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Heartland Institute paper on reforming Texas's insurance environment

Heartland Institute paper on reforming Texas's insurance environment

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Published by Texas Watchdog
Four Problems, Four Solutions: A Blueprint for Reforming Texas's Insurance Environment, by Eli Lehrer. Policy brief issued by the Heartland Institute.
Four Problems, Four Solutions: A Blueprint for Reforming Texas's Insurance Environment, by Eli Lehrer. Policy brief issued by the Heartland Institute.

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Categories:Types, Research
Published by: Texas Watchdog on Oct 04, 2011
Copyright:Attribution Non-commercial


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Eli Lehrer is vice president of Washington, DC operations for The Heartland Institute. A more completebio appears on page 10.
A.M. Best and Company. “Texas Insurance Department Takes Oversight Control of TWIA; Manager IsOusted,” March 1, 2011.
The right actions will make the statemore fiscally stable, safer, and moreresistant to nature’s worst.
March 2011
Four Problems, Four Solutions:A Blueprint for ReformingTexas’s Insurance Environment
By Eli Lehrer 
This report reviews four major problems with Texas’s insurance environment and proposes four categories of action that elected leaders should take in order to remedy them.The Texas Windstorm InsuranceAssociation’s management, its costs, theretreat of many private insurers, andinadequate coastal mitigation efforts areTexas’s biggest property insurance problems.To solve them, efforts should be undertakento reform TWIA’s structure, change regulations to attract insurers, and invest in coastalmitigation.Although the problems with Texas’s property insurance system are significant, the right actionswill make the state more fiscally stable, safer, and more resistant to nature’s worst.
One: TWIA’s Management and Structure Are Problematic
On February 28, 2011, the Texas Department of Insurance placed TWIA under administrativeoversight, citing a number of severe management problems. Simultaneously, TWIA’s longtimemanager, Jim Oliver, was removed from his position.
Among other things, Insurance
© 2011 The Heartland Institute. Nothing in this report should be construed as supporting or opposing anyproposed or pending legislation, or as necessarily reflecting the views of The Heartland Institute.
Steve Miller, “Texas’ government-operated property insurance agency – TWIA – found “hazardous tothe public” in the wake of Texas Watchdog’s reporting,” February 28, 2011, www.texaswatchdog.org/2011/02/texas-government-operated-property-insurance-agency-twia-found/1298927853.column.
Texas Windstorm Insurance Association, “About TWIA,” www.twia.org/AboutTWIA/tabid/56/Default.aspx.
Property Insurance Service Office,
2010 Market Penetration Report 
, PIPSO.org.
Texas Department of Insurance, Hurricane Ike Information Center,www.tdi.state.tx.us/consumer/storms/cpmhurrike.html.
- 2 -
Just a few days after the allegationsagainst TWIA were made, it was clear the agency’s unique legal structurecontributed to its woes. TWIA isneither public nor private.
Commissioner Mike Geeslin’s order creating administrative oversight – a
de facto
state takeover of TWIA’s operations – alleged problems with claims adjustment, fraud reporting, and financialmanagement practices. Press reports have alleged other problems with TWIA’s management andfinancial practices.
Just a few days after the allegations againstTWIA were made, it was clear the agency’sunique legal structure contributed to its woes.Right now, TWIA is neither public nor  private: Insofar as it is mandated by state lawand serves a public purpose, TWIA looks likea government entity. Insofar as it competeswith private market players for some policiesit writes, and doesn’t have to follow state purchasing and hiring rules, it looks like a privateentity. (The Texas FAIR Plan Association, which serves as a market of last resort in non-coastalcounties, has the same fundamental structure.) TWIA’s compensation practices, for example,were out of line with government’s – its head made more money than the governor – but notwith those of private insurance companies. As the organization is neither public nor private,oversight of TWIA is both complex and confused.
Two: TWIA Could Cost Taxpayers Billions
TWIA has existed since 1971 and is supposed to provide “last resort” coverage againstwindstorms for property owners unable to find such insurance in the private sector.
Since itscreation, however, TWIA has grown to become the second largest such “market of last resort” inthe United States; it writes more than 3 percent of all property insurance in Texas.
Only onestate, Florida, has a larger government-run or government-mandated property insurer.
In 2008, TWIA paid out claims of more than $3.8 billion and, at the time, had reinsurance andassessment capacity to cover them.
Today, TWIA has no reinsurance and no meaningful ability
Technically, TWIA still can assess private insurers but the tax credits the state offered to offset theassessments have been tapped for decades to come. Larger insurers would experience losses as a result,while some smaller ones might have their viability threatened.
In the wake of the 2004 and 2007 storm seasons, Florida, Louisiana, and Mississippi bailed out their TWIA-equivalents. No state has ever allowed a similar mechanism to fail.
Texas Windstorm Association,
Fiscal Year 2008/2009 Report 
Patrick Danner. “USAA to Expand Wind Coverage,”
San Antonio Express-News
, January 12, 2011.www.mysanantonio.com/business/article/USAA-to-expand-wind-coverage-953379.php.
- 3 -
Texas’s system of insurance regulationhas driven away many insurers.
to charge special taxes called “assessments” to private insurers.
If two particularly bad stormshit back-to-back, Texas taxpayers could end up having to pay as much as $8 billion
– somethingthey cannot afford to do.Although recent history shows it could easily have to pay at least $4 billion in losses in a singleseason, it has only about $300 million in hard assets to pay them.
The rest of its claims-payingcapacity would come from a newly granted authority to issue up to $2.5 billion in bonds – bondsit might not be able to sell and that, one way or another, Texans would have to pay back withinterest.
Three: Private Insurers Do Not Want to Write Insurance in Texas
Although Texas has a pro-businessreputation, the state’s system of insuranceregulation has driven away many insurers.Whereas new auto insurers have flocked tothe state, many major national insurers have stopped writing new property insurance policies incoastal areas. Even the major Texas-based insurer that has expanded its overall policy countalong the coast simultaneously non-renewed some policies.
Getting private insurers back intothe state is key to shrinking TWIA and making insurance more affordable.Texas already has most of the things – population growth, a good business climate – that shouldattract insurers, but they are not coming. A smaller TWIA and lower rates cannot be achievedwithout more competition, and changes to insurance regulation are needed to achieve that.
Four: Texas Properties Are Not Secure Enough Against Storms
Texas’s coastal counties – some of the poorest in the state – are not sufficiently secure againstmajor storms. Houses are not strong enough, and too many wetlands, which help mitigatedamage from storms, are being destroyed.

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