The Texas Windstorm Insurance Association’s board of directors on May 15 voted to approve a 5% rate increase for 2013, but a separate plan to institute higher “territorial” ratings for the highest risk regions has been shelved until at least August.

If the rate increase is approved by Insurance Commissioner Eleanor Kitzman, 2013 would mark the third straight year TWIA instituted a 5% rate hike. In 2009, the association raised rates by 10%.

Last month, TWIA’s Actuarial/Underwriting Committee forwarded to the board a plan for an overall 4.7% rate hike on residential properties and 1.7% on commercial properties. The board also proposed territorial adjustments that could see rates fall by as much as 10% in some areas and rise by as much as 10% in others.

Under current state law, rates within each of the 14 Tier 1 counties that participate in the association cannot vary by more than 8%. The actuarial committee’s recommendations would divide each county into between one and four territories. TWIA covers roughly 200,000 policyholders across its territory.

The committee’s recommendations were made in response to analysis by actuarial consulting firm Merlinos and Associates, which showed that TWIA would need $4.8 billion of claims-paying resources to cover losses following a 1-in-100-year storm. Including both $436 million of premiums and other income and $2.5 billion of post-event bonds authorized by the Legislature, TWIA could only cover up to $3.79 billion in losses. The firm estimated a 27% chance the agency could not cover all of its liabilities.

Merlinos’ analysis found that Galveston County and parts of Harris County were the riskiest areas for TWIA.  The Galveston Daily News reported that representatives of the Coastal Windstorm Insurance Association, former Galveston Mayor Henry Freudenburg and state Rep. Craig Eiland, D-Galveston, were among those who appeared at the May 15 meeting to implore the board to hold off on approving the territorial rating plan.

Lowering rates in some areas doesn’t make sense, Eiland said. It would just be a disincentive for private insurance firms to provide coverage and would only mean more people signing up with the windstorm insurance association.

Meanwhile, dramatically raising rates in other areas would hurt policyholders who have nowhere else to turn for insurance, he said.

“None of us get dramatic pay raises,” Eiland said.

The board’s next meeting is actually scheduled to be in Galveston on Aug. 7, when the board will likely decide the fate of the territorial rating plan, the Texas Tribune reported.

Mike Gerik, TWIA board chairman, indicated that the proposal for such territorial rate changes is not off the table, and could be approved at a later time in addition to the 5 percent overall rate increase. If the board approves the territorial rate changes, it “would be up to the [insurance] commissioner to decide whether or not we can take that much rate,” he said.

TWIA, which was rendered nearly insolvent by Hurricane Ike in 2008 and by a torrent of litigation that followed the storm alleging claims-handling problems, was placed under administrative oversight by the Texas Department of Insurance early last year. Kitzman has hired consulting firm Alvarez and Marsal to evaluate possible ways to restructure the association.

The Federal Reserve Board made history this past week, for the first time giving approval for a Chinese bank to purchase a U.S. bank.

The Fed approved applications by China’s largest bank, the $2.5 trillion Industrial and Commercial Bank of China Ltd., as well as China Investment Corp. and Central Huijin Investment Ltd. to become bank holding companies after jointly acquiring up to 80% of the voting shares of New York-based The Bank of East Asia (U.S.A.) National. Bank of East Asia has 13 branches in New York and California and about $621 million in deposits.

Not coincidentally, the Fed also approved applications by Agricultural Bank of China Ltd. and Bank of China Ltd. to open bank branches in New York and Chicago, respectively. The applications had been pending for as long as two years.

As reported by USA Today, the approvals followed “high-level talks last week between the United States and China.”

In those talks, which were overshadowed by a dispute involving a Chinese dissident, China agreed to let foreigners including U.S. companies have bigger stakes in its securities firms and make other concessions designed to give foreign firms greater access to the U.S. market.

Treasury Secretary Timothy Geithner, who along with Secretary of State Hillary Clinton headed up the U.S. side for the annual discussions, said at the conclusion of the talks Friday that China had made “important steps” that would translate “into greater opportunities for U.S. workers and companies.”

