Terrorism Insurance: Implementation of the Terrorism Risk	 
Insurance Act of 2002 (23-APR-04, GAO-04-307).			 
                                                                 
After the terrorist attacks of September 11, 2001, insurance	 
coverage for terrorism largely disappeared. Congress passed the  
Terrorism Risk Insurance Act (TRIA) in 2002 to help commercial	 
property-casualty policyholders obtain terrorism insurance and	 
give the insurance industry time to develop mechanisms to provide
such insurance after the act expires on December 31, 2005. Under 
TRIA, the Department of Treasury caps insurer liability and would
process claims and reimburse insurers for a large share of losses
from terrorist acts that Treasury certified as meeting certain	 
criteria. As Treasury and industry participants have operated	 
under TRIA for more than a year, GAO was asked to describe (1)	 
their progress in implementing the act and (2) changes in the	 
terrorism insurance market under TRIA.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-307 					        
    ACCNO:   A09875						        
  TITLE:     Terrorism Insurance: Implementation of the Terrorism Risk
Insurance Act of 2002						 
     DATE:   04/23/2004 
  SUBJECT:   Insurance						 
	     Insurance claims					 
	     National preparedness				 
	     Terrorism						 
	     Insurance regulation				 
	     Treasury Terrorism Risk Insurance			 
	     Program						 
                                                                 

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GAO-04-307

United States General Accounting Office

     GAO	Report to the Chairman, Committee on Financial Services, House of
                                Representatives

April 2004

                                   TERRORISM
                                   INSURANCE

           Implementation of the Terrorism Risk Insurance Act of 2002

                                       a

GAO-04-307

Highlights of GAO-04-307, a report to the Chairman, Committee on Financial
Services, House of Representatives

After the terrorist attacks of September 11, 2001, insurance coverage for
terrorism largely disappeared. Congress passed the Terrorism Risk
Insurance Act (TRIA) in 2002 to help commercial property-casualty
policyholders obtain terrorism insurance and give the insurance industry
time to develop mechanisms to provide such insurance after the act expires
on December 31, 2005. Under TRIA, the Department of Treasury caps insurer
liability and would process claims and reimburse insurers for a large
share of losses from terrorist acts that Treasury certified as meeting
certain criteria. As Treasury and industry participants have operated
under TRIA for more than a year, GAO was asked to describe (1) their
progress in implementing the act and (2) changes in the terrorism
insurance market under TRIA.

GAO recommends that the Secretary of the Treasury, as part of Treasury's
study of the effectiveness of TRIA and after consultation with insurance
industry participants, identify for Congress alternatives that may exist
for expanding the availability and affordability of terrorism insurance
after TRIA expires. These alternatives could assist Congress during its
deliberations about terrorism insurance.

April 2004

TERRORISM INSURANCE

Implementation of the Terrorism Risk Insurance Act of 2002

Treasury and industry participants have made significant progress in
implementing TRIA during its first year, but Treasury has important work
to complete in order to comply with its responsibilities under the act.
For example, Treasury has issued regulations to define program
requirements, created and fully staffed the Terrorism Risk Insurance
Program office, and begun data collection efforts in support of mandated
studies. Insurers also have adjusted their operations and policies to
comply with TRIA. However, insurers have expressed concerns that Treasury
has not yet decided whether to extend through 2005 the requirement that
insurers offer terrorism coverage on terms that do not differ materially
from other coverage. Although the act gives Treasury until September 1,
2004, to decide this issue, a more timely decision is needed to avoid
hindering underwriting and pricing decisions for policies that are issued
or renewed through 2005. In addition, Treasury has not fully established a
claims processing and payment structure. Insurers are concerned that a
delayed payment of claims by Treasury, whether because of the length of
time taken to certify that an act of terrorism met the requirements for
federal reimbursement or from inadequate claims processing capability,
might seriously impact insurer cash flows or, in certain circumstances,
insurer solvency.

