Treasury Issues Rule on Terrorism Risk Insurance Program

Targeted News Service

WASHINGTON, Dec. 22 -- The Department of the Treasury published the following rule in the Federal Register:

Terrorism Risk Insurance Program

A Rule by the Treasury Department on 12/21/2016

Printed version: PDF

Publication Date: 12/21/2016

Agency: Department of the Treasury

Dates: This rule is effective January 17, 2017.

Effective Date: 01/17/2017

Document Type: Rule

Document Citation: 81 FR 93756

Page: 93756-93784 (29 pages)

CFR: 31 CFR 50

RIN: 1505-AC53

Document Number: 2016-29987

AGENCY:

Departmental Offices, Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

The Department of the Treasury (Treasury) is issuing this final rule as part of its implementation of changes to the Terrorism Risk Insurance Program (TRIP or Program) required by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (2015 Reauthorization Act), as published in proposed form on April 1, 2016, for public comment. Treasury previously issued an interim final rule addressing the process for certification of an act of terrorism, as published in proposed form on April 1, 2016. This final rule addresses the balance of the other proposed rules published on April 1, 2016, and adopts the general renumbering of sections as proposed on April 1, 2016. Some clarifying changes have been made in this final rule in response to comments, and certain other wording changes have also been added which do not change the meaning of the rule as originally proposed.

DATES:

This rule is effective January 17, 2017.

FOR FURTHER INFORMATION CONTACT:

Richard Ifft, Senior Insurance Regulatory Policy Analyst, Federal Insurance Office, 202-622-2922 (not a toll free number) or Kevin Meehan, Senior Insurance Regulatory Policy Analyst, Federal Insurance Office, 202-622-7009 (not a toll free number).

SUPPLEMENTARY INFORMATION:

I. Background

The Terrorism Risk Insurance Act of 2002 (the Act or TRIA)[1] was enacted on November 26, 2002, following the attacks of September 11, 2001, to address disruptions in the market for terrorism risk insurance, to help ensure the continued availability and affordability of commercial property and casualty insurance for terrorism risk, and to allow for the private markets to stabilize and build insurance capacity to absorb any future losses for terrorism events. TRIA requires insurers to "make available" terrorism risk insurance for commercial property and casualty losses resulting from certified acts of terrorism (insured losses), and provides for shared public and private compensation for such insured losses. The Secretary of the Treasury (Secretary) administers the Program, including the issuance of regulations and procedures. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Insurance Office assists the Secretary in administering the Program.[2]

The Program has been reauthorized three times.[3] Most recently, on January 12, 2015, the President signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015 (2015 Reauthorization Act),[4] reauthorizing the Program until December 31, 2020. The 2015 Reauthorization Act reformed various operational matters respecting the Program. Among other changes, the 2015 Reauthorization Act mandates that Treasury issue final rules governing the certification process,[5] and that Treasury collect from participating insurers information and data considered by the Secretary to be appropriate to analyze the effectiveness of the Program.[6]

II. Previous Rulemaking

To date, rules establishing general provisions implementing the Program, including key definitions, and requirements for policy disclosures and mandatory availability, are found in Subparts A, B, and C of 31 CFR part 50.[7] Treasury's rules applying provisions of the Act to state residual market insurance entities and state workers' compensation funds are set forth in Subpart D of 31 CFR part 50.[8] Rules concerning claims procedures governing payment of the Federal share of compensation for insured losses are currently found at Subpart F of 31 CFR part 50.[9] Subpart G of 31 CFR part 50 currently contains rules on audit and recordkeeping requirements for insurers,[10] while Subpart H of 31 CFR part 50 currently addresses recoupment and surcharge procedures.[11] Subpart I of 31 CFR part 50 currently contains rules implementing the litigation management provisions of TRIA,[12] and Subpart J of 31 CFR part 50 currently addresses rules concerning the cap on annual liability established under TRIA.[13] Finally, Subpart K of 31 CFR part 50 currently addresses rules concerning the certification process under TRIA.[14] To assist insurers, policyholders, and other interested parties in complying with immediately applicable requirements of the Act, Treasury has also at times issued interim guidance to be relied upon by insurers until superseded by regulations.

III. The Proposed Rule

The proposed rule on which this final rule is based was published in the Federal Register at 81 FR 18950 on April 1, 2016.[15] The proposed rule would strike existing 31 CFR part 50 in its entirety and would replace it with revised Program rules incorporating new Program financial and operational provisions contained in the 2015 Reauthorization Act. The proposed rule included several new subparts to 31 CFR part 50. Subpart F--Data Collection addressed the collection of Program data by Treasury, as required under the 2015 Reauthorization Act, is adopted in this final rule. Subpart G to Part 50, which comprised Treasury's regulations concerning the certification process, was adopted as an interim final rule on December 7, 2016. In addition to these new subparts, the proposal also incorporated a Civil Penalties rule under the Program, pursuant to authority granted by Congress in TRIA,[16] and proposed the adoption, with certain minor changes, of a previously proposed rule addressing the Final Netting of Payments. Finally, the proposal reordered the existing rules to incorporate the new subparts, and made other changes providing further clarification to existing rules and eliminating redundancies.

IV. Summary of Comments and Final Rule

Treasury is issuing this final rule after careful consideration of all comments received on the proposed rule. While this final rule largely reflects the proposed rule, Treasury has made several revisions based on the comments received.

Seventeen commenters submitted comments in response to the general proposal relating to 31 CFR part 50.[17] The 17 commenters included: Insurance industry trade associations; trade associations representing consumers of terrorism risk insurance; insurance companies; Lloyd's (an insurance and reinsurance market); and individuals.[18] The comments received and Treasury's revisions to the proposed rule are summarized below.

