Even before the Texas Windstorm Insurance Association’s board and Actuarial and Underwriting Committee met to host an informational workshop on rates, members of the public submitted comments opposed to rate increases, an item that was specifically not on the April 21 workshop agenda.
One commenter from Galveston, whose name was redacted because he or she is a TWIA policyholder, took his opposition to rates a step further, suggesting that TWIA is mismanaging its premium income.
Another said, “TWIA rates have been unfairly influenced by politics… . There is no reason that the coastal counties should bear the brunt of the cost… . Obviously, the highest cost should be born (sic) by those on the actual coastline. (beach etc).”
Another commenter provided his message succinctly: “We are requesting no rate increase.”
An additional 48 comments that followed TWIA’s announcement of the meeting on TWIA’s page of the NextDoor app were included in the written public comments available to the board members for the meeting that was conducted virtually on Zoom. TWIA redacted all names from the copy provided for the meeting record; many of the comments were only peripherally related to the to-be-held workshop, getting off-topic with mentions of USAA claims and coverage and cancellation issues with surplus lines.
Meanwhile the legislature was considering legislation affecting TWIA’s rate making authority. At the time of the virtual workshop, several House and Senate bills were active, including two that would reauthorize legislative oversight boards to study TWIA’s funding compared with other catastrophe prone states’ property markets of last resort.
TWIA went back to the basics in its workshop. The four-hour virtual meeting that is available for replay on YouTube covered rating definitions and statutory requirements, as well as specific issues requested by the board and committee members. Starting with the actuarial definition of rate and the legal requirements for insurance rates under Texas state law, TWIA staff noted that by law, TWIA’s rates, like any other insurer’s, must be reasonable, adequate, not unfairly discriminatory and nonconfiscatory as to any class of insurer.
The staff’s 48-minute primer included an explanation of the cost components that form the basis of TWIA’s residential rates. The most recent staff analysis demonstrates the inadequacy of TWIA’s rates. Staff attributes 48.9 percent of premium to hurricane costs, 19.7 percent to bond payments for prior losses, 19.5 percent to reinsurance, 16.0 percent to agents’ commissions, 14.6 percent to non-hurricane losses, 8.5 percent to operating expenses, 5.0 percent to its anticipated contribution to the Catastrophe Reserve Trust Fund and 1.9 percent to taxes. TWIA, while not subject to federal income tax, is subject to premium tax and maintenance tax payable to the state.
Staff also gave an overview of pending legislation affecting TWIA directly. Between the virtual workshop and mid-May, only SB 1448, by Sen. Larry Taylor, R-Friendswood, completed the legislative process and moved to the governor’s desk. This proposal was originally filed to extend the deadline for the legislatively created oversight boards to examine the funding and funding structure of TWIA and to consider merging TWIA with the FAIR Plan. In the process, the bill picked up amendments about a week after the TWIA rate workshop. These amendments remove the ability of TWIA to raise rates even at a minimal level without commissioner approval and also require any rate increase recommendation to receive a two-thirds vote of the board, concepts that were in other bills that appeared to have stalled in the process.
Other legislation affecting TWIA that is still alive, as of mid-May, is HB 769 by Rep. Mayes Middleton, R-Galveston. Middleton’s bill would add a requirement that the board not vote on a rate increase if there is a vacancy on the board. The proposal also would prohibit TWIA from including loss adjustment expenses in determining the probable maximum loss and require that TWIA contract with someone other than the reinsurance broker to execute hurricane risk simulation models preceding the storm season. The bill adds a further restriction: to use only the model which produces the lowest probable maximum loss. While the bill continues to include a requirement that the TWIA office move to a Tier 1 or Tier 2 county, deleted from the original bill is the shift of all costs of TWIA’s reinsurance to the member companies in the voluntary market. This legislation was referred to the Senate Natural Resources and Economic Development Committee on May 13. To remain active, the bill must reach the senate floor by May 26. The legislature adjourns the session on May 31.
TWIA’s virtual workshop on April 21 included other issues that can impact rates, some about which the board sought additional information from staff for future meetings, some postponed, and others that met with insufficient interest to pursue further. Jennifer Armstrong, TWIA’s VP of commication and legislative affairs, facilitated the discussion on multiple topics.
