The Texas Windstorm Insurance Association (TWIA) could potentially save as much as $28 million by shifting its traditional reinsurance cover to the capital markets, although there is yet to be any formal analysis as to the impact of such a transition.
During a recent TWIA Board of Directors meeting, held Tuesday December 6th, 2016, the organisation discussed a suggestion from a reinsurance broker that it could make a significant saving from shifting its traditional reinsurance cover to the catastrophe bond market.
As part of the TWIA Board’s meeting it was explained that reinsurance broker Guy Carpenter had again been voted to remain as the organisation’s brokerage, as it has been for some time now.
Around this discussion John Polak, General Manager, TWIA, explained that there was an “appreciation of the fact that the capital markets aspect has grown increasingly competitive” and, one of the brokers suggested that, “if you were to shift away from traditional reinsurance to cat bonds there would be significant savings.”
The potential saving to be made that was put forward by the broker, “was somewhere in the neighbourhood of $28 million,” said Polak, adding that “there was not a lot of discussion in terms of what the impact would have been.”
As shown by the Artemis Deal Directory TWIA has utilised the catastrophe bond market twice since 2014, with a $400 million Alamo Re Ltd. (Series 2014-1) deal, and a $700 million Alamo Re Ltd. (Series 2015-1) transaction, both of which provide cover for Texas named storms.
Speaking to Artemis about TWIA’s past and future use of the capital markets and traditional reinsurance, Polak said; “TWIA has been very pleased with the opportunities the capital markets have provided to us, in the form of competitive pricing and additional diversification.
“With the expiration of $400 million in Alamo Re 2014 catastrophe bonds this year, TWIA will be actively evaluating its options for the 2017 reinsurance program and expects to continue to utilize all available sources of capacity, including both traditional reinsurance and capital markets, to design the most cost-effective reinsurance program. This may include the issuance of additional catastrophe bonds to replace some or all of the expiring bonds.”
Polak stressed during the company’s Board of Directors meeting that the $28 million figure suggested by a reinsurance broker received a lot of attention at the time. This was mainly driven by the fairly sizeable number put forward, explained Polak, and resulted in a lot people highlighting that it was something that they hadn’t necessarily given thought.
The meetings with the brokers were to decide on which firm was going to represent TWIA moving forward rather than the actual structure of its reinsurance programme, hence a lack of discussion surrounding the impact a transition away from the traditional market to the cat bond space would have on things like the commission structure, and the costs of the shift itself.
Without comprehensive analysis into the impacts of TWIA replacing its current reinsurance protection and existing cat bond issuance with additional cat bonds, it’s very difficult to say whether the potential $28 million saving put forward is accurate, and exactly where this would come from.
But clearly TWIA benefits from utilising the capital markets to optimise and increase the efficiency of its reinsurance programme, and as noted by Polak, the company expects to continue to rely on the cat bond space for a cost-effective solution.
Catastrophe bonds are becoming an increasingly cost-effective way to access reinsurance capital, as evidenced by the reduction in expected loss to coupon multiples at market over the last few years. Recent deals have reflected high levels of investor appetite for new cat bond issues, which could make greater use of the structure attractive to sponsors like TWIA in 2017.
TWIA explained to Artemis that it will start to plan its 2017 reinsurance programme in early spring, although the size of the overall programme and the proportion that is dedicated to the traditional space and the capital markets will be determined at the time.
The reinsurance market remains under significant pressure and rates across the industry are expected to fall further at the January 1st renewal season and beyond, unless a truly market turning event takes place and a substantial amount of capacity exits the market.
Pressures in the global reinsurance market are also impacting the insurance-linked securities (ILS) industry, and with the buyers market persisting the efficient flood of reinsurance capital has been suggested as a reason behind a recent decline in catastrophe bond issuance.
That being said, the catastrophe bond market is still growing, as discussed recently by Artemis, and should TWIA, and others for that matter, be able to secure the right amount of protection for the right price via the capital markets, it’s very likely that the investor base would be more than willing to supply the capacity.