[Federal Register: September 17, 2008 (Volume 73, Number 181)]
[Proposed Rules]
[Page 53798-53809]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17se08-43]
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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