[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