Reaping the wind will be the responsibility of insurers

By Sandra Helin | February 26, 2007

There seem to be many questions on the minds of consumers, agents and public policy makers about coastal insurance issues presently and in the future. As an industry, we have been forthright about insurance issues facing coastal residents and people living in every region of Texas.

The Texas Windstorm Insurance Association (TWIA) is seeking solutions so they will have enough money to pay claims when, not if, a hurricane strikes the Texas coast and thus not compromise the state’s General Revenue Fund.

TWIA is rapidly becoming the market of first choice for consumers and not the market of last resort as it was intended to be when it was formed. For example, TWIA has $45.5 billion in exposure along the coast as of Jan. 31, 2007. The number of structures insured by TWIA is growing dramatically each month. Between Dec. 31, 2006, and Jan. 31, 2007, the exposure in TWIA grew $2 billion.

TWIA’s exposure in Galveston County alone as of Jan. 31, 2007, was $14.6 billion.

Those private insurers who have stopped or restricted writing wind coverage in areas of Texas where a hurricane could make landfall have done so for good reasons.

The most significant reason and best explanation is an insurer must have a rate sufficient to cover the loss. That has not been the case in Texas. Insurance regulators have simply not connected the dots and provided incentives for private insurers sufficient to prompt them to write wind coverage along the Gulf coast.

Projecting the exact cost of a hurricane is difficult for insurers. In addition, it will be complicated to determine what damage is caused by wind and what is caused by flooding. Resources, both human and financial, will likely be needed to address this issue.

The cost of Hurricane Katrina to insurers in the states of Louisiana, Mississippi and Alabama will be about $40.6 billion, making it the worst weather-related natural disaster in the history of this country. The National Flood Insurance Program estimates they will pay out $15.4 billion in claims in Louisiana, Mississippi and Alabama due to flooding.

The fact that the insurance industry will report profits in 2006 is indeed significant, but not for the reasons industry critics suggest. Homeowners insurance claim payments resulting from the 2005 hurricanes in Louisiana equaled all homeowners premiums paid in the state during the past 25 years, as well as every dollar of homeowners insurance profits ever earned there. Clearly, insurance companies must have sustained long-term profitability in order to build the financial capacity needed to pay claims for the next Andrew, Katrina or Rita.

A hurricane the size and strength of Katrina striking Galveston is projected to cost the Texas Windstorm Insurance Association, the largest writer of wind coverage in Galveston, $4-$6 billion. Under the current funding structure, they have $1.04 billion to pay claims. Those figures do not contemplate a scenario where Texas is hit by multiple hurricanes in various coastal cities.

Dr. William Gray of Colorado State University predicts 14 named storms for 2007 and a 40 percent chance of one making landfall anywhere from the Gulf Coast of the Florida Panhandle to Brownsville, Texas.

Most insurers in Texas are financially strong, but some companies have publicly admitted that a major hurricane striking Galveston could result in insolvency or a dramatically restricted ability to write more homeowners business in Texas. That would leave consumers in a market where the availability of insurance at any price would be severely restricted.

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Insurance Journal West February 26, 2007
February 26, 2007
Insurance Journal West Magazine

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