Following a bit of political pressure and discussion on expanding the data available for the independent actuary, the Actuarial and Underwriting Committee of the Texas Windstorm Insurance Association postponed action on a rate increase for residential and commercial policyholders for 2021. Instead, the committee instructed TWIA staff to make additional data elements available as soon as possible for Willis Towers Watson (WTW) to provide further rate adequacy analysis. By incorporating the new data elements in the catastrophe models, WTW will report revised rate indications to the committee by the end of November.
The seven-member committee met virtually on Sept. 22 and will hold its next committee meeting on Dec. 1 by teleconference. It is then that the members will determine a recommendation to present to the nine-member TWIA board of directors when it meets on Dec. 8.
The cost of this further analysis, which is outside the scope of the original contract with WTW, was still undetermined as of Oct. 6. The cost of this additional work includes obtaining limited licenses from RMS and AIR for WTW to apply the additional risk characteristics to their proprietary models. The bill for the work already completed by WTW was $142,000.
Jade Nguyen, senior vice president of catastrophe management services, Willis Re Inc., coordinated the project on behalf of WTW with TWIA staff. She told committee members that capturing the additional data to use in the modeling will make the models more accurate, but there is no guaranty that the resulting rate indication will be greater or less than the indications provided in the Sept. 4 report. “You don’t know if collecting these modifiers is going to increase the expected loss or decrease it until you actually get the data,” said Nguyen.
“I just want to stress that . we don’t really know what the underlying data is now. It may lead to decreases, which is my sense. But more detailed data does not necessarily mean it will lead to a decrease. It depends on the different type of risk characteristics that you guys are able to capture. I can’t just guarantee that it will lead to lower losses. It will be more accurate,” said Nguyen.
The secondary risk characteristics that TWIA plans to gather into its exportable database over the next few weeks include data on manufactured home construction, roof age, roof cover, roof geometry and building condition, information that TWIA has collected through applications, EagleView images, WPI-8 certifications, or claims files, but has not previously incorporated into its primary policyholder database. Additional data will be gathered over time, said Jerry Fadden, TWIA’s CFO, as TWIA’s current IT project, called Elevate, is in the process of incorporating both internal information, public source data and additional information obtained through agents handling the application and renewal processes.
Insurers typically do not capture most of the secondary modifiers, said WTW in its Sept. 4 report. According to WTW, the challenge of capturing the secondary risk characteristics is that they are “beyond the understanding of most homeowners (unless they consult an expert).” Further, WTW said that the options that can be modeled are not the same for both the RMS and AIR models.
Board member and committee member Georgia Neblett, a non-industry coastal representative, expects the additional data to yield a lower estimate of TWIA’s probable maximum losses. Neblett faulted the report’s classification of TWIA’s residential portfolio as “older properties.” Neblett said that the grandfathered properties that were not required to upgrade to current building codes have been hit by hurricanes Ike or Harvey and have since been repaired. “Agents tell me,” she said, “that TWIA has been very effective for older structures in checking for the age and condition of the roof.” Newer structures were required by law to be built to comply with higher building standards and certified as such.
“Properties are more resilient after the last two storms. The business is more resilient. It seems to me that if we were actually reflecting our book of business that there would be a significant reduction in our insurance costs,” said Neblett, who is a resident of Port Aransas and TWIA policyholder.
Debbie King, chairwoman of the committee and former TWIA board member, told the committee that lack of the information is affecting not only the rate indication, but also probable maximum loss and reinsurance costs. King is an actuary and vice president of risk management for AmTrust Financial Services.
Nguyen assured the committee that the models used reasonable default assumptions for the secondary characteristics, but acknowledged that actual data would improve the accuracy of the models. Jim Murphy, director of analytics at TWIA, said the actual data would affect the rate indication only to the extent that actual data differs from the default assumption.
Murphy explained by example, “The models have a default of a 50-50 or 60-40 assumption on exterior opening protections built in. If we successfully identify this in a large portion of the risk portfolio to determine if they (the insured properties) actually have such exterior protections, the difference would be between what we actually have and their 50-50 assumption.”
