[Federal Register Volume 68, Number 75 (Friday, April 18, 2003)]
[Proposed Rules]
[Pages 19309-19313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9613]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA99


Terrorism Risk Insurance Program

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 Risk Insurance Program (Program) under which the Federal 
Government will share the risk of insured losses from certified acts of 
terrorism with commercial property and casualty insurers until the 
Program sunsets on December 31, 2005. This notice of proposed 
rulemaking would apply provisions of the Act to State residual market 
insurance entities and State workers' compensation funds which are 
insurers under the Program. This is the third in a series of 
regulations that Treasury will issue to implement the Act.

DATES: Written comments may be submitted on or before May 19, 2003.

ADDRESSES: Submit comments (if hard copy, preferably an original and 
two copies) to Office of Financial Institutions Policy, Attention: 
Terrorism Risk Insurance Program Public Comment Record, Room 3160 
Annex, Department of the Treasury, 1500 Pennsylvania Ave., NW., 
Washington, DC 20220. Because paper mail in the Washington, DC area may 
be subject to delay, it is recommended that comments be submitted by 
electronic mail to: [email protected]. All comments should be 
captioned with ``April 18, 2003 NPRM TRIA Comments.'' 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.

[[Page 19310]]

To make appointments, call (202) 622-0990 (not a toll-free number).

FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director, 
Office of Financial Institutions Policy (202) 622-2730, or Martha 
Ellett or Cynthia Reese, Attorney-Advisors, Office of the Assistant 
General Counsel (Banking & Finance), (202) 622-0480 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

I. Background

A. Terrorism Risk Insurance Act of 2002

    On November 26, 2002, President Bush signed into law the Terrorism 
Risk Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The 
Act was effective immediately. 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 as defined in the Act and 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 
prescription of regulations and procedures. The Program will sunset on 
December 31, 2005.
    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.
    The amount of Federal payment for an insured loss resulting from an 
act of terrorism is to be determined based upon the insurance company 
deductibles and excess loss sharing with the Federal Government, as 
specified by the Act. Thus, the Program provides a Federal reinsurance 
backstop for a temporary period of time. The Act also provides Treasury 
with authority to recoup Federal payments made under the Program 
through policyholder surcharges, up to a maximum annual limit.
    Each entity that meets the definition of ``insurer'' (well over 
2000 firms) must participate in the Program. The Act includes State 
residual market insurance entities and State workers compensation funds 
in the definition of insurer but requires Treasury to issue regulations 
as soon as practicable to apply the provisions of the Act to these 
insurers.
    From the date of enactment of the Act through the last day of 
Program Year 2 (December 31, 2004), insurers under the Program must 
``make available'' terrorism risk insurance in their commercial 
property and casualty insurance policies and the coverage must not 
differ materially from the terms, amounts and other coverage 
limitations applicable to commercial property and casualty losses 
arising from events other than acts of terrorism. The Act permits 
Treasury to extend the ``make available'' requirement into Program Year 
3, based on an analysis of factors referenced in the study required by 
section 108(d)(1) of the Act, and not later than September 1, 2004.
    An insurer's deductible increases each year of the Program, thereby 
reducing the Federal Government's involvement prior to sunset of the 
Program. An insurer's deductible is based on ``direct earned premiums'' 
over a statutory Transition Period (now expired) and the three Program 
Years. Once an insurer has met its deductible, the Federal payments 
cover 90 percent of insured losses above the deductible, subject to an 
aggregate annual cap of $100 billion. The Act prohibits duplicative 
payments for insured losses that are covered under any other Federal 
program.
    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 must 
submit a claim and certain certifications to Treasury. Treasury will be 
prescribing claims procedures at a later date.
    The Act also contains specific provisions designed to manage 
litigation arising from or relating to a certified act of terrorism. 
Section 107 creates an exclusive Federal cause of action, provides for 
claims consolidation in Federal court and contains a prohibition on 
Federal payments for punitive damages under the Program. This section 
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. As part of the claims process, and as directed by the 
President, Treasury will be issuing regulations addressing Treasury's 
role in the approval of settlements.

