TWIA Board confirms new PML with ~$4bn reinsurance & cat bonds needed

The Board of the Texas Windstorm Insurance Association (TWIA) met today and has confirmed a 1-in-100 year PML for 2024 funding purposes at a new high of $6.5 billion, meaning the insurer of last resort will seek to require just over $4 billion in reinsurance limit for the 2024 wind season.

The Board were also told that, in order to achieve this significantly larger reinsurance purchase for 2024, the costs are expected to go well over the budget that had been set.

As we reported last week, the Actuarial Committee of the Texas Windstorm Insurance Association (TWIA) had recommended a new blend of model outputs be used to come up with the 2024 PML, which sets the funding limit and provides the target for reinsurance purchasing.

For 2024, the Committee opted to recommend to the TWIA Board that the 1-in-100 year PML be set using a blend of 75% RMS, 25% AIR (Verisk), which comes out at $5.67 billion at the base, but then when loaded with 15% for loss adjustment expenses (LAE) reaches $6.5 billion.

For reference, for the 2023 reinsurance funding the Board agreed a 1-in-100 year PML of $3.92 billion, which including the 15% for loss adjustment expenses (LAE) reached a $4.5 billion PML last year.

For 2024, TWIA’s attachment point is expected to rise to $2.44 billion, so with the new $6.5 billion PML now confirmed by the Board, this suggests a targeted reinsurance limit of $4.06 billion will be needed.

The next question to arise in the Board’s discussion was the potential cost, given the hard reinsurance market environment.

For 2024, the reinsurance budget has been raised significantly to $298 million, but the Board heard today that in discussing the potential cost, this will not be sufficient to secure the reinsurance limit needed to hit this new $6.5 billion PML funding level.

Those discussions with Gallagher Re resulted in a conclusion that the cost to secure the necessary reinsurance for 2024 at the new PML level will be in the range of $400 million.

This drove some discussion on ways to reduce the cost, with some suggesting a restructuring of how reinsurance costs are apportioned.

But, in voting on the new PML, the TWIA Board approved it by 8 votes to 1.

So now the work to secure the reinsurance will continue, having already begun some months back.

TWIA staff are already working with Gallagher Re and its capital markets and catastrophe bond affiliate, Gallagher Securities on this.

Catastrophe modeling in support of a traditional reinsurance placement is already completed and is in progress for expected catastrophe bond issuance.

In addition, documents and exhibits supporting both traditional reinsurance and catastrophe bonds have also been updated, as TWIA prepares for the reinsurance placement process.

As we explained before, with cat bond market conditions improved compared to a year ago, it is possible now that TWIA could look for a significant purchase from the insurance-linked securities (ILS) market this year, especially with so much additional reinsurance limit now required under the now agreed $6.5 billion PML.

Multi-year coverage has benefitted TWIA in the past and with its exposure and total insured values growing at accelerating pace, locking in more multi-year coverage would seem prudent, especially as the appetite for new investment opportunities among the cat bond investor base remains very high at this time.

Of the $1.2 billion of catastrophe bonds TWIA currently has outstanding, $500 million are scheduled to mature just prior to the 2024 hurricane season, meaning only $700 million of cat bonds will definitely be in-force at that time.

As a result, TWIA will look to purchase some $3.35 billion in fresh reinsurance and cat bond coverage this year, the organisation said.

It’s worth remembering, that the $700 million of in-force catastrophe bonds also need their coupons paying through this year as well, so TWIA will be paying for around $4 billion of protection in 2024.

TWIA had already been advised to get out early into the cat bond market, to ensure the capacity it needs is available, so we suspect that now this Board meeting has been completed, a new TWIA catastrophe bond could be imminent.

You can read about all of TWIA’s Alamo Re catastrophe bonds it has ever sponsored in the Artemis Deal Directory.