The Centers for Better Insurance has submitted these comments in furtherance of the mission of the Advisory Committee on Risk-Sharing Mechanisms (ACRSM) to “provide advice and recommendations to the Federal Insurance Office (FIO) with respect to the creation and development of non-governmental, private market risk-sharing mechanisms for protection against losses arising from acts of terrorism.”

1. Submission of Public Comments
To: Advisory Committee on Risk-Sharing Mechanisms (ACRSM) via acrsm@treasury.gov
From: Centers for Better Insurance, LLC (Frederick, Maryland)
Re: Federal Transparency over Captive Terrorism Risk Programs
Date: February 19, 2001
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The Centers for Better Insurance submits these comments in furtherance of the ACRSM’s mission to
“provide advice and recommendations to the Federal Insurance Office (FIO) with respect to the creation
and development of non-governmental, private market risk-sharing mechanisms for protection against
losses arising from acts of terrorism.”
FIO is currently considering whether to create transparency over captive insurance arrangements for the
benefit of:
• Itself as the administrator of the Terrorism Risk Insurance Program;
• Congress as the overseer of this $100 billion program; and
• The public as the funder of the Program’s commitments.
The ACRSM should urgently and strongly advise and recommend to FIO that it must exercise its authority
under the Terrorism Risk Insurance Act to create transparency into the role of captives in the Program as
a means to:
• Promote awareness of promising private terrorism risk solutions developing in the captive space;
and
• Protect small businesses from falling into potentially abusive terrorism risk financing schemes.
Avrahami v. Commissioner, 149 T.C. 144 (2017) explains why this second point is so important to American
small businesses. In this case, start-up insurance company Pan American Reinsurance Company, Ltd. sold
over 100 stand-alone terrorism insurance policies – including coverage for biological and chemical attacks
– in its first year. Pan American enjoyed 30% growth in policy count the following year. Like the coverage
required to be made available under TRIA, the terrorism coverage sold by Pan American paid out in the
event the U.S. Secretary of Treasury certified an act of terrorism. However, because Pan American is
ineligible to participate in the Terrorism Risk Insurance Program it had no access to the federal backstop.
As recounted in Avrahami, an owner of several Phoenix-area jewelry stores formed a captive insurance
company. Through this captive, the jeweler paid Pan American $360,000 for a one-year terrorism risk
insurance policy (including biological and chemical coverage) with a limit of $5,525,000. During this same
period, the jeweler paid about $1500 for $2 million of terrorism coverage (excluding biological and
chemical attacks) to an insurer participating in the Terrorism Risk Insurance Program.
While the Pan American policy had the advantage of covering biological and chemical attacks, the Tax
Court expressed concern over the policy’s exclusion of loss from any attack occurring in a city with more

2. than 1.5 million residents and the option for Pan American to pay claims by delivering a promissory note
that could not be redeemed for three years. Ultimately, the Tax Court concluded the jeweler had paid
“grossly excessive” premiums for the terrorism coverage sold by Pan American. The jewelry store
subsequently filed federal and state RICO and fraud claims against Pan American, among others involved
in designing, pricing, and administering its terrorism product.
While many of the problems faced by the jeweler in Avrahami nominally took place offshore, similar
circumstances could (and perhaps do) face the many hundreds of small businesses obtaining terrorism
coverage through onshore captive arrangements. Normally we would expect state departments of
insurance to serve as the first line of regulatory defense, but they have little authority when it comes to
public accountability for captives. For example, the Delaware Department of Insurance has taken the
position it cannot comply with an IRS subpoena relating to potentially abusive captive schemes on the
grounds that state insurance law:
[P]rovides confidentiality, immunity from subpoena, and immunity from disclosure, for
confidential documents relating to the license application for captive insurance, and forbids the
Commissioner or Department from disclosing such documents other than to insurance
departments or law enforcement or agencies of a state or the United States with an agreement
in writing to hold it confidential in a manner consistent with the section.
In other words, state departments of insurance have their hands tied when it comes to publicly exposing
situations like the “grossly excessive” terrorism premiums at issue in Avrahami. If the states are powerless
to deliver the transparency necessary to protect small businesses, surely FIO should feel compelled to
step up.
The ACRSM was established to help FIO understand both the potential for legitimate alternative financing
of the terrorism risk as well as the pitfalls of dubious terrorism financing schemes. For these reasons, the
ACRSM should advise and recommend FIO to use the authority Congress granted to it under Section
102(6)(C) of the Terrorism Risk Insurance Act and thereby fill the void left by state insurance laws barring
insurance commissioners from safeguarding consumer protection when it comes to captives.