State Department's Initial Review Of The Twia

Initial Review Texas Windstorm Insurance Association (TWIA) Hurricane Ike Claims Handling Process Summary I.

Background • Hurricane Ike struck the Texas coast at Galveston Island on September 13, 2008. •

The insured property loss resulting from Hurricane Ike is estimated at $12 billion to $13 billion to date, and the insurance industry has handled an estimated 800,000 claims related to the storm.

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TVVIA ultimately received more than 92,000 claims for residential and commercial property after Hurricane Ike. This number represents an estimated 50 percent of the combined property claims reported in the first tier.

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In Galveston County, T\MA had approximately 45,700 claims for residential and commercial property representing an estimated 66 percent of the combined property claims reported in Galveston County.

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When Hurricane Ike hit, TWIA was still processing approximately 2,000 claims from Hurricane Dolly, which struck the southern coastal area of Texas on July 23, 2008.

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As of June 1, 2009, TDI had received 1,681 complaints regarding TWIA’s handling of Hurricane Ike claims. These complaints represent approximately 1.8 percent of the total number of TWIA claims reported at that time. Of those received, 1,053 were closed complaints. Sixty-three percent of the closed complaints were rated as justified. The most common reasons for complaint were delays in processing, unsatisfactory settlement/offers, denials of claims, and customer service issues.

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The Commissioner requested an on-site review of TWIA’s Hurricane Ike claims handling processes. The initial review began on June 29, 2009, and was completed on September 10, 2009. This review was conducted in addition to the routine communications and complaint processing activity associated with major storm response.

Scope and Methodology of the Review • At TDI’s request, TWIA agreed to provide on-site access to claim files and computer resources and to make TWIA staff available for interviews. •

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TDI staff reviewed 350 claims and 50 complaints related to Hurricane Ike claims. The types of claims reviewed were randomly selected samples from various categories of claims, including paid, denied, litigated, and total loss claims. TWIA refers to total loss claims as “slab claims” since the slab is often all that remains of the covered property. The complaints were randomly selected samples from the complaints filed with TDI.

TWIA Hurricane Ike Claims Process Summary

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The selected categories of claims were considered a good representative sample of all types of claims. Some categories were selected to review compliance and control processes.

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TDI staff conducted interviews with the TWIA general manager, claims managers, and other claims staff. TDI staff requested and received responses from TWIA relating to compliance and control processes that became evident during the review, as well as concerns relating to TDI complaints.

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TWIA staff exhibited a spirit of full cooperation and professionalism throughout the review and provided excellent resources, office space, and assistance.

Initial Review Findings • Claims Management > 338 of 350 (96.57%) claims reviewed by TDI in the random sampling were opened and entered into the TWJA computer system within two days. >

TWIA assigned claims to adjusting firms within five days in most cases. Some claim files do not show evidence of communication with policyholders regarding certain aspects of the claims process, including the status of the claim. This contributed to the number of complaints filed with TDI.

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Claim settlement checks were often sent without an explanation of how TWIA calculated the check amount. This often resulted in confusion for the policyholder. TWIA’s Claims Handbook states that adjusting firms are to send a copy of the completed estimate to the policyholder after the claim is approved. However, the manual is not clear regarding timeframe expectations on this procedure. The review team understands that policyholders ultimately received an explanation; however, an explanation sent with the check, or a notice that one will follow, would have eliminated policyholder confusion and resulted in fewer complaints.

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Under the TWIA policy, insureds may be entitled to replacement cost coverage proceeds after repair or replacement of damaged property. Insureds are advised of this coverage early in the claims process. TWIA advised that its policy is to send a notice with the initial claim payment regarding the collection of replacement cost coverage benefits once the repair or replacement of damaged property is completed. However, TWIA did not follow up with policyholders to ensure that they were aware of possible additional claim proceeds for replacement cost benefits. TWIA captures information regarding the number of claims filed; however, there are limited management reports available to provide regular updates about the current status of pending claims. For example, TDI staff reviewed various stages of the claims handling process to determine how long it took TWIA to open claims, assign to an adjuster, contact the claimant, inspect the property, make a determination of coverage, and make payment. The availability of management reports providing such information would enable TWIA to better monitor the claims process in order to facilitate a quicker claim resolution.

