[Federal Register Volume 70, Number 11 (Tuesday, January 18, 2005)]
[Proposed Rules]
[Pages 2830-2832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-925]
[[Page 2830]]
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DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AB09
Terrorism Risk Insurance Program; Additional Claims Issues;
Insurer Affiliations
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 (Act). The Act established a temporary
Terrorism Insurance Program (Program) under which the Federal
Government will share the risk of insured loss from certified acts of
terrorism with commercial property and casualty insurers until the
Program ends on December 31, 2005. This proposed rule is a
clarification that, for purposes of calculating insurer deductibles and
meeting the requirements for claiming the Federal share of compensation
for insured losses, affiliations are to be determined based on the
insurer's circumstances as of the date of the first certified act of
terrorism in a Program Year.
DATES: Written comments may be submitted on or before February 17,
2005.
ADDRESSES: Submit comments by e-mail to [email protected] 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 Ave., NW., Washington, DC
20220. All comments should be captioned with ``Proposed Rule on Insurer
Affiliations''. Please include your name, affiliation, address, e-mail
address and telephone number in your comment. Comments will be
available for public inspection by appointment only at the Reading Room
of the Treasury Library. To make appointments, call (202) 622-0990 (not
a toll-free number).
FOR FURTHER INFORMATION CONTACT: Howard Leikin, Senior Insurance
Advisor; or David Brummond, Legal Counsel, Terrorism Risk Insurance
Program, (202) 622-6770 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Background
On November 26, 2002, the President signed into law the Terrorism
Risk Insurance Act of 2002 (Pub. L. 107-297, 116 Stat. 2322). The Act
was effective immediately. The Act's purposes are to address market
disruptions, ensure the continued widespread availability and
affordability of commercial property and casualty insurance for
terrorism risk, and to allow for a transition period for the private
markets to stabilize and build capacity while preserving State
insurance regulation and consumer protections.
Title I of the Act establishes a temporary Federal program of
shared public and private compensation for insured commercial property
and casualty losses resulting from an act of terrorism, which as
defined in the Act is certified by the Secretary of the Treasury, in
concurrence with the Secretary of State and the Attorney General. The
Act authorizes Treasury to administer and implement the Terrorism Risk
Insurance Program, including the issuance of regulations and
procedures. The Program will end on December 31, 2005. Thereafter, the
Act provides Treasury with certain continuing authority to take actions
as necessary to ensure payment, recoupment, adjustments of compensation
and reimbursement for insured losses arising out of any act of
terrorism (as defined under the Act) occurring during the period
between November 26, 2002, and December 31, 2005.
Each entity that meets the definition of ``insurer'' (well over
2000 firms) must participate in the Program. The amount of Federal
payment for an insured loss resulting from an act of terrorism is to be
determined based upon insurance company deductibles and excess loss
sharing with the Federal Government, as specified by the Act and the
implementing regulations. An insurer's deductible increases each year
of the Program, thereby reducing the Federal Government's share prior
to expiration of the Program. An insurer's deductible is calculated
based on a percentage of the value of direct earned premiums collected
over certain statutory periods. Once an insurer has met its deductible,
the federal payments cover 90 percent of insured losses above the
deductible, subject to an annual industry-aggregate limit of $100
billion.
The Program provides a federal reinsurance backstop for three
years. The Act provides Treasury with authority to recoup federal
payments made under the Program through policyholder surcharges, up to
a maximum annual limit. The Act also prohibits duplicate payments for
insured losses that have been covered under other Federal programs.
The mandatory availability or ``make available'' provisions in
section 103 of the Act require that, for Program Year 1, Program Year
2, and, if so determined by the Secretary of the Treasury, for Program
Year 3, all entities that meet the definition of insurer under the
Program must make available in all of their commercial property and
casualty insurance policies coverage for insured losses resulting from
an act of terrorism. This coverage cannot differ materially from the
terms, amounts and other coverage limitations applicable to losses
arising from events other than acts of terrorism. On June 18, 2004, the
Secretary of the Treasury announced his decision to extend the make
available requirements through Program Year 3.
