[Federal Register Volume 73, Number 181 (Wednesday, September 17, 2008)]
[Proposed Rules]
[Pages 53798-53809]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-21699]


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DEPARTMENT OF THE TREASURY

31 CFR Part 50

RIN 1505-AB10


Terrorism Risk Insurance Program; Recoupment Provisions

AGENCY: Departmental Offices, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of the Treasury (Treasury) is issuing this 
proposed rule as part of its implementation of Title I of the Terrorism 
Risk Insurance Act of 2002 (``TRIA'' or ``the Act''), as amended by the 
Terrorism Risk Insurance Extension Act of 2005 (``Extension Act'') and 
the Terrorism Risk Insurance Program Reauthorization Act of 2007 
(``Reauthorization Act''). The Act established a temporary Terrorism 
Risk Insurance Program (``TRIP'' or ``Program'') under which the 
Federal Government would share the risk of insured losses from 
certified acts of

[[Page 53799]]

terrorism with commercial property and casualty insurers. The 
Reauthorization Act has now extended the Program until December 31, 
2014. This proposed rule is the latest in a series of regulations 
Treasury has issued to implement the Act. The proposed rule 
incorporates and implements statutory requirements in section 103(e) of 
the Act, as amended by the Reauthorization Act, for the recoupment of 
the federal share of compensation for insured losses. In particular, 
the proposed rule describes how Treasury will determine the amounts to 
be recouped and establishes procedures insurers are to use for 
collecting Federal Terrorism Policy Surcharges and remitting them to 
Treasury. The rule generally builds upon previous rules issued by 
Treasury.

DATES: Written comments must be received on or before October 17, 2008.

ADDRESSES: Submit comments electronically through the Federal 
eRulemaking Portal: http://www.regulations.gov, or by mail (if hard 
copy, preferably an original and two copies) to: Terrorism Risk 
Insurance Program, Public Comment Record, Suite 2100, Department of the 
Treasury, 1425 New York Avenue, NW., Washington, DC 20220. Because 
paper mail in the Washington, D.C., area may be subject to delay, it is 
recommended that comments be submitted electronically. All comments 
should be captioned with ``TRIA Recoupment Proposed Rule Comments.'' 
Please include your name, affiliation, address, e-mail address, and 
telephone number in your comment. Comments will be available for public 
inspection on the Federal eRulemaking Portal and by appointment at the 
TRIP Office. To make appointments, call (202) 622-6770 (not a toll-free 
number).

FOR FURTHER INFORMATION CONTACT: Howard Leikin, Deputy Director, 
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 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. The Act 
authorizes Treasury to administer and implement the Terrorism Risk 
Insurance Program, including the issuance of regulations and 
procedures. The Program provides a federal backstop for insured losses 
from an act of terrorism. Section 103(e) of the Act gives Treasury 
authority to recoup federal payments made under the Program through 
policyholder surcharges.
    The Program was originally set to expire on December 31, 2005. On 
December 22, 2005, the President signed into law the Terrorism Risk 
Insurance Extension Act of 2005 (Pub. L. 109-144, 119 Stat. 2660), 
which extended the Program through December 31, 2007. On December 26, 
2007, the President signed into law the Terrorism Risk Insurance 
Program Reauthorization Act of 2007 (Pub. L. 110-160, 121 Stat. 1839), 
which extends the Program through December 31, 2014.
    The Reauthorization Act, among other changes, revised the 
recoupment provisions of the Act. These changes are explained below in 
the context of discussion of other provisions.

II. Previous Rulemaking

    To assist insurers, policyholders, and other interested parties in 
complying with immediately applicable requirements of the Act, Treasury 
has issued interim guidances to be relied upon by insurers until 
superseded by regulations. Rules establishing general provisions 
implementing the Program, including key definitions, and requirements 
for policy disclosures and mandatory availability, can be found in 
Subparts A, B, and C of 31 CFR Part 50. Treasury's rules applying 
provisions of the Act to State residual market insurance entities and 
State workers' compensation funds are at Subpart D of 31 CFR Part 50. 
Rules setting forth procedures for filing claims for payment of the 
Federal share of compensation for insured losses are at Subpart F of 31 
CFR Part 50. Subpart G of 31 CFR Part 50 contains rules on audit and 
recordkeeping requirements for insurers, while Subpart I of 31 CFR Part 
50 contains Treasury's rules implementing the litigation management 
provisions of section 107 of the Act.

III. The Proposed Rule

    This proposed rule would add a Subpart H to part 50, which 
comprises Treasury's regulations implementing the Act. It also proposes 
to add definitions in Sec.  50.5 of Subpart A and amend Sec. Sec.  
50.60 and 50.61 of Subpart G.

A. Overview

    Section 103(e)(6) of the Act, as amended, establishes an insurance 
marketplace aggregate retention amount for insured losses in any 
Program Year. This essentially guarantees that a certain aggregate 
amount of the insured losses will be borne by insurers and their 
policyholders in the insurance marketplace, irrespective of individual 
insurer deductibles and share of losses above those deductibles. Under 
the Reauthorization Act, the insurance marketplace aggregate retention 
amount for any additional Program Year after 2007 is the lesser of 
$27.5 billion and the aggregate amount, for all insurers, of insured 
losses during the Program Year. To carry this out, Sections 103(e)(7) 
and (e)(8) of the Act set forth the requirements for recoupment and 
policy surcharges for terrorism loss risk-spreading premiums. The Act 
establishes a mandatory recoupment amount representing all or a portion 
of the federal payments for insured losses. The Act requires the 
Secretary to collect, through terrorism loss risk-spreading premiums, 
an amount equal to 133 percent of the mandatory recoupment amount.\1\ 
The Act also authorizes the Secretary, at his discretion, to recoup 
additional amounts to the extent that federal payments exceed the 
mandatory recoupment amount. The Act requires that amounts established 
by the Secretary as terrorism loss risk-spreading premiums are to be 
imposed as a policyholder premium surcharge on property and casualty 
insurance policies in force after the date of establishment of the 
surcharge. The Secretary is required to provide for insurers to collect 
terrorism loss risk-spreading premiums and remit the amounts collected 
to Treasury.
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    \1\ Prior to the Reauthorization Act, under Section 103(e)(7)(C) 
of TRIA, the Secretary was required to collect premiums in an amount 
equal to any mandatory recoupment amount. The Reauthorization Act 
changed the amount to 133 percent of the mandatory recoupment 
amount.
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    The Reauthorization Act added section 103(e)(7)(E), which 
establishes deadlines by which the collection of terrorism loss risk-
spreading premiums, which are required for mandatory recoupment, must 
be accomplished. The amounts and deadlines vary depending on when an 
act of terrorism occurs:
     For any act of terrorism that occurs on or before December 
31, 2010, the Secretary shall collect all required premiums by 
September 30, 2012;

[[Page 53800]]

