TWIA's residential windstorm rates were 38% inadequate in 2024. In 2025 they were 3% inadequate. On June 18, 2026, TWIA posted its annual rate adequacy analysis and found residential rates adequate by 9%, with commercial coverage adequate by 4% (TWIA, June 2026). The four-year trajectory reversed not because hurricane activity declined or modeled losses improved, but because two bills from the 2025 Texas legislative session restructured the financial obligations that determine TWIA's break-even premium. House Bill 3689 reduced the required catastrophe protection standard from a 1-in-100 probable maximum loss to a 1-in-50 PML, cutting the required reinsurance tower from roughly $4.2 billion to $2.28 billion. House Bill 2517 exempted TWIA from premium and maintenance taxes previously loaded into the rate formula. Together they moved the indicated rate need below current premium levels without touching the hurricane peril assumptions (TWIA, June 2026).

Five Years of Rate Adequacy: A Deficiency That Peaked at 38%

The trajectory heading into 2024 documented a deepening structural problem, not a volatile one-year deviation:

Year Residential Commercial
2022 15% inadequate 11% inadequate
2023 20% inadequate 22% inadequate
2024 38% inadequate 45% inadequate
2025 3% inadequate 5% inadequate
2026 9% adequate 4% adequate

TWIA covers 286,251 Texas Gulf Coast policyholders holding $127.1 billion in total insured value, with Galveston County representing roughly one-third of that exposure (TDI, Q1 2026). The association entered the 2026 hurricane season carrying a $41.6 million surplus, reversing a $17.4 million year-end 2025 deficit, against $4.3 billion in total available funding across all sources. Financially, the picture is stable. But the adequacy deficits of 2022 through 2024 were real: they documented that at current rates, TWIA could not cover its projected break-even costs, reinsurance chief among them.

TWIA's rate adequacy is defined more narrowly than voluntary market rate adequacy. The analysis measures whether current premium income covers projected operating expenses, expected losses, loss adjustment expenses, and catastrophe reinsurance costs, with no profit provision and no risk-adjusted return on capital. A finding of 9% adequate means premiums exceed the actuarially determined break-even level by exactly that margin. It is not a signal to cut rates by 9%; it is a buffer the board must weigh against exposure in an above-average hurricane year.

What HB 3689 Did to the Reinsurance Tower

TWIA's rate need has always been dominated by catastrophe reinsurance costs, not attritional losses. The Texas Gulf Coast faces concentrated hurricane risk with limited geographic diversification; the reinsurance premium needed to transfer that risk is the dominant cost item in the annual ratemaking formula. TWIA funds losses from a layered capital stack: operating surplus and Catastrophe Reserve Trust Fund balances provide first-dollar capacity; post-event bond issuance can supplement that; commercial reinsurance and catastrophe bonds, placed before hurricane season, cover the largest potential loss events.

Before HB 3689, Texas statute required TWIA to secure catastrophe protection sufficient to cover a 1-in-100 year probable maximum loss event. TWIA calculated that threshold at $6.227 billion (Insurance Business, 2025). With roughly $2 billion available from statutory funding sources at the base of the stack, the old regime required TWIA to purchase approximately $4.2 billion in reinsurance, covering the layer from roughly $2 billion in cumulative losses up to the $6.2 billion PML ceiling.

HB 3689 reset the required coverage standard to the 1-in-50 PML level, which TWIA put at $4.3051 billion (Insurance Business, 2025). At the same statutory funding base, the required reinsurance tower dropped to $2.2801 billion. TWIA currently has $1.95 billion in multi-year catastrophe bonds in force and has budgeted $237 million as a placeholder for its 2026 reinsurance program costs (TWIA, 2025-2026). The $1.9 billion reduction in required reinsurance coverage eliminated layers that under the prior law had to be purchased and paid for annually.

The pricing flow is direct: TWIA allocates its annual reinsurance premium across its residential and commercial books as an expense component of the rate need. When the required tower height drops by $1.9 billion, the allocated annual reinsurance cost falls correspondingly. That cost reduction shows up in the adequacy analysis as a lower required premium, not as improved hurricane loss experience. The modeled mean annual loss, the burning cost loaded into the rate need, was unchanged. Only the size of the reinsurance program required by statute changed. Patterns in residual market pricing show this is the most significant mechanism by which legislative action can shift a rate adequacy finding without any underlying change in the actual peril being insured.

How Tower Height Changes Translate to Annual Cost

The connection between tower height and annual premium cost is not one-for-one, and the direction of the effect matters for understanding why a $1.9 billion reduction in required coverage can produce a large swing in the rate indication. Catastrophe reinsurance layers are priced based on their probability of attachment: lower layers (those covering smaller, more probable loss events) carry higher rate-on-line than upper layers (those covering rarer, catastrophic-scale events). The 1-in-50 to 1-in-100 layer of the old TWIA tower represented coverage that would only attach if total losses exceeded $4.3 billion, a scenario implied to occur roughly once in 100 years.

