Supplement to Using Mathematica 6 To Inform Political Debate

The Texas Windstorm Insurance Simulator

Professor Seth J. Chandler

University of Houston Law Center

Uncontested Facts

TWIA collected about $250 million in premiums last year and has total exposure of $58 billion. Both numbers growing extremely rapidly (19% last year).

TWIA has no money in hand to pay its insureds in the event of any significant hurricane

In the event of a large hurricane, TWIA would (and has) made assessments against all insurers in Texas. Assessments are essentially in proportion to property/casualty business throughout the entire state and are joint and several.

TWIA has in recent years obtained some insulation for those insurers by putting premiums aside into a "catastrophe fund" (currently about $400 million)

TWIA uses a significant part of its premiums ($151 million) to purchase reinsurance against $1 billion of its obligations in excess of those paid for by the catastrophe fund

Insurers are permitted to credit all of their assessments in excess of a certain level against otherwise existing premium tax obligations

The credit is (a) non-refundable and (b) must be spread over at least 5 years.

In essence, above a certain level of assessment, the insurers just make an interest free loan to the state for these excess assessments. The state (i.e. taxpayers) pay back the loan by not charging insurers for otherwise existing premium tax obligations.

TWIA Information Flow

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Real World Implications

current system does not adequately protect Texas taxpayers from disaster

the aftermath of a major hurricane is not when you want to lose tax revenue

potential for a cascade of failures

TWIA could be our levies

consider alternatives to reinsurance such as cat bonds

It is costing $151 million to reinsure what appears actuarially to cost less than $75 billion

this is a fixable problem

state should purchase insurance against loss of premium tax revenue

state should consider placing limits on TWIA insurance and seeing if a thicker excess market develops (parallels to federal flood policies)

good climatological data and models are crucial

extreme sensitivity to Poisson coefficient

conflict between proprietary goals of modelers and public debate

perhaps a Gulf Coast Consortium on Catastrophe Modeling