1. Subpart A--General Provisions

The proposed changes to Subpart A principally addressed changes to definitional provisions, many of which were required by the 2015 Reauthorization Act, or which were otherwise required by the passage of time or to provide greater clarity to existing provisions. Treasury did not receive comments respecting many of these proposed changes, which are adopted as originally proposed. Treasury received comments concerning four of the definitions within Subpart A: (1) The proposed change to the definition of "affiliate" in section50.4(c)(2), as it relates to the rule of construction in Section 106 of the 2015 Reauthorization Act, which provides that control for purposes of determining if an insurer is an "affiliate" under TRIA is not established solely because an entity acts as an attorney-in-fact for another entity that is a reciprocal insurer; (2) the proposed change in section50.4(g) defining "captive insurer" for purposes of implementing TRIA, and the related exclusion of captive insurers from the definition of "small insurer" in proposed section50.4(z); (3) the proposed change in section50.4(m) as it relates to the manner in which Treasury proposes to determine the insurance marketplace aggregate retention amount for any calendar year beginning with 2020, in accordance with the requirement in Section 104 of the 2015 Reauthorization Act to issue rules for determining this amount; and (4) the definition proposed in section50.4(z) of "small insurer" as required under Section 112 of the 2015 Reauthorization Act for purposes of conducting a study of small insurers participating in the Program, and as it might relate to the scope of data to be collected from such entities.

One comment was received concerning the proposed revision to the "affiliate" definition, which suggested that the proposed language would nonetheless permit the Secretary to find control by an entity based solely upon its attorney-in fact relationship with a reciprocal insurer, contrary to the intention of the rule of construction contained in Section 106 of TRIA.[19] Treasury did not intend to suggest that a control determination could be made based solely upon an attorney-in-fact relationship, and will accordingly modify the proposed rule consistent with the comment (by eliminating the cross-reference to the attorney-in-fact rule of construction), to confirm that the ability of the Secretary to determine that control exists, notwithstanding the non-applicability of the specific factors identified in section50.4(c)(2)(i), cannot be based upon the attorney-in-fact relationship addressed in section50.4(c)(2)(ii).

The comments received concerning the definition of captive insurer in proposed section50.4(g) (which simply references how captives are identified by relevant state law) were principally based upon reference to the term in proposed section50.4(z), which excludes captive insurers from the definition of "small insurer" regardless of their size. Most comments questioned the basis for excluding all captives from the "small insurer" definition, regardless of the size of the captive insurer or its sponsoring parent organization. Other comments suggested that exclusion of captive insurers from the definition of small insurers should not be made before further evaluation of the issue.[20]

The "small insurer" definition has only two consequences under the proposed Program rules: (1) It will define those insurers that will be considered in the studies Treasury shall conduct and resulting reports it will prepare pursuant to the 2015 Reauthorization Act;[21] and (2) it will identify those insurers which may be subject to exemption from modified annual data calls under proposed section50.51. See proposed section50.51(e).[22]

Regarding the first point, the principal purpose of the "small insurer" studies and reports mandated by the 2015 Reauthorization Act is "to identify any competitive challenges small insurers face in the terrorism risk insurance marketplace," based upon a number of identified factors, including changes in market share, premium volume, and policyholder surplus vis-r-vis large insurers, and the impact on such insurers of the mandatory availability requirement.[23] This report requirement was originally proposed in conjunction with a provision under consideration prior to the 2015 reauthorization of TRIA (which ultimately was not adopted) that would have permitted Treasury to develop an "opt out process" from TRIA for small insurers "if they can demonstrate financial hardship or financial infeasibility of providing coverage for insured losses." H. Rept. 113-523, 20.

As Treasury has recently observed, "captive insurers may issue policies for terrorism risk subject to the Program that provide coverage that might not be readily available otherwise, such as for NBCR [nuclear, biological, chemical, and radiological] risks, or for `trophy' properties."[24] As a result, captive insurers may play an important role in the provision of terrorism risk insurance, and Treasury is currently reviewing other comments received concerning their participation in the Program. That participation, however, is subject to issues very different from those faced by small conventional insurers that must make available terrorism risk insurance generally in the insurance marketplace:

The potential exposure associated with terrorism risk insurance written by captive insurers for parent or other affiliated entities differs from that of conventional commercial insurers that must "make available" terrorism risk insurance coverage to all potential, unrelated policyholders in the TRIP-eligible lines of insurance. For captive insurers, the offer and acceptance of terrorism risk insurance under the Program is essentially controlled by the insured.[25]

Although captive insurers are mandatory participants in the Program, and may be an important resource in the terrorism risk insurance marketplace, the potentially unique issues such captives face are not on account of "competitive challenges" vis-a-vis other insurers as contemplated by the 2015 Reauthorization Act, and accordingly they do not present the concerns (regardless of their size) that led to the requirement for the study in question. For these reasons, the "small insurer" studies should not and will not address captive insurers, regardless of their size. Treasury has reserved Subpart E of the Program rules to address captive insurers and other self-insurance mechanisms, and development of these regulations in the future will allow Treasury to address any issues particular to captive insurers that might justify individualized treatment under the Program rules.

The other concern identified in the comments--that captive insurers will not be excused from annual data calls (or potentially subject to different data calls) under proposed section50.51(e)--should be obviated by other changes to the proposed rules that have been made in connection with the final rules as adopted. Based upon Treasury's experience with its recent collection of data on a voluntary basis, a request that may make sense in connection with one type of insurer may be unnecessary or overly burdensome when directed to another. Treasury accordingly has modified section50.51 as adopted in final form to contain a provision confirming that Treasury may modify data requests by type of insurer to which the requests are directed. Treasury intends to develop data requests for participating captive insurers that will be tailored to the manner in which these entities participate in the Program, which will allow such insurers to provide necessary information in an efficient fashion.

Accordingly, the fact that the definition of "small insurers" excludes captive insurers does not have any significant consequences for captive insurers, and Treasury will adopt section50.4(g) and section50.5(z) as originally proposed.

Treasury received two comments concerning proposed section50.4(m), which addressed, as required by the 2015 Reauthorization, the manner of calculation and publication of the insurance marketplace aggregate retention amount beginning in calendar year 2020.[26] One comment "finds the process outlined in Section 50.4(m) to be adequate and aligned with the requirements under the statute."[27] The other comment did not identify any proposed changes to the rule, but suggested that the final rule should be deferred given that it is based upon data collection that has not yet occurred, and that Treasury may benefit from future data collection experience before finalizing the rule.[28]

Treasury will issue section50.4(m) as originally proposed at this time. Given the deadline for the issuance of this rule, no data that will be used to calculate the insurance marketplace aggregate retention amount for 2020 will be collected before the rule must be issued,[29] and therefore there is no benefit in waiting to finalize the rule. Between the issuance of the present rule and the time when a final rule concerning the methodology for the collection must be issued in January 2018, Treasury would gain only one further year of data collection (in 2017, for information relating to calendar year 2016). While further experience over time will no doubt continue to allow Treasury to improve and refine the data collection process, Treasury remains able to modify collection requests made on an annual basis to address any lessons learned over time (see proposed section50.51(c)(2)). By the time data is collected that will factor into the calculation of the insurance marketplace aggregate retention amount for 2020, the collected data to date will provide an appropriate basis for making the calculation as set forth in the proposed rule.