In 2011, the legislature authorized TWIA to include binding arbitration in its contracts; however, according to David Durden, TWIA’s VP of legal, the authority depends on using a form prescribed by the commissioner. No rule prescribing a form has been promulgated, said Durden, so in essence, TWIA cannot pursue this avenue to settle disputes with policyholders.
Durden added that the appraisal process and mediation are currently used effectively by TWIA to resolve disputes, making the binding arbitration authority less important to pursue. Durden offered as evidence a chart comparing the disputes following Hurricane Ike in 2008 and Hurricane Harvey in 2017, with the more recent storm occurring after the appraisal process and notice of dispute requirement were put into law.
TWIA had 93,074 claims from Hurricane Ike, 76,716 from Harvey. The appraisal process was used to settle 865 of the Harvey claims for an average appraisal award of $42,115. By contrast, lawsuits following Ike totaled 9,035, with the average lawsuit settlement or award reaching $94,630. Harvey lawsuits numbered only 477, with an average settlement or award of $28,509. TWIA estimated a significant difference in attorney involvement with claims following the two weather catastrophes; the association estimated that indemnity paid to plaintiff attorneys following Ike exceeded $340 million; TWIA’s estimate for attorney compensation following Harvey was about $14.5 million.
The shift in the litigation environment for TWIA means that there would not be much cost savings from implementing binding arbitration clauses in policies at this time. Board Chairwoman Chandra Franklin Womack said that could change with any meeting of the legislature, and the board agreed to postpone any future discussion of binding arbitration until after the legislative session.
Underwriting inspection program
Prior to 2015 when TWIA started using EagleView aerial imaging to inspect risks, about 20 percent of TWIA insured properties were inspected on the ground every year, meaning that properties remaining in TWIA were inspected once every five years.
Armstrong said that the new system has brought the average inspection cost per property from $50 to $7. The images make it possible to assess eligibility and insurability, determine roof condition, identify unrepaired damage, capture secondary factors, and more, she said.
Denise Larzalere, TWIA’s VP of underwriting, said that EagleView generates a change detection report when new structures appear in the most recent image. When that occurs, the next step is for the underwriter to review the Windstorm Protection Inspection certificate (WPI-8) for the new structure. Currently, a TWIA on-site inspection is triggered only if the aerial image displays a reason for a visit that cannot be determined from TDI’s building standards certification document. Physical visits occur only when indicated in the underwriter’s judgment, said Larzalere.
Noting that at 16 percent, agents are paid greater commission for placing TWIA policies, than they earn from private market insurers, board member Ron Walenta suggested that agents be made responsible for on-the-ground inspections when placing policies and periodically at renewal.
“You never know what you can’t see from the air,” Walenta said.
Board Vice Chairwoman Georgia Neblett objected to the inspection becoming the role of the agent, as the agent is not trained to do inspections. Furthermore, when the policyholder and agent live in north Texas, and the TWIA policy covers a second residence on the coast, it becomes cost prohibitive for an agent to perform the inspection.
Former TWIA board member Garry Kaufman, a coastal insurance agent, pointed out that the vast majority of TWIA’s business was written by 30 percent of the agents, and on-site inspections and reports would be extremely burdensome on these agents.
The consensus of the board was inspections should not be delegated to agents.
Policyholder, agent self-service options
Policyholders want more payment options, said Armstrong. Since November, TWIA has offered policyholders the option of paying the annual premium in two installments.
Michael Gerik, an industry representative on the board, objected to the two installment offering being counted by TWIA as fulfillment of the sunset recommendation to accept installment payments. Policyholders who want a monthly installment must involve the agent who sets up a premium finance arrangement.
Basically, the board kicked this issue to the Agent Advisory Group for discussion and recommendations.
Agent commissions are set by the commissioner of insurance at 16 percent for both residential and commercial new business and renewals and 12 percent for mobile homes. Sixteen percent is the highest commission paid among the seven states with residual markets, where the range is from five to 14 percent.
Gerik said it has been a commitment of the board not to recommend a change to agents’ commissions until TWIA launches its new system, ELEVATE, which will result in a number of system and process changes for agents and bring TWIA processes more in line with the voluntary market. Depending on how that relieves agents of the workload they incur from TWIA, commissions can again be discussed.
Both Lee Loftis, government affairs for the Independent Insurance Agents of Texas, and Kaufman were invited by the board to comment on this issue during the workshop. Loftis urged the board members to look at the processes and agent involvement and responsibilities in the other states in order to make a fair comparison of commission.
