Analysis of September 2005 Pulse Survey
In partnership with captive.com, Towers Watson launched a monthly pulse survey to learn more about the current use of captives to write terrorism coverage and what changes are being considered by captive managers in light of changes to TRIA renewal.
This analysis was written by analysts at Towers Watson.
There were 88 total respondents in the September survey. Of the 88, 69 participants answered the TRIA questions. The remainder were ignored in this analysis. Most participants (83%) indicated that they do not use their captive to insure TRIA-backed terrorism insurance. Of the remaining 17% that use captives to insure TRIA, over one third will continue to insure terrorism at the same limits and premium should TRIA change its reimbursement program; 9% will increase the limits they write; and 27% will eliminate TRIA from the captive altogether. Of the respondents writing TRIA in their captive, 27% plan to change the captiveís capitalization if TRIA changes.
One participant indicated their intent to place standalone coverage, as the captive cannot increase its capital to meet possible new, increased TRIA retentions (e.g., $500 million). Another participant said they would adjust the risk so the amount the captive retains will not change materially.
In light of possible major changes to TRIA, itís not surprising that more than half of the respondents said they would stop writing terrorism and/or change the capitalization. Prior to launching the survey, however, we anticipated that most captive owners would stop writing or severely restrict terrorism coverage in light of this concern, and we are somewhat surprised that more than a third of participants indicated that they would continue to write at the same limits and premiums, although we are not familiar with each respondentís particular circumstances and the bases for these decisions. Quite possibly, many have arranged or expect to arrange commercial reinsurance negating the need for TRIA, although we believe that market probably has limited capacity compared to TRIA. This coverage can also be rather expensive. We also find it interesting that increasing limits are being written.
We would ask, how will the captiveís capital be exposed with little or no reinsurance, and how will regulators look for back-up capital?
Our primary concern with the changes being contemplated by Congress is whether there will be a substantial increase in the current $5 million trigger to access TRIA. This amount could rise to $500 million. Since captive insurers are generally small entities, such an increase to the trigger amount would have major implications. Captives would need access to capital to fund whatever losses are no longer covered by TRIA, up to the insurance limits. As this is probably much more than current deductibles required by TRIA (i.e., a $5 million trigger followed by a 15% direct-earned premium deductible), most captives will expose lots of their capital once TRIA changes. We discussed the impact of TRIA renewal on captives in greater detail in the September 2005 issue of the Captive Insurance Company Reports.