# Presentation: 114740

##        Terrorism Risk Insurance Program

**Jeffrey S. Bragg**
**Executive Director **

**Notes:**
Introduction

## 		   Terrorism Risk Insurance Program                                      Purpose

**Address Insurance Market Disruptions**
**Ensure Availability and Affordability of Commercial P&C Terrorism Coverage**
**Provide Transition Period**
**Stabilize and Build Capacity in Private Market**
**Strengthen Overall Economy**

**Notes:**
Good morning and thank you for the opportunity to speak to you today on Treasury’s progress and plans for implementing the Terrorism Risk Insurance Act of 2002. 

With an estimated $40B in insured losses as a result of the events of 9/11 the market for terrorism coverage became severely disrupted.   

However, in addition to wanting to address Insurance industry disruptions, the Congress and the President recognized that wide spread dislocations in insurance markets also had a negative impact on business’ ability to finance economic activity and recovery. 

TRIA was therefore enacted to stabilize the availability of insurance protection as well as to stabilize the overall economy.

## 			   Terrorism Risk Insurance Program		                    Overview

- Certifies Act of Foreign Terrorism
- 	Resulting in Damage > 5M
- 			IN
- 		United States
- 		U.S. Missions
- 		U.S. Air Carriers
- 		U.S. Vessels
- 			FOR
- 		Commercial Lines P & C
- 		Workers Compensation

**Notes:**
TRIA effectively places the Federal Government temporarily in the terrorism risk reinsurance business:

The program provides coverage for P&C commercial lines losses including workers’ compensation. 

Coverage is triggered when the Secretary of the Treasury, the Secretary of State, and the Attorney General together certify that an act of terrorism carried out on behalf of a foreign interest has occurred.

This terrorism generated loss must be greater than $5M

And the event must have taken place in the US, or a US foreign mission, or on a US air carrier or vessel.

##   		   Terrorism Risk Insurance Program                                      Restrictions

**Temporary Program**
**	****	****Expires 2005**
**Company Deductible**
**     ****2005****	****	****15%  +  10% Insured Loss **
**	****	**
**$100 Billion Annual Cap on Insured Losses**

**Notes:**
 Like any program there are restrictions:

Deductibles have increased over the 3 year term of the program and are expressed as a percent of an insurer’s direct earned premium. 

The Federal Government’s share under the program is equal to 90% of that portion of insured losses that exceed the current 15% insurer deductible.  

The program is scheduled to end on December 31, 2005

Many of you here today believe that all federal programs last forever.  However the Former Riot Reinsurance Program and the Former Federal Crime Insurance Program are 2 examples of government insurance mechanisms that have been discontinued when it became clear that their temporary mission had been fulfilled. 

## 		  		  		   Terrorism Risk Insurance Program                                          Goals

- Continued availability/affordability of insurance from Certified Acts of Terrorism
- Transitional period for private markets to stabilize, build capacity
- Preserving state insurance regulations
- Equitable distribution of shared costs of recovery

**Notes:**
The goals which drive our administration of the program are taken from the Act itself.  

Given that the legislation was so specific we had little latitude to adjust or add to them.  

The 3rd  goal, “preserving state insurance regulation” was specifically mandated by the statute.  While many in the industry consider it laudable it does create what I consider to be substantial issues which I will discuss later.

The 4th goal is one we did add but it is so obviously important and would be an expected outcome by all associated with the program.

## 		  		   		   Terrorism Risk Insurance Program		                   Core Values

**Sense of  Urgency and Purpose**
**Open and Transparent Operations**
**Efficient, Fair and Accurate Service**
**Fiscal Responsibility**
**Accountability**

**Notes:**
Where the TRIP staff had some discretion in how we approached our responsibilities was in identifying the articles which would guide our day to day activities.

We do take our responsibilities seriously.

We plan our work, set our deadlines for completing our objectives, and monitor our progress against that plan.

We also work very diligently through our speeches, written communications, and web site to inform the stakeholders of decisions we make and also to share the rational for those decisions. 

At The end of the day we expect to be held accountable for a well run and accountable program.

