Combine and conquer

How complicated a risk to write is terrorism?

Writing a terrorism-specific programme in captive insurance has historically had similar requirements to writing other programme lines. Prior to the Terrorism Risk Insurance Act (TRIA), doing so in the US generally just required the advance approval of the domicile regulator, which could typically be secured by proposing the programme and detailing the plans in a letter to the regulator and then answering any follow-up questions to the regulator’s satisfaction. There usually aren’t any policy forms or rate filing requirements, so those elements can be customised to meet the needs of the captive insurer and policyholders, subject only to any specific requirements accompanying the domicile regulator’s approval.

Upon passage of TRIA in 2002, writing terrorism-specific programmes became more complex, because TRIA imposed additional requirements on all US-based insurers. Those requirements increased again with the 2015 extension. The key special requirements imposed by TRIA, on any subject programme including terrorism-specific programmes, currently includes certain notice and disclosure requirements beginning at the time of offer, and also accumulating and reporting detailed exposure data to the Federal Insurance Office.

After the reauthorisation of TRIA in 2015, was there an uptick in captives writing terrorism risk, and why?

Yes, there was an uptick in writing terrorism-specific programmes in captive insurance, because the uncertainty regarding TRIA’s future was resolved. As the expiration date approached, many captive insurers that were writing terrorism-specific programmes ensured the policies they issued had terms that took into account the possibility that TRIA would not be extended after the scheduled sunset on 31 December 2014. For example, some ensured their policies contained an option to cancel or reduce coverage if TRIA expired.

Others that were evaluating adding terrorism, for various reasons, for the year or two preceding the expiration pursued those plans only tentatively, in general, and in some cases put those plans on hold.

Once TRIA was renewed, they proceeded with feasibility and, in many cases implemented those changes, resulting in an uptick in captive insurers writing terrorism-specific programmes.

Do you think a captive is an effective solution for managing terrorism exposures, now TRIA is live?

Two key TRIA objectives that captive insurers support are: to create a coverage option where commercial options are limited or non-existent, for example nuclear, biological, chemical and radiological (NBCR) coverages and coverages for so-called trophy properties; and to help create competition in the market.

From a captive owner’s perspective, three key values include: a risk transfer option where such an option might not otherwise exist; greater flexibility in customising policy language to meet specific requirements than exists with commercial placements; and, that if no loss occurs, the premium paid to the captive insurer stays with the consolidated group.

How should captives access TRIA following last year’s reauthorisation?

The key steps are to ensure the captive has a licence issued by a US-domicile, to secure the domicile regulator’s approval to write the programmes and to ensure the offer and policy issuance processes incorporate all the required disclosure and associated provisioning rules imposed by TRIA.

They must then confirm that the underwriting files of the captive insurer include the appropriate information to comply with the annual TRIA data call that is expected to be mandatory from the beginning of 2017 for policies issued in 2016. Once they issue the policy, they just have to make sure subsequent renewals of the programme follow the disclosure and associated provisioning rules imposed by TRIA.

Is there anything else captives should consider?

Captive owners should always explore commercial insurance options simultaneous to exploring use of their captive insurer for a terrorism-specific programme. These options can include direct commercial insurance programmes and reinsurance programmes available via the captive insurer. In some cases the commercial options are very attractive, and the best structure could be a combination of a commercial programme and a captive programme.

For example, a commercial programme is secured, providing coverage for conventional losses of terrorism, and the captive can operate parallel to the commercial programme, providing NBCR and difference in conditions coverage, thus making the combined programme more comprehensive.

At the very least, exploring commercial options is good due diligence, since it will inform the scope and pricing of the captive insurance programme, which is a good way to demonstrate that the captive insurer isn’t being unduly influenced by the policyholder regarding important terms such as the amount of premium.

Since TRIA’s share of a loss is partly a function of the premium earned by participating insurers, it is important to ensure the premium isn’t set inappropriately low.

What are the advantages of using a captive to access the programme? Are there any implications or drawbacks that they should be aware of?

The key advantages are that there is a risk transfer option where a risk transfer option might not otherwise exist—there is greater flexibility in crafting policy language than exists with commercial placements. Also, if no loss occurs, the premium paid to the captive insurer stays with the consolidated group.

One of the key drawbacks is that there is uncertainty related to the programme—no losses have ever been paid, so it remains to be seen how effective the claims process will be and what complications may arise.

In short, the full expected recovery can’t be guaranteed by the professionals involved in implementing a captive TRIA programme.

Another implication is the opportunity cost of any portion of the premium, capital and surplus maintained in the captive to support the risk that could otherwise be used for operations of the captive insurer’s sponsor.

There are also compliance aspects of TRIA, particularly the significantly increased burden provisioned in the 2015 renewal related to annual data collection.

Finally, TRIA contains a $100 billion programme cap, so if aggregate insured terrorism losses exceed that amount, both participating insurers and the US government will limit their payments to an aggregate of $100 billion, potentially resulting in only partial payments of the policy limits to policyholders.
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