[Federal Register Volume 68, Number 201 (Friday, October 17, 2003)]
[Rules and Regulations]
[Pages 59715-59720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26250]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AA99


Terrorism Risk Insurance Program; State Residual Market Insurance 
Entities

AGENCY: Departmental Offices, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
final rule as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (Act). The 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 ends on December 31, 2005. Treasury published a proposed rule 
with a request for comment on April 18, 2003. This rule is issued 
pursuant to section 103(d)(1) of the Act, which directs Treasury to 
issue regulations that apply the provisions of the Act specifically to 
State residual market insurance entities and State workers' 
compensation funds. This rule is the third final rule in a series of 
regulations that Treasury is issuing to implement the Program.

DATES: This final rule is effective October 17, 2003.

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, or C. Christopher 
Ledoux, Senior Attorney,

[[Page 59716]]

Terrorism Risk Insurance Program (202) 622-6770 (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 (Pub. L. 107-297, 116 Stat. 2322). The Act 
was effective immediately. The Act's purposes are to address market 
disruptions, ensure the continued widespread availability and 
affordability of commercial property and casualty insurance for 
terrorism risk, and to allow for a transition period for the private 
markets to stabilize and build capacity while preserving State 
insurance regulation and consumer protections.
    Title I of the Act establishes a temporary Federal program of 
shared public and private compensation for insured commercial property 
and casualty losses resulting from an act of terrorism, which as 
defined in the Act is certified by the Secretary of the Treasury, in 
concurrence with the Secretary of State and the Attorney General. The 
Act authorizes Treasury to administer and implement the Terrorism Risk 
Insurance Program, including the issuance of regulations and 
procedures. The Program will end on December 31, 2005.
    Each entity that meets the definition of ``insurer'' (well over 
2000 firms) must participate in the Program. The amount of Federal 
payment for an insured loss resulting from an act of terrorism is to be 
determined based upon the insurance company deductibles and excess loss 
sharing with the Federal Government, as specified by the Act and the 
implementing regulations. An insurer's deductible increases each year 
of the Program, thereby reducing the Federal Government's share prior 
to expiration of the Program. An insurer's deductible is calculated 
based on the value of ``direct earned premiums'' collected over certain 
statutory periods. Once an insurer has met its individual deductible, 
the Federal payments cover 90 percent of insured losses above the 
deductible, subject to an industry-aggregate limit of $100 billion.
    The Program provides a Federal reinsurance backstop for three 
years. The Act provides Treasury with authority to recoup Federal 
payments made under the Program through policyholder surcharges, up to 
a maximum annual limit. The Act also prohibits duplicative payments for 
insured losses that have been covered under any other Federal program.
    The mandatory availability or ``make available'' provisions in 
section 103(c) of the Act require that, for Program Year 1 and Program 
Year 2 and, if so determined by Treasury, in Program Year 3, all 
entities that meet the definition of insurer under the Program must 
make available in all of their property and casualty insurance policies 
coverage for insured losses resulting from an act of terrorism. This 
coverage can not differ materially from the terms amounts and other 
coverage limitations arising from events other than acts of terrorism.
    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 the 
Federal share of compensation for insured losses under the Program. In 
addition, the Act requires that insurers must submit a claim and 
certain certifications to Treasury. Treasury will engage in rulemaking 
to prescribe claims procedures for the Program 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. The Act 
provides the United States with the right of subrogation with respect 
to any payment or claim paid by the United States under the Program.
1. Three Year Program
    The duration of the Program is three years. The Act was signed into 
law on November 26, 2002, and section 108(a) of the Act provides that, 
``[t]he Program shall terminate on December 31, 2005.'' Thereafter, the 
Act provides Treasury with certain continuing authority to take actions 
as necessary to ensure payment, recoupment, adjustments of compensation 
and reimbursement for insured losses arising out of any act of 
terrorism occurring during the period between November 26, 2002, and 
December 31, 2005. The duration of the Program and the Program's 
termination date should not be confused with the make available 
requirements contained in section 103(c) of the Act. As reflected in 
both the interim final and final rules, the make available requirements 
in section 103(c) of the Act apply to all insurers, through the end of 
Program Year 2. However, the Secretary of the Treasury may determine, 
not later than September 1, 2004, to extend the make available 
requirements through Program Year 3, based on factors referenced in 
section 108(d)(1) of the Act. Regardless of whether the make available 
requirements of section 103 are extended, the Program and the Act's 
Federal backstop for insured losses for acts of terrorism continue 
through December 31, 2005.
2. Program Implementation Goals
    In implementing the Program, Treasury is guided by several goals. 
First, Treasury strives to implement the Act in a transparent and 
effective manner that treats comparably those insurers required to 
participate in the Program and provides necessary information to 
policyholders in a useful and efficient manner. Second, in accord with 
the Act's stated purposes, Treasury seeks to rely as much as possible 
on the State insurance regulatory structure. In that regard, Treasury 
has coordinated the implementation of all aspects of the Program with 
the National Association of Insurance Commissioners (NAIC). Third, to 
the extent possible within statutory constraints, Treasury seeks to 
allow insurers to participate in the Program in a manner consistent 
with procedures used in their normal course of business. Finally, given 
the temporary and transitional nature of the Program, Treasury is 
guided by the Act's goal for insurers to develop their own capacity, 
resources, and mechanisms for terrorism insurance coverage when the 
Program expires.

