[Federal Register: July 11, 2003 (Volume 68, Number 133)]
[Rules and Regulations]
[Page 41250-41266]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy03-4]
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DEPARTMENT OF THE TREASURY
31 CFR Part 50
RIN 1505-AA96
Terrorism Risk Insurance Program
AGENCY: Departmental Offices, Treasury.
ACTION: Final rule.
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SUMMARY: The Department of the Treasury (Treasury) is issuing this rule
in final form as part of its implementation of Title I of the Terrorism
Risk Insurance Act of 2002 (Act). That Act established a temporary
Terrorism Risk 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 sunsets on December 31, 2005. Treasury published an interim
final rule with a request for comment on February 28, 2003. That rule
set forth the purpose and scope of the Program and key definitions that
Treasury will use in implementing the Program. It was the first in a
series of regulations that Treasury will be issuing to implement the
Program. This final rule generally adopts the interim final rule, but
makes revisions in the definition of ``affiliate'' and certain other
changes described in the preamble.
DATES: This final rule is effective July 11, 2003.
[[Page 41251]]
FOR FURTHER INFORMATION CONTACT: Mario Ugoletti, Deputy Director,
Office of Financial Institutions Policy (202) 622-2730, or Martha
Ellett or Cynthia Reese, Attorney-Advisors, Office of the Assistant
General Counsel (Banking & Finance), (202) 622-0480 ( not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
I. Background
A. Terrorism Risk Insurance Act of 2002
On November 26, 2002, President Bush signed into law the Terrorism
Risk Insurance Act of 2002 (Public Law 107-297, 116 Stat. 2322). The
Act was effective immediately. 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 as defined in the Act and 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 sunset on December 31,
2005.
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. The amount of Federal payment for an insured loss
resulting from an act of terrorism is to be determined based upon the
insurance company deductibles and excess loss sharing with the Federal
Government, as specified by the Act. Thus, the Program provides a
Federal reinsurance backstop for a temporary period of time. The Act
also provides Treasury with authority to recoup Federal payments made
under the Program through policyholder surcharges, up to a maximum
annual limit.
Each entity that meets the definition of ``insurer'' (well over
2000 firms) must participate in the Program. From the date of enactment
of the Act through the last day of Program Year 2 (December 31, 2004),
insurers under the Program must ``make available'' terrorism risk
insurance in their commercial property and casualty insurance policies
and the coverage must not differ materially from the terms, amounts and
other coverage limitations applicable to commercial property and
casualty losses arising from events other than acts of terrorism. The
Act permits Treasury to extend the ``make available'' requirement into
Program Year 3, based on an analysis of factors referenced in the study
required by section 108(d)(1) of the Act, and not later than September
1, 2004. An insurer's deductible increases each year of the Program,
thereby reducing the Federal government's involvement prior to sunset
of the Program. An insurer's deductible is based on ``direct earned
premiums'' over a statutory Transition Period and the three Program
Years. Once an insurer has met its deductible, the Federal payments
cover 90 percent of insured losses above the deductible, subject to an
aggregate annual cap of $100 billion. The Act prohibits duplicative
payments for insured losses that have been covered under any other
Federal program.
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 must
submit a claim and certain certifications to Treasury. Treasury will be
prescribing claims procedures at a later date.
The Act also contains specific provisions designed to manage
litigation arising from or relating to a certified act of terrorism.
Section 107 creates an exclusive federal cause of action, provides for
claims consolidation in federal court and contains a prohibition on
Federal payments for punitive damages under the Program. This section
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.
B. The Interim Final Rule
The interim final rule established Subpart A of a new Part 50 in
Title 31 of the Code of Federal Regulations. Subpart A of new Part 50
contains certain general provisions and definitions of Program terms.
The definitions contained in the interim final rule provide the
foundation for participation by insurers under the Federal reinsurance
Program created by the Act.
Some of the definitions in the interim final rule were taken
virtually verbatim from the Act because they do not need further
clarification. For other definitions, the interim final rule generally
incorporated previously issued interim guidance provided by Treasury as
it pertains to Program terms, for example, the terms ``insurer,''
``affiliate,'' ``property and casualty insurance'' and ``direct earned
premium.'' Such interim guidance was published at 67 FR 76206 (December
11, 2002), 67 FR 78864 (December 26, 2002) and 68 FR 4544 (January 29,
2003). In several areas, the interim final rule made clarifying
modifications to, or supplemented, the previously issued interim
guidance.
In implementing the Program, Treasury has been guided by several
goals. First, we strive to implement the Act in a transparent and
effective manner that treats comparably those insurers required to
participate in the Program and that provides necessary information to
policyholders in a useful and efficient manner. Second, Treasury seeks
to rely as much as possible on the State insurance regulatory
structure. In that regard, Treasury is closely coordinating with the
National Association of Insurance Commissioners (NAIC) in implementing
definitional and other aspects of the Program. Third, to the extent
possible within statutory constraints, Treasury seeks to allow insurers
to participate in the Program in a manner consistent with their normal
course of business. Finally, given the temporary and transitional
nature of the Program, Treasury is guided by the Act's goal for
insurers to develop their own capacity, resources and mechanisms for
terrorism risk insurance coverage when the Program expires.
II. Summary of Comments and Final Rule
Treasury received over 40 comments on the interim final rule.
Comments were submitted by insurance companies, industry trade
associations, the NAIC, two cities, and by two members of Congress.
After review and careful consideration of these comments, as well as
additional research and consultation with the NAIC, Treasury is now
promulgating a final rule concerning TRIA definitions. In general, the
final rule reflects the interim final rule. However, revisions and
clarifications were made in several areas, based on comments received.
For example, revisions were made to the rebuttable presumptions to
controlling influence determinations under the definition of
``affiliate,'' and clarifications were made to the definitions of
``direct earned premium'' and ``commercial property and casualty
insurance.'' The final rule, including changes and clarifications, is
discussed in the summary below.
A. ``Act of Terrorism'' (Section 50.5.b)
The interim final rule incorporated the statutory definition of
``act of terrorism'' found in section 102(1) of the Act. In that
regard, the interim final rule provides that an ``act of terrorism''
for
[[Page 41252]]
purposes of the Program must be certified by the Treasury Secretary, in
concurrence with the Secretary of State and the Attorney General of the
United States, and must fall within other statutory parameters. The
requirements in clauses (i)-(iv) of section 102(1)(A) are conjunctive.
An act of terrorism, if it also meets the limitations in section
102(1)(B), may be certified if it: is violent or dangerous to human
life, property or infrastructure; and has resulted in damage within the
United States, or outside the United States in the case of certain air
carriers or vessels or if on the premises of a U.S. mission; and has
been committed by individual(s) on behalf of any foreign person or
foreign interest, as part of an effort to coerce the U.S. civilian
population or to influence the policy or affect the conduct of the U.S.
government by coercion. Therefore, acts of domestic civil disturbance
would not be covered by the Act's definition of ``act of terrorism'' or
by the Program.
Section 102(1)(B) limits the Secretary's ability to certify an act
if committed as part of a course of war declared by Congress, (except
for workers'compensation coverage), or if property and casualty
insurance losses resulting from the act, in the aggregate, do not
exceed a $5,000,000 de minimis threshold. With regard to the first
limitation, one commenter raised a question concerning the effect of a
declaration of war on an act of terrorism certification. While it is
not possible for a regulation to address all potential situations
surrounding an act of terrorism determination under the Program, it is
Treasury's view that the war exclusion in the Act applies only to acts
of terrorism committed in connection with a formal, congressionally
declared war. While the phrase ``war declared by the Congress'' is not
defined in the Act, Article I, section 8, clause 11 of the Constitution
grants Congress the exclusive authority to declare war. Congress has
done so on five occasions, the most recent of which occurred in 1941 at
the outset of World War II. Most other American military actions have
been conducted pursuant to constitutional authorities of the President
connected with his role as commander-in-chief, and while many of these
have also enjoyed explicit Congressional support, they have not been
authorized by a formal declaration of war. For example, the
``Authorization for Use of Military Force Against Iraq Resolution of
2002,'' (P.L. 107-243) gave the President authority to conduct military
operations, but is not a formal declaration of war.
With regard to the second statutory limitation on an act of
terrorism certification, one commenter asked whether the $5,000,000
threshold loss has to be suffered by one insured policyholder. The Act,
as reflected in the interim final rule, provides that the de minimis
threshold is based on loss ``in the aggregate''. One certified act of
terrorism could result in insured losses from several policyholders,
none of which alone would amount to $5,000,000, but, in the aggregate,
would be in excess of that amount.
Section 106(a)(2) of the Act provides that the Act's definition is
the exclusive definition of the term ``act of terrorism'' for purposes
of compensation for insured losses under the Act. In addition, section
102(1)(C) of the Act provides that the Secretary's determination or
certification with regard to whether an act is an act of terrorism for
purposes of the Program is final and is not subject to judicial review.
One commenter urged Treasury to establish a time frame within which
the Secretary would be required to make a determination or
certification that an ``act of terrorism'' had occurred in order to
better assist insurers in responding to inquiries and claims from their
policyholders. Treasury understands the desire for certainty of those
in the industry who would advocate a definite time frame, and intends
to make its determination as promptly as possible after obtaining and
evaluating the facts surrounding a possible act of terrorism. However,
there is no way to predict future events and ascertain a time frame
that would be appropriate for all potential situations. Facts could be
immediately available and, after consultation, present a clear basis
for a quick determination by the Secretary; conversely, a determination
could require more time to gather information and conduct an analysis
of the act. Given this inherent uncertainty and the significance of an
act of terrorism determination to all aspects of the Program, Treasury
does not believe that it would be in the public interest to establish
in advance a regulatory time frame that may later prove to be
inappropriate or unattainable.
B. ``Affiliate'' Including ``Control'' (Section 50.5(c))
Approximately one-third of the comments submitted to Treasury on
the interim final rule raised questions or concerns with regard to the
definition of ``affiliate'', which includes the definition of
``control'' in section 50.5(c). Most of these comments raised questions
with either procedural or substantive aspects of the rebuttable
presumptions of controlling influence in this section. After careful
consideration of the comments and further consultation with the NAIC,
Treasury has made several revisions in the final rule to address these
comments. The regulatory definitions and changes to the interim final
rule are set forth below.
Section 102(6) of the Act defines an ``insurer'' to include ``any
affiliate thereof.'' The definitions of ``affiliate'' and ``control''
are intertwined in the Act. Section 102(2) defines ``affiliate'' to
mean ``with respect to any insurer, an entity that controls, is
controlled by, or is under common control with the insurer.'' Pursuant
to Section 102(3) of the Act, ``control'' exists if
[sbull] an entity directly or indirectly or acting through 1 or
more other persons owns, controls, or has power to vote 25 percent or
more of any class of voting securities of the other entity; or
[sbull] an entity controls in any manner the election of a majority
of the directors or trustees of the other entity; or
[sbull] the Secretary determines, after notice and opportunity for
hearing, that the entity directly or indirectly exercises a controlling
influence over the management or policies of the other entity.
Section 50.5(c) of the interim final rule generally incorporates
and combines the related statutory definitions of ``affiliate'' and
``control.'' In addition, the interim final rule provides that an
affiliate must itself meet the definition of ``insurer'' to participate
in the Program. (See part E of this preamble for further discussion of
``insurer'' definition.) The definitions of affiliate and control are
integral to Treasury's implementation of the Program. As discussed
further in parts C and F of this preamble, affiliated insurers are
treated collectively as one entity by Treasury for purposes of
calculating direct earned premiums and an insurer deductible under the
Program. Three comments objected to this consolidated treatment as not
equitable. However, as noted in the preamble to the interim final rule,
this consolidated treatment is in accord with the Act's legislative
history and the clear intent of Congress. The Conference Report states
that the terms ``affiliate'' and ``control'' were meant ``to ensure
that affiliated insurers are treated as a consolidated entity for
calculating direct earned premiums.'' H.R. Conf. Rep. No. 107-779
(2002).
