[Federal Register Volume 70, Number 113 (Tuesday, June 14, 2005)]
[Rules and Regulations]
[Pages 34348-34351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-11684]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB09


Terrorism Risk Insurance Program: Additional Claims Issues; 
Insurer Affiliates

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 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. This final rule clarifies that, for 
purposes of calculating direct earned premium and insurer deductibles 
and meeting the requirements for claiming the Federal share of 
compensation for insured losses for any Program Year, an insurer's 
affiliates will be determined based on the insurer's circumstances as 
of the date of occurrence of the act of terrorism that is the first act 
of terrorism certified by the Secretary for that Program Year.

DATES: This final rule is effective July 14, 2005.

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Senior Insurance 
Advisor, or David Brummond, Legal Counsel, Terrorism Risk Insurance 
Program, (202) 622-6770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

    On November 26, 2002, the President 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, and to issue regulations and procedures. The Program provides 
a Federal reinsurance backstop for three years. The Program ends 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 (as defined under the Act) 
occurring during the period between

[[Page 34349]]

November 26, 2002, and December 31, 2005.
    Each entity that meets the definition of ``insurer'' (well over 
2000 firms) must participate in the Program. The amount of the Federal 
share of compensation for an insured loss resulting from an act of 
terrorism is to be determined based upon 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 a percentage of the value of direct 
earned premiums collected over certain statutory periods. Once an 
insurer has met its deductible, the Federal payments cover 90 percent 
of insured losses above the deductible, subject to an annual industry-
aggregate limit of $100 billion.

II. Proposed Rule and Overview of Comments

    Under the Act and regulations, ``affiliates'' are treated 
collectively as one insurer for purposes of calculating the insurer 
deductible for a Program Year. Treasury issued a proposed rule on 
insurer affiliations, with a request for comment, on January 18, 2005 
(70 FR 2830). The proposed rule would have clarified subpart F of 31 
CFR part 50, the claims procedures for insurers seeking the Federal 
share of compensation for insured losses. The proposed rule added new 
section 50.55, which provided that for purposes of subpart F, an 
insurer's affiliates for any Program Year are to be determined based on 
the insurer's circumstances as of the date of the first certified act 
of terrorism in that Program Year. This clarification was needed 
because affiliations of insurers may change over the course of a 
Program Year and there may be more than one certified act of terrorism 
in a Program Year. After careful consideration of comments on the 
proposed rule, Treasury is now issuing this final rule.
    Treasury received one comment on the proposed rule from an ad hoc 
industry working group that included members from eight national 
property-casualty insurance trade associations, collectively 
representing insurers, reinsurers and producers. The commenter 
disagreed with the proposed rule, asserting that adoption of the 
``fixed'' affiliate status approach would lead to unintended compliance 
and administrative consequences for the industry and Treasury in the 
event of multiple terrorist acts during a Program Year. The working 
group recommended that Treasury adopt a regulation that would: ``(a) 
tie Treasury or insurer action (e.g., reporting, claim payment) 
pursuant to TRIA to an insurer's affiliate status as of the date of 
that action; and (b) determine an insurer's TRIA deductible based on 
affiliate status as of the date of each certified terrorism event in 
any given Program Year.''
    Treasury appreciates the concerns raised by the commenter and has 
thoroughly reviewed the material provided. With the potential for 
changes in insurer affiliations during the year, an annual deductible 
presents implementation problems no matter how a final rule is 
constructed. However, the Act defines an insurer deductible on a 
Program Year basis. As further explained below in response to specific 
concerns, Treasury believes that, overall, fixing affiliations as of 
one event in a Program Year presents a more comprehensive solution to 
all of the potential implementation problems. After reviewing the 
comment provided, however, Treasury is modifying the proposed rule in 
certain respects to clarify and improve how the regulation would be 
applied. Specifically, the final rule provides that an insurer's 
affiliates are determined by the circumstances existing on the date of 
occurrence of the act of terrorism that is the first act of terrorism 
in a Program Year to be certified by the Secretary for that Program 
Year. In addition, based on the comment presented, Treasury intends to 
provide for enough flexibility in its administration of the claims and 
payment process to accommodate, where possible, particular insurer 
circumstances.
    To assist in explaining its position, the commenter constructed 
several hypothetical scenarios which served to illustrate the concerns 
with the proposed rule.
    1. The industry working group presented Treasury with an example to 
illustrate how deductible and Federal share calculations would be 
applied with its suggested approach to affiliations, i.e., considered 
as of each certified act. In Treasury's view, the suggested approach of 
calculation of the deductible at each event essentially produces an 
approach that blends a ``per event'' methodology with a methodology 
based on insurer affiliations as of the last certified act of terrorism 
in a Program Year. As more specifically explained in (a)-(d) below, 
after careful review of the example, Treasury continues to believe that 
the first certified act of terrorism must be the point in time that 
establishes insurer affiliations.
    (a) The working group's approach relies on Treasury having to 
assume how the Federal payments for a first event are distributed 
within the insurer group in order to determine the appropriate 
deductible applicable to the new configuration of affiliations as of a 
second event. Specifically, the example provided assumes that Federal 
payments are allocated among affiliates in proportion to their share of 
the total insured losses of their insurer group. This may not be the 
way payments are actually allocated.
    (b) The example presents a simplified scenario where all claims 
from a first certified act of terrorism have been settled and paid 
prior to an insurer seeking the Federal share for claims arising from a 
second certified act. In a real situation it is much more likely that 
claims from the first event will continue to be submitted even as 
claims from the second event are presented. Thus, in such a scenario, 
it is unclear what deductible should be applied for losses arising out 
of the first event. Treasury anticipates that the administrative burden 
in processing such a mixture of claims exceeds the reasonable 
capabilities of the reporting and processing systems.
    (c) The working group's approach shifts deductible amounts based on 
the direct earned premium for an individual insurer within an insurer 
group to another insurer group as affiliations change. The suggested 
methodology for determining the group deductible for the new 
affiliation at the time of a subsequent certified act of terrorism can 
lead to duplicative application of deductible amounts within a single 
Program Year. This is contrary to the Act's requirement of applying a 
single calendar year deductible to the insured losses of insurers.
    (d) As noted above, the Act requires the application of a single 
calendar year deductible to the insured losses of each insurer. Since 
Treasury has no separate contracts with insurers, there is less 
flexibility in dealing with the allocations and calculations proposed 
by the commenter than what the commenter suggests. The working group's 
approaches to allocating the deductible and to calculating the Federal 
share seem more appropriate as items subject to negotiation in crafting 
the terms of a merger or acquisition agreement than a Federal 
rulemaking.
    2. The working group noted that pursuant to the proposed rule, in a 
Program Year with multiple certified acts of terrorism, even a minimal 
first event involving insured losses for only one insurer would fix 
affiliations for the entire industry. The working group also

