[Federal Register Volume 68, Number 133 (Friday, July 11, 2003)]
[Rules and Regulations]
[Pages 41250-41266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17585]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA96


Terrorism Risk Insurance Program

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury (Treasury) is issuing this rule 
in final form as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (Act). That Act established a temporary 
Terrorism Risk 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 sunsets on December 31, 2005. Treasury published an interim 
final rule with a request for comment on February 28, 2003. That rule 
set forth the purpose and scope of the Program and key definitions that 
Treasury will use in implementing the Program. It was the first in a 
series of regulations that Treasury will be issuing to implement the 
Program. This final rule generally adopts the interim final rule, but 
makes revisions in the definition of ``affiliate'' and certain other 
changes described in the preamble.

DATES: This final rule is effective July 11, 2003.

[[Page 41251]]


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 issuance 
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. 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 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 have been 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.

B. The Interim Final Rule

    The interim final rule established Subpart A of a new Part 50 in 
Title 31 of the Code of Federal Regulations. Subpart A of new Part 50 
contains certain general provisions and definitions of Program terms. 
The definitions contained in the interim final rule provide the 
foundation for participation by insurers under the Federal reinsurance 
Program created by the Act.
    Some of the definitions in the interim final rule were taken 
virtually verbatim from the Act because they do not need further 
clarification. For other definitions, the interim final rule generally 
incorporated previously issued interim guidance provided by Treasury as 
it pertains to Program terms, for example, the terms ``insurer,'' 
``affiliate,'' ``property and casualty insurance'' and ``direct earned 
premium.'' Such interim guidance was published at 67 FR 76206 (December 
11, 2002), 67 FR 78864 (December 26, 2002) and 68 FR 4544 (January 29, 
2003). In several areas, the interim final rule made clarifying 
modifications to, or supplemented, the previously issued interim 
guidance.
    In implementing the Program, Treasury has been guided by several 
goals. First, we strive to implement the Act in a transparent and 
effective manner that treats comparably those insurers required to 
participate in the Program and that provides necessary information to 
policyholders in a useful and efficient manner. Second, Treasury seeks 
to rely as much as possible on the State insurance regulatory 
structure. In that regard, Treasury is closely coordinating with the 
National Association of Insurance Commissioners (NAIC) in implementing 
definitional and other aspects of the Program. Third, to the extent 
possible within statutory constraints, Treasury seeks to allow insurers 
to participate in the Program in a manner consistent with their normal 
course of business. Finally, given the temporary and transitional 
nature of the Program, Treasury is guided by the Act's goal for 
insurers to develop their own capacity, resources and mechanisms for 
terrorism risk insurance coverage when the Program expires.

II. Summary of Comments and Final Rule

    Treasury received over 40 comments on the interim final rule. 
Comments were submitted by insurance companies, industry trade 
associations, the NAIC, two cities, and by two members of Congress. 
After review and careful consideration of these comments, as well as 
additional research and consultation with the NAIC, Treasury is now 
promulgating a final rule concerning TRIA definitions. In general, the 
final rule reflects the interim final rule. However, revisions and 
clarifications were made in several areas, based on comments received. 
For example, revisions were made to the rebuttable presumptions to 
controlling influence determinations under the definition of 
``affiliate,'' and clarifications were made to the definitions of 
``direct earned premium'' and ``commercial property and casualty 
insurance.'' The final rule, including changes and clarifications, is 
discussed in the summary below.

A. ``Act of Terrorism'' (Section 50.5.b)

    The interim final rule incorporated the statutory definition of 
``act of terrorism'' found in section 102(1) of the Act. In that 
regard, the interim final rule provides that an ``act of terrorism'' 
for

[[Page 41252]]

purposes of the Program must be certified by the Treasury Secretary, in 
concurrence with the Secretary of State and the Attorney General of the 
United States, and must fall within other statutory parameters. The 
requirements in clauses (i)-(iv) of section 102(1)(A) are conjunctive. 
An act of terrorism, if it also meets the limitations in section 
102(1)(B), may be certified if it: is violent or dangerous to human 
life, property or infrastructure; and has resulted in damage within the 
United States, or outside the United States in the case of certain air 
carriers or vessels or if on the premises of a U.S. mission; and has 
been committed by individual(s) on behalf of any foreign person or 
foreign interest, as part of an effort to coerce the U.S. civilian 
population or to influence the policy or affect the conduct of the U.S. 
government by coercion. Therefore, acts of domestic civil disturbance 
would not be covered by the Act's definition of ``act of terrorism'' or 
by the Program.
    Section 102(1)(B) limits the Secretary's ability to certify an act 
if committed as part of a course of war declared by Congress, (except 
for workers'compensation coverage), or if property and casualty 
insurance losses resulting from the act, in the aggregate, do not 
exceed a $5,000,000 de minimis threshold. With regard to the first 
limitation, one commenter raised a question concerning the effect of a 
declaration of war on an act of terrorism certification. While it is 
not possible for a regulation to address all potential situations 
surrounding an act of terrorism determination under the Program, it is 
Treasury's view that the war exclusion in the Act applies only to acts 
of terrorism committed in connection with a formal, congressionally 
declared war. While the phrase ``war declared by the Congress'' is not 
defined in the Act, Article I, section 8, clause 11 of the Constitution 
grants Congress the exclusive authority to declare war. Congress has 
done so on five occasions, the most recent of which occurred in 1941 at 
the outset of World War II. Most other American military actions have 
been conducted pursuant to constitutional authorities of the President 
connected with his role as commander-in-chief, and while many of these 
have also enjoyed explicit Congressional support, they have not been 
authorized by a formal declaration of war. For example, the 
``Authorization for Use of Military Force Against Iraq Resolution of 
2002,'' (P.L. 107-243) gave the President authority to conduct military 
operations, but is not a formal declaration of war.
    With regard to the second statutory limitation on an act of 
terrorism certification, one commenter asked whether the $5,000,000 
threshold loss has to be suffered by one insured policyholder. The Act, 
as reflected in the interim final rule, provides that the de minimis 
threshold is based on loss ``in the aggregate''. One certified act of 
terrorism could result in insured losses from several policyholders, 
none of which alone would amount to $5,000,000, but, in the aggregate, 
would be in excess of that amount.
    Section 106(a)(2) of the Act provides that the Act's definition is 
the exclusive definition of the term ``act of terrorism'' for purposes 
of compensation for insured losses under the Act. In addition, section 
102(1)(C) of the Act provides that the Secretary's determination or 
certification with regard to whether an act is an act of terrorism for 
purposes of the Program is final and is not subject to judicial review.
    One commenter urged Treasury to establish a time frame within which 
the Secretary would be required to make a determination or 
certification that an ``act of terrorism'' had occurred in order to 
better assist insurers in responding to inquiries and claims from their 
policyholders. Treasury understands the desire for certainty of those 
in the industry who would advocate a definite time frame, and intends 
to make its determination as promptly as possible after obtaining and 
evaluating the facts surrounding a possible act of terrorism. However, 
there is no way to predict future events and ascertain a time frame 
that would be appropriate for all potential situations. Facts could be 
immediately available and, after consultation, present a clear basis 
for a quick determination by the Secretary; conversely, a determination 
could require more time to gather information and conduct an analysis 
of the act. Given this inherent uncertainty and the significance of an 
act of terrorism determination to all aspects of the Program, Treasury 
does not believe that it would be in the public interest to establish 
in advance a regulatory time frame that may later prove to be 
inappropriate or unattainable.

B. ``Affiliate'' Including ``Control'' (Section 50.5(c))

    Approximately one-third of the comments submitted to Treasury on 
the interim final rule raised questions or concerns with regard to the 
definition of ``affiliate'', which includes the definition of 
``control'' in section 50.5(c). Most of these comments raised questions 
with either procedural or substantive aspects of the rebuttable 
presumptions of controlling influence in this section. After careful 
consideration of the comments and further consultation with the NAIC, 
Treasury has made several revisions in the final rule to address these 
comments. The regulatory definitions and changes to the interim final 
rule are set forth below.
    Section 102(6) of the Act defines an ``insurer'' to include ``any 
affiliate thereof.'' The definitions of ``affiliate'' and ``control'' 
are intertwined in the Act. Section 102(2) defines ``affiliate'' to 
mean ``with respect to any insurer, an entity that controls, is 
controlled by, or is under common control with the insurer.'' Pursuant 
to Section 102(3) of the Act, ``control'' exists if

    [sbull] an entity directly or indirectly or acting through 1 or 
more other persons owns, controls, or has power to vote 25 percent or 
more of any class of voting securities of the other entity; or
    [sbull] an entity controls in any manner the election of a majority 
of the directors or trustees of the other entity; or
    [sbull] the Secretary determines, after notice and opportunity for 
hearing, that the entity directly or indirectly exercises a controlling 
influence over the management or policies of the other entity.
    Section 50.5(c) of the interim final rule generally incorporates 
and combines the related statutory definitions of ``affiliate'' and 
``control.'' In addition, the interim final rule provides that an 
affiliate must itself meet the definition of ``insurer'' to participate 
in the Program. (See part E of this preamble for further discussion of 
``insurer'' definition.) The definitions of affiliate and control are 
integral to Treasury's implementation of the Program. As discussed 
further in parts C and F of this preamble, affiliated insurers are 
treated collectively as one entity by Treasury for purposes of 
calculating direct earned premiums and an insurer deductible under the 
Program. Three comments objected to this consolidated treatment as not 
equitable. However, as noted in the preamble to the interim final rule, 
this consolidated treatment is in accord with the Act's legislative 
history and the clear intent of Congress. The Conference Report states 
that the terms ``affiliate'' and ``control'' were meant ``to ensure 
that affiliated insurers are treated as a consolidated entity for 
calculating direct earned premiums.'' H.R. Conf. Rep. No. 107-779 
(2002).
    Therefore, for example, if an insurance company meets the 
definition of an ``insurer'' under section 102(6) as implemented by 
Treasury, and three out

[[Page 41253]]

