Bill Caption

Relating to the operation of the Texas Windstorm Insurance Association and the renaming of the Texas Windstorm Insurance Association as the Texas Coastal Insurance Association.

Fiscal Notes

No significant fiscal implication to the State is anticipated.

Bill Analysis

SB 900 would make changes to Chapter 2210 of the Insurance Code. Chapter 2210 concerns the Texas Windstorm Insurance Association (TWIA).

First, this legislation would rename the Texas Windstorm Insurance Association to the Texas Coastal Insurance Association (TCIA).

A new section in Chapter 2210 would require the Texas Department of Insurance (TDI) to conduct a study, each biennium, on the market incentives to promote participation in TCIA.

This bill allows the commissioner to contract with an administrator to manage TCIA.   

Losses due to a catastrophe would be paid through different funds and assessments. This legislation outlines the requirements for when each assessment and fund may be used to help pay for the losses.

A Class 1 member assessment pays when the catastrophe reserve trust fund (CRTF) cannot. Property Insurers are the members of TCIA and these members are assessed an amount that may not exceed $500 million for the year that the catastrophe occurs. The $500 million would be reapportioned to each member’s market share.  Additionally, these insurers would not be allowed to recoup the costs of the assessment through a premium surcharge or tax credit.  

These requirements for Class 1 member assessments also apply for Class 2 member assessments. Except Class 2 assessments may only be used when the CRTF, Class 1 assessments and Class 1 public securities are unable to pay on the catastrophic losses.

Class 1 public securities would be allowed to issue no more than $500 million in a catastrophe year, instead of $1 billion. This same amount and restriction would apply to Class 2 public securities.

SB 900 would change the composition of the nine members that make up the board of directors for TCIA:

• Three members would need to be representatives of the insurance industry and they must write windstorm insurance in the first tier coastal counties.

• Three members must reside in different first tier regions.

• One member must be a representative of an area that is not along the coastal area.

• One member must be an engineer who resides in a second tier coastal city and is knowledgeable about “wind-related design and construction practices.”

• One member must reside in a second tier coastal city and be a representative of the financial industry.

SB 900 clarifies that the CRTF may only be used for paying insured losses, which includes funding obligations and purchasing reinsurance or using alternative risk financing mechanisms.  In fact, Section 2210.453 would allow alternative risk financing mechanisms, while also making changes to when reinsurance may be implemented.

Lastly, SB 900 would repeal the following sections:

• Section 2210.074 (Payment Through Class 3 Public Securities)

• Certain provisions of Section 2210.602 (Definitions) 

• Certain provisions of Section 2210.605 (Terms of Issuance)

• Section 2210.6135 (Payment of Class 3 Public Securities)

• Section 2210.6136 (Alternative Sources of Payment)   

5/22/15 update: 

The House committee substitute does not rename TWIA and sets different guidelines for when the fund may be used to help pay for the losses.

Vote Recommendation Notes

5/22/2015 update:

There are substantive differences between the engrossed Senate version and the House committee substitute, but our position remains unchanged. The second chamber sponsor is Rep. Greg Bonnen.

First chamber recommendation: 

TWIA controls 69 percent of the market share along the coast. Unfortunately, as common as this government run entity may be, understanding of how it works is less so. If Texas has a major storm that exceeds insurance reserves, the mechanism for covering this loss is dispersed over a system of assessments and bonds. SB 900 would only add to this complex web of insurance liabilities and requirements.  

For example, Sections 2210.0716 and 2210.0725 would require Class 1 and Class 2 assessments on insurers during a year in which a catastrophe occurs. This means that if losses exceed the CRTF or bonds, that insurers must pick up the tab to the tune of $1 billion between Class 1 and Class 2 assessments. Obviously, insurers will try to find a way to recoup the costs of having to pay this assessment; however, SB 900 would prevent those insurers from using tax credits or a premium surcharge to make up this deficit. This means that the only way an insurer could recoup these costs is by adjusting its rates across the state to compensate; in other words homeowners across Texas would be absorbing the costs. Texans expect to pay insurance premiums on their own homes, not to have losses in coastal communities socialized across the state. 

The transparency issues are the least of this bill’s problems. While we have concerns as to the actuarial soundness of this bill (i.e. Section 2210.453 requires TWIA to purchase reinsurance or use alternative risk financing mechanisms in an amount equal to the probable maximum loss sustained in a one in 100 year wind storm), this does not completely convey why we recommend opposing it.

TWIA was created to be an insurer of last resort; however, this bill would go against that principle. Section 2210.015 says that TDI should conduct a study of market incentives “to promote participation” in TWIA. This section goes so far as to address the incentives of implementing mandatory or voluntary windstorm insurance in conjunction with a homeowner’s policy. This seemingly benign study shows that the goal is to make TWIA or is successor organization broader and more permanent. TWIA is not and should not be treated as a private insurer. It should be no more than an insurer of last resort.

For these reasons, we oppose SB 900 because it undermines limited government and free market principles.