TWIA expects “historically hard market” as 2023 reinsurance planning begins

The Board of the Texas Windstorm Insurance Association (TWIA) heard an initial discussion on planning for its 2023 reinsurance renewals this week, with early modelled indications projecting that it could need to buy close to $3 billion of protection for the next hurricane season.

It’s important to note that this is not an official target, rather it is based on the output of modelling TWIA’s projected exposure into the next wind season and how the residual market insurer may respond when it comes to buying its necessary reinsurance covers.

The Texas Windstorm Insurance Association’s (TWIA) Chief Financial Officer Stuart Harbour presented these reinsurance projections to the Board, explaining that the modelled figures were a starting point for helping with budget preparations for the next year.

But what these figures do show is that TWIA could buy more reinsurance for 2023, in its usual mix of traditional cover and catastrophe bonds.

They also show that TWIA is anticipating the hard market conditions, in both reinsurance and ILS markets and so is beginning to prepare for the potential to make a higher spend on its reinsurance and cat bonds as well.

TWIA is projecting that its exposures in force will grow 25.3% over 2022 to over $74.6 billion, but forecasting out this is projected to rise another 10.3% in 2023 to as much as $82.3 billion.

At the end of 2021 exposures in force were just over $59.5 billion, so it’s clear to see the expansion of TWIA’s exposure over the last year and with this expected to continue through 2023, it’s clear more protection, or at least funding will be needed, with reinsurance one of the options.

CFO of TWIA Harbour presented some projected figures on the cost of reinsurance for 2023 based on information that’s known at this time, saying that these are “extremely preliminary” and only to start the budgeting discussion.

TWIA tends to set its budget for reinsurance buying in the new year and with reinsurance market conditions so fluid right now, these are definitely subject to change.

The figures reflect an estimate based on revised exposures, after modelling by TWIA’s service providers, such as its broker.

The 100 year probable-maximum-loss (PML) figure for TWIA in 2023 could rise to as high as $5.247 billion, the projections suggest, while funding through debt, assessments and the Catastrophe Reserve Trust Fund (CRTF) could reach $2.28 billion together.

Which would leave a $2.967 billion, so close to $3 billion gap in funding, that would typically be filled by reinsurance and catastrophe bonds.

It’s a relatively big jump from the just over $2 billion of reinsurance and cat bonds secured for the 2022 hurricane season, but based on the projected exposure growth, the funding will be needed and if market conditions are at all conducive it seems TWIA could buy a relatively significantly larger reinsurance tower in 2023.

Finally, Harbour said the projections suggest reinsurance premiums needed for 2023, to secure the near $3 billion of coverage, could be as much as just over $225.5 million, a relatively significant hike from the nearly $131.4 million of estimated reinsurance premium for 2022.

The rate-on-line could rise from the 6.45% of 2022’s reinsurance tower, to 7.6% for 2023, according to the projections.

Commenting on reinsurance market conditions, TWIA CFO Harbour said, “There’s a lot of things happening here, it’s a historically hard market that’s happening and it was challenging last year, actually and prices were up, as we’ve seen in our reinsurance in the current year.

“But now we’ve had all the different factors that come into play. We have hurricane Ian of course, we have higher interest rates which have an impact, because risk free capital is now available at 3% and 4% which which will deter some people to invest elsewhere.”

It has to be stressed these are preliminary figures, but the news for the catastrophe bond market here is that TWIA could require a much greater amount of reinsurance support for 2023, of which the cat bond market could provide a reasonable share, as it has done in prior years.

You can read about all of TWIA’s Alamo Re catastrophe bonds it has ever sponsored in the Artemis Deal Directory.