Texas “Insurers of Last Resort” Likely Face Staggering Claims from Harvey; What it Means to You

Devastating, and expensive, the damage in Texas from Hurricane Harvey will fall mainly on the National Flood Insurance Program (NFIP) as I said last week. Catastrophe funding will also kick in for those without coverage.

But other Property & Casualty (P&C) insurers covering homes, cars, commercial properties, and farms are also enormously exposed. None are more so than the two Texas state “Insurers of Last Resort”: The Texas FAIR Plan Association (FAIR Plan, rated “E-” by Weiss) and the Texas Windstorm Insurance Association (TWIA, not rated by Weiss). Unfortunately, our research shows they’re woefully underfunded – and that means all Texas insurers could be hit with multi-billion-dollar assessments to fill the hole. That, in turn, will get passed on to customers in the form of future premium hikes.

Let’s start with some background: Texas knew these insurers were woefully underfunded. But just like many consumers dig in their heels over purchasing flood insurance, policymakers neglected the two insurers. They failed to ensure they received adequate funding before disaster struck, including in the very region for which they were set up to provide coverage.

Firstly, looking at the FAIR Plan, it provides coverage to those that cannot obtain coverage elsewhere. It has provided a safety net for residents since it started in 2002.

But with its inadequate capital structure, the FAIR Plan is in deep trouble. It holds the lowest possible rating issued by Weiss Ratings. In the starkest possible terms, this is an under-capitalized, under-reserved shell of an insurer. Prior to Harvey, it was already paying out more than 92% of its premiums in claims.

As of the end of March, it had $12.4 billion in exposure on 80,796 policies in Harris County alone — the county where a large amount of land is currently underwater and where the city of Houston is located. The FAIR Plan’s total exposure in the state of Texas was $19.3 billion on 118,572 policies.

If previous experience is anything to go by, there will be huge numbers of claims made to the FAIR Plan. Hurricane Ike, which hit Galveston in 2008 as a weaker Category 2 storm, resulted in claims under the plan totaling $316 million. That was an estimated 30% of current exposure. This could mean the FAIR Plan will see tens of thousands of claims with a potential cost exceeding $4 billion as a minimum.

But as remarkable as that is, it could have been even worse. That’s because the FAIR plan excludes certain very high-risk locations from its potential coverage universe, including significant coastal areas and parts of Harris County.

For these catastrophe areas, the Texas Windstorm Insurance Association (TWIA – Not rated by Weiss) has to take responsibility. It’s not even a state agency, so it depends on premiums, funds from the Catastrophe Reserve Trust Fund (a state fund that primarily obtains its funding through excess premiums paid to TWIA), investments, and re-insurance.

It has $4.9 billion available for the 2017 hurricane season, according to the TWIA website. That will almost certainly not be enough given that calculations for coverage were based on a 1-in-100-year event. According to the state’s own documents released in May, exposure in the affected counties is more than $72.1 billion.

Furthermore, to highlight how unprepared Texas was for Harvey, we only have to refer to a 2012 report commissioned by the state. It said: “Storm model simulations indicate a 1 in 7 chance that over the next 10 years TWIA will need funding in excess of the amounts currently available, according to Merlinos and Associates; there is a shortfall of at least $1 billion in a 1-in-100-year event under all current funding scenarios.”

Well, it happened. Harvey is formally being designated a 1-in-1,000-year event. This is significantly worse than the worst case projected. The report went on to say: “TWIA has no funding contingency plan, and policyholders do not have any guidance regarding how TWIA will pay claims if full, timely payment is not possible.”

Nothing appears to have changed, with one exception. The state just reported that as of April 30, 2017, total funding available in the catastrophe fund was only $737.4 million. With only $4.9 billion available for claims, including the fund and re-insurance, the only place TWIA can raise money is from the insurance companies licensed in Texas. What that means is that the insurers will all have to contribute — and then they will pass on those assessments directly to their customers.

How large will those assessments be? Well, between the FAIR Plan and TWIA, 2008’s Hurricane Ike resulted in $2.9 billion in claims. That was 24.2% of the estimated $12 billion in total damage. If this is repeated, and based on at least one estimate that Harvey’s ultimate price tag could top $190 billion, the insurers of last resort will have total claims of around $46 billion.

Worse, even the $190 billion estimate (Katrina cost $160 billion) may be vastly under the mark. The National Centers for Environmental Information have not dismissed the possibility that Harvey losses could exceed $230 billion. It will release an official estimate in early October, but experience has shown that revisions to estimates tend to go up.

With around $5.4 billion available for claims completely wiping out both the FAIR Plan and TWIA, this will leave an estimated shortfall of at least $40.6 billion. Almost all of that, based on current law, will be levied as assessments.

What’s more, with insufficient funds available, there is nowhere for policyholders to get their claims paid unless emergency Federal funding becomes available. Inevitably, even if this is the case, policyholders will face major delays in being able to re-start their lives.

Bottom line: The best-case scenarios have Harvey costing $70 billion, while the worst run as high as $230 billion. As it is likely the insurers of last resort will run out of cash to pay policyholders once the total reaches $22.3 billion, even that level of damage would put them in a $11.5 billion hole.

So be ready for higher premiums, potential reimbursement delays, and other hassles if you’re in the affected areas. And whether you are or not, be sure to always check the safety of any insurer you do business with using our Weiss Ratings.

Think Safety,

Gavin Magor

Insurance Insights Edition, By Gavin Magor, Senior Financial Analyst Gavin has more than 30 years of international experience in credit-risk management, commercial lending and insurance, banking and stock analysis and holds an MBA. Gavin oversees the Weiss ratings process, developing the methodology for Weiss’ Sovereign Debt and Global Bank Ratings. Gavin has appeared on both radio and television, including ABC and NBC as an expert in insurance, bank and stock ratings and has been quoted by CNBC, The New York Times, Los Angeles Times, and Reuters as well as several regional newspapers and trade media.