The Texas Windstorm Insurance Association (TWIA) plans to purchase more reinsurance and risk transfer in 2024, as the nonprofit wind and hail insurer of last resort for the state forecasts a significant increase in exposure, alongside a tough and ongoing reinsurance market.
Remind that, in May 2023, the Texas Windstorm Insurance Association (TWIA) obtained reinsurance and risk transfer that was placed at the targeted depletion level of $4.508 billion, of which $1.2 billion of this coverage is provided by its catastrophe bond program..
Within the TWIA reinsurance tower, catastrophe bonds represented a slightly larger component of the total than in previous years.
In total, TWIA’s 2023 reinsurance program included $2.24 billion in reinsurance, with TWIA’s catastrophe bonds represent the largest portion, with $1.2 billion outstanding.the rest being traditional reinsurance.
For 2024, when TWIA begins its renewal process in the spring, it is currently expected that the association will need to purchase a higher reinsurance limit, albeit at a higher attachment point.
The reason why TWIA is likely to have a higher anchor point for its reinsurance and risk transfer from mid-2024, when the renewal process ends each year, is that funding for the Catastrophe Reserve Trust Fund (CRTF) has increased, which sits beneath the layers of reinsurance.
As the CRTF grows, TWIA will benefit from purchasing reinsurance and catastrophe bonds that begin to attach at a higher level, which will help it reduce its costs somewhat.
But the association expects the global reinsurance market to remain firm until 2024, and therefore expects its reinsurance costs to increase, driven by growth in exposure.
Overall, TWIA expects 28.2% annual growth in exposure in terms of total insured value (TIV) through 2024, so it will need to purchase reinsurance to support this expansion.
Direct exposures, or commitments in force, are expected to increase by 44% since the end of 2022.
Growth is both in the number of policies, but also in exposure and property values, with inflation being a significant factor.
The projected cost, in terms of reinsurance deposit premiums paid to reinsurers for the 2023 tower, is estimated at this stage to be $204.4 million. But the projection to cover TWIA’s reinsurance needs in 2024, based on exposure forecasts and expectations of continued challenging market conditions, is 46% higher, at $298 million.
TWIA Chief Financial Officer Stuart Harbor provided the association’s board of directors with some general information on reinsurance projections regarding the premiums TWIA will have to pay next year.
Commenting on the reinsurance market in general, Harbor said: “The market remains challenging as reinsurers remain committed to improving terms and prices. We heard recently that there is more capacity and capital is coming back into the market, but the market will be tough through 2024 and they expect it to be tough through 2025.”
Explaining how the figures on which the budget is based were calculated, Harbor commented: “The stated amount of $298 million for 2024 reflects a rough estimate, calculated by calculating the expected online rate for each reinsurance layer of $100 million dollars, revised exposures and input from our reinsurance intermediary Gallagher Re on potential market conditions, based on current conditions and forecasts.
“The growth in this estimate is primarily based on increasing exposures and assumes a relatively stable reinsurance market.”
Regarding what that means, as well as CRTF growth, Harbor continued: “We will have a higher attachment point for our reinsurance because of CRTF growth, not dramatically higher, but it will be higher.
“But the savings will be dwarfed by the additional amount of reinsurance limit that will be needed to cover the expected higher level of probable maximum loss (PML) of 1 in 100.”
Buying more reinsurance will clearly increase the cost, but a higher attachment should help offset this slightly, as the online rate drops the more tower protection is provided.
This could also be an opportunity for the catastrophe bond market, given the efficiency of capital market capacity at higher levels.
Harbor said pricing will become clearer and year-end renewals will provide better insight into developments in the reinsurance market.
“We will have a better idea of the rates once the January 1 renewals are completed, but everything seems to indicate that the reinsurers are still determined to maintain the firm rates that we had,” he explained.
Adding that: “We are hearing that some capacity is coming back into the market, which is encouraging. »
It is important to note that the TWIA Board of Directors will approve a budget for 2024 in December and that, even beyond, discussions on forms of financing and the use of reinsurance or catastrophe bonds will continue. as protection, the insurer will buy next year.