B. The Proposed Rule

    The proposed rule proposed to amend subpart D of part 50 in title 
31 of the Code of Federal Regulations by adding sections 50.30, 50.33, 
50.35, and 50.36. Subpart A of part 50 addresses the scope and purpose 
of the Program, key definitions and certain general provisions and was 
finalized and published in the Federal Register at 68 FR 41250 (July 
11, 2003) (as amended at 68 FR 48280 (August 13, 2003)). Subparts B and 
C were established by an interim final rule published in the Federal 
Register at 68 FR 19301 (Apr. 18, 2003) and were recently finalized. 
Subpart B incorporates and clarifies certain conditions for Federal 
payment contained in section 103(b) of the Act that require insurers to 
provide certain clear and conspicuous disclosures to their 
policyholders with regard to terrorism risk insurance for insured 
losses under the Program. Subpart C clarifies requirements in section 
103(c) of the Act that insurers ``make available,'' in all of their 
commercial property and casualty insurance policies, coverage for 
insured losses

[[Page 59717]]

resulting from an act of terrorism as defined by section 102(1) of the 
Act. In this regard, section 103(c) requires insurers to make such 
terrorism risk coverage available at terms, amounts and other coverage 
limitations that do not differ materially from those applicable to 
losses arising from events other than from acts of terrorism. Subpart 
D, as directed by section 103(d)(1) of the Act, applies the provisions 
of the Act to State residual market insurance entities and State 
workers' compensation funds. In the preamble to the proposed rule, 
Treasury requested comment on application of the disclosure 
requirements of the Act to State residual market insurance entities and 
State workers' compensation funds. As part of this rulemaking, Treasury 
is amending section 50.19 of subpart B, which was previously reserved, 
to apply the disclosure requirements to those entities.
    The various rules reflect earlier interim guidance notices, issued 
by Treasury soon after the Act's enactment date, and designed to assist 
insurers, policyholders, and other interested parties in complying with 
immediately applicable and time-sensitive requirements.\1\ In 
finalizing this rule, Treasury carefully considered the comments 
submitted and consulted with the NAIC.
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    \1\ These interim guidance notices were published in the Federal 
Register at 67 FR 76206 (Dec. 11, 2002); 67 FR 78864 (Dec. 26, 2002) 
and at 68 FR 4544 (Jan. 29, 2003). Treasury also issued a fourth 
interim guidance at 68 FR 15039 (Mar. 27, 2003), which has 
subsequently been superceded by a new provision in the final rule 
for Subpart A, published at 68 FR 41250 (July 11, 2003). The interim 
guidance and all regulations can also be located on Treasury's 
Terrorism Risk Insurance Program Web site at www.treasury.gov/trip.
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II. Summary of Comments and Final Rule

    Treasury received four comments on the proposed rule. Comments were 
submitted by a group of insurance trade associations, the Ohio Bureau 
of Workers' Compensation, and a State residual market insurance entity. 
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 applying the Act to State residual market 
insurance entities and State workers' compensation funds (referred to 
collectively as ``residual market mechanisms'' where appropriate). 
Treasury has made no changes to the proposed rule. Treasury is, 
however, adding specific disclosure provisions by amending section 
50.19. The final rule and amendment to section 50.19, including 
clarifications, are discussed in the summary of comments below.