     For any act of terrorism that occurs between January 1 and 
December 31, 2011, the Secretary shall collect 35 percent of any 
required premiums by September 30, 2012, and the remainder by September 
30, 2017; and
     For any act of terrorism that occurs on or after January 
1, 2012, the Secretary shall collect all required premiums by September 
30, 2017.
The Reauthorization Act also requires the Secretary to issue 
regulations describing the procedures to be used for collecting the 
required premiums in these time periods.\2\
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    \2\ The collection timing requirements and the requirement to 
collect 133 percent of the mandatory recoupment amount were included 
in an amendment to H.R. 2761, the terrorism Risk Insurance Program 
Reauthorization Act of 2007. 153 Cong. Rec. S14592 (daily ed. Nov. 
16, 2007). In a letter dated November 15, 2007, to Chairman Dodd to 
the Senate Committee on Banking, Housing, and Urban Affairs, the 
Congressional Budget Office (CBO) estimated that the amended would 
cause Treasury to collect more revenues on an expedited basis an 
amounts sufficient to offset the estimated cost for the bill. http://www.cbo.gov/ftpdocs/88xx/doc8825/TRIAltrSenBankingComm.pdf. In its 
earlier cost estimate for the bill, CBO had noted that gross 
collections of surcharges would be partially offset by a loss of 
receipts from income and payroll taxes and, consistent with standard 
procedures for estimating the revenue impact of indirect business 
taxes, had reduced the gross revenue impact of the insurance 
surcharges by 25 percent to reflect offsetting effects on income and 
payroll tax receipts. (S. Rep. No. 110-215, at 14 (2007).)
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    The Reauthorization Act also added a provision (Section 
103(e)(7)(F)) requiring the Secretary to publish, within 90 days of an 
act of terrorism, an estimate of aggregate insured losses which shall 
be used as the basis for determining whether mandatory recoupment will 
be required. This 90-day period would begin to run from the date of 
certification. Such estimate is to be updated as appropriate, and at 
least annually.
    The proposed rule describes how Treasury will determine the amounts 
to be recouped, the factors and considerations that would be the basis 
for establishing the specific surcharge amount, the procedures for 
Treasury's notification to insurers regarding the surcharges to be 
imposed, and the requirements for insurers to collect, report, and 
remit surcharges to the Treasury. Treasury seeks comment on all aspects 
of the proposed rule.
    It is Treasury's intention, to the extent possible, to keep insurer 
reporting requirements for recoupment purposes consistent with 
reporting schedules and definitions that currently apply under state 
insurance regulations. Treasury notes that certain elements of the TRIA 
recoupment requirements are similar to the state processes involved in 
assessing insurers for state guaranty funds or collecting state premium 
taxes. In developing this proposed rule, Treasury has looked to these 
state regulatory processes as models for designing the recoupment 
mechanism and has consulted with the National Association of Insurance 
Commissioners (NAIC).

B. Description of the Proposed Rule

    The major provisions of the proposed rule are as follows:
1. Determination of Recoupment Amount
    The proposed rule describes how and when Treasury will determine 
recoupment amounts. Definitions of insurance marketplace aggregate 
retention amount, aggregate Federal share of compensation, mandatory 
and discretionary recoupment amounts, and uncompensated insured losses, 
which reflect requirements in the Act, would be added to Sec.  50.5.
    The mandatory recoupment amount is the difference between the 
insurance marketplace aggregate retention amount for a Program Year and 
the aggregate amount, for all insurers, of uncompensated insured losses 
during such Program Year (unless the aggregate amount of uncompensated 
insured losses is greater than the insurance marketplace aggregate 
retention, in which case the mandatory recoupment amount is zero). For 
any Program Year beginning with 2008 through 2014, the insurance 
marketplace aggregate retention amount is the lesser of $27.5 billion 
and the aggregate amount, for all insurers, of insured losses from 
Program Trigger Events during the Program Year. For example, if the 
aggregate amount of insured losses from Program Trigger Events during 
the Program Year were $10 billion, the insurance marketplace aggregate 
retention amount would be $10 billion. The mandatory recoupment amount 
would be the difference between $10 billion and the aggregate amount of 
uncompensated insured losses. ``Uncompensated insured losses'' is 
generally the aggregate amount of insured losses from Program Trigger 
Events not compensated by the Federal Government because the losses are 
within insurer deductibles or the 15 percent insurer share, or 
otherwise not paid. The amount of uncompensated insured losses depends 
on the distribution of those losses among insurers. So continuing with 
the above example, if uncompensated insured losses amounted to $8 
billion and Federal payments amounted to $2 billion, the mandatory 
recoupment amount would be $2 billion (the difference between $10 
billion and the aggregate amount of uncompensated insured losses of $8 
billion). The amount the Secretary would be required to collect would 
be 133 percent of $2 billion, or $2.67 billion.
    Section 103(e)(7)(D) of the Act also provides the Secretary with 
discretionary authority to recoup additional amounts to the extent that 
the amount of Federal financial assistance exceeds the mandatory 
recoupment amount. The Secretary may recoup such additional amounts the 
Secretary believes can be recouped based on: the ultimate costs to 
taxpayers of no additional recoupment; the economic conditions in the 
commercial marketplace; the affordability of commercial insurance for 
small- and medium-sized businesses; and such other factors that the 
Secretary considers appropriate. The proposed rule refers to these 
considerations in proposed Sec.  50.70(b). Because of the great 
uncertainty as to economic conditions after the occurrence of an act of 
terrorism, Treasury believes it is prudent to retain maximum 
flexibility to address these considerations at a future time. In 
exercising this discretionary authority, however, Treasury generally 
intends to consider these various factors on a broad-scale basis.
    As described above, the Reauthorization Act included certain 
deadlines for the collection of mandatory recoupment amounts. The 
timing requirements for collecting ``required premiums'' means that 
surcharges must be sufficient to recoup Federal funds outlaid as of 
these target dates for the Federal share of compensation for insured 
losses.
    The timing requirements for mandatory recoupment present two 
potential operational challenges, the severity of which depends on when 
an act of terrorism occurs within the designated time periods. The 
first is that in order to meet the deadlines, recoupment may have to be 
initiated based on estimates of insured losses and Federal outlays, but 
prior to the submission to Treasury of significant amounts of actual 
insurer claims for the Federal share of compensation for losses. The 
other challenge is that, again, in order to meet the deadlines, it may 
be difficult to provide the most desirable lead time notification to 
insurers for implementing surcharges. Both of these issues are further 
addressed below.
    Proposed Sec.  50.71(a) provides that if payments for the Federal 
share of compensation have been made for a Program Year, and Treasury 
determines that insured loss information is sufficiently developed and 
credible to serve as a basis for calculating

[[Page 53801]]

