Growing insurance crisis spreads to Texas

By Thomas Frank | 04/17/2023 06:49 AM EDT

Texas’ state-chartered insurer is facing huge growth as insurance companies go insolvent and stop covering coastal homes.

Debris deposited by Hurricane Ike

Debris deposited by Hurricane Ike in Galveston, Texas, in 2008. Scott Olson/Getty Images

Florida came first. Then Louisiana.

Now an insurance crisis that has swept across the Gulf Coast is spilling into Texas, where increasingly scarce property coverage has forced tens of thousands of coastal homeowners to buy policies from a state-chartered insurance program.

The rapid growth has alarmed officials and insurers. And it’s raised concerns that if a major storm hits Texas, so many claims will be filed that the state-chartered insurer will force insurance companies and residents statewide to help pay them.


The mushrooming problems have made Texas the latest state to feel the effects of the insurance industry’s ongoing contraction in the Gulf area following huge losses from recent storms and litigation.

Many smaller insurers in the region have become insolvent in the past year or stopped covering property in hurricane-prone areas such as the Texas coast. That’s triggered unprecedented growth in the region’s state-chartered insurance programs at a time of devastating storms.

In Texas, the program’s growth poses a threat to insurance companies and policyholders throughout the state because the program has insufficient reserves to pay a deluge of claims that would be filed after a major storm.

Instead, the insurer relies on its authority to assess insurance companies in the state up to $1 billion a year to pay claims — an authority it has exercised four times since 2005.

As the number of properties covered by the Texas state-chartered insurer grows, so do the chances that it will drain its reserves and impose an assessment that insurers will pass on to policyholders.

Other Gulf Coast states foreshadow potential problems in Texas.

Florida’s state-chartered insurer — which has seen astronomical growth — warned recently that the depletion of its reserves after Hurricane Ian could force it to impose a surcharge on millions of insurance policies in the state (Climatewire, March 21).

The Louisiana Legislature in February approved spending $45 million in taxpayer money to lure property insurers to the state after major storms left 11 insurers insolvent and prompted 12 others to submit withdrawal notices. Louisiana’s state-chartered insurer also has seen huge growth — its policy count tripled in 2022 (Climatewire, Feb. 7).

Yet the increasing demands on the populace threaten to trigger a backlash.

A Texas lawmaker introduced legislation in March that would effectively abolish the state’s quasi-public insurer — a move the insurance industry says would be catastrophic. The bill is pending in a committee and has not faced a vote.

“We can’t understand how that’s possible,” said Beamon Floyd, executive director of the Texas Coalition for Affordable Insurance Solutions, an advocacy group funded by major national property insurers. “If you did that, the immediate impact of the bill would be a real availability crisis.”

The Texas program is run by the Texas Windstorm Insurance Association, a nonprofit created by the state Legislature in 1971 to insure coastal property when owners cannot get coverage elsewhere. The association insures only wind and hail damage.

The association’s near-record growth in 2022 created a huge spike in its financial exposure, which is the total value of the property it insures. The exposure jumped by 27 percent, to $78 billion, and is expected to continue growing as more Gulf Coast insurers become insolvent.

Yet as the financial exposure grew, reserves remained nearly flat. The association has just $192 million in reserves to pay claims. That’s less than a quarter the amount it had in 2017 before Hurricane Harvey and a fraction of the money it would need to pay claims after a major storm.

The association holds a unique status as an insurer that operates only in the most exposed areas of a state. It’s the largest provider of wind and hail coverage in the 14 coastal counties where it is authorized to sell insurance. A separate state-chartered insurer covers the rest of Texas.

An association consultant projected recently that a worst-case-scenario storm this year would generate $5.2 billion in claims on the program. That’s $1 billion higher than the projection for last year.

Although the jump is driven largely by policy growth, climate change is playing a role, experts said. The growing intensity of storms caused by global warming has contributed to unprecedented destruction, huge insurer losses and reluctance to cover vulnerable properties.

“Our industry has seen several back-to-back years of record losses with regard to catastrophes,” said Don Griffin, department vice president of policy, research and international at the American Property Casualty Insurance Association. “Insurers are being a little more cautious about what they write and how much they write for the Gulf Coast.”

Three of the most destructive hurricanes in Gulf history have occurred in the past three years: Hurricanes Laura and Ida in Louisiana and Hurricane Ian in Florida. Winter Storm Uri, which knocked out power across Texas in early 2021, caused $80 billion to $130 billion in damage.

Albert Betts, executive director of the Insurance Council of Texas, an industry trade group, said there’s been a “decline in private-market writing in the coast, particularly after the winter storm in 2021 and the huge losses associated with that.”

Storm-related losses have made the industry more focused on climate impacts.

“There’s more attention among the catastrophe modelers and reinsurers about what’s going to happen in the future, what’s going to happen with storms, and that when they do happen, they seem to be much more severe and pack much more severe rain and wind,” Betts said.

Facing growing financial exposure, the association has scrambled to find new funding sources to pay claims after a catastrophic storm. The association currently has the capacity to pay $4.2 billion in claims.

One option under consideration involves the unprecedented step of requiring insurance companies in Texas to buy a $700 million reinsurance policy for the association. Reinsurance pays claims after claims payments by a primary insurer such as the Texas association reach a predetermined financial threshold.

The $700 million policy would help bring the association’s claims-paying capacity to $5.2 billion. The board will discuss the option at a meeting Tuesday.

Insurance companies oppose the option, which they say would eat into their own reserves and be particularly harmful to smaller insurers.

Floyd of the insurance coalition said it would cost $20 million to $55 million to buy a $700 million reinsurance policy. The cost would be split among property insurers in Texas according to each one’s market share.

“It’s not an enormous number, but it is significant,” Floyd said.

Insurers also fear that the payment would set a precedent that could lead to them buy increasingly large reinsurance policies for the association at a growing cost, said Betts of the insurance council.

Yet even if the association secures financing to cover $5.2 billion in claims, some officials say that’s not enough.

At a meeting of the association’s governing board in January, board member Ron Walenta warned that if a storm hits a highly developed coastal county such as Galveston, the damage “is going to go way beyond $5.2 billion. There’s so much exposure there.”

And if claims exceed the association’s ability to pay, property owners likely would get stuck with partial payments.

“There’s nothing behind us. There’s no state guaranty fund. There’s no obligation from the state of Texas,” Walenta told fellow board members. “One bad storm, that’s it.”