of four of the companies it controls also meet the Act's definition of 
``insurer,'' then the parent company and the three companies it 
controls that meet the Act's definition of ``insurer'' (the parent 
company's affiliates) will be treated by Treasury collectively as one 
insurer for purposes of calculating direct earned premiums and 
calculating the insurer deductible under the Program. The company that 
does not meet the definition of ``insurer'' is not included in the 
Program.
    In addition, if an entity is under common control with an insurer, 
and that entity also meets the definition of ``insurer'' under Section 
102(6) of the Act as implemented by Treasury, then the two insurers are 
``affiliates'' and Treasury will treat them collectively as one 
``insurer'' for the Program purposes of consolidating direct earned 
premiums and calculating the insurer deductible. If their parent 
company does not meet the definition of ``insurer'' under the Act, then 
it is not included in the Program.
Control
    The statutory definition of ``control'' in section 102(3) contains 
three categories. Section 102(3)(A) and (B) establish conclusive 
control under certain circumstances for purposes of the Program. The 
conclusive control provisions of the Act are contained in the 
definition of ``affiliate'' in the interim final rule at section 
50.5(c)(2)(i) and (ii). If a relationship between or among insurers 
does not fit within the conclusive control provisions, control may 
still exist for purposes of the Program if Treasury determines, 
pursuant to section 102(3)(C), that an entity directly or indirectly 
exercises a controlling influence over the management or policies of 
another entity. Section 102(3)(C) is contained in the interim final 
rule at section 50.5(c)(2)(iii). In making a determination of whether 
controlling influence exists among insurers, section 102(3)(C) of the 
Act requires Treasury to provide notice and an opportunity for a 
hearing.
    The Act's definition of control in section 102(3)(A), (B) and (C) 
is almost identical to the definition of ``control'' contained in the 
Bank Holding Company Act (BHCA) at 12 U.S.C. 1841(a)(2) and in the 
Savings and Loan Holding Company Act (SLHCA) at 12 U.S.C. 1467a, except 
that the Act does not contain a presumption of no control for holding 
less than 5 percent of any class of voting securities, nor does the Act 
provide any of the other explicit statutory exemptions that are 
provided in the BHCA and SLHCA. The Act's definition of control is also 
similar to the definition of control in the NAIC's Model Insurance 
Company Holding Company Act (Model Act) except that the Model Act 
contains a presumption of control if an entity owns 10 percent of the 
voting securities of an insurance company instead of the 25 percent 
conclusive control threshold that is contained in the Act (and in the 
BHCA and the SLHCA).
Owns, Controls or has the Power to Vote 25 Percent or More of Voting 
Securities
    Under Section 102(3)(A) of the Act, ``an entity has `control' over 
another entity if the entity directly or indirectly or acting through 1 
or more persons owns, controls or has the power to vote 25 percent or 
more of any class of voting securities of the other entity.'' The 
interim final rule incorporates this statutory definition, but uses the 
word ``insurer'' instead of ``entity'' to clarify that the definition 
of control does not include entities that are not insurers.
    One commenter asked for clarification that an affiliate itself must 
be an insurer to be treated as part of a consolidated entity with a 
related insurer. In view of the congressional intent that affiliated 
insurers be treated as a consolidated entity for purposes of 
calculating direct earned premiums, there is no reason to include non-
insurer entities in the definition of ``affiliate'' because these 
entities do not have ``direct earned premiums'' as defined in the Act. 
Viewing a group of affiliates with both insurer and non-insurer 
entities, the direct earned premiums for the group should be no 
different whether or not the non-insurers are included in the group. 
For this reason, Treasury has decided to interpret the Act as generally 
excluding non-insurers from the definitions of affiliate and control at 
this time. Treasury could revisit this issue if it finds evidence that 
other corporate structures or arrangements are being used to thwart the 
goals and purposes of the Program.
    Five insurance industry commenters took the position that ownership 
of 25 percent or more of the voting securities of an insurer should not 
automatically result in control. These commenters asserted that 
Treasury could and should by regulation change this statutory limit. 
One commenter referenced the NAIC Model Act language in support of 
creating a regulatory presumption. As noted above, unlike section 
102(3)(A), the NAIC Model Act contains a 10 percent statutory 
presumption not a threshold of conclusive control. Several of these 
commenters stated that a 25 percent or more conclusive control limit 
could adversely affect the availability and affordability of coverage, 
and in particular, would have an adverse effect on their own companies 
if they were required to aggregate direct earned premiums. These 
commenters suggested various alternatives for Treasury to use instead 
of the 25 percent statutory limit. These included substituting other 
regulatory factors for the 25 percent limit and accepting a state 
determinations of ``no control'' based on state law even where there is 
ownership of more than 25 percent.
    Consistent with the statutory language in section 102(3)(A) and 
with other statutes containing similar language, Treasury interprets 
the 25 percent or more direct or indirect ownership of any class of 
voting securities to be an objective standard establishing conclusive 
control. Under the plain language of the statute, the 25 percent voting 
securities threshold is not a presumption, and is not subject to 
rebuttal. We also note that in addressing the rebuttable presumptions 
in the interim final rule in connection with section 102(3)(C), several 
commenters characterized the ownership of 25 percent or more of any 
class of voting securities threshold in section 102(3)(A), as well as 
the control provision in section 102(3)(B), as objective standards. For 
these reasons, Treasury has not made any change in the final rule to 
the 25 percent threshold in section 50.5(c)(2)(ii) of the interim final 
rule.
Controls the Election of a Majority of the Directors or Trustees
    The interim final rule provides that an insurer controls another 
insurer for purposes of the Program if the insurer controls in any 
manner the election of a majority of the directors or trustees of the 
other insurer. In general, this regulatory provision incorporates the 
statutory language in section 102(3)(B). For the reasons stated above 
in connection with section 102(3)(A), Treasury interprets the section 
102(3)(B) as another objective standard that establishes conclusive 
control for purposes of the Act. This standard is not a presumption and 
is not subject to rebuttal.
Controlling Influence and Rebuttable Presumptions
    In addition to the conclusive control provisions in section 
102(3)(A) and (B), the Act defines control to exist if, ``the Secretary 
determines, after notice and opportunity for hearing, that the entity 
directly or indirectly exercises a controlling influence over the 
management or policies of the other entity.'' Section 102(3)(C). In the 
interim

[[Page 41254]]

final rule, Treasury established several rebuttable presumptions for 
the purposes of a determination of controlling influence: (1) If a 
State has determined that an insurer controls another insurer; (2) if 
an insurer provides 25 percent or more of another insurer's capital (in 
the case of a stock insurer), policyholder surplus (in the case of a 
mutual insurer), or corporate capital (in the case of other entities 
that qualify as insurers); or (3) if an insurer, at any time during a 
Program Year, supplies 25 percent or more of the underwriting capacity 
for that year to an insurer that is a syndicate consisting of a group 
including incorporated and individual unincorporated underwriters.
    Section 50.5(c)(4) of the interim final rule provided an insurer 
with an opportunity for an informal hearing to rebut a controlling 
influence presumption through written submissions and, in addition in 
Treasury's discretion, by an informal oral presentation. Treasury 
subsequently issued a notice on March 25, 2003 (68 FR 15039, March 27, 
2003, ``Interim Guidance IV'') providing further guidance on the 
procedure for rebutting a presumption of controlling influence.
    In establishing several rebuttable presumptions in Section 
50.5(c)(3) of the interim final rule, Treasury had two key goals. One 
was to provide additional transparency about the factors that Treasury 
considers indicative of controlling influence to provide greater 
certainty to insurers prior to a final determination of control and 
thereby facilitate the calculation of insurer deductibles prior to 
presentment of a claim.
    The second was to enhance administrative efficiency given available 
time and other resources in this temporary Program.
    With regard to the second goal, we point out that, in the Act, 
Congress established a temporary backstop program with the expectation 
that Treasury would not build a large bureaucratic program structure, 
but instead would leverage off of the state insurance regulatory 
structure, where possible and appropriate. Unlike state insurance 
commissioners, or state or federal bank examiners, Treasury does not 
conduct regular on-site examinations of Program participants, nor does 
it routinely review acquisitions, mergers or other transactions of such 
insurers. Thus, Treasury does not have ready access to detailed 
information on the control relationships of insurers that is generally 
available to regulators that implement the control provisions of the 
BHCA, the SLHCA, or state insurance law.
    At this point, it is unclear to Treasury how many insurers fall 
outside section 102(3)(A) and (B) but may come within the controlling 
influence category. Rejecting the imposition of significant new 
regulatory reporting requirements on the property and casualty 
insurance industry, Treasury decided to utilize regulatory presumptions 
to accomplish these two goals and to implement the controlling 
influence provisions.
    Treasury received 6 comments, from insurers and from a large 
insurance industry trade group, taking exception to the rebuttable 
presumptions as presented in the interim final rule. These commenters 
objected on procedural and substantive grounds. In addition, one 
commenter supported, in principle, the rebuttable presumption process.
    Most of these commenters objected to the reliance on a state law 
determination of control in the first rebuttable presumption in the 
interim final rule. They contended that exclusive reliance on a state 
law determination, for purposes of a rebuttable presumption, was 
inappropriate given the varying state standards and the differences 
between the Act's definition of ``control'', and the definition of 
``control'' in the NAIC Model Law used by most states. Several 
commenters suggested that Treasury utilize specific guidelines or 
standards (such as the existence of a management agreement) instead of 
rebuttable presumptions.
    After consideration of these comments and the stated administrative 
goals, Treasury has decided to retain the use of rebuttable 
presumptions, with modifications. Use of the rebuttable presumptions 
provides increased certainty and transparency to insurers and others of 
the factors that Treasury considers indicative of a controlling 
influence. Rebuttable presumptions have been and are used successfully 
by other agencies in implementing nearly identical statutory 
definitions of ``control.'' Rebuttable presumptions also aid efficient 
implementation of the controlling influence determination process, 
given that Treasury does not have ready access to relevant information 
about the financial, managerial, policymaking and corporate structures 
of insurers. Moreover, a rebuttable presumption is not a final 
determination of controlling influence by Treasury. Under the final 
rule, insurers subject to rebuttable presumptions, and others that do 
not fall within the conclusive control provisions and wish to have a 
final determination of controlling influence, all have an opportunity 
for a hearing. Based upon the comments, and further consultation with 
NAIC, Treasury is revising the rebuttable presumptions to provide more 
detail and transparency concerning factors that Treasury will consider 
indicative of controlling influence and is using these factors in the 
rebuttable presumptions. For example, in response to several comments, 
no rebuttable presumption relies exclusively on a state law 
determination of control in the absence of the existence of at least 
one of the listed control factors. The final rule also adds the 
existence of at least one of the control factors to the other two 
presumptions (which are based on the provision of 25 percent corporate 
capital/ policyholder surplus, or the provision of 25 percent 
underwriting capacity to another insurer).
    In the final rule, if an insurer does not come within the 
conclusive control provisions of section 102(3)(A) or (B) (section 
50.5(c)(2)(i) or (ii) of the final rule), but at least two of the 
following control factors exists, then Treasury will presume 
controlling influence exists prior to a final determination unless and 
until rebutted by the insurer:

    [sbull] The insurer is one of the two largest shareholders of any 
class of voting stock;
    [sbull] The insurer holds more than 35 percent of the combined debt 
securities and equity of the other insurer;
    [sbull] The insurer is party to an agreement pursuant to which the 
insurer possesses a material economic stake in another insurer 
resulting from a profit-sharing arrangement, use of common names, 
facilities or personnel, or the provision of essential services to 
another insurer;
    [sbull] The insurer is party to an agreement that enables the 
insurer to influence a material aspect of the management or policies of 
another insurer;
    [sbull] The insurer would have the ability, other than through the 
holding of revocable proxies, to direct the votes of more than 25 
percent of the other insurer's voting stock in the future upon the 
occurrence of an event;
    [sbull] The insurer has the power to direct the disposition of more 
than 25 percent of a class of voting stock in a manner other than a 
widely dispersed or public offering;
    [sbull] The insurer and/or the insurer's representative or nominee 
constitute more than one member of the other insurer's board of 
directors;
    [sbull] The insurer or its nominee or an officer of the insurer 
serves as the chairman of the board, chairman of the

[[Page 41255]]

executive committee, chief executive officer, chief operating officer, 
chief financial officer or in any position with similar policymaking 
authority in another insurer;

