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Captives and TRIA

Terrorism-SF
January 23, 2017

Before the events of September 11, 2001, coverage for terrorism was typically included in most commercial property and casualty policies. After the attack, which cost property-casualty insurers approximately $43 billion, Congress enacted the Terrorism Risk Insurance Act of 2002, or "TRIA." Since its passage, which was for an initial period of 3 years, TRIA has been reauthorized 3 times, most recently in January 2015. Each subsequent revision has resulted in more risk being borne by the private markets versus the federal government. The table below summarizes the changes that have occurred with each reauthorization of the program.

EVOLUTION OF TRIA COVERAGE

 

2002

2005

2007

2015

Period

3 years

2 years

7 years

6 years

Terrorist Acts

Foreign

Foreign

Foreign and Domestic

Foreign and Domestic

Threshold Trigger

$5 million

$5 million

$5 million

$5 million

Coverage Trigger

$50 million

$100 million

$100 million

$100–$200 million

Deductible

7%–15%

17.5%–20%

20%

20%

Coinsurance

10%

10%–15%

15%

15%–20%

The following definitions apply to the terms used in the table.

  • Threshold trigger: For the loss to be certified as an act of terror by the secretary of the treasury, insured losses must surpass $5 million.
  • Coverage trigger: Once the loss is eligible to be certified as an act of terror, aggregate insured losses must surpass this amount. For the reauthorization in 2015, the coverage trigger rises from $100 million to $200 million ratably through 2020, the program's sunset date. The 2015 Act also clarifies that TRIA coverage is triggered after aggregate insured losses from any "acts" of terror reach the applicable threshold. This means that multiple acts of terror in a single calendar year will contribute to meeting the trigger threshold.
  • Deductible: Before an insurer qualifies for reimbursement under the Act, the company must satisfy a deductible amount currently specified as a percentage of direct earned premiums for the previous year.
  • Coinsurance: The percentage of the loss a company must retain after meeting the deductible threshold. For the reauthorization in 2015, the coinsurance percentage increases ratably from 15 percent to 20 percent through 2020.

While the passage of the original Act in 2002 certainly helped the traditional property-casualty markets, it did create confusion on the applicability of the law to US-domiciled captive insurance companies. The problem stemmed from the definition used in the language of the Act that stated it applied to "insurers" that provide "property/casualty insurance," which could be interpreted as excluding captive insurers. Because the Department of the Treasury did not issue a rule declaring captives to be "insurers," there was hesitation to conclude captives were indeed subject to the Act. This ambiguity disappeared in 2003 when the Treasury issued final regulations stating that "state licensed captive insurance companies" and "state licensed or admitted risk retention groups" were considered to be "insurers" as defined under the Act if they received premiums for any type of commercial property and casualty coverage.

The fact that captives are considered "insurers" under the Act took on additional significance with the reauthorization of TRIA in 2015. Under the reauthorization, the secretary of the treasury was directed to begin to collect data to analyze the overall effectiveness of the program and to provide an annual report to both the House Financial Services Committee and the Senate Committee on Banking, Housing, and Urban Affairs. 

Under the 2015 Act, the secretary is required to collect the following information.

  1. Lines of insurance with exposure to terrorism losses
  2. Premiums earned on coverage offered for terrorism losses
  3. Geographical location of coverages
  4. Pricing of terrorism coverage offered
  5. The take-up rate for the terrorism coverage
  6. The amount of private reinsurance purchased to cover acts of terrorism
  7. Any other such information the secretary considers appropriate

After consultation with major insurers, the Treasury released a data collection template in March 2016. Recognizing the need for a transition period, the Treasury made the 2016 data collection effort strictly voluntary. The initial report to Congress, titled Report on the Overall Effectiveness of the Terrorism Risk Insurance Program, was published in June 2016.  

Of particular note to captive insurers are the following comments drawn directly from the report.

Notably, while Treasury was able to obtain some data from insurers representing a significant portion of the market, some of the reporting insurers were unable to complete all data templates. Treasury will continue to work with stakeholders to adopt an efficient data collection process that satisfies the statutory objectives.

In addition, Treasury sought to collect data from alien surplus lines insurers and domestic captive insurers because these types of insurers also participate in the Program. Treasury received only limited data from these entities during the 2016 data collection. Alien surplus lines insurers and domestic captive insurers are eligible for reimbursement under the Program and often provide coverage for risks that are more difficult to insure. Treasury will continue to evaluate the manner in which these insurers participate in the program through the collection of responsive data and otherwise. While this initial data collection exercise was voluntary, failure to provide data in future years may result in financial penalties under the Program.

Captives need to be aware of their data reporting requirements under TRIA and the fact that noncompliance can and most likely will result in fines being assessed in the future. Ultimately, if the noncompliance by captives remains significant, it could cause the Department of the Treasury to recommend against captives being eligible to participate in the program when it comes up for reauthorization in 2020.

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