There is, of course, no especially compelling reason to bar Chinese firms from accessing the U.S. financial services market, including through mergers and acquisitions. Frankly, we could use the capital.

But there is a certain irony in federal priorities here. Sabre-rattling aside, China does remain a strategic rival of the United States. And these aren’t simply banks headquartered in China: they are, like most of that nation’s major firms, state-controlled. The Chinese government owns 71% of Industrial and Commerce Bank, for instance.

And yet, while these state-controlled foreign banks will be permitted to expand their operations in the United States and free to make loans to U.S. small businesses, community-oriented, nonprofit credit unions are still constrained by regulations that don’t allow them to devote more than 12.25% of their assets to business lending. That is a striking disparity.

(This article originally appeared in The Huffington Post.)

If Mitt Romney wants to win the election and become president, he should come out and support gay marriage. Doing so will work not so much because it’s consistent with conservative principle (which it is) and generally popular (that too) but because it will fracture Obama’s base.

Let’s start with why marriage is right from a conservative perspective. Conservatism is, as Russel Kirk wrote a “body of sentiments, rather than… a system of ideological dogmata.” And, as such, it has to evolve with the times. In a very different society where two-parent marriage was essentially the only setting in which children could be raised, divorce was very difficult to obtain, premarital sex frowned upon by “respectable” people, and co-habitation without marriage virtually unknown amongst the well-educated; it’s possible that having the state stand for one-man/one-woman-only marriage could make sense.

But that’s not how modern society works. Gay and straight Americans alike enter into a lot of different types of partnership arrangements. Some of these are clearly undesirable. But others — committed heterosexual couples who live together long-term without marriage, committed same-sex couples raising children together — bring many of the same social benefits as marriage. Making these relationships stronger and granting them legal recognition is a good idea if one wants to create a society where families, houses of worship, and other voluntary institutions, not government, does most things.

Second gay marriage is a winning issue. In the wake of the President’s announcement that he supports gay marriage, Americans’ positions are changing — quickly. For the first time, outright majorities of Americans in big, well-controlled national polls say that they support gay marriage. While simply looking at polls doesn’t always tell you what will get votes — easing of restrictions on gun ownership is generally unpopular but nonetheless a winning political issue for many candidates — they’re nonetheless a decent guide. And now, a majority of Americans want gay marriage.

This matters because current polls show Obama holding a rather narrow lead in the popular vote and a bigger one in the electoral college. Overall, this means that his positions and person are more popular than Romney’s. The problem for Romney that much of President Obama’s true base, a bit of 40 percent of the vote is simply not going to vote for Romney under any circumstances. Despite a lackluster economy, the President has delivered pretty well for union bosses, businesses that rely on government subsidies, government workers, current college students, and others who make up the Democratic base. For a variety of reasons — including the historical nature of his presidency — African-Americans (who, polls show, generally oppose gay marriage) can also be expected to cast ballots for Obama almost no matter what. The bottom line is simple: nothing Romney could do will dislodge most of the Democratic base and he’s best off writing it off.

But gay voters are “getable” in significant numbers and could change the calculus. Beyond the party’s acceptance of them as people — an understandably big deal — there is no reason why gay or lesbian Americans should necessarily belong to either party. Gay government workers, hard-core environmentalists, adherents of age religions, union bosses, and welfare recipients probably should and will vote for Democrats. Gay entrepreneurs, gun owners, pro-lifers, people of traditional faiths, and those just sick of being overtaxed will most often find their interests best met by the GOP. Right now, however, most people in the later group will still vote Democratic just because of the GOP’s rejection of gay marriage. If one goes with low-ball estimates that somewhere around 2-3 percent of the population is gay (and it’s probably twice that) getting even half of the gay vote would almost certainly put Romney over the top. And there’s reason to think he could get more: Marketing data does generally indicate that gay couples are more affluent than the population as a whole and thus likely to benefit from the lower-tax policies that Romney would pursue.

While some voters would certainly be turned off by a Romney endorsement of gay marriage, many people concerned enough to vote against a rock-solid conservative like Romney over gay marriage alone might also vote against Romney for his Mormon faith or previous support for abortion. Sure, endorsing gay marriage has risks but, for Romney, it may be one of the few paths he has to the White House.