    In addition, if a State has determined that an insurer controls 
another insurer, and at least one of the factors listed above exists, 
then Treasury will presume controlling influence exists unless and 
until rebutted by the insurer.
    Further, if an insurer provides 25 percent or more of another 
insurer's capital in the case of a stock insurer, policyholder surplus 
(in the case of a mutual insurer) or corporate capital (in the case of 
other entities that qualify as insurers), and at least one of the 
factors listed above exists, then Treasury will presume a controlling 
influence exists unless and until rebutted by the insurer.
    Finally, if an insurer, at anytime during the Program Year, 
supplies 25 percent or more of the underwriting capacity for that year 
to an insurer that is a syndicate consisting of a group including 
incorporated and individual unincorporated underwriters, and at least 
one of the factors in the above list exists, then Treasury will presume 
a controlling influence unless and until rebutted by the insurer.
    A few of the commenters objected to the second and third rebuttable 
presumptions in the interim final rule as inconsistent with the 
conclusive control provisions in section 102(3)(A) and (B). As a 
general matter, Treasury is directed by the Act to treat insurers 
comparably under the Program. Treasury views the provision by an 
insurer of 25 percent of an insurer's corporate capital (or 
policyholder surplus), or supplying of 25 percent of an insurer's 
underwriting capacity for the Program Year, to indicate the functional 
equivalent of ownership of 25 percent of voting securities. As the 
administrator of the Program, Treasury also seeks to prevent loopholes 
in the regulations and elsewhere that may create opportunities to avoid 
or greatly minimize an insurer deductible merely on the basis of an 
insurer's unusual corporate structure or arrangement where, in effect, 
the insurer exercises a controlling influence over another insurer in 
the same or similar manner as the more traditional corporate structures 
of other insurers. The controlling influence determination authority in 
section 102(3)(C) aids Treasury's efforts to treat insurers comparably 
and helps preserve the goals and effectiveness of the Program. As 
described below, the final rule provides insurers with an opportunity 
for a hearing and a final determination on controlling influence.
Opportunity for Hearing
    Section 102(3)(C) of the Act authorizes Treasury to make a 
determination that an insurer directly or indirectly exercises a 
controlling influence over the management or policies of another 
insurer, after notice and opportunity for hearing. The statutory 
language providing an opportunity for hearing does not require a formal 
hearing on the record. In the interim final rule, Treasury provided an 
opportunity for an informal hearing to any insurer that (1) does not 
come within the conclusive control provisions of section 102(3)(A) or 
(B) and (2) wanted to rebut a presumption of controlling influence. The 
informal hearing procedure requires an insurer to provide Treasury with 
relevant facts and circumstances concerning the relationship and in 
support of the insurer's contention that no controlling influence 
exists. The procedure also allows a supplementary oral presentation by 
the insurer, if deemed necessary by Treasury. Based on the information 
provided by the insurer, including any oral presentation, the factors 
listed in the regulation and other relevant facts and circumstances, 
Treasury would then make a final determination of whether a controlling 
influence exists.
    A few commenters contended that Section 554 of the Administrative 
Procedure Act (``APA''), 5 U.S.C. Sec.  554, requires Treasury to hold 
a formal hearing for insurers challenging determinations of entity 
control under section 102(3) of the Act. We do not agree. The APA's 
formal hearing requirements apply when a hearing on the record is 
required by statute. ``While the exact phrase `on the record' is not an 
absolute prerequisite to the application of formal hearing procedures, 
the Supreme Court has made clear that these provisions do not apply, 
unless Congress has clearly indicated that the `hearing' required by 
the statute must be trial-type hearing on the record.'' U.S. Lines Inc. 
v. Federal Maritime Commission, 584 F. 2d 519 (D.C. Cir 1978) (citing 
United State v. Florida East Coast R. Co., 410 U.S. 224, 234-38 
(1973)). The D.C. Circuit added that, in that case, the statute did not 
provide for a hearing ``on the record,'' and nothing in the terms of 
the statute or in its legislative history indicated that a trial-type 
hearing was intended. Id. Similarly, section 102(3)(C) of the Act does 
not require a hearing on the record and nothing in the language or 
history of the Act indicates that Congress intended Treasury to 
establish procedures and apparatus for formal trial-type hearings on 
the issue of controlling influence for purposes of this temporary 
Program.
    In response to the comments received, the final rule revises the 
interim final rule to provide greater transparency in the controlling 
influence determination process. The final rule includes regulatory 
notice of specific factors that Treasury considers indicative of a 
controlling influence, and the rebuttable presumptions in the interim 
final rule are revised to avoid reliance on state law determinations 
without other indicia of control. The final rule affords insurers an 
opportunity to request an informal hearing in which an insurer may 
submit all relevant information on the issue of controlling influence, 
whether to rebut a presumption or to otherwise obtain a final 
controlling influence determination from Treasury. As in the interim 
final rule, the final rule allows an oral presentation, where deemed 
necessary by Treasury to supplement the written submission. Treasury 
will base its final determination on the factors set forth in the final 
rule, on information provided to Treasury by the insurer and on other 
relevant facts and circumstances. Although the final rule sets no 
deadline for an insurer to request a hearing, Treasury encourages 
insurers that do not come within the conclusive control provisions but 
that are in a relationship or arrangement in which the control factors 
apply or exist to request a hearing as soon as possible if they wish to 
rebut the regulatory presumptions of controlling influence and obtain a 
final determination from Treasury of whether the relationship involves 
a controlling influence (and therefore control).
    Separately from the issuance of the interim final rule, Treasury 
solicited comment on a pro rata allocation method for control 
determinations under section 102(3)(C) of the Act, in situations in 
which multiple insurers each provide 25 percent or more of the capital 
of a stock insurer, policyholder surplus of a mutual insurer or 
corporate capital of other entities that meet the definition of insurer 
under the Act and in the interim final rule. The pro rata approach 
under consideration by Treasury would allocate premium on a pro rata 
basis in situations where there are multiple 25 percent owners. This 
approach is still under consideration by Treasury and may be proposed 
in connection with claims procedures.
    Treasury anticipates proposing within claims procedures at a later 
date that the controlling insurer will be the insurer that will be 
required to file any claim with Treasury for Federal payment under the 
Program and that this insurer

[[Page 41256]]

will receive the Federal payment that is to be distributed within the 
consolidated insurer group in accordance with distribution of risk 
within the consolidated insurer group.
    Treasury also solicited comment on various means to ensure the 
prompt distribution of the federal payment as appropriate to ensure 
that the purposes of the Program are not thwarted or evaded, and that 
the ultimate risk bearing entities are treated in an equitable manner, 
within the Act's requirements. Treasury will propose means of 
distribution of the federal payment in connection with the claims 
procedures at a later date.

C. Direct Earned Premium (Section 50.5.d) and Property and Casualty 
Insurance (Section 50.5.l)

    The Act requires that ``commercial property and casualty 
insurance'' that falls within the scope of ``insured loss'' and that is 
written by an ``insurer,'' is part of the Program, and thus eligible 
for Federal payments and also subject to other provisions of the Act. 
Losses arising from a certified act of terrorism that do not meet these 
requirements are not eligible for Federal payments under the Program. 
For those losses that are eligible, the amount of Federal payment that 
an insurer may receive is subject to the insurer's ``insurer 
deductible,'' which is determined by a calculation based on the 
insurer's ``direct earned premium''.
    In the interim final rule, Treasury initially looked to the Act's 
definition to ascertain the scope of commercial property and casualty 
insurance for purposes of the Program. Section 102(12) of the Act 
expressly includes several lines of insurance: excess insurance, 
workers' compensation insurance and surety insurance. It also expressly 
excludes several additional lines of insurance: (i) Federal crop 
insurance issued or reinsured under the Federal Crop Insurance Act or 
any other type of crop or livestock insurance that is privately issued 
or reinsured; (ii) private mortgage insurance as defined in the 
Homeowners Protection Act or title insurance; (iii) financial guaranty 
insurance issued by monoline financial guaranty insurance corporations; 
(iv) insurance for medical malpractice; (v) health or life insurance 
including group life insurance; (vi) flood insurance provided under the 
National Flood Insurance Act of 1968; and (vii) reinsurance or 
retrocessional reinsurance.
    In addition to these specific statutory inclusions and exclusions, 
Treasury needed to develop a uniform regulatory definition of 
commercial property and casualty insurance for purposes of the Program. 
Insurance is generally regulated by State law in the United States. 
After consulting with the NAIC and others, Treasury found no uniform or 
consistent definition of ``commercial property and casualty insurance'' 
among the States that could provide guidance or be used for purposes of 
the Program. In some States, a line of insurance may be considered as 
commercial; and, in other States, the same line of insurance may be 
considered as a personal line.
    The closest reference point that Treasury found for a uniform 
definition was the NAIC's Annual Statement's Exhibit of Premiums and 
Losses (``Statutory Page 14''). Therefore, the interim final rule 
incorporated the interim guidance issued at 67 FR 76206 that designated 
those commercial lines reported on specified lines of Statutory Page 14 
as commercial property and casualty lines of coverage to be included in 
the Program (subject to the Act's specific inclusions and exclusions). 
The lines so specified were: Line 1 (Fire); Line 2.1 (Allied Lines); 
Line 3 (Farmowners Multiple Peril); Line 5.1 (Commercial Multiple 
Peril--non-liability portion); Line 5.2 (Commercial Multiple Peril--
liability portion); Line 8 (Ocean Marine); Line 9 (Inland Marine); Line 
16 (Workers' Compensation); Line 17 (Other Liability); Line 18 
(Products Liability); Line 19.3 (Commercial Auto No Fault--personal 
injury protection); Line 19.4 (Other Commercial Auto Liability); Line 
21.2 (Commercial Auto Physical Damage); Line 22 (Aircraft--all perils); 
Line 24 (Surety); Line 26 (Burglary and Theft); and Line 27 (Boiler and 
Machinery). In making this determination Treasury considered the Act's 
definition of ``commercial property and casualty insurance'' and how it 
relates to the lines of coverage listed on Statutory Page 14, the 
Program structure, and what would be necessary to effectively 
administer the Program. In developing the interim final rule, Treasury 
consulted with the NAIC and others regarding State law and premium 
reports filed with insurance regulators in the respective States and 
with the NAIC.
    Section 102(4) of the Act defines ``direct earned premium'' to mean 
direct earned premium (DEP) for property and casualty insurance issued 
by any ``insurer'' for losses within the scope of ``insured loss.'' The 
interim final rule also clarified that premium information on the 
specified lines of Statutory Page 14 should be included in calculating 
an insurer's DEP only to the extent that coverage under the Program is 
provided for commercial property and casualty exposures. Therefore, 
policies (or portions of policies) not eligible for Federal payments 
under the Program, such as personal lines or other lines of coverage 
(such as medical malpractice) specifically excluded by the Act, should 
not go into the calculation of an insurer's DEP. Treasury's approach is 
designed to maintain a close correlation between the lines of 
commercial property and casualty insurance eligible for the Federal 
payments under the Program, and the amount of premiums for those 
coverages that actually go into calculating an insurer's DEP under the 
Program.
    Many policies have combined risk coverage (hybrid policies). Under 
some hybrid policies, some of the risks or lines are covered by the 
definition of commercial property and casualty insurance under the 
Program and some are not covered. To address these situations, the 
interim final rule allows (but does not require) an insurer to allocate 
a portion of the premium (i.e. that portion for covered lines or risks) 
in calculating an insurer's DEP under the Program. If an insurer does 
not choose to allocate its hybrid policy premiums in this manner, then 
the entire DEP reported on the specific lines of Statutory Page 14 must 
go into its DEP calculation, and also, potentially, into the recoupment 
base for that insurer. Treasury has not yet issued rules or procedures 
governing any potential recoupment under section 103(e)(7) of the Act 
or concerning the surcharges required by section 103(e)(8) of the Act. 
However, it is Treasury's expectation that an insurer's policies (or 
portions of policies) that go into calculating an insurer's DEP would 
be the same policies (or portions of policies) that go into determining 
an insurer's recoupment base.
    Instead of issuing a new reporting requirement or mandating a 
specific allocation formula for hybrid policies, Treasury has suggested 
several methods that insurers may use in adjusting and calculating 
their DEP under the Program:

    (1) For policies with predominant personal line coverages, but 
where the premiums might also cover a portion for coverage of 
commercial risks, Treasury indicated that a policy would be 
considered personal, and not included in DEP, if the commercial 
portion was incidental (less than 25 percent of the total premium). 
If the commercial coverage portion represented more than 25 percent 
of the total premium, then the company should allocate the 
appropriate portion of the premium as commercial to be included in 
DEP.
    (2) For policies written by insurers required to participate in 
the Program, but for which the premiums are not reported on 
Statutory Page 14 (e.g. certain county or town

