Texas Looks to Broaden Cat Fund Into ILS

Proposals to rework the Texas windstorm fund would allow the use of catastrophe bonds and other insurance-linked securities products.

Texas lawmakers are looking to free the board of the Texas Windstorm Insurance Association (TWIA) to tap capital markets as part of a long-term plan to recapitalize the fund after it was brought to the brink of collapse in 2008 following Hurricane Ike.

Two bills under consideration in the Texas legislature– S.B.14 and H.B. 911 — give the TWIA board broad authority to issue bonds or other types of securities.

“These bills want to open up the menu for the board of directors,” says Joe Woods, assistant vice president and regional manager for Property Casualty Insurers Association of America. “Not only do you have reinsurance and cat bonds, but you have any combination of any other capital market solutions that are out there.”

The two bills were introduced last week and are currently awaiting action in the legislature which convenes every other year.

Use of pre and post event bonds was considered in the last legislative session but those bills died after coastal and inland lawmakers could not come to agreement on a solution.

The insurer of last resort for wind and hail coastal coverage in the state has become the focus of lawmakers after Hurricane Ike drained its $370 Catastrophe Reserve Trust Fund. It also assessed local carriers an additional $230 million to cover Hurricane Ike related claims.

The ability of TWIA to place an unlimited amount of assessments on the local P/C industry is prompting a complete rethink of how the program is funded and risk is transferred, says Mark Hanna, a spokesman for Insurance Council of Texas.

The assessments can be recouped by the industry through tax credits over the next five years which — in turn — is depleting the state’s general fund coffers.

The option of using capital market solutions is part of a longer term plan to rehabilitate TWIA and ween it away from using state funds and reinsurance only to cover its risks.

“TWIA is never insolvent because it has the backing of the insurance industry and — behind that — the Texas government,” says Woods. “If this were a company, you could argue that it’s way beyond insolvent.”

Funding TWIA is taking a new urgency as the state moves into the Hurricane season still reeling from last year’s Ike claims.

“If we were to get a major hurricane now we wouldn’t be looking at millions out of the general revenue fund we would be looking at billions,” says Hanna. “That’s the same fund pay that pays for roads and welfare programs. It effects the health of the state”

Initial discussion between insurance industry representatives and lawmakers include a short term fix of either having the state pay for catastrophe reinsurance for 2009 through a loan from the general fund or one of the state retirement systems.

Another proposal would have the state act as the reinsurer, but Hanna says many are leery of that option because of the cost.

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