Don't Mess With TRIA, Captive Owners Told

One of the questions is "are [captive owners] going to try to game the program," Mr. Bragg told National Underwriter after his presentation. "We're going to take our insurance responsibilities very seriously, and it's just not fair to the other insurers or the taxpayers for that to happen," he said.

He continued saying that the department is "going to look very seriously" at any captives or insurers that try to carve exceptions out of the program in attempts to evade deductibles.

For example, he said, a company might try to "game" the program by changing its "affiliation and control issues. A company could sell off a subsidiary so that it appears not to have control of the subsidiary," he said.

"Say you owned 25 percent or more of a subsidiary company. The statute says that you then control that affiliate–and its premiums would be subject to the deductible calculation," he noted. (Under the terms of TRIA, the annual deductible for each insurer is a percentage of its direct earned premiums for the prior yearat 7 percent in 2003.)

Mr. Bragg said the company could try to sell off 5 percent of that subsidiary and try not to attach that subsidiary's deductible to the TRIA program.

"I'm saying that we would look beyond that and if we thought there was gaming, we would use our presumptive control discretion and try to prevent it," he asserted.

Mr. Bragg explained the rules of presumptive control and conclusive control of an affiliate during his presentation at the conference.

First, he told his audience at VCIA that progress has been made implementing new regulations to support TRIA. Four interim guidance notices, two interim final rules, one notice of proposed rulemaking and one final rule have been implemented, he said.

The final rule, published in the Federal Register on July 11, he said, gives key definitions that Treasury will use when implementing the program. Among other things, he said, the rule addresses guidance for lines of insurance covered under the act, as well as control and affiliation issues.

The insurance industry and VCIA, specifically, he said, have been helpful in representing industry views to the Treasury department.

One of the most discussed issues in the new regulations, he said, is the definition of affiliate and what constitutes control. This issue is important, he said, because it goes to the "heart of understanding the appropriate deductibles to assign each affiliated insurance group."

Conclusive control is when an insurer "has the power to vote 25 percent or more of any class of voted securities of another insurer," he said. Or if it controls "the majority of the board of directors or the trustees of another insurer–that's a given," he said.

There are about 11 different factors to be considered when determining presumptive control, he said, any two of which "can cause the secretary to declare that one insurer does, in fact, control another." If the secretary determines presumptive control, the affiliate companies will be forced to participate in the program, he said.

This is important, Mr. Bragg explained, because of articles he has seen in "some trade journals" that "frankly describe strategies by which insurers can game the program."

Mr. Bragg also said that since the rules and regulations can be confusing, a mechanism is in place for answering questions and interpreting them. A question can be submitted on a page or two, "and we'll try to get these issues turned around as quickly as possible so that we don't have a lot of frustration in the industry about the program."

He added that he is "amazed at how many insurers are out there that aren't insurance companies."

He said a second set of rules is being finalized that will address disclosure requirements and guidance for the state residual markets. The process is "never ending," he said.

He said "considerable" work remains. Many in the industry have expressed concerns over adverse selection, continued lack of reinsurance availability, huge exposure in workers' compensation and affordability. "I don't really lose much sleep over these issues. These are issues that have been volatile at various times in the history of our industry, and TRIA was passed, in fact, to address them."

"I believe over time the free market economy will help solve them," he said.

TRIA contributes, over time, to "help build capacity and help stabilize the market," he said.

What does keep him awake, he said, are emergency procedures that have been put in place "in case there is a loss before we are fully operational," ensuring that "we will be able to respond to that loss." This means "we have had to work with dual paths while we've tried to implement the program," he said.

Jon Harkavy, vice chairman of the VCIA board of directors, told National Underwriter that VCIA thought it had secured an opt-in, opt-out provision for captives during the TRIA legislative process. "But Treasury took the other position," said Mr. Harkavy, who chairs VCIAs legislative committee and is vice president and general counsel with Risk Services, LLC in Arlington, Va. Treasury clearly wanted "the broadest possible funding mechanism in case a terrorism event takes place," he said.

VCIA's concern, he said, was that "this would be just another incentive for a captive to go offshore." However, he said no captives have yet left Vermont to go offshore because of TRIA.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 18, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.