Several Changes to TRIPRA Will Impact Captives in 2017

Several changes to the The Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) will affect captives in 2017. The principal changes include raising the program trigger and increasing the insurer’s quota share.

Background on TRIPRA

TRIPRA extended the federal terrorism insurance backstop through 2020. Under TRIPRA, the federal government provides reinsurance for commercial property and casualty policies covering certified acts of terrorism that occur in the US. Captives have been using and accessing TRIPRA since 2002 in the US.

Below is a summary of the most recent changes to the act:

• For 2018, the program trigger increased to US$160 million and the federal reinsurance quota share was reduced to 82%, increasing the insurer quota share to 18%.
• Early in January 2017, The US Department of Treasury updated the process and timeframe it will follow when determining if it will certify an attack as an act of terrorism, which is necessary for those eligible to recoup losses under TRIPRA. The update provides some certainty around the 30-day timeframe.
• Treasury issued guidance to clarify that the requirement of TRIPRA applies to cyber liability insurance policies reported under a Terrorism Risk Insurance Program-eligible line of insurance, effectively covering cyber-terrorism perils.

How Changes Will Affect Captives

The federal government will only provide reinsurance for losses that exceed the program trigger. A captive would be fully responsible for any terrorism losses below US$160 million for 2018.  The trigger will increase $20 million a year until 2020, when it will reach $200 million.

Captive owners should consider if supplementary “trigger protection” insurance is a viable option for their programs. Organizations should also review their cyber limits to determine if a captive can provide more capacity than their current cyber policies. The option to effectively buy down the deductible with reinsurance may be attractive to many captive owners.

The increase in a captive’s quota share of a certified terrorism loss could impact the level of capital the captive is required to maintain. Captive owners should evaluate and ensure that the policy premium is appropriately adjusted to reflect this increase in exposure.

Many captives and their owners depend on the federal terrorism insurance backstop in the event of a certified loss. The recent updates to the US Treasury’s certification process are intended to remove some of the uncertainty around whether an act will qualify for the federal terrorism insurance backstop.   

Treasury’s recent clarification on cyber liability insurance creates an opportunity for captives to expand the insurance protection TRIPRA offers. Captive insurers that access TRIPRA can offer broader coverage than would be available through a standalone policy.

Through a captive, organizations can also avoid some of the common restrictions or exclusions in commercial property insurance policies. Captive owners should review their current property and terrorism insurance programs, including exclusions, to determine if their captives can enhance their existing coverage.