TWIA reinsurance and cat bond tower may shrink as loss funding mandate drops to 1-in-50 year

Recent legislative changes enacted in Texas have halved the state mandated calculation for the amount of loss funding the Texas Windstorm Insurance Association (TWIA) is required to have in place, from a 1-in-100 year minimum, down to a 1-in-50 year, which may result in less reinsurance and catastrophe bonds being purchased in 2026.

Enacted in the Texas House this year, Bill 3689 reduces the statutory minimum funding level for the residual market property insurer for the State, as lawmakers seek to reduce the financial burden and costs the Texas Windstorm Insurance Association (TWIA), to benefit policyholders and members.

Texas House Bill 3689 states, “The association shall maintain total available loss funding in an amount not less than the probable maximum loss for the association for a catastrophe year with a probability of one in 50. If necessary, the required funding level shall be achieved through the purchase of reinsurance or the use of alternative financing mechanisms, or both, to operate in addition to or in concert with the trust fund, public securities, financial instruments, and assessments authorized by this chapter.”

That section of the previous bill stated one in 100 was the level of loss funding required by TWIA, which is the level the Assocition has based its funding and reinsurance buying on in recent years.

It’s worth looking back to remember that TWIA last purhcased risk transfer and reinsurance up to the 1-in-50 year level in the past, as recently as 2013.

At the time, TWIA had a goal to fund itself to the 100-year level, but was rebuilding its financial resources.

At the 2014 renewal, TWIA increased its funding to the 1-in-60 year level, thanks in part to the use of catastrophe bonds, with this being the first year the Association secured risk transfer from the cat bond market.

Back then, TWIA’s funding needs were far lower than today, as its exposure base has increased meaningfully since.

In fact, for the 2025 hurricane season, TWIA’s Board defined its 1-in-100 year probable maximum loss (PML) figure at the $6.227 billion level.

To hit that mix of funding TWIA utilises a number of sources and for the current wind season that is made up of $2 billion of other financing sources and $4.227 billion of risk transfer and reinsurance.

$2.45 billion of that risk transfer comes from catastrophe bonds in 2025, while the rest comes via reinsurance from the traditional or collateralized markets.

That 1-in-100 year PML, for funding purposes, was defined using a blend of risk models and at an Actuarial Committee meeting yesterday, TWIA staff discussed how the new 1-in-50 year funding level might compare.

For background, the drop from 1-in-100 year to 1-in-50 year, as now statutorily mandated be the Texas legislative, effectively means TWIA only needs to fund to a level where there is a 98% chance its funding proves sufficient at the 50-year level.

Using the same models and weightings as the PML was calculated for 2025, at the 1-in-50 year level the PML would drop significantly to $3.781 billion, TWIA staff discussed at yesterday’s meeting.

Using individual risk model outputs, the range of 50-year PML’s spans from as low as $3.5 billion, to as high as $4.9 billion.

Which means that, depending on how the staff and Board decided to proceed in 2026, TWIA could end up buying almost half the risk transfer, reinsurance and cat bonds it purchased for 2025.

The Texas bill also provides additional routes for financing going forwards, with up to $2 billion of pre and post-event financing from the state to be accessible.

The idea with this new state-funded financing is to reduce TWIA’s reliance on issuing public securities, which have always made up a decent chunk of its provisions for loss funding, roughly $2 billion in 2025, we understand.

This new state-funding mechanism could be used alongside public securities though, which could even serve to reduce the reliance on reinsurance and catastrophe bonds further, it seems.

Ultimately, the new legislation suggests TWIA’s funding needs will drop and its use of reinsurance, or other forms of risk transfer such as cat bonds, will decline with that.

In fact, at the meeting yesterday the TWIA staff discussed rate adequacy on the inwards side, showing that reinsurance expenses could decline by 25% or more under the 1-in-50 year loss funding scenario.

With that, TWIA’s Actuarial & Underwriting Committee has recommended no rate change for 2026 policies, thanks to the reduced costs and given reinsurance expense was a major component of its rates, which is now expected to decline.

A statement said, “This is attributed directly to legislation passed in the recently concluded session of the Texas Legislature, which reduced TWIA’s expected costs related to reinsurance and premium & maintenance taxes.”

This now needs to go to the TWIA Board for approval, but it seems likely the Association will move forwards on policy rates at this flat level for next year.

Which further suggests the new funding level is getting baked into decision-making at TWIA, which is likely to solidify the need for less reinsurance and cat bonds to be purchased.

The Board and staff will need to define a PML, or loss funding level, next year and so it could adopt a higher level than the comparables we described above, plus its exposure may increase in the mean-time.

So it’s impossible to forecast what levels of funding TWIA will aim for in 2026, but it does seem less new reinsurance and cat bonds will be bought.

One benefit for TWIA as it adopts this new statutory funding level, is that its catastrophe bonds are multi-year in nature.

TWIA has $500 million of Alamo Re catastrophe bonds scheduled to mature in June 2026, so the Association will still have $1.95 billion of catastrophe bond backed reinsurance in-force for the hurricane season, no matter what level the PML is set at.

If the PML is reduced by as much as now looks possible next year, TWIA will not need to purchase anywhere near as much new reinsurance as has been seen over the last few years, which on an expense basis will make a meaningful difference to the Association and continue to flow through as a benefit in policyholder rates.

Of course, a lot can happen in the interim, including a major hurricane loss hitting Texas this season, which could change TWIA’s need for funding and reinsurance in 2026.

In addition, how TWIA utilises the new state-funding, or public securities, will also have a bearing in 2026.

But the main takeaway is that its statutory mandated loss funding level could shrink meaningfully, reducing the need for new reinsurance to be purchased, while its multi-year catastrophe bonds will provide certainty and continuity through this change.

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