Under the old standard, TWIA was required to purchase that upper layer regardless of its cost. The $237 million 2026 reinsurance budget covers a $2.28 billion tower; the prior tower of approximately $4.2 billion would have required proportionally higher annual costs for the same protection periods, plus the cost of the additional $1.9 billion of upper-layer coverage now eliminated. TWIA executives expressed confidence at the time of the 2025-2026 reinsurance planning that the $237 million figure could be achieved at or below budget, suggesting the new, smaller tower is priced within that envelope (Insurance Business, 2025).

The practical illustration: if the eliminated upper-layer coverage ($1.9 billion of protection between the 1-in-50 and 1-in-100 levels) was priced at roughly 1.5% to 2.5% of limit annually, reflecting its low attachment probability, the annual savings would range from approximately $28 million to $47 million. Spread across $127.1 billion in total insured value and approximately $2,877 in average residential premium (TDI, Q1 2026), even a $30-40 million cost reduction translates into a measurable improvement in rate adequacy when the total rate need is measured against the full premium base.

The Tax Exemption: HB 2517 and the Expense Loading

HB 2517 addressed a separate line in the rate need: the expense loading for state taxes. Before the 2025 session, TWIA loaded premium taxes and maintenance taxes into its ratemaking formula as a percentage of premium, the same way a voluntary carrier treats state taxes in its expense ratio. Because TWIA targets break-even, every dollar of tax expense required a corresponding dollar of premium. The exemption removes that percentage entirely from the formula.

The effect is structurally equivalent to a reduction in the expense ratio. The required break-even premium falls by the amount of the tax rate previously loaded. This contributed to the improvement in measured adequacy alongside HB 3689's reinsurance cost reduction, though the reinsurance tower change was the primary driver given the scale of the coverage reduction involved. Together, the two bills shifted the rate need below current premium levels without the board, TDI, or TWIA's actuaries changing a single assumption about hurricane frequency, intensity, or loss cost.

Residential vs. Commercial: The 5-Point Adequacy Gap

The 5-percentage-point spread between residential adequacy (9%) and commercial adequacy (4%) reflects differences in how the two books are exposed, not differences in how the legislation was applied. Both books received the same reinsurance cost reduction and the same tax exemption. The gap comes from the underlying risk profiles.

Commercial windstorm policies cover larger structures with higher per-policy insured values and more complex construction classifications. They concentrate in coastal industrial and commercial zones where storm surge and high-wind exposure is densest. The distribution of commercial limits across coastal locations differs from the residential distribution, which includes a larger share of inland barrier island and upper-coast properties where modeled losses per dollar of insured value are lower. Under a stochastic hurricane simulation, higher policy limits mean larger modeled losses per event. The mean annual loss for commercial policies tends to run higher per dollar of coverage than for residential, requiring more premium per dollar of insured value to reach break-even.

The residential book's wider adequacy margin today also reflects the cumulative effect of prior rate increases relative to the residential loss indication; the commercial book may have entered the 2026 cycle with a narrower pre-legislative surplus, leaving less room once the legislative relief flowed through. Demand surge on commercial repair costs, which can amplify losses after a major hurricane, adds a further margin-thinning factor specific to the commercial book.

How Residual Market Ratemaking Differs from Voluntary

Pricing actuaries at commercial carriers face a structurally different ratemaking problem from TWIA's actuary. Three differences define the residual market framework.

The rate target. TWIA's rate need includes no profit provision and no risk-adjusted return on equity. The actuarial objective is literal break-even: premiums equal to expected losses plus loss adjustment expenses plus reinsurance costs plus administrative expenses. A voluntary carrier filing for a 95% combined ratio is targeting a profit margin that reflects its cost of capital; TWIA targets 100%, with the CRTF and reinsurance tower providing the catastrophic loss buffer rather than surplus held for return purposes. This changes the interpretation of a rate adequacy finding. A 9% adequate finding means the current rate produces a projected 91% combined ratio at expected loss levels, not a 9% profit margin. The board must decide whether to reduce rates toward break-even or retain the surplus as a buffer against adverse loss development.

The catastrophe loss indication. TWIA's expected annual loss comes from a stochastic hurricane simulation, typically blending outputs from multiple vendor models (AIR, RMS, Verisk Extreme Events) to produce a distribution of annual losses and probable maximum loss figures at specified return periods. The mean annual loss from that distribution is the burning cost loaded directly into the rate need. The PML estimates at the 100-year and 250-year return periods drive the reinsurance tower sizing. When HB 3689 reduced the required protection level from 1-in-100 to 1-in-50, it severed the link between the 100-year PML and the purchasing requirement. The modeled loss expectation at the 50-year level became the relevant constraint, and that is a materially lower threshold.

