Reinsurance News

TWIA needs $1.043bn of fresh reinsurance for 2023 as Board rejects ILW option

19th April 2023 - Author: Luke Gallin

The Texas Windstorm Insurance Association (TWIA) needs to procure $1.043 billion of new traditional reinsurance limit at the mid-year renewals to take its 2023 tower to the 1-in-100 level of $4.508 billion, with the Board recently declining an industry-loss warranty (ILW) option for the top of its tower.

Previously, TWIA’s Board voted to establish the association’s 1:100 probable maximum loss (PML) for the 2023 storm season at $4.5 billion, including LAE.

As we wrote at the time, with a stated retention target of $2.265 billion of statutory capital, TWIA needed to secure a minimum of $2.243 billion of reinsurance and catastrophe bond coverage to run through 2023 at the 1:100 PML.

Also at this meeting, the TWIA Board agreed to look at the costs of an additional almost $700 million to the top of its 2023 reinsurance tower, which would raise its claims paying capacity for the year to $5.2 billion.

Now, TWIA currently has $1.1 billion of in-force catastrophe bonds for 2023, a $500 million Alamo Re 2021-1 deal, a $200 million Alamo Re 2022-1 transaction, and a $400 million Alamo Re 2020-1 transaction, although this last deal is scheduled to mature ahead of the storm season. TWIA has now priced a new $500 million Alamo Re 2023-1 cat bond, which more than replaces the $400 million of cover set to mature soon.

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So, that means that of the at least $2.243 billion of reinsurance limit required for 2033, TWIA has secured $1.2 billion of this from the cat bond market, on a multi-year basis.

This leaves $1.043 of traditional reinsurance limit needed to take the 2023 tower to the 1-in-100 level of $4.508 billion.

TWIA’s reinsurance broker is Gallagher Re, and at a Board meeting last night, the broker outlined some options available to TWIA to take the tower up to the $5.2 billion, which considered both pricing and coverage layers. The reinsurance broker considered all forms of risk transfer and explored indemnity protection, parametric coverage, and also ILWs as a way to fill out the additional layer at the top of the 2023 tower.

The TWIA Board was reminded that ahead of the mid-year renewals the reinsurance market remains challenging, highlighting both the risk-free rate and the retrocession market as two main issues.

Gallagher Re executive Allen Cashin explained that placing additional limit in the current reinsurance market is very difficult, hence why the broker is looking at all possible risk transfer options for TWIA.

Interestingly, Cashin compared TWIA’s losses from Hurricanes Ike and Harvey to the PCS industry impacts, noting that the association’s actual losses might compare to the industry impact. As an example, the broker laid out an ILW attaching at a $50 billion Texas named storm loss, covering TWIA to a $70 billion industry loss, stating that a roughly 5% ROL might be required.

According to Gallagher Re, TWIA’s 1-in-100 year loss equates to a roughly $58 billion Texas wind only industry loss.

Despite this, TWIA’s Board were generally against the idea of taking on any basis risk and therefore the ILW product appears to be an unpopular choice, with most opting for indemnity protection.

The result is that TWIA’s Board failed to agree as to whether to purchase reinsurance limit above the PML limit at the upper end of its 2023 tower, and did not order Gallagher Re to purchase any additional limit above the 1-in-100 level.

This means that TWIA will head into the 2023 storm season with the reinsurance tower shown in the image below, procuring $1.043 billion of new reinsurance from the traditional market at the mid-year renewals.


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