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TWIA Hurricane Ike Claims Process Summary

Certain claims were not processed within the timeframes specified in the TWIA policy. The reason provided by T”MA for many of the claims that were not processed within the timeframes specified in the policy was that the adjuster’s report had not been submitted to TWIA by the independent adjusting firm. Such claims could be identified with proper management reports. Management reports could also assist in evaluating adjuster compliance with TWIA policies and procedures. Adjuster Management TWIA used 12 dedicated adjusting firms that committed up to 25 adjusters each. The dedicated firms also secured additional independent adjusters, which increased the number of adjusters available to handle TWIA claims. In addition to the dedicated adjusting firms, TWIA had prior commitments from other adjusting firms to provide additional adjusters to assist with Hurricane Ike claims. As a result, approximately 1,500 adjusters worked on claims on behalf of TWIA. Because of the enormous claim volume, it was necessary for TWIA to use adjusters outside its dedicated adjuster program. -

The dedicated adjusters typically attend four hours of annual training provided by TWIA. To maintain dedicated adjuster status, they must attend four hours of training every two years. Dedicated adjusters also attend two to three hours of training conducted in the area of the catastrophe. The additional independent adjusters only attend the two to three hours of training conducted in the area of the catastrophe. While we recognize the transient nature of the various adjusting firms used by TWIA, adequate training is essential for effective claims handling. TWIA offered claims adjusting software specific to T’MA claims adjusting (IntegraClaim TWIA Special Edition) but did not require that all adjusters use the same software. TDI identified at least five different software programs in the course of the review, including what appeared to be different editions or versions of some programs. TWIA advised that adjusting firms were provided labor and materials pricing guidelines established by TWIA for use in other software programs. The pricing guidelines included the most commonly used materials and types of repairs.

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Complaint Tracking Because of the volume of Hurricane Ike claims and complaints, TWIA worked with TDI to implement a new process for receiving and responding to written complaints received by TDI. To reduce initial processing times for Hurricane ,.

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All claims were subject to review by a TWIA examiner in Austin. Information gathered during the review indicated that the TWIA examiners were responsible for supervising the adjusting firms, reviewing the adjuster reports, and ordering the claim payments. Examiner oversight of adjusters was not uniform, contributing to inconsistencies in the oversight process. Additionally, TWIA examiners do not have policies or procedures in place to effectively manage adjusters and track the processing of claims. Enhanced examiner procedures and/or checklists would improve the management of adjusters and promote consistency in the oversight process.

TWIA Hurricane Ike Claims Process Summary Ike complaints, TDI developed and TVVIA pilot-tested a new paperless process. TDI placed copies of complaint documents on a secure server that TWIA downloaded for review. TWIA used TDI’s new secure web application called eDisaster to view a list of complaints, select an individual complaint. and enter a text response about actions taken. The response was transferred electronically into the journal record for the complaint in TDIs complaints database. .-

TWIA does not maintain written complaint procedures. complaints received from TDI.

TWIA only tracks

TWIA does not maintain a complete complaint record as required by §542.005, Texas Insurance Code. IV.

TWIA I Industry Hurricane Ike Claims I Complaints Comparison • TWIA was formed in 1970 to provide wind and hail coverage along the Texas coast for properties that met the building code requirements. To a large extent, it has become the market of last resort for residents of certain areas of the coast. In recent years the voluntary market has restricted coastal writings, resulting in significant growth in TWIA, especially for property located on islands and along bays. •

The following statistics provide some key claims processing comparisons between TWIA and the rest of the insurance industry: Hurricane Ike TWIA I Industry Claims Comparison (as of June 30, 2009) Claim Statistic

TWIA

Industry

95.5

70.7

5t Tier* Percent of 1 Claims Open (excluding claims closed with no payment)

4.8%

4.1%

Percent of 1 St Tier Claims Closed With No Payment

12.4%

44.1 %**

Avg. No. of Days to Settle a

5t 1

Tier Claim

Notes: *The first tier counties affected by Hurricane Ike were Matagorda, Brazoria, Galveston, Chambers, and Jefferson. **Staff believes a significant number of T’MA claims were first reported to voluntary insurers. The voluntary insurer then closed the claim without payment since wind was excluded from the policy. This largely explains the high percentage of claims closed with no payment in the first tier for the industry.

