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How hurricane insurance became another taxpayer ripoff in Texas

By   /   May 29, 2013  /   12 Comments

AP photo

SWAMPED: Crystal Beach, Texas, was inundated by Hurricane Ike in 2008.


By Jon Cassidy | Watchdog.org

HOUSTON — On Tuesday, four days before the start of a particularly menacing hurricane season, the biggest trial lawyer in Texas announced that he’d gotten a hold of the last few bucks in the government trust fund meant to insure billions of dollars of coastal property against hurricane damage.

Houston attorney Steve Mostyn, the president of the Texas Trial Lawyers Association and an influential Democratic donor in the state, announced that he’d reached a $135-million settlement for the 1,200 claims his clients’ had made against the Texas Windstorm Insurance Association.

That’s the sort of obvious problem that somebody in government ought to do something about, and somebody sort of did, but she left office Monday. Now ex-Insurance Commissioner Eleanor Kitzman was pushing in the right direction — toward freedom and away from the hyper-regulation that has the local insurance market looking as pinched, stretched and bloated as a balloon puppet — but without the necessary political skill.

Democrats didn’t like her laissez-faire views. Some Republicans in the state Senate didn’t care for her, either — enough that Gov. Rick Perry didn’t seek to have her reappointed. I asked around and heard the same reasons reported elsewhere: Some didn’t trust her and others thought she could be pro-industry rather than pro-market, a subtle but crucial distinction that’s sometimes easy to miss. Others were frustrated that she couldn’t stop the bleeding at TWIA.

I’d argue that her struggles exemplify why the state’s spectacular natural disasters have led to manmade policy disasters that are nearly as impressive. Or they will be, I should say, because Texas simply is unprepared for the next big hurricane. The government institutions have failed, while pushing out the private institutions that might work.

To see why, let’s start not with the weather or the bureaucracy, but with an article in the Dallas Morning News this week rightly criticizing Kitzman for delaying the release of annual reports on insurance company profitability that might have been used against her.

The companies had higher profits than expected in 2012, which was “of particular interest to the insurance commissioner, because she declined to block — or even question — a 20 percent increase in insurance premiums that (State Farm) put in place last year,” the newspaper reported.

But it’s not Kitzman that’s failing to ask questions. It’s the media that rarely question whether government has any business dictating to a company what it may charge for its services. The existence of a regulatory office is all that’s needed to assume that regulators do something good or necessary.

It’s an easy assumption — one the average voter makes — that makes it easy politics to attack Kitzman as an industry stooge.

The problem with price controls, as Florida has discovered and any first-semester econ student could tell you, is that they produce shortages, starting with those most at-risk. As the state steps in to help them, it creates “a regulatory death spiral, where competition is replaced by social pricing, the market becomes dependent on state catastrophe and reinsurance funds, and consumers are left to pay more for less,” writes Stephen Pociask of the American Consumer Institute Center for Citizen Research.

In Florida, prices continue to rise, as large, solvent insurers abandon the market to the state-run Citizens Property Insurance Corp. and its heavily subsidized premiums. At the same time, taxpayers are now exposed to $429 billion through Citizens, enough to bankrupt the state. The good news is that in Texas, the state’s exposure is only about the size of the state budget.

Easy answers and easy politics have created a situation where 60 percent of coastal homeowners in Texas have insurance policies that are worthless, backed by a quasi-governmental agency that’s broke.

Instead of a functioning insurance market, where risk is spread among policyholders across the country, you have a local pool that has no way of socializing its risk.

The TWIA policyholders pay into a pool of money that most will need to draw from the next time a big hurricane hits. It’s a sort of self-insurance, but they’re not paying enough to cover themselves, and what little they are paying is being siphoned off by the trial lawyers the homeowners hire to sue, well, themselves, basically.

The policyholders are told that TWIA will sell bonds to cover their claims from the next hurricane, but does that sound like a business model that savvy investors will want to put money into? That means the real insurance company is the taxpayer in general, and homeowners statewide in particular, whose own insurance policies will be taxed if TWIA needs the money.

Even before Mostyn’s $135-million settlement, TWIA already was broke from paying out some $2.5 billion in claims from Hurricane Ike, and hundreds of millions more due to related lawsuits. Its Feb. 28 financials are a horror show, with a balance of $379 million in unpaid losses and liabilities outweighing assets by $183 million.

