Every insurance company licensed by a state department of insurance to sell commercial property and casualty insurance is required to participate in the Terrorism Risk Insurance Act (TRIA). Under this $100 billion program, U.S. Treasury reimburses 80% of a participating insurer’s covered terrorism losses above an individual insurer deductible.
The proposed Pandemic Risk Insurance Act (PRIA) would use this same framework to make sure business interruption coverage is available in the event of a future pandemic. The total amount of coverage available under this program balloons to $750 billion with U.S. Treasury liable for 95% of losses.
Most businesses buy terrorism insurance coverage through traditional insurance companies as part of their standard property or liability insurance policies. U.S. Treasury acts as a sort of reinsurer by promising to reimburse part of the insurer’s terrorism insurance payouts. This same reimbursement approach is envisioned for PRIA with respect to pandemic insurance. In either case, the policyholder negotiates with its own insurer for terms of coverage and pricing and in settling any claims. U.S. Treasury sits in the background until the insurance company reports that it has settled a covered claim.
Because the insurer is on the hook for 20% of terrorism losses (or 5% of pandemic losses in the case of PRIA), Congress figured the insurance company and Treasury’s interests are well aligned. The insurance company would not be motivated to underprice coverage or overpay claims since its money is at stake right alongside the U.S. taxpayer’s. So confident Congress was in the power of market forces to keep the program fair to policyholders, insurers and taxpayers, U.S. Treasury does not even keep a list of insurance companies that participate in the program. Day-to-day regulatory oversight of participating insurers is entirely deferred to state departments of insurance.
What could go wrong? Well, if a policyholder could set up its own insurance company to insure itself against terrorism or pandemic this careful alignment of interests between the U.S. taxpayer and the insurance company breaks down. Here is where captive insurance companies come in. A captive is a limited purpose insurance company authorized to issue an insurance policy to its corporate parent and affiliates. Since TRIA became law in 2002, Vermont, Delaware, Utah, Hawaii and more than a dozen other states have licensed well over one thousand new “captive insurers.”
Because state licensed captive insurance companies participate in TRIA (and would be eligible to participate in PRIA), captive owners can establish a direct line for reimbursement of their terrorism (or pandemic) losses from U.S. Treasury without having to go through traditional insurers. Owners of TRIA / PRIA eligible captives include Amazon, Microsoft, Apple, Disney, eBay, Goldman Sachs, Google, Facebook, Mastercard, Starbucks, Comcast, Equifax, and the New York Times among many, many others.
Another owner of a TRIA/PRIA eligible captive is the Aviation Industry Corporation of China (AVIC). In fact, AVIC owns two U.S. captive insurance companies acquired in 2011:
- Superior Aerospace Insurance Company, managed by Aon and licensed by Vermont’s Department of Financial Regulation; and
- Mangrove Cell 1 PC, a cell of Mangrove Insurance Solutions, PCC, managed by Marsh and licensed by the District of Columbia’s Department of Insurance, Securities and Banking.