As conditions for federal payment under the Program, insurers must
provide clear and conspicuous disclosure to the policyholders of the
premium charged for insured losses covered by the Program and of the
Federal share of compensation for insured losses under the Program. In
addition, the Act requires that insurers make certain certifications to
Treasury and process and submit claims for the insured loss in
accordance with appropriate business practices and any reasonable
procedures Treasury may prescribe.
The Act also contains specific provisions designed to manage
litigation arising out of or resulting from a certified act of
terrorism. Among other provisions, section 107 creates, upon
certification of an act of terrorism by the Secretary, an exclusive
Federal cause of action and remedy for property damage, personal
injury, or death arising out of or relating to an act of terrorism;
preempts certain State causes of action; provides for consolidation of
all civil actions in Federal court for any claim (including any claim
for loss of property, personal injury, or death) relating to or arising
out of an act of terrorism; and provides that amounts awarded in
actions for property damage, personal injury, or death that are
attributable to punitive damages are not to be counted as ``insured
losses'' and not paid under the Program. The Act also provides the
United States with the right of subrogation with respect to any payment
or claim paid by the United States under the Program.
In implementing the Program, Treasury is guided by several goals.
First, Treasury strives to implement the Act in a transparent and
effective manner that treats comparably those insurers required to
participate in the Program and provides necessary information to
policyholders in a useful and efficient manner. Second, in accord with
the Act's stated purposes, Treasury seeks to rely as much as possible
on the
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State insurance regulatory structure. In that regard, Treasury has
coordinated the implementation of all aspects of the Program with the
National Association of Insurance Commissioners (NAIC). Third, to the
extent possible within statutory constraints, Treasury seeks to allow
insurers to participate in the Program in a manner consistent with
procedures used in their normal course of business. Finally, given the
temporary and transitional nature of the Program, Treasury is guided by
the Act's goal that insurers develop their own capacity, resources, and
mechanisms for terrorism insurance coverage when the Program expires.
II. Previous Rulemaking
To assist insurers, policyholders, and other interested parties in
complying with immediately applicable requirements of the Act, Treasury
issued interim guidance to be relied upon by insurers until superseded
by regulations. These notices of interim guidance have now been
superseded by final regulations. General provisions, including the
scope of the Program and key definitions, and rules on disclosures and
mandatory availability are at Subparts A, B, and C of 31 CFR part 50
(68 FR 41250; 68 FR 59720). 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 (68 FR 59715).
The 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 (69 FR 39296). Subpart G of 31 CFR part 50 (69 FR 39296)
contains the rules on audit and recordkeeping, which specify record
retention by insurers in connection with the handling and settlement of
claims to enable Treasury to perform financial and claim audits.
Subpart I of 31 CFR part 50 (69 FR 44932) contains Treasury's rules
implementing the litigation management provisions of section 107 of the
Act.
III. The Proposed Rule
Under the Act and regulations, ``affiliates'' are treated
collectively as one insurer for purposes of calculating the insurer
deductible. This proposed rule amends Subpart F of 31 CFR part 50,
which contains the claims procedures for insurers seeking the Federal
share of compensation for insured losses, to clarify that for that
Subpart's purposes, insurer affiliations for any Program Year shall be
determined based on the insurer's circumstances as of the date of the
first certified act of terrorism in that Program Year.
This change will clarify how deductible calculations, loss
certifications, claims for the Federal share of compensation and
receipt of payment are to be handled, considering that (1) affiliations
of insurers may change over the course of a Program Year, and (2) there
may be more than one act of terrorism certified in a Program Year. It
is Treasury's intention to make known how such a combination of
circumstances will be addressed under the Program so that insurers can
plan their business affairs and transactions accordingly.
An insurer's deductible for a Program Year is based on direct
earned premium from the prior calendar year. Through an interpretive
letter, issued on December 1, 2003, Treasury addressed the question of
how the direct earned premium (and consequently, the insurer
deductible) would be determined for an insurer or insurer group where
the composition of the affiliations has changed since the prior
calendar year. The interpretive letter indicated that the affiliations
in place at the time of the occurrence of the certified act of
terrorism would govern how an insurer's or insurer group's direct
earned premium would be determined and the resulting deductible
calculated. This interpretation did not address the circumstance where
more than one event is certified in the same Program Year.