Therefore, for example, if an insurance company meets the
definition of an ``insurer'' under section 102(6) as implemented by
Treasury, and three out
[[Page 41253]]
of four of the companies it controls also meet the Act's definition of
``insurer,'' then the parent company and the three companies it
controls that meet the Act's definition of ``insurer'' (the parent
company's affiliates) will be treated by Treasury collectively as one
insurer for purposes of calculating direct earned premiums and
calculating the insurer deductible under the Program. The company that
does not meet the definition of ``insurer'' is not included in the
Program.
In addition, if an entity is under common control with an insurer,
and that entity also meets the definition of ``insurer'' under Section
102(6) of the Act as implemented by Treasury, then the two insurers are
``affiliates'' and Treasury will treat them collectively as one
``insurer'' for the Program purposes of consolidating direct earned
premiums and calculating the insurer deductible. If their parent
company does not meet the definition of ``insurer'' under the Act, then
it is not included in the Program.
Control
The statutory definition of ``control'' in section 102(3) contains
three categories. Section 102(3)(A) and (B) establish conclusive
control under certain circumstances for purposes of the Program. The
conclusive control provisions of the Act are contained in the
definition of ``affiliate'' in the interim final rule at section
50.5(c)(2)(i) and (ii). If a relationship between or among insurers
does not fit within the conclusive control provisions, control may
still exist for purposes of the Program if Treasury determines,
pursuant to section 102(3)(C), that an entity directly or indirectly
exercises a controlling influence over the management or policies of
another entity. Section 102(3)(C) is contained in the interim final
rule at section 50.5(c)(2)(iii). In making a determination of whether
controlling influence exists among insurers, section 102(3)(C) of the
Act requires Treasury to provide notice and an opportunity for a
hearing.
The Act's definition of control in section 102(3)(A), (B) and (C)
is almost identical to the definition of ``control'' contained in the
Bank Holding Company Act (BHCA) at 12 U.S.C. 1841(a)(2) and in the
Savings and Loan Holding Company Act (SLHCA) at 12 U.S.C. 1467a, except
that the Act does not contain a presumption of no control for holding
less than 5 percent of any class of voting securities, nor does the Act
provide any of the other explicit statutory exemptions that are
provided in the BHCA and SLHCA. The Act's definition of control is also
similar to the definition of control in the NAIC's Model Insurance
Company Holding Company Act (Model Act) except that the Model Act
contains a presumption of control if an entity owns 10 percent of the
voting securities of an insurance company instead of the 25 percent
conclusive control threshold that is contained in the Act (and in the
BHCA and the SLHCA).
Owns, Controls or has the Power to Vote 25 Percent or More of Voting
Securities
Under Section 102(3)(A) of the Act, ``an entity has `control' over
another entity if the entity directly or indirectly or acting through 1
or more persons owns, controls or has the power to vote 25 percent or
more of any class of voting securities of the other entity.'' The
interim final rule incorporates this statutory definition, but uses the
word ``insurer'' instead of ``entity'' to clarify that the definition
of control does not include entities that are not insurers.
One commenter asked for clarification that an affiliate itself must
be an insurer to be treated as part of a consolidated entity with a
related insurer. In view of the congressional intent that affiliated
insurers be treated as a consolidated entity for purposes of
calculating direct earned premiums, there is no reason to include non-
insurer entities in the definition of ``affiliate'' because these
entities do not have ``direct earned premiums'' as defined in the Act.
Viewing a group of affiliates with both insurer and non-insurer
entities, the direct earned premiums for the group should be no
different whether or not the non-insurers are included in the group.
For this reason, Treasury has decided to interpret the Act as generally
excluding non-insurers from the definitions of affiliate and control at
this time. Treasury could revisit this issue if it finds evidence that
other corporate structures or arrangements are being used to thwart the
goals and purposes of the Program.
Five insurance industry commenters took the position that ownership
of 25 percent or more of the voting securities of an insurer should not
automatically result in control. These commenters asserted that
Treasury could and should by regulation change this statutory limit.
One commenter referenced the NAIC Model Act language in support of
creating a regulatory presumption. As noted above, unlike section
102(3)(A), the NAIC Model Act contains a 10 percent statutory
presumption not a threshold of conclusive control. Several of these
commenters stated that a 25 percent or more conclusive control limit
could adversely affect the availability and affordability of coverage,
and in particular, would have an adverse effect on their own companies
if they were required to aggregate direct earned premiums. These
commenters suggested various alternatives for Treasury to use instead
of the 25 percent statutory limit. These included substituting other
regulatory factors for the 25 percent limit and accepting a state
determinations of ``no control'' based on state law even where there is
ownership of more than 25 percent.
Consistent with the statutory language in section 102(3)(A) and
with other statutes containing similar language, Treasury interprets
the 25 percent or more direct or indirect ownership of any class of
voting securities to be an objective standard establishing conclusive
control. Under the plain language of the statute, the 25 percent voting
securities threshold is not a presumption, and is not subject to
rebuttal. We also note that in addressing the rebuttable presumptions
in the interim final rule in connection with section 102(3)(C), several
commenters characterized the ownership of 25 percent or more of any
class of voting securities threshold in section 102(3)(A), as well as
the control provision in section 102(3)(B), as objective standards. For
these reasons, Treasury has not made any change in the final rule to
the 25 percent threshold in section 50.5(c)(2)(ii) of the interim final
rule.
Controls the Election of a Majority of the Directors or Trustees
The interim final rule provides that an insurer controls another
insurer for purposes of the Program if the insurer controls in any
manner the election of a majority of the directors or trustees of the
other insurer. In general, this regulatory provision incorporates the
statutory language in section 102(3)(B). For the reasons stated above
in connection with section 102(3)(A), Treasury interprets the section
102(3)(B) as another objective standard that establishes conclusive
control for purposes of the Act. This standard is not a presumption and
is not subject to rebuttal.
Controlling Influence and Rebuttable Presumptions
In addition to the conclusive control provisions in section
102(3)(A) and (B), the Act defines control to exist if, ``the Secretary
determines, after notice and opportunity for hearing, that the entity
directly or indirectly exercises a controlling influence over the
management or policies of the other entity.'' Section 102(3)(C). In the
interim
[[Page 41254]]
final rule, Treasury established several rebuttable presumptions for
the purposes of a determination of controlling influence: (1) If a
State has determined that an insurer controls another insurer; (2) if
an insurer provides 25 percent or more of another insurer's capital (in
the case of a stock insurer), policyholder surplus (in the case of a
mutual insurer), or corporate capital (in the case of other entities
that qualify as insurers); or (3) if an insurer, at any time during a
Program Year, supplies 25 percent or more of the underwriting capacity
for that year to an insurer that is a syndicate consisting of a group
including incorporated and individual unincorporated underwriters.
Section 50.5(c)(4) of the interim final rule provided an insurer
with an opportunity for an informal hearing to rebut a controlling
influence presumption through written submissions and, in addition in
Treasury's discretion, by an informal oral presentation. Treasury
subsequently issued a notice on March 25, 2003 (68 FR 15039, March 27,
2003, ``Interim Guidance IV'') providing further guidance on the
procedure for rebutting a presumption of controlling influence.
In establishing several rebuttable presumptions in Section
50.5(c)(3) of the interim final rule, Treasury had two key goals. One
was to provide additional transparency about the factors that Treasury
considers indicative of controlling influence to provide greater
certainty to insurers prior to a final determination of control and
thereby facilitate the calculation of insurer deductibles prior to
presentment of a claim.
The second was to enhance administrative efficiency given available
time and other resources in this temporary Program.
With regard to the second goal, we point out that, in the Act,
Congress established a temporary backstop program with the expectation
that Treasury would not build a large bureaucratic program structure,
but instead would leverage off of the state insurance regulatory
structure, where possible and appropriate. Unlike state insurance
commissioners, or state or federal bank examiners, Treasury does not
conduct regular on-site examinations of Program participants, nor does
it routinely review acquisitions, mergers or other transactions of such
insurers. Thus, Treasury does not have ready access to detailed
information on the control relationships of insurers that is generally
available to regulators that implement the control provisions of the
BHCA, the SLHCA, or state insurance law.
At this point, it is unclear to Treasury how many insurers fall
outside section 102(3)(A) and (B) but may come within the controlling
influence category. Rejecting the imposition of significant new
regulatory reporting requirements on the property and casualty
insurance industry, Treasury decided to utilize regulatory presumptions
to accomplish these two goals and to implement the controlling
influence provisions.
Treasury received 6 comments, from insurers and from a large
insurance industry trade group, taking exception to the rebuttable
presumptions as presented in the interim final rule. These commenters
objected on procedural and substantive grounds. In addition, one
commenter supported, in principle, the rebuttable presumption process.
Most of these commenters objected to the reliance on a state law
determination of control in the first rebuttable presumption in the
interim final rule. They contended that exclusive reliance on a state
law determination, for purposes of a rebuttable presumption, was
inappropriate given the varying state standards and the differences
between the Act's definition of ``control'', and the definition of
``control'' in the NAIC Model Law used by most states. Several
commenters suggested that Treasury utilize specific guidelines or
standards (such as the existence of a management agreement) instead of
rebuttable presumptions.
After consideration of these comments and the stated administrative
goals, Treasury has decided to retain the use of rebuttable
presumptions, with modifications. Use of the rebuttable presumptions
provides increased certainty and transparency to insurers and others of
the factors that Treasury considers indicative of a controlling
influence. Rebuttable presumptions have been and are used successfully
by other agencies in implementing nearly identical statutory
definitions of ``control.'' Rebuttable presumptions also aid efficient
implementation of the controlling influence determination process,
given that Treasury does not have ready access to relevant information
about the financial, managerial, policymaking and corporate structures
of insurers. Moreover, a rebuttable presumption is not a final
determination of controlling influence by Treasury. Under the final
rule, insurers subject to rebuttable presumptions, and others that do
not fall within the conclusive control provisions and wish to have a
final determination of controlling influence, all have an opportunity
for a hearing. Based upon the comments, and further consultation with
NAIC, Treasury is revising the rebuttable presumptions to provide more
detail and transparency concerning factors that Treasury will consider
indicative of controlling influence and is using these factors in the
rebuttable presumptions. For example, in response to several comments,
no rebuttable presumption relies exclusively on a state law
determination of control in the absence of the existence of at least
one of the listed control factors. The final rule also adds the
existence of at least one of the control factors to the other two
presumptions (which are based on the provision of 25 percent corporate
capital/ policyholder surplus, or the provision of 25 percent
underwriting capacity to another insurer).