B. Previously Issued Interim Guidance

    To assist insurers, policyholders and other interested parties in 
complying with immediately applicable and time-sensitive requirements 
of the Act prior to the issuance of regulations, Treasury issued 
interim guidance in four separate notices. Treasury publicly released 
these interim guidance notices on its Program Web site, http://www.treasury.gov/trip and published each notice in the Federal 
Register.
    Treasury released the first notice of Interim Guidance on December 
3, 2002, within a week of the Act's enactment (Interim Guidance I). 
Interim Guidance I was published at 67 FR 76206 on December 11, 2002, 
and addressed several issues pertaining to immediately applicable 
provisions of the Act, including statutory disclosure obligations of 
insurers as conditions for Federal payment under the Program and the 
requirement that an insurer ``make available'' terrorism risk 
insurance. The disclosure guidance in Interim Guidance I references 
certain model forms of the National Association of Insurance 
Commissioners (NAIC) and provides a safe harbor for those insurers that 
make use of such forms prior to the issuance of regulations, but 
Interim Guidance I stated that these forms are not the exclusive means 
by which insurers could comply with the disclosure conditions prior to 
the issuance of regulations. Interim Guidance I also provided guidance 
concerning the ``direct earned premium'' on lines of property and 
casualty insurance to enable insurers to calculate their ``insurer 
deductibles'' and enable insurers to price and disclose premiums for 
terrorism risk insurance to policyholders within statutory time 
periods.
    On December 18, 2002, Treasury issued a second notice of interim 
guidance. This interim guidance was published at 67 FR 78864 on 
December 26, 2002 (Interim Guidance II). Interim Guidance II addressed 
the statutory categories of ``insurers'' that are required to 
participate in the Program, including their ``affiliates''; provided 
clarification on the scope of ``insured loss'' covered by the Program 
and provided additional guidance to enable eligible surplus line 
carriers listed on the Quarterly Listing of Alien Insurers of the NAIC 
or Federally approved insurers to calculate their insurer deductibles 
for purposes of the Program.
    On January 22, 2003, Treasury issued a third notice of interim 
guidance, published at 68 FR 4544 on January 29, 2003 (Interim Guidance 
III). Interim Guidance III further clarified certain disclosure and 
certification questions, issues for non-U.S. insurers, and the scope of 
the term ``insured loss'' under the Act.
    On March 25, 2003 Treasury issued a fourth interim guidance 
published at 68 FR 15039 on March 27, 2003 (Interim

[[Page 19311]]

Guidance IV). Interim Guidance IV provided insurers a procedure by 
which they could seek to rebut a presumption of control established in 
Treasury's first set of interim final regulations. See Previously 
Issued Regulations in section C below and Treasury's Web site at http://www.treasury.gov/trip.
    In issuing each notice of Interim Guidance, Treasury stated that 
the Interim Guidance may be relied upon by insurers until superseded by 
regulations or a subsequent notice. Treasury provided safe harbors for 
actions by those insurers taken in accordance with, and in reliance on, 
the interim guidance for the time period prior to the issuance of 
regulations.

C. Previously Issued Regulations

    Treasury published the first regulation implementing the Act on 
February 28, 2003 (68 FR 9804) as an interim final rule together with a 
proposed rule. Both request comments by March 31, 2003. The first 
regulation, which is subpart A of new part 50 in Title 31 of the CFR, 
covers the purpose and scope of the Program, key definitions, and 
certain general provisions.
    In addition, Treasury has published an interim final rule on 
requirements concerning disclosures that insurers must make to 
policyholders as a condition for federal payment under the Act, and 
requirements that insurers make available, in their commercial property 
and casualty insurance policies, terrorism risk coverage for insured 
losses under the Program. (See Subparts B and C of 31 CFR Part 50).

II. The Proposed Rule

    Section 102(6) of the Act includes State residual market insurance 
entities and State workers' compensation funds as insurers that are 
required to participate in the Program. Section 103(d) of the Act 
requires Treasury to ``issue regulations, as soon as practicable after 
the date of enactment of this Act, that apply the provisions of this 
title [Title I] to State residual market insurance entities and State 
workers' compensation funds.'' Pursuant to this statutory directive, 
Treasury is issuing this notice of proposed rulemaking.

