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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

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 TWIA Hurricane Ike Claims Process Summary

• 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.

• 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.

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

ill. 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.

> 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.

> 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.

- 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.

• 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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 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. TWIA only tracks
complaints received from TDI.

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

5t
1
Avg. No. of Days to Settle a Tier Claim 95.5 70.7
5t Tier*
Percent of 1 Claims Open (excluding 4.8% 4.1%
claims closed with no payment)

Percent of 1 St Tier Claims Closed With No 12.4% 44.1 %**

Payment

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.

All Closed Justified Dollars

Company Files Complaints Complaints Returned
TVVIA 2,038 1.214 762 (62.77%) $12,596,216
Allstate Texas Lloyd’s 265 259 95 (36.68%) $1,785,959
State Farm Lloyds 262 252 112(44.44%) $2,037,414
Texas FAIR Plan Association 255 253 134 (52.96%) $1,266,890
Fire Insurance Exchange 125 99 28 (28.28%) $1,256,396
Texas Farmers Insurance Company 121 116 26 (22.41%) $264,197
Captiol County Mutual Fire Insurance
Company 112 108 50 (46.30%) $331,713
Underwriters At Lloyd’s, London 93 86 26 (30.23%) $1,601,397
Allstate Insurance Company 92 46 5 (10.87%) $117,289
National Lloyds Insurance Company 78 76 31 (40.79%) $367,031
TOTAL 3,441 2,509 1,269 $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.

V. 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.

> 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.

> 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.

VI. 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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