In the final rule, if an insurer does not come within the
conclusive control provisions of section 102(3)(A) or (B) (section
50.5(c)(2)(i) or (ii) of the final rule), but at least two of the
following control factors exists, then Treasury will presume
controlling influence exists prior to a final determination unless and
until rebutted by the insurer:
[sbull] The insurer is one of the two largest shareholders of any
class of voting stock;
[sbull] The insurer holds more than 35 percent of the combined debt
securities and equity of the other insurer;
[sbull] The insurer is party to an agreement pursuant to which the
insurer possesses a material economic stake in another insurer
resulting from a profit-sharing arrangement, use of common names,
facilities or personnel, or the provision of essential services to
another insurer;
[sbull] The insurer is party to an agreement that enables the
insurer to influence a material aspect of the management or policies of
another insurer;
[sbull] The insurer would have the ability, other than through the
holding of revocable proxies, to direct the votes of more than 25
percent of the other insurer's voting stock in the future upon the
occurrence of an event;
[sbull] The insurer has the power to direct the disposition of more
than 25 percent of a class of voting stock in a manner other than a
widely dispersed or public offering;
[sbull] The insurer and/or the insurer's representative or nominee
constitute more than one member of the other insurer's board of
directors;
[sbull] The insurer or its nominee or an officer of the insurer
serves as the chairman of the board, chairman of the
[[Page 41255]]
executive committee, chief executive officer, chief operating officer,
chief financial officer or in any position with similar policymaking
authority in another insurer;
In addition, if a State has determined that an insurer controls
another insurer, and at least one of the factors listed above exists,
then Treasury will presume controlling influence exists unless and
until rebutted by the insurer.
Further, if an insurer provides 25 percent or more of another
insurer's capital in the case of a stock insurer, policyholder surplus
(in the case of a mutual insurer) or corporate capital (in the case of
other entities that qualify as insurers), and at least one of the
factors listed above exists, then Treasury will presume a controlling
influence exists unless and until rebutted by the insurer.
Finally, if an insurer, at anytime during the Program Year,
supplies 25 percent or more of the underwriting capacity for that year
to an insurer that is a syndicate consisting of a group including
incorporated and individual unincorporated underwriters, and at least
one of the factors in the above list exists, then Treasury will presume
a controlling influence unless and until rebutted by the insurer.
A few of the commenters objected to the second and third rebuttable
presumptions in the interim final rule as inconsistent with the
conclusive control provisions in section 102(3)(A) and (B). As a
general matter, Treasury is directed by the Act to treat insurers
comparably under the Program. Treasury views the provision by an
insurer of 25 percent of an insurer's corporate capital (or
policyholder surplus), or supplying of 25 percent of an insurer's
underwriting capacity for the Program Year, to indicate the functional
equivalent of ownership of 25 percent of voting securities. As the
administrator of the Program, Treasury also seeks to prevent loopholes
in the regulations and elsewhere that may create opportunities to avoid
or greatly minimize an insurer deductible merely on the basis of an
insurer's unusual corporate structure or arrangement where, in effect,
the insurer exercises a controlling influence over another insurer in
the same or similar manner as the more traditional corporate structures
of other insurers. The controlling influence determination authority in
section 102(3)(C) aids Treasury's efforts to treat insurers comparably
and helps preserve the goals and effectiveness of the Program. As
described below, the final rule provides insurers with an opportunity
for a hearing and a final determination on controlling influence.
Opportunity for Hearing
Section 102(3)(C) of the Act authorizes Treasury to make a
determination that an insurer directly or indirectly exercises a
controlling influence over the management or policies of another
insurer, after notice and opportunity for hearing. The statutory
language providing an opportunity for hearing does not require a formal
hearing on the record. In the interim final rule, Treasury provided an
opportunity for an informal hearing to any insurer that (1) does not
come within the conclusive control provisions of section 102(3)(A) or
(B) and (2) wanted to rebut a presumption of controlling influence. The
informal hearing procedure requires an insurer to provide Treasury with
relevant facts and circumstances concerning the relationship and in
support of the insurer's contention that no controlling influence
exists. The procedure also allows a supplementary oral presentation by
the insurer, if deemed necessary by Treasury. Based on the information
provided by the insurer, including any oral presentation, the factors
listed in the regulation and other relevant facts and circumstances,
Treasury would then make a final determination of whether a controlling
influence exists.
A few commenters contended that Section 554 of the Administrative
Procedure Act (``APA''), 5 U.S.C. Sec. 554, requires Treasury to hold
a formal hearing for insurers challenging determinations of entity
control under section 102(3) of the Act. We do not agree. The APA's
formal hearing requirements apply when a hearing on the record is
required by statute. ``While the exact phrase `on the record' is not an
absolute prerequisite to the application of formal hearing procedures,
the Supreme Court has made clear that these provisions do not apply,
unless Congress has clearly indicated that the `hearing' required by
the statute must be trial-type hearing on the record.'' U.S. Lines Inc.
v. Federal Maritime Commission, 584 F. 2d 519 (D.C. Cir 1978) (citing
United State v. Florida East Coast R. Co., 410 U.S. 224, 234-38
(1973)). The D.C. Circuit added that, in that case, the statute did not
provide for a hearing ``on the record,'' and nothing in the terms of
the statute or in its legislative history indicated that a trial-type
hearing was intended. Id. Similarly, section 102(3)(C) of the Act does
not require a hearing on the record and nothing in the language or
history of the Act indicates that Congress intended Treasury to
establish procedures and apparatus for formal trial-type hearings on
the issue of controlling influence for purposes of this temporary
Program.
In response to the comments received, the final rule revises the
interim final rule to provide greater transparency in the controlling
influence determination process. The final rule includes regulatory
notice of specific factors that Treasury considers indicative of a
controlling influence, and the rebuttable presumptions in the interim
final rule are revised to avoid reliance on state law determinations
without other indicia of control. The final rule affords insurers an
opportunity to request an informal hearing in which an insurer may
submit all relevant information on the issue of controlling influence,
whether to rebut a presumption or to otherwise obtain a final
controlling influence determination from Treasury. As in the interim
final rule, the final rule allows an oral presentation, where deemed
necessary by Treasury to supplement the written submission. Treasury
will base its final determination on the factors set forth in the final
rule, on information provided to Treasury by the insurer and on other
relevant facts and circumstances. Although the final rule sets no
deadline for an insurer to request a hearing, Treasury encourages
insurers that do not come within the conclusive control provisions but
that are in a relationship or arrangement in which the control factors
apply or exist to request a hearing as soon as possible if they wish to
rebut the regulatory presumptions of controlling influence and obtain a
final determination from Treasury of whether the relationship involves
a controlling influence (and therefore control).
Separately from the issuance of the interim final rule, Treasury
solicited comment on a pro rata allocation method for control
determinations under section 102(3)(C) of the Act, in situations in
which multiple insurers each provide 25 percent or more of the capital
of a stock insurer, policyholder surplus of a mutual insurer or
corporate capital of other entities that meet the definition of insurer
under the Act and in the interim final rule. The pro rata approach
under consideration by Treasury would allocate premium on a pro rata
basis in situations where there are multiple 25 percent owners. This
approach is still under consideration by Treasury and may be proposed
in connection with claims procedures.
Treasury anticipates proposing within claims procedures at a later
date that the controlling insurer will be the insurer that will be
required to file any claim with Treasury for Federal payment under the
Program and that this insurer
[[Page 41256]]
will receive the Federal payment that is to be distributed within the
consolidated insurer group in accordance with distribution of risk
within the consolidated insurer group.
Treasury also solicited comment on various means to ensure the
prompt distribution of the federal payment as appropriate to ensure
that the purposes of the Program are not thwarted or evaded, and that
the ultimate risk bearing entities are treated in an equitable manner,
within the Act's requirements. Treasury will propose means of
distribution of the federal payment in connection with the claims
procedures at a later date.
C. Direct Earned Premium (Section 50.5.d) and Property and Casualty
Insurance (Section 50.5.l)
The Act requires that ``commercial property and casualty
insurance'' that falls within the scope of ``insured loss'' and that is
written by an ``insurer,'' is part of the Program, and thus eligible
for Federal payments and also subject to other provisions of the Act.
Losses arising from a certified act of terrorism that do not meet these
requirements are not eligible for Federal payments under the Program.
For those losses that are eligible, the amount of Federal payment that
an insurer may receive is subject to the insurer's ``insurer
deductible,'' which is determined by a calculation based on the
insurer's ``direct earned premium''.
In the interim final rule, Treasury initially looked to the Act's
definition to ascertain the scope of commercial property and casualty
insurance for purposes of the Program. Section 102(12) of the Act
expressly includes several lines of insurance: excess insurance,
workers' compensation insurance and surety insurance. It also expressly
excludes several additional lines of insurance: (i) Federal crop
insurance issued or reinsured under the Federal Crop Insurance Act or
any other type of crop or livestock insurance that is privately issued
or reinsured; (ii) private mortgage insurance as defined in the
Homeowners Protection Act or title insurance; (iii) financial guaranty
insurance issued by monoline financial guaranty insurance corporations;
(iv) insurance for medical malpractice; (v) health or life insurance
including group life insurance; (vi) flood insurance provided under the
National Flood Insurance Act of 1968; and (vii) reinsurance or
retrocessional reinsurance.
In addition to these specific statutory inclusions and exclusions,
Treasury needed to develop a uniform regulatory definition of
commercial property and casualty insurance for purposes of the Program.
Insurance is generally regulated by State law in the United States.
After consulting with the NAIC and others, Treasury found no uniform or
consistent definition of ``commercial property and casualty insurance''
among the States that could provide guidance or be used for purposes of
the Program. In some States, a line of insurance may be considered as
commercial; and, in other States, the same line of insurance may be
considered as a personal line.
The closest reference point that Treasury found for a uniform
definition was the NAIC's Annual Statement's Exhibit of Premiums and
Losses (``Statutory Page 14''). Therefore, the interim final rule
incorporated the interim guidance issued at 67 FR 76206 that designated
those commercial lines reported on specified lines of Statutory Page 14
as commercial property and casualty lines of coverage to be included in
the Program (subject to the Act's specific inclusions and exclusions).
The lines so specified were: Line 1 (Fire); Line 2.1 (Allied Lines);
Line 3 (Farmowners Multiple Peril); Line 5.1 (Commercial Multiple
Peril--non-liability portion); Line 5.2 (Commercial Multiple Peril--
liability portion); Line 8 (Ocean Marine); Line 9 (Inland Marine); Line
16 (Workers' Compensation); Line 17 (Other Liability); Line 18
(Products Liability); Line 19.3 (Commercial Auto No Fault--personal
injury protection); Line 19.4 (Other Commercial Auto Liability); Line
21.2 (Commercial Auto Physical Damage); Line 22 (Aircraft--all perils);
Line 24 (Surety); Line 26 (Burglary and Theft); and Line 27 (Boiler and
Machinery). In making this determination Treasury considered the Act's
definition of ``commercial property and casualty insurance'' and how it
relates to the lines of coverage listed on Statutory Page 14, the
Program structure, and what would be necessary to effectively
administer the Program. In developing the interim final rule, Treasury
consulted with the NAIC and others regarding State law and premium
reports filed with insurance regulators in the respective States and
with the NAIC.
Section 102(4) of the Act defines ``direct earned premium'' to mean
direct earned premium (DEP) for property and casualty insurance issued
by any ``insurer'' for losses within the scope of ``insured loss.'' The
interim final rule also clarified that premium information on the
specified lines of Statutory Page 14 should be included in calculating
an insurer's DEP only to the extent that coverage under the Program is
provided for commercial property and casualty exposures. Therefore,
policies (or portions of policies) not eligible for Federal payments
under the Program, such as personal lines or other lines of coverage
(such as medical malpractice) specifically excluded by the Act, should
not go into the calculation of an insurer's DEP. Treasury's approach is
designed to maintain a close correlation between the lines of
commercial property and casualty insurance eligible for the Federal
payments under the Program, and the amount of premiums for those
coverages that actually go into calculating an insurer's DEP under the
Program.
