Texas considering cat bonds to shore up depleted catastrophe fund

Two new pieces of legislation are being put forwards in Texas in an attempt to solve the problems the Texas Windstorm Insurance Association (TWIA) is facing now it’s reserves have been depleted by Hurricane Ike. 730,000 claims were filed in the three months after Hurricane Ike struck Texas, about 90% of those claims have now been settled, the unpaid claims are predominantly on the coast where debates over wind vs water damage rage. The TWIA was set up to provide insurance cover in exposed coastal areas that private insurers had all but abandoned.

The TWIA trust fund of $530m has been severely depleted by claims from Ike and it’s currently unclear how the fund will be replenished in time for the approaching 2009 hurricane season. Various bills have been put forwards to try to rectify the issue, for example a house bill that would require a portion of state hotel/motel tax to be diverted to the windstorm trust fund. The bill’s more likely to actually solve the issue are the ones which call for more reinsurance, raised rates, increasing assessments from private insurers and the use of catastrophe bonds. I’m surprised there isn’t also a call to make use of hurricane futures.

What might really help the coastal home and business owners in Texas would be for them (or the State itself) to be able to access a parametric windstorm insurance product which could pay claims based on an index of windspeed. This would help to provide cover in difficult areas and ensure much faster payouts to allow for rebuilding to commence more quickly. If the State starts to use catastrophe bonds then can they cascade that index-based trigger approach to the consumer in such a way?