TRIP(RA) Down Memory Lane

The long-term viability of the U.S. property terrorism insurance market is back in the spotlight as Congress looks at renewing the federal reinsurance backstop, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which is set to expire in Dec. 31, 2020.

Despite a trend of decreasing risk, new threats will likely arise. A report from Marsh points to events that will likely affect terrorism risks in 2019, including the territorial defeat of First, Islamic State (IS) that the report warns will likely bring new threats both in the Middle East and in Western states, especially in the wake of the chaos in Syria. Religious extremism is expected to remain the dominant terrorism threat globally, but the threat from the “extreme right-wing groups” is also expected to rise in Western states, most likely in the form of “low-capability attacks that “generate little property damage, but pose significant risks to people.”

Why do I bring this up now? We all remember the last-minute deal for the last reauthorization, and are seeking to avoid it. Congress held a hearing on October 16th on the subject, and Joe Carter, acting president and CEO of United Educators, a risk retention group, testified on behalf of the American Property Casualty Insurance Association.  United Educators is a longstanding and active member of VCIA.

Joe testified that the “TRIA program has been successful in making much needed terrorism insurance coverage available to meet the needs of the market and protect the nation’s economy. Reinsurers’ appetite for writing terrorism insurance without the program in place may be limited. Failure to reauthorize the program could have significant economic implications and would expose taxpayers to even greater risk because pressure for federal disaster assistance to compensate for uninsured losses would increase in the aftermath of an attack.” I couldn’t agree with him more.

The good news is that the new chair of the House Financial Services Committee, Maxine Waters, supports the reauthorization. The more troubling news is that a letter was filed from the Consumer Federation of America stating that TRIA should NOT be reauthorized as there was “plenty of capacity in the market”. It is hard to fathom why the Consumer Federation of America is taking this stance, especially as there is no impact to taxpayers or consumers with TRIPRA.

Jim McIntyre, VCIA’s DC counsel, believes there is sufficient support on Capitol Hill to get it reauthorized, and VCIA will work with a coalition to move the agenda forward – so we are hopefully wringing our hands at the end of 2020 wondering if it will pass!

Thank you very much, I look forward to hearing from you.

Rich Smith,
VCIA President

VCIA Newsy News

newsblogTwo quick pieces of news regarding VCIA members to bring forward.

First, congratulations to VCIA Board Member Anne Marie Towle, for being one of this year’s winners of Business Insurance magazine’s “Women To Watch” award!  Launched in 2006, the award recognizes women leaders doing outstanding work in risk management and commercial insurance. Nominated by readers based on their accomplishments, expertise, leadership, and future prospects, honorees are selected by a panel of editors.  Anne Marie is Hylant Global Captive Solutions leader, and joins Sandy Bigglestone, Director of Captive Insurance for the State of Vermont, who was awarded this prestigious honor last year.

And a warm welcome to Vermont goes out to Arsenal Insurance Management, which is opening a new office in Burlington. Arsenal, founded in 2006, is headquartered in Montgomery, Alabama, and joins the already considerable number (20!) of captive managers with Vermont offices. I had the privilege of seeing Arsenal president Norm Chandler on a panel at the National Risk Retention Association conference in Chicago a few weeks ago. He presented a session entitled RRGs in The Future of Healthcare Without Health Insurance alongside fellow VCIA members Tim Padovese, CEO of Ophthalmic Mutual Insurance Co., and Stephen Koca, Principal and Consulting Actuary at Milliman. Join me in welcoming Arsenal to VCIA and to Vermont!

Thank you very much,  I look forward to hearing from you.

Rich Smith,
VCIA President

It’s Your Reputation on the Line

reputation-risk-panel

On Monday, August 19, a group of high-powered American executives, including seven of the large commercial insurers, published a statement on the role of shareholders in corporate governance that departs sharply from tradition.  The “Statement on the Purpose of a Corporation” put forth by the Business Roundtable asserts that corporations have greater obligations beyond generating profits for shareholders. In short, they are responsible for creating better lives for all their stakeholders.  Putting these parties first and treating them ethically is ultimately what keeps businesses going and the economy growing.