Many policies have combined risk coverage (hybrid policies). Under
some hybrid policies, some of the risks or lines are covered by the
definition of commercial property and casualty insurance under the
Program and some are not covered. To address these situations, the
interim final rule allows (but does not require) an insurer to allocate
a portion of the premium (i.e. that portion for covered lines or risks)
in calculating an insurer's DEP under the Program. If an insurer does
not choose to allocate its hybrid policy premiums in this manner, then
the entire DEP reported on the specific lines of Statutory Page 14 must
go into its DEP calculation, and also, potentially, into the recoupment
base for that insurer. Treasury has not yet issued rules or procedures
governing any potential recoupment under section 103(e)(7) of the Act
or concerning the surcharges required by section 103(e)(8) of the Act.
However, it is Treasury's expectation that an insurer's policies (or
portions of policies) that go into calculating an insurer's DEP would
be the same policies (or portions of policies) that go into determining
an insurer's recoupment base.
Instead of issuing a new reporting requirement or mandating a
specific allocation formula for hybrid policies, Treasury has suggested
several methods that insurers may use in adjusting and calculating
their DEP under the Program:
(1) For policies with predominant personal line coverages, but
where the premiums might also cover a portion for coverage of
commercial risks, Treasury indicated that a policy would be
considered personal, and not included in DEP, if the commercial
portion was incidental (less than 25 percent of the total premium).
If the commercial coverage portion represented more than 25 percent
of the total premium, then the company should allocate the
appropriate portion of the premium as commercial to be included in
DEP.
(2) For policies written by insurers required to participate in
the Program, but for which the premiums are not reported on
Statutory Page 14 (e.g. certain county or town
[[Page 41257]]
mutuals), the interim final rule suggested other methods by which
adjustments could be made by the insurer to calculate its DEP.
Specific methods were suggested in the interim final rule for county
or town mutual insurers, eligible surplus line insurers, and
federally approved insurers.
Included Versus Excluded Lines of Coverage in General
Several commenters were uncertain about whether the interim final
rule's list of commercial lines as reported on the specified lines of
Statutory Page 14 was exclusive or merely illustrative. Their
uncertainty appears to arise from use of the word ``includes'' in
section 50.5(l) of the interim final rule that property and casualty
insurance (``includes commercial lines within the following lines of
insurance.'') These commenters suggested that Treasury clarify whether
it intended for the list to be exclusive, or identify those lines of
business that are excluded.
As previously noted, Treasury consulted with the NAIC and others
concerning the definition of commercial property and casualty
insurance. Finding no uniform or consistent definition of the term,
Treasury determined that the NAIC's Statutory Page 14, provided the
best available point of reference--not only for identifying the lines
of coverage for the Program, but also for guidance in determining an
insurer's DEP for those lines of coverage. Treasury intended that the
list of specified lines on Statutory Page 14 would be exclusive, and
premiums reported on other lines would not be part of the Program. The
final rule revises the previous language to clarify this.
In its comment on the interim final rule, the NAIC suggested
Treasury should add the following language from the Act: ``* * * or any
other type of crop or livestock insurance that is privately issued or
reinsured'' to section 50.5(l)(2)(i) of the interim final rule. The
NAIC commented that such an addition would prevent any uncertainty
concerning the treatment of crop or livestock coverage that is not part
of the Program.
In developing the interim final rule, Treasury understood based on
available information that privately issued or reinsured crop or
livestock insurance was reported under Multiple Peril Crop insurance on
Line 2.2 of Statutory Page 14. It is now Treasury's understanding,
based on additional information from the NAIC, that privately issued or
reinsured crop or livestock insurance is generally reported as Allied
Lines insurance on Line 2.1 of Statutory Page 14. Therefore, in the
final rule, Treasury has added the specific statutory language and the
appropriate reporting lines of Statutory Page 14 to section
50.5(l)(2)(i) of the final rule.
The Act and interim final rule exclude Federal flood insurance
which is a line of single peril natural disaster insurance. Similarly,
the interim final rule excluded earthquake insurance reported on
Statutory Page 14. Treasury received no comments on the interim final
rule regarding the treatment of any single peril natural disaster
insurance. However, in light of information subsequently received in
response to Treasury's proposed rule concerning state residual market
insurance entities, Treasury is considering issuing a proposed rule
specifically requesting comment on the inclusion or exclusion in the
Program definition of commercial property and casualty insurance of
other single peril natural disaster insurance, such as stand alone,
single peril wind insurance, if reported on included lines of Statutory
Page 14.
Personal Lines
One commenter asserted that Treasury's determination that
commercial coverage is incidental if its applicable premium is less
than 25 percent of a hybrid personal/commercial lines policy premium
would have adverse effects, suggesting that this could cause insurers
to force incidental coverages off such personal policies, such as
Homeowners insurance. Others commented that the incidental rule should
only be used as a threshold calculation, or that insurers should be
allowed to allocate personal/commercial hybrid policy premiums
according to their normal business methods and procedures. One
commenter contended that Homeowners policies should not be included in
the Program regardless of the percentage of commercial premium, and
that allocation of commercial/personal premium would not be appropriate
for Farmowners or Farm Properties policies since they are both
considered by some states to be commercial lines.
As discussed above, Treasury has suggested methods for the
allocation of commercial portions of premiums in hybrid policies in an
attempt to aid insurers by simplifying the adjustment and calculation
of an insurer's DEP. If the appropriate premium was included in the DEP
and the other required conditions for Federal payment are met,
commercial portions of hybrid policies are covered by the Program. The
25 percent incidental provision was included in the interim final rule
by Treasury to provide a threshold, so that those insurers that did not
want to calculate an actual allocation of premiums on small incidental
amounts of coverage, and did not intend to perfect their right to
recover Federal payment on claims paid on such incidental commercial
coverage, could then exclude those premiums from their DEP calculation
if they wished to do so. In order to clarify this in the final rule,
and to make it clear that an insurer can chose to allocate premiums
below that amount, Treasury has modified the language in section
50.5(d)(1)(i-iv) of the interim final rule.
Personal Versus Commercial Lines
Four commenters asked for clarification with regard to whether
coverage for one to four family rental units is personal or commercial
insurance. One pointed out that such coverage is generally written
under a Dwelling Properties insurance policy (which is considered to be
a personal line). However, in other situations, under four family
rental units are written as a commercial coverage. Treasury's
designation in section 50.5(l)(1) of the interim final rule of the
specific lines of commercial coverage from Statutory Page 14 was made,
in part, to provide greater clarity for insurers in cases where various
States may not treat certain types of coverage consistently as
commercial coverage. In general, it is our understanding that premium
income for one to four family rental unit insurance coverage generated
from policies insuring property owned for business purposes (e.g. to
generate income for the property owner) is reported on Lines 1 (Fire)
2.1 (Allied Lines) and 17 (Other Liability) of Statutory Page 14. Based
on section 50.5(l)(1) of the final rule, such insurance coverage would
be considered commercial property and casualty insurance coverage that
is included in the Program. Treasury also addressed the issue of
personal lines in the context of adjustments to DEP in section
50.5(d)(1) of the interim final rule and through adjustments to that
section in the final rule. To the extent that one to four family rental
units have a personal coverage component, the suggested methods of
adjusting and calculating the appropriate DEP may be used by an
insurer.
Another commenter stated that farm residences should be considered
commercial. For purposes of the Program, Treasury does not agree, but
considers any owner occupied residence to be basically a personal
coverage. Therefore, where a farm residence is covered in a hybrid farm
policy, the suggested methods of adjusting and
[[Page 41258]]
calculating the appropriate DEP can be utilized.
Other Non-Covered Lines
One commenter suggested that Treasury consider extending the
commercial/personal allocation to other hybrid contracts containing
premiums for excluded lines of coverage such as Medical Malpractice in
combination with Hospital General Liability coverage. Such insurance
lines are not within the scope of the definition of commercial property
and casualty insurance of the Act and are not included in the Program.
Therefore, premiums in hybrid policies applicable to those exceptions
do not need to be included in an insurer's DEP. Any allocation of
premium for such exclusions should be calculated by insurers either
using methods suggested by Treasury, or other similar methods in
accordance with the insurer's normal business methods and procedures.
Another commenter suggested that Treasury should exclude premiums
reported on the specified lines on Statutory Page 14, but earned from
retroactive insurance programs such as certain Novations, Adverse
Development Cover, or Loss Portfolio Transfer Programs. Retroactive
insurance is insurance covering only events that occurred prior to the
inception date of the policy, but there appears to be no
differentiation in the Statutory Page 14 reporting to indicate that
such premiums relate to risks from prior years. Treasury takes the
position that such retroactive premiums are not within the time period
of the definition of ``insured losses'' if they are associated with
losses that occurred prior to enactment and the effective date of the
Act (November 26, 2002). Such premium income may be removed in an
insurer's calculation of its DEP. Treasury has modified the language in
the final rule (section 50.5(d)(1)(i-iv) of the interim final rule) to
clarify the nature of the allocation provisions with regard to hybrid
policies and other policies with coverage of losses outside the scope
of insured losses under the Program.
Fidelity Insurance
Treasury did not include Line 23 (Fidelity) of Statutory Page 14 in
its list of specified lines considered to be commercial ``property and
casualty insurance'' covered under the Act in its initial interim
guidance or in its interim final rule. Comments were received from five
different commenters, two in support of Treasury's position, and three
in opposition.
One of the commenters advocating the inclusion of fidelity
insurance argued that it can also have a distinct property component as
in cases where coverage is provided for the destruction of money and
securities, such as those held in bank or corporate vaults. The
commenter pointed out that it had losses associated with fidelity
policies arising from the September 11 terrorist attacks totaling some
$20 million due to the destruction of cash on the premises of its
insured. Another commenter emphasized that fidelity has always been
considered by state regulators, insurers, and policyholders to be a
commercial property and casualty line.
Those opposed to the inclusion of fidelity insurance contend that
it is a line of insurance that by itself faces low exposure to
terrorism losses. One commenter had indicated previously that it had
provided terrorism coverage for all of its fidelity policies prior to
the Act, but needed to confirm whether fidelity insurance was covered
under the Program in order to know how much reinsurance coverage would
be needed to cover its deductible exposure. Commenters also pointed out
that if Treasury were to reverse itself and now include fidelity
insurance as a covered line, problems associated with the timing of the
disclosure requirements and other issues would need to be addressed.
After considering the comments, Treasury has determined that
fidelity insurance is not covered under the Act, and thus has not
inserted Line 23 (Fidelity) in the specified lines on Statutory Page 14
that make up commercial property and casualty insurance covered under
the Act. In making the overall determination of what lines of coverage
are included and excluded in the definition of property and casualty
insurance, Treasury relied on specific guidance provided by Congress in
section 102(12) of the Act. Section 102(12)(A) expressly includes
excess insurance, workers' compensation insurance, and surety
insurance. Traditional surety insurance and fidelity insurance share a
similar characteristic in that they guarantee against losses associated
with the performance of third parties. Treasury maintains the position
that if Congress had intended fidelity insurance to be covered, it
would have specifically included it as it did surety insurance.
Treasury relied on a similar rationale for excluding group accident
coverage, a line of coverage that shares some of the same risk
characteristics as workers' compensation coverage, from the list of
specified lines on Statutory Page 14 that make up commercial property
and casualty insurance covered under the Act.
Through the comment process, Treasury has been made aware that the
traditional fidelity insurance coverage has been expanded in recent
years by some insurers to include coverage to non-employee
``insiders,'' as well as to property coverage for loss of firm assets,
including cash, due to crime. Although Treasury is making no change to
the interim final rule definition with regard to fidelity in the final
rule, Treasury will continue to evaluate this wrap-around or hybrid-
type coverage which could include other types of coverage that are
generally covered by the Act, but not reported as such. In this regard,
Treasury will evaluate whether and how the designation of included and
excluded lines has affected the availability of coverage for terrorism
insurance risk, and whether any further change in the Program might be
warranted.
