Terrorism Risk Insurance Program; Cap on Annual Liability, 66061-66068 [E9-29614]

Agencies

• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 74, Number 238 (Monday, December 14, 2009)]
[Rules and Regulations]
[Pages 66061-66068]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-29614]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB92


Terrorism Risk Insurance Program; Cap on Annual Liability

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Treasury'') is issuing this 
final rule as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (``TRIA'' or ``the Act''), as amended by the 
Terrorism Risk Insurance Program Reauthorization Act of 2007 
(``Reauthorization Act''). The Act established a temporary Terrorism 
Risk Insurance Program (``TRIP'' or ``Program'') under which the 
Federal Government would share with commercial property and casualty 
insurers the risk of insured losses from certified acts of terrorism. 
The Reauthorization Act has now extended the Program until December 31, 
2014. This rule was published in proposed form on September 30, 2008, 
for public comment. Some clarifying changes have been made in the final 
rule in response to comments. The rule incorporates and implements 
statutory requirements in section 103(e) of the Act, as amended by the 
Reauthorization Act, for capping the annual liability for insured 
losses at $100 billion. In particular, the rule describes how Treasury 
intends to determine the pro rata share of insured losses under the 
Program when insured losses would otherwise exceed the cap on annual 
liability. The rule builds upon previous rules issued by Treasury.

DATES: This rule is effective January 13, 2010.

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director, 
Terrorism Risk Insurance Program, (202) 622-6770 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION: 

I. Background

    The Terrorism Risk Insurance Act of 2002 (Pub. L. 107-297, 116 
Stat. 2322) was enacted on November 26, 2002. 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 
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. The Act 
authorizes Treasury to administer and implement the Program, including 
the issuance of regulations and procedures. The Program provides a 
federal backstop for insured losses from an act of terrorism. Section 
103(e) of the Act gives Treasury authority to recoup federal payments 
made under the Program through policyholder surcharges. The Act also 
contains provisions designed to manage litigation arising from or 
relating to an act of terrorism.
    The Program originally was to expire on December 31, 2005; however, 
on December 22, 2005, the Terrorism Risk Insurance Extension Act of 
2005 (Pub. L. 109-144, 119 Stat. 2660) was enacted, which extended the 
Program through December 31, 2007. On December 26, 2007, the Terrorism 
Risk Insurance Program Reauthorization Act of 2007 (Pub. L. 110-160, 
121 Stat. 1839) was enacted, extending the Program through December 31, 
2014.
    The Reauthorization Act, among other Program changes, revised the 
provisions of the Act with regard to the cap on annual liability for 
insured losses of $100 billion. Previously, section 103(e)(3) stated 
that Congress would determine the procedures for and the source of any 
payments for insured losses in excess of the cap. This was deleted. 
Instead, this section now requires the Secretary of the Treasury to 
notify Congress not later than 15 days after the date of an act of 
terrorism as to whether aggregate insured losses are estimated to 
exceed the cap. TRIA, as amended by the Reauthorization Act, also 
requires the Secretary to determine the pro rata share of insured 
losses to be paid by each insurer incurring losses under the Program 
and that meets its deductible when insured losses exceed the cap, and 
to issue regulations for carrying this out.

II. Previous Rulemaking

    To assist insurers, policyholders, and other interested parties in 
complying with immediately applicable requirements of the Act, Treasury 
has issued interim guidance for reference until issuance of superseding 
regulation. Rules establishing general provisions implementing the 
Program, including key definitions, and requirements for policy 
disclosures and mandatory availability, can be found in Subparts A, B, 
and C of 31 CFR Part 50. 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. 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. 
Subpart G of 31 CFR Part 50 contains rules on audit and recordkeeping 
requirements for insurers, while Subpart I of 31 CFR Part 50 contains 
Treasury's rules implementing the litigation management provisions of 
section 107 of the Act.

III. The Proposed Rule

    The proposed rule on which this final rule is based was published 
in the Federal Register at 73 FR 56767 on September 30, 2008. The 
proposed rule proposed to add a Subpart J to part 50, which comprises 
Treasury's regulations implementing the Act. It also proposed to amend 
Sec.  50.53 of Subpart F. The proposed rule described how Treasury 
would initially estimate whether the cap will be exceeded, the means by 
which Treasury would develop and maintain estimates for determining the 
pro rata share of insured losses to be paid, the factors that would be 
considered in determining a pro rata percentage of the insured losses 
that are to be paid in order to stay within the cap, and the 
application of the pro rata percentage in paying insured losses.

[[Page 66062]]

IV. Summary of Comments and Final Rule

    Treasury is now issuing this final rule after careful consideration 
of all comments received on the proposed rule. While this final rule 
largely reflects the proposed rule, Treasury has made several 
clarifications based on the comments received.
    Treasury received comments on the proposed rule from two national 
insurance industry trade associations, a national insurance rating and 
data collection bureau, and one insurance company. Commenters generally 
noted that the approach to the administration of the cap is appropriate 
and efficient under the circumstances. Although Treasury invited the 
submission of alternatives to the proposed process for prorating 
insured losses when aggregate insured losses exceed the cap on annual 
liability, no other alternatives were submitted. In response to 
specific comments, Treasury has refined and clarified provisions in 
three areas: (1) Claims payments to be made immediately after an act of 
terrorism that is likely to exceed the cap on annual liability, but 
where specific pro rata amounts cannot yet be determined, (2) which 
insured losses will be affected by a pro rata determination, and (3) 
the prorating of insured losses where an insurer has not yet met its 
insurer deductible. The comments received and Treasury's revisions to 
the proposed rule are summarized below.

