RRG Terror Coverage Could Be Nixed By Treasury

WASHINGTON–A Treasury Department official has restated agency objections to risk retention groups creating captive insurance programs limited to providing stand-alone, single-risk coverage for terrorism losses.

His remarks indicated that the agency will not approve such programs for coverage under the Terrorism Risk Insurance Act (TRIA).

In comments at a meeting of the Captive Insurance Council of Washington, D.C. today, Jeffrey Bragg, executive director of the Treasury unit that oversees implementation of TRIA, was specific in saying the agency believes that creating such programs risks “gaming the system.”

At the same time, in other comments regarding TRIA, Mr. Bragg said the take-up rate for the program continues to grow.

He said that it started at 23 percent of insurers in 2003, rose to 59 percent by 2006, and is now over the 60 percent level, although he does not have exact figures.

Mr. Bragg also voiced concern about the decision not to mandate coverage of nuclear, biological, chemical and radiation attacks–as sought by House officials during debate on renewal of the program in 2007, but rejected by the Senate.

He said that only seven states bar exclusions for NBCR risk. If there are no requirements that it be covered, he said, the Treasury Department will not cover the claims if there is such an attack.

“This is a hole in the program,” he said. “It is a potential problem that needs to be addressed.”

Mr. Bragg's comments on single-risk programs by retention groups were consistent with guidance the agency provided in 2006 indicating that seeking approval of such an insurer “raises questions regarding the integrity of the program.”

But, he said, while the agency is just jawboning on the issue at this time, it is likely to take firmer action if applications for such coverage are sought, for example, issue regulation specifically barring them.

“We're not persuaded that such programs are eligible for coverage under TRIA,” he said.

He made clear that he has received no application, but there have been “inquiries” as to how Treasury would react, citing the 2006 guidance.

In that letter, the agency said, “We believe that an entity considering forming a captive insurer for stand-alone, single-risk terrorism insurance should be strongly cautioned and advised against undertaking such proposed action if it is doing so in order to avoid the Act's deductible requirements.”

In other comments regarding TRIA, Mr. Bragg noted that the law extending the program through 2014 that was enacted in 2007 makes major changes in the original law, which was passed in late 2002.

One of the changes is that while the Treasury Department is given the authority to certify a terrorism event when claims exceed $5 million, it can only pay claims on attacks whose costs exceed $100 million.

He also noted that Congress imposed an absolute cap of $100 billion on all terrorism claims under the law when it revised the law.

That means, he said, that if there is an event in one year of perhaps $50 billion, then a later event that year of perhaps $75 billion, claims for the first event are likely to be paid in full, while claims for the second event are likely to be paid on a pro-rata basis.

“That is our interpretation of the law,” he said.

He also said that under pay-go rules imposed when the Democrats took over Congress in 2007, recoupment of funds paid out by the Treasury for a terrorism event will be substantively accelerated based on provisions in the new law.

Specifically, before pay-go rules were introduced, Treasury had the authority to recoup up to 3 percent of premiums for as long as required to recover the funds, Mr. Bragg said. Now, however, there is a time-specific period and there is no cap on the surcharge, he said.

Under the law, the surcharge is levied on policyholders, and then paid to Treasury by the insurers.