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H Homeowners and Windstorm d Wi d Insurance in Texas Insurance in Texas B I LL P E ACOCK, D I R E CTOR CE N TE R F O R E CO N O M I C F R E E D O M Texas Homeowners Insurance: A Brief History 1997 Legislature authorizes

SLIDE 1

H ’ d Wi d Homeowners’ and Windstorm Insurance in Texas Insurance in Texas

B I LL P E ACOCK, D I R E CTOR

CE N TE R F O R E CO N O M I C F R E E D O M

SLIDE 2

Texas Homeowners’ Insurance: A Brief History

1997 – Legislature authorizes form deregulation – TDI

g g refuses to deregulate

1999 – Court reinterprets standard HO-A form:

d M li d B ll d $ illi f ld l i awards Melinda Ballard $32 million for mold claim

2001 – Mold claims grow from 1,050 (2000) to 14,706;

1 300 percent increase & 70 percent of national total 1,300 percent increase & 70 percent of national total

2002 – Texas gubernatorial election heats up debate 2002 – TDI allows new forms; requires price cuts 2002 – TDI allows new forms; requires price cuts 2003 – Market crises over, political crisis reaches peak

SLIDE 3

Texas Homeowners’ Insurance: A Brief History

2003 – Legislature enacts new file and use system,

3 g y , eliminates Lloyd’s exemption form rate regulation

2003-2007 – TDI attempts to force rate reductions,

several companies fight, one still fighting today

2005 - TDI sues Allstate to force payment of living

d it l l i f expenses, despite clear language in form

2006 –Texas Select Lloyds Insurance Company

declared insolvent declared insolvent

2007 – TDI rejects or threatens to reject three rate

filings Texas system operates as prior approval filings, Texas system operates as prior approval

SLIDE 4

Texas Homeowners’ Insurance – Challenges

TDI regulatory focus on “affordability,” not risk

g y y,

Inattention to solvency or adequacy Refusal to allow file and use: government seen as

g alternative to markets for price discovery

Belief that markets can’t handle homeowners’ due to

various characteristics: Inelastic demand & windstorm pool problem P li i “C ” l ki

Politics – “Consumer” groups constantly attacking

policymakers and pushing for regulation

SLIDE 5

Storm of 1900 - Galveston

SLIDE 6

Storm of 1900 – Galveston

Houston, Texas

11:25 P M 11:25 P.M. September 9, 1900 To: Willis Moore Chief, U.S. Weather Bureau Fi f G l j i d b i hi h ld

First news from Galveston just received by train which could get no

closer to the bay shore than six miles (10 km) where Prairie was strewn with debris and dead bodies. About two hundred corpses counted from train. Large Steamship stranded two miles (3 km) g p (3 )

inland. Nothing could be seen of Galveston. Loss of life and

property undoubtedly most appalling. Weather clear and bright here with gentle southeast wind.

G L Vaughan G.L. Vaughan

Manager, Western Union, Houston

SLIDE 7

Storm of 1900 - Galveston

Deadliest natural disaster in U.S. History Entire island under water: 15 foot storm surge vs. 8.7

feet highest elevation

Death toll – 8,000 plus 3,600 hundred homes destroyed $483 million in damages (2006 USD)

SLIDE 8

Storm of 1900 – Galveston: In Denial

National Weather Service never used “hurricane” to

describe the storm: prohibited Cuban telegrams

Last weather forecast: “For Eastern Texas: Rain

Saturday with high northerly winds; Sunday rain Saturday, with high northerly winds; Sunday rain, followed by clearing”

Business on island was conducted as usual:

husbands left families at home in rising water to return to work after lunch Chi f t l i t I Cli d i d i hb t

Chief meteorologist Isaac Cline advised neighbors to

stay in homes near beach rather than seek high ground g

SLIDE 9

Texas Windstorm Insurance: In Denial

The Texas Windstorm Insurance Association is a

pool of all property and casualty (P&C) insurance companies authorized to write coverage in Texas.