[[Page 41257]]

mutuals), the interim final rule suggested other methods by which 
adjustments could be made by the insurer to calculate its DEP. 
Specific methods were suggested in the interim final rule for county 
or town mutual insurers, eligible surplus line insurers, and 
federally approved insurers.
Included Versus Excluded Lines of Coverage in General
    Several commenters were uncertain about whether the interim final 
rule's list of commercial lines as reported on the specified lines of 
Statutory Page 14 was exclusive or merely illustrative. Their 
uncertainty appears to arise from use of the word ``includes'' in 
section 50.5(l) of the interim final rule that property and casualty 
insurance (``includes commercial lines within the following lines of 
insurance.'') These commenters suggested that Treasury clarify whether 
it intended for the list to be exclusive, or identify those lines of 
business that are excluded.
    As previously noted, Treasury consulted with the NAIC and others 
concerning the definition of commercial property and casualty 
insurance. Finding no uniform or consistent definition of the term, 
Treasury determined that the NAIC's Statutory Page 14, provided the 
best available point of reference--not only for identifying the lines 
of coverage for the Program, but also for guidance in determining an 
insurer's DEP for those lines of coverage. Treasury intended that the 
list of specified lines on Statutory Page 14 would be exclusive, and 
premiums reported on other lines would not be part of the Program. The 
final rule revises the previous language to clarify this.
    In its comment on the interim final rule, the NAIC suggested 
Treasury should add the following language from the Act: ``* * * or any 
other type of crop or livestock insurance that is privately issued or 
reinsured'' to section 50.5(l)(2)(i) of the interim final rule. The 
NAIC commented that such an addition would prevent any uncertainty 
concerning the treatment of crop or livestock coverage that is not part 
of the Program.
    In developing the interim final rule, Treasury understood based on 
available information that privately issued or reinsured crop or 
livestock insurance was reported under Multiple Peril Crop insurance on 
Line 2.2 of Statutory Page 14. It is now Treasury's understanding, 
based on additional information from the NAIC, that privately issued or 
reinsured crop or livestock insurance is generally reported as Allied 
Lines insurance on Line 2.1 of Statutory Page 14. Therefore, in the 
final rule, Treasury has added the specific statutory language and the 
appropriate reporting lines of Statutory Page 14 to section 
50.5(l)(2)(i) of the final rule.
    The Act and interim final rule exclude Federal flood insurance 
which is a line of single peril natural disaster insurance. Similarly, 
the interim final rule excluded earthquake insurance reported on 
Statutory Page 14. Treasury received no comments on the interim final 
rule regarding the treatment of any single peril natural disaster 
insurance. However, in light of information subsequently received in 
response to Treasury's proposed rule concerning state residual market 
insurance entities, Treasury is considering issuing a proposed rule 
specifically requesting comment on the inclusion or exclusion in the 
Program definition of commercial property and casualty insurance of 
other single peril natural disaster insurance, such as stand alone, 
single peril wind insurance, if reported on included lines of Statutory 
Page 14.
Personal Lines
    One commenter asserted that Treasury's determination that 
commercial coverage is incidental if its applicable premium is less 
than 25 percent of a hybrid personal/commercial lines policy premium 
would have adverse effects, suggesting that this could cause insurers 
to force incidental coverages off such personal policies, such as 
Homeowners insurance. Others commented that the incidental rule should 
only be used as a threshold calculation, or that insurers should be 
allowed to allocate personal/commercial hybrid policy premiums 
according to their normal business methods and procedures. One 
commenter contended that Homeowners policies should not be included in 
the Program regardless of the percentage of commercial premium, and 
that allocation of commercial/personal premium would not be appropriate 
for Farmowners or Farm Properties policies since they are both 
considered by some states to be commercial lines.
    As discussed above, Treasury has suggested methods for the 
allocation of commercial portions of premiums in hybrid policies in an 
attempt to aid insurers by simplifying the adjustment and calculation 
of an insurer's DEP. If the appropriate premium was included in the DEP 
and the other required conditions for Federal payment are met, 
commercial portions of hybrid policies are covered by the Program. The 
25 percent incidental provision was included in the interim final rule 
by Treasury to provide a threshold, so that those insurers that did not 
want to calculate an actual allocation of premiums on small incidental 
amounts of coverage, and did not intend to perfect their right to 
recover Federal payment on claims paid on such incidental commercial 
coverage, could then exclude those premiums from their DEP calculation 
if they wished to do so. In order to clarify this in the final rule, 
and to make it clear that an insurer can chose to allocate premiums 
below that amount, Treasury has modified the language in section 
50.5(d)(1)(i-iv) of the interim final rule.
Personal Versus Commercial Lines
    Four commenters asked for clarification with regard to whether 
coverage for one to four family rental units is personal or commercial 
insurance. One pointed out that such coverage is generally written 
under a Dwelling Properties insurance policy (which is considered to be 
a personal line). However, in other situations, under four family 
rental units are written as a commercial coverage. Treasury's 
designation in section 50.5(l)(1) of the interim final rule of the 
specific lines of commercial coverage from Statutory Page 14 was made, 
in part, to provide greater clarity for insurers in cases where various 
States may not treat certain types of coverage consistently as 
commercial coverage. In general, it is our understanding that premium 
income for one to four family rental unit insurance coverage generated 
from policies insuring property owned for business purposes (e.g. to 
generate income for the property owner) is reported on Lines 1 (Fire) 
2.1 (Allied Lines) and 17 (Other Liability) of Statutory Page 14. Based 
on section 50.5(l)(1) of the final rule, such insurance coverage would 
be considered commercial property and casualty insurance coverage that 
is included in the Program. Treasury also addressed the issue of 
personal lines in the context of adjustments to DEP in section 
50.5(d)(1) of the interim final rule and through adjustments to that 
section in the final rule. To the extent that one to four family rental 
units have a personal coverage component, the suggested methods of 
adjusting and calculating the appropriate DEP may be used by an 
insurer.
    Another commenter stated that farm residences should be considered 
commercial. For purposes of the Program, Treasury does not agree, but 
considers any owner occupied residence to be basically a personal 
coverage. Therefore, where a farm residence is covered in a hybrid farm 
policy, the suggested methods of adjusting and

[[Page 41258]]

calculating the appropriate DEP can be utilized.
Other Non-Covered Lines
    One commenter suggested that Treasury consider extending the 
commercial/personal allocation to other hybrid contracts containing 
premiums for excluded lines of coverage such as Medical Malpractice in 
combination with Hospital General Liability coverage. Such insurance 
lines are not within the scope of the definition of commercial property 
and casualty insurance of the Act and are not included in the Program. 
Therefore, premiums in hybrid policies applicable to those exceptions 
do not need to be included in an insurer's DEP. Any allocation of 
premium for such exclusions should be calculated by insurers either 
using methods suggested by Treasury, or other similar methods in 
accordance with the insurer's normal business methods and procedures.
    Another commenter suggested that Treasury should exclude premiums 
reported on the specified lines on Statutory Page 14, but earned from 
retroactive insurance programs such as certain Novations, Adverse 
Development Cover, or Loss Portfolio Transfer Programs. Retroactive 
insurance is insurance covering only events that occurred prior to the 
inception date of the policy, but there appears to be no 
differentiation in the Statutory Page 14 reporting to indicate that 
such premiums relate to risks from prior years. Treasury takes the 
position that such retroactive premiums are not within the time period 
of the definition of ``insured losses'' if they are associated with 
losses that occurred prior to enactment and the effective date of the 
Act (November 26, 2002). Such premium income may be removed in an 
insurer's calculation of its DEP. Treasury has modified the language in 
the final rule (section 50.5(d)(1)(i-iv) of the interim final rule) to 
clarify the nature of the allocation provisions with regard to hybrid 
policies and other policies with coverage of losses outside the scope 
of insured losses under the Program.
Fidelity Insurance
    Treasury did not include Line 23 (Fidelity) of Statutory Page 14 in 
its list of specified lines considered to be commercial ``property and 
casualty insurance'' covered under the Act in its initial interim 
guidance or in its interim final rule. Comments were received from five 
different commenters, two in support of Treasury's position, and three 
in opposition.
    One of the commenters advocating the inclusion of fidelity 
insurance argued that it can also have a distinct property component as 
in cases where coverage is provided for the destruction of money and 
securities, such as those held in bank or corporate vaults. The 
commenter pointed out that it had losses associated with fidelity 
policies arising from the September 11 terrorist attacks totaling some 
$20 million due to the destruction of cash on the premises of its 
insured. Another commenter emphasized that fidelity has always been 
considered by state regulators, insurers, and policyholders to be a 
commercial property and casualty line.
    Those opposed to the inclusion of fidelity insurance contend that 
it is a line of insurance that by itself faces low exposure to 
terrorism losses. One commenter had indicated previously that it had 
provided terrorism coverage for all of its fidelity policies prior to 
the Act, but needed to confirm whether fidelity insurance was covered 
under the Program in order to know how much reinsurance coverage would 
be needed to cover its deductible exposure. Commenters also pointed out 
that if Treasury were to reverse itself and now include fidelity 
insurance as a covered line, problems associated with the timing of the 
disclosure requirements and other issues would need to be addressed.
    After considering the comments, Treasury has determined that 
fidelity insurance is not covered under the Act, and thus has not 
inserted Line 23 (Fidelity) in the specified lines on Statutory Page 14 
that make up commercial property and casualty insurance covered under 
the Act. In making the overall determination of what lines of coverage 
are included and excluded in the definition of property and casualty 
insurance, Treasury relied on specific guidance provided by Congress in 
section 102(12) of the Act. Section 102(12)(A) expressly includes 
excess insurance, workers' compensation insurance, and surety 
insurance. Traditional surety insurance and fidelity insurance share a 
similar characteristic in that they guarantee against losses associated 
with the performance of third parties. Treasury maintains the position 
that if Congress had intended fidelity insurance to be covered, it 
would have specifically included it as it did surety insurance. 
Treasury relied on a similar rationale for excluding group accident 
coverage, a line of coverage that shares some of the same risk 
characteristics as workers' compensation coverage, from the list of 
specified lines on Statutory Page 14 that make up commercial property 
and casualty insurance covered under the Act.
    Through the comment process, Treasury has been made aware that the 
traditional fidelity insurance coverage has been expanded in recent 
years by some insurers to include coverage to non-employee 
``insiders,'' as well as to property coverage for loss of firm assets, 
including cash, due to crime. Although Treasury is making no change to 
the interim final rule definition with regard to fidelity in the final 
rule, Treasury will continue to evaluate this wrap-around or hybrid-
type coverage which could include other types of coverage that are 
generally covered by the Act, but not reported as such. In this regard, 
Treasury will evaluate whether and how the designation of included and 
excluded lines has affected the availability of coverage for terrorism 
insurance risk, and whether any further change in the Program might be 
warranted.
Other DEP-Related Comments
    On behalf of county or town mutual insurers that do not report on 
Statutory Page 14, one commenter suggested that Treasury's suggestion 
that they convert direct premium or other types of payments such as 
assessments or contributions into DEP, would lead to inconsistencies in 
the Program because states have varying reporting requirements. The 
result would be that DEPs would vary significantly from state to state, 
which would be ``bad from a public policy perspective, but leaves 
insurers on uncertain ground despite their best good faith efforts at 
compliance.'' Treasury has consulted with the NAIC on this issue and we 
understand that the NAIC plans to develop a recommended conversion 
method that States in turn could recommend to county or town mutual 
insurers.
    Another commenter requested that Treasury give insurers assurance 
that ``fronted'' premiums received by an insurer would not be included 
in DEP and thus raise its deductible, if the insurer assuming the risk 
(captive or otherwise) is also an insurer under the Program. The 
commenter explained that ``fronting'' is a credit enhancement procedure 
that is sometimes employed by business customers and their insurers to 
expand available insurance capacity, and is recognized by state 
regulators. However, fronting arrangements are not addressed in the 
Act, and the Act does not appear to provide any basis to exclude 
``fronted'' premiums from DEP. If one insurer ``fronts'' for another by 
receiving premiums but passes the risk to another,

[[Page 41259]]

it remains the ``insurer'' under the Act and the premiums it receives 
become part of its DEP. This is not unlike situations where primary 
insurers report DEP on policies that they subsequently reinsure, and 
reinsurance is specifically excluded from the Act. Therefore, Treasury 
will not provide assurance that fronted premiums will not be included 
in DEP.