1. Notice to Congress (Sec.  50.91)

    Proposed Sec.  50.91 stated, in part, that pursuant to Section 
103(e)(3) of the Act, the Secretary shall provide an initial notice to 
Congress within 15 days of the certification of an act of terrorism, 
stating whether the Secretary estimates that aggregate insured losses 
will exceed $100 billion for the Program Year. Two commenters requested 
that Treasury change the language of proposed Sec.  50.91, in 
accordance with their reading of Section 103(e)(3), to require an 
initial notice to Congress within 15 days of the occurrence of an act 
of terrorism.
    Section 103(e)(3) of the Act requires the Secretary to notify the 
Congress if estimated or actual aggregate insured losses exceed $100 
billion during a Program Year. It further provides (as added by the 
Reauthorization Act) that ``the Secretary shall provide an initial 
notice to Congress not later than 15 days after the date of an act of 
terrorism, stating whether the Secretary estimates that aggregate 
insured losses will exceed $100,000,000,000.''
    ``Act of terrorism'' is a defined statutory term. Under Section 
102(1)(A), an ``act of terrorism'' is any act which is certified by the 
Secretary, in concurrence with the Secretary of State and the Attorney 
General of the United States, to meet certain specified elements. 
Without certification, an act does not meet the definition of an ``act 
of terrorism.''
    Treasury believes that the most reasonable interpretation of the 
second sentence of Section 103(e)(3) is that the initial notice must be 
provided to Congress not later than 15 days after certification of an 
act of terrorism. There is no limitation under Section 102(1) on the 
time the Secretary may take to certify, or determine not to certify, an 
act as an act of terrorism. That time could in many circumstances be 
more than 15 days after the act. In addition, as noted in the preamble 
to the proposed rule, there may be significant challenges involved in 
obtaining data for an estimate of aggregate insured losses even within 
the 15 days following the certification of an act of terrorism.
    This interpretation is also consistent with the Procedural Order 
entered by the Judicial Panel on Multidistrict Litigation concerning 
the 90-day period in Section 107(a)(4) of the Act, which requires a 
designation by the Panel ``not later than 90 days after the occurrence 
of an act of terrorism.'' The order notes the definition of an ``act of 
terrorism'' and accordingly provides that ``the 90-day period for the 
Panel to designate the court or courts for litigation covered by the 
Act begins on the date that the Treasury Secretary certifies an act of 
terrorism.'' Procedural Order filed June 1, 2004 is available at https://www.treas.gov/offices/domestic-finance/financial-institution/terrorism-insurance/pdf/order.pdf.
    For the above reasons, Treasury is adopting as the final rule Sec.  
50.91 as it was proposed.

2. Determination of Pro Rata Share (Sec.  50.92)

    Under the Reauthorization Act, the Secretary shall not make any 
payment for any portion of the amount of aggregate insured losses that 
exceeds $100 billion during any Program Year; and no insurer that has 
met its deductible shall be liable for the payment of any portion of 
the amount of such insured losses that exceeds $100 billion. Generally, 
Treasury's approach will be to establish any proration relatively 
conservatively when it is estimated that the cap will be reached, so 
that early payments are not inequitably higher than later payments, and 
so that, barring a subsequent act of terrorism in the same Program 
Year, later refinements to the proration will allow additional payments 
to policyholders for prior settled losses. During a Program Year, until 
events have transpired that lead Treasury to believe that the cap could 
be reached, it is our intention that no proration would be established.
    The final rule includes a definition of ``pro rata loss 
percentage'' (``PRLP''). This is the percentage determined by the 
Secretary to be applied against the amount that would otherwise be paid 
by an insurer under the terms and conditions of an insurance policy 
providing property and casualty insurance under the Program if there 
were no cap on annual liability. An insurer would apply the PRLP to 
compute the pro rata share of insured losses to be paid under an 
insurance policy.
    The final rule provides that if Treasury estimates that insured 
losses may exceed the cap on annual liability for a Program Year, then 
Treasury will determine an initial PRLP and an effective date for that 
PRLP. This percentage applies in determining insured loss payments for 
insured losses incurred during the subject Program Year, starting with 
the effective date until Treasury determines a revised PRLP. 
Considerations in establishing the PRLP are: (1) Estimates of insured 
losses from insurance industry statistical organizations; (2) any data 
calls issued by Treasury; (3) expected reliability and accuracy of 
insured loss estimates and likelihood that insured loss estimates could 
increase; (4) estimates of insured losses and expenses not included in 
available statistical reporting; and (5) such other factors as the 
Secretary considers important. Revisions to the PRLP will be based on 
the same considerations, as needed. Notices of the initial and any 
revised PRLP will be provided through the Federal Register, or in 
another manner Treasury deems appropriate, based upon the circumstances 
of the act of terrorism under consideration.
    In the preamble to the proposed rule, Treasury expressed its 
concern that there could be circumstances where we estimate that the 
cap on annual liability will be exceeded, but there is not yet adequate 
knowledge of insured losses with which to determine a PRLP. Allowing 
payments for early insured losses under the Program to continue without 
proration appears to be inequitable to those claimants with insured 
losses coming in later, for which the pro rata share calculation would 
have to be that much more severe. Treasury proposed that in such

