Despite pleas from officials and policyholders in Texas Gulf Coast communities, the board of the state’s insurer of last resort for wind along the coast has decided not to assess its member insurance companies for losses resulting from Hurricane Ike.
However, at its Aug. 13 meeting in Galveston, the board of the Texas Windstorm Insurance Association left open the possibility of future assessments.
The company was created by a legislative mandate but is not necessarily “backed” by the state. It was a fairly low-key and stable entity until Ike hit near Galveston in 2008 and subsequently drained TWIA of its financial resources through damage claims, expenses and litigation related to the hurricane.
As of June 30, 2013, the estimated ultimate net loss to TWIA associated with Hurricane Ike is $2.675 billion dollars, according to Mike Perkins, general counsel for the association.
“Of that amount, $1.3 billion was paid by reinsurance, $430 million was paid through member company assessments and $370 million was paid [from] funds in the catastrophe reserve trust fund (CRTF),” Perkins said during the board meeting. “The remainder of the association’s ultimate net loss from Hurricane Ike, approximately $575 million has been paid or reserved from the association’s premium revenue and its investment income that has been earned or collected during the five years since Hurricane Ike struck.”
Under the statute that was in place in 2008, TWIA had the ability to assess insurance companies for an unlimited amount if it depleted all its other resources for paying policyholder claims. By the end of 2008, however, TWIA estimated that it had enough funds to pay claims resulting from both Hurricane Ike and Hurricane Dolly, a smaller storm that also hit the Texas coast in 2008.
That was before the association was inundated with several large class-action lawsuits over its handling of Ike claims. The costs of those lawsuits ran into the hundreds of millions of dollars and forced TWIA into a precarious financial situation.
In 2011 TWIA was placed under the supervision of the Texas Department of Insurance.
Fearing that the association won’t have enough money to pay its claims should an Ike-like hurricane hit the Texas coast this year or next, coastal authorities and policyholders want TWIA to exercise its rights under the law that was in place in 2008 and assess the association’s insurance company members for additional millions of dollars.
Whether the association has legal authority to do that is not clear, however. In 2009, the state Legislature changed the statute that addressed funding for TWIA from one that was backed by the state in the form of premium tax credits to those companies that have may have been assessed for TWIA losses to a tiered funding schedule based on the issuance of Class 1, 2 and 3 catastrophe bonds.
Speaking at the Aug. 13 board meeting, state Rep. Craig Eiland, whose district encompasses Galveston and the Bolivar Peninsula, both of which were devastated by Hurricane Ike, urged the board to go ahead and assess the industry.
“You know what the total assessment needs to be if there’s going to be one. If you do assess then the insurance industry, I believe, will file suit to challenge whether or not you have the right to assess under the law,” Eiland said. “They need to do that … because most of the companies, as I understand it … have reinsurance that cover their assessment for Ike and Dolly. Therefore the reinsurance companies are going to want to know and make them prove that it is a valid legal assessment. … If you don’t assess then I believe there are policyholders along the coast are going to come and file suit, as well, to say you’ve got to assess.”
Eiland said that testing the assessments through the judicial process would be a way to get clarity on the matter.
Foster Edwards, president and CEO of the Corpus Christi Chamber of Commerce, also spoke in favor of insurer assessments in order to boost TWIA’s financial condition.
“I suspect you’re going to vote some sort of a rate increase on the policyholders,” Edwards told the TWIA board. “You’re going to assess the policyholders and when you assess the policyholders you’re going to get a little more money. But the members need to be assessed.”
One insurance industry advocate countered that since claims from Hurricane Ike have either been paid or money has been reserved for payment assessments on insurers are unnecessary.
“As far as the insurance companies know the Ike claims have been paid and there is sufficient cash rolling through TWIA to pay the claims,” said Beaman Floyd, representing Texas Coalition for Insurance Solutions – a group of large insurance companies that operate in the state. “Since the statute allows you to turn to available revenue we think that is a significant consideration for you.”
A Lack of Clarity
Uncertainty over whether the board has legal authority to pursue assessments on insurers for Ike losses at this time, rather than an unwillingness to do so seemed to be prevailing reason why the motion to assess did not garner enough votes to pass. Four board members voted to assess, four voted against the motion to assess insurance companies $575 million for Ike losses, and one abstained.
Perkins summed up the situation in advance of the vote, saying: “Although there is legal basis to support continuing authority to assess the members for losses incurred prior to the repeal of the law, such authority is not clear. [Former] Commissioner Mike Geeslin and [former] Commissioner Eleanor Kitzman expressed differing positions on the issue of whether the association should seek to assess the member insurers for additional Ike losses.”
Several board members expressed the opinion that it would be better to wait until Attorney General Greg Abbotts responds to a request for an opinion as to whether the board has the capacity to act under the 2008 law.
Board Treasurer Alice Gannon, who abstained from the vote, said she would welcome the addition of $575 million to bolster TWIA’s financial position. However, Gannon said, “I feel strongly that there is a serious question as to whether the old law applies and to vote for an assessment now could put this board into the position of taking illegal action, which I can’t support.”
Although the board voted not to asses at this time, the proposal is not necessarily off the table.
In a prepared statement read after the board’s vote, Perkins said the “board takes very seriously the liquidity and funding challenges facing TWIA. The board is committed to take all action board members believe to be fiscally prudent and clearly legally authorized to protect the association and its policyholders and its ability to timely pay policy claims and association expenses.”
The option to act on assessments would remain open, Perkins said, if relevant developments, such as a major storm or the attorney general’s opinion, make it seem prudent to do so.