Deborah Bailin, Christian Camara, Julie Drenner, R.J. Lehmann, Alan Smith, and I have all submitted our resignations from the Heartland Institute effective May 31^, 2012. You can read the press release here.

Matthew Glans, who has been a frequent blogger on this site, will be continuing at the Heartland Institute and focusing on other issues. All of us expect that we’ll continue to work with him and others at Heartland. We’ll be continuing Out of the Storm News and, indeed, all of our other work under a new brand, the R Street Institute. Watch this site—and other Heartland sites—for more information about our transition and set up as a new, independent, non-partisan think tank.

All of us proud of the work we’ve done at Heartland and grateful to our colleagues who will continue to work there after we depart.  Heartland is a vital organization that has done more than any other think tank to advance liberty on the state level.

As R Street, we plan to partner with Heartland and believe that it will continue to do much good work and, indeed, thrive, in the future. Joe Bast, Heartland’s CEO, has been a gentleman and partner in every part of this transition. I have nothing but good things to say about Heartland and my colleagues there. It was a good place to work and, for a little more than two more weeks, still will be.  This isn’t an ending but, instead, a new beginning. We’re excited but we’re also nervous.

***

On a more personal note, I am sorry about the billboard that Heartland ran. It was an experiment. It was short lived.  I didn’t create it and didn’t know about it until about five minutes before it launched. Nonetheless, I still work for the Heartland Institute through May 31 and, as such, I feel I owe everyone an apology.  I’ll say it again: I’m sorry. The billboard just isn’t my style or a message that I particularly agree with.

***

Back on insurance: the so-called Flood the Hill efforts continued this week. Because of recent chaos, Heartland wasn’t there to take part. But it’s clear the debate won’t end right away. Even if the U.S. Senate somehow votes before May 31, a short-term extension is still going to be needed while the Senate and U.S. House work out their differences. (Although it strikes me as possible that the House could simply pass the Senate bill.)  What seems most likely now is a very short-term extension to June 30, 2012 as Sen. David Vitter, R-La., has proposed. This is probably a decent idea since it keeps alive the possibility that the flood program could get the real changes it needs during 2012.

The problem with short-term reauthorizations is that, in general, they have not compelled action on the flood program or any real reform. The reason for this, in the past, was simple: the House and Senate were simply too far apart. Although I admired him for doing it, Sen. Richard Shelby, R-Ala., was fighting a rather lonely fight when he tried to use the short-term extensions to create pressure on the program.

This time, however, it may be different: a short-term extension does keep the pressure on and, because the House and Senate aren’t that far apart, could result in a real, meaningful reform bill passing during 2012. We can—and should—always hope.

Until next week.

The Heartland Institute has decided to spin off its insurance research project effective May 31.

According to Joseph Bast, president of The Heartland Institute, “We’re convinced this will be a win-win situation for Heartland as well as Eli Lehrer and his team of very skillful and devoted policy experts. We urge any individual, foundation, and corporation with an interest in insurance and related finance issues to contribute to Eli’s new organization once it is up and running. We look forward to working closely with Eli in the future.”

Eli Lehrer, who will continue to serve as director of Heartland’s Washington DC office and its Center on Finance, Insurance, and Real Estate until May 31, said, “Separating our project from Heartland will allow us to focus on the issues that we are best known for and good at. I have worked with The Heartland Institute for many years, and now under a new name, my team and I will continue to ally ourselves with Heartland where we can both work to advance the cause of freedom and free markets.”

Lehrer added, “We thank everyone at Heartland, from Joe Bast, its dynamic CEO, on down for their support and friendship over the years. We look forward to working together for many, many years on our common goals.”

Florida homeowners purchasing their flood insurance through the National Flood Insurance Program (NFIP) may find their insurance rates increasing next year. According to the South Florida Sun Sentinel, around 2 millions households with NFIP policies could see a rate increase of around 5 percent in the fall. The National Flood Insurance Program, the national flood insurer of last resort, is plagued with debt and is currently being considered for reauthorization.

