TRIA Program Falls Short on NBCR
Treasury should advise Congress that TRIA is ineffective in helping small and medium businesses manage nuclear, biological, chemical, and radiological terrorism risks.
These comments respond to Treasury’s Notice appearing at 87 FR 18473 (March 30, 2022) seeking comments in advance of its 2022 Report on the Effectiveness of the Terrorism Risk Insurance Program with a focus on the risk of nuclear, biological, chemical, and radiological terrorism (NBCR) events.
Executive Summary
There is strong evidence that the Program has advanced its statutory objectives with respect to the risk of loss from conventional terrorism events, but little in Treasury’s prior assessments of the Program to suggest widespread availability, affordability, or capacity with respect to risk of loss from NBCR terrorism events.
While small and medium businesses, nonprofits, and local governments are generally unable to benefit from the Program with respect to their NBCR risks (other than for workers compensation), many hundreds of large U.S. and foreign corporations use captive insurance companies to leverage the Program to protect themselves with hundred and even billions of dollars in NBCR coverage at ultra-low cost to those corporations but at extraordinarily high cost to the taxpayers financially backing the Program.
For these reasons, Treasury should use the 2022 TRIP Effectiveness Report to advise the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate that the Program is ineffective with respect to the risk of loss from NBCR terrorism events.
NBCR Coverage for Small and Medium Businesses, Nonprofits, and Local Governments
Question 4 of the Request for Comment inquires as to the availability of terrorism risk insurance coverage for losses arising from nuclear, biological, chemical, or radiological (NBCR) exposures.
In its 2020 Effectiveness Report, Treasury provided data comparing available reinsurance capacity across different catastrophe types. This information is summarized as follows for non-small insurers (representing 80% of the commercial property and casualty insurance market subject to TRIA):[1]
In very broad terms, it is reasonable to conclude from this data that in a vibrant catastrophe reinsurance market non-small insurers would place around $60 billion in aggregate limits with private reinsurers. Non-small insurers are placing only $45 billion in private insurance for conventional terrorism risks suggesting meaningful capacity restriction in the convention terrorism market.[2] By comparison, the engagement of a nominal $2-$3 billion in NBCR reinsurance capacity for non-workers compensation exposures strongly signals a non-functioning market for NBCR terrorism reinsurance.
The data provided by Treasury reveals a partial explanation for the lack of capacity in the NBCR terrorism reinsurance market for commercial property and liability insurance (i.e., other than workers compensation):[3]
The total amount of NBCR reinsurance capacity available to non-small insurers remains very small even when including workers compensation. Nevertheless, this data shows that non-small insurers are directing available NBCR reinsurance capacity toward workers compensation exposures — a line of business for which many catastrophe risk management tools (such as exclusions, limitations, and pricing) are virtually non-existent.[4]
Viewing the reinsurance market as a proxy for the direct market, it is no surprise that NBCR coverage is largely unavailable from traditional insurers.[5] To the extent NBCR coverage is available to small and medium businesses, nonprofits, and local governments, the limits on offer are modest with pricing largely unaffordable.
The exception is workers compensation where insurers are generally required by state law to assume the NBCR risk without limit. If an insurer cannot access adequate reinsurance for its workers compensation NBCR exposures, its only practical risk management tool is to decline to write the entire workers compensation policy. In that way, traditional insurers are directing available NBCR capacity toward sustaining a viable overall workers compensation insurance market. Accordingly, even if private NBCR capacity somehow doubled or tripled, relatively little of that additional capacity is likely to find its way to support the property and liability NBCR terrorism markets. Instead, this data suggests any additional NBCR terrorism capacity would be readily absorbed in the workers compensation market.
NBCR Coverage for Large US and Foreign Corporations
Question 9 of the Request for Comments inquires as to the manner in which captive insurers access TRIP, including the extent to which coverage is provided on a standalone versus embedded basis, or for NBCR risks only, and the reasons behind such choices.
A captive insurer is a special insurance company formed to insure the risks of its owner.[6] While there are different types of captive arrangements, pure (single owner) captives are most likely to participate in the Program. 90% of the Fortune 500 and S&P 500 are reported to have established captive insurance subsidiaries.[7] It is therefore safe to conclude that nearly all of the captives participating in the Program are owned by the world’s largest corporations.
Captive insurers account for an extremely low proportion (4%) of commercial property and casualty premium subject to the Program:[8]
Yet, the data assembled by Treasury shows a consistent pattern in which captive insurance companies are poised to collect a disproportionate share of taxpayer-funded payouts from the Terrorism Risk Insurance Program:
This disconnect is particularly pronounced in the case of an NBCR loss event. Under the San Francisco NBCR modeled loss scenario, captive insurance companies would receive 86¢ of every Program dollar paid out.[9] Small and medium businesses, nonprofits, and local governments (representing 96% of the market) that cannot afford or are not sophisticated enough to set up their own personal insurance companies are left with the crumbs — a mere 14% of Program dollars.
