Once again the Texas Windstorm Insurance Association (TWIA) hits the headlines for all the wrong reasons. The Texas state hurricane insurer of last resort has now exhausted its ability to pay claims resulting from hurricane Ike which struck the Texas coast in September 2008.
Claims from hurricane Ike have been pouring in over the last three years and the total payable by the TWIA has now reached $2.3 billion. The problem is that the TWIA only raised $2.1 billion by assessing insurance companies, emptying its catastrophe reserve trust fund and collecting on its reinsurance policies.
Now the TWIA has two choices, to collect further monies from insurers to help pay claims, laws in effect at the time of hurricane Ike allow the states insurers to recover any payment to the TWIA through tax credits over five years, the alternative is to use current premiums to pay the shortfall which would of course reduce their reserves for events this year.
This problem won’t face the TWIA again as they can now issue pre-event bonds after some changes in the regulations surrounding the insurance facility. However, observers expect the TWIA to, rather than sell bonds, attempt to achieve repayment for them through assessing state insurers and adding surcharges to policyholders. That defeats the point of the reforms which were attempting to prevent the burden being pushed onto policyholders and state insurers.
So we return to the thought that the only way these insurers of last resort can survive is for them to utilise some form of capital markets risk transfer so that by offering investors an attractive enough opportunity they will be prepared to bear some of their risk. The TWIA have been mandated to investigate alternatives to reinsurance but whether that will happen quickly enough to save its future remains to be seen.