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036_037_038_039_Captive18 23/1/04 1:47 pm Page 36
TRIA
Clarifying
TRIA
Now that the M ore than year has passed since the
Terrorism Risk Insurance Act of 2002
(TRIA) became law, causing the US to join the
provided for other perils under the policy.
Insurers are required to ‘make available’
such coverage until 31 December 2004,
US Treasury list of nations with government-sponsored although the Secretary of the Treasury has
terrorism insurance plans. During that time, discretion to extend this requirement for an
has clarified the US Department of the Treasury has issued additional year.
a series of guidance documents and The federal reinsurance provided by TRIA is
the regulations interpreting and clarifying the subject to a deductible calculated as a
new law. Nevertheless, several important percentage of the insurer’s total direct earned
participation issues regarding how TRIA operates, premiums for all commercial property and
especially with respect to captive insurers casualty policies that they cover domestic
of US and other self-insurance arrangements, are risks. The deductible is 7% in 2003, 10% in
still to be resolved. 2004 and 15% in 2005. Above the deductible,
captives in the programme pays 90% of insured losses. In
Federal contribution addition, the reinsurance is subject to a
the TRIA TRIA established a temporary programme of market-wide aggregate retention equal to
reinsurance provided by the US government US$10bn in 2003, US$12.5bn in 2004 and
reinsurance for commercial property and casualty losses US$15bn in 2005. Reinsurance payments
arising from a ‘certified act of terrorism’. The above the retention must be recouped by the
programme, programme applies to acts occurring between government through a surcharge on
26 November 2002 and 31 December 2005. commercial property and casualty premiums.
Captive Events occurring after that date will not be Terrorism reinsurance is not available until
covered unless Congress passes – and the market-wide aggregate losses equal or exceed
Review President signs – a new law extending the US$5m. (For a more detailed discussion of
programme. TRIA’s requirements, see Chris Tait’s “Insuring
considers the In return for the promise of federal reinsur- the Unthinkable” Captive Review, March 2003
ance, insurers licensed or admitted to provide issue.)
full impact primary or excess insurance in any US state,
territory or possession must offer coverage Implementation by Treasury
of this for certified acts of terrorism in all Over the past year, the Department of the
commercial property and casualty policies Treasury has issued a number of guidance
landmark Act covering domestic risks. Insurers subject to documents and regulations interpreting and
TRIA include captive insurers licensed in any applying TRIA. These include regulations:
US state, territory or possession, including • Defining which insurers must participate in
the US Virgin Islands. Surplus lines carriers the federal reinsurance programme and
listed on the National Association of therefore must offer terrorism coverage
Insurance Commissioners’ alien insurers and collect any premium surcharges
listing are also subject to TRIA. necessary for federal recoupment
TRIA provides that insurers must offer • Specifying the scope of a ‘certified act of
terrorism coverage on the same terms (except terrorism’ covered by the programme
price) and in the same amounts as coverage • Clarifying the types of disclosure
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TRIA
participating insurers must make to
policyholders and how these disclosures A particularly troubling provision of the
must be communicated
• Clarifying the requirement that insurers proposed regulation would require insurers
‘make available’ coverage for acts of
terrorism to certify payment of underlying terrorism
• Specifying how participating insurers
should calculate their deductible claims in full before the government will pay
• Proposing procedures for obtaining
reimbursement from the federal its 90% share of the losses
government in the event that an act of
terrorism occurs recoupment if a terrorism loss were to occur.
• Establishing a formal process for In a final regulation issued in July 2003 the
requesting interpretations of TRIA. Treasury rejected this and other arguments
One of the Treasury’s first actions was to for allowing domestic captives to opt in or out
clarify that domestic captives must of the programme and reiterated its position
participate in the reinsurance program estab- that such insurers are required to participate.
