Terrorism Risk Insurance Program; Additional Claims Issues; Insurer Affiliations, 2830-2832 [05-925]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 70, Number 11 (Tuesday, January 18, 2005)]
[Proposed Rules]
[Pages 2830-2832]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-925]



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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB09


Terrorism Risk Insurance Program; Additional Claims Issues; 
Insurer Affiliations

AGENCY: Departmental Offices, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
proposed rule as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (Act). The Act established a temporary 
Terrorism Insurance Program (Program) under which the Federal 
Government will share the risk of insured loss from certified acts of 
terrorism with commercial property and casualty insurers until the 
Program ends on December 31, 2005. This proposed rule is a 
clarification that, for purposes of calculating insurer deductibles and 
meeting the requirements for claiming the Federal share of compensation 
for insured losses, affiliations are to be determined based on the 
insurer's circumstances as of the date of the first certified act of 
terrorism in a Program Year.

DATES: Written comments may be submitted on or before February 17, 
2005.

ADDRESSES: Submit comments by e-mail to triacomments@do.treas.gov or by 
mail (if hard copy, preferably an original and two copies) to: 
Terrorism Risk Insurance Program, Public Comment Record, Suite 2100, 
Department of the Treasury, 1425 New York Ave., NW., Washington, DC 
20220. All comments should be captioned with ``Proposed Rule on Insurer 
Affiliations''. Please include your name, affiliation, address, e-mail 
address and telephone number in your comment. Comments will be 
available for public inspection by appointment only at the Reading Room 
of the Treasury Library. To make appointments, call (202) 622-0990 (not 
a toll-free number).

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Senior Insurance 
Advisor; or David Brummond, Legal Counsel, Terrorism Risk Insurance 
Program, (202) 622-6770 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

I. Background

    On November 26, 2002, the President signed into law the Terrorism 
Risk Insurance Act of 2002 (Pub. L. 107-297, 116 Stat. 2322). The Act 
was effective immediately. The Act's purposes are to address market 
disruptions, ensure the continued widespread availability and 
affordability of commercial property and casualty insurance for 
terrorism risk, and to allow for a transition period for the private 
markets to stabilize and build capacity while preserving State 
insurance regulation and consumer protections.
    Title I of the Act establishes a temporary Federal program of 
shared public and private compensation for insured commercial property 
and casualty losses resulting from an act of terrorism, which as 
defined in the Act is certified by the Secretary of the Treasury, in 
concurrence with the Secretary of State and the Attorney General. The 
Act authorizes Treasury to administer and implement the Terrorism Risk 
Insurance Program, including the issuance of regulations and 
procedures. The Program will end on December 31, 2005. Thereafter, the 
Act provides Treasury with certain continuing authority to take actions 
as necessary to ensure payment, recoupment, adjustments of compensation 
and reimbursement for insured losses arising out of any act of 
terrorism (as defined under the Act) occurring during the period 
between November 26, 2002, and December 31, 2005.
    Each entity that meets the definition of ``insurer'' (well over 
2000 firms) must participate in the Program. The amount of Federal 
payment for an insured loss resulting from an act of terrorism is to be 
determined based upon insurance company deductibles and excess loss 
sharing with the Federal Government, as specified by the Act and the 
implementing regulations. An insurer's deductible increases each year 
of the Program, thereby reducing the Federal Government's share prior 
to expiration of the Program. An insurer's deductible is calculated 
based on a percentage of the value of direct earned premiums collected 
over certain statutory periods. Once an insurer has met its deductible, 
the federal payments cover 90 percent of insured losses above the 
deductible, subject to an annual industry-aggregate limit of $100 
billion.
    The Program provides a federal reinsurance backstop for three 
years. The Act provides Treasury with authority to recoup federal 
payments made under the Program through policyholder surcharges, up to 
a maximum annual limit. The Act also prohibits duplicate payments for 
insured losses that have been covered under other Federal programs.
    The mandatory availability or ``make available'' provisions in 
section 103 of the Act require that, for Program Year 1, Program Year 
2, and, if so determined by the Secretary of the Treasury, for Program 
Year 3, all entities that meet the definition of insurer under the 
Program must make available in all of their commercial property and 
casualty insurance policies coverage for insured losses resulting from 
an act of terrorism. This coverage cannot differ materially from the 
terms, amounts and other coverage limitations applicable to losses 
arising from events other than acts of terrorism. On June 18, 2004, the 
Secretary of the Treasury announced his decision to extend the make 
available requirements through Program Year 3.
    As conditions for federal payment under the Program, insurers must 
provide clear and conspicuous disclosure to the policyholders of the 
premium charged for insured losses covered by the Program and of the 
Federal share of compensation for insured losses under the Program. In 
addition, the Act requires that insurers make certain certifications to 
Treasury and process and submit claims for the insured loss in 
accordance with appropriate business practices and any reasonable 
procedures Treasury may prescribe.
    The Act also contains specific provisions designed to manage 
litigation arising out of or resulting from a certified act of 
terrorism. Among other provisions, section 107 creates, upon 
certification of an act of terrorism by the Secretary, an exclusive 
Federal cause of action and remedy for property damage, personal 
injury, or death arising out of or relating to an act of terrorism; 
preempts certain State causes of action; provides for consolidation of 
all civil actions in Federal court for any claim (including any claim 
for loss of property, personal injury, or death) relating to or arising 
out of an act of terrorism; and provides that amounts awarded in 
actions for property damage, personal injury, or death that are 
attributable to punitive damages are not to be counted as ``insured 
losses'' and not paid under the Program. The Act also provides the 
United States with the right of subrogation with respect to any payment 
or claim paid by the United States under the Program.
    In implementing the Program, Treasury is guided by several goals. 
First, Treasury strives to implement the Act in a transparent and 
effective manner that treats comparably those insurers required to 
participate in the Program and provides necessary information to 
policyholders in a useful and efficient manner. Second, in accord with 
the Act's stated purposes, Treasury seeks to rely as much as possible 
on the