recoupment amounts, then Treasury will make an initial determination of 
any mandatory or discretionary recoupment amounts for that Program 
Year. Treasury believes that it is desirable, to the extent possible, 
to base recoupment amounts on retrospective reviews of insured losses 
and the Federal share of compensation for those losses. Determining 
accurate recoupment amounts is dependent on the availability of mature 
and credible insured loss information. Enough time must pass to allow 
losses to be reported by insureds to their insurers, and for insurers 
to settle, pay and report their insured losses to Treasury and others 
such as states and statistical agents. It is clear that insured loss 
amounts will be changing over time. As new information becomes 
available, estimates of insured losses for a Program Year will 
gradually approach an accurate final number. Ideally, Treasury will use 
loss information obtained from the submissions by insurers for the 
Federal share of compensation, as well as other industry sources, to 
determine the appropriate time to make an initial determination of 
recoupment amounts. Thereafter, as described under proposed Sec.  
50.71(c), Treasury will at least annually examine the latest available 
information on insured losses to recalculate any recoupment amounts 
until such time as Treasury determines that the calculation is 
considered final.
    However, Treasury must also be prepared to initiate mandatory 
recoupment based on estimates, prospectively, of insured losses, the 
Federal share of compensation for insured losses, and the resulting 
Federal outlays. Proposed Sec.  50.71(b) provides that within 90 days 
after an act of terrorism, the Secretary shall publish an estimate of 
aggregate insured losses which shall be used as the basis for initially 
determining whether mandatory recoupment will be required. Further, if 
at any time Treasury projects that payments for the Federal share of 
compensation will be made for a Program Year, and that in order to meet 
the collection timing requirements of section 103(e)(7)(E) of the Act 
it is necessary to use an estimate of such payments as a basis for 
calculating recoupment amounts, Treasury will make an initial 
determination of any mandatory recoupment amounts for that Program 
Year. As noted above, Treasury will at least annually examine the 
latest available information on insured losses to recalculate any 
recoupment amounts.
    Treasury is proposing, in Sec.  50.71(d), that it may issue a data 
call to insurers for the submission of information on insured losses 
from Program Trigger Events and for insurer deductible information. 
There are at least two circumstances where such a collection of data 
may be necessary. The first arises out of the requirement to publish 
within 90 days of an act of terrorism an estimate of insured losses and 
potentially to have to initiate mandatory recoupment based on the 
estimate in order to meet the Reauthorization Act's timing requirements 
for collections. Treasury intends, to the extent possible, to rely on 
existing industry statistical reporting mechanisms in making initial 
estimates. However, in order to initiate recoupment, it may be 
necessary to have more timely detail regarding insurer deductibles and 
reserves for insured losses from lines of business not normally 
included in existing industry reporting.
    A second potential need for a data call arises even in the 
circumstance where Treasury is able to retrospectively review insured 
loss payments in order to determine a recoupment amount. Treasury will 
have accurate data on how much has been paid as the Federal share of 
compensation and will also have accurate data on the insured losses of 
the insurers that have submitted claims for the Federal share. However, 
Treasury will not have its own access to data on insured losses of 
insurers that have not submitted claims for the Federal share (in most 
cases because the insurers have not met their insurer deductibles). If 
it is apparent from industry sources that the aggregate amount of 
insured losses from Program Trigger Events for a Program Year is 
clearly below the specific dollar amount of the insurance marketplace 
aggregate retention amount, i.e., $27.5 billion, then Treasury will 
have the information that is needed to determine the mandatory 
recoupment amount. If the aggregate amount of such insured losses 
appears to be close to or greater than the specific insurance 
marketplace aggregate retention dollar amount, then Treasury may 
require more specific data on insured losses of insurers who have not 
submitted a claim for the Federal share.
    It is Treasury's intention to proceed with the development of forms 
for the electronic submission of insurer responses to a data call, with 
appropriate opportunity being provided for public review and comment. 
The circumstances of a particular Program Trigger Event will likely 
have a significant bearing on which insurers should receive the data 
call and how the data should be coordinated, perhaps with the NAIC or a 
particular state. Additional data call guidance will be provided as 
necessary based on the circumstances of the particular Program Trigger 
Event. Treasury expects that for insurers that have already submitted 
data in conjunction with a claim for the Federal share, the requirement 
to respond to a special data call may not apply.
2. Establishment of Federal Terrorism Policy Surcharge
    Once Treasury has determined an amount to be recouped, an 
assessment period and Surcharge amount will be established. The 
proposed rule includes new definitions for ``Federal Terrorism Policy 
Surcharge'' (also referred to herein as the Surcharge), ``assessment 
period'' and ``Surcharge effective date'', which would be added to 
Sec.  50.5 of the regulations. Proposed Sec.  50.72(b) provides that 
the Surcharge is the obligation of the policyholder and payable to the 
insurer with the premium for a property and casualty insurance policy 
in effect during the assessment period.
    Treasury is proposing to define an ``assessment period'' as a 
period during which policyholders must pay, and insurers must collect, 
the Federal Terrorism Policy Surcharge for remittance to Treasury. 
Treasury's intention is that, to the extent possible, assessment 
periods will be in full-year increments in order to equitably impose 
the Surcharge on policyholders who have policy term effective dates 
throughout the year. Due to the collection deadlines, however, this may 
not always be feasible.
    The proposed definition for ``Federal Terrorism Policy Surcharge'' 
is the amount established by Treasury as a policy surcharge on policies 
of ``property and casualty insurance'' as that term is defined in the 
existing Sec.  50.5(n) (proposed to become Sec.  50.5(u)). The 
Surcharge would be expressed as a percentage of the amount charged as 
written premium for commercial property and casualty coverage in such 
policies.
    The factors and considerations Treasury would consider in 
establishing the amount of the Federal Terrorism Policy Surcharge are 
set out in proposed Sec.  50.72(a). They include requirements of the 
Act as well as other factors. In particular, section 103(e)(7)(C) of 
TRIA as amended by the Reauthorization Act, requires that once a 
mandatory recoupment amount is determined, collections are to equal 133 
percent of that amount.
    In order to estimate the premium base for the Surcharge during the 
anticipated assessment period, Treasury will use generally available 
industry reported information for written premium from

[[Page 53802]]

the prior calendar year for the lines of business defined as commercial 
lines of property and casualty insurance under Treasury regulations. 
Treasury is aware that there might be trends in written premium (e.g, 
hard or soft markets) that could be significant to the amounts 
anticipated during the assessment period. To the extent such trends are 
known and quantifiable, Treasury will consider the effect on the 
premium base and adjust the surcharge percentage accordingly.
    Establishment of the Surcharge will be heavily influenced by the 
collection timing requirements of section 103(e)(7)(E) of the Act for 
mandatory recoupment. In the case of discretionary recoupment, the 
collection timing requirements do not apply, but the Act specifies that 
the Surcharge can be no greater, on an annual basis, than three percent 
of the premium charged for property and casualty insurance coverage 
under the policy.
    Section 103(e)(8)(D) of the Act also requires Treasury, in 
determining the method and manner of imposing the Surcharge, to take 
into consideration the economic impact on commercial centers of urban 
areas, risk factors related to rural areas and smaller commercial 
centers, and various exposures to terrorism risk for different lines of 
insurance. While Treasury will consider these factors at the time it 
becomes necessary to establish the amount of a Surcharge, for the 
following reasons it is likely that the same Federal Terrorism Policy 
Surcharge would apply to all commercial property and casualty lines of 
insurance, as defined by the Act, and all rating classifications.
    It is Treasury's understanding, after consulting with industry 
experts, that recognition of differences in risk factors related to 
rural versus urban areas and different lines of insurance is 
substantially accomplished through the rating plans for commercial 
lines insurance policies. These rating plans reflect variations in the 
underlying premiums to which the Surcharge would be applied based on 
the same sorts of adjustment factors described in the Act--rural versus 
urban risks, line of business risk, etc. For example, the same 
Surcharge percentage will produce a larger dollar amount when applied 
to the greater premiums in larger urban centers than it will produce 
when applied to premiums for insurance policies covering risks in other 
areas. In other words, variations in underlying premium amounts for 
commercial lines insurance policies already appear to substantially 
operate in a way that addresses the adjustment factors described in the 
Act.
    Treasury is also concerned about the time and resources needed to 
perform the complex analyses and to construct and implement a detailed 
risk classification scheme reflecting these factors. Too detailed a 
schedule of Surcharges could also create an undue administrative burden 
in the insurance marketplace where, generally, surcharge mechanisms are 
implemented on a comparatively broad basis. Moreover, these economic 
considerations would need to be applied along with the requirements to 
collect 133 percent of the mandatory recoupment amount by certain 
deadlines. As noted above, the Surcharge may very well be implemented 
on the basis of estimates of future Federal outlays for the Federal 
share of compensation for insured losses.
    Treasury is therefore inclined to implement the same Surcharge for 
all commercial property and casualty lines of insurance and all rating 
classifications. However, based on a review of economic conditions at 
the time a Surcharge amount is established, Treasury might, if 
necessary, and within the collection timing constraints, mitigate 
economic impacts by imposing a lesser Surcharge over a longer period of 
time. Treasury welcomes comments on this approach.
3. Notification of Recoupment
    Section 50.73 of the proposed rule states that Treasury will 
provide reasonable advance notice of any initial Surcharge effective 
date. This effective date shall be January 1, unless such date would 
not provide for sufficient notice of implementation while meeting the 
collection timing requirements of section 103(e)(7)(E) of the Act. As 
explained below, the purpose of a January 1 effective date is to 
coordinate with the NAIC Annual Statement reporting period. Treasury's 
preference is to provide at least 180 days advance notice, allowing 
insurers to schedule necessary system changes and to take into account 
policy renewal cycles. Treasury will provide notification annually as 
to continuation of the Surcharge. Treasury also proposes to provide 
reasonable advance notice of any modification or cessation of the 
Surcharge. In such cases, Treasury anticipates providing at least 90 
days notice. Notifications will be accomplished through publications in 
the Federal Register or in another manner Treasury deems appropriate, 
based upon the circumstances of the act of terrorism under 
consideration.
    With respect to a January 1 effective date, Treasury believes that 
there is a clear advantage to coordinating an assessment period and the 
written premium and remitted Surcharge amounts with the calendar year 
basis for the NAIC Annual Statements. However, the timing of an act of 
terrorism, the emerging estimates of insured losses and resulting 
Federal outlays, and the requirement to collect the Surcharges by 
certain deadlines could impinge on Treasury's ability to provide a full 
180 days' notice to insurers of a Surcharge implementation as of 
January 1. There are two possible alternatives for managing this 
circumstance for which Treasury is interested in public comment.
    The first alternative is a possible bifurcated notification to 
insurers. Treasury would notify insurers 180 days in advance of January 
1, that an assessment period will commence, but the actual Surcharge 
amount would not yet be provided. This would allow insurers time to 
develop systems changes to implement a Surcharge. The actual Surcharge 
amount would be provided at a later date, perhaps at least 60 days in 
advance of January 1.
    The second alternative is to relax the standard of a January 1 
implementation date. The assessment period could start as of the first 
day of a later month, but continue through that calendar year. The 
result of this would be a more complicated reconciliation of written 
premium and Surcharge amounts with Annual Statement data, but would yet 
be substantially consistent with the Annual Statement reporting period.
4. Collecting the Surcharge
    Section 50.74 of the proposed rule specifies that insurers shall 
collect a Federal Terrorism Policy Surcharge as established by Treasury 
on new, renewal, mid-term, or audit additional premiums for all 
property and casualty insurance policies with policy term effective 
dates during the assessment period. Policies placed in force prior to 
the assessment period are not subject to the Surcharge until renewal, 
regardless of mid-term endorsements. Property and casualty insurance 
has been previously defined in the existing Sec.  50.5(n). That 
definition was the result of extensive consultation, which produced a 
regulatory definition of commercial property and casualty insurance 
crafted in terms of specific lines of business employed in the NAIC's 
Exhibit of Premium and Losses, modified by the exceptions for certain 
types of insurance excluded by the Act.
    Insurers will be obligated to implement the Federal Terrorism 
Policy Surcharge on a policyholder transaction level. Treasury prefers 
a Surcharge collection mechanism that is relatively