A. Mandatory Participation as an ``Insurer''

    State residual market insurance entities and State workers' 
compensation funds have been established to provide insurance coverage 
where private insurance companies are unwilling or unable to provide 
coverage. Private insurance companies may be unwilling or unable to 
provide coverage because of the policyholder's risk profile or because 
the economics of a particular transaction are not consistent with the 
types of risk the insurer is willing or able to underwrite. In some 
cases a residual market entity shares the risks of its underlying 
policies with insurance companies that provide certain types of 
coverage within the state, and in other cases a residual market entity 
operates on a stand alone basis.
    All entities that meet the definition of ``insurer'' in section 
102(6)(A) and (B) and, if prescribed by Treasury, criteria in 
102(6)(C), of the Act are required to participate in the Program. 
Section 102(6)(A)(iv) includes State residual market insurance entities 
and State workers' compensation funds in the definition of insurer for 
purposes of the Program. Treasury considers the term State residual 
market insurance entity to encompass all such residual market entities 
that arrange for or provide commercial property and casualty insurance 
coverage. This includes residual market entities associated with the 
provision of commercial property, liability, workers' compensation, and 
automobile (including State automobile funds) coverage. Section 
102(6)(B) provides an exception to the direct earned premium 
requirement for State residual market entities and State workers' 
compensation funds. Treasury has issued no regulatory criteria under 
section 102(6)(C). Therefore, State residual market insurance entities 
and State workers' compensation funds are insurers covered by the 
Program and required to participate in the Program. Section 103(d) of 
the Act requires Treasury to issue regulations as soon as practicable 
to apply the provisions of the Act to these types of insurers.
    Following consultation with the NAIC, Treasury identified a group 
of entities that falls within the category of State residual market 
insurance entities and State workers compensation funds. Treasury 
included this list as part of its Interim Guidance II (67 FR 78864). In 
that notice of interim guidance, Treasury also requested that any State 
residual market insurance entity or State workers' compensation fund, 
not included on the list, notify Treasury. In response, Treasury 
received additional information and a number of suggestions concerning 
the State residual market entities and State workers' compensation 
funds on the list. After consideration of this additional information 
and further consultation with the NAIC, Treasury has updated and 
expanded the initial list in the interim guidance of State residual 
market insurance entities and State workers' compensation funds. This 
revised list will be updated as necessary, and publicly available at 
http://www.treasury.gov/trip.

B. Treatment or Allocation of Premium

    Section 103(d)(2) of the Act divides State residual market 
insurance entities into two broad classes for purposes of their 
treatment as insurers under the Program: (1) Entities that do not share 
profits and losses with private sector insurance companies; and (2) 
entities that do share profits and losses with private sector insurance 
companies. Section 103(d)(2)(A) provides that ``a State residual market 
insurance entity that does not share its profits and losses with 
private sector insurers shall be treated as a separate insurer.'' For 
State residual market insurance entities that fall under section 
103(d)(2)(A) or for State workers' compensation funds Treasury is 
proposing that these entities follow the regulatory guidelines set 
forth in 31 CFR 50.5(d)(1) or 50.5(d)(2) for the purposes of 
calculating the appropriate measure of direct earned premium.
    Section 103(d)(2)(B) of the Act provides that ``a State residual 
market insurance entity that shares its profits and losses with private 
sector insurers shall not be treated as a separate insurer, and shall 
report to each private sector insurance participant its share of the 
insured losses of the entity, which shall be included in each private 
sector insurer's insured losses.'' Section 103(d)(3) further provides 
that ``any insurer that participates in sharing profits and losses of a 
State residual market insurance entity shall include in its 
calculations of premiums any premiums distributed to the insurer by the 
State residual market insurance entity.'' A significant number of State 
residual market entities share their profits and losses with private 
sector insurance companies, including entities that arrange for 
commercial automobile, property, and workers' compensation coverages. 
In addition, some State residual insurance market entities contract 
with private sector insurance companies, which act as servicing 
carriers. In a servicing carrier arrangement, a private sector 
insurance company issues and services the residual market entity's 
policies in exchange for a servicing fee. The servicing carrier does 
not bear the ultimate risk of such policies, but rather that risk is 
shared by all the insurance companies that participate in the residual 
market. However, other residual market entities (e.g., most property 
plans) do not use servicing

