James W.

Oliver
General Manager

November 10, 2009

To the Members of the Windstorm Insurance Legislative Oversight Committee

The Honorable Robert Duncan The Honorable John Smithee

The Honorable Troy Fraser The Honorable Larry Taylor
The Honorable Mike Jackson The Honorable Todd Hunter
The Honorable Leticia Van De Putte The Honorable Ryan Guillen
Texas Senate Texas House of Representatives
P.O. Box 12068 P.O. Box 2910
Austin, Texas 78711 Austin, Texas 78768

Dear Senators and Representatives:

On October 30, 2009, Commissioner Geeslin sent members of the Windstorm Insurance
Legislative Oversight Board a summary of TDI’s initial review of TWIA claims handling
processes during Hurricane Ike. The purpose of this letter is to respond to certain issues
presented in the TDI report, and provide additional context for the entire report.

As stated in my September 30, 2009 letter to the Oversight Committee members (copy
attached), we are making changes in our processes and procedures to provide better
communication to policyholders. However, it is important that committee members
know that this storm was unprecedented in scope and presented unique challenges that
had to be addressed in real time.

TWIA is a non-profit statutory association established by the Texas Legislature in 1971

as a mechanism to provide windstorm and hail coverage to Texas Gulf Coast property
owners unable to obtain such insurance in the voluntary market. From the day after
Hurricane Ike hit Texas, TDI staff, including Commissioner Geeslin, were invited to
review all aspects of our claims handling and weigh into the processes established. A
TDI staff member attended TWIA staff meetings for six weeks following Hurricane Ike.
I had regular – often daily – calls and meetings with Commissioner Geeslin regarding our
response to the catastrophe. TWIA continued its high level of coordination and
cooperation with TDI throughout the on-site review of claims handling processes.
TDI’s decision to focus its investigative resources on TWIA, like no other carrier, must
reflect the special public function that TWIA carries out for the State. It may also reflect
the reality that TWIA had the largest number of high-risk properties in areas most
vulnerable to the devastating forces of Hurricane Ike. Unfortunately, in making its
claims comparisons between TWIA and private industry, TDI does not address the
structural differences, risk and regulatory environment that set TWIA apart from carriers
in the voluntary market.

Hurricane Dolly occurred in July 2008, approximately seven weeks before Hurricane Ike.
Hurricane Dolly has produced 8,339 claims. Hurricane Ike has produced 92,235 claims.
When Hurricanes Ike and Dolly are combined with other wind and hail events during
2008, the result is more than 102,000 claims reported to TWIA. In the last nine years on
average TWIA has received approximately 3,300 claims a year. The exception was 2005
when Hurricane Rita hit. TWIA received approximately 13,000 claims in 2005, which
was the largest number that TWIA had received in one year during the last 25 years.

Obviously, in 2008 with more than 102,000 claims reported, necessary adjustments had
to be made to manage this unprecedented volume. TWIA staff implemented its existing
catastrophe plan, which had been reviewed with TDI in advance. We added the
appropriate trained and experienced staff to existing space and added new space and
work stations. All of our systems, computers, telephones, etc., were adapted as we
expanded. These systems were set up in advance to be adaptable and scaleable while
providing cost efficiencies during years when TWIA had low claim volumes.

Hurricane Ike was a singular storm event for TWIA and for Texas. It was a Category 2
wind event with a Category 4/5 surge. Flood/surge is not covered under TWIA policies
so independent adjusters and other experts, working for TWIA, had to sort out the
covered wind losses from the excluded flood/surge. Since TWIA provides coverage on
more than 90% of the residential and commercial properties in the areas most affected by
surge, the Association received hundreds of complaints from policyholders who did not
have flood insurance or adequate flood insurance. TWIA records show that
approximately 40% of policyholders with flood losses did not have flood insurance and
approximately 40% were underinsured. We believe only about 20% of policyholders
with surge losses had adequate flood coverage. TWIA has faced inaccurate and unfair
criticism (and litigation) from many policyholders who do not have coverage for their
devastating losses.