D. Insured Loss (Section 50.5.e)

    Treasury incorporated the statutory definition of ``insured loss'' 
found in section 102(5) of the Act in section 50.5(e)(1) of the interim 
final rule. Section 50.5(e)(2) of the interim final rule clarified the 
meaning of insured loss as it relates to section 102(5)(B) of that Act 
as follows:
    (i) A loss that occurs to an air carrier (as defined in 49 U.S.C. 
40102), to a United States flag vessel, or a vessel based principally 
in the United States, on which United States income tax is paid and 
whose insurance coverage is subject to regulation in the United States, 
is not an insured loss under section 102(5)(B) of the Act unless it is 
incurred by the air carrier or vessel outside the United States.
    (ii) An insured loss to an air carrier or vessel outside the United 
States under section 102(5)(B) of the Act does not include losses 
covered by third party insurance contracts that are separate from the 
insurance coverage provided to the air carrier or vessel.
    One commenter took exception to Treasury's clarification that such 
extraterritorial insured third party losses to United States air 
carriers and vessels are not insured losses, and cited legislative 
history of the Act to indicate an intent on the part of Congress to 
provide extraterritorial coverage to United States air carriers and 
vessels without limitation.
    After reviewing the comments including the legislative history 
cited by the commenter, Treasury has determined not to change the 
position it took in the interim final rule. Therefore, for purposes of 
the Program, an insured loss is ``any'' loss, including a third party 
liability loss, if it occurs within the geographic boundaries of the 
United States; but, if the loss occurs outside of the geographic 
boundaries of the United States (extraterritorial) to a United States 
air carrier or vessel, then only that portion of the loss ``to'' that 
air carrier or vessel is an insured loss eligible for the backstop. To 
further clarify, ``to'' in this context means insured losses that are 
incurred by United States air carriers and vessels (e.g., through 
United States air carriers' or vessels' property and liability 
insurance coverage), not losses that are incurred by other entities 
that are covered by third party insurance contracts that are separate 
from the insurance coverage provided to the air carrier or vessel.
    Treasury's position is consistent with how third party liability 
losses are generally treated under the Program (including how such 
losses are treated for foreign air carriers and foreign flag vessels) 
in that such losses would be considered insured losses if they are 
incurred within the geographic scope of the United States. The 
extension of coverage provided to United States air carriers and 
vessels under the Act is related directly to those entities and their 
potential insurance exposures, which are fully covered under the 
interim final rule. Treasury does not believe that granting broader 
third party indemnification on an extraterritorial basis and creating 
greater exposure for United States taxpayers is consistent with 
congressional intent for the Program.

E. Insurer (Section 50.5.f)

    The interim final rule incorporated the statutory definition of 
``insurer'' as generally reflected in previously issued interim 
guidance that was published at 67 FR 78864. In accordance with section 
103(a)(3) of the Act, each entity that meets the definition of 
``insurer'' under the Act as implemented by Treasury must participate 
in the Program. To participate in the Program, an entity, including an 
``affiliate'' of an insurer (see further discussion in part B of this 
preamble), must itself meet all of the requirements of section 
102(6)(A) and (B) and, as the Treasury may prescribe, (C). This means 
that to be an insurer, an entity must: (1) Fall within one of the 
categories in section 102(6)(A) described below; (2) receive direct 
earned premiums as required by section 102(6)(B); and (3) meet any 
additional criteria established by Treasury pursuant to section 
102(6)(C).
    The categories of insurers in Section 102(6)(A) that were directly 
addressed in the interim final rule include:

    (i) Licensed or admitted to engage in the business of providing 
primary or excess insurance in any State (``State'' includes the 
District of Columbia and territories of the United States);
    (ii) Not so licensed or admitted, but is an eligible surplus 
line carrier listed on the Quarterly Listing of Alien Insurers of 
the National Association of Insurance Commissioners;
    (iii) Approved for the purpose of offering property and casualty 
insurance by a Federal agency in connection with maritime, energy or 
aviation activity; and
    (iv) A State residual market insurance entity or State workers' 
compensation fund.

    The interim final rule provides that an entity that falls within 
two categories will be considered by Treasury to fall within the first 
category that it meets under section 102(6)(A)(i)-(iv). All entities 
that are licensed or admitted by a State's insurance regulatory 
authority, such as captive insurers, risk retention groups, and farm 
and county mutuals, fall under section 102(6)(A)(i).
    The interim final rule also specified that the scope of insurance 
coverage (insured losses) under the Program for federally approved 
insurers under section 102(6)(A)(iii) is only to the extent of federal 
approval of the commercial property and casualty insurance coverage 
approved by the Federal agency in connection with maritime, energy or 
aviation activity. Therefore, insured losses under other insurance 
coverage that may be offered by a federally approved insurer under 
section 102(6)(A)(iii) would not be covered by the Program.
    In addition to falling within a category in section 102(6)(A), an 
``insurer'' must meet the requirements in section 102(6)(B) unless 
statutorily excepted. Therefore, an ``insurer'' must receive ``direct 
earned premiums'' (as defined) on any type of commercial property and 
casualty insurance (as defined). In addition, an ``insurer'' must meet 
any additional criteria prescribed by Treasury under section 102(6)(C). 
The interim final rule did not prescribe additional criteria under 
section 102(6)(C). However, under a separate notice of proposed 
rulemaking published at 68 FR 9814 Treasury solicited public comment on 
whether the Secretary should prescribe other criteria for certain 
insurers pursuant to the authority provided by section 102(6)(C) and, 
if so, what criteria Treasury should prescribe.
Captive Insurers
    Treasury received six comments that addressed the treatment of 
captive insurers under the Program. The majority of these objected to 
Treasury's mandatory inclusion of captive insurers as a State licensed 
or approved insurer under Section 102(6)(A)(i). These commenters 
suggested that captives should be allowed to opt-in to the Program as 
opposed to being mandatory participants. In support of this position, 
commenters offered the following points: many captive insurers were 
created to operate outside of the traditional insurance marketplace, 
and thus they should not be treated as other insurance companies; some 
types of commercial coverage provided by

[[Page 41260]]

captive insurers may have little or no exposure to terrorism risk, thus 
captive insurers should not be subject to the Act's potential 
recoupment provisions; and mandatory participation requirements for 
captives, in particular the Act's potential recoupment provisions, 
could negatively affect the formation of domestic captives as companies 
may find setting up off-shore captives to be advantageous.
    Treasury received one comment letter in support of treating State 
licensed or admitted captive insurers as mandatory participants under 
the Program. Treasury also received a comment letter from the NAIC that 
described a split view on the part of State regulators over mandatory 
participation requirements for state-licensed or admitted captive 
insurers. Although the NAIC's comments included some of the points 
noted above, the NAIC also acknowledged that allowing opt-in treatment 
for captive insurers could allow for adverse selection and could set a 
bad precedent as other entities would seek similar treatment. In 
addition, the NAIC noted that ``when pressed for a decision regarding 
whether a complete inclusion is better than a complete exclusion for 
captives, regulators generally agree that inclusion is preferable.''
    Treasury disagrees with the suggestion in some comments that 
captive insurers should be provided with opt-in treatment. Requiring 
mandatory participation for State licensed or admitted captive insurers 
is in accord with the plain language of section 102(6)(A)(i) where no 
distinction is made regarding types of State licensed or admitted 
insurers. This treatment also furthers other statutory objectives such 
as ensuring that policyholders have widespread access to the terrorism 
risk insurance benefits of the Program, and spreading potential costs 
of the Program associated with any federal loss-sharing payments. For 
example, the cost spreading provisions in connection with recoupment as 
required by section 103(e)(7) and in connection with surcharges as 
required by section 103(e)(8) are to be applied to all commercial 
property and casualty policyholders.
    As it relates to the overall administration of the Program, 
allowing for opt-in treatment would create the potential for adverse 
selection within the Program as those captive insurers that perceived 
themselves to have higher risk to terrorism would likely opt-in to the 
Program while others with lower perceived risks would likely opt-out of 
the Program. A major consequence of this type of action would be the 
potential policyholder recoupment base would be reduced, which in turn 
would increase the potential recoupment costs on the policyholders of 
other mandatory participants in the Program.
    Treasury does not support the view set forth by some of the 
commenters that limited risk exposure to terrorism of the coverage 
provided by some captive insurers is a reason to provide for an opt-in 
option. This same type of argument could be made by any number of 
insurers and policyholders that feel they have limited risk exposure to 
terrorism. Because the recoupment base applies to all commercial 
property and casualty policyholders, potentially limited risk exposure 
to terrorism is not a valid reason to limit participation under the 
Program.
    Treasury also finds little or no support for assertions that the 
potential recoupment provisions of the Act would have an adverse effect 
on U.S. domestic captive jurisdictions. It should be noted that any 
such recoupment would only be imposed in the case of a terrorist event 
that triggers Federal payments under the Program, and that any 
potential recoupment is limited to a maximum 3 percent of premium 
surcharge in any given year. Although it is possible that certain 
state-licensed or admitted captive insurers would find these potential 
costs unattractive and search out other jurisdications, other state-
licensed or admitted captive insurers would recognize the benefits of 
Program participation. Therefore, the ultimate effect on any particular 
captive insurance jurisdiction is difficult to quantify.
    In addition to the general comments on providing captive insurers 
opt-in treatment under the Program, two members of Congress offered the 
view that, in the case of captives, the Act must be read in the context 
of section 103(f). This section authorizes (but does not require) 
Treasury to apply the provisions of the Act to ``other'' classes or 
types of captive insurers. These commenters believe that the use of the 
word ``other'' in section 103(f) is a grammatical error in the Act and, 
for that reason, they contend that Treasury's interim final rule does 
not reflect the intent of Congress to create a process through which 
captive insurers could be integrated into the Program on an opt-in 
basis.
    As previously noted, Section 102(6)(A)(i) of the Act mandates 
participation by insurers that are ``licensed or admitted'' by a State 
to engage in the business of providing property and casualty insurance. 
Following this state-licensed or admitted category in the definition of 
``insurer'', is a category for ``any other entity described in Section 
103(f), to the extent provided in the rules of the Secretary issued 
under section 103(f).'' (emphasis added). Section 103(f) of the Act 
gives discretionary authority to the Secretary to add to the Program, 
``other classes or types of captive insurers * * *'' (emphasis added). 
A key principle of statutory construction is that words in a statute 
must be read to have meaning unless the reading of those words produces 
an absurd result. The bar for interpreting words in a statute to be a 
legislative error is extremely high. If the words in a statute can be 
construed as having a rational meaning, then the rules of statutory 
construction preclude an interpretation that they were enacted by 
Congress in error.
    In this case, the word ``other'' in these two provisions can be 
easily construed as referring to captives other than those that are 
State-licensed or admitted. Adopting the interpretation of legislative 
error suggested by the two commenters would require the conclusion that 
Congress erred in two places in the Act. In addition, we found nothing 
in the Act's language or legislative history that would support 
treating state-licensed or admitted captives differently from other 
state-licensed or admitted insurers for purposes of the Program. For 
these reasons, the definition of ``insurer'' in the final rule, as in 
the interim final rule, includes those entities, including any 
captives, that are state-licensed or admitted. Therefore, if a captive 
is not state licensed or admitted, then it is not in the Program, 
unless subsequently brought in by any rules issued under section 
103(f).
Pooling Arrangements and Joint Underwriting Associations
    Treasury received comments requesting clarification on how 
insurance pooling arrangements, such as joint underwriting 
associations, are treated under the Act. These commenters found the 
interim final rule and previously issued interim guidance to be unclear 
with regard to (a) whether such entities are insurers under the Act, 
and (b) if they are insurers, the category of insurer under which they 
would belong (e.g., State licensed or admitted, or federally approved). 
These commenters suggested that Treasury either clarify that State 
authorized joint underwriting associations are State licensed and 
admitted insurers under the Act, or directly inform a joint 
underwriting association of its status under the Act. Some commenters 
also