[[Page 66063]]

a circumstance it would call a brief hiatus in insurer loss payments of 
up to two weeks. During this time Treasury would develop a PRLP as 
quickly as possible. During this hiatus, insurers could still make 
payments, but with the understanding that the PRLP would be effective 
retroactively to the start of the hiatus. Any insured losses later 
submitted in support of an insurer's claim for the Federal share of 
compensation would be reviewed for compliance with the regulations 
pertaining to the pro rata share payments.
    One commenter commented that, absent an agreement between Federal 
and State officials concerning the preemptive scope of the 
Reauthorization Act, State insurance departments and labor commissions 
may seek to require the continuation of full benefits despite the 
hiatus. Insurers may have no option but to continue paying full 
benefits which would place them at odds with the compensation to be 
provided later under a retroactive PRLP. The commenter suggested, as an 
alternative to the hiatus, establishing an initial conservative PRLP 
which would be replaced by a higher PRLP determined later.
    Treasury included a provision on a hiatus in the proposed rule 
because we believe that it is consistent with our authority in the 
Reauthorization Act to implement our Program obligations. In developing 
the proposed rule, Treasury consulted with the National Association of 
Insurance Commissioners (NAIC), and has not received any further 
comments from that group. In considering the submitted comment, we do 
see merit in providing some flexibility in managing the circumstances 
that had prompted the proposed hiatus and have made some revisions to 
Sec.  50.92(e) in the final rule. First, we have added a provision 
stating that we would consult with the relevant state authorities 
before initiating action. Second, while we have retained the hiatus as 
a possible action, we have also added the possible alternative of 
determining an interim PRLP. This separately defined term is an amount 
determined without the availability of information necessary for 
consideration of all factors listed in Sec.  50.92(b). All other 
provisions applicable to the PRLP would apply to the interim PRLP. This 
would be a conservatively low percentage amount determined in order to 
facilitate initial partial payments of claims by insurers after an act 
of terrorism and prior to the time that information becomes available 
to determine a PRLP based on consideration of the factors listed in 
Sec.  50.92(b).
    The more refined and expectedly higher PRLP, as later determined, 
would be effective retroactively as of the effective date of the 
interim PRLP. Any insured losses submitted in support of an insurer's 
claim for the Federal share of compensation would then be reviewed for 
the insurer's compliance with pro rata payments in accordance with the 
effective date of the interim PRLP, or as later replaced by the 
subsequent PRLP as appropriate. Thus, an insurer would be able to make 
additional payments and claims for the Federal share on insured losses 
previously limited by the interim PRLP. This alternative should provide 
us with enough flexibility to quickly establish proration, if 
necessary, in the aftermath of an act of terrorism.
    One commenter requested clarification as to how and when 
policyholders are to be notified that benefits will be adjusted 
pursuant to the PRLP. As provided in TRIP regulations (Sec.  50.15(b)), 
as a condition for payments of the federal share of compensation for 
insured losses, an insurer must disclose to the policyholder the 
existence of the cap on annual liability for losses, at the time of 
offer, purchase, and renewal of the policy. The timing and form of 
notification to the policyholder of the adjustment, once Treasury has 
provided public notice of its determination of a PRLP, is up to the 
discretion and management of the insurer as guided by any pertinent 
State requirements.

3. Application of Pro Rata Share (Sec.  50.93)

    In the proposed rule, Treasury provided that the PRLP be applied by 
insurers prospectively on individual insured losses that have not been 
settled as of the effective date of a PRLP. The intention was that the 
process of proration would not retroactively require repayment of any 
claims already legitimately made (or agreed to be paid) to insureds for 
insured losses. The impracticality of recovering payments already made 
has been generally recognized.
    Proposed Sec.  50.93 directed insurers to apply the PRLP to 
determine the pro rata share of each insured loss to be paid by the 
insurer on all insured losses where there is not a signed settlement as 
of the effective date established by Treasury for the PRLP. The same 
procedure would apply whether this was an initial PRLP or a subsequent 
PRLP that supersedes the prior determination.
    Two commenters raised concerns over the use of a ``signed 
settlement'' in determining whether an insured loss is subject to 
proration. One commenter noted that the types of claims generated by a 
terrorist event may not lend themselves to signed settlement agreements 
and therefore recommended that the rule should refer to a ``claim 
paid'' instead. The other commenter, addressing the same concern, 
suggested that the rule refer to a ``complete and final settlement'' 
and a ``memorialization'' of the settlement. After consideration of 
these comments, Treasury has modified the final rule to provide that an 
insurer ``shall apply the PRLP to determine the pro rata share of each 
insured loss to be paid by the insurer on all insured losses where 
there is not an agreement on a complete and final settlement as 
evidenced by a signed settlement agreement or other means reviewable by 
a third party as of the effective date established by Treasury.'' We 
believe that this allows reasonable flexibility for insurers settling 
claims before and after the effective date of a PRLP while requiring 
appropriate documentation that can be reviewed during an audit.
    One commenter also noted that it appeared that the proposed rule 
would not allow ``signed settlements'' executed after an initial PRLP 
to be modified should the PRLP later increase. This circumstance was 
addressed in proposed Sec.  50.95(a) which spoke to Treasury's 
determination of a final PRLP and ``adjustments to previous insured 
loss payments.'' We anticipate that it is most likely that Treasury 
would only increase the PRLP once it is clear what a final proration 
should be. However, in reviewing this comment we have determined that 
we can accommodate other increases in the PRLP should they be warranted 
prior to determining a final PRLP and allow payments on ``prior 
settlements'' to be increased. This will be accomplished by 
establishing the effective date of a higher PRLP retroactively to an 
appropriate earlier PRLP effective date, similar to the mechanism 
described above for the interim PRLP that would facilitate initial 
partial claim payments by insurers under Sec.  50.92(e). This will 
allow insurers to determine any additional payment amounts and allow 
the submission of updated loss information to Treasury for purposes of 
determining the Federal share of compensation to be reviewed under the 
new PRLP criteria.
    In proposed Sec.  50.93(a), Treasury provided that the pro rata 
share is determined based on the final claim settlement amount that 
would otherwise be paid. If partial payments have already been made as 
of the effective