[[Page 34350]]

noted that the order in which events are actually certified as acts of 
terrorism may be different than the order in which such events 
occurred. Consequently, the proposed rule could result in claims 
reporting and Federal payments being made under a set of affiliations 
that does not match the affiliations that were in place at the time of 
the first act of terrorism in a Program Year.
    Treasury has extensively reviewed both of these concerns. Having 
concluded that calculating the insurer deductible and processing the 
Federal share of compensation requires insurer affiliations to be fixed 
at a single point in a Program Year, Treasury examined how, within that 
constraint, the commenter's two concerns could be addressed. To address 
the first concern, i.e., minimal first event fixing affiliations for 
the entire industry, Treasury reconsidered the alternative discussed in 
the preamble of the proposed rule of establishing affiliations as of 
the first event for which an insurer, or any affiliates, actually had 
insured losses. In reexamining this alternative in conjunction with 
addressing the second concern, i.e., the order in which acts of 
terrorism are certified may be different than the order in which the 
acts occur, it became apparent that crafting a final rule that would 
address both concerns raised by the working group resulted in an overly 
complex process for determining affiliations. Treasury has concluded 
that it is more important to clarify that the first certified act of 
terrorism will be based on the certification date, not the occurrence 
date of the underlying act giving rise to certification. This will 
allow for the expeditious processing of claims for the Federal share 
without having to depend on a certification being made for a prior 
terrorist event that may still be under investigation. For the final 
rule, Treasury has thus clarified the regulation to provide generally 
that an insurer's affiliations are determined by the circumstances on 
the date of occurrence of the act that is the first act of terrorism 
certified by the Secretary for the Program Year. This is illustrated in 
the following example.
    A possible act of terrorism occurs in March for which 
investigations begin. In the meantime a second terrorist event occurs 
in September that is readily identifiable as an act of terrorism under 
the Act and is certified by the Secretary in October. The March event 
is certified by the Secretary in November. In this case, the first 
certified act used to determine affiliations for the Program Year would 
be the September terrorist event. Affiliations would be fixed for the 
entire Program Year as of the occurrence date of the act of terrorism 
in September.
    3. The working group stated that the proposed rule would not treat 
insurers equitably because as affiliations change, the effective 
deductible for an insurer deviates from the Act's mandated 15 percent 
for Program Year 3. Treasury disagrees that the proposed or final rule 
results in inequitable treatment of insurers. The working group's 
example calculations, based on its hypothetical scenarios, purport to 
show that the proposed rule results in the insurer deductible deviating 
from the mandated 15 percent of ``direct earned premium'' (DEP) for a 
second act of terrorism. This point is based on the premise that the 
deductible can vary as of each event based on the affiliations at the 
time of each event. This is not possible with an annual deductible as 
mandated by the Act. The commenter's proposal would result in the re-
computation of deductibles and payments for losses for the entire 
Program Year based on affiliations as of the last act of terrorism in 
the Program Year. The same logic used in the example could then be 
applied to the prior event to show that now the deductible in that 
first event deviated from the required 15 percent insurer deductible. 
Treasury's rule applies the deductible, set at 15 percent of DEP for 
the affiliated structure at the time of the first terrorism event, 
consistently throughout the Program Year.
    4. The working group asserted that complications would arise from 
the proposed rule's impact on producers because disclosure requirements 
may have been met by sending the disclosures through producers. The 
commenter noted that the proposed rule's ``fictional'' affiliations 
could require an agent to assist an insurer in certifying compliance 
with the Act's notice requirements where the agent no longer has any 
legal relationship with the insurer. Treasury appreciates the concern 
raised by producers that they may be called upon to assist an insurer 
in certifying compliance. The issue that is raised, however, is not 
related to the Program's proposed treatment of affiliations, but is 
rooted in the fact that affiliations may change over time, even in the 
aftermath of a single event or independent of any event. Treasury 
expects an insurer to be able to certify that disclosures have been 
made and that records are available for audit, if necessary. Treasury 
has recognized that insurers may or may not carry out their disclosure 
responsibilities through producers. Whatever approach is taken is an 
insurer decision on how to comply with the Act's disclosure 
requirements. In any case, Treasury believes the decision to call upon 
producers to certify or otherwise document insurer compliance with the 
Program's disclosure requirements is a prerogative of the insurer.

