CBI Comments on TRIA - Captives

This comment letter focuses on the proposed rule changes under the Terrorism Risk Insurance Program with respect to the outsized role captive insurers play in the Program and whether the Program should permit public identification of individual captive insurers.

1. 1

2019 TRIA Reauthorization Proposed Rules Comments

Centers for Better Insurance Submission on Request for Comments - Captives
The Centers for Better Insurance, LLC (CBI) is an independent organization committed to
enhancing the value the insurance industry delivers to all stakeholders (including policyholders,
employees, and society at large). CBI does so by making available unbiased analysis and insights
about key regulatory issues facing the industry for use by insurance professionals, regulators, and
policymakers. Additional information regarding CBI is available on the web at www.betterins.org
or by email request at [email protected].
This comment letter focuses on the proposed rule changes with respect to the outsized role
captive insurers play in the Program and whether the Program should permit public identification
of individual captive insurers.
CBI is submitting separate comment letters with respect to certain other matters of relevance to
the issues raised in Treasury’s Notice appearing at 85 FR 71588 (November 10, 2020).
The Nature of a Captive

A captive may be best thought of as an exclusive private insurance company with a single
customer – its owner.
1
Other have put it this way:
2


The owner(s) of a captive place their own capital at risk, and they directly control
their insurer. Captive insurance company owners are willing to risk their own
capital in anticipation of the financial rewards associated with better control over
their insurance program.

Treasury has observed that because the corporation acts as both the policyholder and the
insurer, “the decision of a captive owner to insure its terrorism risk exposure with a captive
insurer is a self-insurance decision as opposed to a market decision.”
3
The corporate parent’s
control over its captive is “strategic” as well as operational:
4


Ownership and control by its insureds distinguish a captive insurer from a
commercial insurer. This is not the type of ownership or control evidenced by a

1
Treasury describes captives as “insurers formed to insure the risk exposures of their policyholder owners and
regulated by the captive insurance laws of a particular state jurisdiction.” Report on the Effectiveness of the
Terrorism Risk Insurance Program, U.S. Treasury (June 2020) at 11.
2
What Is Captive Insurance?, Captive.com (Aug. 8, 2018).
3
Report on the Effectiveness of the Terrorism Risk Insurance Program, U.S. Treasury (June 2020) at footnote 78.
4
What Is Captive Insurance?, Captive.com (Aug. 8, 2018).

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nominal percentage share in the company's surplus. It means ownership in the
company's strategic business purpose.
***
Claims handling services are unbundled and separately arranged. Strict guidelines
can be drafted and enforced by the captive. This is preferable to allowing a
commercial insurer, whose interests might be more self-serving than an insured
desires, to dictate how claims are handled.

While it sounds complicated (and often is), a captive is simply a bit of clever internal financial
engineering. By setting up its own insurance company, a corporate parent can pull all the strings
on both sides of the transaction ranging from what coverages the captive will sell, how much it
will charge its owner and whether and how much to pay when its owner makes a claim.

Captives and the Terrorism Risk Insurance Act
Under the Terrorism Risk Insurance Act, Treasury is obligated to reimburse 80% of terrorism
insurance losses incurred by participating insurers (subject to a deductible equal to 20% of the
insurer’s prior year direct earned premium). After paying out to a participating insurer, Treasury
must levy a policyholder surcharge upon all commercial property and casualty insurance
policyholders nationwide (even those that did not purchase coverage against terrorism). This
policyholder surcharge totals 140% of the amount paid to the participating insurer.
5

According to the Insurance Information Institute, over 3000 captives are domiciled in the United
States.
6
598 captives responded to the most recent Terrorism Risk Insurance Program data call.
7

Treasury “estimates that the significant majority of captive insurers participating in the Program”
complied with the mandatory data call.
8
It is clear Treasury does not know how many captives
actually participate in the Terrorism Risk Insurance Program but the possibilities range from the
598 that complied with the Congressionally mandated data call to the 3000 catalogued by the
Insurance Information Institute. Treasury seems to suggest the number of captives participating
in the Program is toward the lower end of this range.
From the information supplied by those that did respond to Treasury’s last data call, captives
represent only 4% of commercial property and casualty premium in the lines of business subject
to the Program but fully 18% of the premium charged for terrorism coverage.
9
Moreover, 80% of
the terrorism premium captives receive come from terrorism-only insurance policies issued to

5
Following extraordinarily large loss events, some or all of these policyholder surcharges may be levied at Treasury’s
discretion.
6
Captives by State, Insurance Information Institute.
7
Sec. 104(h)(1).
8
Report on the Effectiveness of the Terrorism Risk Insurance Program, U.S. Treasury (June 2020) at 12 and footnote
150.
9
Report on the Effectiveness of the Terrorism Risk Insurance Program, U.S. Treasury (June 2020) at 11 and 77-78.

