VCIA: Let Captives Opt From Terror Program

Meanwhile, other captive associations are still weighing in on the issue, or have decided to decline any discussion.

Jon Harkavy, chairman of the legislative committee for the Burlington, Vt.-based VCIA, and vice president and general counsel for Risk Services, LLC in Arlington, Va., said VCIA "feels that the proper interpretation of that section is that one can opt-in, with permission of Treasury."

Molly Lambert, president of VCIA, told National Underwriter that Vermont's newly elected Republican Governor, Jim Douglas, is backing the effort. Gov. Douglas last month sent a letter to President George W. Bush about the interpretation of the Terrorism Risk Insurance Act for captives, she said.

Ms. Lambert also said U.S. Senators Patrick Leahy and James Jeffords added emphasis to the effort by sending a letter last month to Kenneth W. Dam, acting Treasury Department secretary.

The senators' letter said they "are requesting the Treasury Department reconsider an interim guideline regarding participation by captive insurance companies, including risk retention groups and other self-insurance mechanisms in the Terrorism Risk Insurance Act of 2002.

"Interim Guidance issued December 18, 2002, takes the position that all U.S. domiciled captives writing direct property and casualty insurance are automatically included in the program.

"As authors and supporters of the language that resulted in section 103(f) of P.L. 107-297, we assure you that the intent was to make clear the captives are not automatically included. It was also the intent to give the Secretary flexibility to include those captives that need to participate in the program."

The letter continued, "The intent of the general exclusion of captives was based on two fundamental principles. First, these are self-insurers who write coverage only for their related companies, industries or associations.

"They are simply not in the same category as insurers writing for the public commercial insurance market. Second, under nearly all state captive laws, captives are expressly exempted from participating in various residual market mechanisms, such as guaranty funds. In the case of risk retention groups, Congress also has made that point clearly."

The letter concluded that, "An important point to consider is that a self-insurance entity forced to participate has little incentive to continue to hold a license as a captive."

Mr. Harkavy said that whether the Treasury will go for the interpretation is "always tough to determine. They came out with an interim statement saying that [captives] are in and that they're mandatory participants, but one never knows."

Mr. Harkavy continued, "What's important to us is that we have some indication of whether they're going to go by their initial interim rules or whether they will consider some flexibility for captives."

He said the Treasury has asked for comment on the interim regulations and "hopefully they will reconsider them. It's hard getting Treasury to change its position, but they were interim regs, and they did ask for comments. Perhaps something will happen."

The captive domicile of Hawaii is leaning towards pursuing an opt-in, opt-out interpretation because some captive owners want to participate and some do not, said Craig M. Watanabe, captive insurance administrator for the State of Hawaii Insurance Division in Honolulu.

Jim Kinder, president of the South Carolina Captive Insurance Association and chief executive officer of the Self Insurance Institute of America, said, "It appears that there is not continuity among the industry in the interpretation of the regulations, and that's what we're working on." His staff's focus, he said, is to understand the differences in the interpretation of the law before deciding on a definitive move.

Mr. Kinder said SIIA was involved in drafting language that "we felt would bring parity [with insurance companies] to the table."

He said the legislation is now being interpreted and "by no means is the job done." However, he said "freedom of choice," or an opt-in, opt-out interpretation, could "create an entirely different dialogue."

The Captive Insurance Companies Association has elected to stay out of the discussion.

Rick Hamilton, a member of the CICA board and president and general manager of CSX insurance company in Burlington, Vt., said, "We are not publicly making the effort, at least at this point, to have our membership go in that direction."

He stated that because of CICA's international focus, some of the issues that VCIA raises, "which are, indeed, negatives as respect to a domestic domicile, from the standpoint of the international domiciles, become positives. So it seems reasonable for CICA to remain quiet on this issue."