A. Mandatory Participation by Residual Market Mechanisms (Section 
50.30)

    In subpart D of this final rule, Treasury is setting forth 
regulations specific to the participation of residual market mechanisms 
in the Program. Section 102(6) of the Act specifically includes State 
residual market insurance entities and State workers' compensation 
funds as insurers that are required to participate in the Program. As 
we stated in the notice of proposed rulemaking (published in the 
Federal Register at 68 FR 19309 on April 18, 2003), Treasury considers 
the Act's terms ``State residual market insurance entities'' and 
``State workers' compensation funds'' to encompass all State 
legislatively-created residual market mechanisms that facilitate the 
availability of primary and excess commercial property and casualty 
insurance coverage for risks that face difficulties in obtaining such 
coverage from the voluntary market. This includes--but is not limited 
to--residual market mechanisms associated with the provision of 
commercial property, commercial liability, workers' compensation, and 
commercial automobile coverage. Sections 50.30(a) and (b) of this final 
rule, taken together, provide that residual market mechanisms are 
insurers under the Program, even if they do not receive direct earned 
premiums, and thus are mandatory participants in the Program.
1. List of Residual Market Mechanisms
    In its second notice of interim guidance (67 FR 78864), Treasury 
first published a list of entities that Treasury, in consultation with 
the NAIC, identified as residual market mechanisms required to 
participate in the Program and that provide commercial property and 
casualty insurance, as defined by the Act and regulations. The list is 
not exclusive. A residual market mechanism should not assume that 
because it is not listed on Treasury's List of State Residual Market 
Mechanisms it is not required to participate in the Program. All State 
residual market insurance entities and State workers' compensation 
funds are insurers that must participate in the Program. See sections 
50.5(f)(1)(D) and 50.4. Treasury's list was merely intended to provide 
guidance and certainty to those entities on the list as well as to 
foster transparency in the Program.
    In the notice of interim guidance, Treasury encouraged residual 
market mechanisms that were not included on the list to notify 
Treasury. Since the publication of that notice of interim guidance, 
Treasury has continued to work with the NAIC to revise the List of 
State Residual Market Mechanisms. Section 50.30(c) of this final rule 
explains that Treasury will maintain and continue to update this list 
from time to time, as necessary. Treasury's list will be publicly 
available at www.treasury.gov/trip, along with the procedures for 
providing comments and updates.
    Treasury, in consultation with the NAIC, has considered the 
following characteristics in identifying residual market mechanisms 
that should be included on Treasury's list:
    [sbull] Was the mechanism created by a state legislature?
    [sbull] Does the mechanism provide commercial property and casualty 
insurance to policyholders, either directly or through servicing 
carriers?
    [sbull] Does the mechanism seek to make available commercial 
property and casualty insurance for risks that are ``distressed'' or 
``hard to place'' in the voluntary market?
    [sbull] How does the mechanism share or allocate its profits and 
losses from its operations?
    [sbull] Does the mechanism meet the requirements of Sec.  50.5(f)?
2. State Workers' Compensation Reinsurance Pools
    Treasury received a comment from the Minnesota Workers' 
Compensation Reinsurance Association (``WCRA''), a State workers'' 
compensation reinsurance pool, that requested the Secretary exercise 
his discretion under section 103(f) of the Act (which mentions State 
workers' compensation reinsurance pools) and include such pools in the 
Program. Treasury is not making a section 103(f) determination at this 
time. However, looking beyond the commenter's name to its function, 
Treasury has determined that the commenter fits within the residual 
market mechanism category under section 103(d) of the Act, as explained 
below.
    The WCRA is a State-mandated reinsurance pool from which workers' 
compensation insurers are required by State law to purchase excess 
reinsurance. WCRA also provides workers' compensation insurance 
directly to self-insured employers. While section 102(12)(vii) of the 
Act expressly excludes reinsurance from the definition of property and 
casualty insurance covered by the Program, Treasury believes that an 
insurance arrangement between a self-insured and

