Congress authorized a seven-year extension of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in advance of its expiration at the end of 2020. TRIPRA provides several benefits to organizations with captive insurance structures that may ultimately reduce premiums and enhance terrorism coverage. As US-domiciled captives are obligated to offer terrorism insurance under TRIPRA, organizations need to carefully examine their captive structures and TRIPRA’s requirements to ensure compliance and to take best advantage of the program when addressing terrorism risks. These provisions only apply to primary insurance; reinsurance transactions are excluded.
The Captive Advantage
Access to the reinsurance backstop has specific advantages for captive owners, including:
- Premium savings – In the event there has been no certified terrorism event during the policy period, premiums paid to the captive are not lost to unrelated parties.
- Improved capacity – Where commercial terrorism capacity is limited, such as in high-density metropolitan areas, captives can provide additional capacity through direct access to federal reinsurance.
- More commercial options – Commercial insurers provide a variety of products designed to reduce or eliminate deductibles and co-pays.
- Broader coverage – Captives can offer broader terms for coverage that are often restricted or unavailable from commercial insurers such as:
- NBCR exposures.
- Cyber risks.
- Contingent time element losses.
- Flexible policy wording – Captive domiciles generally permit greater customization for policy wording.
- Coverage certainty – In each of the four reauthorization bills, the government has refined and updated the process and timetable that must be followed when determining if it will certify an attack as an act of terrorism.
Key Steps for Captives To Access TRIPRA
- Determine the net captive exposure by calculating the sum of the deductible and excess share.
- Consider the coverage limitations created by TRIPRA’s trigger, loss certification requirements, and US$100 billion program cap.
- Consider purchasing reinsurance for the deductible and/or quota-share, and/or net trigger risk.
- Be aware of terrorism risks that are not covered by TRIPRA, such as terrorism losses occurring outside of the US.
- Evaluate captive capitalization compared to the net captive exposure, including any commercial reinsurance.
- Determine the premium charge for the terrorism exposure.
- Compare captive options to available commercial options.
- Secure any required approval from the responsible domicile insurance regulator.
- Implement the program.
TRIPRA and Cyber Liability
In 2017, Treasury issued guidance to clarify that the requirement of TRIPRA applies to cyber liability insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance, effectively covering cyber-terrorism perils.
Treasury’s clarification on cyber liability insurance creates an opportunity for captives to expand the insurance protection TRIPRA offers. Captive insurers that access TRIPRA can offer broader coverage than would be available through a standalone policy.
Through a captive, organizations can also avoid some of the common restrictions or exclusions in commercial property insurance policies. Captive owners should review their current property and terrorism insurance programs, including exclusions, to determine if their captives can enhance their existing coverage.