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TWIA Hurricane Ike Claims Process Summary

The following table lists the top 10 Companies for all complaints received related to Hurricane Ike (inquiries, closed, justified and unjustified complaints) as of 10/26/2009.

Company TVVIA Allstate Texas Lloyd’s State Farm Lloyds Texas FAIR Plan Association Fire Insurance Exchange Texas Farmers Insurance Company Captiol County Mutual Fire Insurance Company Underwriters At Lloyd’s, London Allstate Insurance Company National Lloyds Insurance Company TOTAL •

V.

All Files 2,038 265 262 255 125 121

Closed Complaints 1.214 259 252 253 99 116

112 93 92 78 3,441

108 86 46 76 2,509

Justified Complaints 762 (62.77%) 95 (36.68%) 112(44.44%) 134 (52.96%) 28 (28.28%) 26 (22.41%) 50 26 5 31

(46.30%) (30.23%) (10.87%) (40.79%) 1,269

Dollars Returned $12,596,216 $1,785,959 $2,037,414 $1,266,890 $1,256,396 $264,197 $331,713 $1,601,397 $117,289 $367,031 $21,624,502

When using the statistics provided above to compare TWIA’s performance with others in the industry, it should be noted that most insurers are multistate writers that have many resources and vast experience in handling various catastrophes. Furthermore, as the market of last resort, TWIA has less control over its exposure and growth.

TDI Actions • Finalize additional review. .— As a result of certain concerns raised during the review, TDI recently initiated a review of approximately 300 claims with potential issues relating to the payment of overhead and profit. TDI concluded the on-site review on October 13, 2009, and is currently reviewing the information collected. > An additional concern raised prior to and during the review related to the use of multiple adjusters on some claims and the impact it may have had on the claim settlement. The review team captured data during the review and will further analyze this information. >

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TDI plans to further review TWIA’s claims handling process related to slab claims.

Take appropriate administrative action, pending further review, relating to: TWIA’s failure to maintain a complete complaint record as required by §542.005, Texas Insurance Code. -

TWIA’s failure to process claims within the timeframes set forth in the policy. Note: There is a pending administrative proceeding regarding alleged unfair settlement practices relating to claims payment for “lifted” or unsealed roof shingles. A hearing is scheduled at the State Office of Administrative Hearings (SOAH) on December 1, 2009.

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TWIA Hurricane Ike Claims Process Summary

Make recommendations for process improvements to the TWIA Board, including the following: Develop management reports to provide regular updates regarding the status of individual claims. Develop written procedures and a centralized complaint intake and tracking unit to ensure effective and efficient complaint handling. ‘-

Establish procedures for enhanced adjuster oversight, including a system to regularly follow up on adjuster reports, assign a unique identifier to each individual adjuster, and provide for uniformity in adjuster reports. Evaluate and enhance pre-storm and post-storm adjuster training.

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Evaluate the feasibility of all adjusters using the same adjusting software. Establish procedures to better communicate information and status of claims to policyholders, including providing an estimate of damages with the claim check or notice that an estimate will follow under separate cover. Such procedures should also address follow-up explanations about claiming replacement cost benefits payable after repair or replacement of the damage. Create a Compliance and Customer Service Officer position that may directly report to the TWIA Board.

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Conclusion TWIA by nature of its primary purpose, which is to provide windstorm insurance along the coast, may have lengthy periods of low claim activity punctuated at times by very severe and intense claims activity, It makes good economic sense for TWIA to have a small core claims processing unit to handle periods when the demand is low and to supplement the core unit with temporary adjusters when they are needed. However, to ensure that all claims are handled fairly, consistently and efficiently when there is an influx of adjusters with differing experience, TWIA needs to strengthen catastrophe management controls. Expanded adjuster oversight and training, improved communication with claimants, and enhanced policies and procedures will go a long way to ensure that policyholders who suffer losses are made whole in a fair and expedient manner. This undertaking will require a significant investment of expense and effort, but TDI believes the ultimate savings and policyholder satisfaction are well worth this investment.

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