Texas Approves $1 Billion in Reinsurance for Windstorm Pool

The Texas Windstorm Insurance Association (TWIA) in early June submitted a proposal to the Texas Department of Insurance for the purchase of $1.5 billion in reinsurance under a three-tiered program. On July 11, Texas Insurance Commissioner Mike Geeslin approved the first two tiers of the proposal, which allow for the purchase for $1 billion in reinsurance that would be in effect through May 31, 2007.

The cost for that $1 billion in reinsurance has risen dramatically over last year. The total cost for reinsurance for all three layers of the proposed program would cost $169, 947,500, according to the commissioner’s order. That number is some $100 million more than the $69.5 million TWIA paid for reinsurance last year. Reinsurance costs are paid with TWIA policyholder premiums.

The order pointed out that “Despite the magnitude of the expenditure, the proposed reinsurance program is not sufficient to fund even a 50 year storm without resorting to member insurer assessments at a level that would qualify for premium tax credits. At the same time, TWIA’s liability has approximately doubled and the anticipated premium to be collected has also doubled.” According to the department this disparity “illustrates the limitations of attempting to offset ever-increasing probable maximum losses through the purchase of greater amounts of reinsurance.”

The department approved the first two layers, or $1 billion, of the proposal. Reinsurance for those two layers is estimated to cost around $150 million and would be provided by “reinsurers that are rated “A-” or better by A.M. Best or Standard and Poor’s.” The reinsurers are also required to maintain an adequate level of surplus.

TDI had less of an appetite for the third layer of the proposal, the funding of which would have relied on non-traditional capital sources.

TWIA’s current liability is more than $46 billion and some expect that number to grow to $60 billion by the end of the year. Approximately 50 percent of that liability is located in Galveston and Brazoria counties.

In the order, the department noted the necessity of long term planning, which “should be conducted to provide both cost effective and adequate funding for TWIA” considering the “dramatic growth in the probable maximum loss for TWIA and the increased concentration of risk.”

A copy of the commissioner’s order (No. 07-0595) can be found on TDI’s Web site at http://www.tdi.state.tx.us/orders/index.html.