[[Page 66064]]

date of the PRLP, then the pro rata share for that loss is the greater 
of the amount already paid or the amount computed by applying the PRLP 
to the estimated or actual final claim settlement amount. One commenter 
recommended the inclusion of words at the end of the subsection, for 
consistency and clarity, reinforcing that the PRLP is being applied to 
the final claim settlement amount ``that would otherwise be paid.'' The 
final rule has been revised to include this. Treasury noted in the 
preamble to the proposed rule that some insured losses, such as those 
associated with workers' compensation or business interruption, may 
involve ongoing regular payments. In these cases, the proration would 
still be determined based on the final claim settlement amount that 
would otherwise be paid.
    In the claims procedures regulations (Subpart F) and in the forms 
for insurer submissions for the Federal share of compensation that 
Treasury has already promulgated, workers' compensation losses are 
required to be substantiated at the policy level. That is to say, 
underlying loss information on the bordereaux and reviewed by Treasury 
in determining the Federal share is submitted in aggregate by policy/
employer rather than individual claimant/employee. In the proposed 
rule, Treasury proposed to continue that scheme. The application of the 
PRLP to determine the pro rata share would be against the estimated or 
actual unprorated loss amounts by policy (broken down by medical only, 
medical portion of indemnity, and indemnity portion of indemnity), 
following the way loss information has been required to be reported as 
part of the TRIP Certifications of Loss. Despite this calculation of 
the pro rata share at the policy level for purposes of reporting to 
Treasury, Treasury noted its expectation that insurers would prorate 
payments made to individual claimants.
    One commenter suggested that for workers' compensation losses, the 
PRLP should be applied and controlled by Treasury at the claimant level 
rather than at the policy level. The comment also made note that 
workers' compensation losses could involve ``hundreds or thousands of 
claimants from the same event at the same location.'' The commenter 
also supplied an example of a scenario where the proration on a policy 
basis was carried out in such a way that the pro rata portion of the 
payment that otherwise would have been made to one claimant (58 
percent) was significantly different than the pro rata portion of 
payment for another claimant (92 percent) under the same policy.
    Treasury has carefully reviewed this comment along with the 
submitted example. In part, the disparity in the example is due to the 
timing of claims with the establishment of a PRLP, a circumstance that 
has generally been noted as possibly producing disparities in all lines 
of business, not just workers' compensation. We note that the disparity 
in pro rata portions of payments in the example was exacerbated by the 
manner in which the PRLP was applied at the claimant level. Application 
of the proration at the claimant level can be carried out in ways that 
are consistent with the rule, but can reduce or exacerbate disparities.
    After considering this comment in the context of other authority 
and control concerns, Treasury has concluded that the proposed 
application of the PRLP to workers' compensation claims, controlled by 
Treasury at the policy level as described in the notice of proposed 
rulemaking, will be adopted in the final rule for the following 
reasons.
    When establishing the claims process for TRIP, it was generally 
recognized that creating a system under which detailed reporting of 
insured losses would be required at the claimant level went beyond what 
is necessary for Treasury to fulfill its program obligations as a 
``reinsurer''. We believe that this is still fundamentally the right 
approach and do not want to require a more detailed reporting structure 
for all acts of terrorism because of the contingency that there might 
be a requirement to cap annual losses. Nor do we want to develop a 
system with two different levels of reporting dependent on whether 
annual losses are to be capped or not.
    There is some flexibility in how an employer (the policyholder) and 
the insurer decide to manage payment streams. This includes how and 
when insurance payments to claimants are continued at a reduced level, 
or stopped after limits are reached. We expect proration to be done in 
some manner at the claimant level, but the detail as to exactly how 
that is done may depend on other factors and authorities that are not 
superseded by this rule.
    Treasury's interest is in managing the proration due to the cap on 
annual losses in such a way that makes sense as a ``reinsurer''. We 
continue to believe that this is best accomplished by controlling the 
application of proration at the policy level. However, as discussed 
below, we have provided for the possibility of some adjustments in the 
calculation of the Federal share of compensation for insured losses in 
the context of workers' compensation policies in one particular 
situation.
    The same commenter also recommended language for Sec.  50.93(a) to 
provide additional flexibility in workers' compensation cases for 
handling partial payments versus the final claim settlement amount. 
Under the commenter's assumption that proration and the computation of 
the Federal share of compensation would be computed at the claimant 
level, the commenter provided examples where an injured worker either 
had a shorter life or returned to work sooner than anticipated in the 
estimates of final claim settlement amount. Thus applying the PRLP to 
the actual final claim settlement amount produced a lower pro rata 
amount than the amount of partial payments already made, which were 
based on the expectation of a higher final claim settlement amount. An 
insurer therefore might not be fully compensated in the computation of 
the Federal share because it is based on applying the PRLP to the lower 
actual final settlement amount. However, in the provided examples where 
payments to an injured worker continued longer than anticipated in the 
estimates, applying the PRLP to the actual final claim settlement 
amount fully compensated the insurer. The commenter recommended 
modifying the proposed rule to provide that in cases where the 
estimated or actual settlement amount is lower than a prior estimate, 
then ``the pro rata share of that loss is the greater of the amount 
already paid or the amount computed by applying the PRLP to the 
estimated or actual final claim settlement amount.''
    The issue presented is another reason why Treasury believes that 
the better way to compute and control the pro rata share of losses 
under a workers' compensation policy for purposes of determining the 
Federal share of compensation is at the policy level. For a workers' 
compensation policy, in all likelihood the final claim settlement 
amount to which the PRLP is applied will remain an estimated amount for 
quite some time. As noted by the commenter, the fluctuation of the 
actual settlement amount from the estimated amount at the claimant 
level could be significant.
    Treasury anticipates the estimate at the policy level would be a 
much more stable amount, taking into account that some actual payments 
to individual claimants may be less than the expected amounts while 
others may be greater. However, we do understand how even at the policy 
level, where perhaps a policy is covering a small number of employees, 
that a circumstance such as

