The TWIA board met Friday. I could not listen in on the meeting so my information is very limited.
It appears that TWIA is going to seek $500 million in pre-event bonds for the 2013 hurricane season in order to augment its skimpy $180 million catastrophe reserve fund. Although the total of $680 million is inadequate to address the $70 billion plus in total insured value, it is still an improvement over the $180 million that might be the only certain funding. My AIR/RMS derived hurricane models (CompoundPoissonDistribution[0.54, WeibullDistribution[0.42, 177000000]]) suggest this reduces the probability that TWIA will be unable to pay claims in full for hurricanes this year down from 14% to about 9%. Yes, TWIA may be paying a high interest rate to engage in this sort of borrowing, and from what I understand the borrowing has yet to be consummated, but this is a significant step.
I also understand from a Rick Spruill Twitter post that TWIA is going to seek $1.15 billion in reinsurance. What I can’t tell you right now is
- at what level will the reinsurance attach, i.e. atop the Class 3 as I have recommended or inserted between Class 2 and Class 3 as a Guy Carpenter presentation suggested might occur
- will the reinsurance “drop down” in the event any of the post-event bonds underlying it can not be sold; if not this reinsurance may well be worthless
- what premium will TWIA pay for this reinsurance; TWIA in the past has paid very high rates for reinsurance that probably had higher attachment points
- will the market in fact sell TWIA this much reinsurance; reinsurance capacity is not unlimited
- is the reinsurance per occurrence or per year; it matters a lot if we have multiple storms
- if per occurrence, what right of reinstatement will TWIA have and at what price
These are all very important questions in assessing the extent to which TWIA policyholders are at risk for this summer while the Texas legislature considers alternative short and long run fixes.
One additional note
Although the decrease from 14% risk of failure to a 9% risk of failure is significant, one must recognize that over a long period of time, 9% risks materialize. There is, for example, an 85% chance that a 9% risk will materialize at some point during a 20 year period. So, getting funds up to $680 million is a positive development, it is not by any means a long run solution.