41250 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

amount. The individual’s rights to the 

payment are not subject to a substantial risk 

of forfeiture (within the meaning of section 

457(f)(3)(B)). 

(ii) Conclusion. In this Example 1, because 

there is no substantial risk of forfeiture with 

respect to the agreement to transfer property 

in 2005, the present value (as of December 1, 

2002) of the payment is includible in the 

individual’s gross income for 2002. Under 

paragraph (a)(4) of this section, when the 

payment is made on January 15, 2005, the 

amount includible in the individual’s gross 

income is equal to the excess of the fair 

market value of the property when paid, over 

the amount that was includible in gross 

income for 2002 (which is the basis allocable 

to that payment).

Example 2. (i) Facts. As part of an 

arrangement for the deferral of compensation, 

individuals A and B rendering services for a 

tax-exempt entity each receive in 2010 

property that is subject to a substantial risk 

of forfeiture (within the meaning of section 

457(f)(3)(B) and within the meaning of 

section 83(c)(1)). Individual A makes an 

election to include the fair market value of 

the property in gross income under section 

83(b) and individual B does not make this 

election. The substantial risk of forfeiture for 

the property transferred to individual A 

lapses in 2012 and the substantial risk of 

forfeiture for the property transferred to 

individual B also lapses in 2012. Thus, the 

property transferred to individual A is 

included in A’s gross income for 2010 when 

A makes a section 83(b) election and the 

property transferred to individual B is 

included in B’s gross income for 2012 when 

the substantial risk of forfeiture for the 

property lapses. 

(ii) Conclusion. In this Example 2, in each 

case, the compensation deferred is not 

subject to section 457(f) or this section 

because section 83 applies to the transfer of 

property on or before the date on which there 

is no substantial risk of forfeiture with 

respect to compensation deferred under the 

arrangement.

Example 3. (i) Facts. In 2004, Z, a taxexempt entity, grants an option to acquire 

property to employee C. The option lacks a 

readily ascertainable fair market value, 

within the meaning of section 83(e)(3), has a 

value on the date of grant equal to $100,000, 

and is not subject to a substantial risk of 

forfeiture (within the meaning of section 

457(f)(3)(B) and within the meaning of 

section 83(c)(1)). Z exercises the option in 

2012 by paying an exercise price of $75,000 

and receives property that has a fair market 

value (for purposes of section 83) equal to 

$300,000. 

(ii) Conclusion. In this Example 3, under 

section 83(e)(3), section 83 does not apply to 

the grant of the option. Accordingly, C has 

income of $100,000 in 2004 under section 

457(f). In 2012, C has income of $125,000, 

which is the value of the property transferred 

in 2012, minus the allocable portion of the 

basis that results from the $100,000 of 

income in 2004 and the $75,000 exercise 

price.

Example 4. (i) Facts. In 2010, X, a taxexempt entity, agrees to pay deferred 

compensation to employee D. The amount 

payable is $100,000 to be paid 10 years later 

in 2020. The commitment to make the 

$100,000 payment is not subject to a 

substantial risk of forfeiture. In 2010, the 

present value of the $100,000 is $50,000. In 

2018, X transfers to D property having a fair 

market value (for purposes of section 83) 

equal to $70,000. The transfer is in partial 

settlement of the commitment made in 2010 

and, at the time of the transfer in 2018, the 

present value of the commitment is $80,000. 

In 2020, X pays D the $12,500 that remains 

due. 

(ii) Conclusion. In this Example 4, D has 

income of $50,000 in 2010. In 2018, D has 

income of $30,000, which is the amount 

transferred in 2018, minus the allocable 

portion of the basis that results from the 

$50,000 of income in 2010. (Under section 

72(e)(2)(B), income is allocated first. The 

income is equal to $30,000 ($80,000 minus 

the $50,000 basis), with the result that the 

allocable portion of the basis is equal to 

$40,000 ($70,000 minus the $30,000 of 

income).) In 2020, D has income of $2,500 

($12,500 minus $10,000, which is the excess 

of the original $50,000 basis over the $40,000 

basis allocated to the transfer made in 2018).

§ 1.457–12 Effective dates. 

(a) General effective date. Except as 

otherwise provided in this section, 

§§ 1.457–1 through 1.457–11 apply for 

taxable years beginning after December 

31, 2001. 

(b) Transition period for eligible plans 

to comply with EGTRRA. For taxable 

years beginning after December 31, 

2001, and before January 1, 2004, a plan 

does not fail to be an eligible plan as a 

result of requirements imposed by the 

Economic Growth and Tax Relief 

Reconciliation Act of 2001 (115 Stat. 

385) (EGTRRA) (Public Law 107–16) 

June 7, 2001, if it is operated in 

accordance with a reasonable, good faith 

interpretation of EGTRRA. 

