According to industry publication The Insurance Insider, TWIA has secured the rights to $1 billion in reinsurance attaching at $1.7 billion. TWIA also has the option of instead obtaining a larger $1.25 billion in reinsurance but with a higher $2.2 billion attachment point. Both policies apparently cost about the same, likely around $100 million or about 23% of TWIA’s available cash. Purchase of the reinsurance, while helping to protect the struggling state-sponsored insurer for this summer, will, however, reduce TWIA’s ability to increase its internal Catastrophe Reserve Trust Fund. Purchase will thus keep Texas’ largest coastal windstorm nsurer dependent on this expensive form of protection.
TWIA’s choice about which reinsurance option to pursue likely depends on actions at the Texas Department of Insurance. If Texas Insurance Commissioner Julia Rathgeber accedes to requests from some that she overturn the decision of her predecessor, Eleanor Kitzman, and permit TWIA to borrow $500 million in advance of the storm, TWIA would likely go for the higher attachment point and more coverage. TWIA would likely hope on raising an additional $1.5 billion through sale of Class 2 and 3 bonds, such that with $200 million in operating funds and its Catastrophe Reserve Fund (this number keeps getting smaller) there would not be a large gap between the amount of cash TWIA actually possessed to pay claims and the size of losses at which reinsurance dollars would be obliged to come pouring in. If Commissioner Rathgeber respects the decision of her predecessor, TWIA would likely go with the lower attachment point even if it mean less total protection. TWIA would likely have, as discussed here before, at most $1.7 billion in its own cash to pay claims and would need reinsurance to attach at that lower point in order to avoid a gap.
The success of this plan, which would get TWIA up to either about $2.7 billion or $3.45 billion, depends on its success in selling post-event bonds. As has been discussed on this blog many times, most recently here, this is far from a certainty. And while a a special session of the legislature might fix problems with the current funding structure, Governor Perry has not yet decided to add windstorm insurance to the agenda. Leaving matters in limbo creates risk. If TWIA doesn’t have cash up to the attachment point because it can’t sell bonds or its internal funds are depleted, reinsurance will not provide complete protection and policyholders might not be paid in full. Reinsurance does not generally “drop down.”
TWIA also benefits this year from the “softening” — as it is called in insurance circles — of the catastrophe reinsurance market, meaning that prices have declined. Last year, for about the same premium, TWIA obtained only $850 million for a reinsurance policy that attached at $2.3 billion. In general, the price of reinsurance decreases (or the amount of reinsurance that can be purchased for the same price increases), as the “attachment point” increases. There is, therefore, no guarantee that a deal of this nature would be available for the 2014 hurricane season or thereafter.
According to the Insurance Insider publication, TWIA has until July to make up its mind about which policy to purchase. Although waiting that long might permit TWIA to see what political developments occur, it also has its risks. Reinsurance will obviously not pay for storms that occur prior to the date on which the contract is signed and, I suspect, the formal offer to TWIA may well contain prohibitions on electing coverage once a storm forms in the Gulf.