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At the end of last year, with Yuletide still in the air, President George W. Bush signed into law the second extension of the Terrorism Risk Insurance Act, which kept in place the federal backstop for seven more years. The new law went into effect on Dec. 26, 2007. The final bill, though only slightly different than the previous TRIA version that expired at the end of the year, does pose issues that captive owners should consider.

After all, domestic captives are obligated under the law (as they were under previous TRIA versions) to offer TRIA coverage to its owner(s) like any other insurance company.

The key, of course, is that captive owners can choose not to "buy" the coverage. But perhaps more owners would be more willing to take up their captives on the TRIA offer, now that the new seven-year extension is providing relative stability.

"I think it would encourage people," said Ball.

Aaron Davis, managing director of Aon's National Property Practice, and Tom Stokes, head of the brokerage firm's Captive Group, both agreed that interest in buying TRIA cover from captives could increase.

"The longer term extension brings greater contract certainty," Davis told Risk & Insurance®, adding that the broader definition of "act of terrorism" in the bill might also augment the "utility" of TRIA coverage for many clients.

That broader definition--whereby domestic acts of terrorism are now covered--is one of the big changes to the bill, said Ball. The change in part requires all onshore captives to disclose to their owners that this expansion of the definition has occurred.

But for captive owners already buying TRIA cover through their vehicles, the new definition could cause them to reconsider such use because in theory it could increase the net exposure risk that the captives have. This could be the case, explained Ball, because captives would be on the hook for acts of domestic terror that occur between the $5 million minimum of losses needed to make an act certifiable under the law, and the $100 million trigger that must be reached before the federal backstop kicks in with reinsurance.

Just something to think about--and perhaps raise rates if you think your domestic terrorism exposure falls in that range.

Another change in the new extension that could have impact, said Ball, involves the way that recoupment and surcharges work. These are built into the law to reimburse the federal government for any amount that it would pay out as TRIA reinsurance. Imposed surcharges would be placed on all P/C insurance premiums, whether or not an insured has ever bought TRIA.

Captives would be on the hook for this too. The difference going forward in the next seven years--the mandatory recoupment rate has increased by one-third and the surcharges to pay that recoupment are no longer limited to 3 percent of premiums annually. Again, captives would have to collect these fees whether or not its owners chose to buy TRIA insurance from it.

Still, as complex is the TRIA issue (as you can tell from reading that last bit about recoupments), the client's overall perspective about terrorism insurance is even more complicated.

For large commercial policyholders with property far-flung around the globe, writing TRIA through a captive is just one solution to terrorism exposure, Davis made sure to stress.

"There are very few insureds that are relying on the TRIA captive structure as the sole means of recovering," he said. In part, it's because many would rather buy the cover on the traditional market if pricing and availability are attractive. But large insureds also have international terrorism exposure to worry about.

And to go one level higher of perspective higher, insureds make decisions about terrorism insurance with their overall P/C program in mind.

MATTHEW BRODSKY is Web editor/senior editor of Risk & Insurance®.

March 1, 2008

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