Going into the peak time of the year for hurricane development, Texas’ property insurance company of last resort in coastal areas has around $800 million in available cash to immediately handle claims in the event a storm hits the state’s coastline.
With approximately $300 million on hand from a combination of its catastrophe trust fund and premium revenue, the Texas Windstorm Insurance Association recently negotiated a way to make an additional $500 million available to pay claims, its top manager said.
Through “a very unique process and a very difficult process,” TWIA “successfully secured $500 million in financing through what is known as a bond anticipation note,” General Manager John Polak told members and attendees at a meeting of the association’s board in Galveston on Aug. 7.
Polak explained that the bond anticipation note will have “no impact on either current or future rates. … [It is] simply a function of using current funding to secure an interim type of financing, if you will.”
Commenting on the new funding source, Texas Insurance Commissioner Eleanor Kitzman also stressed that “no rate changes, no rate increases would be needed for purposes of this debt.”
Kitzman told the board that while TWIA has limited funding capability, with all the resources it could tap into it is possible the association would be able to generate around $4 billion this year if the need arose.
“Between the catastrophe reserve trust fund, the cash on hand and the $500 million note, there’s about $800 million of cash on hand if there’s a storm this season,” Kitzman said. “TWIA then has up to $2.5 billion of maximum bonding capacity. Then there’s $850 million of reinsurance on top of that. If all of that were available to TWIA, there’s a little over $4 billion.”
She clarified, however, that “the $2.5 billion in bonding is post-event, meaning we can’t even go to market until after the storm. It’s going to take time for that cash to be available to TWIA.”
Additionally, the $850 million in reinsurance won’t attach until claims reach $2.3 billion.
“The concern is there are certain scenarios in which TWIA may not have sufficient funding to pay all claims in a full and timely manner,” Kitzman said. “It’s not just one big event that could cause a problem. Probably the more problematic situation would be multiple smaller events that would deplete the cash on hand, the bonding, but never hit the reinsurance attachment point. That’s not to say that some other arrangements could not be made and claims could not be paid but there would be at a minimum a timing issue.”
Kitzman challenged the board to develop a contingency plan to deal with a potential funding gap should claims exceed the $800 million currently available to pay them.
“The contingency plan needs to deal with what you do when there is a shortfall between whatever funding is available and the amount of claims that you think you will have,” Kitzman told the board. “Whatever funding, reinsurance that may happen later is a separate issue, but the overriding purpose of the contingency plan is just how you deal with a potential shortfall.”
In relation to the $800 million “cash on hand,” the plan should be a guideline for how TWIA administrators “will disperse those funds in a fair and equitable manner without discriminating amongst policyholders when they are not able to pay all policyholders’ claims in full immediately,” she said.
While both Kitzman and Polak said the recent bond anticipation note will not impact premium rates for customers, Kitzman has previously stated TWIA’s current structure is not sustainable and that its rates are insufficient.
State Rep. John Smithee, who represents the Amarillo area and is chairman of the House Insurance Committee, wrote to Kitzman earlier this year, expressing concerns over TWIA’s ability to pay claims should a massive hurricane hit heavily populated coastal areas
One legislator from a coastal county, however, said the funding mechanism the legislature approved in 2009 was never intended to cover claims from “a storm that had never happened and probably would never happen.”
At the Aug. 7 board meeting, State Rep. Craig Eiland, of Galveston, reminded the board and meeting attendees that TWIA is in fact funded for a 98.6 percent probability of storms hitting the state’s coastline.
“TWIA is funded up to I think $4 billion,” Eiland noted. “The largest storm ever that hit the coast of Texas, Hurricane Ike, is going to end up being $2.5 (billion), $2.8 (billion), something like that. So there’s a realization that at some point it doesn’t make sense to try to fund the unknown storm that probably will never happen. …
“Before we disturb our business market and concern our mortgage companies and our real estate agents and our bankers, we need to make sure we take a breath and say: We are funded on all actuarial accounts to pay for 98.6 probability of a storm that will hit Texas. That is better than our teacher retirement system is funded. That is better than our employee retirement system is funded.”
Eiland acknowledged that there are issues that need to be addressed with TWIA. However, when “this particular funding mechanism was put in place it was recognized: If a storm hits Texas that is 25 percent bigger than Hurricane Ike, the legislature and the governor would respond and the people of Texas would respond,” he said. “We don’t need to go out and tax the coast for unknown and unlimited potential storms that have a 1.4 percent chance of happening.”
TWIA has been under intense regulatory and legislative scrutiny since 2008’s Hurricane Ike wiped out the association’s reserves. A firestorm of litigation ensued over TWIA’s claims handling. Some of that litigation is ongoing. The organization was placed under administrative oversight of the Texas Department of Insurance last year.