## 		  		   		   Terrorism Risk Insurance Program                                     Regulations		

**1st**** Final Rule**
**	****-****	****Provides key definitions, such as “Act of Terrorism,” “Insurer,” ****	****and “Affiliate”**
**	****-****	****Identifies lines of Commercial Property & Casualty Insurance ****	****included in the Program**
**2****nd**** Final Rule**
**	****-****	****Make available requirements**
**	****-****	****Disclosure requirements**
**3****rd**** Final Rule**
**	****-****	****State residual market mechanisms**
**	**

**Notes:**
The Treasury department has been extremely active in implementing the regulations necessary to support the new act. 

The first Final Rule was published on July 11, 2003.

Among other things this rule addresses:

Guidance on the Lines of Insurance covered under the act
Which entities are eligible for participation (over 2000 insurance companies are in the program)
Control and affiliation issues

The ink was not dry on the first Final Rules when we published a second and third set of rules which address such issues as:

Make available requirements
Disclosure requirements
State residual markets

These topics were the subject of interim rules which most of you are familiar with so I will not elaborate on them further here.

## 		   Terrorism Risk Insurance Program                                    Claims Rule

**Speed with which TRIP will act on a request for reimbursement.**
**Payment of allocated loss adjustment expenses.**
**Level of documentation required to support a claim.**
**Unique data elements required in reporting.**
**Partial payments.**

**Notes:**
We have also published a fourth final rule which outlines how claims will be filed and paid under the program.

In our rule we have attempted wherever possible to insure that claims made under the program will be processed and paid in a manner highly consistent with what you now experience with the reinsurance industry.

This claims rule not only implemented the bullets you see on this slide but I am also pleased that we were able to create a process that allows advance payments to insured’s 

## 		   Terrorism Risk Insurance Program                               Advance Payments

- TRIP Claims
- Management

- 4. TRIP Office
-  Approves Payment

- 5. Treasury
- Issues Funds

- 3. Co.
- Establishes
- Segregated
- Account

- Insurance Co.

- Company Submits Certification of Loss with Bordereau

- 2. Reviews COL for Accuracy Recommends Payment

- Request ASAP System

- Payment

**Notes:**
The insurance company only need comply with 3 easy steps in order to receive advance payments.

First, the insurer electronically submits the certificate of loss with the loss bordereau.  

Next, the insurance company sets up a segregated account to hold the advance payments remitting any interest earned on the funds back to the Treasury Department.

Finally, the company applies for access to the Treasury ASAP system which allows for electronic funds transfer into the segregated account.

We have already tested the claims payment system with 6 insurance company volunteers who have declared that the system works well and is easy to use.

We have also successfully tested the ASAP system with 3 insurance companies.

Finally I personally know that it is easy to use because I have used the system myself. 

## 		  Terrorism Risk Insurance Program                                Claims Forms 

**Initial Notice of loss**
**Certification of loss**
**Schedule A – DEP & Insurer deductible**
**Schedule B – Certification of Compliance**
**Schedule C - Bordereau**

**Notes:**
As in anything the devil is in the details. But even if you drill down to the more detailed steps, the process still is quite simple and manageable.

There are all together 5 forms to be completed by insurers filing for Federal compensation under the program, all of which may be completed electronically.

The first is “The initial notice of loss” form which is to be completed when an insurer learns that their loss has exceeded 50% of the company deductible for the program year.  This form also provides TRIP with insurer contact information.

The second form is completed when the insurer is actually making a claim under the program and submits the “Certificate of Loss.” This form must be submitted by an officer of the insurer or insurer group.  The COL is supported by Schedules A, B, and C.

Schedule A certifies an insurers direct earned premium and deductible for the program year.

Schedule B certifies that the insurer is in compliance with the regulations of the program and therefore is eligible to receive payments under TRIP.

Schedule C is the detailed listing of losses the insurer is currently prepared to pay and for which it is seeking the federal share of compensation.