[[Page 59718]]

an insurer, or a pool of insurers, is more like direct primary or 
excess property and casualty insurance versus traditional reinsurance 
(i.e., an insurer reinsuring another insurer).
    After consulting with the NAIC and considering the characteristics 
described above, Treasury considers WCRA to be similar to a residual 
market mechanism. WCRA is a legislatively-established risk pool that 
issues insurance directly to policyholders, which risks are hard to 
place in the voluntary insurance market. WCRA also has a procedure 
through which it shares or allocates its profits and losses with 
private sector insurers. Therefore, for these reasons, Treasury has 
added WCRA to its List of State Residual Market Mechanisms and its 
participation in the Program is confirmed. If any other State workers' 
compensation reinsurance pool believes that it shares the 
characteristics of a residual market mechanism and believes it should 
be included on the list, under section 50.9, the reinsurance pool 
should submit a request for an interpretation of the application of 
these regulations to its particular circumstance.

B. Allocation of Premium (Sections 50.33 through 50.36)

    Section 103(d)(2) of the Act divides residual market mechanisms 
into two broad classes for purposes of their treatment as insurers 
under the Program: (1) entities that do not share profits and losses 
with private sector insurance companies; and (2) entities that do share 
profits and losses with private sector insurance companies.
    Section 103(d)(2)(A) provides that ``a State residual market 
insurance entity that does not share its profits and losses with 
private sector insurers shall be treated as a separate insurer.'' For 
State residual market insurance entities that fall under section 
103(d)(2)(A) of the Act or for State workers' compensation funds, 
section 50.33 of the final rule provides that these mechanisms follow 
the regulations set forth in sections Sec.  50.5(d)(1) or Sec.  
50.5(d)(2) for the purposes of calculating the appropriate measure of 
direct earned premium. Residual market mechanisms functioning in this 
manner are thus treated as risk bearers in the same manner as private 
sector insurers. Treasury received a comment from a group of trade 
associations that endorsed this approach. These provisions of the 
proposed rule are adopted without change.
    Section 103(d)(2)(B) of the Act provides that ``a State residual 
market insurance entity that shares its profits and losses with private 
sector insurers shall not be treated as a separate insurer, and shall 
report to each private sector insurance participant its share of the 
insured losses of the entity, which shall be included in each private 
sector insurer's insured losses.'' Section 103(d)(3) of the Act 
provides that ``any insurer that participates in sharing profits and 
losses of a State residual market insurance entity shall include in its 
calculations or premiums any premiums distributed to the insurer by the 
State residual market insurance entity.'' Residual market insurance 
mechanisms functioning in this manner are thus treated as risk 
apportioning entities and not risk bearing entities. Proposed section 
50.35 reflected this treatment and also provided that these entities 
should continue to report, in accordance with normal business 
practices, to each participant insurer its share of premium income and 
insured losses, which is to be included respectively in the participant 
insurer's direct earned premium and insured loss calculations. Treasury 
received a comment from a group of trade associations that supported 
this approach. This provision of the proposed rule is adopted without 
change.
    Section 50.36 of the proposed rule further addressed the 
calculation of direct earned premium based on the allocation of premium 
income shared between the residual market mechanism and its servicing 
carriers or participant insurers. Favorable comments were received on 
this provision, which is adopted without change.

C. Other Issues

State Residual Market Mechanisms and Natural Disaster Insurance
    Treasury received a comment from a residual market mechanism that 
issues commercial policies that provide coverage only for the peril of 
wind. The commenter requested that Treasury modify section 50.5(l) of 
the regulations to exclude commercial single peril wind insurance from 
the provisions of the Act. The commenter analogized single peril wind 
insurance to that of flood insurance and earthquake insurance, which 
are not included in the Program. See section 50.5(l)(1). Upon 
consideration of the comment, Treasury is not revising section 50.5(l). 
However, as stated in the preamble to the final rule published July 11, 
2003, Treasury may later request comment on the exclusion from the 
Program definition of commercial property and casualty insurance 
single-peril natural disaster insurance currently included in the 
Program.

