The US terrorism insurance pooling proposals could lead to some larger captives moving back offshore, according to a leading Captive magazine.

Captive Insurance Company Reports said in its May issue that the rules that have come out of the consultation process with the US government do not give captive owners any choice in the matter.

And captives in the US will be included in the pooling process - when others based offshore will be exempt from any payouts.

"For the moment, offshore captives are not included," said the publication. "Look for some larger captives moving back offshore."

Since the September 11 terrorism attacks hit insurance companies hard and made terrorism insurance almost impossible to obtain, the US government has been looking at ways of making sure that the country would be covered

The Terrorism Insurance Act of 2002, (TRIA) was enacted by Congress in November 2002 and aimed at giving the US a terrorism insurance plan based on existing national schemes in the United Kingdom, France, Israel, Germany and Northern Ireland.

It mandates that the insurance industry offer terrorism coverage and the federal government will share in the losses.

The federal government would provide an annual $100 billion backstop, not reinsurance cover above the insurers' deductible.

The government can recover a portion of these losses through premium surcharges that can be passed onto policyholders.

In exchange for this protection insurers got rid of terrorism exclusions and replacing them with terrorism coverage offering similar terms and conditions as other property and casualty lines.

The act covers a wide range of US property and casualty insurers but excludes medical malpractice, reinsurance and retrocessional insurance.

It is still unclear whether captives are covered by the act as the Secretary of the Treasury is given discretion to apply the act to captives.

Captives managers wanted to option to get an opt-in clause in the legislation, but did not get this.

"The rules that came out of the consultation process do not seem to give the captive owners any choice," said the report. "If licensed in the United States and if writing property/casualty business and if it isn't hospital/physician property/casualty, then captives and risk retention groups - like all other insurers - will be liable for their share in any assessment for recoupment after a government payment to the insurance industry.

"This kind of forced participation in pooling is something captives seek to avoid, even if the surcharge they are now exposed to is only three percent of future premiums."It went on to say that offshore captives are not included but could lead to some of the larger captives relocating offshore "unless the three year duration of the threat of payments under the federal terrorism recoupment makes it not seem worth the trouble."

Assuming a captive is subject to the act, a captive insurer, as with commercial insurers, must offer the coverage at a defined premium to its policyholders, who may reject it.

Following is a captive impact comparison:

If coverage is not elected

Advantages/ Disadvantages

No price modelling work/No TRIA coverage

No structural change/No insurance for parent/owner

No solvency impact (i.e. large deductible or co-pay requirements)/Fire - still covered. Doesn't avoid assessments.

note: even if the captive is not providing insurance coverage, it still has to pay the 3 percent surcharge to government.

If coverage is elected

Advantages/Disadvantages

Access to federal money/Increases solvency risk

Protects net worth of parent/Cash flow concerns: when will the government reimburse?

Can price at desired level/Management (pricing, claims handling, policy terms and conditions)

Source: Captive Insurance Company Reports - May 2003