It appears that Congress's first objective in creating TRIA-to ensure that
business activity did not materially suffer from a lack of available
terrorism insurance-has been largely achieved. Since TRIA was enacted in
November 2002, terrorism insurance has been generally available to
businesses. But most commercial policyholders are not buying the coverage.
According to insurance industry experts, purchases have been higher in
areas considered to be at high risk of another terrorist attack. However,
many policyholders with businesses or properties not located in perceived
high-risk locations are not buying coverage because they view any price
for terrorism insurance as high relative to their perceived risk exposure.
Further, those who have bought terrorism insurance remain exposed to
significant perils. Insurers have broadened long-standing policy
exclusions of nuclear, biological, and chemical events. Congress's second
objective-to give private industry a transitional period during which it
could begin pricing terrorism insurance and develop ways to cover losses
after TRIA expired-has not yet been achieved. Industry sources indicated
that under TRIA, insurance market participants have made no progress to
date toward the development of reliable methods for pricing terrorism
risks and made little movement toward developing any mechanism that would
enable insurers to provide terrorism insurance to businesses without
government involvement.

www.gao.gov/cgi-bin/getrpt?GAO-04-307.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Richard J. Hillman at (202)
512-8678 or [email protected].

Contents

  Letter

Results in Brief
Background
Treasury and Industry Participants Have Made Progress in

Implementing TRIA, but Treasury Has Not Yet Achieved Key Goals

Despite Availability, Few Are Buying Terrorism Insurance, and the Industry
Has Made Little Progress toward Post-TRIA Coverage

Conclusions
Recommendation for Executive Action
Agency Comments

1 3 5

8

22 29 30 30

  Appendix

            Appendix I: Comments from the Department of the Treasury

Table Table 1: TRIA-Mandated Studies and Data Collection

Figures Figure 1: Prerequisites and Limits of Coverage under TRIA 6 Figure
2: Regulations and Procedures Necessary to Implement TRIA 12

Abbreviations

GAO U.S. General Accounting Office
NAIC National Association of Insurance Commissioners
NBC nuclear, biological, and chemical
OMB Office of Management and Budget
RFP Request for Proposal
SFP standard fire policy
TRIA Terrorism Risk Insurance Act of 2002
TRIP Terrorism Risk Insurance Program

Contents

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A

United States General Accounting Office Washington, D.C. 20548

April 23, 2004

The Honorable Michael Oxley Chairman, Committee on Financial Services
House of Representatives

Dear Mr. Chairman:

The terrorist attacks of September 11, 2001, drastically changed the way
insurers viewed the risk of terrorism. An industry that had considered the
risk of terrorism so low that it did not identify or price terrorism risk
separate from property and casualty coverage will pay approximately $40
billion for losses arising from September 11, according to industry
experts. In the aftermath, we reported that insurance coverage was
disappearing for terrorist events, particularly for large businesses and
those perceived to be at some risk.1 As contracts between reinsurers and
insurers came up for renewal, reinsurers excluded terrorism from
coverage.2 Without reinsurance, insurers retained greater levels of risks
than they could responsibly carry, and their reaction was to exclude these
risks from commercial policies as they were renewed.

In light of concerns that the lack of terrorism insurance could have
significant effects on the economy or that, in the event of another
terrorist attack, the economic costs would fall directly on the victims
and the government, Congress passed the Terrorism Risk Insurance Act of
2002 (TRIA), which took effect on November 26, 2002.3 Under TRIA, the
Department of the Treasury (Treasury) would reimburse insurers for a large
share of the losses associated with certain acts of foreign terrorism that
occur during the 3-year term of the act. The purpose of TRIA is twofold:
to make terrorism insurance widely available and affordable to

1U.S. General Accounting Office, Terrorism Insurance: Rising Uninsured
Exposure to Attacks Heightens Potential Economic Vulnerabilities,
GAO-02-472T (Washington, D.C.: Feb. 27, 2002).

2Reinsurance is a mechanism that insurance companies routinely use to
spread risk associated with insurance policies. Simply put, it is
insurance for insurance companies. Reinsurance is a normal business
practice that satisfies a number of needs in the insurance marketplace,
including the need to expand capacity and obtain protection against
potential catastrophes.

3When the President signed TRIA into law on November 26, 2002, its
provisions took effect immediately.

commercial policyholders for the duration of the act and to provide a
transitional period during which insurance market participants could find
ways to price terrorism insurance and develop market-driven resources and
mechanisms that would offer terrorism insurance after TRIA expires on
December 31, 2005.

