[Federal Register Volume 68, Number 156 (Wednesday, August 13, 2003)]
[Rules and Regulations]
[Pages 48280-48282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20644]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA96


Terrorism Risk Insurance Program

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: This final rule modifies the current regulatory definition of 
``direct earned premium'' in the regulations under Title I of the 
Terrorism Risk Insurance Act of 2002 (Act). The Act established a 
temporary Terrorism Risk Insurance Program (Program) under which the 
Federal Government will share the risk of insured losses from certified 
acts of terrorism with commercial property and casualty insurers until 
the Program sunsets on December 31, 2005. The Department of the 
Treasury (Treasury) is responsible for implementing the Act. This final 
rule clarifies the current regulatory definition of ``direct earned 
premium'' to parallel the definition of ``direct earned premium'' in 
section 102(4) of the Act.

DATES: This final rule is effective August 13, 2003.

FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director, 
Office of Financial Institutions Policy (202) 622-2730, Martha Ellett 
or Cynthia Reese, Attorney-Advisors, Office of the Assistant General 
Counsel (Banking & Finance), (202) 622-0480, or C. Christopher Ledoux, 
Senior Attorney, Terrorism Risk Insurance Program (202) 622-6770 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: On July 11, 2003, Treasury published a final 
rule containing definitions and other general provisions under the Act 
(68 FR 41250, July 11, 2003) (the July final rule). Treasury is now 
making a clarifying revision to the definition of ``direct earned 
premium'' in the July final rule to ensure that the rule parallels the 
definition in section 102(4) of the Act.
    Under section 102(6) of the Act, an ``insurer'' calculates its 
``insurer deductible'' based on the insurer's ``direct earned 
premium.'' Except in the case of new insurers, an ``insurer 
deductible'' is an insurer's direct earned premiums over the preceding 
calendar year, multiplied by a percentage specified in the Act for that 
year. If a certified act of terrorism occurs, an insurer would only be 
entitled to federal payment under the Program if the insurer's insured 
losses exceed its insurer deductible and other required conditions are 
met.
    Section 102(4) of the Act defines the term ``direct earned 
premium'' as ``a direct earned premium for property and casualty 
insurance issued by any insurer for insurance against losses occurring 
at the locations described'' in section 102(5)(A) and (B) of the Act 
(emphasis added). These cross-referenced locations appear within the 
definition of ``insured loss.'' The locations are (1) ``within the 
United States,'' (2) ``to an air carrier'' (as defined), (3) ``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),'' and (4) ``at 
the premises of any United States mission.'' Therefore, there is a 
relationship between the locations contained in the definition of 
``insured loss'' and the scope of the definition of ``direct earned 
premium,'' since both make reference to the same specified locations.
    The July final rule was preceded by an interim final rule that 
requested public comments (68 FR 9804, February 28, 2003). No comments 
were received on the interim final rule concerning the relationship of 
the terms ``insured loss'' and ``direct earned premium.'' Upon further 
review, Treasury notes that the current regulatory definition of 
``direct earned premium'' in the July final rule could be interpreted 
as inconsistent with the statutory definition of ``direct earned 
premium.'' This is because the

[[Page 48281]]

regulatory definition ``direct earned premium'' includes an abbreviated 
reference to ``insured losses'' under the Program. Treasury's intent 
was to reflect the statutory definition, including the specified 
locations, as described above. An unintended consequence of the current 
text of the regulatory definition of direct earned premium is that it 
might be read to narrow the statutory definition of ``direct earned 
premium'' to refer only to direct earned premiums for losses resulting 
from acts of terrorism rather than direct earned premiums on all 
commercial property and casualty insurance covering all risks within 
the specified locations.
    After further review of the definition in the July final rule, 
Treasury is by this final rule revising the regulatory definition of 
``direct earned premium'' in section 50.5(d) to ensure that it 
parallels the definition in the Act. Treasury is also revising the 
related provisions in the definition of direct earned premium for State 
licensed or admitted insurers that report to the NAIC and certain 
eligible surplus line carrier insurers. (Although there are no changes 
to some of these provisions, paragraphs (d)(1) and (d)(3) of section 
50.5(d) are being set out in their entirety for ease of reading and 
understanding.) The effect of these changes to the current regulatory 
text is to clarify that direct earned premium, as provided in the Act, 
consists of direct earned premium for all commercial property and 
casualty insurance (as that term is used in the Act and Treasury's 
regulations) issued by an insurer for insurance against losses at the 
specified locations. Consistent with the preamble discussion in the 
July final rule, premiums for retroactive insurance may continue to be 
excluded by an insurer if they are associated with losses that occurred 
prior to the date of enactment of the Act (November 26, 2002). An 
insurer receiving premiums for retroactive insurance associated with 
losses that occurred prior to November 26, 2002 may continue to follow 
the guidelines in section 50.5(d)(1) for the purposes of calculating 
the appropriate measure of direct earned premium.

