The Case for Transparency of Captive Arrangements

Photo by Sarah Shull on Unsplash

This Thursday the U.S. House Committee on Financial Services Subcommittee on Housing, Community Development and Insurance will hold a hearing entitled Insuring against a Pandemic: Challenges and Solutions for Policyholders and Insurers.

Coincidentally, perhaps, The New York Times published a Sunday feature Capitalism Is Amazing! (It’s Also Inadequate) a version of which is available in TheUpshot online. The Times is in full lobbying mode for a federal pandemic risk insurance program patterned after the Terrorism Risk Insurance Act (TRIA):

The nine months of the pandemic have shown that in a modern state, capitalism can save the day — but only when the government exercises its power to guide the economy and act as the ultimate absorber of risk. The lesson of Covid capitalism is that big business needs big government, and vice versa.

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After the Sept. 11 terrorist attacks, for example, private insurers would not write terrorism insurance policies to owners of commercial buildings for practically any price; the government stepped in and provided it.

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When big risks appear on the horizon, whether it is a pandemic or a global security threat, it can bring out the best in private industry, worthy of celebration and applause. But the history, both distant and contemporary, shows that business can’t do it alone.

The Times, like hundreds of other large corporations, has not been doing it alone. Not 6 months after TRIA became law, The Times formed its own personal “captive” insurance company named Midtown Insurance Company. With the guidance of its insurance broker Marsh, The Times used Midtown and some fancy financial engineering to bore a tunnel directly into the coffers of U.S. Treasury through which now flows a commitment of nearly $1 billion. Under the quirky rules of TRIA, U.S. Treasury acts as an amplifier and pass-through of insured losses such that $1 billion of payouts under the program produces $1.4 billion of surcharges on small businesses, nonprofits, local governments, and other commercial policyholders. Somehow, that did not make it into the article on Sunday. In fact, although the Times regularly provides favorable reporting on TRIA it has never once disclosed its billion-dollar interest in the program.

The Pandemic Risk Insurance Act (HR 7011), the subject of this week’s hearing, would replicate TRIA and apply it to pandemics. The Times and the hundreds of other large corporates that had set up captives to tap into federal terrorism insurance dollars are poised to leverage the same financial engineering that has drawn down on TRIA’s $100 billion limit to write their own pandemic bailout schemes using PRIA’s $750 billion commitment of taxpayer funds.

Unfortunately, The Times will not be testifying about the billions it has positioned itself to reap from TRIA and a future PRIA. Instead, another New York business — Annie’s Blue Ribbon General Store, billed as a “modern gift shop showcasing quirky knickknacks, toys, pet items, housewares & decor” — will appear to represent the interests of businesses large and small. Sadly and likely unbeknownst to proprietor Anne Cantrell, PRIA is unlikely to provide small businesses any meaningful protection. PRIA is a cynical money-grab by large corporations hiding behind their secretive captive insurance companies while shamelessly exploiting the public’s sympathy for the small businesses, nonprofits, and local governments who will be left with the program’s crumbs.

While it is important to finally have a hearing about how to manage the risk of future pandemics, we must be willing to hold an open and honest discussion about who benefits and who pays when multi-billion corporations are allowed to design their own secret taxpayer funded bailouts.

We used to be able to count on newspapers to help us understand whose hands are in our pockets. Sadly, its theirs.

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Founder and Managing Member of Centers for Better Insurance, LLC

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Jason Schupp

Jason Schupp

Founder and Managing Member of Centers for Better Insurance, LLC

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