Is Texas prepared for what could be one of the most active hurricane seasons on record?

The seasonal outlook issued by the National Oceanic and Atmospheric Administration’s [NOAA] Climate Prediction Center anticipates an “active to extremely active” hurricane season for the Atlantic Basin, with as many as seven major hurricanes.

As panelists discussed at our Policy Primer yesterday, a major hurricane blowing through Texas this year would likely leave Texas taxpayers footing the bill for damage along the coast.

Set up to be the state’s windstorm insurer of last resort, the Texas Windstorm Insurance Association (TWIA) has morphed into the primary coastal insurer due to laws that require it to offer artificially low, actuarially unsound rates. The number of TWIA policyholders has reached 220,552—up from 68,756 in 2001—while TWIA’s total exposure to potential claims has climbed to $71 billion.

A large, diverse group of policyholders is what spreads risk and minimizes costs, keeping prices competitive. Yet TWIA cannot diversify its policyholders or its risk; it can only write windstorm insurance to people who live along the Texas coast.

This has created a scenario whereby rates do not adequately fund risk exposure, even though TWIA’s rates may be higher than some comparable coverage in the private sector. TWIA’s Catastrophe Reserve Trust Fund can only cover about a few hundred million dollars—much less than the potential losses from a significant storm. Homeowners and taxpayers from across the state are on the hook for the rest. In case of a major hurricane, the Texas Legislature may have to convene a special session to find a way to cover that amount of loss.

Reforms in the last legislative session made progress, but didn’t do enough. TWIA’s hands remain tied when it comes to charging rates that ensures it can pay its claims.

Yet we are stuck with a government-mandated system that has given private insurers an excuse not to write policies along the coast and substantially increased financial risk in the case of a major storm, leaving everyone worse off. Coastal residents are forced to buy policies from the state that may not cover their losses unless taxpayers across the state step up to pay them: a no-win scenario that pits coastal residents against the rest of the state.

It shouldn’t be this way—and it doesn’t have to be. In the marketplace, buyers and sellers are free to come together and craft solutions that satisfy all of their needs. All parties leave the transaction better off, which is never the case when government gets involved. That is why the Foundation continues to labor crafting free-market solutions for windstorm insurance and many of the other challenges facing our state today.

Ryan Brannan is an Economic Freedom Policy Analyst at the Texas Public Policy Foundation

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