[[Page 41261]]

suggested that Treasury's treatment of federally approved insurers (see 
next section) should be broadened to include all types of coverage 
provided by this category of insurers.
    The issue of Treasury's treatment of federally approved insurers 
is, for the most part, separable from the fundamental question of 
whether joint underwriting associations are State licensed or admitted 
insurers. With regard to joint underwriting associations operating in 
the United States, if such entities are considered to be State licensed 
or approved insurers, then they must participate in the Program as 
insurers in this category under the Act. The federally approved issue 
is not reached in this situation.
    Treasury acknowledges that certain joint underwriting associations 
and other entities may not fit neatly within what is traditionally 
thought of as the ``State licensed or admitted'' market. To provide 
more clarity in the category of ``State licensed or admitted,'' the 
final rule provides that, with regard to joint underwriting 
associations and other pooling arrangements, such entities must meet 
all three of the following criteria to be an insurer under the Program:

    [sbull] An entity must have gone through a process to be licensed 
or admitted to engage in the business of providing primary or excess 
insurance that is administered by the State's insurance regulator. If 
such a process differs from what a State's insurance regulator 
generally applies to insurance companies, such a process should be 
similar in scope and content;
    [sbull] An entity must generally be subject to State insurance 
regulation (including financial reporting requirements) applicable to 
insurance companies within the State; and
    [sbull] An entity must be managed independently from other insurers 
that are participating in the Program.
    If a joint underwriting association, pooling arrangement or other 
entity is still uncertain of its status as State licensed or admitted 
insurers under the Program, such entities are encouraged to provide 
Treasury with an explanation of their particular circumstances and how 
the criteria listed above apply or do not apply. After reviewing this 
information, Treasury will directly contact such entities regarding 
their status under the Program. These Treasury decisions also will be 
made available to the public.
Federally Approved Insurers
    Treasury received fifteen comments regarding Treasury's treatment 
of federally approved insurers in the interim final rule. Under the 
interim final rule, the scope of insurance coverage (``insured 
losses'') for federally approved insurers is only to the extent of 
federal approval of the commercial property and casualty insurance 
coverage approved by the Federal Agency in connection with maritime, 
energy or aviation activity. Most of these commenters contended that 
Treasury's interpretation regarding the scope of insurance coverage 
under the Program for federally approved insurers was too narrow and 
that such an interpretation was counter to the intent of Congress.
    The maritime shipping industry and their mutually owned insurance 
companies (International Group of Protection and Indemnity Clubs) 
raised particular concerns that Treasury's interpretation regarding 
federally approved insurers would unduly limit access to the Program 
for the United States and world shipping fleets. As it relates to the 
maritime industry, the United States Maritime Administration (MARAD) 
has in place various mechanisms to approve underwriters providing 
insurance coverage for vessels built or operated with subsidy or 
covered by vessel obligation guarantees issued pursuant to Title XI of 
the Merchant Marine Act, 1936, as amended. (46 U.S.C. 1271-1279). 
Commenters noted that vessels built with Title XI subsidies or 
guarantees make up a small portion of the United States flag fleet. 
Therefore, to the extent that the portion of United States flag fleet 
not subject to MARAD insurance approval was relying solely on federally 
approved insurers for their insurance coverage, such vessels would 
currently have limited access to federal payments under the Program. 
Commenters also noted that a similar situation exists to the extent 
that foreign flag vessels are currently relying on federally approved 
insurers for their insurance coverage.
    MARAD has set forth eligibility criteria for underwriters of marine 
hull insurance at 46 CFR 249.4 and 249.5. Broadly speaking, to be 
eligible under the MARAD program an insurer must be: licensed to do 
business in the United States; an underwriter at Lloyd's; a member 
company of the Institute of London Underwriters; or specifically 
approved by MARAD. There is a fair degree of overlap between MARAD's 
eligibility criteria for Marine Hull insurers and the definition of 
``insurer'' under the Act. Under sections 102(6)(A)(i-iv), the Act 
includes entities that are State licensed or admitted and entities that 
are listed on the Quarterly Listing of Alien Insurers of the NAIC as 
``insurers'' under the Act. These insurers participate in the Program 
for all coverages that fall within the definition of ``commercial 
property and casualty'' within the scope of the definition of ``insured 
loss'' under the Act. Thus, insurers that fall within the first three 
of MARAD's eligibility criteria are for the most part already eligible 
insurers under the Act (although there may be some uncertainty 
regarding the Institute of London Underwriters as it is our 
understanding that this group has merged with another organization to 
form the International Underwriting Association). For insurers that 
MARAD specifically approves as Marine Hull underwriters, based on the 
most recently available lists (NAIC's Quarterly Listing of Alien 
Insurers--April 1, 2003, and MARAD Approval List--May 16, 2003), 13 out 
of the 18 MARAD approved insurers were listed on the NAIC's Quarterly 
Listing of Alien Insurers, and 1 of the 5 insurers that were not 
currently on the NAIC's Quarterly Listing of Alien Insurers was on the 
list in recent years. Thus, as it relates to Marine Hull underwriters, 
Treasury's interpretation with regard to federally approved insurers 
does not appear to have caused major disruptions in insurance coverage. 
Treasury also notes that we did not receive any comments directly from 
Marine Hull underwriters objecting to the treatment of federally 
approved insurers.
    MARAD, as part of its general insurance information and 
requirements, also accepts the International Group of Protection and 
Indemnity Clubs (International Group) as providers of liability 
coverage. The International Group is made up of 13 independent 
Protection and Indemnity Clubs. Each club is independently owned by its 
ship-owner members. The International Group allows for the individual 
clubs to share claims, purchase reinsurance as a group, and coordinate 
on maritime public policy issues. Unlike the case with MARAD-approved 
hull insurance underwriters, of the 13 members of the International 
Group only two qualify as eligible insurers under the Act in a category 
separate from the federally approved insurer category. Hence, the bulk 
of the comments Treasury received from the maritime community focused 
on the treatment of the International Group under the interim final 
rule.
    Treasury also received similar comments from the offshore oil and 
gas drilling industry objecting to the interim final rule's 
interpretation regarding the participation of federally approved 
insurers under the Act. The Department of Interior's Minerals 
Management Service approves insurance coverage as one method covered 
offshore facilities can use for demonstrating oil spill

[[Page 41262]]

financial responsibility, and the Minerals Management Service has 
procedures in place (30 CFR 253.29) regarding eligibility criteria 
under their program. To further understand the oil and gas drilling 
industry's concerns, the Minerals Management Service provided Treasury 
with a list of insurers that had been approved to provide coverage 
under the oil spill financial responsibility program. Treasury, in 
consultation with the NAIC, identified 102 out of 105 insurers that 
were approved by the Minerals Management Service as being eligible 
participants under the Act because they either were State licensed or 
admitted or were on the NAIC's Quarterly Listing of Alien Insurers. 
Thus, as it relates to insurance coverage for offshore drilling 
interests, Treasury's interpretation with regard to federally approved 
insurers does not appear to have caused disruptions in insurance 
coverage. Treasury did not receive any comments from insurers providing 
coverage for offshore drilling interests objecting to the treatment of 
federally approved insurers.
    Treasury also received comments regarding the treatment of 
federally approved insurers under the Department of Labor's authority 
to authorize workers' compensation coverage under the Longshore and 
Harbor Worker's Act (33 U.S.C. 901) and its extensions. The Department 
of Labor authorizes both insurance carriers (20 CFR 703.101) and self-
insurers (20 CFR 703.301) for the purpose of meeting the requirements 
of the Longshore and Harbor Worker's Act. Insurers that are authorized 
under 20 CFR 703.101 clearly meet the criteria of section 50.5(f)(1)(C) 
of being ``approved or accepted for the purpose of offering property 
and casualty insurance by a Federal agency in connection with maritime, 
energy, or aviation activity.'' In this regard a key element is that 
such insurers are ``offering'' insurance coverage.
    In contrast, the Department of Labor and other Federal agencies may 
approve self insurance as an acceptable means of meeting the financial 
requirements or responsibilities of their respective programs. In this 
regard, self insurance is just another means of establishing financial 
responsibility and is not a substitute for the requirement that 
insurance is being ``offered.'' Thus, self insurance arrangements 
approved by Federal agencies are not included under section 
50.5(f)(1)(C). However, Treasury may consider self insurance 
arrangements for inclusion in the Program through Treasury's general 
authority to consider such arrangements under section 102(6)(A)(v) of 
the Act, which is also described in section 50.5(f)(1)(E) of the 
interim final rule. Treasury has not yet taken any action regarding the 
inclusion of self insurance arrangements under the Act.
    In addition to the general concerns noted above regarding the 
treatment of federally approved insurers, airline insurance pools and 
other commenters (e.g., those addressing issues related to nuclear 
insurers) noted that Federal approval may be for amounts of insurance 
coverage that is less than what is normally provided by the insurance 
industry. For example, commenters noted that standard airline liability 
limits are $1.5 billion, while the Federal Aviation Administration's 
required liability coverage is much lower. Likewise, commenters noted 
that policy limits on nuclear property coverage generally exceed the 
mandated requirements of $1.06 billion per licensee.
    After consideration of these comments by the maritime industry and 
their mutually owned insurance companies and others, Treasury has 
decided not to make any changes to the interim final rule's treatment 
of federally approved insurers for the following reasons.
    First, the interim final rule's treatment of federally approved 
insurers is in accord with the statutory language of the Act in section 
102(6)(A)(iii) (``approved for the purpose of offering property and 
casualty insurance by a Federal agency in connection with maritime, 
energy or aviation activity''). While some commenters pointed to 
congressional intent supporting a broader interpretation, no express 
language in the Act's legislative history supports this view. Moreover, 
Treasury's treatment of federally approved insurers in the interim 
final rule is consistent with the underlying reason for the Federal 
government providing Federal agencies with the authority to approve 
insurers. In general, the Federal government provides agencies with 
approval authority to address important national interests or to 
protect the Federal government's interests. For example, the Federal 
government requires that airlines maintain a minimum amount of 
liability insurance coverage. In contrast, the Federal government has 
no similar overall liability requirements for ocean going vessels, but 
such vessels are required to demonstrate financial responsibility for 
oil spills. As an example of protecting the Federal government's 
interest, MARAD approves insurance coverage for vessels that were built 
with a government subsidy or guarantee. MARAD could have been granted 
broader insurance approval authority than just federally subsidized 
vessels if there were a clear national interest in ensuring that all 
ocean going vessels in U.S. waters had adequate overall liability 
insurance coverage.
    Second, Treasury's treatment of federally approved insurers is 
consistent with Treasury's consideration of a pre-existing nexus (for 
example, the nexus of State-licensing or NAIC approval for listing on 
the Quarterly Listing of Alien Insurers) to be very important to the 
effective and efficient administration of the Program. Some commenters 
criticized Treasury for not more fully explaining the importance of 
this consideration.
    The following three key factors highlight the importance of a pre-
existing regulatory nexus or structure for the administration of the 
Program.
    Ongoing Data Requirements. As Program administrator, Treasury has 
chosen not to impose new ongoing data reporting requirements on 
insurers. That does not mean that validating and collecting certain 
data is not important to the Program. The calculation of an insurer's 
DEP forms the basis for an insurer calculating its deductible under the 
Program, and in the event that insurers would submit a claim for 
payment under the Program, Treasury would expect to validate an 
insurer's calculation of its deductible. Treasury believes that the 
existing ongoing data reporting requirements of the State insurance 
regulators and the consolidated reporting requirements as implemented 
by the NAIC form a sound basis for the administration of the Program. 
Therefore, there was not a pressing need to implement new ongoing data 
reporting requirements through Treasury (and to create additional 
paperwork burdens for the insurance industry) for this temporary 
government Program.
    However, such ongoing data is useful and important, especially as 
it relates to foreign insurers that are providing coverage on global 
risk policies. Global risk polices (e.g., such as those provided to 
ocean going vessels) have historically not allocated premium income to 
reflect the scope of insured losses covered under the Act, which is a 
key measure in calculating an insurer's deductible. Treasury has 
determined to utilize data collected by the NAIC from insurers on the 
Quarterly Listing of Alien Insurers that captures the amount of premium 
income related to the scope of insured loss under the Act. Federal 
agencies approving insurers under section 102(6)(A)(iii), while 
generally having some type of financial criteria for

