Texas Windstorm reform bill includes mandate to look at alternatives

by Artemis on June 30, 2011

The Texas Windstorm Insurance Association reform bill was passed by the local legislature yesterday and now moves on to be signed by the governor of the state. The bill strengthens the TWIA with improved claims and administrative operations and also allows the TWIA to issue pre-event bonds to help with financing.

Interestingly, the bill also mandates that a committee look into alternatives ways to provide insurance to the coastal area of the state and asks for them to assess ways to involve the private re/insurance market in this. The TWIA recently secured an additional $636m of reinsurance but it’s suggested that won’t be enough should more than one major storm hit the state. We first wrote about the possibility of the TWIA using catastrophe bonds back in 2009, and then again earlier this year when the Heartland Institute recommended private market risk transfer solutions to the TWIA’s problems.

The bill says (Section 56 in case you’re interested):

Requires the committee to examine alternative ways to provide insurance to the seacoast territory of this state through a quasi-governmental entity, including providing insurance coverage through a system or program in which insurers in this state provide insurance in the seacoast territory of this state in proportion to the percentage of insurance coverage provided in geographic areas of this state other than the seacoast territory; study the residual markets for windstorm and hail insurance in other states to determine if those markets operate more efficiently and effectively than the residual market for windstorm and hail insurance coverage in this state; recommend the appropriate scope of authority and responsibility for the entity to provide insurance to the seacoast territory of this state; an organizational structure to exercise authority and responsibility over the provision of insurance to the seacoast territory of this state; a timetable for implementation; and specific amendments to state laws and rules that are necessary to implement the committee’s recommendations under this subdivision; and estimate funding requirements to implement the recommendations.

The committee are required to report back to the governor and legislature by December 2012, so nothing is going to happen very quickly, but it is a promising step in the right direction.

Catastrophe bonds would seem a natural fit for the Texas windstorm problem. Allowing them to hedge the upper layers of their insurance facility, with a predictable source of multi-year reinsurance, and concentrate on paying claims on the lower layers themselves.

Source: The Heartland Institute’s Out of the Storm blog.

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