III. Final Rule

    The final rule adds new section 50.55 and provides that for the 
purposes of subpart F (Claims Procedures), an insurer's affiliates for 
any Program Year shall be determined by the circumstances existing on 
the date of occurrence of the act of terrorism that is the first act of 
terrorism in a Program Year to be certified by the Secretary. The final 
rule also includes a technical change to the definition of 
``affiliate'' in section 50.5(c) to provide a cross-reference to 
section 50.55.
    This final rule provides additional guidance to insurers on how 
affiliations will be viewed for purposes of calculating the insurer 
deductible under the Act and otherwise meeting requirements of subpart 
F. By clarifying insurer rights and obligations that were cited as 
concerns by the working group, this rulemaking makes available 
information relevant to insurers evaluating and addressing risks 
associated with corporate restructuring. Treasury recognizes that claim 
submissions and Federal payments for insured losses may continue for 
years following a certified act of terrorism. Consequently, over time, 
processing difficulties may arise from a change in an insurer's 
affiliation status whether or not more than one certified act of 
terrorism occurs in a Program Year. Within the scope of this rule and 
other constraints on Treasury in administering the claims process, 
Treasury will strive for ease of operations. This could, for example, 
involve recognition of alternative reporting structures where there is 
no impact on insurer deductibles and/or the amount of the Federal share 
of compensation owed to affected insurers. Treasury may make 
adjustments in its procedures, promulgate revised rules, or on a case-
by-case basis enter into agreements with the involved parties to 
address administrative difficulties arising from changes in insurer 
affiliations once insured losses have been incurred.

IV. Procedural Requirements

    Executive Order 12866, ``Regulatory Planning and Review''. This 
rule is not a significant regulatory action for purposes of Executive 
Order 12866, ``Regulatory Planning and Review,'' and therefore has not 
been reviewed by the Office of Management and Budget.

[[Page 34351]]

    Regulatory Flexibility Act. Pursuant the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., it is hereby certified that the final rule 
will not have a significant economic impact on a substantial number of 
small entities. Treasury is required to pay the Federal share of 
compensation to insurers for insured losses in accordance with the Act. 
A condition of Federal payment is that the insurer must submit to 
Treasury, in accordance with procedures established by Treasury, a 
claim for payment and certain certifications. The Act itself requires 
all insurers receiving direct earned premium for any type of property 
and casualty insurance, as defined in the Act, 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 of insurance without any reference to size or 
scope of the insurer or the insured. Accordingly, any economic impact 
associated with the proposed rule flows from the Act and not the 
proposed rule. The rule merely clarifies the point in time at which 
insurer affiliations are determined for purposes of the Program. A 
regulatory flexibility analysis is thus 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 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 of subpart A is amended by adding paragraph (c)(6) to 
read as follows:


Sec.  50.5  Definitions.

* * * * *
    (c) * * *
    (6) See Sec.  50.55 of this part for determination of an insurer's 
affiliates for purposes of subpart F.
* * * * *

0
3. Subpart F of part 50 is amended by adding Sec.  50.55 to read as 
follows:


Sec.  50.55  Determination of Affiliations.

    For the purposes of subpart F, an insurer's affiliates for any 
Program Year shall be determined by the circumstances existing on the 
date of occurrence of the act of terrorism that is the first act of 
terrorism in a Program Year to be certified by the Secretary for that 
Program Year.

    Dated: June 8, 2005.
Gregory Zerzan,
Acting Assistant Secretary of the Treasury.
[FR Doc. 05-11684 Filed 6-13-05; 8:45 am]
BILLING CODE 4810-02-P