TWIA reinsurance & cat bond target could be even higher at $4bn for 2024

The Texas Windstorm Insurance Association (TWIA) could need even more reinsurance limit for the 2024 wind season, as its exposure growth drove its Actuarial and Underwriting Committee to recommend the Board sets a 1-in-100 year PML for funding purposes at a new high of $6.5 billion.

It’s important to note that this recommendation goes to the Board of TWIA in the coming days and the Board could change the quantum of reinsurance needed to be purchased.

But, it’s clear from yesterday’s meeting in Texas that exposure growth has been significant at TWIA and continues to be, so by the time the insurer of last resort gets into the 2024 hurricane season, its exposure will be even higher than it is today, growing at around 1% per month while policy renewal rate increases are around 10% as well, driving exposure even higher.

We reported earlier this week, that modelled data on a comparable basis with how the 1-in-100 year PML was set a year ago for TWIA, suggested TWIA may consider as much as a 65.7% increase in reinsurance limit for 2024, with up to $3.7 billion of reinsurance limit needed for 2024.

At yesterday’s meeting, the Actuarial and Underwriting Committee heard from executives at broker Aon, who explained that the exposure growth means all modelled outputs suggest more funding is required this year.

With the addition of growth in policy count and premiums due to rate increases, TWIA could go into the hurricane season with even higher exposure and the Committee also heard that some meteorologists are already citing concerns about a challenging hurricane season for the Texas coast, where the TWIA exposure base lies.

As a result, the Committee opted to take a different approach with their modelled data input to setting the all-important 1-in-100 year PML this year, opting for a blend of RMS and AIR (Verisk) models.

As we explained earlier this week, a year ago the 1-in-100 year PML for TWIA was $3.92 billion, but for 2024 this has risen to $5.331 billion. When including 15% for loss adjustment expenses (LAE) that was a $4.5 billion PML last year and a projected $6.13 billion PML for 2024, using a comparable model, which was RMS only.

However, the Committee opted to send a recommendation 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.

The TWIA reinsurance and cat bonds are expected to attach a little higher up for 2024, as additional funding of roughly $450 million is expected for the Catastrophe Reserve Trust Fund (CRTF) helps to lift it slightly.

The attachment point is expected to rise by around 7% as a result, from last year’s $2.28 billion to a 2024 reinsurance attachment point of $2.44 billion.

On which basis, if TWIA looks to buy reinsurance and catastrophe bond backed risk transfer up to the new 1-in-100 year PML of $6.5 billion, suggests that over $4 billion of limit now needs to be secured.

As said, this is just the recommendation of TWIA’s Actuarial and Underwriting Committee, which will be taken to the Board in the coming days, so a different model blend, or number, could be chosen for the target.

Last year, the TWIA Board did change the Committee’s recommendation and lowered the PML.

But, if the TWIA Board opts to stick with this recommendation, then TWIA will target buying around $4.06 billion of reinsurance limit, across its catastrophe bonds and traditional reinsurance tower for 2024.

At TWIA’s 2023 attachment and PML, the reinsurance program consisted of $2.24 billion of reinsurance limit, with TWIA’s catastrophe bonds making up the biggest share at $1.2 billion, the rest being traditional reinsurance.

It’s a big jump from $2.24 billion of reinsurance limit to just over $4 billion, a $1.82 billion increase or an 81% increase in limit needed to be sought.

But, TWIA’s exposure is up by 26.4% on the prior year, as of November 30th 2023.

Since then, TWIA’s exposure had already increased by a further 2.3% up to January 2024 and an additional 1% exposure is forecast to be added each month up to hurricane season, while the 10% rate increases expected for renewing policies is additional growth to that.

The question then becomes, can TWIA afford the reinsurance it may now need to buy for 2024, should its Board approve the recommended $6.5 billion 1-in-100 year PML?

Last year, TWIA budgeted $225 million for its 2023 reinsurance and cat bonds, securing the $2.24 billion of limit for the year.

For 2024, the reinsurance budget has been raised significantly to $298 million. Whether that will stretch to purchasing the full roughly $4 billion of limit this year remains to be seen.

Market conditions have improved, with cat bond spreads down from their highs and reinsurance expected to renew much closer to flat, or just with slight increases.

Given the cat bond market has softened off somewhat compared to a year ago, it is possible TWIA could look for a significant purchase from the insurance-linked securities (ILS) market this year.

As a reminder, 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.

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 after the Board meeting a new TWIA catastrophe bond could be imminent.

All of which suggests that when TWIA comes back to the catastrophe bond market, as is anticipated, it could look to more than replace the expiring cat bonds, with a large new cat bond issuance from the residual market wind insurer possible in 2024.

As said though, it is possible the Board of TWIA opts to reduce the 1-in-100 year PML figure, or just makes a resolution to buy as much as it can for the budgeted $298 million, in which case the reinsurance purchase could fall short of the $4 billion target.

The way TWIA’s need for reinsurance limit has increased is being reflected at many other major insurers and buyers of protection.

It reflects the increased demand being seen and this has been helping to soak up some of the capital increase in the marketplace.

With more of the largest reinsurance buyers anticipated to need more limit this year, there is a clear opportunity to grow the role of cat bonds and ILS in the provision of this protection.

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