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their corporate owners – the kind of financial structures Treasury has repeatedly flagged as
potentially abusive.
10

Each year for the last several years, Treasury has included a hypothetical terrorist attack in its
data call asking insurers to report back (through a statistical aggregator, to protect anonymity
from Treasury) how much they would expect to recover from the backstop. Captives expect to
receive a surprisingly disproportionate share of Program payouts:
11


Scenario Modality Share of Program Dollars Paid to Captives
New York City Truck Bomb 32%
Chicago Truck and Suitcase Bombs 95%
San Francisco Truck Bomb 32%
San Francisco Radiological Bomb 86%
Dallas Truck Bombs 45%

Little is known by Treasury or the American people about captive insurance companies.
12
All we
really know is that large corporations have set up at least 598 captives allowing them to directly
participate in the Program. This special purpose vehicles dominate the program by laying claims
to up to 95% of the proceeds from the Program.
Case Studies
The pressing need for administrative and public transparency into these remarkably efficient
financial structures is perhaps best illustrated by comparing Treasury’s approach to public
disclosure of (a) the small businesses that received loans from the Paycheck Protection Program;
with (b) the large corporations that set up captives to access free federal reinsurance under the
Terrorism Risk Insurance Program.

10
Report on the Effectiveness of the Terrorism Risk Insurance Program, U.S. Treasury (June 2020) at 27 and 78.
Treasury has stated an intent to “administer the Program effectively and fairly, including preventing evasion of
insurer deductible requirements by special purpose entities formed to provide terrorism risk only coverage.” 68 FR
9815 (Feb. 28, 2003). Interpretive Letter, March 2, 2004 (“We believe that an entity considering forming a captive
insurer for stand-alone, single risk terrorism insurance should be strongly cautioned and advised against undertaking
such proposed action if it is doing so in order to avoid the Act’s deductible requirements.”). Interpretive Letter, Sept.
21, 2004 (“Treasury has concerns about the strategic use of captives as a means of avoiding the requirements of the
Act and its implementing regulations.”). Interpretive Letter, September 24, 2004 (“The post-enactment formation
or utilization of a captive insurer that will only provide stand-alone, single-risk TRIA-only coverage for losses from
acts of terrorism raises questions regarding the integrity of the Program.”).
11
TRIA — Analysis of Treasury’s Modeled Loss Scenarios, Medium.com (Aug. 2, 2020).
12
Many captive-friendly states have enacted laws prohibiting the Commissioner of Insurance from cooperating with
Treasury or making any public disclosures about individual captives. Captives and Special Purpose Vehicles, An NAIC
White Paper (July 2013) at 14-17. In fact, Treasury is currently suing the Delaware Commissioner of Insurance for
refusing to comply with an IRS subpoena for documents relating to more than 100 captives suspected of being used
in a tax abuse scheme. IRS sues insurance regulator for documents on captives, Business Insurance (June 23, 2020).

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A. Disclosure under the Paycheck Protection Program – Mar’s Medical Ride Corp.
In response to the economic ravages brought about by the COVID-19 crisis, Congress charged
Treasury and the Small Business Administration with the responsibility to run the Paycheck
Protection Program. The Paycheck Protection Program is intended to issue forgivable loans to
small businesses (generally, those with 500 or fewer employees) in amounts not to exceed $10
million. The average PPP loan is $101,000.
To obtain a PPP loan, a small business must complete an application requiring:
13

• Name
• Identity of its owners
• Past disciplinary actions with respect to other federal programs
• Past felony convictions
• The amount of the loan requested
• Some justification for the calculation of the loan amount and purpose of the loan
If a loan is granted, Treasury releases data on each PPP loan to the public including:
• Loan Amount
• Business Name
• Business Address
• Form of Business
• Race or Ethnicity
• Gender
• Veteran Status
• Number of Employees
• Date of Loan Approval
• Name of Lender originating the loan

Treasury recently released data on all 5.2 million PPP borrowers.
14

Here we can see that Mar’s Medical Ride Corp. of 13702 Main St., Carson, California received an
$8 loan approved on June 27, 2020 through the Cross River Bank. The borrower’s owner identifies
as an Asian male not having served in the military.