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State insurance regulatory structure. In that regard, Treasury has 
coordinated the implementation of all aspects of the Program with the 
National Association of Insurance Commissioners (NAIC). Third, to the 
extent possible within statutory constraints, Treasury seeks to allow 
insurers to participate in the Program in a manner consistent with 
procedures used in their normal course of business. Finally, given the 
temporary and transitional nature of the Program, Treasury is guided by 
the Act's goal that insurers develop their own capacity, resources, and 
mechanisms for terrorism insurance coverage when the Program expires.

II. Previous Rulemaking

    To assist insurers, policyholders, and other interested parties in 
complying with immediately applicable requirements of the Act, Treasury 
issued interim guidance to be relied upon by insurers until superseded 
by regulations. These notices of interim guidance have now been 
superseded by final regulations. General provisions, including the 
scope of the Program and key definitions, and rules on disclosures and 
mandatory availability are at Subparts A, B, and C of 31 CFR part 50 
(68 FR 41250; 68 FR 59720). Treasury's rules applying provisions of the 
Act to State residual market insurance entities and State workers' 
compensation funds are at Subpart D of 31 CFR part 50 (68 FR 59715). 
The rules setting forth procedures for filing claims for payment of the 
Federal share of compensation for insured losses are at Subpart F of 31 
CFR part 50 (69 FR 39296). Subpart G of 31 CFR part 50 (69 FR 39296) 
contains the rules on audit and recordkeeping, which specify record 
retention by insurers in connection with the handling and settlement of 
claims to enable Treasury to perform financial and claim audits. 
Subpart I of 31 CFR part 50 (69 FR 44932) contains Treasury's rules 
implementing the litigation management provisions of section 107 of the 
Act.

