Capital Risk Ready: Using Captives to Access Terrorism Coverage
Too often, we’re reminded of the devastation terrorism causes. While protecting employees is paramount, companies also need to prepare for the potential financial damage a terrorist act can wreak. Terrorism insurance, which can be purchased as part of a property policy or on a standalone basis, is one way to mitigate the financial exposure.
The Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) extended the federal terrorism insurance backstop through 2020. Under TRIPRA, the federal government provides reinsurance for commercial property and casualty policies covering certified acts of terrorism that occur in the US.
Companies can also access terrorism insurance under TRIPRA through captives, which are required to offer the coverage. This year, we expect more captive insurer owners in the US to use them to access terrorism coverage. Yet our research shows that less than a quarter of the Marsh-managed captive insurers domiciled in the US currently underwrite terrorism risk.
Two converging trends should turn that around this year:
- Increased global concern over terrorism. Companies doing business in the US in 2015, ranked terrorism as one of the top three risk concerns, according to the World Economic Forum’s Global Risks 2016.
- Growing awareness of the potential benefits of using a captive to underwrite the risk.
BENEFITS OF USING A CAPTIVE TO ACCESS TERRORISM INSURANCE
Captive insurers that accesses TRIPRA can offer broader coverage than would be available through a standalone policy. Through a captive, businesses can also avoid some of the common restrictions or exclusions in commercial property insurance policies, including for:
- Nuclear, biological, chemical, or radiological (NBCR) attacks.
- Contingent time element losses.
Coverage for these risks can be obtained through a captive, and policy wording can be customized to meet your organization’s specific needs.
In addition, terrorism coverage pricing via a captive is often competitive with that of traditional commercial insurers. If there aren’t any terrorism losses, premiums paid to a related party can be retained on a consolidated basis.
Though captives provide several advantages, there are also some drawbacks. Funding a terrorism insurance program via a captive requires a significant upfront capital investment. And if you’re not already purchasing some form of commercial property terrorism insurance, it means paying an additional premium.
It’s also important to note that under TRIPRA, the federal government will only provide reinsurance for losses of a certain size — $120 million in 2016, rising in $20 million increments to $200 million in 2020. A captive would be fully responsible for any terrorism losses below this threshold. (Supplementary “trigger protection” insurance, however, can allow captives to take advantage of the federal backstop even for losses below the threshold.)
In considering using captives for terrorism coverage and to help your organization be risk ready, you should review your current property and terrorism insurance programs, including exclusions. For more on captive insurance trends, read Marsh’s US Insurance Market Report 2016.