From the Sun-Sentinel:

“The National Flood Insurance Program, the only source of coverage for 2.1 million Florida households, will raise its rates by an average of 5 percent in October and maybe as much as 20 percent in high-risk areas over the next few years.

Federal officials also have told Florida insurance agents they can no longer provide discounts of up to 15 percent for their customers.

The looming increases are another jolt to home ownership in the state, especially in coastal areas or along inland waterways near sea level, where lenders cannot finance a mortgage without flood insurance. Some of the riskiest areas may even be excluded from coverage, making further development untenable in those parts of the state.

Higher rates are inevitable as Congress lumbers toward revamping the insurance program, which is mired in more than $18 billion of debt.”

Higher rates inform homeowners that their homes are susceptible to catastrophic flood damage. Increasing the cost of living in a flood zone both limits new home construction and prepares homeowners for losses, limiting future disaster assistance covered by taxpayer dollars. NFIP’s rates have been artificially low for years, encouraging unwise construction in high risk areas while rebuilding homes that remain exposed to high flood risk.

These “repetitive loss properties” are one of the biggest concerns NFIP faces. A Congressional report in 2004 found the program costs taxpayers up to $200 million annually, primarily because some properties repeatedly experience flood losses. According to the National Center for Policy Analysis, since 1984 the NFIP has paid out nearly $1 billion for at least 10,000 properties that have experienced two or more losses, with cumulative claims often exceeding the value of the property.

Eli Lehrer, vice president for DC Operations at The Heartland Institute argues in the Sun-Sentinel piece that the rate increases are a necessary step towards making the program financially viable.

“People who receive the most subsidies in risky areas will see big premium increases, probably phased in,” predicted Eli Lehrer, national director of the Center on Finance, Insurance and Real Estate at the Heartland Institute in Washington. “Rates have to go up. The real question is: Will the program be sustainable? It cannot continue at the rates it has now.”

The impact is especially significant in Florida, home to 2.1 million of the nation’s 5.6 million flood insurance policies.

Policyholders in Florida may also lose the rebates they have received in the past on hurricane coverage. Some insurance companies have offered rebates to homeowners who harden their homes against hurricane damage. While mitigation is an important part of hurricane preparedness, these rebates have proven controversial because some homes have used it to bring down their rates even when the improvements made do little to bring down costs. Some homeowners, despite living inland far from the Florida coasts, received rebates for hardening their homes when significant damage was unlikely to occur. Other homes fraudulently received the discounts without making the upgrades.

“The Federal Emergency Management Agency has informed Florida insurance companies that as of Oct. 1 they will no longer be able to provide “rebates,” or discounts that have sliced premiums for some customers by as much as 15 percent.

Ending rebates means that many Floridians will pay more, said Jerry Wahl, president of Statewide Condominium Insurance.

“Times are tough,” he said, “and we believe all businesses should be permitted to conduct operations in accordance with Florida statutes.”

Could pet insurance be a potential model for human health care insurance? A new editorial in the Weekly Standard by Eli Lehrer, vice president for D.C. operations at The Heartland Institute argues, that there are many features of pet insurance that are highly desirable in human health care and that could serve as a model for the future, but it isn’t perfect.

Pet insurance offers many benefits that many human insurance policyholders would kill for: low costs, greater choice in products and services and more flexibility in coverage, all while being regulated primarily by market forces and not government regulation. While Lehrer warns that many of the mechanisms that allow the pet insurance market to work so well cannot be replicated in the health care market, due to layers and layers of rules and regulations, there is ample ground for similar innovations.

From the Weekly Standard:

The market for pet health insurance is a competitive one that offers many popular, desirable policy features—including many that politicians want to impose on the human health insurance industry. But it’s not perfect. A detailed look at the market, the least regulated broad health benefits system in the country, suggests it would be impossible for the human health insurance system to simultaneously do everything people say they desire, contain costs, and follow purely market principles. This isn’t a reason for free market health care reformers to despair but, rather, a cause for them to be careful about what they promise.