[[Page 41263]]

approving insurers, do not have in place any type of ongoing data 
reporting requirements similar to that of the NAIC.
    Ability to Impose Surcharges or Take Enforcement Actions. Many of 
the insurers approved by Federal agencies may be outside the direct 
jurisdiction of the United States. Treasury has little leverage vis a 
vis these insurers and this could make it difficult for Treasury to 
impose surcharges in the case of any recoupment under the Act or to 
take enforcement actions if needed. In contrast, if an insurer on the 
NAIC's Quarterly Listing of Alien Insurers is not in compliance with 
provisions of the Act, the insurer could suffer the consequences of 
losing its NAIC listing for poor character, which in turn could 
adversely affect its U.S. business operations. It is possible that a 
Federal agency could also revoke approval for noncompliance with 
provisions of the Act. However, the limited nature of a Federal 
agency's approval authority could somewhat lessen the impact of any 
such action and Treasury has no authority to require such action by 
another federal agency.
    Comparability Among Federally Approved Insurers. Treasury strongly 
believes that all federally approved insurers should be treated in a 
similar manner that is consistent with the statute. For example, such 
consistency implies that the mandatory participation requirements of 
the Act should be applied to all federally approved insurers in a 
similar fashion. In that regard, Treasury would find it difficult to 
justify one group of federally approved insurers having broader access 
to the Program than the current interim final rule provides, while 
other groups stayed with the current approach in the interim final 
rule.
    Treasury has considered carefully the concerns raised by commenters 
regarding the interim final rule's treatment of federally approved 
insurers. At this time, Treasury has decided that no changes to the 
rule are warranted. It appears that many of the insurers that have been 
approved by a Federal agency also qualify to participate in the Program 
based on other criteria. Treasury also notes that obtaining a listing 
on the NAIC's Quarterly Listing of Alien Insurers is an option that 
insurers can employ if they are not satisfied with the treatment of 
federally approved insurers under the interim final rule. Obtaining 
such a listing would satisfy the concerns we noted above, while at the 
same time imposing limited burden on insurers. It is our understanding 
that perhaps the major obstacle to obtaining a listing is setting up 
the necessary trust fund.
    Treasury will continue to evaluate this issue as the Program 
matures. While Treasury does not plan on making any changes to the 
treatment of federally approved insurers at this time, Treasury would 
be open to considering alternatives if the three key factors listed 
above `` ongoing data reporting requirements, ability to impose 
surcharges or take enforcement actions, and comparability among 
federally approved insurers--could be addressed.
Other Insurer Criteria
    Under a separate notice of proposed rulemaking published at 68 FR 
9814 Treasury solicited public comment on whether the Secretary should 
prescribe other criteria for certain insurers pursuant to the authority 
provided by section 102(6)(C) and, if so, what criteria Treasury should 
prescribe. Specifically, Treasury solicited comment on whether criteria 
should be developed to prevent newly formed insurance companies from 
participating in the Program if such companies were established for the 
purpose of evading the Act's deductible requirements.
    A few commenters raised concerns that developing such criteria 
could limit the development of new structures to provide terrorism risk 
insurance coverage. One commenter acknowledged the concerns raised by 
Treasury and supported the interim final rule's treatment of the 
deductible requirements for newly formed insurance companies in section 
50.5(g)(2) as an appropriate safeguard. Another commenter suggested a 
set of general criteria that Treasury could look to as it considers 
this issue. As Treasury noted in the preamble to interim final rule, we 
are seeking to balance the goals of encouraging new sources of capital 
in the market for terrorism risk insurance while also maintaining the 
integrity of the Program. Treasury is not proposing any additional 
criteria at this time, but we will continue to monitor developments in 
the market for terrorism risk insurance and the market's response to 
the Act.
    Treasury also solicited comments on whether additional criteria 
should be proposed for federally approved insurers. Some commenters 
suggested that additional financial criteria could be applied if 
necessary, while one commenter suggested that the Act does not give 
Treasury the authority to regulate insurance. Given that the final rule 
retains the interim final rule's treatment of federally approved 
insurers, the scope of potential problems related to the financial 
integrity of such insurers is somewhat limited. Thus, Treasury is not 
proposing any additional criteria at this time, but we will continue to 
study and monitor this issue.

F. Insurer Deductible (Section 50.5.g)

    The interim final rule incorporated the statutory definition of 
``insurer deductible'' found in section 102(7) of the Act and set forth 
a procedure specifying how newly formed insurance companies would 
calculate their deductible under the Program. In particular, the 
interim final rule specified that for an insurer that came into 
existence after November 26, 2002, the insurer deductible will be based 
on data for direct earned premiums for the current Program Year. If the 
insurer has not had a full year of operations during the applicable 
Program Year, the direct earned premiums for the current Program Year 
will be annualized to determine the insurer deductible.
    The two commenters who addressed this issue both indicated support 
for Treasury's determination that premiums for new insurers would be 
annualized in the calculation of their insurer deductible, and the 
language of the interim final rule is incorporated without change into 
the final rule.

III. Procedural Requirements

    The Act established a Program to provide for loss sharing payments 
by the Federal Government for insured losses resulting from certified 
acts of terrorism. The Act became effective immediately upon the date 
of enactment (November 26, 2002). Preemptions of terrorism risk 
exclusions in policies, mandatory participation provisions, disclosure 
and other requirements and conditions for federal payment contained in 
the Act applied immediately to those entities that come within the 
Act's definition of ``insurer.'' Treasury has issued and will be 
issuing additional regulations to implement the Program. This final 
rule provides critical information concerning the definitions of 
Program terms that lays the groundwork for Treasury's implementation of 
the Program. No one can predict if, or when, an act of terrorism may 
occur. There is an urgent need for Treasury, as Program administrator, 
to lay the groundwork for Program implementation through regulations to 
provide clarity and certainty concerning which entities are required to 
participate in the Program; the scope and conditions of Program 
coverage; and other implementation issues that immediately affect 
insurers, their policyholders, State regulators and other interested 
parties. This includes the need to supplement, or modify as

[[Page 41264]]

necessary, the previously issued interim final rule.
    Accordingly, pursuant to 5 U.S.C. 553(d)(3), Treasury has 
determined that there is good cause for the final rule to become 
effective immediately upon publication.
    This final rule is a significant regulatory action and has been 
reviewed by the Office of Management and Budget under the terms of 
Executive Order 12866.
    It is hereby certified that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
The Act requires all licensed or admitted insurers 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 without any reference to the size or scope of the 
commercial entity. Although the Act affects small insurers, the 
proposed rule also gives insurers flexibility in calculating their 
direct earned premium for policies that have both commercial and 
personal exposures, and it provides a safe harbor to exclude policies 
that have incidental coverage for commercial purposes. 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.
    The collection of information contained in Sec.  50.8 of this final 
rule has been reviewed and approved by the Office of Management and 
Budget (OMB) in accordance with the requirements of the Paperwork 
Reduction Act (44 U.S.C. 3507(j)) under control number 1505-0190. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a valid 
control number assigned by OMB.
    This information is required in order for Treasury to determine 
whether an insurer has rebutted a presumption that the insurer 
exercises a controlling influence over the management or policies of 
another insurer. The collection of information is mandatory with 
respect to an insurer seeking to rebut a presumption. The estimated 
average burden associated with the collection of information in this 
final rule is 40 hours per respondent.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Office 
of Financial Institutions Policy, Room 3160 Annex, Department of the 
Treasury, 1500 Pennsylvania Ave., NW., Washington, DC 20220 and to OMB, 
Attention: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

0
For the reasons set forth above, the interim final rule adding 31 CFR 
Part 50, which was published at 68 FR 9804 on February 28, 2003, is 
adopted as a final rule with the following changes:

PART 50--TERRORISM RISK INSURANCE PROGRAM

0
1. The authority citation for 31 CFR 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).

0
2. Section 50.2 is added to read as follows:


Sec.  50.2  Responsible office.

    The office responsible for the administration of the Terrorism Risk 
Insurance Act in the Department of the Treasury is the Terrorism Risk 
Insurance Program Office. The Treasury Assistant Secretary for 
Financial Institutions prescribes the regulations under the Act.

0
3. Section 50.5(c), (d)(1), (f)(1), and (l) are revised to read as 
follows:


Sec.  50.5  Definitions.

* * * * *
    (c)(1) Affiliate means, with respect to an insurer, any entity that 
controls, is controlled by, or is under common control with the 
insurer. An affiliate must itself meet the definition of insurer to 
participate in the Program.
    (2) For purposes of paragraph (c)(1) of this section, an insurer 
has control over another insurer for purposes of the Program if:
    (i) The insurer directly or indirectly or acting through one or 
more other persons owns, controls, or has power to vote 25 percent or 
more of any class of voting securities of the other insurer;
    (ii) The insurer controls in any manner the election of a majority 
of the directors or trustees of the other insurer; or
    (iii) The Secretary determines, after notice and opportunity for 
hearing, that an insurer directly or indirectly exercises a controlling 
influence over the management or policies of the other insurer, even if 
there is no control as defined in paragraph (c)(2)(i) or (c)(2)(ii) of 
this section.
    (3) An insurer described in paragraph (c)(2)(i) or (c)(2)(ii) of 
this section is conclusively deemed to have control.
    (4) For purposes of a determination of controlling influence under 
paragraph (c)(2)(iii) of this section, if an insurer is not described 
in paragraph (c)(2)(i) or (c)(2)(ii) of this section, the following 
rebuttable presumptions will apply:
    (i) If an insurer controls another insurer under any State law, and 
at least one of the factors listed in paragraph (c) (4)(iv) of this 
section applies, there is a rebuttable presumption that the insurer 
that has control under State law exercises a controlling influence over 
the management or policies of the other insurer for purposes of 
paragraph (c)(2)(iii) of this section.
    (ii) If an insurer provides 25 percent or more of another insurer's 
capital (in the case of a stock insurer), policyholder surplus (in the 
case of a mutual insurer), or corporate capital (in the case of other 
entities that qualify as insurers), and at least one of the factors 
listed in paragraph (c)(4)(iv) of this section applies, there is a 
rebuttable presumption that the insurer providing such capital, 
policyholder surplus, or corporate capital exercises a controlling 
influence over the management or policies of the receiving insurer for 
purposes of paragraph (c)(2)(iii) of this section.
    (iii) If an insurer, at any time during a Program Year, supplies 25 
percent or more of the underwriting capacity for that year to an 
insurer that is a syndicate consisting of a group including 
incorporated and individual unincorporated underwriters, and at least 
one of the factors in paragraph (c)(4)(iv) of this section applies, 
there is a rebuttable presumption that the insurer exercises a 
controlling influence over the syndicate for purposes of paragraph 
(c)(2)(iii) of this section.
    (iv) If paragraphs (c)(4)(i) through (c)(4)(iii) of this section 
are not applicable, but two or more of the following factors apply to 
an insurer, with respect to another insurer, there is a rebuttable 
presumption that the insurer exercises a controlling influence over the 
management or policies of the other insurer for purposes of paragraph 
(c)(2)(iii) of this section:
    (A) The insurer is one of the two largest shareholders of any class 
of voting stock;
    (B) The insurer holds more than 35 percent of the combined debt 
securities and equity of the other insurer;