lished by TRIA. Some segments of the The Treasury also has clarified that to be
industry, including the Vermont Captive eligible for federal reimbursement for
Insurance Association (VCIA), argued US- terrorism claims, an insurer must comply
licensed captives should have the option to with certain requirements of TRIA to provide
participate, but should not be required to do ‘clear and conspicuous’ disclosure to
so. If domestic captives were required to policyholders regarding the premium charged
participate, it was argued, companies with for terrorism coverage and the federal share
little exposure to terrorism risk would insure of compensation. In addition, the Treasury has
through an offshore captive, which would not stated that insurers must process terrorism
be subject to the mandatory federal claims in accordance with appropriate
Captive Review February/March 2004
37
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TRIA
business practices and any prescribed federal
procedures. In focus
Recently, the Treasury published a proposed Captive Review’s auditing expert Debbie
regulation that would establish procedures for Lambert, principle of Johnson Lambert & Co,
reporting terrorism claims to the government describes the impact of TRIA on the auditing of
and obtaining federal payment in the event of a captive.
an attack. The proposed procedures would “The primary impact of TRIA on an audit of a
require insurers seeking federal payment to captive is one of compliance testing. For an
make certain certifications and submit a audit of a captive, which directly issues policies, the auditor per-
bordereau identifying insured losses. A partic- forms certain underwriting tests, which would include evaluation of
ularly troubling provision of the proposed documentation of compliance with TRIA’s requirement that terrorism
regulation would require insurers to certify coverage be made available to policyholders. For policyholders
payment of underlying terrorism claims in full electing the coverage audit testing would include testing of the
before the government will pay its 90% share additional premium charged for the coverage.”
of the losses. This proposal raises significant
it would welcome comment on the
Insurers subject to TRIA include ‘appropriate criteria to prevent participation
in the programme by newly-formed insurance
captive insurers licensed in any companies deemed by the Treasury to be
established for the purpose of evading the
US state, territory or possession, insurer deductible requirements of the Act
and the Program’.
including the US Virgin Islands The Treasury has revealed at least the outline
of its criteria for avoiding the possibility that a
solvency concerns for the insurance industry, captive structure could be deemed to be
especially captive insurers. Captive industry ‘gaming the system’ and, therefore, invalid.
representatives have voiced strong opposition These criteria have emerged through several
to this requirement and are hopeful the public statements by Treasury officials and do
Treasury will rethink this aspect of the not, as yet, reside in any official Treasury
proposed regulation. publication. First, the pricing of premium must
be ‘arms length’ on the basis of industry
Market reaction standards. Second, there must be a bona fide
The market’s reaction to TRIA has been mixed. transfer of risk to the captive, not just the
A survey conducted by the Council of appearance of such a transfer. Third, proper
Insurance Agents & Brokers (CIAB) in March documentation in the form of insurance
2003 found nearly 60% of brokers responding contracts, actuarial reports and so on, that
to the survey said fewer than 10% of their meet industry standards must exist. Finally, in
small commercial property/casualty accounts regard to the issue of the recoupment, the
and fewer than 20% of medium-sized Treasury has articulated its theory that the
accounts had purchased terrorism coverage recoupment follows the risk and, therefore, it
required to be offered by TRIA. Of brokers can obtain its recoupment even if the captive
handling large accounts, 48% said fewer than does not continue in business after the event of
20% of their largest customers had purchased terrorism has occurred.
Robert H Myers Jr the coverage. Large national brokers have
Myers is a partner in reported similar figures. Anecdotal evidence TRIA’s narrow coverage
Morris, Manning & suggests little has changed in the market The definition of an ‘act of terrorism’ in TRIA
Martin LLP’s since the CIAB issued its report last year. is narrow. The precipitating act must be
insurance group. He committed ‘on behalf of any foreign person or
practices in areas of Unfinished business foreign interest’, which would exclude US
insurance regulation, The purpose of TRIA is to encourage insurers domestic terrorism such as the Oklahoma City
antitrust and trade association law. and reinsurers to create market capacity for bombing. Perhaps more important, TRIA
insuring terrorism risk. The availability of the continues to permit state law to allow the
federal reinsurance at 90 cents on the dollar exclusion of nuclear, biological and chemical
Joseph T Holahan is a significant incentive. However, the access (NBC) coverage. It is yet unclear how a ‘dirty
Holahan is counsel for to these federal dollars is offset by the bomb’ a conventional explosive which scatters
Morris, Manning & threshold requirements of exceeding the radioactive material would fall under this
Martin LLP. Based in substantial deductible and being subjected to exclusion. Nonetheless, the uncertainty
Washington DC, he is the post-terrorism occurrence recoupment. created is a major concern.