The positive aspects of the pet insurance market aren’t trivial. For starters, it offers far more choices. Only 3 companies market individual health insurance in New Jersey, while at least 10 write policies for dogs and cats. And the pet insurance carriers offer plans with benefits to fit any budget. Almost all pet insurance policies provide the same coverage at any hospital or vet, whereas almost all human health policies have no or limited benefits for “out of network” care. While people over 50 can have a very difficult time finding individual health insurance at any price, coverage for older dogs and exotic breeds isn’t a problem since several companies will write a policy for any dog or cat of any age. And many of the features politicians have felt themselves compelled to mandate in health insurance plans are provided by pet carriers as a matter of course. Even very cheap policies often throw in some “wellness” coverage that discounts routine tests and checkups. And the pricing schemes are also more attractive than those in the private individual health market. Although pet insurance premiums rise yearly as individual pets age and veterinary costs go up, many pet insurers don’t increase them on the basis of claims history, and most promise never to drop coverage no matter how sick a pet gets.

Eli emphasizes in his article while pet insurance can provide a useful model for human health care, it does have its own flaws. These flaws are not due to any inherent problems with the market, moral or economic, but rather because “certain aspects of human health simply transcend the economic.”

Eli’s article was mentioned in a Washington Post article by Sarah Kliff who expanded on this point. One of the most obvious differences between pet insurance and human health care is end-of-life care. While health care costs for human patients are highly concentrated in the last years of life, pet health costs can be lower, due to additional options lime euthanasia.

From the Washington Post:

The one biggest difference, however, between pet health care and its human counterpart is likely end-of-life care. That tends to be one of the most expensive part of health insurance for humans, with 27 percent of Medicare dollars spent on the last year of life. Suffice it to say, end-of-life care for dogs comes with quite different options, including euthanasia.

There’s good news in Florida these days, and certainly something that gives Gov. Rick Scott some bragging rights. The state’s unemployment rate has dipped to 9%, which is a drop of 0.4 percentage points, the largest monthly decrease in almost twenty years. When Gov. Scott took office, the unemployment rate was nearly 12%. This is a major boost to Gov. Scott, who has been suffering from poor approval ratings essentially since he first took office. Scott has made job creation his top priority and even his campaign slogan was “Let’s Get To Work.”

Of course, 9% is still above the national average of roughly 8.2%, but Florida’s rate of decline in unemployment largely outpaces the nation’s. Many have dismissed Scott as a one-term governor due to his poor poll numbers, but I have always pointed to Charlie Crist’s sky high approval numbers this time four years ago as proof that political winds change on a whim. Four years ago, it was totally inconceivable that Crist would lose any race in 2010, and yet in less than a year his political fortunes made a drastic 180 degree turn. If Florida’s economic and unemployment figures continue to improve, Scott will be nearly impossible to defeat in 2014.

***

Speaking of elections, the Florida Senate race had a bit of a hiccup recently when it was revealed that Florida Chief Financial Officer Jeff Atwater was considering making a late entrance into the GOP Primary. The race for the GOP nomination currently pits Rep. Connie Mack IV (son of Florida’s popular former Sen. Connie Mack III and great-grandson of the legendary baseball manager Connie Mack) against former Sen. George LeMieux and retired Army Col. Mike McCalister running a distant third.

Polls show Mack handily winning the GOP nomination, but not fairing as well against incumbent Democratic Sen. Bill Nelson in the general election. Despite his decent poll numbers in the primary, however, it would appear that Mack has not been able to consolidate grassroots support or generate much energy for his campaign. George LeMieux, on the other hand, has been traveling the state and meeting with just about every Republican organization he possibly can. Despite his close ties to Republican pariah Charlie Crist, many in the grassroots and Tea Party circles are giving LeMieux a second look due to his strong ability to articulate conservative principles. Those against LeMieux, however, point to his years-long association with Charlie Crist, during which time he advised him on policy, politics, and later touted much of the governor’s liberal record. Those critical of Mack argue that he spends more time in California with his wife, Rep. Mary Bono, than he does in Florida.

Due to the apparent enthusiasm void for both these candidates, CFO Atwater toyed with the idea of jumping into the race, especially due to Florida law that does not require officeholders to resign if they run for a federal position. Tallahassee insiders all felt he would run, but he announced via Facebook several days later that he was going to focus on the job he was elected to do.