[[Page 41265]]

    (C) The insurer is party to an agreement pursuant to which the 
insurer possesses a material economic stake in the other insurer 
resulting from a profit-sharing arrangement, use of common names, 
facilities or personnel, or the provision of essential services to the 
other insurer;
    (D) The insurer is party to an agreement that enables the insurer 
to influence a material aspect of the management or policies of the 
other insurer;
    (E) The insurer would have the ability, other than through the 
holding of revocable proxies, to direct the votes of more than 25 
percent of the other insurer's voting stock in the future upon the 
occurrence of an event;
    (F) The insurer has the power to direct the disposition of more 
than 25 percent of a class of voting stock of the other insurer in a 
manner other than a widely dispersed or public offering;
    (G) The insurer and/or the insurer's representative or nominee 
constitute more than one member of the other insurer's board of 
directors; or
    (H) The insurer or its nominee or an officer of the insurer serves 
as the chairman of the board, chairman of the executive committee, 
chief executive officer, chief operating officer, chief financial 
officer or in any position with similar policymaking authority in the 
other insurer.
    (5) An insurer that is not described in paragraph (c)(2)(i) or 
(c)(2)(ii) of this section may request a hearing in which the insurer 
may rebut a presumption of controlling influence under paragraph 
(c)(4)(i) through (c)(4)(iv) of this section or otherwise request a 
determination of controlling influence by presenting and supporting its 
position through written submissions to Treasury, and in Treasury's 
discretion, through informal oral presentations, in accordance with the 
procedure in Sec.  50.8.
    (d) * * *
    (l) State licensed or admitted insurers. For a State licensed or 
admitted insurer that reports to the NAIC, direct earned premium is the 
premium information for commercial property and casualty insurance 
coverage reported by the insurer on column 2 of the NAIC Exhibit of 
Premiums and Losses of the Annual Statement (commonly known as 
Statutory Page 14). (See definition of property and casualty 
insurance).
    (i) Premium information as reported to the NAIC should be included 
in the calculation of direct earned premiums for purposes of the 
Program only to the extent of commercial property and casualty coverage 
issued by the insurer against an insured loss under the Program.
    (ii) Premiums for personal property and casualty insurance coverage 
(coverage primarily designed to cover personal, family or household 
risk exposures, with the exception of coverage written to insure 1 to 4 
family rental dwellings owned for the business purpose of generating 
income for the property owner) or for insurance coverage for any loss 
that would not be an insured loss under the Program, should be excluded 
in the calculation of direct earned premiums for purposes of the 
Program.
    (iii) Personal property and casualty insurance coverage that 
includes incidental coverage for commercial purposes is primarily 
personal coverage, and therefore premiums may be fully excluded by an 
insurer from the calculation of direct earned premium. For purposes of 
the Program, commercial coverage is incidental if less than 25 percent 
of the total direct earned premium is attributable to commercial 
coverage. Property and casualty insurance coverage for any loss that 
would not be an insured loss under the Program that includes incidental 
coverage for an insured loss under the Program is primarily non-Program 
coverage, and therefore premiums may be fully excluded by an insurer 
from the calculation of direct earned premium. For purposes of the 
Program, coverage for an insured loss is incidental if less than 25 
percent of the total direct earned premium is attributable to such 
coverage.
    (iv) If a property and casualty insurance policy covers both 
commercial and personal risk exposures, insurers may allocate the 
premiums in accordance with the proportion of risk between commercial 
and personal components in order to ascertain direct earned premium. If 
a property and casualty insurance policy covers risk exposures for both 
insured losses and losses that would not be insured losses under the 
Program, insurers may allocate the premiums in accordance with the 
proportion of risk between the insured loss and non-insured loss 
components in order to ascertain direct earned premium.
* * * * *
    (f) Insurer means any entity, including any affiliate of the 
entity, that meets the following requirements:
    (1)(i) The entity must fall within at least one of the following 
categories:
    (A) It is licensed or admitted to engage in the business of 
providing primary or excess insurance in any State, (including, but not 
limited to, State licensed captive insurance companies, State licensed 
or admitted risk retention groups, and State licensed or admitted farm 
and county mutuals), and, if a joint underwriting association, pooling 
arrangement, or other similar entity, then the entity must:
    (1) Have gone through a process of being licensed or admitted to 
engage in the business of providing primary or excess insurance that is 
administered by the State's insurance regulator, which process 
generally applies to insurance companies or is similar in scope and 
content to the process applicable to insurance companies;
    (2) Be generally subject to State insurance regulation, including 
financial reporting requirements, applicable to insurance companies 
within the State; and
    (3) Be managed independently from other insurers participating in 
the Program;
    (B) It is not licensed or admitted to engage in the business of 
providing primary or excess insurance in any State, but is an eligible 
surplus line carrier listed on the Quarterly Listing of Alien Insurers 
of the NAIC, or any successor to the NAIC;
    (C) It is approved or accepted for the purpose of offering property 
and casualty insurance by a Federal agency in connection with maritime, 
energy, or aviation activity, but only to the extent of such federal 
approval of commercial property and casualty insurance coverage offered 
by the insurer in connection with maritime, energy, or aviation 
activity;
    (D) It is a State residual market insurance entity or State 
workers' compensation fund; or
    (E) As determined by the Secretary, it falls within any other class 
or type of captive insurer or other self-insurance arrangement by a 
municipality or other entity, to the extent provided in Treasury 
regulations issued under section 103(f) of the Act.
    (ii) If an entity falls within more than one category described in 
paragraph (f)(1)(i) of this section, the entity is considered to fall 
within the first category within which it falls for purposes of the 
Program.
* * * * *
    (l) Property and casualty insurance means commercial lines of 
property and casualty insurance, including excess insurance, workers' 
compensation insurance, and surety insurance, and
    (1) Means commercial lines within only the following lines of 
insurance from the NAIC's Exhibit of Premiums and Losses (commonly 
known as Statutory Page 14): Line 1--Fire; Line 2.1--Allied Lines; Line 
3--Farmowners Multiple Peril; Line 5.1--Commercial

[[Page 41266]]

Multiple Peril (non-liability portion); Line 5.2--Commercial Multiple 
Peril (liability portion); Line 8--Ocean Marine; Line 9--Inland Marine; 
Line 16--Workers' Compensation; Line 17--Other Liability; Line 18--
Products Liability; Line 19.3--Commercial Auto No-Fault (personal 
injury protection); Line 19.4--Other Commercial Auto Liability; Line 
21.2--Commercial Auto Physical Damage; Line 22--Aircraft (all perils); 
Line 24--Surety; Line 26--Burglary and Theft; and Line 27--Boiler and 
Machinery; and
    (2) Does not include:
    (i) Federal crop insurance issued or reinsured under the Federal 
Crop Insurance Act (7 U.S.C. 1501 et seq.), or any other type of crop 
or livestock insurance that is privately issued or reinsured (including 
crop insurance reported under either Line 2.1--Allied Lines or Line 
2.2--Multiple Peril (Crop) of the NAIC's Exhibit of Premiums and Losses 
(commonly known as Statutory Page 14);
    (ii) Private mortgage insurance (as defined in section 2 of the 
Homeowners Protection Act of 1988 (12 U.S.C. 4901) or title insurance;
    (iii) Financial guaranty insurance issued by monoline financial 
guaranty insurance corporations;
    (iv) Insurance for medical malpractice;
    (v) Health or life insurance, including group life insurance;
    (vi) Flood insurance provided under the National Flood Insurance 
Act of 1968 (42 U.S.C. 4001 et seq.) or earthquake insurance reported 
under Line 12 of the NAIC's Exhibit of Premiums and Losses (commonly 
known as Statutory Page 14); or
    (vii) Reinsurance or retrocessional reinsurance.
* * * * *

0
4. Section 50.8 is added to Subpart A to read as follows:


Sec.  50.8  Procedure for requesting determinations of controlling 
influence.

    (a) An insurer or insurers not having control over another insurer 
under Sec.  50.5(c)(2)(i) or (c)(2)(ii) may make a written submission 
to Treasury to rebut a presumption of controlling influence under Sec.  
50.5(c)(4)(i) through (iv) or otherwise to request a determination of 
controlling influence. Such submissions shall be made to the Terrorism 
Risk Insurance Program Office, Department of the Treasury, Suite 2110, 
1425 New York Ave NW, Washington, D.C. 20220. The submission should be 
entitled, ``Controlling Influence Submission,'' and should provide the 
full name and address of the submitting insurer(s) and the name, title, 
address and telephone number of the designated contact person(s) for 
such insurer(s).
    (b) Treasury will review submissions and determine whether Treasury 
needs additional written or orally presented information. In its 
discretion, Treasury may schedule a date, time and place for an oral 
presentation by the insurer(s).
    (c) An insurer or insurers must provide all relevant facts and 
circumstances concerning the relationship(s) between or among the 
affected insurers and the control factors in Sec.  50.5(c)(4)(i) 
through (iv); and must explain in detail any basis for why the insurer 
believes that no controlling influence exists (if a presumption is 
being rebutted) in light of the particular facts and circumstances, as 
well as the Act's language, structure and purpose. Any confidential 
business or trade secret information submitted to Treasury should be 
clearly marked. Treasury will handle any subsequent request for 
information designated by an insurer as confidential business or trade 
secret information in accordance with Treasury's Freedom of Information 
Act regulations at 31 C.F.R. Part 1.
    (d) Treasury will review and consider the insurer submission and 
other relevant facts and circumstances. Unless otherwise extended by 
Treasury, within 60 days after receipt of a complete submission, 
including any additional information requested by Treasury, and 
including any oral presentation, Treasury will issue a final 
determination of whether one insurer has a controlling influence over 
another insurer for purposes of the Program. The determination shall 
set forth Treasury's basis for its determination.
    (e) This Sec.  50.8 supersedes the Interim Guidance issued by 
Treasury in a notice published on March 27, 2003 (68 FR 15039).


(Approved by the Office of Management & Budget under control number 
1505-0190)


0
5. Section 50.9 is added to Subpart A to read as follows:


Sec.  50.9  Procedure for requesting general interpretations of 
statute.

    Persons actually or potentially affected by the Act or regulations 
in this Part may request an interpretation of the Act or regulations by 
writing to the Terrorism Risk Insurance Program Office, Suite 2110, 
Department of the Treasury, 1425 New York Ave NW, Washington, DC 20220, 
giving a detailed explanation of the facts and circumstances and the 
reason why an interpretation is needed. A requester should segregate 
and mark any confidential business or trade secret information clearly. 
Treasury in its discretion will provide written responses to requests 
for interpretation. Treasury reserves the right to decline to provide a 
response in any case. Except in the case of any confidential business 
or trade secret information, Treasury will make written requests for 
interpretations and responses publicly available at the Treasury 
Department Library, on the Treasury Web site, or through other means as 
soon as practicable after the response has been provided. Treasury will 
handle any subsequent request for information that had been designated 
by a requester as confidential business or trade secret information in 
accordance with Treasury's Freedom of Information Act regulations at 31 
CFR Part 1.

    Dated: July 7, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-17585 Filed 7-10-03; 8:45 am]
BILLING CODE 4810-25-P