Insurers Well Stocked for Storm Season, But Soft Spots Remain~

As hurricane season looms, there's one bright spot. Despite the financial crisis plaguing the insurance industry as a whole, casualty insurers who provide windstorm insurance are generally well positioned to handle the financial impact of hurricane damage that may occur this year, according to Martha C. White on the Washington Post's "The Big Money" blog, (" Insurers Ready as Hurricane Season Unfurls"). Writes Ms. White, "While insurers like AIG lost a bundle in 2008 because of their investments in mortgage-backed derivatives, companies who offer things like homeowner's insurance didn't dabble as much in these riskier options." According to White's story, property insurers who face the likelihood of frequent small claims tend to keep their assets in the form of fixed-income investments — which withstood last year's collapse better than did the exotic financial instruments that brought down AIG, along with major Wall Street investment houses. As a result, says White, "property and casualty firms were sitting on $456 billion at the end of 2008" — enough to withstand even a catastrophe such as a Category 4 direct hit on the city of Houston, and still survive. In the aftermath of such losses, however, government intervention would likely be required to restore the industry to full solvency. On the other hand, if this year were to bring another Katrina or Andrew, the industry would likely be able to sustain the hit and still stay healthy. However, this does not mean that all individual insurers are ready to handle all possible storm risks — much less that all homeowners, particularly in coastal regions, are well protected by insurance. In Texas, a compromise measure to address a shortfall in funding for the Texas Windstorm Insurance Association passed the state legislature at the last minute, but may have disappointed more Texans than it satisfied. (Technically, the measure actually passed the state Senate after the last minute — according to press reports, the Senate sergeant at arms stopped the chamber's official clock at one minute to midnight so that the body could complete its action in real-world time, before game time officially ran out on the legislative session.) TWIA currently lacks the reserves to handle another Ike-size storm. Under the previous system, the Association would assess other, private-sector, insurers in the state to cover excess claims payouts. The private companies could then claim a tax credit from the state, leaving Texas taxpayers effectively on the hook for the insurance awards. Under the new system, any future shortfall will be covered by ten-year bonds issued by the TWIA; the bonds would be then be paid for by a future increase in premiums for insured homeowners on the coast. In an editorial in the Houston Chronicle, Seth Chandler, a law professor at the University of Houston Law Center, described the insurance bill itself as a catastrophe (" Reformulated coastal insurance plan a catastrophe," by Seth Chandler). By holding insurance premiums relatively flat, says Chandler, the plan appeased coastal residents for the time being, but at the expense of their long-term well-being. Because the measure did not replenish the TWIA's catastrophe fund, or provide for the fund to purchase reinsurance, argues Chandler, the next big storm will drain the fund before all claims are paid. ("Put in your claim early," Chandler advises.) After developing and building with the expectation of unrealistically cheap insurance, Chandler says, coastal rate-payers will eventually end up paying the piper. However, all that depends on future storm activity. A hundred years passed between the devastating hurricane that destroyed Galveston in 1905, and 2008's Hurricane Ike. If decades pass again before the Texas coast receives another similar blow, then the Windstorm Association will have time to replenish its reserves.