If you’d like to understand the problem in just two sentences, let me point you to the closing lines of an article that appeared Tuesday afternoon in the Texas Tribune reporting the settlement:

“In his statement, Mostyn gave a green light to efforts to overhaul the agency, which he has opposed until now.

‘It is time for the Legislature to act to ensure the association’s financial solvency for years to come,’ he said.”

In other words, send more money. Mostyn and his fellow predators have slaughtered an entire herd of fat, slow-moving beasts and need fresh prey. That may sound like a hyperbolic interpretation of a dull quote, but the Tribune, in its casually insightful style, was right to say Mostyn is giving a “green light” to legislative action, as Mostyn was the guy who killed a TWIA reform bill last week, at least according to the bill’s author, state Sen. Larry Taylor.

Of course, the hurricane insurance problem is way beyond the scope of Taylor’s bill. In short, if you want to buy insurance in Texas that actually covers hurricanes, you can’t.

You can buy insurance meant to cover hurricanes that won’t. Your premiums will go into a pile that’s supposed to be as big as the next hurricane. Really though, the pile at TWIA was never very big, and now it’s just a hole dug by trial lawyers.

In order to insure TWIA’s $75 billion in exposure, a private company would have to maintain reserves of around $25 billion, according to Texans for Lawsuit Reform. TWIA is covering that exposure with a couple of Whataburger loyalty cards, which may be a few punches short of comprehensive coverage.

You can try to get private coverage from an issuer that’s actually solvent, but there’s not much available.

In the first place, the private sector won’t cover flood damage, which creates an entire industry of post-hurricane wind-vs.-water damage litigation of the sort pursued by Mostyn. Billions of dollars depend on this entirely unreal question: whether a house was destroyed by a hurricane’s wind or its water.

Whenever billions of dollars depend on pointless distinctions, you can be sure the government is involved. In this case, it’s the National Flood Insurance Program, whose existence destroys any incentive for the private sector to issue comprehensive hurricane damage policies. (And if Allstate won’t cover that thing on stilts you built on the seaward side of Galveston, that’s not a market failure. It’s common sense.)

The best you can get is wind insurance, and here, TWIA has taken over the insurance ecosystem like an invasive species, spreading from 17.9 percent of the 14-county coastal market in 2001 to some 60 percent today.

TWIA was meant to be the insurer of last resort, but it so undercharges for premiums that it drives private insurance from the market, not that there was a robust private market in the first place.

The state’s history of strict price controls has made it the fourth most hostile environment in the nation for the insurance industry, according to a 2012 study by the free market R Street Institute. In terms of regulatory oppression, Texas beats out California, and trails just Massachusetts, New York and Florida (and how often will you see a sentence like that?). The 2011 version of the report, which just considered property insurance, ranks Texas third worst.

As Daniel Sutter, an associate professor at the University of Texas-Pan American, put it in a presentation, “The Department of Insurance is ultimately responsible for the price controls on private insurance and the underpricing of TWIA’s coverage which creates the large …  market” for ersatz, unfunded government insurance.

The solution is simple, if politically impossible. Texas just needs to act more like Texas, and less like California, Massachusetts and New York.

Contact Jon Cassidy at [email protected] or @jpcassidy000.


Jon Cassidy was a former Houston-based reporter for Watchdog.org.

  • consumerpal

    This is a great piece and should be read by insurance regulators and state legislators across the nation. Great job!

    Steve Pociask

    American Consumer Institute

    Center for Citizen Research


  • Sherye Johnson

    Is this the Onion? Are you serious? TWIA was working just fine prior to 2003. It covered about 6% of the coastal area. It now covers 79% and insurance companies have fled the coastal areas. In 2003 your idea of less regulation was implemented and TWIA was given full control and is now near insolvency.

    Prior to deregulation premiums in Texas were high, but after deregulation they have skyrocketed, and coverage like foundation, water, and sewer, have been removed. We got less for more. It is a clear case of deregulation failure much like electricity and college tuition deregulation in Texas.

    You should get your facts straight about Texas insurance. Insurance companies were doing just fine in 2003. Now, they are doing so much better at our cost.

  • Jon Cassidy

    So you understand that TWIA has taken over the market and doesn’t have any money to pay its claims, but you don’t see why that’s a problem?