## 		  Terrorism Risk Insurance Program                                Bordereau Formats

**Excel**
**Comma delimited text file**
**Pipe delimited text file**
**Online manual Completion**

**Notes:**
So you see that we have attempted to make the claims payment process as easy and simple to use as possible.  I recently had to file a claim with my insurance company and believe me the process we developed for TRIP is easier to use than what I had to do in filing my personal property loss.  

More good news is that the bordereau can be completed using several formats. If you prefer, you can enter the information online.  But for larger claims you will also have the option to upload your existing Excel or word file to populate the online form.  Just make certain the headings on your forms match the order and content of the headings of the online form.

## 		  Terrorism Risk Insurance Program                                 Claims Process

**www.treas.gov/trip**
**- Links to:**
**TRIP Claims Manager**
**ASAP**

**Notes:**
If any of you would like to review the material I have presented here today you may go to the TRIP website where there are hard copy versions of our claims forms as well as written documentation of the process to follow for requesting the federal share of compensation.

Should an actual certified terrorist event occur, links on the TRIP web site would be activated giving you direct access to our TRIP claims manager to process your request for compensation and to ASAP.  

The Automated Standard Application for Payments system was developed by The Treasury Department’s office of Financial Management and permits the electronic transfer of Federal Funds.

Additionally, we now have a read only link activated at our TRIP website so that insurers may go to the site and get a better feel for how claims will be paid.

We plan to regularly test our systems and processes to make certain we are prepared as we can be should we need to activate the system.

##            Terrorism Risk Insurance Program                   TRIP Service Contractors

- Paragon        Claims Processing & Management
- ISO       Statistical Reporting
- Deloitte        Claims Auditing

**Notes:**
When we put out our call for proposals to serve as TRIP claims manager we were very specific as to how we wanted the process to work.

We had several proposals from very qualified vendors. However, the company which produced the winning proposal was Paragon, who will be managing the day to day TRIP claims process.

Paragon, as many of you know, is a leading provider of reinsurance administration services to insurers.  They also act as the administrator including claims administration for the Florida Hurricane Catastrophe fund which is the largest monocline catastrophe re-insurer in the world.

The Insurance Services Office Inc. working with paragon will provide statistical reporting services.

ISO has provided a very robust statistical reporting engine that should deliver just about any report we want to see or perhaps more importantly any report congress will likely require.

We have also completed a second procurement and have retained Deloitte to be our lead claims auditing contractor.

## 		   Terrorism Risk Insurance Program                                Contracting Process

**Develop initial statement of work**
**Analyze requirements****	**
**Acquisition Office/TRIP Office development of Procurement Plan**
**Conduct market research-receive comments**
**Coordination of technical issues, e.g., systems, financial, accounting**
**Issue request for comments (optional)-receive and analyze comments****	**
**TRIP Office redraft of statement of work-develop independent cost estimate**
**Acquisition announce planned RFP release date on **
**TRIP/Acquisition development selection plan**
**Acquisition Office preparation and clearance of RFP**
**Release of RFP-Announce RFP FEDBIZOPPS.GOV**
**Receive and answer questions**
**Conduct pre-proposal conference**
**Amend solicitation (as required)**
**Receive and evaluate proposals**
**Establish a competitive range, obtain clarifications on conduction negotiations; obtain “Best and Final Offers” (as required)**
**Preparation of Report/Recommendation; Source Selection Authority decision**
**Acquisition Office prepare, clear and award contract**

**Notes:**
Sometimes working in Government is like swimming in Peanut Butter.

The 18 steps you see here must all be completed when ever the government contracts for services.  Most of the tasks you see here have to be carried out by the TRIP program office.

These steps do bring competition and fairness to the system but they are time consuming.

I think it is also instructive to know that what we have accomplished so far we have done with a total staff of only 7 people. 

## 		  Terrorism Risk Insurance Program                          Litigation Management Rule

**Follows Requirements of Act**
**Exclusive Federal cause of action**
**Preempts state causes of action (Not workers comp)**
**Preserves government subrogation rights**
**Federal funds not used to pay punitive damages**
**Presidential Memorandum**
**Advance approval of Secretary of Treasury for proposed settlements of Federal causes of action **
**	****	****	****> $ 2M personal injury or death**
**	****	****	****> $ 10M property damage**

**Notes:**
We have also published our 5th rule which addresses Litigation Management under the act.

Part of this regulation gives the Secretary the Authority to approve proposed settlements of Federal causes of action. Due to concerns voiced by the industry on this issue, Treasury limited the approval authority to settlements for personal injury of over $2M and over $10M for property damage settlements.

