U.S. national think tank The Heartland Institute has published a report outlining the problems and potential solutions with the insurance environment in Texas. The Texas Windstorm Insurance Association (TWIA) has been under increasing pressure to reform lately. In 2010 it was found that the association could not cover the costs of a major hurricane and that its reserves were seriously lacking.
Calls for reform of state level and national disaster plans have been growing over the last few years with concerns that in the event of disaster the only way the disaster plan could recover would be to levy huge tax increases on citizens to cover losses. That has caused much discussion in regulatory and legislative circles, much of which has discussed ways to allow the private reinsurance and risk transfer markets back into the state plans to provide the ultimate reinsurance back up. It’s a similar debate to the one ongoing about the National Flood Insurance Program (which we wrote about recently here) which is now likely to be reformed.
The Heartland Institutes report details four problems with the Texas insurance environment and four solutions it feels can help.
The four problems they highlight are:
- The TWIA management and structure
- TWIA would cost taxpayers billions
- Private insurers do not want to write insurance in Texas
- Texas properties are not secure enough against storms
The four solutions they propose are:
- Clarify TWIA’s legal status as a hybrid entity and create a new office within the Texas Department of Insurance specifically intended to oversee TWIA and the related Texas FAIR Plan Association
- Protect taxpayers by requiring TWIA to have sufficient resources to cover two back-to-back events with a combination of cash and private-sector-recognized risk-transfer instruments
- Improve market competition by reforming rate regulation and Texas’s insurance regulatory bureaucracy, modifying non-renewal laws, and improving the provision of information to consumers
- Promote coastal conservation and safety by restricting subsidies for coastal development and, to the extent practicable, helping people of modest means to retrofit their homes.
As you can see, the proposal is fairly rounded and seeks to address many of the key issues which hold Texas back from having a functioning private market and a decent level of risk transfer.
We’ve highlighted the pertinent proposed solution which deals with increasing the level of reinsurance and risk transfer the TWIA has in place. The Heartland Institute says that state lawmakers have an obligation to do everything they can to mitigate the risks that the TWIA poses to the state’s taxpayers. One reform they call for in this respect is to help expedite any requests for rate rises and allow the TWIA and private insurers to raise rates to reflect the actual risks of disaster. This is a real problem in Texas at the moment and one which hinders the private market as they cannot operate in an environment where rates do not reflect the true risks.
Their second recommendation is to require that the TWIA purchase risk transfer products such as reinsurance and catastrophe bonds sufficient to pay at least $8 billion in claims. The TWIA should be allowed to define the exact mix of risk transfer instruments but they should be held to the same standards that a private sector firm would be.
Two important changes would occur if the TWIA had to buy $8 billion worth of cover in either cat bonds or reinsurance. One, it would force them to put up rates which would in turn allow private insurers to compete more in the Texan market. Two, it would save taxpayers from a financial burden of increased taxes once an event has happened as the TWIA would be able to pay its own claims.
The proposals put forward by the Heartland Institute seem sound and make a good starting point for discussion of reform. It appears increasingly likely that catastrophe bonds will end up playing a part in much of the state level or national disaster plans in the future as the plans seek to take the burden off the taxpayer and place it in the capital markets and with reinsurers.
The full report can be downloaded here.