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Hugh's Views Issue 5: November 22, 2002
Don't say "yes" to captives in the Federal Terrorism program.

As I understand it, the two main points in the three-year Federal terrorism legislation that interest captives boil down to these:

1. Participation will be mandated for all licensed primary insurers. Medmal insuers and reinsurers won't be included. So theoretically, captives, if you consider the drafters of the new legislation meant them to be included as licensed insurers, can offer terrorism coverage and be eligible to take part in the Federal protection program. That sounds good, and might convince captive owners to sign on.
   
   
2. But there's a post-assessment arrangement, which works just like a guaranty fund. The "Mandatory recoupment" of what the government had to pay out, if they ever have to, will also fall on all licensed insurers (with the same exceptions noted above). If captives opted in, they would be part of that assessment.

There is an "out" for direct-writing captives writing property/casualty lines. If the insureds state, in writing, that they don't want terrorism coverage, then the company is excluded from the mandated participation, and presumably, in the mandatory assessment.

There is also a confusing section entitled Subpart f (yes, ANOTHER subpart f to confuse captive owners with Supart (F) of the Internal Revenue Code!) which allows the Secretary of the Treasury "in consultation with the NAIC" to apply the mandatory provisions (including assessment) to captives and to municipal pools, both of which are specifically named.

Carol Pierce of A.M. Bests warns that participation could affect the rating of lower-rated captives. This is because of the as-yet-unknown amount of their obligation under the assessment provisions.

It is almost certainly obvious to me that fronting companies, especially those fronting for workers compensation, will pass on the assessment directly to captives reinsuring them. At a minimum captive owners should be hustling their lobbyists to insert rules or regulations, which are supposed to be promulgated in December, preventing fronting companies from passing along the assessments - or, failing that, attempting to insert preventive clauses in the fronting agreements. I can't imagine AIG, the largest fronting company, for instance, easily accepting such limitations on passing along assessments, but they might if all their captive fronting clients made common cause about it.

Hugh's view: I think captive owners should say "no" to participation in this terrorism program offered by the Feds. They should do this in response to the questionnaires going out from the VCIA and other captive organizations, and should instruct their Washington lobbyists to make their negative views known, too. My main reason for saying this comes from my position that the origin of captive insurance came from "do it yourself," and a wish to stay separate from guaranty funds and residual funds that spread financing of deficits over all insureds. It runs completely counter to the idea that those who seek to distance themselves from the disasters of others by captive programs should be swept back in by virtue of this program. Proponents of captive insurance have always managed to support the argument that they are different from commercial insurers, that they serve the shareholder/insureds first and foremost, and intend to serve as a means for them to control their own destiny.

If that destiny involves terrorism damage or destruction, that may be one of the new risks of our age, like the collapse of interest rates or the failure of social security. We will find ways to manage that risk, even if we can't insure it.

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Hugh Rosenbaum, one of captive.com's friends and valued contributors, is a freelance consultant. Hugh can be reached by telephone at +4420 8883 6729 or by e-mail at hughro2@yahoo.com. Learn how you can spend a day with Hugh!

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