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Ryan Brannan
Texas Public Policy Foundation
Is Texas prepared for one of the most active hurricane seasons on record?
The recent landfall of Hurricane Alex – the first named storm of the season – may lend credence to the seasonal outlook issued prior to hurricane season by the National Oceanic and Atmospheric Administration’s Climate Prediction Center. The outlook called for an “active to extremely active” hurricane season is expected for the Atlantic Basin, with as many as seven major hurricanes. As NOAA’s Jane Luchenco says, “If this outlook holds true, this season could be one of the more active on record.”
A major hurricane blowing through Texas this year would likely leave consumers with few choices and high rates in an insurance market still recovering from Hurricane Ike. Although it is easy to put the blame on the insurers, they have been hit hard too. The past two years have seen the insurance providers suffer major losses.
According to loss ratio data from the Texas Department of Insurance, insurers paid out about $1.02 in claims and expenses for every dollar in premiums collected last year, and $1.76 the year before. For the last two years, insurers have been paying out more than they have been taking in.
As a result, it is not surprising that some insurers have been retreating from the coast in an effort to limit their exposure. Since Hurricane Ike, 23 companies filed to partially or completely withdraw from the Texas market, according to the insurance department. The insurers have pointed to the current regulatory environment for preventing them from charging the rates they need to stay in business.
Unfortunately, the establishment of Texas’ state-run windstorm insurance program has only exacerbated the problem. Set up to be the state’s windstorm insurer of last resort, the Texas Windstorm Insurance Association (TWIA) has morphed beyond that, due to laws that require it to offer actuarially unsound rates.
As a result, the number of TWIA policyholders has reached 220,552 – up from 68,756 in 2001. TWIA’s total exposure to potential claims has climbed to $71 billion.
This has created a scenario whereby rates do not adequately fund risk exposure. In the face of this rapid growth rate, TWIA member assessments and the Catastrophe Reserve Trust Fund can only cover about $2.3 billion of losses, much less than the potential losses from major hurricanes. In case of a major storm, the state legislature would have to convene for a special session to find a way to cover that amount of loss.
The statutory scheme over windstorm insurance has led to the displacement of private insurers and a subsequent large increase in risk to taxpayers, who would be on the hook in the case of a major storm.
Reforms in the last legislative session made progress, but didn’t do enough – they are really a leaky Band-Aid that has left TWIA’s hands still tied when it comes to charging rates that ensures it can pay its claims.
A large, diverse group of policy holders is what spreads the risks and minimizes costs, keeping prices competitive and low. Yet TWIA cannot diversify its policyholders or its risk – it can only write windstorm insurance to people who live along the Texas coast.
If TWIA returns to its original intent of serving the market as a provider of last resort, instead of today’s first and “best” option, insurers would begin writing again on the Texas coastal market – or face the wrath of coastal policymakers. With the market’s return, coastal residents will see competitive prices and a solvent insurance market able to cover homeowners in the case of another major storm. While this must be done, it can’t be accomplished in the short run. The only hope we have for this summer is that the experts are wrong in their predictions.
Ryan Brannan is an economic freedom policy analyst at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.
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