  • Sherye Johnson

    THat is a HUGE problem and it started in 2003. I was testifying at an insurance hearing in Austin when a former Senator in my area (South Houston) Bernie Schwartz (sp?) testified. He filed the bill that created TWIA in the late 70s. He told them that the only reason TWIA is so screwed up today is because of what they did back in 2003 basically giving TWIA to the insurance industry. Now look at us. They refused to pay their bills after Ike and got sued for it. Then they were taken over by the Texas Dept of Insurance. There was evidence of fraud. The current Senator came in to save it by limiting lawsuits, instead of making sure they paid after damage was done. Our current Senator sells TWIA policies and he filed a bill that allowed the commissions to be up to 16%. It passed. Imagine that.

    Is it a problem? Your darn right it is, but the answer is NOT more deregulation. It was fine back in 2003. Now it is not.


  • Jon Cassidy

    Actually, almost all of the price increases occurred in 2001 & 2002, when the avg. premium went from $876 to $1232. That was due entirely to the explosion in mold litigation after a rather unwise legal decision. Since then, prices have been relatively flat, due to price controls. When the state holds the line on price, then coverage areas will be cut. That’s what’s changed since 2003, when Texas allowed companies to customize policies to client needs. It’s hardly some deregulated paradise. If you hold the line on price and dictate minimum coverage, then fewer companies will offer policies. Less competition equals higher prices. That’s all basic econ. I understand the industry has 5 votes on the TWIA board, and I’m sure you’ve been following the board for a while. Are there any particular votes you found outrageous and self-serving?

  • Sherye Johnson

    I am sorry but you must work for the industry. Those are the EXACT talking points I have heard hearing after hearing after hearing.

    1) True mold was involved prior to 2003 until the TDI commissioner limited the insurance companies liability and removed it from policies. Unfortunately, they did not reduce the premiums.

    2) No, the state DOES NOT regulate insurance rates in Texas. That was changed in 2003. They allowed the companies to use a File and Use system. File the intent to raise rates with the TDI then use them The TDI has the right to demand that they roll them back. They have done this with State Farm and have been in court for 8 years or so. Prior to that the companies had to have rate increases approved by the state.

    3) No. Rates have NOT been relatively steady. not by a long shot. In my area I have 10 years of increases documented with USAA, the best in the country. Some years were 23%. Premiums were $800, now $3200. Deductions were $500 now $4000.

    THe bottom line is the bottom line. We here in Texas psy the highest rates in the country and we have some of the worst coverage also.


  • Mark Miller

    You’re wrong. Before 2003, rates were completely unregulated if the policy was written by a Lloyds type insurance company. After 2003, ALL rates are regulated. File and Use just means that the TDI can disapprove the rates after they are in place instead of prior to. You haven’t got an understanding of the realities of the insurance market.

    Second, we pay the highest rates because we have the highest losses. Wow, what a concept, right? Are we are far from having the worst coverage.

    Third, USAA the best in the county? You’re joking right? You really need to shop around if you think USAA is giving you the best rates in the country. I can tell you don’t know insurance because it’s a deductible, not a deduction. If you have a $4000 deductible, that probably means you have a $400,000 house. If you can’t afford $3200 a year in insurance premiums, assuming, with a house that large, you shouldn’t own that big of a house.

  • Mark Miller

    Again, prior to 2003, rates are completely unregulated. You are completely backwards in your thinking. Second, TWIA didn’t become a problem until hurricanes Rita and Ike. It wasn’t in 2003, it was in 2005 the problems started. You really have not done proper research here, not by a long shot.

  • Mark Miller

    There were no changes to TWIA in 2003. The TDI has to approve rate increases with TWIA, and they are capped at 10%. You understand that it is price suppression that has created this monster, right? I’m not sure you do. You see, when TWIA has the lowest rates and no underwriting rules, then private insurance companies can’t compete. It just doesn’t work that way. Also, there were not taken over by the TDI. I don’t know where you got that, but that is flat wrong. They were always semi-governmental, but they are under regulatory supervision right now. That isn’t a takeover. A takeover would be a good thing, because they are insolvent right know.

  • Sherye Johnson

    Ugh. You two need to get a room.

  • Jon Cassidy

    The question was for you, though, not Mark.

  • Casey Michel