TWIA Board Should Assess Insurance Laws, Shore Up Trust Fund

By State Rep. Craig Eiland

craig-eilandTexas Insider Report: AUSTIN, Texas – Last Thursday morning, six coastal legislators met in Chairman Todd Hunter’s office with Texas Insurance Commissioner Eleanor Kitzman and TWIA’s Executive Director. We believe the proposed discussion and any action to place TWIA into receivership is unnecessary and unwarranted. With $775 million in the trust fund, the legislature could build a substantial financial model for the security of the coast and the State of Texas.

What the board should do – as has long been advocated by Mike Geeslin, the previous Insurance Commissioner, as well as coastal members of the TWIA board – is assess the insurance companies under the law applicable to insurance policies in effect in September 2008.

In our meeting, and as reflected in TWIA documents, we were advised TWIA had spent approximately $316 million in 2009-2012 premiums to resolve 2008 Hurricane Ike claims. Furthermore, TWIA has set aside an additional $330+ million in reserves from premiums to pay for the currently pending claims. This brings the total probable payout for Ike to $2.7 billion.

In the September 17, 2008 board meeting after Ike, Jim Oliver, the Executive Director of TWIA, noted that with $42 Billion in insured exposure in the six-county area impacted by Ike, at a 10 percent loss ratio, TWIA’s exposure could be $4 billion. Oliver requested an assessment of $830 million to the insurance carriers under the 2008 TWIA statutory funding structure (this statutory structure was changed in 2009 by HB 4009 as discussed below).

Oliver noted that with cash from the trust fund and $1.5 billion in reinsurance, this $830 million assessment would allow TWIA to pay claims up to $2.5 billion. The four coastal representatives on the board voted for the $830 million assessment, but the five insurance industry representatives did not vote for the assessment. The insurance company representatives would only go as high as a $430 million assessment which brought TWIA to a capacity to pay $2.1 billion.

Despite promises to make further assessments at later dates, as discussed below, no further assessment has ever been made! Instead, the TWIA board, even under the oversight by TDI and Commissioner Kitzman, has paid out and reserved more than $600 million in premiums. If the board would simply follow the law in place for these 2008 policies and assess the insurance companies and move the premium money to the trust fund, which currently has $178 million, TWIA would have over $775 million, which is hundreds of millions more than the trust fund has ever had.

At the October 8, 2008 board meeting, it was noted that TWIA expected 90,000 claims and estimated the cost to be $2.7 billion. Ironically, we were advised in our meeting on March 21 of this year that this is the total that TWIA has paid and reserved for all Ike claims. Moreover, Oliver noted that another assessment might not be necessary until the first quarter of 2009. The board agreed to wait to discuss another assessment until the December 2008 meeting.

On November 18, 2008, the head actuary for TWIA responded to an inquiry from State Representative Larry Taylor’s office that the estimated losses were between $2.1 and $2.5 billion and noted the $430 million in assessments and added, “For example, if the ultimate losses from Hurricane Ike are $2.5 billion, we will need to assess an additional $400 million from the last layer of assessments.”

The next meeting of the TWIA board was December 9, 2008, at which time Oliver estimated the losses would be between $2.1 and $2.4 billion, and that another assessment might be necessary the following summer (2009).

Although there is no talk of an assessment on the companies at the March 9, 2009 meeting, it was noted that, “The two hurricanes (Ike and Dolly) depleted the Catastrophe Reserve Trust Fund. . . Unless a change is made in the statute, TWIA will have no funds for hurricane season 2009, except company assessments.” Likewise, there was no talk of assessments during the June 23, 2009 or December 15, 2009 meetings.

The March 9, 2010 meeting had no discussions of assessments. It was noted that $1.4 billion had been spent to date and there is a reference in the audit documents that $2.3 billion is estimated losses. The June 22, 2010 meeting did not reference any assessments and oddly estimated losses at $1.9 billion ($100 million greater than originally anticipated), which is in direct opposition to all of the above including their answers to the audit report in the March 2010 records.

The September 14, 2010 meeting notes that 92,700 claims had been filed and only 40,000 policyholders in the six counties had not filed a claim. It was noted that $1.725 billion had been paid out to date and the estimate was at $2.1 billion for Ike losses. It is also noted that there was a recent settlement of the “slab” cases.