13
Borrower Application Form Revised June 24, 2020.
14
SBA Paycheck Protection Program Loan Level Data.

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B. Disclosure under the Terrorism Risk Insurance Program – Credit Suisse
Credit Suisse is a Swiss banking giant with its headquarters in Zurich. On September 23, 2008, Credit
Suisse (USA) established Terminus Insurance, Inc. in New York to serve as its captive insurance company
and appointed Aon as manager.
15
Terminus issues Credit Suisse (its owner and only customer) a $1.5
billion terrorism risk insurance policy including coverage for nuclear, biological, chemical, and
radiological (NBCR) attacks.
Credit Suisse controls both sides of this insurance policy. In fact, the three members of the Board
of Directors of Terminus, as the insurer, are the very same executives acting for Credit Suisse, as
the policyholder:
Credit Suisse Role
16
Terminus Role
17

Timothy McAlindin
Managing Director, Head of
Group Insurance
Member of Board of
Directors & President
Robert Dahling
Director, responsible for all
property and casualty
insurance issues and
renewals globally
Member of Board of
Directors & Vice President
Christopher Joneleit
Director, NY & Cayman
Islands Deputy Branch
Manager
Member of Board of Director

The policy issued by Terminus to its owner, Credit Suisse, exposes Treasury to a $1.2 billion
liability.
18
A backstop payout of $1.2 billion to Credit Suisse would force Treasury to levy a $1.68
billion policyholder surcharge on all U.S. small businesses, churches, schools districts and other
commercial policyholders.
To restate, three Credit Suisse executives negotiated with themselves to grant Credit Suisse a
right to claim $1.2 billion from U.S. Treasury at a cost to taxpayers of $1.68 billion.
The Swiss bank’s other interactions with Treasury have not been so remunerative or discrete.
Credit Suisse’s dealings with the United States government have included:
• A guilty plea to “conspiracy to aid and assist U.S. taxpayers in filing false income tax
returns and other documents with the Internal Revenue Service (IRS)” resulting in a $2.6
billion payment to tax authorities;
19


15
Examination Report (Sept. 9, 2015), New York Department of Financial Services.
16
According to their respective LinkedIn profiles.
17
Examination Report (Sept. 9, 2015), New York Department of Financial Services.
18
Under the current 80% reimbursement rate.
19
Credit Suisse Pleads Guilty to Conspiracy to Aid and Assist U.S. Taxpayers in Filing False Returns, U.S. Department
of Justice (May 19, 2014).

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• $5.28 billion settlement with the U.S. Justice Department for “conduct in the packaging,
securitization, issuance, marketing and sale of residential mortgage-backed securities
(RMBS) between 2005 and 2007” which contributed to the last financial crisis;
20

• $885 million settlement with the Federal Housing Finance Agency for alleged violations
of securities laws in connection with private-label mortgage-backed securities;
21

• $536 million forfeiture for transactions Credit Suisse illegally conducted on behalf of
customers from Iran, Sudan and other countries sanctioned in programs administered by
the Department of the Treasury;
22

• $196 million to the SEC for violating the federal securities laws by providing cross-border
brokerage and investment advisory services to U.S. clients without first registering with
the SEC;
23
and
• $16.5 million fine by the Financial Industry Regulatory Authority (FINRA) for failures in its
anti-money-laundering compliance program and other violations.
24

To obtain $1.2 billion of free reinsurance from the Terrorism Risk Insurance Program, Credit
Suisse had to submit to U.S. Treasury . . . Nothing.
Treasury has reported to the American people now exposed to a $1.68 billion policyholder
surcharge because of Credit Suisse’s creative financial engineering . . . Nothing.
Credit Suisse’s sordid history with US authorities prohibits it from borrowing even $8 under the
PPP – yet it snagged a $1.2 billion reinsurance commitment for free under TRIP.
To sum up:
Required Disclosure to Treasury $8 PPP Loan $1.2 billion TRIP Reinsurance
Name Yes No
Beneficial Owners Yes No
Felony Convictions Yes No
Federal Program Violations Yes No
Amount of Program Benefit Yes No
Justification for Receiving Benefit Yes No

Disclosure to Public $8 PPP Loan $1.2 billion TRIP Reinsurance
Name Yes No
Amount of Program Benefit Yes No

20
Credit Suisse Agrees to Pay $5.28 Billion in Connection with its Sale of Residential Mortgage-Backed Securities,
U.S. Department of Justice (Jan. 18, 2017).
21
FHFA Announces $885 Million Settlement with Credit Suisse, FHFA (March 21, 2014).
22
Credit Suisse Agrees to Forfeit $536 Million in Connection with Violations of the International Emergency Economic
Powers Act and New York State Law, U.S. Department of Justice (Dec. 16, 2009).
23
Credit Suisse Agrees to Pay $196 Million and Admits Wrongdoing in Providing Unregistered Services to U.S. Clients,
SEC Press Release (Feb. 21, 2014).
24
Finra Fines Credit Suisse Unit Over Money-Laundering Failures, The Wall Street Journal (Dec. 5, 2016).