TRIA requires that all insurers selling commercial lines of property and
casualty insurance "make available" coverage for certain terrorist events
in the first 2 years of the program. TRIA defines "make available" to mean
that the coverage must be offered for insured losses arising from
terrorist events and that coverage not differ materially from the terms,
amounts, and limitations applicable to coverage for losses arising from
other types of events. However, TRIA gives Treasury the option of
determining whether the "make available" requirement should be extended
through 2005, the third year of the act, and gives the agency until
September 1, 2004, to do so. Also, not all acts of terrorism will trigger
reimbursements under TRIA: the Secretary of the Treasury must "certify"
that an act of terrorism meets the criteria specified in TRIA.4 For
example, "an individual or individuals acting on behalf of any foreign
person or foreign interest" must commit the act. After an event is
certified, TRIA authorizes Treasury to reimburse insurers for most of the
insured losses, after they have paid specified deductible amounts.
Moreover, TRIA authorizes Treasury to administer the Terrorism Risk
Insurance Program (TRIP) office, through which Treasury will administer
TRIA provisions and would pay claims. TRIA also mandates various studies
and data collection efforts and contains provisions affecting the National
Association of Insurance Commissioners (NAIC).5

Treasury and industry participants have operated under TRIA for more than
a year. Consistent with your request, in this report we describe (1) the
progress made by Treasury and insurance industry participants in
implementing TRIA provisions and (2) changes in the market for terrorism
insurance coverage under TRIA.

To address these objectives, we reviewed and analyzed Treasury's final and
proposed regulations in the Federal Register, public comments that were

4Section 102 of TRIA provides that the Secretary of the Treasury, in
concurrence with the Secretary of State and the Attorney General of the
United States, shall determine whether an event should be certified as an
act of terrorism, based on certain criteria.

5NAIC is a voluntary organization of the chief insurance regulatory
officials of the 50 states, the District of Columbia, and four U.S.
territories.

submitted about the regulations, relevant information concerning state
legislation, and publicly available and proprietary industry data and
studies on the terrorism insurance market. We interviewed officials at
Treasury, NAIC, and state insurance regulators from six states with high
insurance sales volumes. We also interviewed representatives of insurance
companies, reinsurance companies, brokers for insurance and reinsurance
companies, industry associations, property owners and developers, and
insurance filing services and credit rating agencies.6 In our discussions
with these organizations, we endeavored to gain an understanding of their
experience in implementing TRIA requirements, obtain their views on the
effects of TRIA on the terrorism insurance market, and identify
developments within the industry to address terrorism risks after TRIA
expires.

We conducted our work in Chicago, New York City, and Washington, D.C.,
from January 2003 through April 2004 in accordance with generally accepted
government auditing standards.

Results in Brief
Treasury and industry participants have made significant progress in
implementing TRIA to date, but Treasury has important actions to complete
in order to comply with its responsibilities under TRIA. Between November
2002 and December 2003, Treasury issued implementing regulations, or final
rules, on issues such as definitions of basic terms used in TRIA and
written disclosure to policyholders about TRIA requirements, limits of
coverage, and prices. During that same period, Treasury issued a proposed
rule on basic claims procedures. According to Treasury officials, Treasury
also fully staffed the TRIP office by September 2003, decided not to
extend TRIA to group life insurance lines based on the results of a
TRIA-mandated study, and began mandated studies and data collection
efforts. However, Treasury has not yet decided whether to extend the
requirement to policies issued or renewed in 2005 that insurers "make
available" terrorism insurance on terms not differing materially from
other coverage. In addition, it has not fully established a claims
processing and payment structure. NAIC, in its advisory role, has
effectively assisted Treasury in drafting guidance and regulations, and
insurance companies generally have made policy and operational
changes-including pricing decisions, policy language revisions, and
policyholder notifications-to

6Filing services perform many services for insurance companies, including
submitting to state insurance regulators the documents required to sell a
line of insurance.

comply with TRIA. However, insurers have expressed concerns about some
work Treasury has not yet completed and the time frames allotted in TRIA
that drive its work and responsibilities. For example, insurers noted that
if Treasury waited until the TRIA deadline, September 1 of this year, to
decide whether insurers would have to make terrorism insurance available
through 2005, the decision would come too late for them to make
appropriate decisions for business planning for the third year of TRIA.
Moreover, a delayed payment of claims by Treasury, whether because of the
length of time taken to certify that an act of terrorism met the
requirements for federal reimbursement or from inadequate claims
processing capability, might seriously impact insurer cash flows or, in
certain circumstances, solvency.