Treasury received very few comments concerning the proposed definition of "small insurer" proposed in section50.4(z), aside from the exclusion of captive insurers from the definition, which is addressed above. One comment offered "no view" as to whether the proposed definition "is suitable for Treasury's purposes," but identified a number of factors for consideration in identifying a small insurer, principally relating to whether the policyholder surplus element of the definition was set at an appropriate level.[30] Another comment questioned the use of a policyholder surplus element in the definition at all, stating that Treasury's preamble to the proposed rule "offers no explanation for the inclusion of the policyholder surplus as a `second prong' of the definition," and "question[ing] its appropriateness" as a part of the definition.[31] Neither comment offered alternative suggestions for measuring a "small insurer" under the 2015 Reauthorization Act.

Treasury will issue section50.4(z) as originally proposed, with the clarifying modification that "policyholder surplus" will be evaluated as it is reported by a participating insurer for state regulatory purposes on its Annual Statement at Page 3, Line 37, Column 1.[32] Treasury explained in its preamble to the rule as originally proposed that some consideration of an insurer's policyholder surplus was required because the impact of a loss that exceeded an insurer's deductible but which did not reach the Program Trigger "would be lessened to the extent the insurer's policyholder surplus was sufficient to satisfy any amounts that would not be reimbursed in such a scenario under the Program."[33] Given the limited purposes of the "small insurer" definition--to define the scope of certain studies concerning competitive challenges faced by participating insurers, and to define the scope of potential modifications to the requirement to provide data--some consideration of the claims-paying ability of insurers, as measured by policyholder surplus, is clearly appropriate. Another comment suggested that there is some "imbalance" which supports elimination of policyholder surplus as a consideration because the TRIP-eligible direct earned premium (DEP) component of the definition is not calculated on the same basis as policyholder surplus (which extends to all lines of insurance).[34] This suggestion ignores the fact that both measures address the same consideration: The impact upon a participating insurer of policyholder claims for certified acts of terrorism, whether the reimbursement for the claims can be obtained through insurer reimbursement under the Program (as measured by the first component of the definition), or if the participant's policyholder surplus is sufficient to pay claims in the absence of Program support (as measured by the second component of the definition).

Treasury also received comments concerning two provisions within proposed Subpart A to which Treasury did not propose any modifications. The first of these is with respect to proposed section50.1(c), which one commenter suggested should be modified to confirm that the Program rules also apply to claimants against participating insurers and their policyholders, given that certain provisions of TRIA and the implementing regulations (for example, matters concerning Subpart K, the Federal Cause of Action, and Subpart L, the Cap on Annual Liability) also have an impact upon such claimants.[35] The observation of this commenter is correct; although many of the proposed rules do not have any direct or indirect impact upon third-party claimants, there are provisions that do have such an effect. Accordingly, Treasury will modify proposed section50.1(c) as suggested.

The second comment referred to proposed section50.5, the Rule of Construction for Dates, which provides that "any date in these regulations is intended to be applied so that the day begins at 12:01 a.m. and ends at midnight on that date." Two commenters have observed that this language presents a potential and unintended gap of 59 seconds, if "midnight" means 12:00:00 a.m., and not 12:00:59 a.m.[36] Treasury does not believe that any modification to the rule as stated (which has been in place since the inception of the Program) is necessary. It is Treasury's intention and understanding that in this context 12:01 a.m. means, if necessary, 12:01:00 a.m., and that "midnight" should be read to mean 12:00:59 a.m., such that there is no unintended gap between the dates as expressed within the rule.

Treasury did not receive comments respecting the remaining proposed changes to Subpart A. Treasury therefore adopts as the final rule Subpart A as it was proposed, subject to the modifications identified above. 2. Subpart B--Disclosures as Conditions for Federal Payment

Subpart B addressed the TRIA disclosure requirements, which must be satisfied in order for a participating insurer to qualify for Federal payments. Treasury proposed a clarifying change to section50.12(b), addressing the manner in which the portion or percentage of the premium attributable to terrorism risk insurance should be disclosed to policyholders or potential policyholders, and also proposed changes to the existing rules to implement changes to the disclosure requirements contained in the 2015 Reauthorization Act. Treasury received comments concerning both of these changes, as well as other suggestions concerning the provisions of Subpart B.

The clarifying change to section50.12(b) proposed to add the phrase "and provided that the amount of annual premium or the method of determining the annual premium is also stated." The intent behind the change, as explained in the proposal, was "to ensure that the actual dollar value of the premium is evident."[37] Treasury received a number of comments concerning this provision, suggesting that it imposes some new or different requirement respecting disclosure of the terrorism risk premium being charged.[38]

It appears from the comments that the principal concern is that while the rule originally stated that an insurer "may describe the premium charged for insured losses covered by the Program as a portion or percentage of an annual premium" (emphasis added), the added proviso potentially purports to require as a matter of disclosure the "annual" premium for terrorism risk insurance, even in situations where policy coverage is not provided on an annual basis, leading to confusion for insurers and policyholders alike.[39] This was not the intention, and given that the proviso modifies language stating that the insurer "may" provide the information in this fashion, the concerns expressed are not required by the language as proposed. Nonetheless, the comments highlight the fact that the rule raises a potential ambiguity in situations where coverage is not provided on an annual basis. To avoid the issue, Treasury will substitute the term "policy" for "annual" where it appears in proposed section50.12(b).

