Windstorm Insurance Bill Stirs Lively Debate in Texas House

Differences of opinion on the never-ending problem of what to do about property insurance along the coast had lawmakers from coastal areas pitted against inland representatives in the waning days of the Texas legislative session.

Sides were drawn in a House debate over Senate Bill 900, which is yet another tweaking of the Texas Windstorm Insurance Association (TWIA), the state-created insurance carrier of last resort for wind and hail for properties in Texas coastal counties.

Some of the feistiest debate in the House came as Rep. John Smithee, R-Amarillo, chair of the House Judiciary and Civil Jurisprudence Committee and former chair of the Insurance Committee, laid out several amendments to the bill.

SB 900 allows for an assessment on property insurers operating in the state of up to $1 billion (in different stages) in the event that TWIA runs out of funds from other sources to pay bills. Insurers would be prohibited from recouping those assessments through a premium surcharge or tax credit.

Smithee has been highly critical of attempts to pass on to statewide policyholders any excess costs for claims resulting from a coastal weather event. He said an assessment on insurers would amount to tax on policyholders because insurers would pass the cost onto policyholders statewide in the form of higher premiums.

That would put policyholders who could least afford it “in the position of having to subsidize literally multi-million dollar beach houses. We’re going to have people living below the poverty level having to subsidize so that people that live in beach houses don’t have to pay an actuarial rate for their insurance,” Smithee said during debate in the House on May 24.

“This is a $1 billion tax bill on insurance companies in Texas but insurance companies never pay the tax bill. They simply pass it on to their constituents inland. … We have approximately 660 million homeowner policies in Texas. If you divide that out that’s about $150 per policy,” he said.

Smithee said he’d rather see TWIA policyholders pay the cost of fully funding the association through actuarially sound rates.

He also took issue with the amount of commission that TWIA pays to agents, saying it is too high and discourages agents from seeking to place coverage along the coast with private carriers.

“We incentivize agents to go to TWIA because we pay 16 percent to agents to put a policy into TWIA and usually only 10 to 12 percent to put a policy with a private carrier. An agent has no incentive whatsoever to write private insurance,” Smithee said.

Rep. Greg Bonnen of League City, who sponsored SB 900 in the House, said Smithee’s comments were “somewhat misleading.”

The $1 billion in assessments Smithee referred to is not new funding, Bonnen said. It replaces a layer of funding that allowed for $800 million in bonds and actually ends up costing less than the bonds, he said.

“When you sell bonds there’s an expense associated with that. When you pay them back you pay the interest on the bonds. The expense in total is more than a billion dollars. When we go from $800 million in bonds to $1 billion in cash assessments we actually reduce the expense to the state … to policyholders,” he said.

Taking isssue with Smithee’s assertion that insurer assessments would amount to a $150 increase in premium payments per policyholder, Bonnen said that in testimony before the House Insurance Committee the question was put to a representative of the American Insurance Association: ‘”What would it cost the policyholders of this state?’ The answer was $5, $10, maybe $15 a year. That was the sworn testimony.”

Smithee’s amendments, including one that would have required insurers to tell policyholders what any TWIA related surcharges are for and one that would have required TWIA to charge actuarially sound rates, were ultimately tabled.

But Smithee’s remarks were regarded by many coastal lawmakers as not only divisive but attacks on coastal residents themselves.

“In reality we’re talking about very small homes all along the coastal area that need this coverage. … Dividing Texans up whenever there are times of disasters that’s not the way historically we’ve done things. … In fact what we have done is stood together as Texans and helped each other,” said Rep. René Oliveira, D-Brownsville.

Other Provisions

In addition to tweaking the way TWIA will be funded in the future, the bill also:

Calls for the Texas Department of Insurance to conduct a study of market incentives to promote more participation among private insurers in providing wind and hail insurance in seacoast areas.
Allows the insurance commissioner to contract with a third-party administrator to manage the association if the commissioner deems that to be in the best interest of policyholders and the state at large.
Changes the makeup of TWIA’s nine-member board of directors.
- Three of the members must be representatives of the insurance industry who actively write and renew windstorm and hail insurance in the first tier coastal counties.
- Three members must reside in first tier coastal counties — one from each of three coastal regions described in the bill. One of the coastal resident members is to be a licensed property and casualty agent who is not a captive agent.
- The three remaining members must reside in a part of the state located more than 100 miles from the Texas coastline.

“All members must have demonstrated experience in insurance, general business, or actuarial principles and the member’s area of expertise, if any, sufficient to make the success of the association probable,” the bill states.

The bill authored by Sen. Larry Taylor, R-Friendswood, was passed by both the House and the Senate and sent to Gov. Greg Abbot for his signature.

An original provision that would have changed the association’s name to the Texas Coastal Insurance Association was struck by the House. That change was approved by the Senate.

Financial Improvement

Financially, TWIA is in the best shape it has been in years. At the beginning of June, TWIA said its funding level is healthy enough cover a 100-year storm, with $4.88 billion in total funds available to pay claims this year.

Available funds include the current year’s premiums, the $480 million Catastrophe Reserve Trust Fund (CRTF), up to $2 billion in public securities authorized by statute, and a $2.3 billion reinsurance program in which both traditional reinsurance and catastrophe bonds play a part, according to TWIA.

The CRTF is the first funding source to be used dedicated to pay insured losses, after premiums, and all net gains from TWIA operations must be transferred into the fund annually. In March, the association transferred $262.7 million leftover from 2014 operations into the CRTF.