III. The Proposed Rule

    Under the Act and regulations, ``affiliates'' are treated 
collectively as one insurer for purposes of calculating the insurer 
deductible. This proposed rule amends Subpart F of 31 CFR part 50, 
which contains the claims procedures for insurers seeking the Federal 
share of compensation for insured losses, to clarify that for that 
Subpart's purposes, insurer affiliations for any Program Year shall be 
determined based on the insurer's circumstances as of the date of the 
first certified act of terrorism in that Program Year.
    This change will clarify how deductible calculations, loss 
certifications, claims for the Federal share of compensation and 
receipt of payment are to be handled, considering that (1) affiliations 
of insurers may change over the course of a Program Year, and (2) there 
may be more than one act of terrorism certified in a Program Year. It 
is Treasury's intention to make known how such a combination of 
circumstances will be addressed under the Program so that insurers can 
plan their business affairs and transactions accordingly.
    An insurer's deductible for a Program Year is based on direct 
earned premium from the prior calendar year. Through an interpretive 
letter, issued on December 1, 2003, Treasury addressed the question of 
how the direct earned premium (and consequently, the insurer 
deductible) would be determined for an insurer or insurer group where 
the composition of the affiliations has changed since the prior 
calendar year. The interpretive letter indicated that the affiliations 
in place at the time of the occurrence of the certified act of 
terrorism would govern how an insurer's or insurer group's direct 
earned premium would be determined and the resulting deductible 
calculated. This interpretation did not address the circumstance where 
more than one event is certified in the same Program Year.
    Treasury thus believes it is necessary to provide additional 
guidance to insurers to clarify Program implementation should more than 
one act of terrorism be certified in a Program Year. In developing this 
proposed rule, Treasury examined a variety of other alternatives for 
determining insurer affiliations, including:
    1. The determination of affiliations as of each certified act of 
terrorism;
    2. The determination of affiliations as of the first certified act 
in a Program Year for which the particular insurer has losses;
    3. The determination of all affiliations as of January 1 of each 
Program Year.
    Treasury has concluded that the first alternative would produce 
unacceptable results because the insurer deductible is a Program Year 
deductible, not a per-event deductible. Any calculation of the 
deductible, in Treasury's view, must be applied against all insured 
losses consistently for the entire Program Year.
    The second alternative, determining affiliations at the time of a 
first certified act in a Program Year for which an insurer actually has 
insured losses, would provide a higher degree of accuracy in reflecting 
the appropriate affiliations at the time of such an event. However, 
after examining the different ways that affiliations may change in the 
interim between events, Treasury considers this approach to be very 
complicated to describe and administer. Given the temporary nature of 
the Program, Treasury believes that this alternative would require too 
great an effort to overcome the possibility of confusion for both 
insurers and the Program.
    The third alternative, determining affiliations as of January 1 of 
a Program Year, would be inconsistent with the interpretation Treasury 
has already issued. More importantly, Treasury considers this approach 
to have too great a potential to provide an inaccurate reflection of 
the insurance entity at the time of an actual certified act of 
terrorism. Since such an event can occur well into a Program Year, 
changes in affiliations may be significant.
    It is Treasury's view that the proposed rule is a reasonable 
compromise approach, one that can be relatively easy to understand and 
follow and practical to administer. Under this approach, the 
affiliations used for calculating direct earned premium and the 
resultant insurer deductible for a Program Year are determined for all 
insurers as of the date of the first act of terrorism certified by the 
Secretary in a Program Year. This is regardless of whether the insurer 
has had any insured losses from the event. Treasury believes that the 
direct earned premium reported for the calendar year prior to the 
Program Year in which the certified act occurs can readily be 
determined for the insurers affiliated at the time of the first event. 
The insurer deductibles calculated from this information can be 
reasonably applied to that first event's insured losses as well as to 
the insured losses resulting from any certified acts in the remainder 
of the Program Year.
    As a practical matter, Treasury is proposing that all requests for 
the Federal share of compensation for a Program Year will be processed 
based on the affiliations as of the first certified act in a Program 
Year, regardless of actual changes to those affiliations prior to the 
occurrence of another certified act within the same Program Year. This 
approach will allow Treasury to receive and maintain consistent 
information in providing the Federal share of compensation and reduce 
the potential administrative burden that Treasury might otherwise have 
in tracking and reviewing claims in this temporary program.

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IV. Procedural Requirements

    Executive Order 12866, ``Regulatory Planning and Review''. This 
rule is not a significant regulatory action for purposes of Executive 
Order 12866, ``Regulatory Planning and Review,'' and therefore has not 
been reviewed by the Office of Management and Budget.
    Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., it is hereby certified that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Treasury is required to pay the Federal share 
of compensation to insurers for insured losses in accordance with the 
Act. A condition of Federal payment is that the insurer must submit to 
Treasury, in accordance with procedures established by Treasury, a 
claim for payment and certain certifications. The Act itself requires 
all insurers receiving direct earned premium for any type of property 
and casualty insurance, as defined in the Act, to participate in the 
Program. This includes all insurers regardless of size or 
sophistication. The Act also defines property and casualty insurance to 
mean commercial lines of insurance without any reference to the size or 
scope of the insurer or the insured. Accordingly, any economic impact 
associated with the proposed rule flows from the Act and not the 
proposed rule. The proposed rule merely clarifies the point in time at 
which insurer affiliations are determined for purposes of the Program. 
A regulatory flexibility analysis is thus not required.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

PART 50--TERRORISM RISK INSURANCE PROGRAM

    1. The authority citation for part 50 continues to read as follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322 (15 U.S.C 6701 note).

    2. Subpart F is proposed to be amended by adding a new section 
50.55 to read as follows:


Sec.  50.55  Determination of Affiliations.

    For the purposes of this Subpart F, an insurer's affiliates for any 
Program Year shall be determined based on the insurer's circumstances 
as of the date of the first certified act of terrorism in that Program 
Year.

    Dated: January 11, 2005.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 05-925 Filed 1-14-05; 8:45 am]
BILLING CODE 4811-15-P