TWIA board approves catastrophe bond issue for 2014

by Artemis on May 8, 2014

The Board of Directors of the Texas Windstorm Insurance Association’s (TWIA) has approved the associations plan to issue its first catastrophe bond in 2014 at a meeting held today. This is the furthest TWIA has ever got down the path to sponsoring a cat bond.

The TWIA Board meeting today, which is still in session now, heard from the association’s chief actuary the details of a proposal, which Artemis reported first in April, put forward by its actuarial and underwriting committee for the 2014 reinsurance program to include TWIA’s first cat bond.

The Board has approved that the actuarial and underwriting team at TWIA work with its broker, Guy Carpenter, to place the 2014 reinsurance program before the 1st of June when the hurricane season begins.

TWIA will work with Guy Carpenter to buy as much reinsurance as possible within a budget of $118m. This budget includes the spend for any traditional reinsurance, any collateralized reinsurance and any catastrophe bond issued.

The Board agreed that an aggregate program is the way to go for TWIA in 2014, providing it with greater cover for smaller storms and any losses resulting from other perils such as hail. TWIA’s reinsurance program has always been per-occurrence to date, but the pricing environment will allow it to move to an aggregate structure in 2014.

The reinsurance program will sit above a retention of at least $1.9 billion, although the retention level could be increased to $2.3 billion if it enables TWIA to secure more cover at better rates. The traditional reinsurance part of the program will be a twelve month contract, while the catastrophe bond portion will be a three year deal.

So, we should expect to hear about the launch of a TWIA sponsored catastrophe bond to the insurance linked securities investment market in the coming days. TWIA and Guy Carpenter do not have long to get this deal launched if it is to be completed and in-force in advance of the hurricane season.

By lifting the retention level up to $1.9 billion or above, TWIA will be able to buy more cover at lower cost and could end up with at least $1.25 billion of reinsurance protection, a portion of which will be provided by a catastrophe bond. It’s 2013 reinsurance program is $1 billion above a retention of $1.7 billion.

We will of course update you as and when a TWIA cat bond comes to market and look forward to seeing how the market receives it. It’s third year lucky for the actuarial and underwriting team at TWIA who have been trying to get a catastrophe bond on the agenda for three years now. It looks like the 2014 attempt at this will be the successful one and that is largely down to the pricing and market conditions, making it impossible to ignore the value a cat bond could bring to it.

For more background on the discussions leading up to the TWIA catastrophe bond and the possible savings it could make by tapping the capital markets read these articles:

TWIA actuarial committee approves plan to issue catastrophe bond

Texas Windstorm Insurance Association to discuss cat bonds (again)

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