D. Disclosure Requirements (Section 50.19)

    Subpart B of 31 CFR part 50 sets forth regulations that address, 
inter alia, the clear and conspicuous disclosures that all insurers are 
required by the Act to provide to policyholders. Section 50.19 of 
subpart B, entitled Disclosure by State residual market insurance 
entities and State workers' compensation funds, had been reserved 
pending this rulemaking. This final rule amends 50.19 to address how 
residual market mechanisms are to comply with the Act's disclosure 
requirements.
    Section 102(6) of the Act specifically includes residual market 
mechanisms as insurers that are required to participate in the Program. 
As a condition for Federal payment under the Program, section 103(b)(2) 
of the Act requires that insurers provide clear and conspicuous 
disclosure to policyholders of the premium charged for insured losses 
covered by the Program and the Federal share of compensation under the 
Program. Section 103(d) of the Act directed the Secretary of the 
Treasury to issue regulations as soon as practicable that apply the 
provisions of the Act (including the disclosure requirements) to 
residual market mechanisms.
    On December 18, 2002, Treasury issued a second notice of interim 
guidance (67 FR 78864). In this notice of interim guidance Treasury 
indicated it would temporarily waive the disclosure requirements for 
those insurers that: (1) are State residual market insurance entities 
and State workers' compensation funds; and (2) have insufficient 
information to issue the disclosures, until Treasury issued regulations 
as required under section 103(d) to apply the provisions of the Act to 
these entities. Thus, the waiver provided a safe harbor pending the 
issuance of this final rule. We expected residual market mechanisms to 
have provided the disclosures if they possessed sufficient information 
to do so.
    In the preamble to the proposed rule, Treasury stated that it was 
still evaluating the applicability of the disclosure requirements to 
certain insurers in this category and asked for public comment. 
Treasury received two comments on this issue. One comment deferred the 
issue to Treasury. Another commenter requested that Treasury exempt 
State workers' compensation funds from the disclosure requirements. The 
commenter argued that the burden and cost associated with providing the 
disclosures outweighs the goals of such

[[Page 59719]]

notice, especially where the fund does not charge additional premium 
for insured losses.
    Section 103(b) of the Act requires that insurers make certain 
disclosures to policyholders as a condition for federal payment under 
the Act. Section 50.10 of the regulations states, in part, that an 
insurer must provide clear and conspicuous disclosure to the 
policyholder of: (1) the premium charged for insured losses covered by 
the Program; and (2) the Federal share of compensation for insured 
losses under the Program. Congress required this disclosure in order 
``to enhance the competitiveness of the marketplace by better enabling 
consumers to comparison shop for terrorism insurance coverage, and to 
make policyholders better aware that the Federal government will be 
sharing the costs of such coverage with insurers thereby reducing the 
insurers' exposure.'' H.R. Conf. Rep. No. 107-779, at 24 (2002).
    After consideration of the comment and the relevant provisions of 
the Act, and following consultation with NAIC and additional study of 
the issue, Treasury is applying disclosure provisions to residual 
market mechanisms that have not yet issued disclosures to 
policyholders. Thus, Treasury is issuing regulations relating to the 
disclosures required of State residual market insurance entities and 
State workers' compensation funds by amending section 50.19 of subpart 
B in this final rule. These regulations supercede the earlier interim 
guidance referenced above and the safe-harbor provided in that guidance 
will no longer be available to these insurers.
    Section 50.19 generally follows the regulations applicable to all 
other insurers. In order to provide residual market insurance 
mechanisms with sufficient time to come into compliance (if they are 
not already), section 50.19 provides a 90-day safe harbor. For policies 
in force on October 17, 2003, or issued or renewed on or before January 
15, 2004, the disclosure is required by the Act but the condition for 
Federal payment is waived with regard to those policies until January 
15, 2004. In section 50.12(c), Treasury has provided that ``an insurer 
may provide disclosure using normal business practices, including forms 
and methods of communication used to communicate similar policyholder 
information to policyholders.'' Section 50.19(b) extends this rule to 
State residual market insurance entities and State workers' 
compensation funds and clarifies that while disclosures may be made by 
the residual market mechanism, the individual insurers that participate 
in the residual market, or the servicing carriers (depending on their 
normal business practices), the ultimate responsibility for ensuring 
that the disclosure requirements have been met rests with the insurer 
that will be filing any claim. In accordance with other requirements of 
subpart B, disclosure must be clear and conspicuous, made on a separate 
line item in the policy at the time of offer, purchase, and renewal of 
the policy.

