Texas’ state-created windstorm pool is looking at changes to the way it would cover losses in the event of a major storm. Last week the Actuarial Committee of the Texas Windstorm Insurance Association (TWIA) met with the organization’s reinsurance broker Guy Carpenter to discuss possible changes to its reinsurance policies.

State law requires TWIA to maintain adequate funds to cover a 1 in 100 year event, which is estimated to be $4.9 billion. TWIA has traditionally met this obligation partly through reinsurance and partly through other mechanisms, such as the agency’s Catastrophic Reserve Trust Fund.

Now, as reported at Seeking Alpha:

Due to a projected $100m increase in the size of the CRTF for 2016, based on premiums coming in and the ability for TWIA to increase CRTF funding as a result, in order to maintain the $4.9 billion of funding TWIA would only need to have $2.2 billion of reinsurance and catastrophe bonds in place, a $100m reduction in reinsurance limit required as the attachment point shifts up to $2.7 billion.

And this is what the Actuarial Committee have proposed to the TWIA Board, that the organization should secure enough reinsurance or additional catastrophe bonds in order to maintain the $4.9 billion funding level, for the lowest cost possible.

The decision on whether to access the catastrophe bond market again will depend on analysis done by Guy Carpenter as well as the response of the traditional reinsurance and alternative markets. However if cat bond capacity is available at a conducive price, within the layer, TWIA may well seek to sponsor another bond.

Making this change would, however, increase TWIA’s vulnerability should it face multiple events in a year:

TWIA has a potential gap in its funding should a major event occur in 2016 and erode the CRTF, leaving the other financing to drop down while the reinsurance and cat bond coverage would continue to attach at $2.7 billion.

That could leave as much as a $700m gap in TWIA’s funding structure, just below the reinsurance attachment point. The Guy Carpenter brokers told the Committee that there could be various options available to close that gap, by securing some sort of second or subsequent event coverage or reinstatement.

This could be achieved by buying another $700m of reinsurance which inures to the CRTF layer, so replacing any CRTF that is eroded and ensuring no gap in coverage.

While the overall change here is relatively minor, it does indicate improved confidence on the part of TWIA in its fiscal position, which has been aided by low storm activity and some rate increases.

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