TDI’s report states that 50% of the policies in the first tier are issued by the private
market companies and 50% by TWIA. What the report does not state is that TWIA
writes at least 95% of the policies on the barrier islands and around the bays and rivers.
Thus, at least 95% of the claims in these areas were TWIA’s to adjust. The private
market companies intentionally removed windstorm coverage from their policies in these
areas to avoid the larger, more difficult claims that often include flood/surge.

TWIA has 2,784 “slab” losses where surge completely destroyed and washed away the
buildings. The private market has very few of these losses. 80% of these policyholders
chose not to buy flood insurance or did not have sufficient flood insurance to replace

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their dwellings and contents. TWIA writes the older, more damage-prone dwellings that
are not built to stronger building codes. The private market intentionally writes newer
dwellings built to the more recent windstorm building codes.

TWIA takes each Hurricane Ike complaint seriously. TWIA legislation and TDI rules
require that the Association notify policyholders who have a complaint that they can
contact the Texas Department of Insurance and appeal TWIA’s decisions to the
Commissioner of Insurance. TWIA often sends this written information multiple times
during the adjustment process, encouraging policyholders to take complaints to TDI. The
private market companies do not have this type of notice requirement so many of their
complaints go to company management and are not recorded as TDI complaints.

TDI’s complaint statistics included hundreds of complaints from individuals who did not
have a windstorm policy in force. TDI rules dictate TWIA’s underwriting when a
hurricane enters the Gulf of Mexico. TWIA legislation and TDI rules require an appeal
of TWIA’s underwriting decision to the Commissioner of Insurance. For the complaints
that proceeded through the appeal process, TWIA’s decisions were reviewed by the State
Office of Administrative Hearings and affirmed by the Commissioner of Insurance in
virtually all cases. With respect to claims-related appeals, the State Office of
Administrative Hearings has issued numerous “proposals for decisions” that would affirm
TWIA’s decision, but no Commissioner’s order has been entered.

Some of the proposed changes in the TDI report are helpful and consistent with TWIA’s
internal recommendations. TWIA instituted a voluntary review of its processes and
procedures and was already implementing appropriate changes before TDI’s report was
issued. There are a few areas of disagreement with TDI’s findings, including the
following:

1. TWIA has asked TDI for a process to review TDI’s rating of “justified”
complaints. Many cases are disputed by TWIA.
2. We disagree with TDI’s characterization of “delayed claim handling”.
Although not described in a TDI rule, bulletin or order, TDI apparently rated
complaints as “justified” even when the claim was handled in accordance with
the claim handling deadlines provided in Texas Insurance Code Chapter 542
(“Prompt Payment of Claims Act”). The benchmarks implied in TDI’s
investigation do not conform to the time periods prescribed by Chapter 542,
and they are sometimes unrealistic for catastrophe operations on the scale
required because of Hurricane Ike. We have asked to review this disconnect
with TDI. Of course, we will continue to implement technology and training
to improve customer service and efficiency even when we already comply
with statutory deadlines.
3. Many complaints relate to customer service issues such as scheduling
inspections, receiving estimates, obtaining claims status, and understanding
the basis of a payment. TDI often rates customer service complaints as
“justified” even if the loss adjustment is accomplished within statutory
deadlines, and the grievance has no bearing on the total amount paid.

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 4. A TDI complaint can be TWIA’s first notice of disagreement regarding the
amount of a covered loss. When the complaint has to do with the amount
paid, TWIA typically responds with reevaluation or additional investigation of
the differences, and attempts to obtain any evidence supporting a claim for
additional benefits. This includes follow-up request to policyholders for
information that was requested but not previously supplied. TDI improperly
assumes that responsible follow-up investigation and reassessment is an
indication of initial failure.

If anyone has a question or comment, or would like to discuss these issues, please contact
me.

Very truly yours,

James W. Oliver

cc: Hon. Rick Perry, Governor

Hon. David Dewhurst, Lt. Governor
Hon, Joe Strauss, Speaker
Mike Geeslin, Commissioner of Insurance