Shareholders have long been corporations’ top priority because disappointing them means withdrawal of their investment at best, and at worst, the potential for securities class action lawsuits. Businesses now operate in an environment of heightened reputation risk that has a tangible impact on income statements. Loss of customer loyalty and diminished brand value are real consequences of social irresponsibility, and these ultimately impact revenue and profit.  As important as the change in priority might be overall, it will add to the growing reputational risk profile of every organization.  That is one of the main reasons VCIA is hosting a webinar on reputational risk and how captive programs can help mitigate it, on October 23rd.

It can be said that reputation is a product of expectations. Often misunderstood and inadequately addressed, reputation risk is the peril of economic harm from leaving stakeholders disappointed and angry. Negative media and social media coverage are often a byproduct, amplifying that disappointment and anger. When reputational crises occur, they impact businesses commercially and financially, and their leadership personally. The August 2019 Business Roundtable declaration raises the stakes.

A captive program can be an effective vehicle for insuring reputational risk. A captive is in the unique position of being able to fund potential losses associated with stakeholder anger and disappointment, and by doing so signal to key stakeholders (employees, creditors & analysts, and regulators) that the company’s governance apparatus is very aware of the peril, and is confident that it is managing the risk well. And if the captive is at least partially reinsured in the open market, it then also demonstrates that an objective third-party has reviewed the company’s practices and is essentially “warrantying” the company’s governance.

So, join us on October 23rd for our webinar featuring Dr. Nir Kossovsky, CEO of Steel City Re, a leading source of integrated reputation risk mitigation solutions and insurances, and Machua Millett, Chief Innovation Officer for FINPRO U.S. and the General Partner Liability Product Leader at Marsh.  Ably moderated by Maigh Wright, an associate actuary with Milliman, this webinar is guaranteed to burnish your reputation!

Thank you very much, and I look forward to hearing from you.

Rich Smith
VCIA President

Parametrics and Nat Cat

floodI participated on the SRS webinar recently about using a captive program for natural catastrophe risks (Nat Cat) and found it quite interesting. Most often, Nat Cat risk is insured with parametric insurance, a type of insurance that does not indemnify the pure loss, but rather issues a set payment upon the occurrence of an objective triggering event, such as an earthquake of a certain magnitude or a hurricane of a specific intensity.  The use of a parametric trigger has been around for some time, but there seems to be growing interest in the tool, especially with the number of natural disasters increasing exponentially every year.

Robert Nusslein, Head, Innovative Risk Solutions Americas, Swiss Re Corporate Solutions, effectively described how captives can play a role in parametric insurance.  With insurance markets looking like they are hardening, especially property in natural disaster-prone areas, a new approach needs to be contemplated. As Swiss Re explains, parametric insurance products are linked to reputable, objective third-party sources, which are used to determine an insurance payout. They are designed to provide catastrophe coverage and complement, but not replace, traditional insurance coverage. Using this structure, parametric insurance payouts are quickly determined, easily measured, and effectively eliminate loss adjustment hassles. The proceeds from a parametric insurance payout can be used at the buyer’s full discretion.

Captives can play a variety of roles in this type of scenario.  As Brady Young pointed out, captives allow corporate to transfer risk of its subsidiaries to the parent’s captive insurer. Also, subsidiaries retain risk in their comfort zone and are able to assume it with less negative impact to financial results from Nat Cat or weather events. The captive can assume an appropriate amount of risk, anywhere from 90% to as little as 10%, with a reinsurer behind the captive assuming the balance of risk. Risk can be split in primary and excess layer participations or a percent quota share participation between captive and reinsurer. Reinsurers provide underwriting, structure and pricing expertise for parametric Nat Cat covers and third-party arm’s length pricing verification for the captive and its regulator.

All of this helps captive owners capture some of the benefits of parametric insurance, such as breadth of coverage, speed of loss payments, and supplemental coverage to traditional insurance.  And with the growing risk from natural catastrophes due to climate change, it is important for captive owners to be ready!

Thank you very much, and I look forward to hearing from you.

Rich Smith,
VCIA President