[[Page 66065]]

actual mortality differing from original assumptions could produce an 
unexpectedly large reduction in the estimated loss after payments have 
already been made. The final rule has been modified by adding a 
provision in Sec.  50.93(c) allowing a workers' compensation insurer to 
submit for review information justifying an appropriate adjustment in 
the calculation of the Federal share of compensation.
    A commenter noted the assumption that concerned insurance trade 
associations would work with Treasury to address the issue of what 
happens if an employer is unable to rely on its workers' compensation 
insurance for full payment of an injured worker's claim. No other 
comments specific to this issue have been submitted. This is not an 
issue addressed under the Act.
    In the notice of proposed rulemaking, Treasury noted that in 
examining our authorities as stipulated in the Reauthorization Act, the 
conclusion was reached that we cannot provide for pro rata sharing of 
insured losses in such a way that an insurer's liability would be 
limited when it has not met its deductible. Thus, proposed Sec.  50.93 
provided that if an insurer has not yet made payments in excess of its 
insurer deductible, but estimates that it will exceed its deductible by 
making payments based on the application of the PRLP, then that insurer 
shall apply the PRLP as of the effective date of the PRLP. If an 
insurer has not yet made payments in excess of its insurer deductible, 
but estimates that it will not exceed its deductible by making payments 
based on the application of the PRLP, then that insurer may make 
payments on the same basis as prior to the effective date of the PRLP. 
In this latter circumstance, the decision to prorate as of the 
effective date of the PRLP would be up to the insurer. If the insurer 
prorates and does not exceed its deductible, then it would be liable 
for additional, retroactive loss payments that in the aggregate bring 
the insurer's total insured loss payments up to an amount equal to the 
lesser of its insured losses without proration or its insurer 
deductible. If the insurer does not prorate, but does exceed its 
deductible, then it would apply the PRLP to its remaining insured 
losses once it makes payments equal to its insurer deductible. Once an 
insurer exceeds its deductible and submits a claim for the Federal 
share of compensation, however, Treasury's review of eligible payments 
associated with the underlying losses and calculations for the Federal 
share would be based on the application of the PRLP as if the insurer 
had originally estimated that it would exceed its deductible while 
applying the PRLP to its insured losses.
    Two comments were submitted regarding this provision of the 
proposed rule. One commenter urged Treasury to require that the PRLP be 
used by all insurers until loss estimates clearly demonstrate that an 
insurer will not reach its deductible. The commenter's concern was that 
an insurer might attempt to gain a competitive advantage in attracting 
or retaining business by underestimating losses to be within the 
insurer deductible and thus making higher loss payments by not applying 
the otherwise required PRLP.
    A second commenter recommended that insurers be allowed to request 
Treasury approval of an individual insurer PRLP that is greater than 
the published PRLP so that an insurer can more quickly make payments 
that approach its insurer deductible amount. The commenter's concern 
was that the proposed rule appeared to allow only two choices: applying 
the PRLP with a delayed truing up with policyholders at a later date 
when Treasury has determined the final PRLP, or making unprorated 
payments to policyholders and possibly exceeding their insurer 
deductible without being eligible for a Federal sharing of losses above 
the deductible.
    These two comments conflict with one another. Treasury's intention 
with Sec.  50.93(c) of the proposed rule was to allow an insurer, that 
already knows that it will not meet its insurer deductible by applying 
the PRLP to its insured losses, to expeditiously meet its obligations 
to its policyholders. The onus for estimating its losses relative to 
its insurer deductible and the consequence for overpaying losses that 
should have been prorated, was placed on the insurer who, as opposed to 
Treasury, would have the most up to date information. On balance, 
Treasury believes that the objective of expediting complete payment of 
insured losses overrides the concern that an insurer might overpay to 
gain a competitive advantage. Any such overpayment will not affect the 
Federal share of compensation. Treasury believes that additional 
flexibility can be provided in the rule without requiring Treasury 
approval of individual insurer PRLP's. The final rule has been modified 
to allow an insurer that has not yet made payments in excess of its 
insurer deductible and that estimates it will not exceed its deductible 
making payments based on the application of the PRLP, to make payments 
``on the basis of applying some other pro rata amount it determines 
that is greater than the PRLP, where the insurer estimates that 
application of such other pro rata amount will result in it not 
exceeding its insurer deductible.'' The insurer is still liable for 
loss payments that in the aggregate bring the insurer's total insured 
loss payments up to an amount equal to the lesser of its insured losses 
without proration or its insurer deductible.

4. Data Call Authority (Sec.  50.94)

    Treasury proposed in Sec.  50.94 of the proposed rule that it may 
issue a data call to insurers for the submission of insured loss 
information. We explained that we anticipate requesting summary level 
information on insured losses and insurer deductible information. Such 
a collection of data may be necessary not only for the purposes of the 
cap on annual liability, but also with regard to potential recoupment. 
Treasury further explained that we intend, to the extent possible, to 
rely on existing industry statistical reporting mechanisms in making 
initial estimates. However, in order to estimate whether the cap on 
annual liability will be reached and determine an initial or subsequent 
PRLP, it may be necessary to have more timely detail regarding insurer 
deductibles and reserves for insured losses from lines of business not 
normally included in existing industry reporting.
    Two entities provided comments regarding the data call authority. 
Both recognized the appropriateness of Treasury collecting insurer loss 
data in order to meet Program obligations.
    One commenter noted that proposed Sec.  50.91 stated that the 
initial reporting obligation to Congress would be met based on loss 
information ``compiled by insurance industry statistical organizations 
and any other information the Secretary in his or her discretion 
considers appropriate.'' Further, Treasury indicated in the description 
of this section of the proposed rule that a data call may not be timely 
enough to meet the reporting obligation. The commenter stated that 
Treasury should consider adding clarifying language to Sec.  50.94 
reflecting this view. We reiterate that our intention is to meet the 
initial reporting obligation through data obtained from statistical 
organizations and other sources of general loss information. However, 
we do not wish to unnecessarily restrict the use of a data call if that 
became the only way for us to meet our statutory reporting obligation. 
Therefore, Sec.  50.94 of the final rule has not been revised.
    Both commenters asserted that data requested be ``relevant and 
accessible'' and that the request should minimize

