Captives Remain Market Choice for Terror Cover

Large corporates continue to see captive formation as their best choice gaining terrorism coverage and accessing the Terrorism Risk Insurance Act (TRIA), according to industry professionals.

“Our clients have developed confidence in the long-term nature [of TRIA],” says Ben Tucker, leader of Marsh’s Property Specialized Risk Group in New York.

TRIA was created in 2002 as a federally funded backstop for the property/casualty industry in order to make terrorism coverage available following the retreat of the market immediately after the attacks of September 11, 2001.

The bill creating TRIA was renewed for two years in 2005, and then renewed again in 2007 for a period of 7 years.

Extending TRIA has given large corporate clients the encouragement to spend the time and effort to create captive companies and access the backstop directly rather than through corporate carriers, says Tucker.

“If you buy captive, the premium is retained,” Tucker says, adding that corporate clients want to make sure the captive formation pays off in the long-term. “The pricing is similar, but you are paying captive and accounting treatment and retained earnings are favorable.”

Tucker says that Hawaii, New York and South Carolina are the most popular domestic domiciles for TRIA captives, although a majority are located in Vermont.

Although TRIA is scheduled to sunset in 2014, the Obama Administration’s budget proposed earlier this year includes language that would cut $100 million from the program starting in 2010.

If and when that proposal every becomes a reality remains to be seen. “If there was any movement on budget reduction that could have an impact on the market. But it’s very speculative,” Tucker says.

Despite TRIA, insureds continue to struggle with coverage for possible threats arising from nuclear, biological, chemical and radiological (NBCR) attacks, says Chris Varin, managing director for Marsh in New York.

While NBCR coverage is available through TRIA, insurers are not required to offer coverage. A stand-alone market has grown around NBCR and companies such as Catlin Insurance Company and Montpelier Re offer NBCR programs, but limits and typed of coverages vary greatly. We have placed stand along NBCR. The marketplace is still quite small and the price is still quite high,” says Tucker.

Captives also are an option to access NBCR coverage, but some insureds remain hesitant of pricing.

“When you consider NBCR you need to look at it differently,” says Varin. “Some companies are very vigilant about determining their exposure. Even than, I’ve seen clients go without cover.”

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