Terrorism (TRIPRA) and Captives
The Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) — the federal terrorism insurance backstop enacted January 12, 2015 — provides several benefits to organizations with captive insurance structures that can 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.
Advantages of Using a Captive to Access TRIPRA
Key benefits include:
- Premium savings: If there is no terrorism loss, premiums paid to a related party are retained on a consolidated basis.
- Broader coverage: Captives can offer coverages that are often restricted by or unavailable from commercial insurers, including for:
- Nuclear, biological, chemical, or radiological (NBCR) attacks.
- Cyber risks.
- Contingent time element losses.
- Policy wording flexibility: Captives are not generally subject to strict policy form requirements, allowing them greater flexibility to customize policy wording.
- Greater certainty: The government has updated the process and timeframe it will follow when determining if it will certify an attack as an act of terrorism, which is necessary for those eligible to recoup losses under TRIPRA.
Key Obligations of Insurers
Any insurer that underwrites certain types of directly issued policies such as workers’ compensation, general liability, and property must make available coverage for insured losses resulting from a certified act of terrorism, and make specified disclosures at the time of the offer.
To the extent that terrorism coverage is offered as part of an existing policy, coverage for terrorism must not differ materially from the terms, amounts, and other coverage limitations applicable to losses from events other than terrorism. This does not, however, prohibit an insured from declining the mandatory offer and seeking TRIPRA-specific coverage in a separate transaction that is better provisioned for its needs.
How TRIPRA Shares in Losses
In the event of a claim, the federal government’s participation is contingent upon a loss prequalification that requires that the aggregate insured loss across all impacted insurers exceeds a threshold known as the trigger. The trigger increases from $180 million to $200 million in $20 million increments per year until 2020. If the loss does not exceed the trigger, the federal government does not participate under TRIPRA.
If the loss exceeds the trigger, and before a federal government contribution is made, an affected insurer is responsible for paying a calculated amount, or deductible. This deductible is equal to 20% of the insurer’s direct earned premiums from the previous calendar year (or the equivalent implied by the current year’s earned premiums if the insurer was not in existence in the previous calendar year).
For 2019, the federal government will pay 81% of the excess while the insurer contributes 19%. TRIPRA decreases the federal government’s participation from 81% to 80% (and so increases the insurer participation from 19% to 20%) by 1% increments per year until 2020.
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.
- Although the US Department of the Treasury recognizes the important contributions of captive insurers in making available terrorism coverage, it cautions captive owners about the inherent conflict of interest and unusual level of control a policyholder has over an insurer in a captive insurance transaction. The warning emphasizes that captive owners should not take actions that would improperly reduce an organization’s overall share; for example, captive insurers should not deliberately underprice the premium in order to reduce the captive’s TRIPRA deductible.
- Capitalization must be determined and provided.
- Capitalization must be sufficient to satisfy the insurance regulator in a particular domicile. Captive insurance company regulators apply differing standards but are primarily concerned with statutory minimums and ensuring the captive insurer has the capacity to meet its reasonably foreseeable obligations to policyholders. Captive insurance regulators consider such traditional factors as reinsurance protection in this analysis but also factor in nontraditional “assets” such as letters of credit and parent financial strength.
- Premiums charged should be market-based.
- Captives, like all subject insurers, are required to submit annually to the Secretary of the Treasury certain information that considers and analyzes the effectiveness of the program.
- The annual liability of the federal government and all subject insurers is capped by TRIPRA at $100 billion. In the event that actual aggregate insured losses exceed $100 billion, this cap could result in a policyholder receiving less than the stated policy limits.
- TRIPRA permits insurers to obtain reinsurance coverage for any portion of any loss not covered by TRIPRA.
- Under TRIPRA, captives are required to process claims in accordance with customary business practices. Other procedures may also be prescribed.
- If a captive insurer is affiliated with other organizations that also qualify as insurers under TRIPRA, the direct earned premiums of the affiliated insurers will be considered together in determining insurer deductibles.
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.