Terrorism insurance can be ‘extremely beneficial’ to captives
The addition of terrorism insurance to a captive insurance company through participation in the Terrorism Risk Insurance Act programme can be “extremely beneficial” to the captive owner – as long as the coverage is appropriate and risk reasonably associated to the operation of the business.
This is according to John Talley, captive program manager for the Missouri Department of Insurance, who spoke to Captive International ahead of the CICA 2018 International Conference in Scottsdale, Arizona.
“Since terrorism comes in many forms (e.g. biological, cyber, chemical, nuclear, non-nuclear explosion, etc.), every type of industry is reviewing its vulnerability to loss due to terrorist attack,” said Talley.
“Specifically, I have seen insurance, manufacturing, transportation, communication and retail companies place terrorism coverage in their captive.”
Talley explained in an article published online that due to the infrequent occurrence of a certified terrorist event, the premium can accumulate in a captive, providing a substantial base for interest income. He also said that many captive have tailored their policies to cover risks that commercial carriers have excluded.
“However, before every owner/insured runs out to start a terrorism programme in their existing captive or form a captive for the perceived financial benefit, the broker/captive manager should approach the financing of the risk as it would any other risk,” he wrote.
TRIA was extended through to December 31, 2020, under Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) 2015.
Changes from TRIPRA 2015 include increasing the programme trigger from $100 million to $200 million.
In order to qualify for reimbursement under TRIPRA, the insurer must satisfy a deductible amount of 20 percent of their direct earned premium, and is required to cover a pro-rata share of the losses of 15 percent – which is rising to 20 percent in 2020 – with the federal government providing compensation for the remaining losses.
When asked whether the current scope of coverage was adequate for captive owners looking to protect their business against terrorism, Talley explained that it is hard to say, as terrorism can come in many forms, and that cyber terrorism can have a huge dollar impact, as an example.
“Even the amounts estimated as damages may not really be the full extent of the losses suffered. My thoughts are that a company should look at the worst case scenario regarding how much loss would “wipe out” the company coffers, then get an actuarial estimate of reserves and necessary premium,” he said.
Citing the outcome of the Avrahami v Commissioner tax case, Talley stressed the importance of properly assessing the business being conducted and risks inherent to that business.
"As we saw in the Avrahami decision, the utilised language must be rational and reasonable. The terrorism policy language in that case basically excluded any possibility of loss,” he said.
"The risk to be covered should be rationally related to the business of the insured. And, the captive insurance company must operate as an insurance company commonly would."