Womack said the issue will stay on the board’s radar. When ELEVATE becomes operational, the board is likely to take up changes to renewal commission, but only if the agent does not get involved in the payment process, said Gerik. Much depends on how much value the ELEVATE system brings to the process, said board member Corisse Morrison.
Materials distributed for the workshop highlighted actions taken by the board and staff that represent significant money savings, such as early redemption of 2014 bonds used to pay Hurricane Harvey losses, representing an $8.5 million in interest savings over the remaining life of the bonds, and the operations savings anticipated as ELEVATE integrates and replaces two IT systems used by the association.
The board shifted the discussion to the annual TWIA budget process, recommending that the proposed annual budget be presented to the board earlier and in more detail.
Womack proposed scheduling a budget workshop for the board to attend virtually in September, even if face-to-face board meetings resume in the meantime. Womack said a 90-minute meeting focused on the budget would allow a more in depth discussion.
Vary rates by territory
In 2019, TWIA commissioned a report by Milliman to determine the rate variation potential across the 14 coastal counties that are currently uniformly rated. When other rate issues surfaced, the Milliman report was never delivered to the board.
When board members expressed interest in resurrecting the report to determine if the more exposed areas have a greater rate need, TWIA General Manager John Polak offered to have staff update the Milliman report with more current data and distribute both the old and new reports to board members.
Neblett, a Port Aransas resident, pointed out the public policy considerations the board must make before adopting a territorial rating plan, noting that the Texas coast is not lined with beach dwellers. “Some people aren’t choosing to live on the coast,” she said. “They live there for their livelihood,” and much of the Texas economy is driven by the industries concentrated at the coast.
Neblett also informed the board that building codes vary among coastal communities making some not only safer from wind risk, but building costs higher to begin with. She also pointed out that there are unincorporated areas without building codes or construction inspections.
TWIA staff indicated that before a territorial rating plan could be used, legislation would be required, and TDI would set the rules for such a plan.
Adopt the WTW recommendations
Willis Towers Watson and Guy Carpenter have differing opinions on blending catastrophe models and the rationale for using long term vs. short term frequency assumptions when determining the probable maximum loss. Both factors are integral to determining the amount of reinsurance to purchase and its cost to TWIA. TWIA set the PML at $4.18 billion; WTW would have set TWIA’s PML at $3.88 billion.
After much discussion, the board opted to wait for action by the legislature. Staff reminded the board that this year a new request for proposal for a reinsurance broker would be offered for bid.
Apply actuarial rates to new business, phase in for renewals
Jim Murphy, TWIA’s director of special projects, said that the principle behind charging actuarially adequate rates for new business and phasing in increased rates on renewals would move TWIA toward rate adequacy without being disruptive. However the practice could run afoul of the requirement that rates not be unfairly discriminatory. Similar risks would not be charged the same rate.
Durden reported that Citizens Property Insurance Company, the residual market in Florida, made such a filing with the state regulator, who rejected using varying rates for new and renewal policies. Morrison surmised that the Texas commissioner would probably react the same way.
Polak said that it is hard to justify different pricing for two identical risks.
Staff advised that this change would require specific authorization by law, noting that the rate filing in Florida may not have been in compliance with Florida’s rating laws. The board indicated it will not pursue this rating method.
TWIA pays state taxes on premiums and maintenance. Last year, TWIA paid $5.9 million in premium tax, or 1.6 percent of its written premium of $369.6 million. Maintenance tax totaled $938,785.
Walenta pointed out that the state seems to have opposing goals in imposing these taxes on TWIA, noting that the coastal area is critical to the financial life of the state. The board agreed to pursue exemption from these taxes through a legislative act, possibly as early as the current session if a currently active bill could be amended to include these exemptions.
Actuarial Committee recommendations
Stephen Alexander, a member of the Underwriting and Actuarial Committee, recommended that TWIA focus more on mitigation to reduce losses and possibly reinsurance costs. His recommendations included reducing deductibles or obtaining property mitigation funding from other sources.
Polak said that this is one area agents can serve their TWIA customers, by helping their customers understand premium savings by improving the wind resistance of their homes with opening protections and structural ties.
TWIA’s board met for its regular quarterly meeting on May 18 by teleconference and web conference. Future meeting dates are Aug. 3 and Dec. 7, with both expected to be conducted by webinar.