director of Morris, The Treasury has publicly acknowledged
Manning & Martin’s this may provide the opportunity for mischief. Cell captives
terrorism insurance group and a member In fact, the Treasury stated in the preamble to Substantial thought has been given by the
of the firm’s insurance practice group. its interim regulations implementing TRIA that captive community to the possibility of
38 Captive Review February/March 2004
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TRIA
utilising a protected cell captive for TRIA purposes. In
theory, this makes a great deal of sense. The benefit of a
protected cell captive is that the cell participant or
‘owner’ can take advantage of the reduced capital and
surplus requirements of being a single cell as well as the
economies of utilising single management for multiple
cells and a single investment manager.
However, the problem is that the definition of ‘insurer’
in TRIA requires that the ‘insurer’ must be ‘licensed or
admitted to engage in the business of providing primary
or excess insurance in any state’. While a US domiciled
cell captive has a license, the individual cell does not. A pioneering leader in the risk management
This creates the problem that the Treasury is likely to
view all of the cells in an aggregate form. For example, industry in the design, implementation, and
the premium of all the cells will be aggregated for the management of the entire spectrum of captive
purposes of determining the insurer deductible as well insurance companies.
as for purposes of determining the recoupment
assessment. This defeats the purpose of utilising a cell Independent, Objective & Technical
captive structure and needs to be remedied by the
Treasury. Excellence
We’re an independent fee-based (no commis-
JUAs and pools sions) risk management consulting firm that is
Joint underwriting associations and pools provide an not owned, controlled, or in any way obligated
enormous amount of direct coverage to states, cities, to primary insurers, reinsurers, fronting compa-
and municipalities. Their status under TRIA is
ambiguous. Many of these pools do not readily fit into nies, brokers, third-party claim administrators,
the ‘state-licensed or admitted’ category because they or other service providers.
may be licensed by an entity other than the insurance
department of a state and may be subjected to different Acknowledged Technical Expertise
kinds of regulation under state law. RiskCap has assembled some of the finest
The Treasury’s regulations address this issue, but do
not come close to the specificity that will be necessary technical consulting staff in our field. Our
for risk managers and their counsel to rely upon. As a clients include not only the industry’s giant
result, the managers of these pools are unclear as to insurance and reinsurance companies, but also
whether they are mandated to offer terrorism cover the mega brokers, and our consultant and
and whether, if they offer it, the federal reinsurance is captive manager competitors, who seek our
available.
knowledge, experience, technical expertise,
Quo vadis TRIA? and integrity.
Uncertainty as to the future of TRIA is a significant
problem and has a chilling effect on the utilisation of the Multiple Domiciles
programme. Congress decided the TRIA legislation Our objectivity is further enhanced by our
should sunset on 31 December 2005. This means the
programme will go into a run-off mode (if an act of feasibility, design, and management of captives in
terrorism has occurred) commencing on that date. In multiple domiciles including:
addition, the ‘make available’ requirement for policies
covering any portion of 2005 is subject to a decision by Arizona, Colorado, Cayman Islands,
the Treasury no later than 1 September 2004. In other District of Columbia, Hawaii, Nevada
words, if the Treasury does not decide to require the
‘make available’ requirement for 2005, then TRIA and Vermont
coverage will end (unless voluntarily extended) on 31
December 2004.
For additional information, please contact us at:
Conclusion 1655 Lafayette St., Suite 200
TRIA was intended to compensate for what was hoped to Denver, Colorado 80218
be a short-term problem with capacity in the US market (303) 388-5688 — (303) 388-5585 Fax
for terrorism insurance and reinsurance following the success@riskcap.com
events of 11 September. Yet continued uncertainty about
the future of the reinsurance programme established by
TRIA and uncertainty about other aspects of the law has Visit us on the web at
operated as an impediment to the full utilisation of TRIA www.riskcap.com
for its intended purpose: creating a viable insurance and
reinsurance market for terrorism cover.
Captive Review February/March 2004
39
