Ike: "Could be Armageddon for Texas"
Thu September 11, 2008 12:07 pm

This was the assessment of an official familiar with the state's complicated mechanism for insuring hurricane damage in the state. The current track, making landfall near Freeport, with Galveston and Houston bearing the brunt of the storm, is the worst case scenario for property loss. The Texas Windstorm Insurance Association (TWIA) sells windstorm insurance and invests the premiums. These proceeds form the Catastrophe Reserve Trust Fund (CRTF), which is state money that cannot be used for any other purpose than paying for hurricane damages.

Dolly, which hit South Texas earlier this year, did $275M worth of damage. TWIA assessed insurance companies doing business in Texas $100M, which went straight to the CRTF to help pay TWIA's policyholders. TWIA can impose a second assessment of $200M, which would bring the CRTF to around $570M. TWIA has another $30M in cash on hand. That's $600M for paying claims.

TWIA can impose additional assessments, but here is where the state budget starts to feel the pinch. For any assessments over $300M, insurance companies can claim a credit on their state premium tax. The credits can last for as long as 20 years. The insurance premium tax brought in $1.34B in FY 2007. A major storm that hits the Houston-Galveston area could inflict several billion in damages and cause a loss of general revenue for several years.

To hedge against the effects of a catastrophic storm, TWIA purchased $1.5B worth of reinsurance. This kicks in above the $600M level in claims. Some policy holders have opposed the purchase of reinsurance, which causes premiums to go up.

TWIA is not an independent actor. Its funding is controlled by the Legislature, and representatives of districts far from the coast do not like to subsidize the losses of others. Windstorm insurance rates are regulated by the commissioner of insurance, an office which has been company-friendly. And the commissioner must approve any purchase of reinsurance.

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