Under TRIA, insurers and, to a limited extent, reinsurers have made
terrorism insurance available, but most commercial policyholders are not
buying the coverage and those that do remain exposed to significant risks.
According to real estate and risk management experts, TRIA primarily has
benefited high-risk policyholders, such as owners and developers of large
commercial properties located in major urban centers and geographic
locations perceived at greater risk for terrorism. Limited, but consistent
results from industry surveys suggest between 10 and 30 percent of
commercial policyholders are purchasing terrorism insurance. However,
according to insurance industry experts, many policyholders with
businesses or properties not located near major urban centers or in
perceived high-risk locations are not buying terrorism insurance because
they perceive themselves at low risk for terrorism and thus view any price
for terrorism insurance as high relative to their risk exposure. Some
industry experts are concerned that adverse selection-where those most at
risk from terrorism are generally the only ones buying terrorism
insurance-may be occurring. The potential negative effects of low take-up,
or purchase rates, in combination with adverse selection would become
evident only in the aftermath of a terrorist attack and include more
difficult economic recovery for businesses without terrorism coverage and
potentially significant financial problems for insurers. Moreover,
policyholders with terrorism insurance may still not be insured for
certain significant perils resulting from terrorist events, even if the
events were to be certified. These perils include losses resulting from
nuclear, biological, and chemical (NBC) agents, radioactive contamination,
and in a growing number of states, fire following terrorist events. The
insurance industry has historically applied certain of these limitations
and exclusions. In the aftermath of September 11, state legislatures have
permitted their expansion and they remain in place. Finally, under TRIA
insurance market

participants have not yet developed a reliable method for pricing
terrorism risks and made little movement toward any mechanism that would
enable insurers to provide terrorism insurance to businesses without
government involvement.

The Assistant Secretary for Financial Institutions, Department of the
Treasury, provided written comments on a draft of this report. Treasury
generally believed the report was a thorough and well-balanced discussion
of the impact and implementation of TRIA. Treasury's comments also
explained how it prioritized its work at the inception of the program to
help the insurance industry implement TRIA's requirements and expanded
upon the details of its contingency plans for a terrorist event occurring
before all regulations and structures were in place and contractors hired.
Treasury's comments are reprinted in appendix I.

Background
Under TRIA, Treasury is responsible for reimbursing insurers for a portion
of terrorism losses under certain conditions. Payments are triggered when
(1) the Secretary of the Treasury certifies that terrorists acting on
behalf of foreign interests have carried out an act of terrorism and (2)
aggregate insured losses for commercial property and casualty damages
exceed $5,000,000 for a single event.7 TRIA specifies that an insurer is
responsible (i.e., will not be reimbursed) for the first dollars of its
insured losses-its deductible amount. TRIA sets the deductible amount for
each insurer equal to a percentage of its direct earned premiums for the
previous year.8 Beyond the deductible, insurers also are responsible for
paying a percentage of insured losses. Specifically, TRIA structures
pay-out provisions so that the federal government shares the payment of
insured losses with insurers at a 9:1 ratio-the federal government pays 90
percent of insured losses and insurers pay 10 percent-until aggregate
insured losses from all insurers reach $100 billion in a calendar year
(see fig. 1).

7Aggregate insured losses are the sum of insured property and casualty
losses from all commercial policyholders as a result of a certified act of
terrorism.

8Section 102(4) of TRIA defines direct earned premiums as "a direct earned
premium for property and casualty insurance issued by any insurer for
insurance against losses...." Treasury provided further clarification that
direct earned premiums are "earned as reported to the NAIC in the Annual
Statement in column 2 of Exhibit of Premiums and Losses (commonly known as
Statutory Page 14)" and cover all risks, not only for risks from
terrorism. The percentage of the direct earned premium allowed as an
insurer deductible varies over the program years: 7 percent in 2003, 10
percent in 2004, and 15 percent in 2005.