## 		  Terrorism Risk Insurance Program                          6th Rule Affiliation Determination

**Final 30 to 60 Days**
**Timing Affiliation Determination**

**Notes:**
While our first rule outlined and hopefully provided clarification of what constitutes affiliated companies.  Our 6th final rule will outline how the TRIP program will determine affiliations if there should be multiple terrorist events in any covered year.

Determining affiliated companies is of course important in order to assess the appropriate deductibles for companies participating in the program.

We have carefully considered comments we received on our proposed rule and plan to provide this final clarification within 30 to 60 Days.

## 		Terrorism Risk Insurance Program	                 Recoupment Example

**Discretionary**
**Recoupment**
**$5 B **

**Mandatory**
**Recoupment**
**$10.3 B**

- 					**$20 B Insured Loss****	****	****	****	****	****	****	****	****	****	****	****100 Insurers Impacted**
**	****	****	****	****	****	****	****	**
**	****	****	****	****	****	****	****	****DEP 100 Insures = $20 B****	****	****	****	****	****	****	**
**	****	****	****	****	**** ****$15 B 3****rd**** Year ****	****	****15% deductible = $3 B**
**Trip****	****	****	****	****                      Industry Aggregate Retention****	**** ****	**
**Pays $15.3 B ****	****	****	****	****	****	****10% quota share = $1.7 B**
**	****	****	****      ****	****         ****	**
**	****	****	****	****	****	****	****	****100 Companies Pay $4.7 B**
**	****	****	****	****	**
- 					**$4.7 B Paid by 100 companies **

**Notes:**
TRIP does not charge premiums. However, if there is a certified event which results in Federal payments The Secretary of the Treasury is required by the statute to recover some of the Federal payments and may recover all Government payments depending on economic conditions.

In the event of a loss, affected insurers would pay their deductible and quota share.  Treasury would disperse funds to pay the remaining losses.  

Treasury would then impose a surcharge of up to 3% on all commercial policies in order to recover at least the insurance industry aggregate retention for the year.

## 		   Terrorism Risk Insurance Program                        7th Proposed Rule - Recoupment

- Published 30 – 60 Days
- Standards for Treasury Notification (6 Months Notice)
- Establishes Electronic Payment System
- Assessments in Full Year Increments (Minimum 1 Year)
- Annual Reconciliation/Audit

**Notes:**
TRIP is now in the process of drafting a proposed rule to outline how Treasury will implement the surcharge should it become necessary.

We initially thought we would need to comply with the miscellaneous receipts act which says that anyone collecting funds on behalf of the Federal Government must remit those within 3 days of collection or pay interest on the amount collected.

Fortunately, we believe we have found a less intrusive form of collection.  Duplicating some other Government programs we will be proposing monthly collections with out the need to asses or pay interest on the collected amounts.

As in our claims payment procedures, we hope to establish an electronic payment system.

## 		   Terrorism Risk Insurance Program                               Rule Making Process

**Preliminary determination of regulatory content (vs. business procedures)****	**
**Develop draft regs**
**TRIP Review draft regs**
**Reinsurer site visit**
**Determine reg vs business process division and incorporate changes to draft reg**
**6.****	****Departmental review and possible meeting with OMB**
**7.****	****OMB review**
**8.****	****Publish in Federal Register (proposed rule)**
**9.****	****Formal public comment**
**10.****	****Paperwork Reduction Review - concurrent with public comment period**
**Review comments**
**Revise regs**
**13.****	****Departmental review**
**14.****	****OMB review**
**15.****	****Publish final regs in Federal Register**

**Notes:**
The proposed recoupment rule will be our 7th rule since the inception of the program.

There are 15 steps in the rule making procedure.  TRIP staff is responsible for the steps you see in blue.

