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Texas Windstorm Insurance Association rejects catastrophe bonds for 2012


The Texas Windstorm Insurance Association (TWIA), the property insurer of last resort for Texas Gulf Coast property owners exposed to windstorms and hail, has today been holding its latest quarterly board of directors meeting. We wrote back in November here that the TWIA actuarial committee had recommended that an item be placed on the agenda for this meeting to discuss and seek approval to move forwards with a catastrophe bond aiming for a March issuance.

The item was raised at the board meeting today as promised but was rejected for a number of reasons. The first was that the Texas Department of Insurance (TDI) felt that it needs more time to evaluate the proposals for using catastrophe bonds as alternatives or complements to reinsurance. They also felt that the cost required to move the catastrophe bond project forwards was prohibitive for TWIA at this time. They requested more time to evaluate the proposal properly.

A member of the actuarial committee offered that the use of cat bonds could actually be more cost-effective than traditional sources of reinsurance and that they may be able to acquire more reinsurance cover for the same price from the insurance-linked securities market. They cited ILS investors greater willingness to take on risks such as the ones TWIA would seek to transfer than the traditional reinsurance markets appetite.

However, the cost to move forwards with the catastrophe bond project would be approximately $700,000 and at this time it was agreed that they couldn’t justify the costs or the additional work which would be required from TWIA staff to put  cat bond in place. They recognised the value that cat bonds could add to their reinsurance mix and resolved to raise the item again later during 2012 when they would hopefully be better prepared, and in a better financial position to implement the cat bond.

TWIA is still in administrative financial oversight at the moment and that is unlikely to change for the moment so perhaps the time is not yet right for them to follow other state catastrophe funds who have tapped into the cat bond market. We expect that they will revisit the question of cat bonds on a regular basis and they will likely become a piece of their reinsurance mix at some point in the future.

We’ve discussed the possible use of cat bonds by the TWIA in a number of earlier stories. Read all our previous articles on the TWIA here.

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