Having a major hurricane hit the Texas coast is not an "if" it's a "when.
" To think otherwise is to ignore our history.
An adequately funded insurance facility that can cover our potential windstorm claims is in the interests of our Coastal County residents and all of Texas.
All Texans would be affected if Texas Windstorm resources are inadequate to handle a major coastal windstorm event.
Unpaid claims would result in unrepaired damage and financial ruin to many of our coastal citizens and businesses.
Important future development in the state would be threaten by withdraw of financing for appropriate building in windstorm risk areas without adequately funded insurance protection.
Our Texas Government would have a moral obligation to make these legitimate claims good for its state controlled windstorm insurer.
With the major storm damage from a hurricane season causing damages at this level, Texas Government funds would already be over tasked dealing with the infrastructure damage, the immediate needs of a large displaced population and other acute issues.
Our coastal homeowners and business owners should shoulder a large share of funding their own protection from the windstorm risk, however, the catastrophic risk of a major hurricane strike in the greater Houston area is so great, it can only be shouldered by a statewide funding system.
Here's why I'm concerned.
What's the size of the problem? A tropical cyclone similar to Hurricane Rita (a 100-year storm, category 3 hurricane) has a high probability of hitting coastal Texas in the next twenty years.
Total losses from Hurricane Ike, a large category 2 hurricane, to TWIA (Texas Windstorm Insurance Association) were approximately $1.
8 billion.
Total losses for TWIA from 2008 season were $2.
1 billion with two Hurricane strikes on the Texas Coast, Hurricanes Ike and Dolly.
The maximum probable loss from a "One Storm" strike on Galveston (with impacts to adjacent counties and inland areas including flooding and wind damage) is approximately $100 billion in total damage per NOAA (National Oceanic & Atmospheric Administration) calculations of which approximately $8 billion could fall on TWIA.
TWIA currently has in excess of $38 billion in insurance contracts in force in on the North Texas Coast (Galveston, Jefferson, Brazoria, Chambers, Matagorda and Harris counties).
Texas state insurance funds also have an additional substantial exposure via the Texas Fair Plan home insurance program in adjacent Harris and Fort Bend counties.
This is a very high concentration of risk to cyclone damage.
The Texas Windstorm Insurance Association also has significant risks in other coastal areas including Corpus Christi, South Padre Island and Beamount / Port Arthur.
Corpus Christi is the second biggest risk concentration with a maximum probable loss from a "One Storm" strike of between $3 and $4 billion.
Frequency of major storms (hurricane category 3 or higher) making landfall on the North Texas coast is one about every twenty years.
There have been six major hurricanes that have struck the North Texas coast since modern weather records (1850's) have been kept.
The following list is the tropical cyclone strikes to North Texas Coast since 1900 with total damage figures adjusted to current development and currency valuation (source = NOAA).
Note that these total damage figures are calculated to include damage beyond the coastal counties and include damage caused by other perils besides windstorm but it is very important as reference in understanding our coastal windstorm risks.
1.
Galveston 1900, Cat.
4, $104 billion (a similar storm is our Probable Maximum Loss with TWIA having losses of approx.
$8 billion) 2.
Galveston 1915, Cat.
4, $71 billion 3.
Ike 2008, Large Cat 2, $20 billion (TWIA $1.
8 billion) 4.
Carla 1961, Cat.
4, $15 billion 5.
Rita 2005, Cat.
3, $12 billion 6.
Allison 2001, Tropical Storm, $6 billion 7.
Alicia 1983, Cat.
3, $5 billion As you can see from this list, our "Probably Maximum Loss" is about four times the losses from Hurricane Ike.
As you can also see from the list, our major hurricane strike frequency is approximately once every twenty years.
How much money does Texas have to handle this risk? By the 2010 hurricane season, TWIA will have approximately $200 million in cash surplus and $2.
5 billion in post-event bonding authority for a total of approximately $2.
7 billion.
Much more is needed to keep Texas safe from our "Probable Maximum Loss" risk.
While post-event bond authority is a useful mechanism, it is inappropriately used as our primary financial protection for normal windstorm risk protection.
Also,TWIA only has revenue stream sufficient to payoff about $1 billion in bonds in the ten year period allowed.
Futhermore, paying off the first billion in bonds would limit TWIA's ability to build surpluses to handle any future storm.
The remaining bonds are paid with a combination of surcharges to policy holders and insurance company assessments.
Who pays the rest if the Texas Windstorm Insurance runs out of money? Currently, Texas is completely naked beyond the very modest cash surpluses of TWIA and the limited post-event bonding authority setup by recent legislation (House Bill 4409, signed June 2009).
Who pays beyond this $2.
7 billion? Either the legislature will pass an emergency funding bill or the claims will be unpaid.
Why is this important to all of Texas?

