New Texas Windstorm Rules Establish Method for Issuing Bonds

May 29, 2014

New rules posted by Texas insurance regulators on May 23 implement a process by which bonds may be issued on behalf of the state’s wind insurer of last resort for properties along the Texas coast.

The Texas Department of Insurance (TDI) issued final rules to update existing loss funding and premium surcharge rules for the Texas Windstorm Insurance Association (TWIA). The rules establish a mechanism for the Texas Public Finance Authority to issue bonds for TWIA in the event a catastrophic storm depletes the association’s available funds.

TWIA was created by the Texas Legislature in 1971 to provide windstorm and hail coverage to coastal residents who are unable to obtain insurance from the voluntary insurance market.

“The purpose of these rules is to implement the legislation that created an orderly process for issuing bonds and paying back those bonds,” Commissioner of Insurance Julia Rathgeber said in the announcement released by TDI. “This process is critical after a storm or event. Lenders need the certainty that these rules will provide, and coastal residents need the certainty that in the event of a storm, there will be adequate funds to pay insurance claims.”

TDI previously adopted loss funding and premium surcharge rules to implement HB 4409, 81st Legislature (2009), which established TWIA’s current funding structure.

Since 2009, the insurance code has required TWIA to issue bonds to provide additional money to pay claims if TWIA premium revenues, other revenues and the catastrophe reserve trust fund are insufficient.

As of March 31, 2014, the balance in the balance in the TWIA catastrophe reserve trust fund was $187, 496, 633.03, according to TDI’s Texas Windstorm Insurance Association Overview published on April 28, 2014.

HB 3 in 2011 amended TWIA’s loss funding by authorizing the issuance of pre-event class 1 bonds, establishing an alternative to issue post-event class 2 and 3 bonds if the fully authorized amount of class 1 bonds cannot be issued, and specifying the lines of insurance that are subject to a premium surcharge used to pay back class 2 bonds.

Surcharges would only apply in the event that class 2 bonds are needed to pay claims after a storm.

TDI’s goal was to establish a formal process for bond issuance in time for the start of the 2014 hurricane season on June 1. On Oct. 14, 2013, TDI published informal draft rules for public comment on its website. A formal rule proposal was published in the Texas Register on Feb. 14, 2014, with a 25-day public comment period. In addition to written comments received, TDI heard public comment three hearings on the proposal: one in Beaumont; one in Austin; and one in Corpus Christi.

The insurance department received approximately 340 written and oral comments on the rule proposals from stakeholders, including hundreds of individuals along the coast who took the time to express their thoughts on TWIA and premium surcharges.

The final rules, to be submitted to the Texas Register for publication on June 6, 2014, are effective June 12, 2014.

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