While small businesses, nonprofits, and local governments are effectively excluded from the NBCR terrorism market, the data Treasury has collected demonstrates that the Program provides massive amounts of NBCR protection to large US and foreign corporations through their captives.
A few examples show how:
Credit Suisse — After TRIA was enacted, Credit Suisse formed Terminus Insurance, Inc. in New York and hired Aon to manage its new captive subsidiary.[10] Terminus issues to Credit Suisse a terrorism insurance policy (covering both conventional and NBCR terrorism) with a $1.5 billion limit. Terminus privately reinsurers 100% of its Program deductible and co-share for conventional terrorism losses. Accordingly, Terminus is only at risk for its Program deductible and co-share for NBCR events. Terminus charges about $1.6 million for the insurance it provides to its parent. With a 20% Program deductible, Terminus is responsible for the first $320,000 of an NBCR terrorism event. After that, the Program pays 80¢ of every dollar of loss. Accordingly, a maximum loss under the Credit Suisse policy would cost the Program $1,199,744,000.[11]
Amazon.com — Amazon formed Day One Insurance, Inc. in Arizona in 2016 and hired Marsh to manage its new captive subsidiary. Among other policies, Day One provides conventional and NBCR terrorism insurance to Amazon with a limit of $1.75 billion.[12] Day One has a Program backstop deductible of about $100 million. Accordingly, a maximum loss under the Amazon terrorism policy would cost the Program $1,320,000,000.
Starbucks — Starbucks formed Olympic Casualty Insurance Company in Vermont in 2006 and hired Marsh to manage its new captive subsidiary.[13] Among other policies, Olympic provides NBCR coverage to Starbucks with a limit of $350 million. Olympic has a Program deductible of about $80,000. Accordingly, a maximum loss under the Starbucks terrorism policy would cost the Program $279,936,000.
As these examples show, large profitable US and foreign corporations with strong balance sheets leverage the Program to offer themselves NBCR terrorism insurance coverage terms, limits, and pricing that are unconstrained by market forces and wholly unattainable by small and medium businesses, nonprofits, and local governments.
Conclusion
The statutory purpose of the Program is twofold:[14]
- Ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk; and
- Build capacity to absorb any future losses.
The data Treasury has collected and analyzed over the life of the Program demonstrates a pronounced difference between:
- The availability, affordability, and capacity in the private market to insure (a) conventional terrorism risks; and (b) NBCR terrorism risks; and
- Access to the program by (a) large, well-financed, multinational corporations; and (b) small and medium businesses, nonprofits, and local governments.
As currently formulated, the Program makes no distinction between (a) acts of conventional and NBCR terrorism; or (b) captive and traditional insurance companies. As a result of the Program’s one-size fits all approach, the insurance market for the risk of traditional terrorism has strengthened over time, while the market for NBCR terrorism is broken. Further, the Program has promoted the inequitable availability of terrorism coverage limits and affordability as between captive owners and everyone else. For these reasons, the Program is ineffective.
[1] 2020 Effectiveness Report at 11.
[2] By definition, non-small insurers have substantial deductibles under the Program. For this group of it is less likely the Program has pushed out private market capacity. In fact, the right to excess program recoveries enjoyed by reinsurers may have the effect of seeming to increase reinsurance capacity. 31 CFR §50.71(b)(1).
[3] 2020 Effectiveness Report at 48.
[4] State law generally does not permit the permit workers compensation insurance to exclude or limit compensable nuclear, biological, chemical, and radiological injuries or disease. Likewise, workers compensation pricing is highly controlled compared to other lines.
[5] Treasury’s annual data call does not collect data on take-up rates for NBCR terrorism coverage.
[6] 2020 Effectiveness Report at 11.
[7] Captives by numbers, Captive International (March 2, 2021).
[8] 2020 Effectiveness Report at 11.
[9] According to Treasury, a “significant majority” of captives participating in the Program comply with mandatory data calls. While there are some 3133 captives potentially eligible to participate in the Program, Treasury has received data from 540. It is therefore possible captives would receive an even higher proportion of Program benefits.
[10] Report on Examination of Terminus Insurance, Inc. as of Dec. 31, 2018.
[11] Terminus only has $1 million of capital and surplus. Presumably, Credit Suisse would recapitalize its captive so that it could pay its claims and thereby tap into $4 federal dollars for every $1 invested into Terminus.
[12] Day One Insurance, Inc. Annual Financial Statement (Dec. 31, 2020).
[13] Olympic Casualty Financial Statement (Sept. 27, 2020).
[14] Sec. 101(b).
