taxpayers would have to shoulder some of the costs, the insurance industry and lawmakers have warned.

The pool's potential losses from a 100-year storm, one having a 1 percent chance of striking in any given year, are estimated at about $3.3 billion, according to the Texas Department of Insurance.

Garry Kaufman, a Galveston insurance agent on the windstorm association's governing board, said he had mixed emotions about the legislative outcome.

Along with needed funding sources, the House bill offered some incentives for more insurers to voluntarily write policies on the coast, of which Kaufman approved.

"To me, there's just no perfect bill," he said. "But this one was about as close as we were going to get for a while. Granted, there were some areas in the bill that could be concerning. Did they outweigh all the good things that needed to happen with this bill? I'm not sure."

As insurers stop voluntarily writing windstorm insurance on the Texas coast, more policies are being forced into the association pool, increasing its liability.

State officials expect its total exposure in 14 coastal counties to reach $65 billion by year's end. Building and contents in Galveston County alone is $15.5 billion, insurance industry officials say.

If the windstorm pool couldn't cover losses from its premiums and investment income, which together amount to about $45 million a year, the program would collect $100 million from its member companies, then tap into the $322 million Catastrophe Reserve Trust Fund.

If more money were needed, the pool would draw about $417 million from reinsurance. Then, another $200 million would be assessed to member insurers.

Once the insurance companies have paid their initial assessments, reserve funds have been depleted and all the reinsurance has been used, remaining losses would be paid at first by the insurance companies.

Industry insiders warn that those unlimited assessments would drive some small insurance companies out of business and inspire others to leave the market, leaving some policyholders uncovered if a second storm hit the same area.

Taxpayers would ultimately pick up the uncovered losses tab, insurers and lawmakers say, through the state's general revenue fund because the companies would receive premium tax credits for five years after paying out.

By not agreeing on a bill, lawmakers also left the make-up of the windstorm association's nine-member board unchanged.

Some lawmakers and consumer advocates had argued that the board's makeup gives insurance companies "working control" of the program.

Some also argue that the present method of selecting board members leaves the association's Catastrophic Reserve Trust Fund unnecessarily subject to federal taxation.

In states such as Louisiana and Florida, insurers of last resort are exempt from federal taxes.

But Texas' windstorm pool is neither a state organization nor a for-profit business. It pays federal taxes on its surplus, even though its profits are kept in reserve to pay off future losses.

For an exemption, the IRS requires that a statewide political authority such as the insurance commissioner or the governor appoint members.

But, for now, board members will continue to be selected by various state agencies and private industry.

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