At the December 7, 2010 meeting, it was reported that $1.82 billion had been paid to date and the incurred losses would probably be $2.3 billion “up from the original estimate of $2.1” yet there was no discussion of assessments.

On March 21, 2011 Commissioner Geeslin wrote a letter to TWIA, as the result of a legislative inquiry, specifically, “could the Association use current premium income to pay for Hurricane Ike and Dolly losses?” After analyzing the legislation that was passed in 2009 (HB 4409) the commissioner determined that, without expressly saying it, TWIA should asses the companies.

“As the losses from Hurricane Ike and Dolly are obligations and liabilities that existed prior to the effective date of HB 4409, we believe the funding mechanism for such losses is contained in Chapter 2210 before it was amended by HB 4409 (i.e. assessment of the companies). . . It appears that current premium dollars should not be used to pay claim losses from Hurricane Ike and Dolly.” Pollack wrote a memo to the board raising the issue. No action was taken.

At the June 28, 2011 board meeting, Pollack noted that it was unclear if assessments were necessary. In an audit that was presented to the board, the auditing company noted under the section, “Nature of Business” that, “In the event of a net loss in any policy year prior to January 1, 2009, members participating in that policy year may be assessed for their share of the loss based upon their respective participation percentages.”

Before he left office, Commissioner Geeslin again wrote the TWIA board on August 12, 2011, addressing the assessment issue. He wrote,

“Also, of substantial interests are issues related to the resolution of Hurricane Ike losses and funding. These include, but are not limited to, the potential assessment of member companies for 2008 losses, and accounting for 2009-2011 annual premium dollars that have been used to pay Ike claims.

“How these matters are resolved will have an impact on the level of public trust of TWIA … I believe that at the next board meeting, the board should have all available information from counsel and TWIA staff necessary to vote on and resolve these issues.”

How prophetic Commissioner Geeslin was 18 months ago as we sit here today!

Commissioner Kitzman took over for Geeslin between the June and September 2011 board meetings. At the September 13, 2011 board meeting, Commissiner Kitzman told the board that she did not think an assessment was needed at that time despite the fact TWIA had paid and reserved more than $200 million out of post Ike premiums, and that the board had sufficient revenue and reinsurance to pay the remaining Hurricane Ike and Dolly claims and that TDI would continue to monitor the situation. It was then noted that TWIA had paid out over $2.0 billion and that reinsurance would be exhausted by the end of the year.

At the December 13, 2011 board meeting it was noted that the reinsurance had been exhausted and that $30 million remained uncollectable due to the Lehman Brothers failure. A memo dated December 31, 2011 raised the estimate of Ike losses to $2.35 Billion along with $305 million in losses from Hurricane Dolly and noted that during a normal non-storm year, approximately $200 million would be put into the trust fund. However, because of the Robstown storm and increasing reserves for Ike, only $82 million would be transferred to the trust fund. No discussion of assessments was mentioned.

A March 31, 2012 “Management Discussion and Analysis” presented at the May 15, 2012 board meeting raised the Ike loss claims estimate to $2.4 Billion. No mention of assessments was presented. Likewise, at the August 12, 2012 board meeting, a lengthy discussion was held with Commissioner Kitzman concerning TWIA funding, including the $174 million in the trust fund and scenarios that could deplete available funding sources. Assessments were never mentioned by anyone. This meeting is in contrast to the meeting just a year earlier where the commissioner said TWIA had sufficient revenue and reinsurance to pay claims.

A memorandum from the TWIA Executive Director John Pollack presented to the board at the December meeting raised the Ike loss estimate from $2.4 billion to $2.53 billion. Assessments were not mentioned.

A review of the available board meeting minutes reveals that the TWIA executive director’s initial estimates that additional assessments were necessary were correct and that nobody ever followed up on Commissioner Geeslin’s directives

It is not too late for the board to take action, assess the member companies, put $600 million in the trust fund, and shore up TWIA’s funding situation which would eliminate the need to even discuss receivership.

With $775 million in the trust fund, the legislature could build a substantial financial model for the security of the coast and the State of Texas.

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