Captives On Edge About Terrorism Cover

Alternative markets back extension of TRIA but worry aboutrising deductibles

While the industry waits for news about whether the TerrorismRisk Insurance Act will be renewed before its Dec. 31 expiration,captive owners and industry groups in the alternative market arewondering how they will be affected should the governmentreinsurance backstop be withdrawn on Jan. 1.

"We are in a situation that is very different than the time atwhich Congress passed the original [TRIA] bill," said DouglasHoltz-Eakin, director of the U.S. Congressional Budget Office inWashington, whose office recently discussed TRIA at the VermontCaptive Insurance Association annual meeting.

"I'd say there has developed a fair consensus that the bill asit stands is probably not suitable and is not going forward," headded.

He noted that Congress "quite likely will, and should modify[TRIA] to some degree if it chooses to extend it." He added that"certainly, the Treasury Department has taken a strong position onthat front–and I think there is a fairly broad sentiment inCongress that buys into that general idea."

However, he warned, "that doesn't mean there is a pinpointconsensus on where to go next and how fast it will happen."

Mr. Holtz-Eakin said the legislative calendar for this fall is"very busy," and that both the House and Senate are "thinking hardabout where to fit [TRIA] into the floor schedule. I haven't seenany specific timetable on either side, but the committee has beenlooking at options. We'll do things for them on a confidentialpolicy basis as they develop their ideas, and we'll see how it goesafter that."

As for changes to TRIA, he said, "a big menu has beendiscussed," including increasing the industry's aggregate retentionand hiking deductibles at the individual insurance companylevel.

Alternative market players, in particular, are "worrying aboutcaptives having a bigger deductible," he added.

Other options on the table include charging premiums for thefederal terrorism coverage and possible changes to the duration ofTRIA, "so that instead of a two- or three-year bill it would havelonger or shorter horizons," he said.

Among the issues being discussed, he noted, "the big one that Ithink has jumped out is what do you do with workers' compensation?"Since workers' comp carriers cannot exclude terrorism exposures,and reinsurance in the private market is scarce or non-existent,expiration of TRIA could leave such insurers vulnerable tocatastrophic losses should terrorists strike again.

VCIA President Molly Lambert said the association has urged itsCongressional delegation to support extension of TRIA. "That was atthe end of March, and since then the Department of Treasury hasissued their report," she explained. "There are all sorts ofproposals on Capitol Hill to tweak the program."

Ms. Lambert said that in addition to extending TRIA, it is "veryimportant for some of our members that liability insurance isincluded in that extension, and there is some discussion on CapitolHill of that not happening."

She noted that "there are some other provisions that might makeit very detrimental for our small insurers. So, yes, we support anextension, but we still are not certain of the proposals we aredealing with right now. Those are still being considered."

Ms. Lambert said that once a proposal is put together, VCIA willdo another analysis before issuing a position statement, "but thebasic [policy] is that we think the extension of TRIA is veryimportant," she noted.

VCIA's original stand for TRIA was an opt-in, opt-out provisionfor captives, which the U.S. Department of Treasury did not allow.Captives, consequently, "were mandated to participate," shenoted.

A member survey revealed that 50 percent wanted to be part ofthe TRIA program, Ms. Lambert reported during an informal pressbriefing at the VCIA conference. Programs like United Educators,which insures the liability of 1,200 colleges and universities, andother captives with marquis properties in their portfolio for whichterrorism coverage was very important wanted TRIA, she said.

Jon Harkavy, outgoing chairman of VCIA, said the organization isambivalent about "captives covering that type of catastrophic loss.But certainly we can't conceive of any captive being able to offerthat type of coverage at all without the backstop."

He emphasized that the United States is the only largeindustrialized nation "that does not have some form of federalbackstop" for terrorism exposures.

Callout, for page 32:

"…Certainly we can't conceive of any captive being able to offerthat type of coverage at all without the backstop," says JohnHarkavy, CICA's outgoing chairman.

Caption for Terrorism Shot:

Captive owners are concerned about having to absorb a muchhigher deductible before triggering TRIA's reinsurance backstop iftheir insured is hit by a terrorism loss.