Among the top recommendations made by a consulting firm hired by Texas insurance regulators to investigate and report on ways to restructure the state’s property insurer of last resort in coastal areas is to reduce agent commissions.
Alvarez & Marsal Insurance Advisory Services LLC (A&M) was retained in March 2012 by the Texas Department of Insurance to explore options for restructuring the Texas Windstorm Insurance Association (TWIA), which was placed under TDI’s administrative oversight in 2011.
Texas Insurance Commissioner Eleanor Kitzman previously has said that TWIA’s present structure is not sustainable. TDI’s request for proposal (RFP) issued in February sought assistance in identifying, evaluating and implementing restructuring options to reduce the exposure and improve service to policyholders.
“TWIA was supposed to be the market of last resort for the 14 coastal counties that comprise Tier 1, but that is not the case anymore,” Kitzman said when the RFP was issued. “In 2001, TWIA’s market share was 17.9 percent. In 2010, it had more than tripled to 57.2 percent and it continues to grow. … With no other significant source of funding to pay claims, this growth in exposure is an excessive burden on coastal citizens.”
A&M presented a number of high priority recommendations in its 108-page report, including restructuring the organization’s board to provide for more input by stakeholders and developing a formal depopulation plan. Perhaps the most controversial for agents, however, is the proposal to lower agent commissions.
A&M explained that its study revealed, among other things, that “TWIA’s high commission rates and strong agent relationships exasperate TWIA’s role as a carrier of last resort.”
It proposed lowering agent commissions to 10 percent for new business and 7 percent for renewals, in order to “reduce agent motivation to place business” in TWIA. Taking such action, the report said, would result in a reduction in TWIA’s overall exposure. Approval of TDI and TWIA management would be necessary to implement a lower commission structure.
The report also recommends “outsourcing underwriting, policy processing, and agency management” to a managing general agent. Such a step would not only reduce TWIA’s operating costs but would also reduce “exposure by utilizing MGA to attract and access new wind carriers and capacity,” according to the A&M report.
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