(c) Special rule for distributions from 

rollover accounts. The last sentence of 

§ 1.457–6(a) (relating to distributions of 

amounts held in a separate account for 

eligible rollover distributions) applies 

for taxable years beginning after 

December 31, 2003. 

(d) Special rule for options. Section 

1.457–11(d) does not apply with respect 

to an option without a readily 

ascertainable fair market value (within 

the meaning of section 83(e)(3)) that was 

granted on or before May 8, 2002. 

(e) Special rule for qualified domestic 

relations orders. Section 1.457–10(c) 

(relating to qualified domestic relations 

orders) applies for transfers, 

distributions, and payments made after 

December 31, 2001.

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT

■ Par. 4. The authority citation for part 

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

■ Par. 5. In § 602.101, paragraph (b) is 

amended by adding an entry in 

numerical order to the table to read as 

follows:

§ 602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.457–8 ..................................... 1545–1580 

* * * * * 

Robert E. Wenzel, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: July 2, 2003. 

Pamela F. Olson, 

Assistant Secretary of Treasury (Tax Policy)

[FR Doc. 03–17523 Filed 7–10–03; 8:45 am] 

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

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 July 

11, 2003.

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41251

FOR FURTHER INFORMATION CONTACT:

Mario Ugoletti, Deputy Director, Office 

of Financial Institutions Policy (202) 

622–2730, or Martha Ellett or Cynthia 

Reese, Attorney-Advisors, Office of the 

Assistant General Counsel (Banking & 

Finance), (202) 622–0480 ( not toll-free 

numbers).

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Terrorism Risk Insurance Act of 2002 

On November 26, 2002, President 

Bush signed into law the Terrorism Risk 

Insurance Act of 2002 (Public Law 107–

297, 116 Stat. 2322). The Act was 

effective immediately. Title I of the Act 

establishes a temporary federal program 

of shared public and private 

compensation for insured commercial 

property and casualty losses resulting 

from an act of terrorism as defined in 

the Act and certified by the Secretary of 

the Treasury, in concurrence with the 

Secretary of State and the Attorney 

General. The Act authorizes Treasury to 

administer and implement the 

Terrorism Risk Insurance Program, 

including the issuance of regulations 

and procedures. The Program will 

sunset on December 31, 2005. 

The Act’s purposes are to address 

market disruptions, ensure the 

continued widespread availability and 

affordability of commercial property 

and casualty insurance for terrorism risk 

and to allow for a transition period for 

the private markets to stabilize and 

build capacity while preserving State 

insurance regulation and consumer 

protections. The amount of Federal 

payment for an insured loss resulting 

from an act of terrorism is to be 

determined based upon the insurance 

company deductibles and excess loss 

sharing with the Federal Government, as 

specified by the Act. Thus, the Program 

provides a Federal reinsurance backstop 

for a temporary period of time. The Act 

also provides Treasury with authority to 

recoup Federal payments made under 

the Program through policyholder 

surcharges, up to a maximum annual 

limit. 

Each entity that meets the definition 

of ‘‘insurer’’ (well over 2000 firms) must 

participate in the Program. From the 

date of enactment of the Act through the 

last day of Program Year 2 (December 

31, 2004), insurers under the Program 

must ‘‘make available’’ terrorism risk 

insurance in their commercial property 

and casualty insurance policies and the 

coverage must not differ materially from 

the terms, amounts and other coverage 

limitations applicable to commercial 

property and casualty losses arising 

from events other than acts of terrorism. 

The Act permits Treasury to extend the 

‘‘make available’’ requirement into 

Program Year 3, based on an analysis of 

factors referenced in the study required 

by section 108(d)(1) of the Act, and not 

later than September 1, 2004. An 

insurer’s deductible increases each year 

of the Program, thereby reducing the 

Federal government’s involvement prior 

to sunset of the Program. An insurer’s 

deductible is based on ‘‘direct earned 

premiums’’ over a statutory Transition 

Period and the three Program Years. 

Once an insurer has met its deductible, 

the Federal payments cover 90 percent 

of insured losses above the deductible, 

subject to an aggregate annual cap of 

$100 billion. The Act prohibits 

duplicative payments for insured losses 

that have been covered under any other 

Federal program. 

As conditions for federal payment 

under the Program, insurers must 

provide clear and conspicuous 

disclosure to the policyholders of the 

premium charged for insured losses 

covered by the Program, and must 

submit a claim and certain certifications 

to Treasury. Treasury will be 

prescribing claims procedures at a later 

date. 

