TWIA sets PML at $6.227bn for 2025, to require $4.227bn of reinsurance & cat bonds

The Board of the Texas Windstorm Insurance Association (TWIA) met today and one item up for discussion was the setting of the 1-in-100 year probable maximum loss (PML), a critical figure for defining its funding needs for the hurricane season and therefore its purchases of reinsurance and catastrophe bonds for 2025.

With reinsurance costs having been significantly higher for TWIA in 2024, compared to 2023, this was a significant focus of today’s Board meeting.

Drivers of higher reinsurance costs for TWIA in 2024 were a growing exposure base, harder reinsurance market pricing conditions, and the selection of a higher probable maximum loss figure for funding needs last year.

Earlier in today’s meeting, public comment saw a number of public officials from Texas coastal areas calling for the Board to adopt a lower 1-in-100 year probable maximum loss (PML) figure so that the need for reinsurance is reduced in order to lower costs as reinsurance prices have been rising.

A lower PML would mean reduced need for reinsurance limit to be purchased, which some of the public comments said would enable TWIA to put more funding into replenishing the Catastrophe Reserve Trust Fund (CRTF), since it has been completely eroded due to the losses from hurricane Beryl.

Comments urged TWIA to be “reasonable” when it comes to setting the 1-in-100 year PML, with one calling for the Board to adopt the Impact Forecasting model in setting this figure, as it would result in the lowest 100-year loss figure, at just over $4.96 billion as of November 30th 2024.

Last year, TWIA’s Board opted to use a blend of the Verisk and Moody’s RMS catastrophe models, with 25% and 75% weighting respectively and resulted in a $6.5 billion PML, taking a long-term view and including loss adjustment expenses (LAE) of 15%.

If the same formula were to be used again for TWIA’s 2025 storm season funding needs, it would result in a 1-in-100 year PML of just over $7.4 billion.

In the end, last year, the Board of the Texas Windstorm Insurance Association (TWIA) approved the 1-in-100 year PML for 2024 funding purposes at the new high of $6.5 billion, which meant the insurer of last resort needed just over $4 billion in reinsurance limit for the 2024 wind season.

Today’s meeting saw a much lengthier debate than in previous years, largely due to the discussion over the increased cost of reinsurance coverage TWIA faces and the fact the CRTF needs to be replenished.

However, the need to protect policyholders was also acknowledged, with reinsurance seen as one critical tool that enables TWIA to do so.

In the end, TWIA’s Board decided today to define the Texas Windstorm Insurance Association’s 1-in-100 year PML for 2025 using a blend of 50% Aon’s Impact Forecasting, 25% Moody’s RMS, and 25% CoreLogic’s RQE risk model outputs. The Board also opted to use long-term assumptions in the modelling, while loss adjustment expenses would be included again at 15%.

That formula results in a 1-in-100 year PML for TWIA for the 2025 hurricane season of $6.227 billion, including the 15% loading for loss adjustment expenses (LAE).

As a result, TWIA will call on its staff to buy reinsurance, excess of its existing $2 billion of funding from other sources, up to the 1-in-100 year PML, meaning $4.227 billion in reinsurance and catastrophe bonds will be required for 2025.

This is lower than had been projected in recent meetings at the end of 2024, when TWIA set its budget for reinsurance spend.

With $2.1 billion of multi-year catastrophe bonds still in-force but $200 million of that maturing in early June, it means TWIA will have $1.9 billion of cat bond coverage available and so the Association requires that an additional $2.327 billion of reinsurance and/or cat bonds will need placing this year.

TWIA’s Board also heard that conversations have begun and preparations for the reinsurance renewal and additional catastrophe bond placements are being made, with the help of its broker Gallagher Re and its insurance-linked securities (ILS) arm Gallagher Securities.

Given how the catastrophe bond market has been executing on recent issuances, TWIA could benefit from the attractive conditions by getting out early this year it seems, so it will be interesting to see whether a new Alamo Re transaction is forthcoming in the next few weeks.

This year, TWIA’s Board were focused on keeping reinsurance costs as low as they could, to minimise the impact on policyholders as costs are passed through, while still providing for the catastrophe funding it requires in case of a major hurricane event.

The change in formula has reduced its reinsurance needs somewhat from the previously budgeted amount, but still TWIA’s reinsurance and cat bond tower will remain one of the larger seen in the United States this year.

TWIA has been directly sponsoring catastrophe bonds since 2014 and remains one of the largest sponsors in our cat bond market sponsor leaderboard.