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). Treasury has issued and will be 
issuing additional regulations to implement the Program. This final 
regulation merely clarifies the current regulatory definition of 
``direct earned premium'' to parallel the definition in the Act. Since 
no one can predict if, or when, an act of terrorism may occur, there is 
a clear need for Treasury to modify the previously issued final rule to 
clarify the definition and avoid any possible reading that it is 
narrower than the definition in the Act. Moreover, the definition in 
the Act is unambiguous and the regulatory change merely clarifies the 
current regulatory definition to parallel the definition in the Act.
    For these reasons, Treasury has determined that notice and public 
procedure are unnecessary and contrary to the public interest, pursuant 
to 5 U.S.C. 553(b)(B). For the same reasons, pursuant to 5 U.S.C. 
553(d)(3), Treasury has determined that there is good cause for this 
final rule to become effective immediately upon publication.
    This final rule is not a significant regulatory action for purposes 
of Executive Order 12866. Because no notice of proposed rulemaking is 
required, the provisions of the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) do not apply. 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.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

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

PART 50--TERRORISM RISK INSURANCE PROGRAM

0
1. The authority citation for part 50 continues to read as follows:

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


0
2. Section 50.5(d) introductory text is revised, and (d)(1) and (d)(3) 
are revised to read as follows:


Sec.  50.5  Definitions.

* * * * *
    (d) Direct earned premium means a direct earned premium for all 
commercial property and casualty insurance issued by any insurer for 
insurance against all losses, including losses from an act of 
terrorism, occurring at the locations described in section 102(5)(A) 
and (B) of the Act.
    (1) 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 NAIC 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 losses occurring at the locations 
described in section 102(5)(A) and (B) of the Act.
    (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 premiums for any other insurance 
coverage that does not meet the definition of commercial property and 
casualty insurance, 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. Commercial property and casualty insurance coverage insuring 
against losses occurring at locations other than the locations 
described in section 102(5)(A) and (B) of the Act, or other insurance 
coverage that does not meet the definition of commercial property and 
casualty insurance, but that includes incidental coverage for 
commercial property and casualty insurance insuring against losses 
occurring at such locations, is primarily non-Program coverage, and 
therefore premiums also may be fully excluded by an insurer from the 
calculation of direct earned premium. For purposes of the Program, 
commercial property and casualty insurance coverage insuring against 
losses at the locations described in section 102(5)(A) and (B) of the 
Act is incidental if less than 25 percent of the

[[Page 48282]]

total direct earned premium is attributable to such coverage. For 
purposes of the Program, commercial coverage combined with coverages 
that otherwise do not meet the definition of commercial property and 
casualty insurance is incidental if less than 25 percent of the total 
direct earned premium is for 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 policy includes insurance coverage that meets the definition of 
commercial property and casualty insurance for losses occurring at the 
locations described in section 102(5)(A) and (B) of the Act, but also 
includes other coverage, insurers may allocate the premiums in 
accordance with the proportion of risk attributable to the components, 
in order to ascertain direct earned premium.
* * * * *
    (3) Certain eligible surplus line carrier insurers. An eligible 
surplus line carrier insurer listed on the NAIC Quarterly Listing of 
Alien Insurers must ascertain its direct earned premium as follows:
    (i) For policies that were in-force as of November 26, 2002, or 
entered into prior to January 1, 2003, direct earned premiums are to be 
determined with reference to the definition of property and casualty 
insurance and the locations described in section 102(5)(A) and (B) of 
the Act by allocating the appropriate portion of premium income for 
losses for property and casualty insurance at such locations. The same 
allocation methodologies contained within the NAIC's ``Allocation of 
Surplus Lines and Independently Procured Insurance Premium Tax on 
Multi-State Risks Model Regulation'' for allocating premium between 
coverage for property and casualty insurance for losses occurring at 
the locations described in section 102(5)(A) and (B) of the Act and all 
other coverage, to ascertain the appropriate percentage of premium 
income to be included in direct earned premium, may be used.
    (ii) For policies issued after January 1, 2003, premium for 
insurance that meets the definition of property and casualty insurance 
for losses occurring at the locations described in section 102(5)(A) 
and (B) of the Act, must be priced separately by such eligible surplus 
line carriers.
* * * * *

    Dated: August 5, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-20644 Filed 8-12-03; 8:45 am]
BILLING CODE 4810-25-P