JLT Towner US Consulting
Groups and cells are among the best options for gaining access to the Terrorism Risk Insurance Act, according to Thomas Stokes of JLT Towner
Why has there been an increase in group and cell captives accessing TRIA?
Group and cell captives in general are experiencing an unprecedented period of growth within the captive industry. Small and middle-market businesses are the engines driving this growth, as the threshold for participation in cell and group captives is lower than other captive options.
Cell captive entities operate in much the same manner as single parent and group entities. Structured properly, these entities function to retain a portion of exposure emanating from the parent company with the goal of accessing underwriting profitability, among other benefits.
It is well established that captives have access to the federal terrorism backstop. The increase seen in accessing the Terrorism Risk Insurance Act (TRIA) as an exposure within a captive’s portfolio of risks is a function of an increase in the utilisation of cell and group captives in general.
What are the necessary steps a risk manager has to take to ensure they are fully covered by TRIA?
The US has been fortunate that, following the terrible events of 9/11, while there are still acts of terrorism affecting both the US and its allies, none have replicated the devastation necessary to trigger the federal backstop covered by TRIA. We hope the federal backstop is never triggered and that all acts of terrorism cease altogether. That being said, because of its limited use, there is little precedent that would detail the process in practice as it pertains directly to captives.
The current legislation details three eligibility requirements. Insurers must: be a recipient of direct earned premiums for any type of commercial property and casualty insurance company; be licensed (or admitted) to provide insurance in any state; and meet any other criteria that the secretary may reasonably prescribe. These last criteria should be settled, again, once industry responses are received and the treasury prescribes additional clarification.
As a result, risk managers must assess their businesses and overall exposure to, and risk of loss from, any potential terrorist event. Because not all terrorism events would qualify as a trigger for the backstop, it is always best for risk managers to work with a broker and an alternative risk consultant familiar with the operation of the provisions of the backstop. This way they can determine first what coverage is available in the marketplace, and at what price, before augmenting coverage through a captive insurance company.
The US Treasury has proposed rules around TRIA and self-insurance arrangements. What is it looking at?
The US Treasury has posed several questions to understand the role of self-insurance arrangements and captive insurers prior to implementing rules designed to affect those industries. The resulting rules will take these comments, as received by the industry, into consideration. While changes are posed to exclude captives from the definition of a small insurer, no posed rules pertaining to the exclusion of captives as entities qualifying for the programme have been detailed. Highlighting this fact is the Treasury’s inclusion of a section within the legislation reserved for further regulations concerning the participation of captive insurers in the programme.
In my opinion, once responses are received from the industry, captives will continue to qualify. The questions are an attempt to understand the various permutations and create rules tailored specifically for the captive industry. Captives are now widely recognised as insurance vehicles by the insurance industry in general and also, more importantly, by the courts. When structured and operated properly, captives serve as qualified insurance entities, and acting otherwise would be contrary to the Treasury’s own stated position.
In addition to qualifying, insurers as well as captives will be subject to data collection protocols designed to monitor the effectiveness of the programme. It has been stated that the captives will have separate protocols following responses to the proposed industry questions. With national elections occurring later this year, however, it is not expected that legislation will be received for several months.
What differentiates JLT’s sponsored cell captive facility, Isosceles Insurance Company, from the competition, particularly when it comes to TRIA?
Sponsored cell captive facilities benefit captive owners by offering lower startup costs, lower exit costs, less lead time for establishment, lower operating costs and less administrative burden as compared with single parent captive or risk retention groups.
JLT has a broad variety of cell captive options that can accommodate almost any desired insurance transaction globally. Our cell facilities in Bermuda, Barbados, Guernsey and Connecticut are each designed to meet specific needs.
Our Connecticut cell facility can be used, pursuant to a properly structured programme, to access the TRIA backstop, to provide for US-based employee benefits and to provide easy and economical access to the benefits of captive insurance. In particular, our Connecticut structure allows participants to incorporate their cells as either the shareholder owner or as a rental of a JLT-owned cell, to further accommodate the structuring needs of our clients.