Treasury thus believes it is necessary to provide additional
guidance to insurers to clarify Program implementation should more than
one act of terrorism be certified in a Program Year. In developing this
proposed rule, Treasury examined a variety of other alternatives for
determining insurer affiliations, including:
1. The determination of affiliations as of each certified act of
terrorism;
2. The determination of affiliations as of the first certified act
in a Program Year for which the particular insurer has losses;
3. The determination of all affiliations as of January 1 of each
Program Year.
Treasury has concluded that the first alternative would produce
unacceptable results because the insurer deductible is a Program Year
deductible, not a per-event deductible. Any calculation of the
deductible, in Treasury's view, must be applied against all insured
losses consistently for the entire Program Year.
The second alternative, determining affiliations at the time of a
first certified act in a Program Year for which an insurer actually has
insured losses, would provide a higher degree of accuracy in reflecting
the appropriate affiliations at the time of such an event. However,
after examining the different ways that affiliations may change in the
interim between events, Treasury considers this approach to be very
complicated to describe and administer. Given the temporary nature of
the Program, Treasury believes that this alternative would require too
great an effort to overcome the possibility of confusion for both
insurers and the Program.
The third alternative, determining affiliations as of January 1 of
a Program Year, would be inconsistent with the interpretation Treasury
has already issued. More importantly, Treasury considers this approach
to have too great a potential to provide an inaccurate reflection of
the insurance entity at the time of an actual certified act of
terrorism. Since such an event can occur well into a Program Year,
changes in affiliations may be significant.
It is Treasury's view that the proposed rule is a reasonable
compromise approach, one that can be relatively easy to understand and
follow and practical to administer. Under this approach, the
affiliations used for calculating direct earned premium and the
resultant insurer deductible for a Program Year are determined for all
insurers as of the date of the first act of terrorism certified by the
Secretary in a Program Year. This is regardless of whether the insurer
has had any insured losses from the event. Treasury believes that the
direct earned premium reported for the calendar year prior to the
Program Year in which the certified act occurs can readily be
determined for the insurers affiliated at the time of the first event.
The insurer deductibles calculated from this information can be
reasonably applied to that first event's insured losses as well as to
the insured losses resulting from any certified acts in the remainder
of the Program Year.
As a practical matter, Treasury is proposing that all requests for
the Federal share of compensation for a Program Year will be processed
based on the affiliations as of the first certified act in a Program
Year, regardless of actual changes to those affiliations prior to the
occurrence of another certified act within the same Program Year. This
approach will allow Treasury to receive and maintain consistent
information in providing the Federal share of compensation and reduce
the potential administrative burden that Treasury might otherwise have
in tracking and reviewing claims in this temporary program.
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IV. Procedural Requirements
Executive Order 12866, ``Regulatory Planning and Review''. This
rule is not a significant regulatory action for purposes of Executive
Order 12866, ``Regulatory Planning and Review,'' and therefore has not
been reviewed by the Office of Management and Budget.
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 pay the Federal share
of compensation to insurers for insured losses in accordance with the
Act. A condition of Federal payment is that the insurer must submit to
Treasury, in accordance with procedures established by Treasury, a
claim for payment and certain certifications. The Act itself requires
all insurers receiving direct earned premium for any type of property
and casualty insurance, as defined in the Act, to participate in the
Program. This includes all insurers regardless of size or
sophistication. The Act also defines property and casualty insurance to
mean commercial lines of insurance without any reference to the size or
scope of the insurer or the insured. Accordingly, any economic impact
associated with the proposed rule flows from the Act and not the
proposed rule. The proposed rule merely clarifies the point in time at
which insurer affiliations are determined for purposes of the Program.
A regulatory flexibility analysis is thus not required.
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
PART 50--TERRORISM RISK INSURANCE PROGRAM
1. The authority citation for part 50 continues to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322 (15 U.S.C 6701 note).
2. Subpart F is proposed to be amended by adding a new section
50.55 to read as follows:
Sec. 50.55 Determination of Affiliations.
For the purposes of this Subpart F, an insurer's affiliates for any
Program Year shall be determined based on the insurer's circumstances
as of the date of the first certified act of terrorism in that Program
Year.
Dated: January 11, 2005.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 05-925 Filed 1-14-05; 8:45 am]
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