FIO’s Small Insurer Study under TRIA
Comments filed by Centers for Better Insurance
The Centers for Better Insurance, LLC (CBI) is an independent organization committed to enhancing the value the insurance industry delivers to all stakeholders (including policyholders, employees and society at large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators, and policymakers. Additional information regarding CBI is available on the web at www.betterins.org or by email request at firstname.lastname@example.org.
CBI submits this comment letter in response to Treasury’s Notice appearing at 88 FR 18374 (March 28, 2022) with respect to the following issues not fully evident by reference to the aggregated data collected by Treasury:
- Evidence of a competitive benefit to small insurers relative to non-small insurers based on a disproportionate frequency of terrorism coverage provided by small insurers at “no charge” to policyholders; and
- Risk of adverse impact on the competitiveness of small insurers from policyholder surcharges driven by advantages conveyed by the Program to captive insurers.
1. Evidence of Program’s Positive Impact on Competitiveness of Small Insurers
The program’s backstop reimburses a portion of an insurer’s terrorism losses and shields the insurer from claims to the extent industry aggregate losses exceed $100 billion for any calendar year but only if the insurer makes certain disclosures to its policyholders. These disclosures include a “clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program . . . on a separate line item in the policy, at the time of offer and renewal of the policy.”
According to data provided to Treasury by insurers, 31% of policies (by premium) disclose no separate terrorism premium charge to the policyholder. Treasury’s further breakdown shows that 30% of non-small insurer issued policies (by premium) disclose no separate terrorism premium charge to the policyholder while 35% of small insurer issued policies (by premium) disclose no separate terrorism premium charge to the policyholder.
Treasury’s further breakdown by line suggests an even wider gap between the disclosure of premium by small and non-small insurers for high-risk lines of business such as allied lines, commercial multi-peril, inland marine, fire, and liability:
State law requires property and casualty insurers to charge a rate that “is not excessive, inadequate or unfairly discriminatory.” Assuming insurers are properly disclosing amounts charged for terrorism coverage (whether made as a separate charge or as embedded in a catastrophe or similar load), insurers disclosing no premium must have concluded that a $0 charge for terrorism coverage is adequate for the exposure assumed and that a charge of greater than $0 would be excessive for the exposure assumed. In other words, absent non-compliance with the Program and state law, the disclosure of a $0 premium conveys that the insurer has no discernable exposure to risk of loss from terrorism under that policy.
With this understanding, the data collected by the Federal Insurance Office suggests that small insurers enjoy a competitive uplift under the program compared to non-small insurers in nearly every line of insurance:
Based on this data, small insurers see such little residual terrorism risk under the Program that that they are far more comfortable than non-small insurers to give terrorism coverage away at no charge. This ability and willingness to provide terrorism coverage at no charge obviously places small insurers in the best conceivable competitive position. The only exception to this observation can be found in the workers compensation line of business where small insurers are less likely to disclose a $0 charge than non-small insurers.
In short, the data Treasury has assembled would appear to support a conclusion that the program has positioned small insurers in an exceptionally favorable competitive position relative to non-small insurers in nearly every line of insurance save workers compensation.
2. Impact of Policyholder Surcharges on Small Insurer Competitiveness
As part of its Report on the Effectiveness of the Terrorism Risk Insurance Program, Treasury collects data with respect to modeled losses based on different hypothetical terrorism events. Treasury does not collect modeled loss data from small insurers. However, a review of modeled loss data Treasury does collect suggests small insurers face a significant competitive distortion through the Program’s methodology for the imposition of policyholder surcharges following an event.
The data assembled by Treasury shows a consistent pattern in which captive insurance companies collect a disproportionate share of payouts from the Terrorism Risk Insurance Program:
While potential program payouts to captive insurers are expected to be very large, captive insurers account for an extremely small proportion of assessable premium:
The result of this mismatch between entitlement to benefits under the program and liability to finance the cost of these benefits disproportionally advantages owners of captive insurance companies while disadvantaging customers of small insurers. For example, under the Washington, D.C. modeled loss scenario payouts to captive insurance companies drive 90% of the total amount of policyholder surcharges levied by Treasury after the event, but policyholders of those captive insurers are only accountable to pay 6% of the total surcharges imposed on all policyholders. The other 94% of the burden is thrust on the shoulders of the policyholders of small insurers, non-small insurers and alien insurers. The practical result is that after a terrorism event insurance sold by small insurers will be relatively far more expensive (and therefore far less competitive) by reference to payouts received under the program as compared to insurance available through a captive insurance arrangement.
This outcome is particularly distressing because captive insurers are typically owned by and insure large organizations (e.g., Fortune 500 companies) while small insurers typically issue policies to small businesses, small non-profits, and small local governmental entities. In other words, the data collected by Treasury suggests that the bulk of the cost of the Program would be incurred by large corporations but funded by small businesses, non-profits, and local governments.
The New York Times once observed that a captive insurance company “sounds too good to be true.” Perhaps it is then fitting to see how The New York Times has structured the captive insurance company it formed in May 2003, just 6 months after TRIA became law. Midtown Insurance Company provides insurance coverage to its owner, The New York Times, and its affiliates. At the end of 2017, this captive insurance company provided $1.3 billion of terrorism coverage (including for nuclear, biological, chemical, and radiological attacks). Midtown Insurance Company had a roughly $7 million deductible under the Program. Accordingly, in the event of a total loss under the policy:
- Midtown Insurance Company would pay The New York Times $1.3 billion;
- Treasury would reimburse Midtown Insurance Company $1.03 billion (80% of $1.3 billion less the $7 million deductible); and
- Treasury would levy an assessment on all policyholders of $1.44 billion (140% of backstop payouts).
Of that $1.44 billion policyholder assessment:
- $1.12 billion (78%) would be levied on customers of non-small insurers;
- $158 million (11%) would be levied on customers of small insurers;
- $72 million (5%) would be levied on customers of alien insurers; and
- $86 million (6%) would be levied on the owners of captive insurance companies.
In order to move $1.03 billion from the federal backstop to The New York Times through its captive insurance subsidiary, U.S. businesses, nonprofits, and local governments would be assessed $1.350 billion while The New York Times and its fellow captive owners of captive would be assessed a mere $86 million. Such would appear to create a significant competitive disadvantage to traditional insurance companies, including small insurers.
 TRIA Sec. 103(b).
 TRIA Sec. 103(b)(2).
 Treasury’s 2022 Effectiveness Report at page 21.
 Treasury’s Study of Small Insurer Competitiveness in the Terrorism Risk Insurance Marketplace (June 2021) at page 24.
 TRIA Sec. 106(a)(2)(B); and Property and Casualty Commercial Rate and Policy Form Model Law, Section 5.C(6). See Terrorism Risk Insurance: Market Challenges may Exist for Current Structure and Alternative Approaches, GAO-17–62 (Jan. 2017), page 15.
 This data is difficult to understand given that the various workers compensation rating bureaus have filed for an explicit charge.
 An Insurer of One’s Own? It’s Possible, with Caveats, Paul Sullivan, The New York times (July 13, 2012).
 Analysis based on New York Department of Financial Services examination of Midtown Insurance Company as of December 31, 2017.
 In its 2018 Effectiveness Report, the Federal Insurance Office reported that the entire global property reinsurance market for certified acts of NBCR terrorism was $8 billion.