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Urgent Action
Captives have been steadily eroding the integrity of the Terrorism Risk Insurance Program for
nearly two decades – unbeknownst to Congress, Treasury, or the American people. In the wake
of COVID-19, political momentum is building to copy TRIA’s right to secret participation, stunted
program oversight, and inexplicable commitment to opacity into the proposed Pandemic Risk
Insurance Act (PRIA).
25

While TRIA “only” puts $100 billion at stake, PRIA ups the taxpayer’s ante to $750 billion. The
time to fix the Program is now before PRIA is engrafted upon it – not years later when the cracks
in the foundation cause these programs to collapse.

Treasury’s Request for Comments

Treasury first seeks comments on a series of questions regarding rule changes or administrative
changes that could be made to bring expected backstop payouts to captives into a more
reasonable proportion to expected payouts to other program participants.

Unfortunately, hardly any information exists in the public domain about which captives
participate in the program, the inside deals they have cut, or even who their parent corporations
are. The public simply cannot develop an informed view of the appropriate role of captives in the
Program until we know who they are, what they are doing and where the money trail leads.
The late historian Henry Steele Commager wrote:
26


The generation that made the nation thought secrecy in government one of the
instruments of Old World tyranny and committed itself to the principle that a
democracy cannot function unless the people are permitted to know what their
government is up to.

The Program must first deliver transparency to Congress, Treasury, and the American taxpayer.
Only then, in a well-functioning democracy, could the people be called upon for their wisdom.



25
HR 7011.
26
The New York Review of Books, Oct. 5, 1972, p. 7.

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Treasury then asks whether the Federal Insurance Office should make information about
individual captives available to the public.

CBI proposes that Treasury should make available to the public no less information about insurers
that participate in TRIA than it has made available about borrowers under the PPP. That means
the American people should have access through the internet to a database containing at least:
• The name and address of each participating insurer or insurer group;
• The nature of the participating insurer (i.e., small insurer, non-small insurer, alien insurer
or captive insurer); and
• The participating insurer’s “insurer deductible” as an indication of the amount of risk the
participating insurers has shifted into the Program.
CBI proposes that for captives, the publicly available information should also include:
• The captive’s ultimate beneficial owner;
• The limits of terrorism insurance provided other than for NBCR; and
• The limits of terrorism insurance provided for NBCR (if any).
The reasons for making such information publicly available were recently explained by Judge
Boasberg of the United States District Court of the District of Columbia when he ordered public
transparency of the comparatively trivial individual commitments of public funds under the
PPP:
27

In light of SBA’s awesome statutory responsibility to administer the federal
government’s effort at keeping the nation’s small businesses afloat amidst an
economic and health crisis of unprecedented proportions, the public interest in
learning how well the agency fulfilled its charge is particularly pronounced.
***
This information, “valuable in itself to enhance ‘public understanding of the
operations or activities of the government,’” also enables meaningful evaluation
of whether the … program [is] being operated consistent with applicable legal
constraints; whether funds have been distributed fairly, equitably, and devoid of
fraud; and whether the programs are achieving their purpose.


27
WP Company LLC v. US SBA, No. 20-1240, Memorandum Opinion (Nov. 5, 2020) at 29-30

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The Terrorism Risk Insurance Program presents an even more compelling case for public
transparency because:
• Treasury currently has no information about the individual captives participating in the
program – not even their names much less the identities of the corporate interests behind
them;
• Congress cannot oversee how multinational corporations have been exploiting the
Program because it delegated administration to Treasury who remains in the dark; and
• State insurance regulators cannot say a word about any individual captive because they
are bound to secrecy under state law.
Congress, Treasury and the American people know more about a one-time $8 loan to an
obscure medical transport company than they do about a $1.2 billion commitment to pay a
well-known Swiss banking giant that has been in place for more than a decade.
As Treasury points out, Congress requires the output from annual data calls to be aggregated
before Treasury’s review or public presentation. However, Congress also charged Treasury to
administer the program.
28
In doing so, Congress empowered Treasury:
29

[T]o prescribe regulations and procedures to effectively administer and
implement the Program, and to ensure that all insurers and self-insured entities
that participate in the Program are treated comparably under the Program.
Effective administration of the Program surely includes collecting information on the names of
program participants, who owns them and how much risk each moves into the Program.
Further, Treasury may condition participation in the Program on satisfaction of any condition
Treasury “may reasonably prescribe.”
30
Asking for a participant’s name, ultimate beneficial
owner, amount of its backstop deductible and, for captives, the limits of coverage it sells to its
owner seems so very reasonable.
Treasury has released the details of 5.2 million small businesses under the Paycheck Protection
Program. It would shake the credibility of Treasury should it decline to disclose similar
information about less than one thousand multinational corporations that have set up captive
insurance companies so they can tap directly into hundreds of millions of public dollars under
TRIA and who are poised to do so again if PRIA becomes law.

28
Sec. 103(a)(2).
29
Sec. 104(a)(2).
30
Sec. 102(6)(C).