June 12th, 2009

TWIA Update

Posted at 11:30 AM ET

Texas legislation HB4409 has been passed and awaits signature by the governor. The 2009 Texas Windstorm Insurance Association (TWIA) risk financing structure approved by HB4409 includes as much as USD2.5 billion of debt, and although it allows the purchase of reinsurance, TWIA’s board members decided to non-renew its catastrophe reinsurance program of USD1.5 billion excess USD600 million that expired on June 1, 2009.

The legislation changes the assessment mechanics for TWIA member companies. Prior to Hurricanes Dolly and Ike, there was USD100 million of non-recoupable assessments attaching immediately upon the occurrence of a catastrophe where premium and other revenue of the association were not adequate to cover losses. This assessment layer sat below the USD466 million Catastrophe Reserve Trust Fund (CRTF) layer. The reinsurance layer attached at USD600 million and exhausted at USD2.1 billion. There was also USD200 million of non-recoupable assessments attaching at the exhaustion of the reinsurance layer. Finally, there were unlimited assessments that were recoupable through premium taxes over a minimum of five years (20 percent per year). The unlimited assessments attached at USD2.3 billion. The 2009 TWIA risk financing structure approved by HB4409 includes as much as USD2.5 billion of debt via post event bonding. Member companies are exposed to servicing the debt on USD800 million of this amount. As a result, members can be expected to incur their shares of the cost of this debt (principal and interest) annually over a 10-year period. The relative return period attachment is higher compared to 2008, though the mechanics of these assessments (i.e., how they will be applied over a 10-year period) remain unresolved based on the new legislation.

At this point in 2009, the CRTF is empty, as it was depleted from Hurricanes Dolly and Ike in 2008. HB4409’s goal is to save cash so that the CRTF can be replenished. TWIA is estimated to generate USD350 million of premium each year, or USD243 million of premium after operating expenses and non-catastrophe losses. It is estimated that, if there are no losses exceeding cash on hand, approximately USD243 million per year (adjusted each year for rate change and other factors) would be added to the CRTF. However, upon the occurrence of a catastrophe which results in insured losses and operating expenses of the association exceeding the premium and other revenue of the association, the TWIA has been authorized to issue public securities to raise funds to pay claims. The first class of securities, in the amount of USD1 billion, will be financed from TWIA premium dollars. TWIA estimates that at a 6 percent interest rate, a 10-year bond’s estimated annual cost would be 40 percent of TWIA premiums, or USD140 million per year. This would leave approximately USD103 million per year to add to the CRTF assuming no other losses or new expenditures.

In the event of a loss exceeding cash on hand excess of USD1 billion, the association will rely on Class 2 public securities which would be financed 30 percent from non-recoupable Member Company Pool assessments and 70 percent from a nonrefundable premium surcharge in an amount set by the commissioner. TWIA has estimated that a 10-year bond at a 6 percent interest rate for USD1B xs USD1 billion would require member company assessments of approximately USD40 million per year for 10 years. For the surcharge, each insurer, TWIA, and the Texas FAIR Plan will assess a premium surcharge to its policyholders who “reside or have operations in, or whose insured property is located in a catastrophe area for each Texas windstorm and hail insurance policy and each property and casualty insurance policy issued for property located in a catastrophe area.” This includes all lines of business except federal flood insurance, workers’ compensation insurance, accident and health insurance, and medical malpractice insurance.

Finally, excess of USD2 billion, the association will rely on USD500 million of Class 3 public securities which would be funded 100 percent from non-recoupable Member Company Pool assessments. The estimated annual cost to finance a 10-year bond at a 6 percent interest is approximately USD70 million.

Guy Carpenter is working to understand and quantify assessment potential for clients under HB 4409. A number of preliminary assessment estimates have been prepared and the initial results show that the TWIA 2009 risk financing structure generates less assessment potential for member companies than the TWIA 2008 risk financing structure. However, the metrics impacting the assessment will vary by return period and by cedent. In addition, when and how members are assessed – and the member company participations to be used over the 10-year amortization – are not addressed in the statute. The expectation is that clarification is forthcoming.

Click here to download the TWIA’s 2009 risk financing structure graph

Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.

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