The committee narrowly defeated a motion by Neblett, seconded by Stephen Alexander, Alexander Actuarial Consulting, which would have required a zero rate recommendation for the committee to bring to the board in early December. Voting no to this motion were King; Corise Morrison, USAA; David Futterleib, Travelers Insurance, and Marilyn Hamilton, retired, Texas Department of Insurance. Neblett cited her reasons for the motion: the pandemic, the request of lawmakers and the upcoming legislative session.
While King, Morrison and Hamilton said they voted against Neblett’s motion in order to keep their options open until the next WTW report, Futterleib said, “My role on this committee is as an actuary. I’m not going to opine on public policy. My role is to look at the actuarial indications. Both TWIA staff and the independent actuary report that there is a pretty substantial rate need.”
The public policy issue was laid out during the public comment period of the meeting when three lawmakers, who are also attorneys, and a Corpus Christi Chamber of Commerce representative urged opposition to any rate increase. TWIA attorney Mike Perkins said that technical difficulties prevented a fifth opponent to a rate hike from making a public comment. He identified him as Charlie Zahn, chairman of the Port of Corpus Christi Authority.
Rep. Abel Herrero, D-Robstown, said, “I implore you to reject any proposed rate increases. Our coastal communities do not need any more burdens placed on them as they battle COVID-19 and worry if major storms are damaging their homes and businesses. Any rate hikes would be cruel and devastating to our friends and neighbors trying to survive these difficult times.”
Sen. Juan “Chuy” Hinojoa, D-McAllen, said, “Our economy right now is pretty much devastated. Unemployment is very high. Many businesses are still shut down. There are people being evicted. A lot of people can’t pay their mortgages that may foreclose. … We are trying to deal with this pandemic, which I know, not a single one of us has experienced in our lifetimes. On top of that, we got the double whammy. The price of oil and gas is pretty much crashing. Now we are faced with a challenge of all these hurricanes. At the same time, it is pretty obvious that the responsible thing to do at this particular time is to recommend zero rate increase.”
Rep. Mayes Middleton, R-Galveston, opposed a rate hike and criticized the process. His remarks were later echoed by Alexander when the committee member requested that WTW further explain how the historical experience of actual hurricane events reported by Property Claim Services differed from the RMS model by 17 percent and the AIR model by 31 percent. Both Middleton and Alexander referred to the difference as “overestimates,” a term that a WTW representative disputed.
Middleton said, “I am here to oppose any rate increases proposed by the Actuarial Committee. We just got back the Willis Towers Watson report, and there are some things on there that we need to account for and look at more closely before any rate changes are considered.
“One of them is the data on exterior opening protections,” Middleton continued. “TWIA has that data. Unfortunately, it is not being accounted for in the one-in-100 year PML. In other words, things like shutter screens, impact glazing, age of roofs, roof geometry. We have that data with TWIA right now, but it is not being factored in. That could reduce TWIA’s estimated losses by 15 to 25 percent. That would mean a lower reinsurance indication, which means less of a rate change recommendation.
“Willis Towers Watson has also discovered that TWIA’s hurricane models overestimate actual losses for recent hurricanes, like Ike, Katrina and Andrew by 17 to 31 percent. We need to get to the bottom of that before we look into any rate changes at all. TWIA spends nearly 25 percent of its revenue, about $100 million a year, on reinsurance. And we know there have been zero claims on reinsurance in the last 10 years. We have got to get this right. It is a major cost to rate payers,” said Middleton.
Middleton went on to critique the amount of money TWIA spends on debt service, and he urged TWIA to retire high interest bonds before contributing to the Catastrophe Reserve Trust Fund, which he said earns less than one percent interest. He asserted that TWIA has sufficient funding resources to pay for $4.2 billion in hurricane losses without any rate increase. Middleton considered the virtual meeting to be “not really open government” and urged the committee to consider all the unheard voices of policyholders who are without access to the internet-hosted meeting and were, therefore, unable to comment.
The earliest a rate filing could become effective after the full board’s Dec. 8 meeting is Jan. 8, 2021; however, much will depend on how much of a rate increase, if any, the board seeks. A rate filing that exceeds a five percent increase requires prior approval from the commissioner.
A recording of the two-hour meeting of TWIA’s Actuarial and Underwriting Committee is available on the TWIA website and on YouTube.