February 24, 2009

Written Testimony on Reforming the Texas Windstorm Insurance Association

  • Daniel Sutter

    Senior Affiliated Scholar
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This written testimony was delivered to the Texas House of Representatives Insurance Committee as part of the February 24, 2009 hearing on Texas Windstorm Insurance Assocation.

Insurance is a critical part of our economic system. At its heart, the purpose of insurance is to allow individuals, firms, and governments to spread risks across times and locations. The prices of insurance policies conveys to policy holders information about the potential risks of different activities. After disasters, insurance acts as a voluntary, contractual means of disaster relief that is critical to rebuilding homes and businesses.

Texas is one of seven states, all located on the Gulf of Mexico or Atlantic coasts, to have a state wind pool to provide insurance for high-risk properties at below-market rates. As of 2007, there were over 1.8 million policies with a total liability of more than $500 billion in effect across these wind pools. The hurricanes that struck Texas in 2008 cost the Texas Windstorm Insurance Association (TWIA), Texas’ wind pool, an estimated $2.7 billion, and have revealed the association’s unsound financial basis and need for reform.

In practice, all state wind pools shift the cost of coastal living to state residents who live inland. This is both inefficient and unfair: inefficient because it induces people to live in areas at highest risk of being hit by hurricanes, and unfair because pool members do not share the benefits of coastal living with inland residents who, as is now the case in the aftermath of Hurricane Ike, have to pay many of the costs associated with living in a hurricane-prone area. For these reasons, Texas needs to consider how to reform TWIA in a way that is both economical and fair.