Exposure: $49.108 billion 100 Year Storm at Galveston: $3 billion in losses 250 Year Storm at Galveston: $5 billion in losses Available resources: $1.084 billion

SLIDE 10

Texas Windstorm Insurance

TWIA’s Available Resources: $1.084 billion

1. $45 million from TWIA premiums for calendar year

$ illi t i i d t

2. $100 million assessment on insurance industry
3. $739 million from Catastrophe Reserve Trust Fund

& reins rance & reinsurance

4. $200 million assessed to insurance industry
5. Assessment on insurance industry – impacts Texas

General Revenue up to $500 million per year through premium tax credit premium tax credit

SLIDE 11

Texas Windstorm Insurance

TWIA originally intended to be insurer of last resort,

g y , but now is first choice along the Texas Gulf Coast

2001 - 68,756 policyholders 2007 - 173,404 policyholders

SLIDE 12

Texas Windstorm Insurance

49.1

45 0 46.0 47.0 48.0 49.0 50.0

Windpool Direct Liability In Force

33.1 38.3 43.5

33 0 34.0 35.0 36.0 37.0 38.0 39.0 40.0 41.0 42.0 43.0 44.0 45.0

al Liability

p y Decem ber 31, 1971 – June 30 , 20 0 7

20.8 23.3 24.2 27.4

22.0 23.0 24.0 25.0 26.0 27.0 28.0 29.0 30.0 31.0 32.0 33.0

ns of Tota

8.8 10 10.911.6 12 12.1 13.2 16.0 18.8

10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0

Billio

0.3 0.7 1.0 1.1 1.2 1.4 1.6 1.6 1.8 1.9 2.1 2.3 2.2 3.2 4.1 4.5 4.4 4.3 4.2 4.2 4.3 5.2 6.5 7.6

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 06 06 06 07 07

197 197 197 197 197 197 197 197 197 198 198 198 198 198 198 198 198 198 198 199 199 199 199 199 199 199 199 199 199 200 200 200 200 200 200 Mar-0 Jun-0 Sep-0 Dec-0 Mar-0 Jun-0

Year

Data Source: Quarterly Statistical Report from Texas Windstorm Insurance Association

SLIDE 13

Texas Windstorm Insurance

SLIDE 14

Texas Windstorm Insurance - Challenges

Modeling not allowed for determining rates; bases

g g ; analysis on past 30 years

TDI notes that TWIA has broken even or made profit

for last 20 years

Texas Legislature has failed to address problem in

th i i & three successive sessions: 2003, 2005 & 2007

Deadlock between coastal and inland delegations

TDI i f d i i d h f l li i

TDI is focused on minor issues and harmful policies

SLIDE 15

Texas Windstorm Insurance - Challenges

TDI is focused on minor issues and harmful policies:

p

Bonds to replace, rather than enhance, reinsurance Streamline TWIA renewal process and reduce renewal

commissions based on actual savings to agents commissions based on actual savings to agents

Increase reporting requirements on engineers Monitor TWIA expense ratios

p

Review insurer rates to ensure rates reflect any reduced loss

exposure

SLIDE 16

Texas Insurance Solutions

Fixing Homeowners’ Insurance

g

TDI regulatory emphasis on fairness/ solvency Deregulate homeowners’ insurance rates Allow Texans to buy from companies licensed in other

states

R t Wi d t t th P i t S t

Return Windstorm to the Private Sector

Make TWIA truly a provider of last resort Require TWIA to base rates on 100 year storm Require TWIA to base rates on 100 year storm Allow TWIA to offer differentiated rates based on risk

SLIDE 17

H ’ d Wi d Homeowners’ and Windstorm Insurance in Texas Insurance in Texas

B I LL P E ACOCK, D I R E CTOR

CE N TE R F O R E CO N O M I C F R E E D O M