[[Page 53803]]

simple to administer and audit and that avoids complex calculations and 
systems adjustments. However, there is a complicating factor in the 
definition of commercial property and casualty insurance. Certain 
exclusions in the definition increase the likelihood of individual 
policies providing types of insurance that are considered to fall both 
within and outside the Act's definition of property and casualty 
insurance. The authorities under the Act (at subsections 103(e)(8)(A) 
and (C) \3\) limit the application of the Surcharge to the policy 
premium amount charged for property and casualty insurance coverage 
under the policy.
    In this rule, as a basic starting point, Treasury proposes that the 
Surcharge apply to the full premium for any policy falling within the 
definition of property and casualty insurance in proposed Sec.  
50.5(u), i.e., the premium for the policy is reported on the insurer's 
NAIC Annual Statement, or equivalent reporting document, in a specified 
commercial line of business as defined by Treasury in Sec.  50.5(n)(1). 
However, a portion of a policy's premium would not be subject to the 
Surcharge if, despite the line of business premium reporting to the 
NAIC, that portion of the premium is for coverage under the policy that 
is a type of insurance not considered to be commercial property and 
casualty insurance as specified in Treasury regulation Sec.  
50.5(n)(2). Treasury anticipates that these cases are most likely to 
occur within Line 17--Other Liability, where professional liability, 
excess liability and umbrella liability policy premiums are reported. 
There may also be cases occurring in other lines involving coverage 
that is considered to be personal, not commercial (residential 
dwellings insured under monoline policies where premium is reported on 
Line 3--Fire) and therefore should be excluded, consistent with 
Treasury's rules in allocating such premiums for purposes of 
calculating direct earned premium. In the case of a policy providing 
multiple insurance coverages, where an insurer cannot identify the 
premium amount charged specifically for property and casualty coverage 
under the policy, the proposed rule provides for two circumstances. If 
the insurer estimates that the portion of the premium amount charged 
for coverage other than property and casualty insurance is de minimis 
to the total premium for the policy, the insurer may impose and collect 
from the policyholder a Surcharge amount based on the total premium for 
the policy. If the insurer estimates that the portion of the premium 
amount charged for coverage other than property and casualty insurance 
is not de minimis, the insurer shall impose and collect from the 
policyholder a Surcharge amount based on a reasonable estimate of the 
premium amount for the property and casualty insurance coverage under 
the policy. Treasury intends to develop reporting forms that will 
provide additional guidance for determining the premium subject to the 
Surcharge.
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    \3\ Under the Reauthorization Act, Section 103(e)(8)(C) now 
applies only to discretionary recoupment.
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    As part of this rule, Treasury is proposing adding a definition to 
Sec.  50.5 for direct written premium, which is the premium information 
for commercial property and casualty insurance, as defined in the 
regulations, that is included by an insurer in column 1 of the Exhibit 
of Premiums and Losses of the NAIC Annual Statement or in an equivalent 
reporting requirement. Consistent with the discussion above, Treasury 
is proposing that in its reporting to Treasury, an insurer would 
subtract the premium that is not subject to the Surcharge. Otherwise, 
the full premium for the policy is included for Surcharge computation. 
Treasury is also proposing minor adjustments to the definition of 
direct earned premium to eliminate some inconsistencies between that 
definition and the new definition of direct written premium. The 
definition of direct written premium has been crafted to be consistent 
with premium billing and collection practices on a transactional level, 
as well as consistent with state regulatory requirements for reporting 
written premiums. The Surcharge itself is not considered premium.
    Treasury is also proposing in Sec.  50.74 that insurers may satisfy 
the obligation to collect the Federal Terrorism Policy Surcharge by 
simply remitting the calculated Surcharge amount to Treasury in 
circumstances where the expense of collecting the Surcharge from all 
policyholders during an assessment period exceeds the amount of the 
Surcharge anticipated to be collected.
    The Federal Terrorism Policy Surcharge is a repayment of Federal 
financial assistance in an amount required by law. It is not a premium 
paid by a policyholder to an insurer. The proposed rule provides that 
no fees or commissions may be charged on the Surcharge. In addition, 
the proposed rule provides that if an insurer returns any unearned 
premium to a policyholder, it shall also return any Federal Terrorism 
Policy Surcharge collected that is attributable to the unearned 
premium.
    As noted above, while the collection of the Surcharge is an 
obligation of the insurer, the payment of the Surcharge is an 
obligation of the policyholder. The proposed rule provides that the 
insurer shall have such rights and remedies to enforce the collection 
of the Surcharge that are equivalent to those that exist under 
applicable state or other law for nonpayment of premium. Insurers 
should follow the appropriate state law in such circumstances.
5. Remitting the Surcharge
    Treasury is proposing in Sec.  50.76 that, notwithstanding the 
definition of an insurer in existing Sec.  50.5(f) (proposed to become 
Sec.  50.5(l)), the collection, reporting and remittance of Federal 
Terrorism Policy Surcharges to Treasury shall be the responsibility of 
each individual insurer entity as otherwise defined in Sec.  50.5(f) 
without including affiliates. This is because affiliations of insurers 
that are relevant in determining insurer deductibles are not pertinent 
to the collection and remittance of the Surcharges.
    Consistent with the Act, Treasury's proposed approach to the 
collection and remittance of the Federal Terrorism Policy Surcharge is 
to place an obligation on the policyholder to pay the Surcharge and 
require the insurer to collect the Surcharge from each policyholder. 
Treasury's proposed rule provides insurers the means to address non-
payment of the Surcharge and provides for the reporting and remittance 
of the Surcharge to Treasury according to calculated amounts that are 
based on statutory financial reporting already required by the states. 
The description of premium subject to the Surcharge in proposed Sec.  
50.74(c) and the definition of ``direct written premium'' in proposed 
Sec.  50.5(g) and other provisions of the proposed rule on the 
treatment of the Surcharge at both the policy transaction and financial 
statement reporting levels have been crafted so that the Surcharge 
amounts calculated for remittance to Treasury will be equivalent to the 
actual collections. By relying on premium amounts that are reported to 
the States, and that are already subject to other audit requirements, 
Treasury expects that its own audit responsibilities can be 
accomplished with less focus on individual insurer compliance with the 
Surcharge collection than would otherwise be necessary. This will 
result in a more efficient mechanism for recoupment for Treasury, 
insurers, and policyholders.
    In developing reporting and remittance frequency requirements, 
Treasury has considered the amount of