Thus, under TRIA's formula for sharing losses, insurers are reimbursed for
portions of the claims they have paid to policyholders. Furthermore, TRIA
then releases insurers who have paid their deductibles from any further
liability for losses that exceed aggregate insured losses of $100 billion
in any one year. Congress is charged with determining how losses in excess
of $100 billion will be paid.9

Figure 1: Prerequisites and Limits of Coverage under TRIA Criteria for
TRIP payments

                                  Event occurs

  Secretary of Treasury certifies the event as an act of foreign terrorism 90%

$0

Payment responsibilities

Federal government reimbursement to insurers Insurer payments to
policyholders (not federally reimbursed) Source: GAO analysis of Terrorism
Risk Insurance Act of 2002.

aThe percentage of direct earned premiums increases each year: 7 percent
in 2003, 10 percent in 2004, and 15 percent in 2005.

TRIA also contains provisions and a formula requiring Treasury to recoup
part of the federal share if the aggregate sum of all insurers'
deductibles and 10 percent share is less than the amount prescribed in the
act-the "insurance marketplace aggregate retention amount." TRIA also
gives the Secretary of the Treasury discretion to recoup more of the
federal payment

9Sections 103(e)(2)(A)(i-ii) and 103(e)(3) of TRIA.

if deemed appropriate.10 Commercial property-casualty policyholders would
pay for the recoupment through a surcharge on premiums for all the
property-casualty policies in force after Treasury established the
surcharge amount; the insurers would collect the surcharge. TRIA limits
the surcharge to a maximum of 3 percent of annual premiums, to be assessed
for as many years as necessary to recoup the mandatory amount. TRIA also
gives the Secretary of the Treasury discretion to reduce the annual
surcharge in consideration of various factors such as the economic impact
on urban centers. However, if Treasury makes such adjustments, it has to
extend the surcharges for additional years to collect the remainder of the
recoupment.

Treasury is funding TRIP operations with "no-year money" under a TRIA
provision that gives Treasury authority to utilize funds necessary to set
up and run the program.11 The TRIP office had a budget of $8.97 million
for fiscal year 2003 (of which TRIP spent $4 million), $9 million for
fiscal year 2004, and a projected budget of $10.56 million for fiscal year
2005-a total of $28.53 million over 3 years. The funding levels
incorporate the estimated costs of running a claims-processing operation
in the aftermath of a terrorist event: $5 million in fiscal years 2003 and
2004 and $6.5 million in fiscal year 2005, representing about 55 to 60
percent of the budget for each fiscal year. If no certified terrorist
event occurred, the claims-processing function would be maintained at a
standby level, reducing the projected costs to $1.2 million annually, or
about 23 percent of the office's budget in each fiscal year. Any funds
ultimately used to pay the federal share after a certified terrorist event
would be in addition to these budgeted amounts.

10According to Treasury officials, the formula for the mandatory portion
of the recoupment is intended to ensure that the insurance industry is
financially responsible for a prescribed level of the first dollars of
losses. The prescribed loss levels are as follows: $10 billion in 2003,
$12.5 billion in 2004, and $15 billion in 2005. Therefore, if the sum of
insurers' aggregate payments for deductibles and the 10 percent share-the
amounts paid by industry-is less than the level prescribed for that year,
then a recoupment would be required to collect the difference. On the
other hand, if the amounts paid by industry exceed the prescribed level,
then a recoupment would not be needed.

11"No-year money" is budget authority that remains available for
obligation until expended, usually until the objectives for which the
authority was made available are attained.

  Treasury and Industry Participants Have Made Progress in Implementing TRIA,
  but Treasury Has Not Yet Achieved Key Goals

More than a year after TRIA's enactment, Treasury and insurance industry
participants have made progress in implementing and complying with its
provisions, but Treasury has yet to fully implement the 3-year program.
Treasury has issued regulations (final rules) to guide insurance market
participants, fully staffed the TRIP office, and started collecting data
and performing studies mandated by TRIA. However, Treasury has yet to make
the claims payment function operational and decide whether to extend the
"make available" requirement through 2005. In its advisory role, NAIC has
effectively assisted Treasury in drafting guidance and regulations and
planning mandated studies. Insurance companies are also generally
complying with TRIA requirements by making changes to their operations,
such as revising premiums and policy terms. However, insurers do not yet
know whether they will be required to "make available" terrorism insurance
for policies issued or renewed in 2005. Additionally, they have voiced
concerns about the time Treasury might take to certify an act of terrorism
as eligible for reimbursement under TRIA and process and pay claims after
an act was certified.