[[Page 19312]]

carriers but, instead, issue and service their policies directly.
    As mentioned in Interim Guidance II, Treasury has consulted with 
the NAIC to develop a proposed allocation methodology that is in accord 
with statutory requirements. In order to implement the requirements of 
section 103(d)(2)(B) (no separate treatment) and 103(d)(3) (inclusion 
of premium income) for State residual market insurance entities that 
share profits and losses with private sector insurers, Treasury is 
proposing the following methodology for allocating direct earned 
premiums across all insurance companies that participate in the 
residual market mechanism.
    First, premiums written by a servicing carrier, on behalf of a 
State residual market insurance entity and ceded to such an entity 
shall not be included as ``Direct Earned Premium'' for purposes of 
calculation of that servicing carrier's deductible.
    Second, premium distributed to or assumed by State residual market 
participants, whether directly from the State residual market insurance 
entity or as quota share insurers of risks written by servicing 
carriers, is included in ``Direct Earned Premium'' for purposes of 
calculation of each pool participant's deductible.
    These two proposed provisions would allocate risk within a State 
residual market mechanism to the ultimate risk bearers. Because 
servicing carriers do not hold the entire risk for the policies that 
they service for the State residual market insurance entity, the 
premium from those policies should not fully accrue to the servicing 
carrier. The servicing carrier does absorb risk within the State 
residual market mechanism, and the appropriate portion of such risk 
would be allocated back to the servicing carrier and other residual 
market participants in the second step. The net effect of these 
offsetting exclusions and inclusions will be no change in total 
industry-wide ``Direct Earned Premium,'' but rather a reallocation to 
account for the unique nature of State residual market insurance 
entities.
    The following provides an illustration as to how insurers that 
participate in State residual market insurance mechanisms should 
calculate their ``direct earned premium'' for purposes of calculating 
an ``insurer deductible'' as defined in section 102(7):
    (1) Start with the appropriate measure of direct earned premium as 
specified in 31 CFR 50.5(d)(1) or 50.5(d)(2). That measure would 
include appropriate adjustments for personal insurance coverage as 
described in section 50.5(d)(1).
    (2) Subtract the value of direct earned premium earned by servicing 
carriers and ceded to State residual market insurance entities if those 
direct earned premiums are reported in step 1.
    (3) Add direct earned premium assumed from or distributed by State 
residual market insurance entities to insurers participating in the 
State residual market mechanism.
    Although no report or information is requested or proposed at this 
time, Treasury may later request that the administrator of a qualifying 
State residual market entity provide Treasury with certified 
information about the aggregate premium and losses, and participant 
allocation information that it provides to participating insurance 
companies if, and to the extent, deemed to be needed by Treasury to 
verify insurers' ``deductible'' calculations.

C. Other State Residual Market Insurer Issues

    Treasury has not yet issued regulations regarding the federal share 
of insured losses as described in section 103(e)(1)(A) of the Act; 
however, consistent with the treatment of premium income described 
above, Treasury is considering proposing that insured losses arising 
from policies insured through State residual market insurance entities 
described in section 103(d)(2)(B) be calculated for each residual 
market insurance participant based on each such insurer's share of the 
insured losses of the State residual market entity as allocated to the 
insurer by the residual market entity. Treasury is also considering 
proposing that the State residual market insurance entity provide an 
allocation of insured losses to each participant and other information 
related to the sharing of insured losses among residual market 
participants as part of regulations issued under the claims 
verification process. Treasury specifically solicits comment in these 
areas.
    As regulations regarding the Federal share of insured loss and the 
claims verification process are developed, Treasury will also be 
considering the general issue of how the insolvency of insurers under 
the Program will be addressed, and in particular how the insolvency of 
a residual market participant or a servicing carrier affects the 
allocation of insured losses among residual market participants. 
Although Treasury has no specific proposal, Treasury also solicits 
comment on these issues.

D. Disclosure

    In Interim Guidance II, Treasury did not require disclosures under 
section 103(b)(2) of the Act by insurers that fall under section 
102(6)(A)(iv), if such State residual market and workers' compensation 
fund insurers did not have sufficient information to make such 
disclosures under section 103(b)(2), pending issuance of final 
regulations. Treasury is still evaluating the applicability of the 
disclosure requirement on certain insurers in this category and 
solicits information on this issue.