Treasury's intention remains to ensure that the actual dollar value of the premium is evident from the disclosure. As stated in the rule, there may be a number of ways for an insurer to accomplish this disclosure, and Treasury is not requiring by rule any particular method.[40] Nor does this revision require an insurer to charge for terrorism risk insurance if the insurer did not otherwise intend to make such a charge.[41] If a charge is being made, however, the intention of the rule is that the disclosure be made to the policyholder in such a way that the policyholder can actually determine the amount that it is being charged by the insurer for the terrorism risk insurance. None of these changes modify the manner in which the Program operates. From the inception, TRIA has required that "the insurer provides clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program,"[42] which requirement has been memorialized in the Program rules as well (see existing 31 CFR 50.10(a)(1)).

Treasury received an additional comment concerning portions of proposed section50.12 that Treasury did not propose to modify from the prior version.[43] The commenter suggested that proposed section50.12(d) and (e) be combined into a single section50.12(d), which would provide that an insurer could demonstrate compliance with disclosure requirements through use of appropriate systems and business practices, "including where an insurer normally communicates with a policyholder through an insurance producer or other intermediary."[44]

Treasury declines to make the suggested change. The comment would eliminate the language in proposed section50.12(d) (which has previously been in the existing rule) that "[i]f an insurer elects to make the disclosures through an insurance producer or other intermediary, the insurer remains responsible for ensuring that the disclosures are provided by the insurance producer or other intermediary to policyholders in accordance with the Act." This language is consistent with industry practice generally--i.e., while insurers may rely upon intermediaries to perform actions that are the responsibility of the insurer, it is the insurer that remains ultimately responsible for ensuring that the actions are performed.

When coupled with existing section50.12(e), an insurer may demonstrate compliance with disclosure requirements "through use of appropriate systems and normal business practices that demonstrate a practice of compliance," and this would extend to the use of such systems and normal business practices by an intermediary on behalf of a participating insurer. However, it is the participating insurer that will remain responsible for demonstrating, if an issue of compliance is raised, that appropriate systems and normal business practices were employed by the intermediary on behalf of the insurer. The use of an intermediary, in and of itself, does not demonstrate compliance, or otherwise excuse an insurer from demonstrating compliance. Treasury will adopt as the final rule section50.12(d) and section50.12(e) as originally proposed.

Treasury made a number of changes to Subpart B to implement provisions of the 2015 Reauthorization Act which modified the timing of the general disclosure requirements. In the 2015 Reauthorization Act, however, no change was made to the timing of the disclosure requirements applicable to the cap disclosure. A number of commenters have suggested that this was an unintentional oversight on the part of Congress, and that Treasury should implement similar revisions to its rules respecting the cap disclosure.[45]

Treasury understands the position of the commenters. However, while it is possible that the different treatment in the 2015 Reauthorization Act of the various requirements respecting disclosure is the result of an oversight, it is equally possible that the differing treatment reflects a conscious determination that a different approach be taken. See, e.g., Loughrin v. United States, 573 U.S. __, 134 S. Ct. 2384, 2390 (2014) ("We have often noted that when `Congress includes particular language in one section of a statute but omits it in another'--let alone in the very next provision--this Court presume[s] that Congress intended a difference in meaning." (quoting Russello v. United States, 464 U.S. 16, 23 (1983)). Treasury declines to provide for the modification sought by the commenters, where it is at best unclear that Congress intended to make such a change.

Treasury adopts as the final rule Subpart B as it was proposed, subject to the modifications identified above.

3. Subpart C--Mandatory Availability

The proposed changes to Subpart C involved changes seeking to delete provisions that are redundant or unnecessary on account of the passage of time, substitute language to clarify Treasury's intent, or implement other minor changes that conform the existing regulations to the requirements of the 2015 Reauthorization Act. No comments were received concerning these proposed changes.

Treasury adopts as the final rule Subpart C as it was proposed.

4. Subpart D--State Residual Market Insurance Entities; Workers' Compensation Funds

No substantive changes were proposed by Treasury to Subpart D, nor did Treasury receive any comments concerning this Subpart.

Treasury adopts as the final rule Subpart D as it was proposed.

5. Subpart E--Self-Insurance Arrangements; Captives [Reserved]

Treasury continues to reserve Subpart E for future additional rules addressing the participation in TRIP of self-insurance arrangements and captive insurers.

6. Subpart F--Data Collection

Subpart F is new; the proposed rules establish procedures for collection of data as mandated by Section 111 of the 2015 Reauthorization Act, and also address the collection of data by Treasury in other contexts, including in the event that an act of terrorism has been certified. Treasury received a number of comments concerning each of these provisions, which it will address on a section-by-section basis. General (section50.50)

Proposed section50.50 states that Treasury may generally request information from insurers in connection with the Program, as part of its administration and implementation of the program. This provision is not related specifically to any of the authorities provided under Section 111 of the 2015 Reauthorization Act, and, if exercised, would be based upon Treasury's general authority to seek information in support of the operation of programs that it administers.

Treasury only received one comment specifically directed to proposed section50.50, and it appears that this comment actually meant to address proposed section50.51, as the comment actually addresses the annual data collection in aid of Treasury's reporting requirements.[46] Treasury will accordingly address that comment in the context of proposed section50.51, and will adopt proposed section50.50 as originally proposed.

Annual Data Reporting (section50.51)

Proposed section50.51 establishes rules concerning the annual collection of data by Treasury from participating insurers concerning the effectiveness of the Program, as mandated by Section 111 of the 2015 Reauthorization Act. The comments concerning proposed section50.51 fall into four general categories: (1) Comments suggesting that provisions should be included memorializing that Treasury should collect data from other sources, if available, in lieu of any annual data collection by Treasury directly from participating insurers;[47] (2) comments suggesting a later collection date than the March 1 date originally proposed by Treasury;[48] (3) comments suggesting the need for participating insurers to review and comment upon the scope and nature of future annual data collections, and seeking additional time beyond the 90 days specified in the proposed rule before requiring collection of any newly-specified data or information;[49] and (4) comments suggesting (either directly or indirectly) that annual data requests should be adjusted by industry group or size of insurer, observing that this is not an area in which "one size fits all."[50] Treasury will address these comments in turn.