[[Page 66066]]

disruptions to insurer claims handling during a catastrophic event. One 
commenter further urged that Treasury ``continue this current 
rulemaking, and determine and define what data they will need.''
    In the Notice of Proposed Rulemaking, Treasury provided estimates 
of burden hours to comply with data requests as well as specific data 
elements for summary level loss information that is contemplated under 
a data call. This included initial information requested in the 
immediate aftermath of an act of terrorism as well as further 
information that might be requested as claims processes progressed. As 
part of the Paperwork Reduction Act requirements for this rulemaking, 
comments on the collection of information in the proposed rule were 
solicited for submission to the Office of Management and Budget (OMB) 
with a 60-day comment period. No comments were submitted.
    In past development of information collection requirements 
associated with the Terrorism Risk Insurance Program, Treasury has 
benefited from both the formal processes and informal contacts with 
members of the insurance industry. We will continue both of these types 
of efforts in further development of the data call requirements.
    Concerning the data calls contemplated by proposed Sec.  50.94, one 
commenter requested that Treasury recognize that the claims data should 
be considered proprietary information of the submitting insurers and 
suggested that provisions be added to the regulation similar to what 
was included in ``The Insurance Information Act of 2008'', which was 
introduced in, but not passed by the 110th Congress.
    The Program does not intend to make insurer-specific data public. 
The regulation does not override other law that would otherwise be 
applicable. Any information submitted to Treasury would be subject to 
the Freedom of Information Act (FOIA). Treasury would handle any 
request for information that has been submitted by an insurer in 
response to a data call in accordance with Treasury's FOIA regulations 
at 31 CFR Part 1. This would include consideration of the applicability 
of FOIA exemptions, including those applicable to commercially or 
financially sensitive information.

5. Other Comments

    One commenter raised the general topic of the interaction of the 
regulations with State law, and suggested that guidance on certain 
issues would be helpful to insurers. The issues noted were: How the 
payment hiatus interacts with State prompt payment laws; the extent to 
which a State regulator may modify the procedures in the regulations; 
and the extent to which a State regulator may require that a preference 
be applied to the full payment of certain lines, claims, or insureds.
    Section 106(a) of the Act provides generally that nothing in the 
Act shall affect the jurisdiction or regulatory authority of the 
insurance commissioner (or any agency or office performing like 
functions) of any State over any insurer or other person except as 
specifically provided in the Act. Section 103(a)(2) of the Act provides 
that notwithstanding any other provision of State or Federal law, the 
Secretary shall administer the Program, and shall pay the Federal share 
of compensation for insured losses in accordance with subsection (e). 
Section 103(e)(2) requires Treasury to issue regulations for 
determining the pro rata share of insured losses under the Program when 
insured losses exceed $100 billion.
    Treasury consulted with the National Association of Insurance 
Commissioners (NAIC) early in the process of formulating the proposed 
rule. If specific issues are raised in the future, Treasury will 
consider issuing further guidance as appropriate.

V. Procedural Requirements

    Executive Order 12866, ``Regulatory Planning and Review''. This 
rule is a significant regulatory action for purposes of Executive Order 
12866, ``Regulatory Planning and Review,'' and has been reviewed by the 
OMB.
    Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., it is hereby certified that this rule will 
not have a significant economic impact on a substantial number of small 
entities. TRIA requires all insurers that receive direct earned 
premiums for commercial property and casualty insurance to participate 
in the Program. The Act also defines ``property and casualty 
insurance'' to mean commercial lines, with certain specific exclusions. 
Insurers affected by these regulations tend to be large businesses, 
therefore Treasury has determined that the rule will not affect a 
substantial number of small entities. In addition, the Department has 
determined that any economic impact will not be significant. Under the 
Act, Treasury shall not make any payment for any portion of the amount 
of annual aggregate insured losses that exceed $100 billion and no 
insurer that has met its insurer deductible is liable for the payment 
of any portion of the amount of annual aggregate insured losses that 
exceeds $100 billion. Further, the Act requires the Secretary to 
determine the pro rata share of insured losses to be paid by each 
insurer and to issue regulations for determining the pro rata share of 
insured losses under the Program. If there is no act of terrorism, or 
there are insured losses cumulatively less than $100 billion (a level 
that is more than three times the amount reported by the insurance 
industry for the World Trade Center), this regulation has no economic 
impact. Should the legislatively mandated cap on annual losses be 
triggered, proration is carried out through existing insurer and 
policyholder processes for claiming, adjusting and settling insured 
losses. Moreover, for any affected commercial property and casualty 
insurers (including those that might be small entities), there is a 
favorable economic impact because the rule implements the statutory 
limitation on an insurer's liability. Treasury did not receive any 
comments at the proposed rule stage relating to the rule's impact on 
small entities. Accordingly, a regulatory flexibility analysis is not 
required.
    Paperwork Reduction Act. The collection of information contained in 
this final rule has been approved by the OMB under the requirements of 
the Paperwork Reduction Act, 44 U.S.C. 3507(d), and has been assigned 
control number 1505-0208. Under the Paperwork Reduction Act, an agency 
may not conduct or sponsor, and an individual is not required to 
respond to, a collection of information unless it displays a valid OMB 
control number.
    Executive Order 13132, ``Federalism.'' The rule may have federalism 
implications to the extent it deals with the making of payments by 
insurers to their policyholders under contracts of insurance, which is 
ordinarily regulated under State insurance law. However, TRIA 
established a temporary Federal program that is national in scope and 
significance. Section 106 of TRIA preserves the jurisdiction or 
regulatory authority of State insurance commissioners or similar 
offices, except as specifically provided in TRIA. Section 103(e)(2) 
requires Treasury to issue regulations for determining the pro rata 
share of insured losses under the Program when insured losses exceed 
$100 billion.
    Treasury consulted with the NAIC early in the process of 
formulating the proposed rule. State insurance commissioners who are 
members of the NAIC Terrorism Insurance Working Group were given an 
opportunity to submit comments, and a few minor and technical comments 
were received and considered by Treasury. No further