[[Page 53804]]

time insurers may be holding the funds collected prior to remittance to 
Treasury, and the current Value of Federal Funds published by the 
Treasury's Financial Management Service. Treasury also recognizes that 
a monthly accounting period is standard within the insurance industry. 
The proposed rule would allow insurers to retain the interest (and 
therefore not have to separately account and remit such amounts to 
Treasury) on funds collected on a ``written'' basis and remitted 
monthly to Treasury. Treasury believes that this is a reasonably 
efficient approach to administering the collection and remittance 
requirements of the Act. Should the Value of Federal Funds at the time 
of any actual imposition of the Federal Terrorism Policy Surcharge be 
significantly greater than current levels, Treasury will revisit this 
issue.
    Section 50.75 of the proposed rule calls for insurers to report and 
remit Federal Terrorism Policy Surcharges on a monthly basis, starting 
with the first month within the assessment period, through November of 
the calendar year and on an annual basis as of the last month. As 
discussed earlier, ideally the first month within the assessment period 
would be January. The proposed requirements are intended to ease the 
administrative burden by building upon reporting requirements already 
imposed by the States. The definition of ``direct written premium'' on 
which an insurer must report and the specific due dates for reporting 
in proposed Sec.  50.75(a) have been coordinated with NAIC Annual 
Statement requirements. The main reconciliation of information reported 
to Treasury and to NAIC would be accomplished with the year-end NAIC 
Annual Statements.
    The collection timing requirements of section 103(e)(7)(E) of the 
Act generally require recoupment of certain amounts of Federal outlays 
through September 30, coinciding with the end of the Federal fiscal 
year. Treasury will estimate recoupment amounts and Surcharges so that 
these deadlines are met, while still keeping to an end of calendar year 
date for defining an assessment period. This end date will allow the 
reporting and reconciliation to be coordinated with Annual Statements.
    To accommodate possible changes in the Federal Terrorism Policy 
Surcharge amount from one year to another, Treasury is proposing that 
direct written premium be broken down by policy year. This is similar 
to requirements imposed at the state level with regard to other 
assessments. Further, since remittance is on a ``written'' basis, there 
will be a continued reporting requirement for one year following the 
end of the assessment period. During this period, Treasury anticipates 
that insurers will primarily be seeking reimbursement from Treasury for 
Federal Terrorism Policy Surcharges returned to policyholders in 
conjunction with a return of unearned premiums.
    Treasury will be developing forms for the reporting and remittance 
of the Federal Terrorism Policy Surcharge and plans on implementing an 
electronic reporting and payment facility.
6. Audit Authority and Recordkeeping
    As stated previously, it is Treasury's intention that its reporting 
requirements, coordinated and reconciled with other state level 
reporting, will result in less of an audit burden than might otherwise 
be necessary. The proposed rule includes a revision of Sec.  50.60 and 
an addition to Sec.  50.61. The revision adds language to the effect 
that the Secretary of the Treasury, or an authorized representative, 
shall have, upon reasonable notice, access to all books, documents, 
papers and records of an insurer that are pertinent to the Federal 
Terrorism Policy Surcharge. The addition generally provides that 
records relating to premiums, Surcharges, collections and remittances 
to Treasury shall be retained by an insurer and kept available for 
review for not less than three (3) years following the conclusion of 
the assessment period or settlement of accounts with Treasury, 
whichever is later.
7. Enforcement
    Insurers will be responsible for collecting appropriate Surcharge 
amounts from their policyholders. Because proposed Sec.  50.74(d) 
provides that insurers have rights and remedies to enforce collection 
that are equivalent to those that exist under state law for nonpayment 
of premium, Treasury believes insurers will have the requisite tools to 
collect the Surcharge. Treasury may rely on its authority to impose 
civil monetary penalties on an insurer pursuant to section 104(e)(1)(A) 
of the Act for the failure to charge, collect or timely remit proper 
Surcharge amounts to enforce the provisions of this proposed rule.
8. Other Technical Changes
    As noted under ``Collecting the Surcharge,'' Treasury is proposing 
some minor changes to the existing definition of ``direct earned 
premium.'' Although the complete definition is set out for information, 
no substantive changes were made to existing Sec.  50.5(d)(1)(iv), 
(d)(2), (d)(3), and (d)(4). Similarly, although the existing provision 
on recordkeeping is set out in proposed Sec.  50.61(a), no substantive 
changes were made to that provision.

IV. Procedural Requirements

    Executive Order 12866, ``Regulatory Planning and Review''. This 
rule is a significant regulatory action for purposes of Executive Order 
12866, ``Regulatory Planning and Review,'' and has been reviewed by the 
Office of Management and Budget.
    Regulatory Flexibility Act. Pursuant to the Regulatory Flexibility 
Act, 5 U.S.C. 601 et seq., it is hereby certified that this proposed 
rule will not have a significant economic impact on a substantial 
number of small entities. Treasury is required to recoup all or a 
portion of the Federal share of compensation paid to insurers for 
insured losses in accordance with the Act. The Act itself requires that 
a policyholder surcharge be imposed on all policies of property and 
casualty insurance, as defined in the Act. The Act requires Treasury to 
provide for insurers to collect the surcharges and remit them to 
Treasury. The Act also defines property and casualty insurance to mean 
commercial lines insurance, with certain specific exclusions, without 
any reference to the size or scope of the insurer or the policyholder. 
Accordingly, any economic impact associated with the proposed rule 
flows from the Act and not the proposed rule. A regulatory flexibility 
analysis is thus not required.
    Paperwork Reduction Act. The collection of information contained in 
this proposed rule has been submitted to the Office of Management and 
Budget (OMB) for review under the requirements of the Paperwork 
Reduction Act, 44 U.S.C. 3507(d).
    Organizations and individuals desiring to submit comments 
concerning the collection of information in the proposed rule should 
direct them to: Office of Management and Budget, Attn: Desk Officer for 
the Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503. A copy of the comments should also be 
sent to Treasury at the addresses previously specified. Comments on the 
collection of information should be received by November 17, 2008.
    Treasury specifically invites comments on: (a) Whether the proposed 
collection of information is necessary for the proper performance of 
the mission of Treasury, and whether the information will have 
practical utility; (b) the accuracy of the estimate of the burden of 
the collections of information (see below); (c) ways to enhance the

