Warnings went unheeded about Texas hurricane plan
Posted on September 16th, 2008By Evan Lehmann
Climatewire: Texas officials warned for two years that the state’s hurricane insurance program is too delicate to handle the gusts of a dangerous storm with bull’s-eye aim.
Now there’s concern that the warnings may have gone unheeded for too long, as Texas struggles to assess the damage wrought by Hurricane Ike, a Category 2 giant that rammed into vulnerable seaside cities last weekend.
The state could be forced to shoulder the economic burden of rebuilding if the insurance program is overrun. That would leave residents vulnerable to higher taxes and fewer public services as the state works to protect shoreline property from storms that many scientists say are intensifying.
“We knew about this,” exclaimed Seth Chandler, an insurance expert at the University of Houston. “We knew about this, but just sort of hoped it wouldn’t happen.”
“Time ran out on us,” he said.
Ike ran ashore at a time when scientists are predicting that warming sea surface temperatures are strengthening wind speeds in hurricanes. Many scientists associate the change with climate change, but say no single storm can be attributed entirely to the phenomenon spurred by rising levels of greenhouse gases.
Chandler expects damage from Ike will capsize the state’s wind insurance program, called the Texas Windstorm Insurance Association (TWIA). It’s equipped to pay $2.3 billion in claims through emergency payments from private insurers, a state catastrophe fund and reinsurance. Taxpayers are responsible for everything above that.
Damage modelers are predicting that Ike caused at least $8 billion in damages, but that includes flooding and fire. The wind program would not be affected by those damages. Loss experts are warning to wait for verifiable reports.
The program, pronounced Twee-a, has not failed since being created in 1971. But times have changed.
Katrina ignited rush to join program
Coastal residents clamored for it after Hurricane Katrina in 2005, when private insurers retreated from risky shorelines or raised their rates. Much of the risk was transferred to the state, and the program’s exposure exploded from $23 billion in 2005 to $60 billion this year.
The majority of that growth occurred in Galveston County, where Ike drove ashore. Nearly one-third of the program’s policies are there, amounting to $18.6 billion in risk.
There are no official damage estimates yet. More than 1,000 adjusters, just for the state program, were waiting Monday for authorities to let them into ravaged areas like Galveston Island, where search and rescue efforts were still under way.
“It will probably be days, maybe even weeks, before adjusters are allowed into the area,” said Jerry Johns, president of the Southwestern Insurance Information Service, a public group that prepares official damage reports for the program. “We simply do not have a sense of the what the insured losses will be.”
He said there will be tens of thousands of claims filed, but stopped short of predicting whether the wind program would require a public bailout.
“We just don’t know. Until they can get in there, it’s just impossible to say [TWIA] will exhaust all of their cash.”
Warning: The plan is ‘completely inadequate’
There have been warnings for at least two years about the fragility of the program.
An urgent reminder came this summer when the state’s Department of Insurance told state officials that its “paramount objective” is to reduce the rapid rise of risk facing taxpayers, according to a report issued in June.
Texas Insurance Commissioner Mike Geeslin called for a major overhaul of the program in 2006, saying in a report to Republican Gov. Rick Perry and lawmakers that it could be “completely inadequate” to handle the amount of risk it has accepted.
Geeslin called for higher premiums, new restrictions barring from the program residents who can buy private insurance, and requiring communities to adopt stronger building codes that could reduce hurricane damage.
“Our intention is to continue the recommendations for the next [legislative] session,” said Jerry Hagins, a spokesman for the Texas Department of Insurance. “Obviously, Hurricane Ike underscores this issue dramatically.”
Several recommendations made it to the Legislature in a bill introduced by state Rep. John Smithee (R-Amarillo), chairman of the House Insurance Committee. A central provision would have required the program to sell bonds before and after major hurricanes as a way of safeguarding its accounts. The bill failed.
Smithee told the Austin American-Statesman that he would be “shocked” if the damage from Ike doesn’t exceed the program’s top limit.
What next? The hurricane season is not over
The program is designed to handle $2.3 billion in claims, or about as much damage as would be caused by a storm that forecasters predict will occur once every 50 years.
To pay that amount, the program would require private insurers belonging to the plan to pay “assessments,” or emergency payments, amounting to $300 million. A reinsurance policy purchased by the program would contribute $1.5 billion, and a catastrophe fund could provide up to $500 million.
After that, it’s up to the state. Private insurers would pay claims that exceed the top threshold, but taxpayers would pay them back through tax breaks.
“These are our levies,” University of Houston’s Chandler said of the program. “This was a system that was not designed to withstand a serious hurricane.”
Ike isn’t the only storm to whip the shores of Texas this year. Hurricane Dolly and Tropical Storm Edouard have already helped deplete the catastrophe fund and spurred one assessment on insurers.
That leaves less cushion for Ike. And there are still six weeks left in the hurricane season.
“We’ve had enough storms,” sighed loss expert Johns.