Under the 2015 Reauthorization Act, the Secretary "shall" collect data from participating insurers annually "regarding insurance coverage for terrorism losses of such insurers as the Secretary considers appropriate to analyze the effectiveness of the Program."[51] The data collected is to form the basis for various reports that the 2015 Reauthorization Act requires the Secretary to submit to Congress.[52] Before such collection is made, Treasury shall "coordinate with the appropriate State insurance regulatory authorities and any relevant government agency or publicly available sources to determine if the information to be collected is available from, and may be obtained in a timely manner by, individually or collectively, such entities."[53] If the information required by the Secretary can be obtained from these other sources, in a timely fashion, Treasury is to collect the information in this manner. If not, Treasury may collect the information directly from participating insurers.[54]

In advance of the recent voluntary data collection, Treasury did coordinate with other sources, including state insurance regulatory authorities, and determined that the data it sought was not available from other sources.[55] In fact, Treasury determined that comprehensive data concerning the participation of insurers in the Program had never been collected previously. Treasury will continue to evaluate in the coming years what data it requires to perform the analyses that it must make, and whether that data can be obtained from other sources in lieu of direct collection from participating insurers. Because this evaluation will necessarily vary from year to year, depending upon the data that Treasury needs, the timing of any reports that must be submitted, and the availability of data from other sources, it is not practical to attempt to codify a uniform process. However, Treasury has added language to section50.51(b) to reflect the possibility that Treasury may be able to obtain some or all of the information from publicly available or other third-party sources. Treasury thus recognizes the provisions of the 2015 Reauthorization Act concerning the potential collection of information from sources other than participating insurers, and will continue to evaluate the availability of such information in future years.

In terms of the timing of annual data collections from participating insurers, Treasury proposed a March 1 deadline because it is consistent with the date of other industry reporting requirements, and it would provide Treasury with the data in sufficient time to complete required reports.[56] Most of the commenters addressing this issue suggested that a March 1 date was problematic precisely because participating insurers had other reporting obligations falling due that day, such that adding an additional obligation at the same time would be burdensome.[57]

Treasury does not wish to pose any unnecessary burdens upon participating insurers on account of required data collection. It will accordingly modify the data collection response date from March 1 to May 15, which will provide participating insurers the additional time sought but should still provide Treasury with sufficient time to analyze the data for the required reports.

Regarding the nature and scope of the annual data collection, future data collections will be based upon proposed collection templates which will be published for comment in the calendar year prior to the actual collection of information.[58] See proposed section50.51(c)(2). Participating insurers will be in a position to comment upon future data collection templates through this mechanism. Furthermore, given that Treasury has moved the collection date to May 15, and new data collection templates will be published during the prior calendar year, participating insurers will now have a period of time of at least 120 days, and likely more, to evaluate changes to data collection protocols and prepare for responding to any modified requests. Accordingly, only one clarifying change to proposed section50.51 is required in light of these issues, as the rule (as modified) effectively addresses these comments.[59]

Finally, a number of comments were received that suggested that annual data collection requests should be adjusted depending upon the nature of the reporting insurer's participation in the Program. The rule as originally proposed recognized this to some extent, in the provision suggesting that "small insurers," as otherwise defined, might be exempted from annual data collection, or subject to modified requests. Based upon Treasury's experience in the recent collection of data, however, it is also the case that modified requests may be used to provide a more efficient collection mechanism for different types of participants in the terrorism risk insurance marketplace, such as captive insurers and alien surplus lines insurers. Accordingly, Treasury will modify subsection (c) of proposed section50.51 to confirm that the forms for data collection may vary depending upon the type of insurer participating in the Program. As noted above, these proposed forms will be published in advance of their approval and use, such that interested parties are in a position to comment upon the information requested.

Treasury will accordingly adopt as the final rule section50.51 as originally proposed, subject to the modifications addressed above.

Small Insurer Data (section50.52)

Proposed section50.52 addresses the collection of data relating to small insurers, as defined in proposed section50.4(z), in support of the studies of small insurers mandated by the 2015 Reauthorization Act. The data elements specified in proposed section50.52 are those specified in Section 112 of the 2015 Reauthorization Act. Apart from the comments concerning whether captive insurers should be considered "small insurers" for these purposes, addressed above, Treasury did not receive any comments concerning proposed section50.52. Treasury accordingly adopts as the final rule section50.52 as originally proposed.

Collection of Claims Data (section50.53)

Proposed section50.53 establishes rules for the collection of data by Treasury once an act has been certified as an act of terrorism. As explained in the preamble to the proposed rule, Treasury proposed this provision, which accelerates the time that participating insurers would otherwise be required to report claims to Treasury, because in the absence of such information Treasury could be unaware that the Program Trigger threshold has been breached, which would thus delay its response to legitimate claims for payment of the Federal share of compensation.[60] Treasury received two comments concerning this proposed rule which suggested, respectively, that no rationale was offered and that the proposal should be withdrawn pending further study, and the existing requirement (which limits claims reporting to situations where 50 percent of a particular insurer's deductible has been eroded) is sufficient.[61]

Having this requirement in the rules serves an important purpose--to alert Treasury to the need to make payments to an insurer that has satisfied its deductible, but as to which it is unclear, based upon that particular insurer's experience alone, that the Program Trigger has been met. While the proposed rule may not provide any particular benefit to a large insurer, whose claims may alone demonstrate that the Program Trigger has been reached, it could be critical to a smaller insurer that cannot make this demonstration on its own, when other insurers have not met the current 50 percent threshold for reporting claim information and have no reporting obligation. Treasury interprets both comments as implying that the monthly reporting requirement would pose an increased burden on insurers. Treasury believes that the information that will be required from an insurer under this provision will be generated by the insurer in the ordinary course of its business. As a result, Treasury does not believe that this provision imposes a significant additional burden on a participating insurer, any more than an insurer would be burdened if it received such a request from its reinsurer.

Under these circumstances, Treasury believes that the proposed rule serves an important purpose, and provides an important safeguard to insurers that may be most at risk when faced with a disproportionate number of terrorism risk claims. Accordingly, Treasury will adopt as the final rule section50.53 as proposed.

