TWIA to present Texas Legislature with a two-fold agenda

Unlike insurers of last resort in states like Louisiana and Florida, the Texas Windstorm Insurance Association does not enjoy federal tax-exempt status. TWIA’s Board of Directors and its Executive Director Jim Oliver want that to change. Along with creating a methodology for boosting the state’s catastrophe fund for windstorm losses along the Gulf Coast, TWIA hopes to convince state lawmakers in the spring special session to change legislatively the way the association staffs its Board in order to receive tax-exempt status from the Internal Revenue Service.

TWIA is the insurer of last resort for windstorm losses for homes and businesses along the Texas Gulf Coast. Oliver said it only makes sense for the association to be exempt from paying federal taxes on its surplus because its profits are kept in reserve to pay off future losses.

Currently, five of TWIA’s nine Board members are elected by insurance companies and the rest are appointed by the state insurance commissioner.

“The IRS requires that the board members be appointed by a statewide political authority, like the insurance commissioner,” Oliver told Insurance Journal. “So the insurance commissioner would need to appoint the board. And he can do so within certain parameters.”

The way it is now, Oliver said, the commissioner appoints the two agents and the two consumers on the Board but not the insurance company representatives. Even though TWIA is not a state agency, it is subject to some state oversight, so the IRS requires the legislature to change the rules so that the insurance commissioner would appoint all the members of the board.

Oliver pointed out the FAIR plan, which is managed by TWIA, received tax-exempt status beginning this year.

Growing the cat fund
The other issue the association wants the legislature to consider is that of increasing the surplus in the state’s catastrophe trust fund.

“Currently we have different ways to fund Texas windstorm losses–assessments of insurance companies, reinsurance and the catastrophe trust fund,” Oliver said. “The trust fund has about $310 million in it. It had about $340 million, a little more, but we used $35 million for Hurricane Rita.

“When you add together company assessments of $300 million and the current reinsurance purchase, which is $700 million, that gets you to a billion dollars. And then the trust fund, which is $300 million, that gets us to $1.3 billion in potential protection for a loss.”

Oliver said if more than $1.3 billion in losses occur, the insurance companies will still “be assessed, but they can recoup those assessments via premium tax credits on their premium taxes. So essentially what happens, over $1.3 billion the state general revenue fund will be short that amount of money, whatever it happens to be, over a five-year period. For example, if we had a loss of a half a billion dollars over $1.3 billion, then that would be spread over five years, and the companies would get tax credits, and the general revenue would be short $100 million a year for five years. It could have a material impact on the operating revenue for the state.”

He explained that all property and casualty insurers that write property insurance in Texas are subject to the assessments. Those companies that cover property along the coast would be hit directly in the event of a major storm, in addition to the assessments they have to pay as members of the windstorm pool.

“The big storm for us is the big storm for them–Galveston and Houston,” Oliver said. “They would be clobbered in Houston. At the same time they would have cash flow issues with regard to their own business we would be tapping them for cash to pay these losses. They do get reimbursed but they lose the time value of money. So there’s no question it’s a problem.”

Oliver said an effective way to increase the amount of surplus in the catastrophe trust fund is through the use of revenue bonds. He said TWIA has been working with the Texas Department of Insurance and the Texas Public Finance Authority to develop legislation that would provide for the ability to raise money through pre-event and post-event revenue bonds.

“Currently we’re working with TDI to develop a program to put $800 million in place … $300 million of pre-event and $500 million of post event bonds. That’s not sufficient for the long term, but it’s a good start,” Oliver said.

One question is how the bonds would be paid back if it is necessary to use them. He said it has been proposed that for pre-event bonds–the $300 million–only those in the areas served by TWIA, 14 counties along the Texas coast, would be assessed a surcharge on their property policies to pay back the bonds. That would amount to about 2 percent per $1,000 of premium per year, or around $20 per year.

If the $500 million in post-event bonds needed to be purchased, the assessment would have to be spread statewide. Oliver said this would “amount to a surcharge of somewhere around .35 to .37 percent depending on the premiums at the time … which means on a $1,000 base premium about $3.50 to $3.70 per $1,000 of coverage–not real significant but it would still be a surcharge.”

It is Oliver’s understanding that after the special session and before the next regular legislative session in 2007, the House and Senate will conduct an interim study of TWIA’s funding and other related issues to be addressed in 2007. One possibility that will be looked at is that of increasing “the post-event bonds perhaps to a billion or a billion and a half or two billion dollars, to gradually pull the general revenue fund off the hook,” he said.

Topics Catastrophe Carriers Texas Profit Loss