[[Page 53805]]

quality, utility, and clarity of the information collection; (d) ways 
to minimize the burden of the information collection, including through 
the use of automated collection techniques or other forms of 
information technology; and (e) estimates of capital or start-up costs 
and costs of operation, maintenance, and purchase of services to 
maintain the information.
    At this time comments are being sought with respect to the 
collection of information in the proposed rule for: (a) The data call 
described at Sec.  50.71 (d); (b) the burden of one-time systems 
changes needed for insurer collection and remittance of surcharges as 
required by Sec.  50.74 and Sec.  50.75; (c) the monthly collection, 
remittance and reconciliation of surcharges pursuant to Sec.  50.74 and 
Sec.  50.75; and (d) the recordkeeping requirement in Sec.  50.61(b) 
for information to be used by Treasury (or its designees) to audit for 
the proper collection and remittance of recoupment amounts to Treasury. 
The forms to be prescribed by Treasury for the data call to collect 
information to ascertain the aggregate amount of insured losses will 
require information readily derived from existing normal industry 
internal and external reporting. This information would be needed by 
Treasury for the purpose of determining initial or recalculated 
recoupment amounts. Hence, Treasury may issue data calls to insurers 
for insurer deductible and insured loss information by Program Year. 
The number of respondents to such a data call is not expected to exceed 
200 insurers. The data to be obtained in the immediate aftermath of 
certification of an act of terrorism would include the insurers' total 
expected losses and estimated insurer deductibles. These data would be 
used to formulate initial estimates of aggregate insured losses for 
determining whether mandatory recoupment might be required. A 
subsequent call(s) to refine the information received would include 
catastrophe code, line of business, losses paid, allocated loss 
adjustment expenses paid, case reserves, incurred but not reported 
reserves as well as the total expected loss and insurer deductible 
data. All of these are routinely generated and reported data in the 
insurance industry. Treasury estimates that an insurer will require 5 
hours, on average, to assemble data and respond to the Treasury 
request. The estimated total burden would therefore be 1,000 hours (200 
insurers x 5 hours). At a blended, fully loaded hourly rate of $85.00, 
the cost would be $85,000.
    If recoupment of the Federal share of compensation is implemented 
by Treasury, all insurers subject to the Act will be required to create 
and maintain records concerning their direct written premium, 
Surcharges, Surcharge amounts collected and Surcharge amounts remitted 
to Treasury. Calculating and imposing surcharges is a standard 
insurance processing system function that would be specifically 
implemented for the Federal Terrorism Policy Surcharge. The burden 
associated with the collection of information in the proposed rule is 
comprised of three components: (1) Surcharge implementation; (2) 
monthly submission and reconciliation; and (3) on-going recordkeeping.
    Treasury estimates that an insurer will require, one time at the 
onset of the imposition of Surcharges, 40 hours, on average, to make 
systems changes necessary to implement the collection of Surcharges 
from policyholders. Treasury also estimates that the proposed rule will 
impose an annual recordkeeping burden, with respect to each insurer 
subject to the Act, of 4 hours. The estimated total burden for 
implementation is 80,000 hours (2,000 insurers x 40 hours) and the 
estimated total annual recordkeeping burden is 8,000 hours (4 hours x 
2,000 insurers). If imposed, the first year cost to respondents for 
implementation of systems and procedures for the recoupment 
requirements is estimated to be $7,400,000 (approximately 80,000 hours 
at a blended, fully loaded hourly rate of $92.50). Once implemented and 
incorporated into respondents' systems, there is expected to be 
virtually no additional operation and maintenance cost.
    To limit the burden on insurers, the reporting requirement to 
Treasury is being designed for electronic fulfillment. The data 
required are those normally developed and reported in the conduct of 
policy writing and accounting. Development and transmission of the 
individual monthly submission (including the final month's annual 
statement) is expected to be 5 hours, or 60 hours annually for each of 
the estimated 2,000 insurers subject to the requirement. At a blended 
hourly rate of $70, the estimated annual burden to insurers is 120,000 
hours and $8,400,000.
    The recordkeeping requirement is mandatory for any insurer that 
writes property and casualty insurance as defined by the Act and 
Treasury's regulations. The number of insurers subject to recordkeeping 
is estimated to be 2,000. Treasury believes that the information that 
insurers would be required to generate and retain under Sec.  50.61(b) 
involves systems and records that insurers routinely operate and 
maintain in the course of issuing and administering policies, 
performing basic accounting, and regularly reporting to state 
regulators. The total annual recordkeeping costs for respondents is 
estimated to be $240,000 (approximately 8,000 hours at a rate of $30.00 
per hour). These costs could continue in subsequent years.
    The total first-year cost of these activities is estimated at 
$16,040,000 with later years estimated at $8,400,000 for collection and 
submission activities and $240,000 for recordkeeping.

List of Subjects in 31 CFR Part 50

    Terrorism risk insurance.

Authority and Issuance

    For the reasons stated above, 31 CFR part 50 is proposed to be 
amended as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

    1. The authority citation for part 50 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322, as amended by Pub. L. 109-144, 119 Stat. 2660 
and Pub. L. 110-160, 121 Stat. 1839 (15 U.S.C. 6701 note).

    2. Section 50.5 is amended as follows:
    a. Paragraphs (d), (e), (f), (g), (h), (i), (j), (k), (l), (m), 
(n), (o), (p), (q), and (r) are redesignated as paragraphs (f), (k), 
(l), (m), (o), (p), (q), (r), (s), (t), (u), (v), (w), (y) and (aa), 
respectively.
    b. New paragraphs (d), (e), (g), (h), (i), (j), (n), (x), and (z) 
are added.
    c. Newly designated paragraph (f) is revised.
    The revisions read as follows:


Sec.  50.5  Definitions.

* * * * *
    (d) Aggregate Federal share of compensation--means the aggregate 
amount paid by Treasury for the Federal share of compensation for 
insured losses in a Program Year.
    (e) Assessment period--means a period, established by Treasury, 
during which policyholders of property and casualty insurance policies 
must pay, and insurers must collect, the Federal Terrorism Policy 
Surcharge for remittance to Treasury.
    (f) Direct earned premium means 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

[[Page 53806]]

admitted insurer that reports to the NAIC, direct earned premium is the 
premium information for commercial property and casualty insurance 
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 it reflects premiums for commercial property 
and casualty insurance 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 
(insurance primarily designed to cover personal, family or household 
risk exposures, with the exception of insurance 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 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 risk exposures at such 
locations, is primarily not commercial property and casualty insurance, 
and therefore premiums for such insurance may also be fully excluded by 
an insurer from the calculation of direct earned premium. For purposes 
of this section, commercial property and casualty insurance for losses 
occurring at the locations described in section 102(5)(A) and (B) of 
the Act is incidental if less than 25 percent of the total direct 
earned premium for the insurance policy is attributable to coverage at 
such locations. Also for purposes of this section, coverage for 
commercial risk exposures is incidental if it is combined with 
coverages that otherwise do not meet the definition of commercial 
property and casualty insurance and less than 25 percent of the total 
direct earned premium for the insurance policy is attributable to the 
coverage for commercial risk exposures.
    (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.
    (2) Insurers that do not report to NAIC. An insurer that does not 
report to the NAIC, but that is licensed or admitted by any State (such 
as certain farm or county mutual insurers), should use the guidance 
provided in paragraph (f)(1) of this section to assist in ascertaining 
its direct earned premium.
    (i) Direct earned premium may be ascertained by adjusting data 
maintained by such insurer or reported by such insurer to its State 
regulator to reflect a breakdown of premiums for commercial and 
personal property and casualty exposure risk as described in paragraph 
(f)(1) of this section and, if necessary, re-stated to reflect the 
accrual method of determining direct earned premium versus direct 
premium.
    (ii) Such an insurer should consider other types of payments that 
compensate the insurer for risk of loss (contributions, assessments, 
etc.) as part of its 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 inforce 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.
    (4) Federally approved insurers. A federally approved insurer under 
section 102(6)(A)(iii) of the Act should use a methodology similar to 
that specified for eligible surplus line carrier insurers in paragraph 
(f)(3) of this section to calculate its direct earned premium. Such 
calculation should be adjusted to reflect the limitations on scope of 
insurance coverage under the Program (i.e., to the extent of federal 
approval of commercial property and casualty insurance in connection 
with maritime, energy or aviation activities).
    (g) Direct written premium--means the premium information for 
commercial property and casualty insurance as defined in paragraph (u) 
of this section that is included by an insurer in column 1 of the 
Exhibit of Premiums and Losses of the NAIC Annual Statement or in an 
equivalent reporting requirement. The Federal Terrorism Policy 
Surcharge is not included in amounts reported as direct written 
premium.
    (h) Discretionary recoupment amount--means such amount of the 
aggregate Federal share of compensation in excess of the mandatory 
recoupment amount that the Secretary has determined will be recouped 
pursuant to section 103(e)(7)(D) of the Act.
    (i) Federal Terrorism Policy Surcharge--means the amount 
established by Treasury under section 103(e)(8) of the Act which is 
imposed as a policy surcharge on property and casualty insurance 
policies, expressed as a percentage of the written premium.
    (j) Insurance marketplace aggregate retention amount--means an 
amount for a Program Year as set forth in section 103(e)(6) of the Act. 
For any Program Year beginning with 2008 through 2014, such amount is 
the lesser of $27,500,000,000 and the aggregate amount, for all 
insurers, of insured