***

On a more serious note, Florida made a bit of history this week when its state-run property insurer, Citizens Property Insurance Corp., issued $750 million in catastrophe bonds. Nearly three times larger than originally planned, the purchase is said to be the largest of its kind and an important change in how Florida chooses to protect itself from damages that exceed its ability to pay.

If losses in Citizens’ coastal account exceed $6.35 billion at any point during the next two years, the bonds kick in. Proceeds not spent during the 2012 hurricane season would be available for the losses in 2013. This is certainly a step in the right direction because it shifts much of Florida’s hurricane risk away from taxpayers. Absent private reinsurance coverage and these other types of transactions, Floridians would be forced to pay massive assessments on their policies to cover any deficits Citizens Property Insurance Corp. or the state-run reinsurer known as the Florida Hurricane Catastrophe Fund might run following a bad hurricane season. The Citizens board deserves props for its decision to shift risk away from taxpayers and onto the private market, and legislators and others who say the private market does not have the will or ability to step in should take note.

Until next time!

It’s now official. Everglades Re Ltd., the first-ever catastrophe bond from Florida’s Citizens Property Insurance Corp., will go down as the largest single-tranche, single-peril cat bond in history, with a record offering size of $750 million.

The offering’s Class A notes have been rated B+ by rating agency Standard & Poor’s. The two-year notes would cover three-quarters of the $1 billion in private reinsurance Citizens projected it would obtain for the 2012 storm season, which starts June 1.

The bonds will pay a coupon to investors of 17.75% above U.S. Treasury money market fund rates, which is considered fairly generous, although perhaps necessary for a catastrophe-prone region like Florida. They will have an attachment point of $6.35 billion, which is a relatively high trigger, and become exhausted at $7.35 billion.

Citizens projects its probable maximum loss from a 10-year event is about $2.85 billion, so that would be below the cat bond trigger. A 25-year event carries a PML of $7.36 billion and the PML of a 100-year event is $21.4 billion.

Citizens originally anticipated it would spend $150 million on ceding to private reinsurers this year and $50 million for “alternative risk transfer” vehicles such as cat bonds. It also projects to spend $550 million on cessions to the Florida Hurricane Catastrophe Fund and to finish the year with $6.18 billion of surplus, up from $5.61 billion at year-end 2011.

The news of the cat bond’s successful placement certainly seems to amply demonstrate private sector interest in catastrophe risk, and it comes at a good time for Citizens, which is losing some of its power to lay “hurricane taxes” on the private market.  Earlier this year, the state Legislature passed H.B. 1127, which eliminates the regular assessment layers (which could be charged to virtually all property/casualty policies in the state in the event of a funding shortfall) that Citizens could charge on its commercial and personal lines accounts to cover, while reducing regular assessments on coastal accounts from 6% to 2% and lengthening the time frame private P&C insurers have to pay the assessments.

Citizens still has the ability to seek emergency assessments on both their own and other companies’ policyholders for up to 10% of annual premium.

Despite successful passage of H.B. 1127, the Legislature once again balked at taking more serious steps to scale back the risks posed both by Citizens and the Cat Fund. Perhaps somewhat ironically, the leadership of both institutions have been much more aggressive in sounding the alarm for reform than Florida lawmakers have been.

Most recently, Citizens announced it was examining whether 2009 legislation that limited annual rate increases to 10% should be considered to apply to new policies.  They are considering a proposal to lift the rate increase cap for new policies, which they hope will both speed along depopulation efforts and help bring Citizens’ overall risk profile closer to being actuarially sound.  Estimates of rate adequacy from Citizens’ actuarial staff showed that both personal lines and commercial residential rates are currently short by 42.3%, while commercial nonresidential rates are 75% below the actuarially indicated levels.

As of March 31, Citizens had 1.4 million policies in force with total exposure of $502.98 billion. Despite ongoing efforts to depopulate Citizens through transfers of blocks of policies to the market, in December, the company projected its policy count would rise 11.5% this year and finish the year at about 1.7 million.