When Hurricane Ike slammed into the Texas Coast last year, it cost the state’s windstorm insurance fund more than $2 billion. That’s $200 million more than the 38-year-old fund collected in all its years of existence.

Lawmakers are considering those numbers as hurricane season approaches.

Inland lawmakers and insurance authorities want coastal residents to pay a bigger share of the fund’s costs.

Lawmakers from coastal counties are fighting bills that have the potential to dramatically raise rates for insurance through the Texas Windstorm Insurance Association. If the rates rise as much as proposed, housing construction could slow and coastal property values could fall.

“Why should our area be punished when we haven’t had a hurricane since 1980?” said state Rep. Todd Hunter, R-Corpus Christi. “Just because we’re on the water? That doesn’t justify an onerous, punitive rate hike.”

If no bill passes, private insurers — who don’t write windstorm insurance on the coast — could end up footing the bill for a major hurricane. That could have an impact on insurance rates paid by homeowners in faraway El Paso and other parts of the state remote from the coast.

The windstorm bill that has made it the farthest in the Legislature could mean more than 30 percent increases to windstorm association customers. A provision of the bill also calls for surcharges on other types of insurance — like auto insurance — if a major storm hits.

Here’s how the windstorm association works now: When a hurricane hits, it uses the premiums it has collected for the year to pay claims. Right now, that’s somewhere between $50 million and $70 million. When that money runs out, the fund asks private insurers to pay a $100 million assessment. If the association runs through that assessment, it draws from a catastrophe reserve fund. The fund could then use up to $700 million in reinsurance — basically insurance for insurance companies.

If it runs through that money, then it can levy another $200 million assessment on insurance companies who write homeowners insurance in the state. They must pay the money for the privilege of doing business in the state. Then, finally, after the windstorm association’s claims exceed $1.3 billion, it can levy unlimited assessments on insurance companies. The state of Texas, however, pays that last category of money back through tax credits. In 2008, that amounted to roughly a $230 million hit to the state budget spread out over five years.

Until 2008, the fund had only assessed insurers twice — the first time during 1983’s Alicia for $157 million, the second during Rita in 2005 for $100 million. But Hurricanes Ike and Dolly went through all the money saved, about $470 million. For the 2009 hurricane season, there is no catastrophe trust fund and no reinsurance.

Critics of the structure say that because of the potential for unlimited assessments, some insurance companies have stayed out of Texas, hindering competition and causing rates to rise. And they say that because the association must take all comers, it ends up insuring the riskiest properties — the ones the private insurers are reluctant to handle on barrier islands and along bays. As the association grows under the current system, so does the potential liability to insurers who don’t offer windstorm insurance. The association’s exposure has grown from $10 billion in 1996 to roughly $68 billion now.

And those critics say the windstorm association simply doesn’t charge enough to cover the risk it insures.

Gary Moore Sr., an insurance company owner in Corpus Christi, said he pays about $2,200 per year on a $300,000 house for windstorm coverage. That’s on top of insurance for flood and a typical homeowners policy.

“If you lived in my house and had to pay it, you wouldn’t think it was low,” Moore said.

But Seth Chandler, a professor at the University of Houston Law Center, said insurance likely would be 40 percent higher if the windstorm association charged enough to cover its actual risk. Though he acknowledges that other experts may come up with different figures, he said nobody seriously disputes that coastal insurance is subsidized.

The association estimates that the “actuarially sound” rate is 30 percent higher than what customers pay.

Beaman Floyd, executive director of the industry group Texas Coalition for Affordable Insurance Solutions, said that if the windstorm association were an insurance company, it likely would be required to have between $10 billion and $20 billion in surplus.

When it was formed in 1971, the association was supposed to be the windstorm insurer of last resort. But today it insures more than 55 percent of homes in Texas’ 14 coastal counties.

The questions for legislators trying to reform windstorm coverage are myriad: How to replenish the fund’s reserves as the June 1 hurricane season approaches? How to assuage the fears of insurance companies who see the possibility of unlimited assessments — and the absence of a windstorm association reserve fund — as a potential reason to stop doing business in Texas? Should residents in economically depressed Robstown pay the same rates for insurance as wealthier homeowners on Padre Island and Key Allegro? How to charge more for insurance in coastal Texas without disrupting the area’s economy? And how can the state induce private insurers to offer windstorm insurance?

Texas isn’t the only state in this predicament. Florida’s insurance pool faces a shortfall of between $10 billion and $15 billion under the worst scenarios. In North Carolina an insurance industry group warns that the state’s “Beach Plan” has just $1.6 billion in reserves, while a medium sized storm would cost the fund $3.7 billion.

Hunter wants to replenish the catastrophe fund with federal stimulus money, though it’s unclear if stimulus money is available for that purpose. Another idea involves using the state’s Rainy Day Fund.

But he said no bill is better than a bad bill.

Some of the proposed answers come in changing the windstorm association’s structure.

Senate Bill 14, the only windstorm bill to pass through a legislative chamber this session, envisions a $400 million assessment to insurers. That’s paid first because right now the association’s reserve fund is zero. The association also could borrow $600 million. That money would be covered by surcharges on windstorm association policies and most other types of insurance in the coastal area, including commercial property insurance and automobile policies.

“Since it’s hard to raise a tax, in some sense they’ve elected to use insurance policies as a taxing mechanism,” Chandler said.

The big hit to coastal residents under Senate Bill 14 is if a larger than average hurricane hits. Those scenarios envision a big surcharge on policies to cover the costs.

Chandler says those surcharges could be as much as 20 percent of a customer’s bill for 20 years.

Chandler described this as a type of anti-insurance. It doesn’t wait for the fund to build up big reserves to make sure it has enough in the till, and the ability to borrow holds off a big increase in premiums.

“They’re saying, ‘We’re going to finance this in reverse. We’ll see what happens, but most of the payments will rest on the coast.’”

Senate Bill 14 still leaves insurance companies on the hook for unlimited payments to the windstorm association. Under the proposed bill, those payments don’t kick in until the association has gone through nearly $5.6 billion. A storm of that size, according to the association’s models, will happen once every 250 years.

The toughest part of drafting the legislation, according to Floyd, is replenishing the reserves. That is, under most plans, the first money to go and the money that’s most at risk.

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