The expense structure. Unlike a voluntary carrier whose expense ratio reflects agent commissions, brokerage, underwriting overhead, and a full tax burden, TWIA's dominant expense item is reinsurance. It operates with a lean administrative structure. When the legislature changes statutory funding requirements or tax treatment, it directly alters the two largest lines in TWIA's rate need: reinsurance cost and, until HB 2517, tax expense. There is no offsetting exposure on the profit side because TWIA does not earn a profit. That asymmetry is why legislative changes carry more concentrated pricing impact in a residual market pool than in a voluntary carrier that can absorb cost changes across a diversified financial structure.

The Actuarial Memorandum When Legislation Drives the Rate

The actuarial memorandum supporting TWIA's TDI filing must isolate the legislative adjustments from the experience-based indication. Texas statute and standard actuarial practice require that the basis for any rate filing be documented, and when the rate need changes materially due to statutory changes rather than loss experience, the documentation must explain and quantify each adjustment separately.

The practical requirement is to present the rate need under two scenarios: the indication that would result from the prior-law statutory structure, and the indication under the new law. Showing these side-by-side lets TDI actuarial staff and the TWIA board see the full policy judgment embedded in the legislative action, distinct from the technical actuarial determination about hurricane risk. If the finding of adequacy rests almost entirely on the cost reduction from HB 3689, the memorandum should say so directly, with the supporting calculations that show how much of the improvement is attributable to the tower height change versus the tax exemption versus any genuine improvement in loss experience.

This documentation requirement also protects the signing actuary. If a major hurricane year produces losses above the modeled expectation and the adequacy finding is subsequently challenged, a memorandum that clearly attributes the improvement to quantified statutory changes, rather than an optimistic view of hurricane risk, makes the basis for the filing defensible. The adequacy finding was not a claim that hurricane losses would be lower. It was a claim that, at the legislatively determined cost structure, current rates exceed break-even. Those are different assertions, and a well-constructed memorandum keeps them separate.

June 30 to October 15: The Filing Path

The Actuarial & Underwriting Committee meets June 30 in Austin to review the adequacy analysis, receive public comment (76 written submissions were filed as of June 26), and formulate a rate recommendation to the TWIA Board of Directors (TWIA, June 2026). The board convenes August 4 to vote; two-thirds approval is required to file a rate increase. Under the statutory calendar, TWIA must submit its annual rate filing to TDI by August 15, and the Texas Insurance Commissioner has until October 15 to approve or disapprove any proposed change. The 2025 cycle ended with no rate change for the 2026 policy year. A 9% adequacy finding could support a rate reduction, but TWIA's political environment as the last-resort insurer for coastal Texas typically argues against reductions of that scale when the 2026 hurricane season is active and the adequacy buffer may look narrow if a significant storm makes landfall before the filing is finalized.

Implications for P&C Pricing Actuaries

The TWIA finding is a textbook case in a corner of ratemaking that most voluntary market actuaries encounter rarely: statutory cost structure changes that drive the rate indication more than loss experience does. The scenario is not unique to TWIA. State-mandated funding levels, legislative tax treatment, and statutory assessments all flow directly through a residual market rate need without touching the underlying loss indication. A pricing actuary reviewing a residual market filing must be able to isolate each statutory assumption in the rate model and stress-test the indication against the scenario where that assumption reverts.

The direction can reverse quickly. If a future Texas legislature reinstates a higher CRTF balance requirement or removes the HB 2517 tax exemption, TWIA's rate need increases immediately without any change in modeled hurricane risk. The 9% adequacy margin found in 2026 would narrow or disappear at the same current rates, under the prior statutory regime. The lesson is not that legislative changes are temporary (they may not be), but that keeping the statutory cost components disaggregated from the experience-based indication in the rate model is the only way to understand how much of the current finding is actuarially driven and how much is legislatively constructed. Carriers and residual market pools that blend these sources in a single rate indication lose the ability to explain their results when conditions change.

Further Reading

Sources

  1. TWIA, "TWIA Posts 2026 Rate Adequacy Analysis; Actuarial & Underwriting Committee to Meet on Rate Recommendation," June 18, 2026 (twia.org)
  2. Insurance Business, "TWIA Caps 2026 Catastrophe Protection," 2025 (insurancebusinessmag.com)
  3. Texas Department of Insurance, "Texas Windstorm Insurance Association Overview," Q1 2026, June 8, 2026 (tdi.texas.gov)
  4. Insurance Business, "TWIA Swings to $41.6 Million Surplus Ahead of 2026 Hurricane Season" (insurancebusinessmag.com)
  5. TWIA, "Timeline for TWIA's Annual Rate Filing Consideration" (twia.org)