Other DEP-Related Comments
On behalf of county or town mutual insurers that do not report on
Statutory Page 14, one commenter suggested that Treasury's suggestion
that they convert direct premium or other types of payments such as
assessments or contributions into DEP, would lead to inconsistencies in
the Program because states have varying reporting requirements. The
result would be that DEPs would vary significantly from state to state,
which would be ``bad from a public policy perspective, but leaves
insurers on uncertain ground despite their best good faith efforts at
compliance.'' Treasury has consulted with the NAIC on this issue and we
understand that the NAIC plans to develop a recommended conversion
method that States in turn could recommend to county or town mutual
insurers.
Another commenter requested that Treasury give insurers assurance
that ``fronted'' premiums received by an insurer would not be included
in DEP and thus raise its deductible, if the insurer assuming the risk
(captive or otherwise) is also an insurer under the Program. The
commenter explained that ``fronting'' is a credit enhancement procedure
that is sometimes employed by business customers and their insurers to
expand available insurance capacity, and is recognized by state
regulators. However, fronting arrangements are not addressed in the
Act, and the Act does not appear to provide any basis to exclude
``fronted'' premiums from DEP. If one insurer ``fronts'' for another by
receiving premiums but passes the risk to another,
[[Page 41259]]
it remains the ``insurer'' under the Act and the premiums it receives
become part of its DEP. This is not unlike situations where primary
insurers report DEP on policies that they subsequently reinsure, and
reinsurance is specifically excluded from the Act. Therefore, Treasury
will not provide assurance that fronted premiums will not be included
in DEP.
D. Insured Loss (Section 50.5.e)
Treasury incorporated the statutory definition of ``insured loss''
found in section 102(5) of the Act in section 50.5(e)(1) of the interim
final rule. Section 50.5(e)(2) of the interim final rule clarified the
meaning of insured loss as it relates to section 102(5)(B) of that Act
as follows:
(i) A loss that occurs to an air carrier (as defined in 49 U.S.C.
40102), to a United States flag vessel, or a vessel based principally
in the United States, on which United States income tax is paid and
whose insurance coverage is subject to regulation in the United States,
is not an insured loss under section 102(5)(B) of the Act unless it is
incurred by the air carrier or vessel outside the United States.
(ii) An insured loss to an air carrier or vessel outside the United
States under section 102(5)(B) of the Act does not include losses
covered by third party insurance contracts that are separate from the
insurance coverage provided to the air carrier or vessel.
One commenter took exception to Treasury's clarification that such
extraterritorial insured third party losses to United States air
carriers and vessels are not insured losses, and cited legislative
history of the Act to indicate an intent on the part of Congress to
provide extraterritorial coverage to United States air carriers and
vessels without limitation.
After reviewing the comments including the legislative history
cited by the commenter, Treasury has determined not to change the
position it took in the interim final rule. Therefore, for purposes of
the Program, an insured loss is ``any'' loss, including a third party
liability loss, if it occurs within the geographic boundaries of the
United States; but, if the loss occurs outside of the geographic
boundaries of the United States (extraterritorial) to a United States
air carrier or vessel, then only that portion of the loss ``to'' that
air carrier or vessel is an insured loss eligible for the backstop. To
further clarify, ``to'' in this context means insured losses that are
incurred by United States air carriers and vessels (e.g., through
United States air carriers' or vessels' property and liability
insurance coverage), not losses that are incurred by other entities
that are covered by third party insurance contracts that are separate
from the insurance coverage provided to the air carrier or vessel.
Treasury's position is consistent with how third party liability
losses are generally treated under the Program (including how such
losses are treated for foreign air carriers and foreign flag vessels)
in that such losses would be considered insured losses if they are
incurred within the geographic scope of the United States. The
extension of coverage provided to United States air carriers and
vessels under the Act is related directly to those entities and their
potential insurance exposures, which are fully covered under the
interim final rule. Treasury does not believe that granting broader
third party indemnification on an extraterritorial basis and creating
greater exposure for United States taxpayers is consistent with
congressional intent for the Program.
E. Insurer (Section 50.5.f)
The interim final rule incorporated the statutory definition of
``insurer'' as generally reflected in previously issued interim
guidance that was published at 67 FR 78864. In accordance with section
103(a)(3) of the Act, each entity that meets the definition of
``insurer'' under the Act as implemented by Treasury must participate
in the Program. To participate in the Program, an entity, including an
``affiliate'' of an insurer (see further discussion in part B of this
preamble), must itself meet all of the requirements of section
102(6)(A) and (B) and, as the Treasury may prescribe, (C). This means
that to be an insurer, an entity must: (1) Fall within one of the
categories in section 102(6)(A) described below; (2) receive direct
earned premiums as required by section 102(6)(B); and (3) meet any
additional criteria established by Treasury pursuant to section
102(6)(C).
The categories of insurers in Section 102(6)(A) that were directly
addressed in the interim final rule include:
(i) Licensed or admitted to engage in the business of providing
primary or excess insurance in any State (``State'' includes the
District of Columbia and territories of the United States);
(ii) Not so licensed or admitted, but is an eligible surplus
line carrier listed on the Quarterly Listing of Alien Insurers of
the National Association of Insurance Commissioners;
(iii) Approved for the purpose of offering property and casualty
insurance by a Federal agency in connection with maritime, energy or
aviation activity; and
(iv) A State residual market insurance entity or State workers'
compensation fund.
The interim final rule provides that an entity that falls within
two categories will be considered by Treasury to fall within the first
category that it meets under section 102(6)(A)(i)-(iv). All entities
that are licensed or admitted by a State's insurance regulatory
authority, such as captive insurers, risk retention groups, and farm
and county mutuals, fall under section 102(6)(A)(i).
The interim final rule also specified that the scope of insurance
coverage (insured losses) under the Program for federally approved
insurers under section 102(6)(A)(iii) is only to the extent of federal
approval of the commercial property and casualty insurance coverage
approved by the Federal agency in connection with maritime, energy or
aviation activity. Therefore, insured losses under other insurance
coverage that may be offered by a federally approved insurer under
section 102(6)(A)(iii) would not be covered by the Program.
In addition to falling within a category in section 102(6)(A), an
``insurer'' must meet the requirements in section 102(6)(B) unless
statutorily excepted. Therefore, an ``insurer'' must receive ``direct
earned premiums'' (as defined) on any type of commercial property and
casualty insurance (as defined). In addition, an ``insurer'' must meet
any additional criteria prescribed by Treasury under section 102(6)(C).
The interim final rule did not prescribe additional criteria under
section 102(6)(C). However, under a separate notice of proposed
rulemaking published at 68 FR 9814 Treasury solicited public comment on
whether the Secretary should prescribe other criteria for certain
insurers pursuant to the authority provided by section 102(6)(C) and,
if so, what criteria Treasury should prescribe.
Captive Insurers
Treasury received six comments that addressed the treatment of
captive insurers under the Program. The majority of these objected to
Treasury's mandatory inclusion of captive insurers as a State licensed
or approved insurer under Section 102(6)(A)(i). These commenters
suggested that captives should be allowed to opt-in to the Program as
opposed to being mandatory participants. In support of this position,
commenters offered the following points: many captive insurers were
created to operate outside of the traditional insurance marketplace,
and thus they should not be treated as other insurance companies; some
types of commercial coverage provided by
[[Page 41260]]
captive insurers may have little or no exposure to terrorism risk, thus
captive insurers should not be subject to the Act's potential
recoupment provisions; and mandatory participation requirements for
captives, in particular the Act's potential recoupment provisions,
could negatively affect the formation of domestic captives as companies
may find setting up off-shore captives to be advantageous.
Treasury received one comment letter in support of treating State
licensed or admitted captive insurers as mandatory participants under
the Program. Treasury also received a comment letter from the NAIC that
described a split view on the part of State regulators over mandatory
participation requirements for state-licensed or admitted captive
insurers. Although the NAIC's comments included some of the points
noted above, the NAIC also acknowledged that allowing opt-in treatment
for captive insurers could allow for adverse selection and could set a
bad precedent as other entities would seek similar treatment. In
addition, the NAIC noted that ``when pressed for a decision regarding
whether a complete inclusion is better than a complete exclusion for
captives, regulators generally agree that inclusion is preferable.''
Treasury disagrees with the suggestion in some comments that
captive insurers should be provided with opt-in treatment. Requiring
mandatory participation for State licensed or admitted captive insurers
is in accord with the plain language of section 102(6)(A)(i) where no
distinction is made regarding types of State licensed or admitted
insurers. This treatment also furthers other statutory objectives such
as ensuring that policyholders have widespread access to the terrorism
risk insurance benefits of the Program, and spreading potential costs
of the Program associated with any federal loss-sharing payments. For
example, the cost spreading provisions in connection with recoupment as
required by section 103(e)(7) and in connection with surcharges as
required by section 103(e)(8) are to be applied to all commercial
property and casualty policyholders.
As it relates to the overall administration of the Program,
allowing for opt-in treatment would create the potential for adverse
selection within the Program as those captive insurers that perceived
themselves to have higher risk to terrorism would likely opt-in to the
Program while others with lower perceived risks would likely opt-out of
the Program. A major consequence of this type of action would be the
potential policyholder recoupment base would be reduced, which in turn
would increase the potential recoupment costs on the policyholders of
other mandatory participants in the Program.
Treasury does not support the view set forth by some of the
commenters that limited risk exposure to terrorism of the coverage
provided by some captive insurers is a reason to provide for an opt-in
option. This same type of argument could be made by any number of
insurers and policyholders that feel they have limited risk exposure to
terrorism. Because the recoupment base applies to all commercial
property and casualty policyholders, potentially limited risk exposure
to terrorism is not a valid reason to limit participation under the
Program.
Treasury also finds little or no support for assertions that the
potential recoupment provisions of the Act would have an adverse effect
on U.S. domestic captive jurisdictions. It should be noted that any
such recoupment would only be imposed in the case of a terrorist event
that triggers Federal payments under the Program, and that any
potential recoupment is limited to a maximum 3 percent of premium
surcharge in any given year. Although it is possible that certain
state-licensed or admitted captive insurers would find these potential
costs unattractive and search out other jurisdications, other state-
licensed or admitted captive insurers would recognize the benefits of
Program participation. Therefore, the ultimate effect on any particular
captive insurance jurisdiction is difficult to quantify.
In addition to the general comments on providing captive insurers
opt-in treatment under the Program, two members of Congress offered the
view that, in the case of captives, the Act must be read in the context
of section 103(f). This section authorizes (but does not require)
Treasury to apply the provisions of the Act to ``other'' classes or
types of captive insurers. These commenters believe that the use of the
word ``other'' in section 103(f) is a grammatical error in the Act and,
for that reason, they contend that Treasury's interim final rule does
not reflect the intent of Congress to create a process through which
captive insurers could be integrated into the Program on an opt-in
basis.
As previously noted, Section 102(6)(A)(i) of the Act mandates
participation by insurers that are ``licensed or admitted'' by a State
to engage in the business of providing property and casualty insurance.
Following this state-licensed or admitted category in the definition of
``insurer'', is a category for ``any other entity described in Section
103(f), to the extent provided in the rules of the Secretary issued
under section 103(f).'' (emphasis added). Section 103(f) of the Act
gives discretionary authority to the Secretary to add to the Program,
``other classes or types of captive insurers * * *'' (emphasis added).
