The Actuarial Committee of the Texas Windstorm Insurance Association (TWIA), the residual market or last-resort property insurer for Texas, is set to seek approval to purchase slightly less first-event reinsurance protection in 2016, but may add a second-event cover.
When we say slightly less reinsurance, it is only $100m of limit less than is currently in place, and only on the first-event front, but with TWIA’s other sources of funding having increased slightly the total funding level will remain at $4.9 billion, as it is today, if the proposal is approved.
Yesterday TWIA’s Actuarial Committee met with the organisations reinsurance broker Guy Carpenter to discuss the state of the reinsurance and ILS market, the availability of capital for both traditional and catastrophe bond coverage and what options should be presented to the TWIA board to seek approval for the 2016 renewal.
TWIA has a $2.3 billion layer of reinsurance, attaching at $2.6 billion, which includes traditional, collateralized and also the outstanding Alamo Re catastrophe bonds which remain in force. The traditional and any collateralised reinsurance is all a one-year coverage, while the Alamo Re cat bonds are multi-year.
So all of the reinsurance coverage TWIA has would need renewing at the June 2016 renewal this year, while the $1.1 billion of it from the $400m Alamo Re Ltd. (Series 2014-1) and more recent $700m Alamo Re Ltd. (Series 2015-1) catastrophe bonds will remain in-force.
TWIA’s Actuarial Committee met to review and discuss possible action on reinsurance for the 2016 hurricane season yesterday. Texas statute mandates that TWIA must be funded up to the 1-in-100 year probable maximum loss, a level of funding that the insurer hit last year thanks to the reduction in reinsurance and catastrophe bond costs due to the softened market.
So for 2016 TWIA needs to consider the renewal of reinsurance, whether to issue further catastrophe bonds, while also bearing in mind the reset for its existing cat bonds, all with the need to fund itself to the 1-in-100 year level and taking into consideration the funding provided by the Catastrophe Reserve Trust Fund (CRTF), assessments and bonding.
Due to a projected $100m increase in the size of the CRTF for 2016, based on premiums coming in and the ability for TWIA to increase CRTF funding as a result, in order to maintain the $4.9 billion of funding TWIA would only need to have $2.2 billion of reinsurance and catastrophe bonds in place, a $100m reduction in reinsurance limit required as the attachment point shifts up to $2.7 billion.
And this is what the Actuarial Committee have proposed to the TWIA Board, that the organisation should secure enough reinsurance or additional catastrophe bonds in order to maintain the $4.9 billion funding level, for the lowest cost possible.
The decision on whether to access the catastrophe bond market again will depend on analysis done by Guy Carpenter as well as the response of the traditional reinsurance and alternative markets. However if cat bond capacity is available at a conducive price, within the layer, TWIA may well seek to sponsor another bond.
The reset of the existing Alamo Re cat bonds also comes into play here, as TWIA said previously it would elect to reset the cat bonds at whatever level was going to result in the most efficient pricing for its reinsurance renewal.
So that gave TWIA and its broker Guy Carpenter the flexibility to ensure that the existing cover from the $1.1 billion of outstanding Alamo Re cat bonds has been used in the best possible way so as to minimise TWIA’s overall reinsurance spend for 2016, while maintaining the coverage (a real benefit of the variable reset feature).
The Actuarial Committee hope that by maintaining the same level of coverage TWIA may benefit from some savings and have some of its reinsurance budget for 2016, which is approximately $125.3m, to spend on securing some second or subsequent event coverage.
TWIA has a potential gap in its funding should a major event occur in 2016 and erode the CRTF, leaving the other financing to drop down while the reinsurance and cat bond coverage would continue to attach at $2.7 billion.
That could leave as much as a $700m gap in TWIA’s funding structure, just below the reinsurance attachment point. The Guy Carpenter brokers told the Committee that there could be various options available to close that gap, by securing some sort of second or subsequent event coverage or reinstatement.
This could be achieved by buying another $700m of reinsurance which inures to the CRTF layer, so replacing any CRTF that is eroded and ensuring no gap in coverage.
The TWIA committee tasked the broker with investigating this option and finding out how much coverage could be obtained, using the remainder of its reinsurance budget after securing its $2.2 billion renewal capacity needs.
The estimated cost for the $2.2 billion excess $2.7 billion reinsurance and cat bond coverage renewal for 2016 is between $114.5m and $120.4m, according to Guy Carpenter and it is likely towards the lower end of that range. That should leave some of the budget to secure this second event cover as well.
The end result, if this is all approved by the TWIA Board and secured for 2016, could be that TWIA actually ends up buying more reinsurance, but some of it being an inuring layer of second event protection.
It will be interesting to see whether another Alamo Re catastrophe bond comes to market this year, or whether having 50% of the risk transfer from cat bonds is deemed sufficient for now. Market pricing will drive a lot of the decisions, as TWIA will likely buy cover from the most efficient sources, while maintaining its reinsurance panel diversity as well.