Billing Code 4810-25-M

**DEPARTMENT OF THE TREASURY**

**Departmental Offices**

**31 CFR Part 50**

**RIN 1505-AA96**

**Terrorism Risk Insurance Program**

**AGENCY:** Departmental Offices, Treasury

**ACTION:** Final rule.

**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 \[INSERT DATE OF PUBLICATION IN
THE FEDERAL REGISTER\]

**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 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

-   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

-   an entity controls in any manner the election of a majority of the
    directors or trustees of the other entity; or

-   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 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 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:

-   The insurer is one of the two largest shareholders of any class of
    voting stock;

-   The insurer holds more than 35 percent of the combined debt
    securities and equity of the other insurer;

-   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;

-   The insurer is party to an agreement that enables the insurer to
    influence a material aspect of the management or policies of another
    insurer;

-   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;

-   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;

-   The insurer and/or the insurer's representative or nominee
    constitute more than one member of the other insurer's board of
    directors;

-   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
    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. § 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 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 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 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 policholders 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, 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);

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(i) 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;

(ii) Approved for the purpose of offering property and casualty
     insurance by a Federal agency in connection with maritime, energy
     or aviation activity; and

(iii) 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 insures 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 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 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 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:

-   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;

-   An entity must generally be subject to State insurance regulation
    (including financial reporting requirements) applicable to insurance
    companies within the State; and

-   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 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 USC 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.]{.underline} 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 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.]{.underline} 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]{.underline}.
> 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 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 final
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 final rule flows from the Act and not the final
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 § 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., N.W., 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**

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**

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).

2\. Section 50.2 is added to read as follows:

**§ 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.

3\. Section 50.5(c), (d)(1), (f)(1), and (l) are revised to read as
follows:

**§ 50.5 Definitions.**

\* \* \* \* \*

(c)(1) [Affiliate]{.underline} 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]{.underline} 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;

\(C\) 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 § 50.8.

\(d\) \* \* \*

\(l\) [State licensed or admitted insurers]{.underline}. 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]{.underline} 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]{.underline} 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 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]{.underline}.), 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 l968 (42 U.S.C. 4001 [et]{.underline} [seq]{.underline}.) 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.

\* \* \* \* \*

4\. Section 50.8 is added to Subpart A to read as follows:

**§ 50.8 [Procedure for requesting determinations of controlling
influence]{.underline}.**

\(a\) An insurer or insurers not having control over another insurer
under § 50.5(c)(2)(i) or (c)(2)(ii) may make a written submission to
Treasury to rebut a presumption of controlling influence under §
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

§ 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 § 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)

5\. Section 50.9 is added to Subpart A to read as follows:

**§ 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, D.C.
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 website, 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