A key principle of statutory construction is that words in a statute
must be read to have meaning unless the reading of those words produces
an absurd result. The bar for interpreting words in a statute to be a
legislative error is extremely high. If the words in a statute can be
construed as having a rational meaning, then the rules of statutory
construction preclude an interpretation that they were enacted by
Congress in error.
In this case, the word ``other'' in these two provisions can be
easily construed as referring to captives other than those that are
State-licensed or admitted. Adopting the interpretation of legislative
error suggested by the two commenters would require the conclusion that
Congress erred in two places in the Act. In addition, we found nothing
in the Act's language or legislative history that would support
treating state-licensed or admitted captives differently from other
state-licensed or admitted insurers for purposes of the Program. For
these reasons, the definition of ``insurer'' in the final rule, as in
the interim final rule, includes those entities, including any
captives, that are state-licensed or admitted. Therefore, if a captive
is not state licensed or admitted, then it is not in the Program,
unless subsequently brought in by any rules issued under section
103(f).
Pooling Arrangements and Joint Underwriting Associations
Treasury received comments requesting clarification on how
insurance pooling arrangements, such as joint underwriting
associations, are treated under the Act. These commenters found the
interim final rule and previously issued interim guidance to be unclear
with regard to (a) whether such entities are insurers under the Act,
and (b) if they are insurers, the category of insurer under which they
would belong (e.g., State licensed or admitted, or federally approved).
These commenters suggested that Treasury either clarify that State
authorized joint underwriting associations are State licensed and
admitted insurers under the Act, or directly inform a joint
underwriting association of its status under the Act. Some commenters
also
[[Page 41261]]
suggested that Treasury's treatment of federally approved insurers (see
next section) should be broadened to include all types of coverage
provided by this category of insurers.
The issue of Treasury's treatment of federally approved insurers
is, for the most part, separable from the fundamental question of
whether joint underwriting associations are State licensed or admitted
insurers. With regard to joint underwriting associations operating in
the United States, if such entities are considered to be State licensed
or approved insurers, then they must participate in the Program as
insurers in this category under the Act. The federally approved issue
is not reached in this situation.
Treasury acknowledges that certain joint underwriting associations
and other entities may not fit neatly within what is traditionally
thought of as the ``State licensed or admitted'' market. To provide
more clarity in the category of ``State licensed or admitted,'' the
final rule provides that, with regard to joint underwriting
associations and other pooling arrangements, such entities must meet
all three of the following criteria to be an insurer under the Program:
[sbull] An entity must have gone through a process to be licensed
or admitted to engage in the business of providing primary or excess
insurance that is administered by the State's insurance regulator. If
such a process differs from what a State's insurance regulator
generally applies to insurance companies, such a process should be
similar in scope and content;
[sbull] An entity must generally be subject to State insurance
regulation (including financial reporting requirements) applicable to
insurance companies within the State; and
[sbull] An entity must be managed independently from other insurers
that are participating in the Program.
If a joint underwriting association, pooling arrangement or other
entity is still uncertain of its status as State licensed or admitted
insurers under the Program, such entities are encouraged to provide
Treasury with an explanation of their particular circumstances and how
the criteria listed above apply or do not apply. After reviewing this
information, Treasury will directly contact such entities regarding
their status under the Program. These Treasury decisions also will be
made available to the public.
Federally Approved Insurers
Treasury received fifteen comments regarding Treasury's treatment
of federally approved insurers in the interim final rule. Under the
interim final rule, the scope of insurance coverage (``insured
losses'') for federally approved insurers is only to the extent of
federal approval of the commercial property and casualty insurance
coverage approved by the Federal Agency in connection with maritime,
energy or aviation activity. Most of these commenters contended that
Treasury's interpretation regarding the scope of insurance coverage
under the Program for federally approved insurers was too narrow and
that such an interpretation was counter to the intent of Congress.
The maritime shipping industry and their mutually owned insurance
companies (International Group of Protection and Indemnity Clubs)
raised particular concerns that Treasury's interpretation regarding
federally approved insurers would unduly limit access to the Program
for the United States and world shipping fleets. As it relates to the
maritime industry, the United States Maritime Administration (MARAD)
has in place various mechanisms to approve underwriters providing
insurance coverage for vessels built or operated with subsidy or
covered by vessel obligation guarantees issued pursuant to Title XI of
the Merchant Marine Act, 1936, as amended. (46 U.S.C. 1271-1279).
Commenters noted that vessels built with Title XI subsidies or
guarantees make up a small portion of the United States flag fleet.
Therefore, to the extent that the portion of United States flag fleet
not subject to MARAD insurance approval was relying solely on federally
approved insurers for their insurance coverage, such vessels would
currently have limited access to federal payments under the Program.
Commenters also noted that a similar situation exists to the extent
that foreign flag vessels are currently relying on federally approved
insurers for their insurance coverage.
MARAD has set forth eligibility criteria for underwriters of marine
hull insurance at 46 CFR 249.4 and 249.5. Broadly speaking, to be
eligible under the MARAD program an insurer must be: licensed to do
business in the United States; an underwriter at Lloyd's; a member
company of the Institute of London Underwriters; or specifically
approved by MARAD. There is a fair degree of overlap between MARAD's
eligibility criteria for Marine Hull insurers and the definition of
``insurer'' under the Act. Under sections 102(6)(A)(i-iv), the Act
includes entities that are State licensed or admitted and entities that
are listed on the Quarterly Listing of Alien Insurers of the NAIC as
``insurers'' under the Act. These insurers participate in the Program
for all coverages that fall within the definition of ``commercial
property and casualty'' within the scope of the definition of ``insured
loss'' under the Act. Thus, insurers that fall within the first three
of MARAD's eligibility criteria are for the most part already eligible
insurers under the Act (although there may be some uncertainty
regarding the Institute of London Underwriters as it is our
understanding that this group has merged with another organization to
form the International Underwriting Association). For insurers that
MARAD specifically approves as Marine Hull underwriters, based on the
most recently available lists (NAIC's Quarterly Listing of Alien
Insurers--April 1, 2003, and MARAD Approval List--May 16, 2003), 13 out
of the 18 MARAD approved insurers were listed on the NAIC's Quarterly
Listing of Alien Insurers, and 1 of the 5 insurers that were not
currently on the NAIC's Quarterly Listing of Alien Insurers was on the
list in recent years. Thus, as it relates to Marine Hull underwriters,
Treasury's interpretation with regard to federally approved insurers
does not appear to have caused major disruptions in insurance coverage.
Treasury also notes that we did not receive any comments directly from
Marine Hull underwriters objecting to the treatment of federally
approved insurers.
MARAD, as part of its general insurance information and
requirements, also accepts the International Group of Protection and
Indemnity Clubs (International Group) as providers of liability
coverage. The International Group is made up of 13 independent
Protection and Indemnity Clubs. Each club is independently owned by its
ship-owner members. The International Group allows for the individual
clubs to share claims, purchase reinsurance as a group, and coordinate
on maritime public policy issues. Unlike the case with MARAD-approved
hull insurance underwriters, of the 13 members of the International
Group only two qualify as eligible insurers under the Act in a category
separate from the federally approved insurer category. Hence, the bulk
of the comments Treasury received from the maritime community focused
on the treatment of the International Group under the interim final
rule.
Treasury also received similar comments from the offshore oil and
gas drilling industry objecting to the interim final rule's
interpretation regarding the participation of federally approved
insurers under the Act. The Department of Interior's Minerals
Management Service approves insurance coverage as one method covered
offshore facilities can use for demonstrating oil spill
[[Page 41262]]
financial responsibility, and the Minerals Management Service has
procedures in place (30 CFR 253.29) regarding eligibility criteria
under their program. To further understand the oil and gas drilling
industry's concerns, the Minerals Management Service provided Treasury
with a list of insurers that had been approved to provide coverage
under the oil spill financial responsibility program. Treasury, in
consultation with the NAIC, identified 102 out of 105 insurers that
were approved by the Minerals Management Service as being eligible
participants under the Act because they either were State licensed or
admitted or were on the NAIC's Quarterly Listing of Alien Insurers.
Thus, as it relates to insurance coverage for offshore drilling
interests, Treasury's interpretation with regard to federally approved
insurers does not appear to have caused disruptions in insurance
coverage. Treasury did not receive any comments from insurers providing
coverage for offshore drilling interests objecting to the treatment of
federally approved insurers.
Treasury also received comments regarding the treatment of
federally approved insurers under the Department of Labor's authority
to authorize workers' compensation coverage under the Longshore and
Harbor Worker's Act (33 U.S.C. 901) and its extensions. The Department
of Labor authorizes both insurance carriers (20 CFR 703.101) and self-
insurers (20 CFR 703.301) for the purpose of meeting the requirements
of the Longshore and Harbor Worker's Act. Insurers that are authorized
under 20 CFR 703.101 clearly meet the criteria of section 50.5(f)(1)(C)
of being ``approved or accepted for the purpose of offering property
and casualty insurance by a Federal agency in connection with maritime,
energy, or aviation activity.'' In this regard a key element is that
such insurers are ``offering'' insurance coverage.
In contrast, the Department of Labor and other Federal agencies may
approve self insurance as an acceptable means of meeting the financial
requirements or responsibilities of their respective programs. In this
regard, self insurance is just another means of establishing financial
responsibility and is not a substitute for the requirement that
insurance is being ``offered.'' Thus, self insurance arrangements
approved by Federal agencies are not included under section
50.5(f)(1)(C). However, Treasury may consider self insurance
arrangements for inclusion in the Program through Treasury's general
authority to consider such arrangements under section 102(6)(A)(v) of
the Act, which is also described in section 50.5(f)(1)(E) of the
interim final rule. Treasury has not yet taken any action regarding the
inclusion of self insurance arrangements under the Act.
In addition to the general concerns noted above regarding the
treatment of federally approved insurers, airline insurance pools and
other commenters (e.g., those addressing issues related to nuclear
insurers) noted that Federal approval may be for amounts of insurance
coverage that is less than what is normally provided by the insurance
industry. For example, commenters noted that standard airline liability
limits are $1.5 billion, while the Federal Aviation Administration's
required liability coverage is much lower. Likewise, commenters noted
that policy limits on nuclear property coverage generally exceed the
mandated requirements of $1.06 billion per licensee.
After consideration of these comments by the maritime industry and
their mutually owned insurance companies and others, Treasury has
decided not to make any changes to the interim final rule's treatment
of federally approved insurers for the following reasons.
First, the interim final rule's treatment of federally approved
insurers is in accord with the statutory language of the Act in section
102(6)(A)(iii) (``approved for the purpose of offering property and
casualty insurance by a Federal agency in connection with maritime,
energy or aviation activity''). While some commenters pointed to
congressional intent supporting a broader interpretation, no express
language in the Act's legislative history supports this view. Moreover,
Treasury's treatment of federally approved insurers in the interim
final rule is consistent with the underlying reason for the Federal
government providing Federal agencies with the authority to approve
insurers. In general, the Federal government provides agencies with
approval authority to address important national interests or to
protect the Federal government's interests. For example, the Federal
government requires that airlines maintain a minimum amount of
liability insurance coverage. In contrast, the Federal government has
no similar overall liability requirements for ocean going vessels, but
such vessels are required to demonstrate financial responsibility for
oil spills. As an example of protecting the Federal government's
interest, MARAD approves insurance coverage for vessels that were built
with a government subsidy or guarantee. MARAD could have been granted
broader insurance approval authority than just federally subsidized
vessels if there were a clear national interest in ensuring that all
ocean going vessels in U.S. waters had adequate overall liability
insurance coverage.
