Insuring the coast is a job for the free market
“At the moment, they have essentially nothing in the pigg y bank.” Seth Chandler, University of Houston Law Center, on TWIA’s financial state
Sea breezes, ocean views and long walks on the beach: The allure of the Texas coast is unmistakable.
The expectation that inland Texans should subsidize coastal homes and businesses with cheap wind insurance, though, is a huge mistake.
Coastal residents are up in arms over the governmentsponsored Texas Windstorm Insurance Association raising premiums 10 percent next year. The bigger concern should be why a conservative state like Texas has a public insurer subsidizing a risky behavior, like owning property in a tropical storm corridor.
Texas set up the quasi-governmental insurer and authorized it to collect as much as $1 billion from private insurance companies so it can offer cheap premiums on 213,278 properties in 14 coastal counties and part of Harris County. Rather than pay higher premiums, folks on the coast want policyholders elsewhere in the state to pay higher premiums instead.
The Texas Windstorm Insurance Association, originally known as the Texas Catastrophe Property Insurance Association, was established after Hurricane Celia made landfall near Port Aransas in 1970 and caused $930 million in damage. The storm forced private insurers to reconsider coverage, and many chose to get out of the market.
Real estate developers and local authorities, though, wanted more construction and more people living along the coast. Private insurers charging actuarially sound premiums would have slowed that down, so the Texas Legislature set up the association best known as TWIA (TWEE-ah).
To qualify for discounted
TWIA coverage, at least one private insurer must have refused to insure a property, which usually means it is very high risk. That’s why TWIA calls itself the insurer of last resort. It is also why TWIA is broke.
Politics have always plagued TWIA, and in 2011 the Texas Department of Insurance took control after discovering widespread mismanagement. Thousands of policyholders sued the association for failing to properly pay tens of millions in claims related to Hurricane Ike, and many of those claims are still pending.
Hurricane Harvey has cost TWIA at least $1.1 billion do far, draining the insurer of its cash reserves and leaving it to rely on expensive catastrophe bonds and reinsurance to pay future claims.
“At the moment, they have essentially nothing in the piggy bank. They are operating an insurance company that has negligible reserves,” Seth Chandler, an expert on insurance at the University of Houston Law Center, told me. “If they are ever going to be anything close to self-sustaining, they need more revenue.”
Policyholders are upset over the 10 percent premium hike, but outside actuaries told TWIA’s board it needs to raise rates at least 32 percent to be fiscally sound. But TWIA can’t charge the appropriate premium because residents put pressure on coastal lawmakers to keep rates low.
“The root problem of TWIA is a political one, which is the deliberate blindness of some Texas legislators to the actual risks posed by development along the Texas coast,” Chandler said. “It is particularly galling because it is free market Republican legislators who are suddenly the big advocates of moving to a government-subsidy scheme.”
State Rep. Todd Hunter, a Corpus Christi Republican, has not only overseen TWIA as a member of the House Insurance Committee, but he’s also worked for the association as a lobbyist in Austin and a consultant on lawsuits. After TWIA announced the premium hike last month, he was on the streets protesting the move alongside seven Coastal Bend chambers of commerce.
“I’m saying no,” he shouts in a video from KRIS-TV. “They’re trying to rush the rate hike faster than they’re paying their claims, and that’s wrong.”
He may be right. Policyholders are filing dozens of lawsuits against TWIA for denying claims related to Harvey. But it was the Texas Legislature that set up the association and then kept it undercapitalized by simultaneously fighting higher premiums on residents and higher assessments on insurance companies.
J.M. Lozano, a Republican state representative from Portland, attended the same protest but proposed a better idea: abolish TWIA.
“Let us have a choice to choose our own insurance carrier,” Lozano said. “In the end, in the free market economy, competition is best.”
Florida, Louisiana and other coastal states have been steadily cutting out their public insurers in recent years and moving customers to private insurance.
Yes, rates went up, but higher premiums encourage responsible behavior, such as constructing buildings capable of withstanding powerful storms. Florida’s stricter building codes also helped bring private insurers back into the market because they lowered the risk, Chandler said.
Some of the structures TWIA covers probably shouldn’t qualify for insurance. Whenever government subsidizes insurance, it encourages risky behavior.
Many an afternoon I daydream about having a place near the beach, with a small sailboat docked nearby. But if that fantasy ever became a reality, I would not expect a homeowner in San Antonio to subsidize my insurance premiums. And nor should anyone else.