1. All of Texas is economically interdependent with the North Texas Coast particularly the port, transportation and industrial facilities.
   
2. All Texans would be impacted by the unpaid obligations of this state controlled insurer.
   
3. Property owners across the entire Texas Coast could have problems financing new construction or rebuilding if bankers were unwilling to accept TWIA as insurance protection for the financed assets.
   

What can be done to reduce this unfunded exposure to Tropical Cyclones? My view is that the "normal" risk level of $2.
5 billion (an Ike level storm strike to Galveston) should be covered by a combination of TWIA surpluses, property insurance company assessments or reinsurance.
The mechanism of pre-arranged post-event bonds could be used beyond this $2.
5 "normal level" for added protection.
The combination needs to equal $8 billion to handle our Probable Maximum Loss (Galveston 1900 level event).
We should also balance the risk load between the coastal counties property owners and the rest of the state with the "normal" risk level (currently $2.
5 billion) bore by the coastal owners and the "catastrophic" risk (beyond $2.
5 billion) spread statewide.

1. Reinsurance - Reinsurance likely will be costly and availability is limited.
   It would require windstorm insurance rates sufficient to afford purchase of this added protection.
   Reinsurance has to be purchased annually.
   
2. Higher windstorm insurance premiums - Higher rates would build cash surpluses and help to purchase reinsurance.
   Rate levels should be sufficient to handle normal loss levels (including sensible reinsurance purchases) and build reserves toward a future major hurricane strike.
   
3. Risk reduction - Windstorm mitigation via building codes with appropriate enforcement.
   From what I understand, this is being addressed.
   
4. Long term funding of catastrophic risks including hurricanes with a pre-event bond financed Catastrophic Fund.
   Since our risk of a major hurricane strike is roughly every twenty years, a structure based on financing the catastrophic risk with twenty year pre-event bonds makes sense.
   
5. Limited assessments to property insurance companies.
   A limited assessment (rather than an unlimited, open-ended assessment that was recently abandoned), would be a way of shifting a part of the coastal windstorm risk funding statewide.
   A known and definitive share of the risk could be rated by property insurers.
   This would not be "free" funding (it would add to statewide property insurance rates) but it would recognize the original intent of TWIA was to pool risk among the state property insurers.
   

Conclusion Hurricane Rita & Ike were wake-up calls.
We need to be ready with primary funding (cash surplus, assessments & reinsurance) to handle a normal range storm strike at least to the Ike range ($2 billion to $2.
5 billion).
We also must be prepared for our "Maximum Probable Loss" to our state windstorm insurance facility which would be a direct strike on the Galveston / Houston area of a Category 4 Hurricane.
This predictable loss could reach $8 billion for the Texas Windstorm Insurance Association.
Texas won't be safe until we get a funding mechanism in place for our full catastrophic risk.
Texas was very fortunate in 2005 when Hurricane Rita veered away from Galveston.
Likewise, we were fortunate again in 2006 with no significant storm hits.
In 2007 several very large hurricanes hit Mexico but missed Texas.
In 2008, Hurricane Ike hit Galveston directly and while damage was significant, the damage could have been much worse if the storm had not reduced in strength just prior to landfall.
Sooner or later, our luck will run out (it nearly did with both Ike & Rita).
We need to be ready.
Higher windstorm insurance rates to better reflect the true potential risk, build cash reserves and enable hedging with reinsurance are needed.
The coastal homeowners and businesses should make a substantial contribution to protect themselves from this peril.
Funding mechanisms for the windstorm peril that task resources beyond the Coastal County property owners should be reserved for the risk of a true catastrophic event.
Insurance rates that are unrealistic low will channel development to areas that cannot be economically protected and increase the long-term risk to us all.
The moderate "pain" of higher rates over time is a good tradeoff for all concerned considering our well documented high long-term risks.
Failure to protect Texas from the known risk from tropical cyclones is irresponsible.