Handling of Data (section50.54)

Finally, proposed section50.54 implements the requirements found in Section 111 of the 2015 Reauthorization Act, which recognize that the data Treasury will need to collect from participating insurers may constitute proprietary information that is highly sensitive to the individual companies (and, potentially, underlying policyholders and claimants) from which it is obtained. Treasury received one comment concerning the proposed rule, which is generally in favor of the provision but which suggests that the rule fails to address potential confidentiality issues presented by the use of a third-party vendor by Treasury, such as an insurance statistical aggregator, to collect confidential data.[62]

The 2015 Reauthorization Act expressly provides that Treasury--"to the extent possible"--shall contract with an insurance statistical aggregator to collect data and obtain it in aggregated form, precisely to address confidentiality issues identified in the 2015 Reauthorization Act and the proposed rule. Such insurance statistical aggregators are subject to confidentiality requirements in their ordinary business activities, and the 2015 Reauthorization Act directs that any such entity with which Treasury might contract "shall keep any nonpublic information confidential . . . ." Although the statutory language effectively addresses the concern identified by the commenter, Treasury will modify the proposed rule to provide that, to the extent Treasury utilizes an insurance statistical aggregator to assist in the collection of data, such insurance statistical aggregator will be subject to the requirement to keep nonpublic information confidential, as required by the 2015 Reauthorization Act.

Treasury adopts as the final rule Subpart F as it was proposed, subject to the modifications identified above.

7. Subpart G--Certification

Subpart G, sections50-60 to 50.63, as modified, was previously adopted by Treasury as an interim final rule, although was initially adopted as Subpart K, sections50.100 to 50.103, in order to avoid reduplication of Subparts and section numbers in light of the existing rules. It is adopted here as Subpart G, sections50.60 to 50.63, as an interim final rule pending receipt and consideration of additional comments concerning the certification process as identified in the interim final rule. In this version of the interim final rule concerning certification, Treasury has also modified the internal citations within Subpart G to conform to the relevant sections that now apply with the issuance of these additional rules.

8. Subpart H--Claims Procedures

Most of the proposed changes to Subpart H addressed modifications required by the 2015 Reauthorization Act. In addition, Treasury proposed new section50.76, addressing the final netting of claims. Treasury previously received comments on this provision after it was originally proposed in August 2010, and made certain changes to the draft rule as currently proposed in response to those comments.[63] Only one additional comment was received in response to the present April 2016 proposed rule, which incorporated comments previously provided in connection with the earlier August 2010 proposed rule. The comment received suggests the proposed rule (at section50.76(e)) should be modified to provide that if a participating insurer meets a 20 percent threshold of additional claims within a year after the Final Netting Date--notwithstanding the final netting and an associated communication--Treasury "shall" reopen the claim.[64] As currently proposed, the rule provides only that Treasury may permit the claim to be reopened. In addition, the same commenter suggests that, when a commutation is being considered, Treasury should provide the insurer in question no less than 180 days within which to submit the information required by Treasury to consider the proposed commutation, as opposed to "no less than 90 days" in proposed section50.76(d)(2).[65]

As Treasury explained in its preamble to this proposed rule, section 103(e)(4) of TRIA provides the Secretary with the sole discretion to determine the time at which claims relating to any insured loss or act of terrorism shall be considered final. Based on that authority, the final netting rule provides the mechanism for the Secretary to determine when claims for the Federal share of compensation shall be considered final, and accordingly that final payments shall be made by Treasury to insurers, or by insurers to Treasury, such that Treasury can close out its claims operation for insured losses for a given calendar year. By contrast, the comment proposes that Treasury leave open the final netting process for further extended periods of time.

Treasury declines to make the proposed change obligating Treasury to necessarily reopen the claims process if an insurer is able to satisfy the 20 percent threshold. As proposed, Treasury will be able to determine that the additional claims experience satisfying the 20 percent threshold arose in an unexpected fashion, such that it could not have been accounted for in any prior commutation process. If it does not appear that the claims in question were otherwise expected--at a time when the likelihood of further claim activity should be quite remote--Treasury would be able to allow for a reopening, assuming no other considerations militate against doing so. However, because the Secretary has sole discretion in determining the time at which claims must be considered to be final, there should not be any mandatory obligation upon the Secretary to further extend the claims process.

Similarly, allowing for a period of not less than 6 months for the provision of requested data would necessarily extend out any commutation process for a period far longer than the time that would reasonably be required. As the commenter acknowledges, "not less than 90 days" means that Treasury may still provide longer than 90 days to the insurer in question, if the insurer shows that a longer period is reasonably required to generate the information called for by Treasury. Imposing a far lengthier default period upon the process, regardless of the time actually necessary to respond to the inquiries, does not strike the appropriate balance in a situation where the statutory goal is to bring to a close Treasury's involvement in the claims process.

Treasury adopts as the final rule Subpart H as it was proposed.

9. Subpart I--Audit and Investigative Procedures

The only substantive change to Subpart I (formerly Subpart G) was new section50.82, addressing civil penalties in connection with TRIA. The proposed rule tracked the statutory language as to the situations in which a civil penalty may be assessed, and provided (as required by the Act) for any penalty to be assessed only after proceedings on the record and after an opportunity for a hearing is extended to the insurer in question. The proposed rule also identified a proposed increase for inflation, as required by Federal law, although more recent statutory authority now requires an increase in the maximum penalty amount from $1,000,000 to $1,311,850, as distinguished from the $1,325,000 as originally proposed. Treasury has already issued an interim final rule increasing the maximum penalty amount and providing for its annual adjustment, as required by statute.[66]

Treasury received a number of comments in response to the proposed rule. None of the comments challenged the authority for the issuance of the rule, or the fact that the amount of the maximum penalty must be increased for inflation on account of Federal law requirements. A number of commenters proposed, however, that proposed section50.82 should be amended to include language requiring that the conduct giving rise to the potential imposition of penalties be subject to increased levels of culpability (e.g., "intentionally", in "gross disregard", "knowingly")[67] where proposed section50.82 as published does not already require "intentional" or "fraudulent" conduct as a basis for a claim of violation justifying the imposition of civil penalties.[68] In addition, one commenter suggested inclusion of a provision that would permit relief for insurers that "upon notification of a potential violation, take steps to correct it."[69]

Proposed section50.82 is based upon the provisions of section 104(e) of TRIA. The violations specified in the proposed regulation are those identified in the statute, which does not prescribe (with the exception of the violations identified in proposed section50.82(a)(2) and (3)) any heightened standard of conduct or culpability in connection with a violation. At least one of the violations which is not subject to any higher standard--the collection of recoupment amounts, under proposed section50.82(a)(1)--implicates matters central to the financial mechanisms under which the Program is based. Furthermore, because the maximum penalty amount is either the statutory figure or, if greater, the amount in dispute in cases of a "failure to pay, charge, collect, or remit amounts in accordance with" the Act, modification of the proposed rule as suggested would impose a greater burden on the government to prove a violation than contemplated by the statute, in a situation where the violation has resulted in a failure to pay, charge, collect, or remit amounts even greater than the statutory figure that could be essential to the integrity of the Program.

