The aftermath of Hurricane Ike has raised what was already an important issue -- insurance -- into possibly the most visible issue of the upcoming legislative session. The Texas Department of Insurance is up for sunset review, and lawmakers are trying to figure out how to fix the coastal Texas Windstorm Insurance Association.

This week, we publish the first portion of our two-part interview with House Insurance Chairman John T. Smithee (R-Amarillo). Smithee has served as chairman of the House Committee on Insurance since 1993. In this week’s installment, Smithee blasts the current structure of the Texas Windstorm Insurance Association, noting that “any competent regulator” would shut down a private insurer that operated like the windstorm association. He also discusses the legislative reforms to the association he would like to see in the upcoming session.

LSR: What do we know about the impact of Hurricane Ike on the Texas insurance market and the Legislature’s debate on insurance?

Smithee: At this point, we have a fairly good estimate of where the damages are going to fall, although we don’t have exact numbers ... They’re coming up with some fairly definitive numbers with what the losses will be, not only to the private insurers who were [writing policies] in that area but also to the [Texas Windstorm Insurance Association —TWIA] and to the assessments to the private insurers [that TWIA has the authority to levy when its premiums, reinsurance, and reserves don’t cover losses].

As a result of that, there may be some issues regarding the solvency of some of the smaller carriers and their ability to pay some of the claims that they have plus make their assessment to TWIA.

LSR: Farmers almost pulled out of the Texas market in 2002. Are we worried about any of the larger carriers?

Smithee: I haven’t heard anything. I don’t think there’s going to be a massive pullout. Texas is just too big of a market. Much of Texas is a very profitable market for homeowners insurance, and not just homeowners but the related lines, particularly auto insurance. Auto has always been a little more profitable than homeowners for these companies, and there is a real value in having a bundle of products to sell ... The big multi-state carriers are going to be inclined to stay in the market.

Now they may reduce their book of value to reduce their exposure to TWIA assessments. And certainly you would expect them to cut their exposure in what they’ve got left in the Tier I (coastal) counties. But I think the real danger now is that some of these companies will cut back in the Tier II counties. And the big county you’re talking about there is Harris County.

LSR: The one thing Ike has accomplished is it has raised the visibility of the TWIA issue, which you have tried to fix for at least three sessions now.

Smithee: [Former] Sen. David Sibley (R-Waco) handed me a letter that he wrote to Lt. Gov. Bob Bullock back in 1996. Basically, [it was] a memo that Sibley wrote to the lieutenant governor that David and I had a discussion concerning the problems with TWIA and felt that something needed to be done.

This has been on the radar screen for over a decade now. We’ve just been unable really to make any progress. And one of the problems has been the absence of a storm. I think that a lot of people both along the coast and off the coast have developed this mentality that we were bulletproof to a major hurricane, since it had been so long since we had one.

LSR: It seems like a lot of coastal legislators didn’t want to vote to make their constituents pay the premiums associated with the risk of coastal property. Does that logjam get broken now?

Smithee: I think things have changed. One of the bad things that has changed is our options have now narrowed. TWIA is now broke ... I would expect reinsurance to be more expensive next season. Typically, the reinsurance market overreacts to catastrophes and losses. Our carriers are not going to be in a position to pay extensive assessments next year, without some danger to their solvency. And, finally, we’re going to have a hit on general revenue as a result of the premium tax credits resulting from Ike. Our state budget is such that it can only absorb so much of the biennial reduction in revenue that comes from premium tax credit.

When you combine all those factors we’re not in a very good position to withstand another storm, either this year or the next year.

LSR: The Texas Department of Insurance is up for Sunset. What were your concerns about the actions of the Sunset staff?

Smithee: My big concern with the staff report was it kind of played around the edges of the governance issue. My opinion is the governance of TWIA is an absolute disaster within itself. The whole concept of a representative board, where certain constituencies are represented like coastal policyholders and insurance companies, I think is a distortion of how a business ought to be run. The real unfair part of this is, ultimately the people who pay the bills for either the good business practices or the bad business practices of TWIA — and some of the bad business practices are mandated by the legislature — the final bill ends up being paid by taxpayers all over Texas, not just along the coast.

As we’ve seen in Washington in recent weeks, it’s real easy to spend other people’s money. There’s been this rapid influx of expanding coverages and growing risk that they’ve taken on. And it’s not their money. The people who’ve been making decisions on this board aren’t the people who are paying the vast majority of the cost.

The other thing about TWIA is that TWIA policy decisions and TWIA rates for the last 30 years have been political decisions. If you don’t believe that, look back to every gubernatorial election year for the last 20 years and see how many of those years had a rate increase. They don’t get their rates increased when the governor is up for re-election. The governor appoints the insurance commissioner. The board’s asked for rate increases, but the commissioner hasn’t approved them for a long, long time.

So you have this bizarre situation where what has become one of the largest insurance companies in the state of Texas basically sets its rates based on political considerations. And if you’re going to have a business that’s almost a $100 billion business, ultimately the accountability and the decisions have to be made in a businesslike and professional manner and not on political considerations.

LSR: What’s your alternative?

Smithee: Two years ago, we had an interim committee to study TWIA. The consensus of the committee ... was basically to come up with a factual overview and summary with no major recommendations. I strongly disagreed with that premise. I wanted to make specific recommendations.

I issued a minority addendum to the report. I identified about 10 issues with TWIA that need to be corrected. I was looking back on those the other day. I don’t think I’d back off any of those. I think all of those need to be stronger now than they were then.

First of all, [it starts with] the mission of TWIA, which started out as the insurer of last resort, which now nobody knows what the mission of TWIA is.

But it also goes to the governance of TWIA. We need a small, knowledgeable, and working policy-making board that is not beholden to or representative of any constituency but has one primary objective: and that is to maintain the internal solvency of TWIA.

We don’t have that now. We’ve never had that. If you tried to run an insurance company the way TWIA has been run over the last 20-30 years, if you were a private insurance company not chartered or mandated by the government, any competent regulator would have shut you down in 10 minutes.

That says a lot for this program that we’ve got. It’s just not a businesslike program that’s run in a competent way.

Now having said that, I’m not trying to be critical of the management or the board, because in many cases they are doing what the statute directs them to do ... A lot of what they have done, they’ve been doing what the Legislature has directed them to do.

LSR: I know there are a lot of people who will be watching the Sunset bill carefully next session, though the decision on who will carry it may not have been made.

Smithee: I don’t know who is going to carry the Sunset bill. I have no desire to carry it. I doubt if I would be asked to. If you carry the Sunset bill, you are bound to some extent to bring the recommendations of the commission when you come in. And I don’t really agree with a lot of those recommendations. It would be hard for me to carry that legislation.

In deference to the Sunset commission [members], they are there for a reason. They have worked the process. Their staff has worked the process. I think whatever they found is entitled to some deference and respect. I don’t think it’s right just to dismiss out of hand what they’ve recommended, but that doesn’t mean every legislator has to agree with it. O

Next week: We publish part 2 of this interview, where Chairman Smithee discusses the Texas Department of Insurance and homeowners’ insurance premiums.

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