Second, Treasury's treatment of federally approved insurers is
consistent with Treasury's consideration of a pre-existing nexus (for
example, the nexus of State-licensing or NAIC approval for listing on
the Quarterly Listing of Alien Insurers) to be very important to the
effective and efficient administration of the Program. Some commenters
criticized Treasury for not more fully explaining the importance of
this consideration.
The following three key factors highlight the importance of a pre-
existing regulatory nexus or structure for the administration of the
Program.
Ongoing Data Requirements. As Program administrator, Treasury has
chosen not to impose new ongoing data reporting requirements on
insurers. That does not mean that validating and collecting certain
data is not important to the Program. The calculation of an insurer's
DEP forms the basis for an insurer calculating its deductible under the
Program, and in the event that insurers would submit a claim for
payment under the Program, Treasury would expect to validate an
insurer's calculation of its deductible. Treasury believes that the
existing ongoing data reporting requirements of the State insurance
regulators and the consolidated reporting requirements as implemented
by the NAIC form a sound basis for the administration of the Program.
Therefore, there was not a pressing need to implement new ongoing data
reporting requirements through Treasury (and to create additional
paperwork burdens for the insurance industry) for this temporary
government Program.
However, such ongoing data is useful and important, especially as
it relates to foreign insurers that are providing coverage on global
risk policies. Global risk polices (e.g., such as those provided to
ocean going vessels) have historically not allocated premium income to
reflect the scope of insured losses covered under the Act, which is a
key measure in calculating an insurer's deductible. Treasury has
determined to utilize data collected by the NAIC from insurers on the
Quarterly Listing of Alien Insurers that captures the amount of premium
income related to the scope of insured loss under the Act. Federal
agencies approving insurers under section 102(6)(A)(iii), while
generally having some type of financial criteria for
[[Page 41263]]
approving insurers, do not have in place any type of ongoing data
reporting requirements similar to that of the NAIC.
Ability to Impose Surcharges or Take Enforcement Actions. Many of
the insurers approved by Federal agencies may be outside the direct
jurisdiction of the United States. Treasury has little leverage vis a
vis these insurers and this could make it difficult for Treasury to
impose surcharges in the case of any recoupment under the Act or to
take enforcement actions if needed. In contrast, if an insurer on the
NAIC's Quarterly Listing of Alien Insurers is not in compliance with
provisions of the Act, the insurer could suffer the consequences of
losing its NAIC listing for poor character, which in turn could
adversely affect its U.S. business operations. It is possible that a
Federal agency could also revoke approval for noncompliance with
provisions of the Act. However, the limited nature of a Federal
agency's approval authority could somewhat lessen the impact of any
such action and Treasury has no authority to require such action by
another federal agency.
Comparability Among Federally Approved Insurers. Treasury strongly
believes that all federally approved insurers should be treated in a
similar manner that is consistent with the statute. For example, such
consistency implies that the mandatory participation requirements of
the Act should be applied to all federally approved insurers in a
similar fashion. In that regard, Treasury would find it difficult to
justify one group of federally approved insurers having broader access
to the Program than the current interim final rule provides, while
other groups stayed with the current approach in the interim final
rule.
Treasury has considered carefully the concerns raised by commenters
regarding the interim final rule's treatment of federally approved
insurers. At this time, Treasury has decided that no changes to the
rule are warranted. It appears that many of the insurers that have been
approved by a Federal agency also qualify to participate in the Program
based on other criteria. Treasury also notes that obtaining a listing
on the NAIC's Quarterly Listing of Alien Insurers is an option that
insurers can employ if they are not satisfied with the treatment of
federally approved insurers under the interim final rule. Obtaining
such a listing would satisfy the concerns we noted above, while at the
same time imposing limited burden on insurers. It is our understanding
that perhaps the major obstacle to obtaining a listing is setting up
the necessary trust fund.
Treasury will continue to evaluate this issue as the Program
matures. While Treasury does not plan on making any changes to the
treatment of federally approved insurers at this time, Treasury would
be open to considering alternatives if the three key factors listed
above `` ongoing data reporting requirements, ability to impose
surcharges or take enforcement actions, and comparability among
federally approved insurers--could be addressed.
Other Insurer Criteria
Under a separate notice of proposed rulemaking published at 68 FR
9814 Treasury solicited public comment on whether the Secretary should
prescribe other criteria for certain insurers pursuant to the authority
provided by section 102(6)(C) and, if so, what criteria Treasury should
prescribe. Specifically, Treasury solicited comment on whether criteria
should be developed to prevent newly formed insurance companies from
participating in the Program if such companies were established for the
purpose of evading the Act's deductible requirements.
A few commenters raised concerns that developing such criteria
could limit the development of new structures to provide terrorism risk
insurance coverage. One commenter acknowledged the concerns raised by
Treasury and supported the interim final rule's treatment of the
deductible requirements for newly formed insurance companies in section
50.5(g)(2) as an appropriate safeguard. Another commenter suggested a
set of general criteria that Treasury could look to as it considers
this issue. As Treasury noted in the preamble to interim final rule, we
are seeking to balance the goals of encouraging new sources of capital
in the market for terrorism risk insurance while also maintaining the
integrity of the Program. Treasury is not proposing any additional
criteria at this time, but we will continue to monitor developments in
the market for terrorism risk insurance and the market's response to
the Act.
Treasury also solicited comments on whether additional criteria
should be proposed for federally approved insurers. Some commenters
suggested that additional financial criteria could be applied if
necessary, while one commenter suggested that the Act does not give
Treasury the authority to regulate insurance. Given that the final rule
retains the interim final rule's treatment of federally approved
insurers, the scope of potential problems related to the financial
integrity of such insurers is somewhat limited. Thus, Treasury is not
proposing any additional criteria at this time, but we will continue to
study and monitor this issue.
F. Insurer Deductible (Section 50.5.g)
The interim final rule incorporated the statutory definition of
``insurer deductible'' found in section 102(7) of the Act and set forth
a procedure specifying how newly formed insurance companies would
calculate their deductible under the Program. In particular, the
interim final rule specified that for an insurer that came into
existence after November 26, 2002, the insurer deductible will be based
on data for direct earned premiums for the current Program Year. If the
insurer has not had a full year of operations during the applicable
Program Year, the direct earned premiums for the current Program Year
will be annualized to determine the insurer deductible.
The two commenters who addressed this issue both indicated support
for Treasury's determination that premiums for new insurers would be
annualized in the calculation of their insurer deductible, and the
language of the interim final rule is incorporated without change into
the final rule.
III. Procedural Requirements
The Act established a Program to provide for loss sharing payments
by the Federal Government for insured losses resulting from certified
acts of terrorism. The Act became effective immediately upon the date
of enactment (November 26, 2002). Preemptions of terrorism risk
exclusions in policies, mandatory participation provisions, disclosure
and other requirements and conditions for federal payment contained in
the Act applied immediately to those entities that come within the
Act's definition of ``insurer.'' Treasury has issued and will be
issuing additional regulations to implement the Program. This final
rule provides critical information concerning the definitions of
Program terms that lays the groundwork for Treasury's implementation of
the Program. No one can predict if, or when, an act of terrorism may
occur. There is an urgent need for Treasury, as Program administrator,
to lay the groundwork for Program implementation through regulations to
provide clarity and certainty concerning which entities are required to
participate in the Program; the scope and conditions of Program
coverage; and other implementation issues that immediately affect
insurers, their policyholders, State regulators and other interested
parties. This includes the need to supplement, or modify as
[[Page 41264]]
necessary, the previously issued interim final rule.
Accordingly, pursuant to 5 U.S.C. 553(d)(3), Treasury has
determined that there is good cause for the final rule to become
effective immediately upon publication.
This final rule is a significant regulatory action and has been
reviewed by the Office of Management and Budget under the terms of
Executive Order 12866.
It is hereby certified that this final rule will not have a
significant economic impact on a substantial number of small entities.
The Act requires all licensed or admitted insurers 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 without any reference to the size or scope of the
commercial entity. Although the Act affects small insurers, the
proposed rule also gives insurers flexibility in calculating their
direct earned premium for policies that have both commercial and
personal exposures, and it provides a safe harbor to exclude policies
that have incidental coverage for commercial purposes. Accordingly, any
economic impact associated with the proposed rule flows from the Act
and not the proposed rule. However, the Act and the Program are
intended to provide benefits to the U. S. economy and all businesses,
including small businesses, by providing a federal reinsurance backstop
to commercial property and casualty insurance policyholders and
spreading the risk of insured loss resulting from an act of terrorism.
The collection of information contained in Sec. 50.8 of this final
rule has been reviewed and approved by the Office of Management and
Budget (OMB) in accordance with the requirements of the Paperwork
Reduction Act (44 U.S.C. 3507(j)) under control number 1505-0190. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid
control number assigned by OMB.
This information is required in order for Treasury to determine
whether an insurer has rebutted a presumption that the insurer
exercises a controlling influence over the management or policies of
another insurer. The collection of information is mandatory with
respect to an insurer seeking to rebut a presumption. The estimated
average burden associated with the collection of information in this
final rule is 40 hours per respondent.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Office
of Financial Institutions Policy, Room 3160 Annex, Department of the
Treasury, 1500 Pennsylvania Ave., NW., Washington, DC 20220 and to OMB,
Attention: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.
List of Subjects in 31 CFR Part 50
Terrorism risk insurance.
Authority and Issuance
0
For the reasons set forth above, the interim final rule adding 31 CFR
Part 50, which was published at 68 FR 9804 on February 28, 2003, is
adopted as a final rule with the following changes:
PART 50--TERRORISM RISK INSURANCE PROGRAM
0
1. The authority citation for 31 CFR Part 50 continues to read as
follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-
297, 116 Stat. 2322 (15 U.S.C. 6701 note).
0
2. Section 50.2 is added to read as follows:
Sec. 50.2 Responsible office.
The office responsible for the administration of the Terrorism Risk
Insurance Act in the Department of the Treasury is the Terrorism Risk
Insurance Program Office. The Treasury Assistant Secretary for
Financial Institutions prescribes the regulations under the Act.
0
3. Section 50.5(c), (d)(1), (f)(1), and (l) are revised to read as
follows:
Sec. 50.5 Definitions.
* * * * *
(c)(1) Affiliate means, with respect to an insurer, any entity that
controls, is controlled by, or is under common control with the
insurer. An affiliate must itself meet the definition of insurer to
participate in the Program.
(2) For purposes of paragraph (c)(1) of this section, an insurer
has control over another insurer for purposes of the Program if:
(i) The insurer directly or indirectly or acting through one or
more other persons owns, controls, or has power to vote 25 percent or
more of any class of voting securities of the other insurer;
(ii) The insurer controls in any manner the election of a majority
of the directors or trustees of the other insurer; or
(iii) The Secretary determines, after notice and opportunity for
hearing, that an insurer directly or indirectly exercises a controlling
influence over the management or policies of the other insurer, even if
there is no control as defined in paragraph (c)(2)(i) or (c)(2)(ii) of
this section.
(3) An insurer described in paragraph (c)(2)(i) or (c)(2)(ii) of
this section is conclusively deemed to have control.
(4) For purposes of a determination of controlling influence under
paragraph (c)(2)(iii) of this section, if an insurer is not described
in paragraph (c)(2)(i) or (c)(2)(ii) of this section, the following
rebuttable presumptions will apply:
(i) If an insurer controls another insurer under any State law, and
at least one of the factors listed in paragraph (c) (4)(iv) of this
section applies, there is a rebuttable presumption that the insurer
that has control under State law exercises a controlling influence over
the management or policies of the other insurer for purposes of
paragraph (c)(2)(iii) of this section.