For these reasons, Treasury declines to modify proposed section50.82 to include higher standards of culpable conduct than were identified by Congress in TRIA when establishing a civil penalty in the first place. Of course, the culpability of an insurer's conduct in responding to a claim that it is subject to a civil penalty may be relevant to the amount of any penalty that is ultimately imposed, when a violation is identified. Treasury believes, however, that this is best accomplished through the individual adjudication process, and does not warrant a modification to the scope of the civil penalty provision as enacted in TRIA.

Similarly, while Treasury agrees with the comment that, in the event of a claimed violation, Treasury should take into account situations where an insurer takes steps to cure an innocent violation upon notification, Treasury will not modify the rule as proposed. The nature of any claimed violation could clearly have an effect on the amount of any civil penalty assessed, or whether any penalty should be assessed at all. The situation identified by the commenter is one of any number of circumstances that might arise reflecting reduced culpability that could be found by Treasury to justify either a reduction or elimination of any civil penalty assessed. However, because such circumstances are fact dependent and case specific, this is something best addressed on a case-by-case basis rather than through a revision to the rule as originally proposed.

Because of the recent inclusion of a new rule addressing the amount of the civil penalty and its adjustment over time, proposed section50.82 is also being modified to reference section50.87--which is renumbered in this Final Rule as section50.83--as the source of the amount of the civil penalty.

Treasury adopts as the final rule Subpart I as it was proposed, subject to the modification identified above.

10. Subpart J--Recoupment and Surcharge Procedures

The principal changes proposed to Subpart J were in connection with proposed section50.90 (formerly section50.70), and were based upon changes to the Program adopted in the 2015 Reauthorization Act--i.e., the increase, from 133 percent to 140 percent, in the amount of terrorism loss risk-spreading premiums to be applied to any mandatory recoupment amount, and the revised schedule for the collection of terrorism loss risk-spreading premiums, depending upon the timing of any certified act of terrorism. The balance of the proposed changes to Subpart J were in the nature of clarifying and conforming changes in light of the 2015 Reauthorization Act, and did not seek to establish any further substantive changes. Treasury did not receive any comments concerning the proposed revisions to this Subpart.

Treasury adopts as the final rule Subpart J as it was proposed.

11. Subpart K--Federal Cause of Action; Approval of Settlements

The proposed Rule incorporated certain changes and clarifications to Subpart K, involving the Federal Cause of Action and Approval of Settlements by Treasury. These changes are designed to enhance Treasury's ability to evaluate and manage significant claims that could have a material impact upon Treasury's payment of the Federal share of compensation. The balance of the proposed changes to Subpart K made certain clarifying changes or deleted material that is now redundant or unnecessary, and did not seek to establish any substantive changes. Treasury did not receive any comments concerning the proposed revisions to this Subpart.

Treasury adopts as the final rule Subpart K as it was proposed.

12. Subpart L--Cap on Annual Liability

The proposed changes in Subpart L incorporated language required by the 2015 Reauthorization Act, or conformed the provisions to Treasury's other data collection authorities under Part 50. Treasury did not receive any comments concerning the proposed revisions to this Subpart.

Treasury adopts as the final rule Subpart L as it was proposed.

V. Procedural Requirements

Executive Order 12866, "Regulatory Planning and Review." Executive Order 12866, as supplemented by Executive Order 13563, establishes a program to reform and make more efficient the regulatory process of the Federal Government. In accordance with such Executive Orders, this rule is a significant regulatory action, and has been reviewed by the Office of Management and Budget.

Regulatory Flexibility Act. In general, the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), which applies to any rule subject to notice and comment rulemaking under the Administrative Procedure Act or any other law, requires a federal agency to conduct a full regulatory flexibility analysis unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. (5 U.S.C. 605(b)). In the preamble to the proposed rule, Treasury certified that the rule, if promulgated, would not have a significant economic impact on a substantial number of small entities. Treasury did not receive any comments in response to the proposed rule on the impact to small entities or insurers, and the final rule has not been revised in any way that warrants a change to this certification. As discussed in the preamble to the proposed rule, some small entities--as defined by the regulations of the SBA (see 13 CFR 121. 201)--and small insurers--as defined by the proposed rules--are affected by the statutory obligation that they submit data to aid the Secretary in analyzing the effectiveness of the Program.[70] Treasury has estimated that approximately 500 insurers will have lesser reporting burdens because they are "small insurers" as now defined in Treasury's regulations, either because of the lesser amount of data that they have, or on account of being excused from the most detailed reporting requirements. See 81 FR 18950, 18957 (April 1, 2016).

Although a substantial number of small entities may be affected, any economic impact will not be significant. Treasury crafted these regulations in a manner that most insurers, including small insurers, should already be collecting and maintaining the data in question as part of their ordinary course of business, such that any additional costs will be occasioned by some reprogramming costs to permit the more efficient reporting of the requested data. Given the character of the information that is sought, Treasury believes that any such costs should be nominal, in light of existing obligations all insurers have to record and retain the information sought by Treasury. Nonetheless, and recognizing that the provisions of the regulations respecting data collection may impose some additional costs and burdens on small insurers, the regulations provide Treasury with the authority to excuse or modify the data collection requirements as applicable to small insurers.

Treasury did receive a number of comments, as addressed above, which questioned the general exclusion of captive insurance companies from Treasury's proposed definition of "small insurers" for purposes of the Program. As explained above, the only consequences of this exclusion are that (1) captive insurers (regardless of their size) will not be evaluated by Treasury in a study of small insurers mandated under the 2015 Reauthorization Act (which Treasury has determined was not meant to address any issues that captive insurers might face); and (2) captive insurers, regardless of their size, will not be subject to data collection requirements instituted for "small insurers"--although, as also explained above, data collection from captive insurers will be addressed separately by Treasury in data collection requests directed specifically to captive insurers in light of the nature of captive insurer operations. Accordingly, Treasury finds that the rule as adopted will not have a significant economic impact on a substantial number of small entities that might also be captive insurers.