    Treasury Has Issued Some Regulations, Staffed the TRIP Office, and Begun
    Studies and Data Collection

To Be Ready for Possible Terrorist Events, Treasury Quickly Issued Interim
Guidance and Interim Final Rules

To implement TRIA and make TRIP functional, Treasury has taken numerous
regulatory and administrative actions, which encompass rulemaking,
creating a new program office, and collecting and analyzing data. To date,
Treasury has issued three final rules and one proposed rule, which provide
uniform definitions of TRIA terms, explain disclosure requirements,
determine which insurers are subject to TRIA, and establish a basic
claims-paying process. Treasury has also created and staffed the TRIP
office, which will oversee claims processing, payment, and auditing.
Finally, Treasury has completed a TRIA-mandated assessment and is working
on other reporting and data collection mandates.

After TRIA became effective, Treasury officials said they moved quickly to
provide immediate guidance to the insurance industry on time-sensitive
requirements. Because the process required to issue final regulations
would take a few months, Treasury published four sets of interim guidance
in the Federal Register between December 2002 and March 2003. The first
three sets of interim guidance were in a question-and-answer format to
provide quick answers to specific questions, and the fourth interim
guidance contained regulatory language. The purpose of the interim
guidance was to help insurance companies and other entities determine if
they were subject to TRIA and to help insurers quickly modify forms and
policies and adjust operations by providing definitions and program

parameters. Interim guidance in December 2002 covered requirements for
disclosure (e.g., notification to policyholders), the "make available"
provision, and which lines of property-casualty insurance were subject to
TRIA. For example, the guidance explained that under TRIA insurers are
required to send notices to their policyholders containing information
about the availability and cost of terrorism insurance and the 90 percent
federal share. Subsequent guidance provided information on topics such as
how certain insurers should allocate direct earned premiums (which are
used to determine what their deductibles would be), alternative methods
for complying with TRIA's disclosure requirement, and the application of
TRIA to non-U.S. insurers. The interim guidance remained in force while
Treasury drafted final rules.

In addition to interim guidance, Treasury also published two interim final
rules and a proposed rule. The first interim final rule laid the
foundation of the program and key definitions for terms used in TRIA. The
second interim final rule covered disclosure and "make available"
requirements. The proposed rule addressed "state residual market insurance
entities" and "state workers compensation funds"-two types of
state-created entities that will be discussed below. The interim final
rules had the force of law until they were superseded by final rules. As a
result, Treasury officials stated, had a terrorist act occurred before
final rules took effect, a regulatory structure would have been in place
to allow a faster response than would otherwise have been possible.

Treasury Also Has Published As of March 1, 2004, Treasury's interim
guidance, interim final rules, and

Final Rules
proposed rule had been superseded by three final rules. The first final
rule was published in the Federal Register on July 11, 2003, and addressed
basic definitions of words used in TRIA, such as "insurer" and "property
and casualty insurance."12 Treasury officials said they completed this
regulation first to provide a foundation for subsequent regulations, which
would use these terms frequently. Although TRIA provided definitions for
these terms, TRIA also specified that state insurance regulations be
preserved where possible. According to Treasury officials, Treasury thus
devoted much effort to ensure that TRIA's definitions of property-casualty
insurance terms would be consistently applied across jurisdictions-a
difficult task because Treasury did not have existing uniform or
consistent

12The first final rule received a technical revision, dealing with the
definition of direct earned premium. Treasury published this technical
revision in August 2003 in volume 68 of the Federal Register, page 48280.

definitions of the terms used in TRIA. For example, the term "commercial
property-casualty insurance" includes slightly different lines of
insurance in each state's definition. Treasury decided to use information
that insurers submitted in annual statements to NAIC as the basis for
defining property-casualty insurance.13

