Jury still out on insurance rate increases due to Rita
Tamarind Phinisee
From the January 6, 2006 print edition of the San Antonio Business Journal
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The 2005 hurricane season left a definite mark in many Texas communities this year. However, the impact from the season on insurance rates for windstorm coverage is not as clear, insurance industry officials say.

The state's insurer of last resort for wind and hail damage, Austin-based the Texas Windstorm Insurance Association (TWIA), has asked the Texas Department of Insurance (TDI) for a 10 percent premium increase in both its commercial and residential lines. TWIA is a pool of property and casualty insurance companies authorized to write coverage in Texas. Its purpose is to provide Texas citizens with adequate wind and hail coverage when it is not available in the insurance marketplace; and to pay the insured's claims when losses occur. Those in the pool pay into the association to help fund claims.

The TWIA, which provides wind and hail coverage in the 14 Texas coastal counties and parts of Harris County (east of Highway 146), anticipates some 12,500 claims and losses of approximately $145 million once it assesses all the damage from Hurricane Rita.

TDI responded to the association's request by granting it a 5 percent increase in its commercial premiums -- effective Jan. 1, 2006 -- and a "no" altogether on its request to raise residential premiums.

TDI spokesman Jim Hurley says its response to TWIA was based on data received before the hurricane activity.

"Their filing did not reflect that damage and could not justify the rate increase," Hurley says.

However, he adds that TDI will be willing to look at TWIA's application next year.

Weathering the storm
Jim Oliver, general manager with the TWIA, says he plans to bring the request up again in the spring. "We'll have a good understanding of our losses and take another bite at it," Oliver says.

Hurley says it's too soon to say if rate increases would be granted in 2006 for private insurers.

"We would take a very long hard look at them," he says. "Any increase would have to be justified by data and it's too early at this point to say one way or the other."

Nathan Benge, producer and agent for locally based independent insurance agency Insurance One, predicts that policyholders with the larger insurers may see a slight fluctuation in rates. Insurance One represents or sells insurance for Allstate , Farmers, State Farm and Nationwide , as well as St. Paul Travelers, Hartford AIG, Kemper, Safeco and others. Benge explains that the San Antonio and Central Texas areas are less likely to be affected by a major windstorm or hurricane, which are catalysts for high claims and increased insurance rates.

Joe McCormick, Dallas spokesman for Northbrook, Ill.-based Allstate, concurs.

"The rates are based on the loss experienced in that particular area," McCormick says. "So for the San Antonio area, your rates are going to reflect loss experiences in that area, which wasn't really impacted by the hurricane."

What is unclear, he says, is whether or not the hurricanes will affect the reinsurance market -- the international market which provides insurance for insurers. If reinsurers are hit, that, in turn, would affect homeowners' insurance.

"I think the one concern is the reinsurance market post Hurricane Katrina and post Hurricane Rita," he says. "Is that going to impact the entire homeowners' market? I don't know. If it does, it may take a number of months to play out."

More to come
The current funding mechanism for wind and hail coverage in Texas is provided in layers and is capable of paying losses to the tune of almost $1.3 billion, after initial losses are paid by insurers under the terms of their polices.

If a special session is called over the issue of education finance, Jerry Johns, president for Austin-based Southwestern Insurance Information Services , says TWIA will probably try to get legislation on the ballot that would call for $300 million in pre-event revenue bonds and $500 million in post-event revenue bonds.

These bonds, Johns says, will be seen as an alternative to depleting the state's general funding system.

Under the current funding mechanism, losses are paid by TWIA up to approximately $100 million. After this, monies are paid from the state's more than $311 million Catastrophe Reserve Trust Fund in cases of extreme emergencies. The next layer is paid by the re-insurance market, which is some $700 million.

"After that, we go back to the insurers for an additional assessment of $200 million," Johns says.

If losses exceed the $1.3 billion mark, Oliver says, insurance companies will have to dip once again into their coffers to pay remaining losses.

However, in that event, the companies are reimbursed via a premium tax credit over the next five years, paid from the state's general revenue fund, Oliver says.

But paying those tax credits, says Bo Gilbert, director of governmental affairs for the Independent Insurance Agents of Texas, means less dollars go into the Texas general revenue fund.

The state's current $64 billion general revenue fund pays for things such as higher education and general costs of government. "The last thing anyone wants to have happen is that we exhaust all funding mechanisms and then tap into the general funding system and ... then we have a whole other situation," Johns says.

But Kathy Walt, a spokeswoman in the governor's office, says it is uncertain whether the bond proposal would be addressed in any special session.

"Gov. (Rick) Perry has not determined what issues to add to the agenda when he calls the Legislature back into session," Walt says. "But the primary focus, if not the entire focus, will be on addressing the Supreme Court ruling on school finance."