[[Page 53807]]

losses from Program Trigger Events during the Program Year.
* * * * *
    (n) Mandatory recoupment amount--means the difference between the 
insurance marketplace aggregate retention amount for a Program Year and 
the uncompensated insured losses during such Program Year. The 
mandatory recoupment amount shall be zero, however, if the amount of 
such uncompensated insured losses is greater than the insurance 
marketplace aggregate retention amount.
* * * * *
    (x) Surcharge effective date--means the date established by 
Treasury that begins the assessment period.
* * * * *
    (z) Uncompensated insured losses--means the aggregate amount of 
insured losses, from Program Trigger Events, of all insurers in a 
Program Year that is not compensated by the Federal Government because 
such losses:
    (1) Are within the insurer deductibles of insurers, or
    (2) Are within the portions of losses in excess of insurer 
deductibles that are not compensated through payments made as a result 
of claims for the Federal share of compensation.
* * * * *
    3. Revise Sec. Sec.  50.60 and 50.61 of Subpart G to read as 
follows:


Sec.  50.60  Audit authority.

    The Secretary of the Treasury, or an authorized representative 
shall have, upon reasonable notice, access to all books, documents, 
papers and records of an insurer that are pertinent to amounts paid to 
the insurer as the Federal share of compensation for insured losses, or 
pertinent to any Federal Terrorism Policy Surcharge that is imposed 
pursuant to subpart H of this part, for the purpose of investigation, 
confirmation, audit and examination.


Sec.  50.61  Recordkeeping.

    (a) Each insurer that seeks payment of a Federal share of 
compensation under Subpart F of this Part shall retain such records as 
are necessary to fully disclose all material matters pertinent to 
insured losses and the Federal share of compensation sought under the 
Program, including, but not limited to, records regarding premiums and 
insured losses for all commercial property and casualty insurance 
issued by the insurer and information relating to any adjustment in the 
amount of the Federal share of compensation payable. Insurers shall 
maintain detailed records for not less than five (5) years from the 
termination dates of all reinsurance agreements involving commercial 
property and casualty insurance subject to the Act. Records relating to 
premiums shall be retained and available for review for not less than 
three (3) years following the conclusion of the policy year. Records 
relating to underlying claims shall be retained for not less than five 
(5) years following the final adjustment of the claim.
    (b) Each insurer that collects a Federal Terrorism Policy Surcharge 
as required by subpart H of this part shall retain records related to 
such Surcharge, including records of the property and casualty 
insurance premiums subject to the Surcharge, the amount of the 
Surcharge imposed on each policy, aggregate Federal Terrorism Policy 
Surcharges collected, and aggregate Federal Terrorism Policy Surcharges 
remitted to Treasury during each assessment period. Such records shall 
be retained and kept available for review for not less than three (3) 
years following the conclusion of the assessment period or settlement 
of accounts with Treasury, whichever is later.
    4. Subpart H of part 50 is added to read as follows:
Subpart H--Recoupment and Surcharge Procedures
Sec.
50.70 Mandatory and discretionary recoupment.
50.71 Determination of recoupment amount.
50.72 Establishment of Federal Terrorism Policy Surcharge.
50.73 Notification of recoupment.
50.74 Collecting the Surcharge.
50.75 Remitting the Surcharge.
50.76 Insurer responsibility.

Subpart H--Recoupment and Surcharge Procedures


Sec.  50.70  Mandatory and discretionary recoupment.

    (a) Pursuant to section 103 of the Act, the Secretary shall impose 
and insurers shall collect, such Federal Terrorism Policy Surcharges as 
needed to recover 133 percent of the mandatory recoupment amount for 
any Program Year.
    (b) In his discretion, the Secretary may recover any portion of the 
aggregate Federal share of compensation that exceeds the mandatory 
recoupment amount through Federal Terrorism Policy Surcharges based on 
the factors set forth in section 103(e)(7)(D) of the Act.
    (c) If the Secretary is required to impose Federal Terrorism Policy 
Surcharges as provided in paragraph (a) of this section, then the 
required amounts shall be collected in accordance with section 
103(e)(7)(E) of the Act:
    (1) For any act of terrorism that occurs on or before December 31, 
2010, the Secretary shall collect all required amounts by September 30, 
2012;
    (2) For any act of terrorism that occurs between January 1 and 
December 31, 2011, the Secretary shall collect 35 percent of any 
required amounts by September 30, 2012, and the remainder by September 
30, 2017; and
    (3) For any act of terrorism that occurs on or after January 1, 
2012, the Secretary shall collect all required amounts by September 30, 
2017.


Sec.  50.71  Determination of recoupment amounts.

    (a) If payments for the Federal share of compensation have been 
made for a Program Year, and Treasury determines that insured loss 
information is sufficiently developed and credible to serve as a basis 
for calculating recoupment amounts, Treasury will make an initial 
determination of any mandatory or discretionary recoupment amounts for 
that Program Year.
    (b) (1) Within 90 days after certification of an act of terrorism, 
the Secretary shall publish in the Federal Register an estimate of 
aggregate insured losses which shall be used as the basis for initially 
determining whether mandatory recoupment will be required.
    (2) If at any time Treasury projects that payments for the Federal 
share of compensation will be made for a Program Year, and that in 
order to meet the collection timing requirements of section 
103(e)(7)(E) of the Act it is necessary to use an estimate of such 
payments as a basis for calculating recoupment amounts, Treasury will 
make an initial determination of any mandatory recoupment amounts for 
that Program Year.
    (c) Following the initial determination of recoupment amounts for a 
Program Year, Treasury will recalculate any mandatory or discretionary 
recoupment amount as necessary and appropriate, and at least annually, 
until a final recoupment amount for the Program Year is determined. 
Treasury will compare any recalculated recoupment amount to amounts 
already remitted and/or to be remitted to Treasury for Federal 
Terrorism Policy Surcharges previously established to determine whether 
any additional amount will be recouped by Treasury.
    (d) For the purpose of determining initial or recalculated 
recoupment amounts, Treasury may issue a data call to insurers for 
insurer deductible and insured loss information by Program

[[Page 53808]]

Year. Treasury's determination of the aggregate amount of insured 
losses from Program Trigger Events of all insurers for a Program Year 
will be based on the amounts reported in response to a data call and 
any other information Treasury in its discretion considers appropriate. 
Submission of data in response to a data call shall be on a form 
promulgated by Treasury.


Sec.  50.72  Establishment of Federal Terrorism Policy Surcharge.