Paperwork Reduction Act. The proposed collection of information as contained in the proposed rule was submitted to the Office of Management and Budget (OMB) for review under the requirements of the Paperwork Reduction Act, 44 U.S.C. 3507(d). In response to its solicitation for comments addressing various factors, Treasury received two comments from the public concerning the necessity of the collection of information with respect to claims data, which Treasury has addressed above in the section entitled "Collection of Claims Data" under proposed section50.53.[71] In addition, Treasury received a number of comments which provided (or could be read to provide) suggestions for minimization of the burden of the annual data requests,[72] which Treasury addressed above in the section entitled "Annual data reporting" under proposed section50.51, and in response to which it has made certain modifications to the rules adopted as final that will govern annual data collection. Treasury also received a comment concerning data that might be collected in support of a commutation under the Final Netting Rule,[73] which Treasury has addressed above in the section entitled "Claims Procedures" under proposed section50.76. Although solicited, Treasury did not receive any comments from the public concerning the accuracy of Treasury's burden estimates; suggestions for enhancement of the quality, utility, and clarity of the information collection; or estimates of capital or start-up costs that would be necessary for compliance with the information collection. The final rule does not contain any new collections of information. Under the Paperwork Reduction Act, 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 OMB Control number. Treasury will obtain final OMB approval for the collection of information concerning Annual Data Requests, Claims Data, or Final Netting-Commutation prior to any collection of such information.

List of Subjects in 31 CFR Part 50

* Insurance

* Terrorism

Authority and Issuance

For the reasons stated in the preamble, 31 CFR part 50 is revised to read as follows:

PART 50--TERRORISM RISK INSURANCE PROGRAM

Subpart A--General Provisions

50.1 Authority, purpose, and scope.

50.2 Responsible office.

50.3 Mandatory participation in program.

50.4 Definitions.

50.5 Rule of construction for dates.

50.6 Special rules for Interim Guidance safe harbors.

50.7 Procedure for requesting determinations of controlling influence.

50.8 Procedure for requesting general interpretations of statute. Subpart B--Disclosures as Conditions for Federal Payment

50.10 General disclosure requirements.

50.11 Definition.

50.12 Clear and conspicuous disclosure.

50.13 Offer and renewal.

50.14 Separate line item.

50.15 Cap disclosure.

50.16 Use of model forms.

50.17 General disclosure requirements for State residual market insurance entities and State workers' compensation funds.

Subpart C--Mandatory Availability

50.20 General mandatory availability requirements.

50.21 Make available.

50.22 No material difference from other coverage.

50.23 Applicability of State law requirements.

Subpart D--State Residual Market Insurance Entities; Workers' Compensation Funds

50.30 General participation requirements.

50.31 Entities that do not share profits and losses with private sector insurers.

50.32 Entities that share profits and losses with private sector insurers.

50.33 Allocation of premium income associated with entities that do share profits and losses with private sector insurers.

Subpart E--[Reserved]

Subpart F--Data Collection

50.50 General.

50.51 Annual data reporting.

50.52 Small insurer data.

50.53 Collection of claims data.

50.54 Handling of data.

Subpart G--Certification

50.60 Certification.

50.61 Public communication.

50.62 Certification data collection.

50.63 Notification of certification determination.

Subpart H--Claims Procedures

50.70 Federal share of compensation.

50.71 Adjustments to the Federal share of compensation.

50.72 Notice of deductible erosion.

50.73 Loss certifications.

50.74 Payment of Federal share of compensation.

50.75 Determination of affiliations.

50.76 Final netting.

Subpart I--Audit and Investigative Procedures

50.80 Audit authority.

50.81 Recordkeeping.

50.82 Civil penalties.

50.83 Adjustment of civil monetary penalty amount.

Subpart J--Recoupment and Surcharge Procedures

50.90 Mandatory and discretionary recoupment.

50.91 Determination of recoupment amounts.

50.92 Establishment of Federal terrorism policy surcharge.

50.93 Notification of recoupment.

50.94 Collecting the surcharge.

50.95 Remitting the surcharge.

50.96 Insurer responsibility.

Subpart K--Federal Cause of Action; Approval of Settlements

50.100 Federal cause of action and remedy.

50.101 State causes of action preempted.

50.102 Advance approval of settlements.

50.103 Procedure for requesting approval of proposed settlements.

50.104 Subrogation.

Subpart L--Cap on Annual Liability

50.110 Cap on annual liability.

50.111 Notice to Congress.

50.112 Determination of pro rata share.

50.113 Application of pro rata share.

50.114 Data call authority.

50.115 Final amount.

Authority: 5 U.S.C. 301; 31 U.S.C. 321; Title I, Pub. L. 107-297, 116 Stat. 2322, as amended by Pub. L. 109-144, 119 Stat. 2660, Pub. L. 110-160, 121 Stat. 1839 and Pub. L. 114-1, 129 Stat. 3 (15 U.S.C. 6701 note); Pub. L. 114-74, 129 Stat. 601, Title VII (28 U.S.C. 2461 note). Subpart A--General Provisions

section50.1 Authority, purpose, and scope.

(a) Authority. This part is issued pursuant to authority in Title I of the Terrorism Risk Insurance Act of 2002, Public Law 107-297, 116 Stat. 2322, as amended by the Terrorism Risk Insurance Extension Act of 2005, Public Law 109-144, 119 Stat. 2660, the Terrorism Risk Insurance Program Reauthorization Act of 2007, Public Law 110-160, 121 Stat. 1839, and the Terrorism Risk Insurance Program Reauthorization Act of 2015, Public Law 114-1, 129 Stat. 3.

(b) Purpose. This part contains rules prescribed by the Department of the Treasury to implement and administer the Terrorism Risk Insurance Program.

(c) Scope. This part applies to insurers subject to the Act and their policyholders and claimants.

section50.2 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 Off

Myron Struck, editor, Targeted News Service, Springfield, Va., 703/304-1897; [email protected]; http://www.targetednews.com

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