On October 17, 2003, Treasury issued its second final rule on disclosure
and "make available" requirements for insurers (see fig. 2). These
time-sensitive requirements, which insurers had to meet to be eligible to
receive federal reimbursement for terrorist losses, had originally been
spelled out in the interim final rule. Among other things, the rule stated
that insurers that had used NAIC's model disclosure forms to notify their
policyholders about TRIA and terrorism insurance premiums had complied
with TRIA disclosure requirements. The rule also clarified that insurers
did not have to make available coverage for certain risks if the insurer's
state regulator permitted the exclusion of those risks and the insurer had
made the same exclusion from coverage on all other types of policies. For
example, Treasury's explanations in the rule specifically used policy
exclusions for NBC events to illustrate this point. (We discuss these
exclusions in more detail later in this report.)

The third final rule, also issued on October 17, 2003, instructed two
kinds of insurers that are typically created by state governments-"state
residual market insurance entities" and "state workers' compensation
funds"-on how TRIA provisions apply to them (see fig. 2). States establish
residual market insurance entities to assume risks that are generally
unacceptable to the normal insurance market, and state workers'
compensation funds are state funds established to provide workers injured
on the job with guaranteed benefits. The other insurance companies
operating in the state usually fund these state-created entities. The rule
explained how a state residual market insurance entity and its insurance
company members should allocate direct earned premiums among themselves
for the purposes of calculating deductibles under TRIA, because the size
of the TRIA deductible is determined by the size of a company's direct
earned premium. Treasury crafted provisions specific to state residual
market insurance entities because, depending on the particular state law,
both the premiums and the profits and losses of these entities may be
shared with

13As previously noted, the information to define "property-casualty
insurance" comes from the exhibit of premiums and losses found in the
annual statement that insurers submit to NAIC.

their insurance company members. Absent these specific provisions, in
those cases where premiums were shared the premiums would be double
counted, resulting in an unfair increase in the deductible of the
insurance company. The rule also applied TRIA's disclosure provisions to
both types of state-created entities.

Treasury also issued a proposed rule on December 1, 2003, which would
establish the first stages of a basic claims-paying process (see fig. 2).
According to Treasury officials, this proposed regulation sets up an
initial framework for the claims process, including instructions to
insurers to notify Treasury when they have reached 50 percent of their
deductible. This notification provides Treasury with advance notice of
possible impending claims. The proposed rule also contains, among other
things, requirements for insurers to receive federal reimbursements and
provides associated recordkeeping requirements. Treasury intends to
supplement the proposed rule with additional, separate guidance that will
provide detailed operating procedures for claims filing and processing.
According to the officials, Treasury took this phased approach to get the
basic rules out to insurers in case a terrorist event occurred.

Finally, a Treasury official said that Treasury staff drafted another
rule, which is currently under review by the Office of Management and
Budget (OMB). The draft, which will be published and available for public
comment as a proposed rule after OMB approves it, addresses litigation
management (see fig. 2). The draft proposed rule would apply a TRIA
provision that establishes that suits arising from certified terrorist
events are federal causes of action and establishes litigation management
procedures.

Figure 2: Regulations and Procedures Necessary to Implement TRIA

Final rule effective

Proposed rule

Under development

No action

Sources: TRIA (data); GAO (analysis).

aTRIA sections that establish specific mandates or provide authority for
Treasury to develop regulations.

bTRIA sections for which Treasury has said that it would issue
regulations.

cTRIA sections that by inference require Treasury to take regulatory or
administrative actions.

dFor example, Treasury published a final rule on July 11, 2003 that
provided basic definitions.

eThe proposed rule details basic procedures insurers would follow to file
a claim for reimbursement of the 90 percent federal share. Treasury also
plans to issue more detailed guidance that, for example, would provide
standardized forms and explain the method of payment.

Writing the regulations has been a lengthy and difficult process, not only
because of the multiple procedural review requirements of federal
rulemaking, but also because TRIA established that state insurance
regulations should be preserved where possible.14 For example, as
previously discussed, creating definitions in accord with the statutory
definitions of more than 50 jurisdictions (the states, District of
Columbia, Puerto Rico, and U.S. territories) required extensive
discussions among the state regulators, which in turn required additional
time to plan and execute.

      Treasury Has Fully Staffed the TRIP Office