For our claims rule, probably the most complicated and detailed rule to date, the TRIP staff completed steps 1-5 in 14 days.  During this time we also meet with 4 reinsurers to make certain nothing was over looked.  Steps 11 and 12 took another 2 weeks.

An additional 3 months effort was required to make certain all of the required government and public reviews were conducted in order to remain compliant with the law.

This is a time consuming process but does provide worthwhile checks and balances to the system.

##             Terrorism Risk Insurance Program	                             				 Program Issues

**State Exemptions (NBC)**
**Losses in Excess $100B**
**Foreign -vs- Domestic Terrorism**
**Program Extension**

**Notes:**
We have come this far resolving all of the issues we have been discussing and we are all now wondering what Congress will do now that the program is scheduled to expire at the end of the year.

Many want Congress to reauthorize TRIP. 

I for one think that a TRIP extension does not address many issues that should be addressed in any long term terrorism insurance program.

There are numerous insurers who exclude coverage for nuclear, radiological, biological, and chemical losses.  Where these losses are excluded from commercial policies there is no TRIP coverage.

How can you have a terrorism insurance program that excludes these losses?
What will happen when workers compensation indemnity losses exceed the $100B cap?

I urge the industry again to think about these and other long term issues before simple extending a program with known flaws.

##             Terrorism Risk Insurance Program	                             		 	Program Alternatives

| 
TRIP Extended
Minor Changes | TRIP Extended
Group Life
Deductibles and/or
Retention | TRIP Extended but only if RNBC or >25M Threshold
 |
| --- | --- | --- |
| 
TRIP Extended with
Group Life | 
TRIP Not Extended
 No Substitute Program | TRIP Extended with Group Life
Higher Deductibles
No Exclusion RNBC |
| TRIP Extended
Deductibles and/or Market Retention | 
TRIP Not Extended Pool Substitute | 
Privatize TRIP |

**Notes:**
The slide before you now shows some program alternatives to a simple extension of TRIP.  Of course there are numerous permutations to these examples.  However, it should be noted that one alternative under consideration is that there will not be any government terrorism insurance program .

And to show you what an inside track the TRIP staff has on this issue, each member of the TRIP team put some cash into a pool and picked the alternative thought most likely to be implemented.

Every alternative was selected by at least one TRIP employee even though the rules allowed that each alternative could be selected by more than one person.  Clearly we know what is going on.

## 		  		  		   Terrorism Risk Insurance Program                             Treasury Offices

**Financial Institutions****	****Office of Economic Policy**
-   TRIP					  Studies
- 	Implementation			      Group Life
- 	Program Management		      Make Available
- 	Program Operations		                   Program Alternatives
- 	Effectiveness
- 	Claims Management/Processing
- 	Financial Integrity
- 	Operational Efficiency

**Notes:**
Two offices within The Treasury Department have TRIA responsibilities.

The TRIP office is responsible for all operational issues including claims management and processing.  We are the insurance company created by the act.

Treasury’s office of Economic Policy is responsible for conducting the various studies required by the act.  They are currently finishing their final study on the effectiveness of the TRIP program.  I had hoped to include some of their findings in my comments to you today but the study results have not yet been released.  Until the results are made available we can only look at what some insurance industry brokers have reported.

## 		   Terrorism Risk Insurance Program                                Market Corrections

**Property Insurance take up % rate**
**	****2003     1****st**** Quarter****	****	****2004     3****rd**** Quarter**
**	****	****  ****24%****	****	****	****         57%**
**Cost of coverage - % of premium**
**	****2003     1****st**** Quarter****	****	****2004     3****rd**** Quarter**
** ****	****      ****10% - 50%****	****	****	****       4.2****%**

**Notes:**
Generally the Brokers are finding:

Access to coverage is improving
The market is becoming more competitive

More specifically at least for property coverage:

Pricing is in the 5 – 10 % of premium range
Low risk profiles are as low as 2% of premium
Target risk rates for commercial real estate has been in the 10% -       as high as 50% but trending down
Take up rates have climbed from a low of 24% to over 57%