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. 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. 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.
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. 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. 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.
The statutory purpose of the Program is twofold:
- 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.