III. Procedural Requirements

    This proposed rule is a significant regulatory action and has been 
reviewed by the Office of Management and Budget under the terms of 
Executive Order 12866.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. The Act 
itself requires State residual market insurance entities and State 
workers' compensation funds to participate in the Program, and these 
entities or funds are generally not small entities.
    The Act itself requires all licensed or admitted insurers to 
participate in the Program. This includes all insurers regardless of 
size or sophistication. Although insurers that participate in sharing 
profits and losses of a State residual market insurance entity or State 
workers' compensation fund may include small entities, the proposed 
rule is based on existing business practices of residual market 
entities in determining the impact on participating insurers. The Act 
also defines property and casualty insurance to mean commercial lines 
without any reference to the size or scope of the commercial entity. 
Accordingly, any economic impact associated with the proposed rule 
flows from the Act and not the proposed rule. However, the Act and the 
Program are intended to provide benefits to the U.S. economy and all 
businesses, including small businesses, by providing a federal 
reinsurance backstop to commercial property and casualty insurance 
policyholders and spreading the risk of insured loss resulting from an 
act of terrorism. Accordingly, a regulatory flexibility analysis is not 
required.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

    For the reasons set forth above, 31 CFR part 50 is proposed to be 
amended as follows:

[[Page 19313]]

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 D of part 50 is proposed to be amended by adding 
Sec. Sec.  50.30, 50.33, 50.35 and 50.36 to read as follows:


Sec.  50.30  General participation requirements.

    (a) Insurers. As defined in Sec.  50.5(f), all State residual 
market insurance entities and State workers' compensation funds are 
insurers under the Program even if such entities do not receive direct 
earned premiums.
    (b) Mandatory participation. State residual market insurance 
entities and State workers'compensation funds that meet the 
requirements of Sec.  50.5(f) are mandatory participants in the Program 
subject to the rules issued in this subpart.
    (c) Identification. Treasury will release and maintain a list of 
State residual market insurance entities and State workers' 
compensation funds at www.treasury.gov/trip. Procedures for providing 
comments and updates to that list will be posted with the list.


Sec.  50.33  Entities that do not share profits and losses with private 
sector insurers.

    (a) Treatment. A State residual market insurance entity or a State 
workers' compensation fund that does not share profits and losses with 
a private sector insurer is deemed to be a separate insurer under the 
Program.
    (b) Premium calculation. A State residual market insurance entity 
or a State workers' compensation fund that is deemed to be a separate 
insurer should follow the guidelines specified in Sec.  50.5(d)(1) or 
50.5(d)(2) for the purposes of calculating the appropriate measure of 
direct earned premium.


Sec.  50.35  Entities that share profits and losses with private sector 
insurers.

    (a) Treatment. A State residual market insurance entity or a State 
workers' compensation fund that shares profits and losses with a 
private sector insurer is not deemed to be a separate insurer under the 
Program.
    (b) Premium and loss calculation. A State residual market insurance 
entity or a State workers' compensation fund that is not deemed to be a 
separate insurer should continue to report, in accordance with normal 
business practices, to each participant insurer its share of premium 
income and insured losses, which shall then be included respectively in 
the participant insurer's direct earned premium or insured loss 
calculations.


Sec.  50.36  Allocation of premium income associated with entities that 
do share profits and losses with private sector insurers.

    (a) Servicing carriers. For purposes of this subpart, a servicing 
carrier is an insurer that enters into an agreement to place and 
service insurance contracts for a State residual market insurance 
entity or a State workers' compensation fund and to cede premiums 
associated with such insurance contracts to the State residual market 
insurance entity or State workers' compensation fund. Premiums written 
by a servicing carrier on behalf of a State residual market insurance 
entity or State workers' compensation fund that are ceded to such an 
entity or fund shall not be included as direct earned premium (as 
described in Sec.  50.5(d)(1) or 50.5(d)(2)) of the servicing carrier.
    (b) Participant insurers. For purposes of this subpart, a 
participant insurer is an insurer that shares in the profits and losses 
of a State residual market insurance entity or a State workers' 
compensation fund. Premium income that is distributed to or assumed by 
participant insurers in a State residual market insurance entity or 
State workers' compensation fund (whether directly or as quota share 
insurers of risks written by servicing carriers), shall be included in 
direct earned premium (as described in Sec.  50.5(d)(1) or 50.5(d)(2)) 
of the participant insurer.

    Dated: April 11, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-9613 Filed 4-17-03; 8:45 am]
BILLING CODE 4810-25-P