(ii) If an insurer provides 25 percent or more of another insurer's
capital (in the case of a stock insurer), policyholder surplus (in the
case of a mutual insurer), or corporate capital (in the case of other
entities that qualify as insurers), and at least one of the factors
listed in paragraph (c)(4)(iv) of this section applies, there is a
rebuttable presumption that the insurer providing such capital,
policyholder surplus, or corporate capital exercises a controlling
influence over the management or policies of the receiving insurer for
purposes of paragraph (c)(2)(iii) of this section.
(iii) If an insurer, at any time during a Program Year, supplies 25
percent or more of the underwriting capacity for that year to an
insurer that is a syndicate consisting of a group including
incorporated and individual unincorporated underwriters, and at least
one of the factors in paragraph (c)(4)(iv) of this section applies,
there is a rebuttable presumption that the insurer exercises a
controlling influence over the syndicate for purposes of paragraph
(c)(2)(iii) of this section.
(iv) If paragraphs (c)(4)(i) through (c)(4)(iii) of this section
are not applicable, but two or more of the following factors apply to
an insurer, with respect to another insurer, there is a rebuttable
presumption that the insurer exercises a controlling influence over the
management or policies of the other insurer for purposes of paragraph
(c)(2)(iii) of this section:
(A) The insurer is one of the two largest shareholders of any class
of voting stock;
(B) The insurer holds more than 35 percent of the combined debt
securities and equity of the other insurer;
[[Page 41265]]
(C) The insurer is party to an agreement pursuant to which the
insurer possesses a material economic stake in the other insurer
resulting from a profit-sharing arrangement, use of common names,
facilities or personnel, or the provision of essential services to the
other insurer;
(D) The insurer is party to an agreement that enables the insurer
to influence a material aspect of the management or policies of the
other insurer;
(E) The insurer would have the ability, other than through the
holding of revocable proxies, to direct the votes of more than 25
percent of the other insurer's voting stock in the future upon the
occurrence of an event;
(F) The insurer has the power to direct the disposition of more
than 25 percent of a class of voting stock of the other insurer in a
manner other than a widely dispersed or public offering;
(G) The insurer and/or the insurer's representative or nominee
constitute more than one member of the other insurer's board of
directors; or
(H) The insurer or its nominee or an officer of the insurer serves
as the chairman of the board, chairman of the executive committee,
chief executive officer, chief operating officer, chief financial
officer or in any position with similar policymaking authority in the
other insurer.
(5) An insurer that is not described in paragraph (c)(2)(i) or
(c)(2)(ii) of this section may request a hearing in which the insurer
may rebut a presumption of controlling influence under paragraph
(c)(4)(i) through (c)(4)(iv) of this section or otherwise request a
determination of controlling influence by presenting and supporting its
position through written submissions to Treasury, and in Treasury's
discretion, through informal oral presentations, in accordance with the
procedure in Sec. 50.8.
(d) * * *
(l) State licensed or admitted insurers. For a State licensed or
admitted insurer that reports to the NAIC, direct earned premium is the
premium information for commercial property and casualty insurance
coverage reported by the insurer on column 2 of the NAIC Exhibit of
Premiums and Losses of the 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 of commercial property and casualty coverage
issued by the insurer against an insured loss under the Program.
(ii) Premiums for personal property and casualty insurance coverage
(coverage primarily designed to cover personal, family or household
risk exposures, with the exception of coverage written to insure 1 to 4
family rental dwellings owned for the business purpose of generating
income for the property owner) or for insurance coverage for any loss
that would not be an insured loss under the Program, 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. Property and casualty insurance coverage for any loss that
would not be an insured loss under the Program that includes incidental
coverage for an insured loss under the Program is primarily non-Program
coverage, and therefore premiums may be fully excluded by an insurer
from the calculation of direct earned premium. For purposes of the
Program, coverage for an insured loss is incidental if less than 25
percent of the total direct earned premium is attributable to such
coverage.
(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 property and casualty insurance policy covers risk exposures for both
insured losses and losses that would not be insured losses under the
Program, insurers may allocate the premiums in accordance with the
proportion of risk between the insured loss and non-insured loss
components in order to ascertain direct earned premium.
* * * * *
(f) Insurer means any entity, including any affiliate of the
entity, that meets the following requirements:
(1)(i) The entity must fall within at least one of the following
categories:
(A) It is licensed or admitted to engage in the business of
providing primary or excess insurance in any State, (including, but not
limited to, State licensed captive insurance companies, State licensed
or admitted risk retention groups, and State licensed or admitted farm
and county mutuals), and, if a joint underwriting association, pooling
arrangement, or other similar entity, then the entity must:
(1) Have gone through a process of being licensed or admitted to
engage in the business of providing primary or excess insurance that is
administered by the State's insurance regulator, which process
generally applies to insurance companies or is similar in scope and
content to the process applicable to insurance companies;
(2) Be generally subject to State insurance regulation, including
financial reporting requirements, applicable to insurance companies
within the State; and
(3) Be managed independently from other insurers participating in
the Program;
(B) It is not licensed or admitted to engage in the business of
providing primary or excess insurance in any State, but is an eligible
surplus line carrier listed on the Quarterly Listing of Alien Insurers
of the NAIC, or any successor to the NAIC;
(C) It is approved or accepted for the purpose of offering property
and casualty insurance by a Federal agency in connection with maritime,
energy, or aviation activity, but only to the extent of such federal
approval of commercial property and casualty insurance coverage offered
by the insurer in connection with maritime, energy, or aviation
activity;
(D) It is a State residual market insurance entity or State
workers' compensation fund; or
(E) As determined by the Secretary, it falls within any other class
or type of captive insurer or other self-insurance arrangement by a
municipality or other entity, to the extent provided in Treasury
regulations issued under section 103(f) of the Act.
(ii) If an entity falls within more than one category described in
paragraph (f)(1)(i) of this section, the entity is considered to fall
within the first category within which it falls for purposes of the
Program.
* * * * *
(l) Property and casualty insurance means commercial lines of
property and casualty insurance, including excess insurance, workers'
compensation insurance, and surety insurance, and
(1) Means commercial lines within only the following lines of
insurance from the NAIC's Exhibit of Premiums and Losses (commonly
known as Statutory Page 14): Line 1--Fire; Line 2.1--Allied Lines; Line
3--Farmowners Multiple Peril; Line 5.1--Commercial
[[Page 41266]]
Multiple Peril (non-liability portion); Line 5.2--Commercial Multiple
Peril (liability portion); Line 8--Ocean Marine; Line 9--Inland Marine;
Line 16--Workers' Compensation; Line 17--Other Liability; Line 18--
Products Liability; Line 19.3--Commercial Auto No-Fault (personal
injury protection); Line 19.4--Other Commercial Auto Liability; Line
21.2--Commercial Auto Physical Damage; Line 22--Aircraft (all perils);
Line 24--Surety; Line 26--Burglary and Theft; and Line 27--Boiler and
Machinery; and
(2) Does not include:
(i) Federal crop insurance issued or reinsured under the Federal
Crop Insurance Act (7 U.S.C. 1501 et seq.), or any other type of crop
or livestock insurance that is privately issued or reinsured (including
crop insurance reported under either Line 2.1--Allied Lines or Line
2.2--Multiple Peril (Crop) of the NAIC's Exhibit of Premiums and Losses
(commonly known as Statutory Page 14);
(ii) Private mortgage insurance (as defined in section 2 of the
Homeowners Protection Act of 1988 (12 U.S.C. 4901) or title insurance;
(iii) Financial guaranty insurance issued by monoline financial
guaranty insurance corporations;
(iv) Insurance for medical malpractice;
(v) Health or life insurance, including group life insurance;
(vi) Flood insurance provided under the National Flood Insurance
Act of 1968 (42 U.S.C. 4001 et seq.) or earthquake insurance reported
under Line 12 of the NAIC's Exhibit of Premiums and Losses (commonly
known as Statutory Page 14); or
(vii) Reinsurance or retrocessional reinsurance.
* * * * *
0
4. Section 50.8 is added to Subpart A to read as follows:
Sec. 50.8 Procedure for requesting determinations of controlling
influence.
(a) An insurer or insurers not having control over another insurer
under Sec. 50.5(c)(2)(i) or (c)(2)(ii) may make a written submission
to Treasury to rebut a presumption of controlling influence under Sec.
50.5(c)(4)(i) through (iv) or otherwise to request a determination of
controlling influence. Such submissions shall be made to the Terrorism
Risk Insurance Program Office, Department of the Treasury, Suite 2110,
1425 New York Ave NW, Washington, D.C. 20220. The submission should be
entitled, ``Controlling Influence Submission,'' and should provide the
full name and address of the submitting insurer(s) and the name, title,
address and telephone number of the designated contact person(s) for
such insurer(s).
(b) Treasury will review submissions and determine whether Treasury
needs additional written or orally presented information. In its
discretion, Treasury may schedule a date, time and place for an oral
presentation by the insurer(s).
(c) An insurer or insurers must provide all relevant facts and
circumstances concerning the relationship(s) between or among the
affected insurers and the control factors in Sec. 50.5(c)(4)(i)
through (iv); and must explain in detail any basis for why the insurer
believes that no controlling influence exists (if a presumption is
being rebutted) in light of the particular facts and circumstances, as
well as the Act's language, structure and purpose. Any confidential
business or trade secret information submitted to Treasury should be
clearly marked. Treasury will handle any subsequent request for
information designated by an insurer as confidential business or trade
secret information in accordance with Treasury's Freedom of Information
Act regulations at 31 C.F.R. Part 1.
(d) Treasury will review and consider the insurer submission and
other relevant facts and circumstances. Unless otherwise extended by
Treasury, within 60 days after receipt of a complete submission,
including any additional information requested by Treasury, and
including any oral presentation, Treasury will issue a final
determination of whether one insurer has a controlling influence over
another insurer for purposes of the Program. The determination shall
set forth Treasury's basis for its determination.
(e) This Sec. 50.8 supersedes the Interim Guidance issued by
Treasury in a notice published on March 27, 2003 (68 FR 15039).
(Approved by the Office of Management & Budget under control number
1505-0190)
0
5. Section 50.9 is added to Subpart A to read as follows:
Sec. 50.9 Procedure for requesting general interpretations of
statute.
Persons actually or potentially affected by the Act or regulations
in this Part may request an interpretation of the Act or regulations by
writing to the Terrorism Risk Insurance Program Office, Suite 2110,
Department of the Treasury, 1425 New York Ave NW, Washington, DC 20220,
giving a detailed explanation of the facts and circumstances and the
reason why an interpretation is needed. A requester should segregate
and mark any confidential business or trade secret information clearly.
Treasury in its discretion will provide written responses to requests
for interpretation. Treasury reserves the right to decline to provide a
response in any case. Except in the case of any confidential business
or trade secret information, Treasury will make written requests for
interpretations and responses publicly available at the Treasury
Department Library, on the Treasury Web site, or through other means as
soon as practicable after the response has been provided. Treasury will
handle any subsequent request for information that had been designated
by a requester as confidential business or trade secret information in
accordance with Treasury's Freedom of Information Act regulations at 31
CFR Part 1.
Dated: July 7, 2003.
Wayne A. Abernathy,
Assistant Secretary of the Treasury.
[FR Doc. 03-17585 Filed 7-10-03; 8:45 am]
BILLING CODE 4810-25-P