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.''
    This rule amends subpart D to part 50 in title 31 that addresses 
how the Program applies to State residual market insurance entities and 
State workers' compensation funds. This rule also amends section 50.19 
of subpart B. This rule is intended to respond to section 103(d)(1) of 
the Act, which directs Treasury to issue regulations that apply the 
provisions of the Act to State residual market insurance entities and 
State workers' compensation funds. Given the importance of applying 
regulations to State residual market insurance entities and State 
workers' compensation funds, there is an urgent need to issue 
immediately effective regulations.
    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.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. The Act 
itself requires State residual market insurance entities and State 
workers' compensation funds to participate in the Program, and these 
entities or funds are generally not small entities.
    The Act itself requires all licensed or admitted insurers to 
participate in the Program. This includes all insurers regardless of 
size or sophistication. Although insurers that participate in sharing 
profits and losses of a State residual market insurance entity or State 
workers' compensation fund may include small entities, the proposed 
rule is based on existing business practices of residual market 
entities in determining the impact on participating insurers. The Act 
also defines property and casualty insurance to mean commercial lines 
without any reference to the size or scope of the commercial entity. 
Accordingly, any economic impact associated with the proposed rule 
flows from the Act and not the proposed rule. However, the Act and the 
Program are intended to provide benefits to the U.S. economy and all 
businesses, including small businesses, by providing a Federal 
reinsurance backstop to commercial property and casualty insurance 
policyholders and spreading the risk of insured loss resulting from an 
act of terrorism. Accordingly, a regulatory flexibility analysis is not 
required.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

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 50.19 of subpart B is revised to read as follows:


Sec.  50.19  1General disclosure requirements for State residual market 
insurance entities and State worker's compensation funds.

    (a) Policies in force on October 17, 2003, or renewed or issued on 
or before January 15, 2004. For policies in force on October 17, 2003, 
or renewed or issued on or before January 15, 2004, the disclosure 
required by section 103(b) of the Act as a condition for Federal 
payment is waived for those State residual market insurance entities 
and State workers' compensation funds that since November 26, 2002, 
have not provided disclosures to policyholders, until January 15, 2004, 
after which disclosures are to be made to policyholders for policies 
then in force and subsequently issued.

[[Page 59720]]

    (b) Residual Market Mechanism Disclosure. A State residual market 
insurance entity or State workers' compensation fund may provide the 
disclosures required by this subpart B to policyholders using normal 
business practices, including forms and methods of communication used 
to communicate similar policyholder information to policyholders. The 
disclosures may be made by the State residual market insurance entity 
or State workers' compensation fund itself, the individual insurers 
that participate in the State residual market insurance entity or a 
State workers' compensation fund, or its servicing carriers. The 
ultimate responsibility for ensuring that the disclosure requirements 
have been met rests with the insurer filing a claim under the Program.
    (c) Other requirements. Except as provided in this section, all 
other disclosure requirements set out in this subpart B apply to State 
residual insurance market entities and State workers' compensation 
funds.
    (d) Prior safe harbor superseded. This section supersedes the 
disclosure safe harbor provisions found at paragraph C.4 of the Interim 
Guidance issued by Treasury in a notice published on December 18, 2002, 
and published at 67 FR 78864 (December 26, 2002).

0
3. Subpart D of part 50 is amended by adding Sec. Sec.  50.30, 50.33, 
50.35, and 50.36 to read as follows:


Sec.  50.30  General participation requirements.

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


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

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


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

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


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

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

    Dated: October 1, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-26250 Filed 10-16-03; 8:45 am]
BILLING CODE 4811-15-P