    (a) Treasury will establish the Federal Terrorism Policy Surcharge 
based on the following factors and considerations:
    (1) In the case of a mandatory recoupment amount, the requirement 
to collect 133 percent of that amount;
    (2) The total dollar amount to be recouped as a percentage of the 
latest available annual aggregate industry direct written premium 
information;
    (3) The adjustment factors for terrorism loss risk-spreading 
premiums described in Section 103(e)(8)(D) of the Act;
    (4) The annual 3 percent limitation on terrorism loss risk-
spreading premiums collected on a discretionary basis as provided in 
Section 103(e)(8)(C) of the Act;
    (5) A preferred minimum initial assessment period of one full year 
and subsequent extension periods in full year increments;
    (6) The collection timing requirements of section 103(e)(7)(E) of 
the Act;
    (7) The likelihood that the amount of the Federal Terrorism Policy 
Surcharge may result in the collection of an aggregate recoupment 
amount in excess of the planned recoupment amount; and
    (8) Such other factors as the Secretary considers important.
    (b) The Federal Terrorism Policy Surcharge shall be the obligation 
of the policyholder and is payable to the insurer with the premium for 
a property and casualty insurance policy in effect during the 
assessment period established by Treasury. See Sec.  50.74(c).


Sec.  50.73  Notification of recoupment.

    (a) Treasury will provide notifications of recoupment through 
publication of Notices in the Federal Register or in another manner 
Treasury deems appropriate, based upon the circumstances of the act of 
terrorism under consideration.
    (b) Treasury will provide reasonable advance notice to insurers of 
any initial Federal Terrorism Policy Surcharge effective date. This 
effective date shall be January 1, unless such date would not provide 
for sufficient notice of implementation while meeting the collection 
timing requirements of section 103(e)(7)(E) of the Act.
    (c) Treasury will provide reasonable advance notice to insurers of 
any modification or cessation of the Federal Terrorism Policy 
Surcharge.
    (d) Treasury will provide notification to insurers annually as to 
the continuation of the Federal Terrorism Policy Surcharge.


Sec.  50.74  Collecting the Surcharge.

    (a) Insurers shall collect a Federal Terrorism Policy Surcharge 
from policyholders as required by Treasury.
    (b) Policies subject to the Federal Terrorism Policy Surcharge are 
those for which direct written premium is reported on commercial lines 
of business on the NAIC's Exhibit of Premiums and Losses (commonly 
known as Statutory Page 14) as provided in Sec.  50.5(u)(1), or 
equivalently reported.
    (c) For policies subject to the Federal Terrorism Policy Surcharge, 
the Surcharge shall be imposed and collected on a written premium basis 
for policies in force during the assessment period. All new, renewal, 
mid-term, and audit additional premiums for a policy term are subject 
to the Surcharge in effect on the policy term effective date. For 
purposes of this subpart:
    (1) Written premium basis means the premium amount charged a 
policyholder by an insurer for property and casualty insurance as 
defined in Sec.  50.5(u), including all premiums, policy expense 
constants and fees defined as premium pursuant to the Statements of 
Statutory Accounting Principles established by the National Association 
of Insurance Commissioners.
    (2) In the case of a policy providing multiple insurance coverages, 
if an insurer cannot identify the premium amount charged a policyholder 
specifically for property and casualty insurance under the policy, 
then:
    (i) If the insurer estimates that the portion of the premium amount 
charged for coverage other than property and casualty insurance is de 
minimis to the total premium for the policy, the insurer may impose and 
collect from the policyholder a Surcharge amount based on the total 
premium for the policy, but
    (ii) If the insurer estimates that the portion of the premium 
amount charged for coverage other than property and casualty insurance 
is not de minimis, the insurer shall impose and collect from the 
policyholder a Surcharge amount based on a reasonable estimate of the 
premium amount for the property and casualty insurance coverage under 
the policy.
    (3) The Federal Terrorism Policy Surcharge is not considered 
premium.
    (d) A policyholder must pay the applicable Federal Terrorism Policy 
Surcharge when due. The insurer shall have such rights and remedies to 
enforce the collection of the Surcharge that are the equivalent to 
those that exist under applicable state or other law for nonpayment of 
premium.
    (e) When an insurer returns an unearned premium to a policyholder, 
it shall also return any Federal Terrorism Policy Surcharge collected 
that is attributable to the unearned premium.
    (f) Notwithstanding paragraphs (a), (b), and (c) of this section, 
if the expense of collecting the Federal Terrorism Policy Surcharge 
from all policyholders of an insurer during an assessment period 
exceeds the amount of the Surcharge anticipated to be collected, such 
insurer may satisfy its obligation to collect by omitting actual 
collection and instead remitting to Treasury the amount otherwise due.
    (g) The Federal Terrorism Policy Surcharge is repayment of Federal 
financial assistance in an amount required by law. No fee or commission 
shall be charged on the Federal Terrorism Policy Surcharge.


Sec.  50.75  Remitting the Surcharge.

    (a) Each insurer shall provide a statement of direct written 
premium and Federal Terrorism Policy Surcharges to Treasury on a 
monthly basis, starting with the first month within the assessment 
period, through November of the calendar year and on an annual basis as 
of the last month of the calendar year. Reporting will be on a form 
prescribed by Treasury and will be due according to the following 
schedule:
    (1) For each month beginning in the first month of the assessment 
period through November, the last business day of the calendar month 
following the month for which premium is reported, and
    (2) March 1 for the calendar year.
    (b) The monthly statements provided to Treasury will include the 
following:
    (1) Cumulative calendar year direct written premium adjusted for 
premium not subject to the Federal Terrorism Policy Surcharge, 
summarized by policy year.
    (2) The aggregate Federal Terrorism Policy Surcharge amount 
calculated by applying the established Surcharge percentage to the 
insurer's adjusted direct written premium by policy year.
    (3) Insurer certification of the submission.
    (c) The annual statements to be provided to Treasury will include 
the following:

[[Page 53809]]

    (1) Direct written premium as defined in Sec.  50.5(g), adjusted 
for premium not subject to the Federal Terrorism Policy Surcharge, 
summarized by policy year and by commercial line of insurance as 
specified in Sec.  50.5(u).
    (2) The aggregate Federal Terrorism Policy Surcharge amount 
calculated by applying the established Surcharge percentage to the 
insurer's adjusted direct written premium by policy year.
    (3) In the case of an insurer that has chosen not to collect the 
Federal Terrorism Policy Surcharge from its policyholders as provided 
in Sec.  50.74(f), a certification that the expense of collecting the 
Surcharge during the assessment period would have exceeded the amount 
of the Surcharge collected over the assessment period.
    (4) Insurer certification of the submission.
    (d) The calculated aggregate Federal Terrorism Policy Surcharge 
amount, as described in paragraphs (b)(2) and (c)(2) of this section, 
shall be remitted to Treasury upon submission of each monthly and 
annual statement. An insurer may request refund of any Federal 
Terrorism Policy Surcharges previously remitted to Treasury that were 
subsequently returned by the insurer to a policyholder as attributable 
to unearned premium under Sec.  50.74(e). A negative calculated amount 
in a monthly or annual statement indicates payment from Treasury is due 
to the insurer.
    (e) Reporting shall continue for the one-year period following the 
end of the assessment period established by Treasury, unless otherwise 
permitted by Treasury.


Sec.  50.76  Insurer responsibility.

    For purposes of the collection, reporting and remittance of Federal 
Terrorism Policy Surcharges to Treasury, an ``insurer,'' as defined in 
Sec.  50.5(l), shall not include any affiliate of the insurer.

David G. Nason,
Assistant Secretary (Financial Institutions).
[FR Doc. E8-21699 Filed 9-16-08; 8:45 am]
BILLING CODE 4810-25-P