[[Page 66067]]

comments were received on the proposed rule.
    The provision in the rule (Sec.  50.92(e)) where Treasury would 
call for a hiatus in payments by insurers in circumstances where the 
cap on annual liability may be exceeded, but an appropriate PRLP cannot 
yet be determined, could potentially conflict with State insurance laws 
prescribing fixed periods for insurers to pay claims. However, Treasury 
believes the impact is limited in the rule because the period of the 
hiatus is brief (up to two weeks), and it would apply shortly after an 
act of terrorism occurs. Treasury concluded that a brief hiatus may be 
necessary to carry out the purpose of the statute to establish shares 
of insured losses on a pro rata basis by avoiding the inequity of 
allowing early claims to be paid in full before a PRLP can be 
determined.
    As noted above in response to a comment on the proposed rule, 
Treasury has modified the final rule to include the second option of an 
interim PRLP to address the circumstance where information necessary 
for consideration of all factors listed in Sec.  50.92(b) is 
unavailable. The final rule also provides that Treasury will consult 
with relevant state authorities before a course of action is selected. 
These added provisions further mitigate the federalism implications.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

0
For the reasons set forth above, 31 CFR Part 50 is amended as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

0
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, as amended by Pub. L. 109-144, 119 Stat. 2660 
and Pub. L. 110-160, 121 Stat. 1839 (15 U.S.C. 6701 note).


0
2. Section 50.53 is amended by adding paragraph (b)(5) to read as 
follows:


Sec.  50.53  Loss certifications.

* * * * *
    (b) * * *
    (5) A certification that if Treasury has determined a Pro rata Loss 
Percentage (PRLP) (see Sec.  50.92), the insurer has complied with 
applying the PRLP to insured loss payments, where required.
* * * * *


0
3. Subpart J is added to read as follows:

SUBPART J--CAP ON ANNUAL LIABILITY
Sec.
50.90 Cap on annual liability.
50.91 Notice to Congress.
50.92 Determination of pro rata share.
50.93 Application of pro rata share.
50.94 Data call authority.
50.95 Final amount.

SUBPART J--CAP ON ANNUAL LIABILITY


Sec.  50.90  Cap on annual liability.

    Pursuant to Section 103 of the Act, if the aggregate insured losses 
exceed $100,000,000,000 during any Program Year:
    (a) The Secretary shall not make any payment for any portion of the 
amount of such losses that exceeds $100,000,000,000;
    (b) No insurer that has met its insurer deductible shall be liable 
for the payment of any portion of the amount of such losses that 
exceeds $100,000,000,000; and
    (c) The Secretary shall determine the pro rata share of insured 
losses to be paid by each insurer that incurs insured losses under the 
Program.


Sec.  50.91  Notice to Congress.

    Pursuant to section 103(e)(3) of the Act, the Secretary shall 
provide an initial notice to Congress within 15 days of the 
certification of an act of terrorism, stating whether the Secretary 
estimates that aggregate insured losses will exceed $100,000,000,000 
for the Program Year in which the event occurs. Such initial estimate 
shall be based on insured loss amounts as compiled by insurance 
industry statistical organizations and any other information the 
Secretary in his or her discretion considers appropriate. The Secretary 
shall also notify Congress if estimated or actual aggregate insured 
losses exceed $100,000,000,000 during any Program Year.


Sec.  50.92  Determination of pro rata share.

    (a) Pro rata loss percentage (PRLP) is the percentage determined by 
the Secretary to be applied by an insurer against the amount that would 
otherwise be paid by the insurer under the terms and conditions of an 
insurance policy providing property and casualty insurance under the 
Program if there were no cap on annual liability under section 
103(e)(2)(A) of the Act.
    (b) Except as provided in paragraph (e) of this section, if 
Treasury estimates that aggregate insured losses may exceed the cap on 
annual liability for a Program Year, then Treasury will determine a 
PRLP. The PRLP applies to insured loss payments by insurers for insured 
losses incurred in the subject Program Year, as specified in Sec.  
50.93, from the effective date of the PRLP, as established by Treasury, 
until such time as Treasury provides notice that the PRLP is revised. 
Treasury will determine the PRLP based on the following considerations:
    (1) Estimates of insured losses from insurance industry statistical 
organizations;
    (2) Any data calls issued by Treasury (see Sec.  50.94);
    (3) Expected reliability and accuracy of insured loss estimates and 
likelihood that insured loss estimates could increase;
    (4) Estimates of insured losses and expenses not included in 
available statistical reporting;
    (5) Such other factors as the Secretary considers important.
    (c) Treasury shall provide notice of the determination of the PRLP 
through publication in the Federal Register, or in another manner 
Treasury deems appropriate, based upon the circumstances of the act of 
terrorism under consideration.
    (d) As appropriate, Treasury will determine any revision to a PRLP 
based on the same considerations listed in paragraph (b) of this 
section, and will provide notice for its application to insured loss 
payments.
    (e) If Treasury estimates based on an initial act of terrorism or 
subsequent act of terrorism within a Program Year that aggregate 
insured losses may exceed the cap on annual liability, but an 
appropriate PRLP cannot yet be determined, Treasury will provide 
notification advising insurers of this circumstance and, after 
consulting with the relevant State authorities, may initiate the action 
described in either paragraph (e)(1) or (e)(2) of this section.
    (1) Call a hiatus in insurer loss payments for insured losses of up 
to two weeks. In such a circumstance, Treasury will determine a PRLP as 
quickly as possible. The PRLP, as later determined, will be effective 
retroactively as of the start of the hiatus. Any insured losses 
submitted in support of an insurer's claim for the Federal share of 
compensation will be reviewed for the insurer's compliance with pro 
rata payments in accordance with the effective date of the PRLP.
    (2) Determine an interim PRLP. (i) An interim PRLP is an amount 
determined without the availability of information necessary for 
consideration of all factors listed in Sec.  50.92(b). It is a 
conservatively low percentage amount determined in order to facilitate 
initial partial claim payments by insurers after an act of terrorism 
and prior to the time that information becomes available to

