Texas windstorm backstop seems to need a backstop

by Artemis on May 12, 2009

The news coming out of Texas about the TWIA (Texas Windstorm Insurance Association) just keeps getting worse and seems to be a perfect opportunity for the capital markets to step in and provide the cover required. It seems that insurers and then tax payers are going to be the ones who lose out, although no doubt insurers will recoup the majority of any deficit through raised premiums. This story in the Houston Chronicle seems to suggest that there is no hope left and taxpayers and insurers alike will have to put up with the situation or move/stop providing cover on the coast (or even in Texas as far as insurers go).

However, what the story does show is that there are a number of thresholds above which matters get worse for taxpayers and insurers. Shouldn’t the insurers operating in those regions be seeking to hedge losses above those thresholds, thus taking the onus off the taxpayer? The story mentions catastrophe bonds but there is little evidence in the market of any being set specifically as a back up to the TWIA. Perhaps the private windstorm futures markets such as the CME Hurricane Index or the IFEX (Insurance Futures Exchange) will see extra volume from the insurers exposed in Texas. With set thresholds such as this a cat bond or future would seem the natural way to go, but perhaps (as commenters on this blog have noted) the price is a little high for investors in an area so exposed to hurricane risks. There has to be a solution for Texas but does it live in the private capital markets? Let us know your thoughts.

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