Captive Insurance Company Lines Of Cover – Part 2

Every year or so, a self-proclaimed captive insurance industry expert will suggest that it is “bogus” for captive insurance companies to insure against terrorism.  Often, this assertion is wrapped in a geographic cloak, such as “if you are buying terrorism insurance in Kansas… beware,” as if major coastal cities are the only places terrorists would strike in the U.S.  

Terrorists can strike anywhere, and it’s certainly reasonable to assume they would strike in the “heartland,” or in a rural area, or hit our power grid, or poison drinking water, or disrupt communications.   Also, a terrorist strike would not have to directly destroy a business or its facilities to severely injure a company.  Terrorism can cause indirect – but overwhelming – losses by destroying key customers, destroying key suppliers or interrupting business in a myriad of ways.

Recent history has demonstrated that terrorists can strike the U.S.  Furthermore, our porous borders, large-scale international student visas, and history of lax immigration standards raise the specter of future terrorist attacks on our soil.  Contrary to the self-proclaimed captive experts, businesses would wise to have terrorism insurance in place and doubly-wise to insure against terrorism via a captive insurance company.

Three things are certain.  First, many commercial insurance policies exclude terrorism.  Second, similar to cyber-attack (discuss in Captivating Thinking last week), the impact and true losses from a terror attack can be far reaching with any third party insurance in place only covering a fraction of the total damage.  And, third, the U.S. government clearly takes terrorism insurance seriously (contrary to the self-proclaimed experts).

A recent article in BUSINESS INSURANCE titled “Treasury hasn’t collected enough insurer data to say if TRIA goals met: GAO,” points to the focus the U.S. government is placing on terrorism insurance.  Congress passed the Terrorism Risk Act of 2002 to, ““help ensure the availability and affordability of insurance for terrorism risk and provide a transitional period in which the private insurance market could determine how to model and price terrorism risk.”  The article points out that not enough progress has been made to fully transition terrorism insurance coverage to the private market.  In fact, Congress is considering extending a modified program for seven more years.  Reading between the lines, it is easy to see that the threat of terrorist attack and corresponding insurance cover protection has not and is not being addressed adequately.

To read the entire article in BUSINESS INSURANCE, CLICK HERE.

Because a terrorist attack could permanently sink a business, particularly a small or mid-sized business, it is a strategic risk.  And the slipshod development of trustworthy and fairly priced terror insurance to date does not inspire confidence in the U.S. government or the commercial insurance market.  Clearly, insuring terrorism in a captive insurance company is a very logical choice for a small or mid-size business.

One of the benefits of captive insurance companies is their ability to write customizable lines of cover.  This is particularly important for strategic risks like terror that cannot be adequately or affordably insured by third party commercial insurance.

Risk management and purchasing business insurance policies can be a daunting task.  It can be particularly challenging when you’re not sure about what you are paying for.  What exclusions apply to the insurance policies you are purchasing?  Is there coverage for all the secondary damage caused by an accident or loss including possible lawsuits and reputational damage?

If there are no losses, the business has paid out significant premiums with nothing to show for it.  Purchasing terrorism insurance from a captive insurance company can have the three-fold benefit of providing terrorism cover, providing cover with few or no exclusions and building captive reserves in the event of no claims.  And, captive reserves insure future losses and also can be translated into profit for the business or its owner (s).  Business owners with a captive in place should also consider insuring several years of future profit via a terrorism insurance policy through their captive insurance company.  It’s an error to ignore terror.