[[Page 66068]]

determine a PRLP based on consideration of the factors listed in Sec.  
50.92(b).
    (ii) In such a circumstance, Treasury will determine a PRLP to 
replace the interim PRLP as quickly as possible. The PRLP, as later 
determined, will be effective retroactively as of the effective date of 
the interim PRLP. Any insured losses submitted in support of an 
insurer's claim for the Federal share of compensation will be reviewed 
for the insurer's compliance with pro rata payments in accordance with 
the effective date of the interim PRLP, or as later replaced by the 
PRLP as appropriate.


Sec.  50.93  Application of pro rata share.

    An insurer shall apply the PRLP to determine the pro rata share of 
each insured loss to be paid by the insurer on all insured losses where 
there is not an agreement on a complete and final settlement as 
evidenced by a signed settlement agreement or other means reviewable by 
a third party as of the effective date established by Treasury. 
Payments based on the application of the PRLP and determination of the 
pro rata share satisfy the insurer's liability for payment under the 
Program. Application of the PRLP and the determination of the pro rata 
share are the exclusive means for calculating the amount of insured 
losses for Program purposes. The pro rata share is subject to the 
following:
    (a) The pro rata share is determined based on the estimated or 
actual final claim settlement amount that would otherwise be paid.
    (b) All policies. If partial payments have already been made as of 
the effective date of the PRLP, then the pro rata share for that loss 
is the greater of the amount already paid as of the effective date of 
the PRLP or the amount computed by applying the PRLP to the estimated 
or actual final claim settlement amount that would otherwise be paid.
    (c) Certain workers' compensation insurance policies. If an 
insurer's payments under a workers' compensation policy cumulatively 
exceed the amount computed by applying the PRLP to the estimated or 
actual final claim settlement amount that would otherwise be paid 
because such estimated or actual final settlement amount is reduced 
from a previous estimate, then the insurer may request a review and 
adjustment by Treasury in the calculation of the Federal share of 
compensation. In requesting such a review, the insurer must submit 
information to supplement its Certification of Loss demonstrating a 
reasonable estimate invalidated by unexpected conditions differing from 
prior assumptions including, but not limited to, an explanation and the 
basis for the prior assumptions.
    (d) If an insurer has not yet made payments in excess of its 
insurer deductible, the rules in this paragraph apply.
    (1) If the insurer estimates that it will exceed its insurer 
deductible making payments based on the application of the PRLP to its 
insured losses, then the insurer shall apply the PRLP as of the 
effective date specified in Sec.  50.92(b).
    (2)(i) If the insurer estimates that it will not exceed its insurer 
deductible making payments based on the application of the PRLP to its 
insured losses, then the insurer may make payments on the same basis as 
prior to the effective date of the PRLP. The insurer may also make 
payments on the basis of applying some other pro rata amount it 
determines that is greater than the PRLP, where the insurer estimates 
that application of such other pro rata amount will result in it not 
exceeding its insurer deductible. The insurer remains liable for losses 
in accordance with Sec.  50.95(c).
    (ii) If an insurer estimates that it will not exceed its insurer 
deductible and has made payments on the basis provided in (2)(i), but 
thereafter reaches its insurer deductible, then the insurer shall apply 
the PRLP to any remaining insured losses. When such an insurer submits 
a claim for the Federal share of compensation, the amount of the 
insurer's losses will be deemed to be the amount it would have paid if 
it had applied the PRLP as of the effective date, and the Federal share 
of compensation will be calculated on that amount. However, an insurer 
may request an exception if it can demonstrate that its estimate was 
invalidated as a result of insured losses from a subsequent act of 
terrorism.


Sec.  50.94  Data call authority.

    For the purpose of determining initial or recalculated PRLPs, 
Treasury may issue a data call to insurers for insured loss 
information. Submission of data in response to a data call shall be on 
a form promulgated by Treasury.


Sec.  50.95  Final amount.

    (a) Treasury shall determine if, as a final proration, remaining 
insured loss payments, as well as adjustments to previous insured loss 
payments, can be made by insurers based on an adjusted PLRP, and 
aggregate insured losses still remain within the cap on annual 
liability. In such a circumstance, Treasury will notify insurers as to 
the final PRLP and its application to insured losses.
    (b) If paragraph (a) of this section applies, Treasury may require, 
as part of the insurer submission for the Federal share of compensation 
for insured losses, a supplementary explanation regarding how 
additional payments will be provided on previously settled insured 
losses.
    (c) An insurer that has prorated its insured losses, but that has 
not met its insurer deductible, remains liable for loss payments that 
in the aggregate bring the insurer's total insured loss payments up to 
an amount equal to the lesser of its insured losses without proration 
or its insurer deductible.

    Dated: December 3, 2009.
Michael S. Barr,
Assistant Secretary (Financial Institutions).
[FR Doc. E9-29614 Filed 12-11-09; 8:45 am]
BILLING CODE 4810-25-P