The Act also contains specific 

provisions designed to manage litigation 

arising from or relating to a certified act 

of terrorism. Section 107 creates an 

exclusive federal cause of action, 

provides for claims consolidation in 

federal court and contains a prohibition 

on Federal payments for punitive 

damages under the Program. This 

section also provides the United States 

with the right of subrogation with 

respect to any payment or claim paid by 

the United States under the Program.

B. The Interim Final Rule 

The interim final rule established 

Subpart A of a new Part 50 in Title 31 

of the Code of Federal Regulations. 

Subpart A of new Part 50 contains 

certain general provisions and 

definitions of Program terms. The 

definitions contained in the interim 

final rule provide the foundation for 

participation by insurers under the 

Federal reinsurance Program created by 

the Act. 

Some of the definitions in the interim 

final rule were taken virtually verbatim 

from the Act because they do not need 

further clarification. For other 

definitions, the interim final rule 

generally incorporated previously 

issued interim guidance provided by 

Treasury as it pertains to Program terms, 

for example, the terms ‘‘insurer,’’

‘‘affiliate,’’ ‘‘property and casualty 

insurance’’ and ‘‘direct earned 

premium.’’ Such interim guidance was 

published at 67 FR 76206 (December 11, 

2002), 67 FR 78864 (December 26, 2002) 

and 68 FR 4544 (January 29, 2003). In 

several areas, the interim final rule 

made clarifying modifications to, or 

supplemented, the previously issued 

interim guidance. 

In implementing the Program, 

Treasury has been guided by several 

goals. First, we strive to implement the 

Act in a transparent and effective 

manner that treats comparably those 

insurers required to participate in the 

Program and that provides necessary 

information to policyholders in a useful 

and efficient manner. Second, Treasury 

seeks to rely as much as possible on the 

State insurance regulatory structure. In 

that regard, Treasury is closely 

coordinating with the National 

Association of Insurance Commissioners 

(NAIC) in implementing definitional 

and other aspects of the Program. Third, 

to the extent possible within statutory 

constraints, Treasury seeks to allow 

insurers to participate in the Program in 

a manner consistent with their normal 

course of business. Finally, given the 

temporary and transitional nature of the 

Program, Treasury is guided by the Act’s 

goal for insurers to develop their own 

capacity, resources and mechanisms for 

terrorism risk insurance coverage when 

the Program expires. 

II. Summary of Comments and Final 

Rule 

Treasury received over 40 comments 

on the interim final rule. Comments 

were submitted by insurance 

companies, industry trade associations, 

the NAIC, two cities, and by two 

members of Congress. After review and 

careful consideration of these 

comments, as well as additional 

research and consultation with the 

NAIC, Treasury is now promulgating a 

final rule concerning TRIA definitions. 

In general, the final rule reflects the 

interim final rule. However, revisions 

and clarifications were made in several 

areas, based on comments received. For 

example, revisions were made to the 

rebuttable presumptions to controlling 

influence determinations under the 

definition of ‘‘affiliate,’’ and 

clarifications were made to the 

definitions of ‘‘direct earned premium’’

and ‘‘commercial property and casualty 

insurance.’’ The final rule, including 

changes and clarifications, is discussed 

in the summary below. 

A. ‘‘Act of Terrorism’’ (Section 50.5.b) 

The interim final rule incorporated 

the statutory definition of ‘‘act of 

terrorism’’ found in section 102(1) of the 

Act. In that regard, the interim final rule 

provides that an ‘‘act of terrorism’’ for 

41252 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

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 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41253

of four of the companies it controls also 

meet the Act’s definition of ‘‘insurer,’’

then the parent company and the three 

companies it controls that meet the 

Act’s definition of ‘‘insurer’’ (the parent 

company’s affiliates) will be treated by 

Treasury collectively as one insurer for 

purposes of calculating direct earned 

premiums and calculating the insurer 

deductible under the Program. The 

company that does not meet the 

definition of ‘‘insurer’’ is not included 

in the Program. 

In addition, if an entity is under 

common control with an insurer, and 

that entity also meets the definition of 

‘‘insurer’’ under Section 102(6) of the 

Act as implemented by Treasury, then 

the two insurers are ‘‘affiliates’’ and 

Treasury will treat them collectively as 

one ‘‘insurer’’ for the Program purposes 

of consolidating direct earned premiums 

and calculating the insurer deductible. 

If their parent company does not meet 

the definition of ‘‘insurer’’ under the 

Act, then it is not included in the 

Program.

Control 

The statutory definition of ‘‘control’’

in section 102(3) contains three 

categories. Section 102(3)(A) and (B) 

establish conclusive control under 

certain circumstances for purposes of 

the Program. The conclusive control 

provisions of the Act are contained in 

the definition of ‘‘affiliate’’ in the 

interim final rule at section 50.5(c)(2)(i) 

and (ii). If a relationship between or 

among insurers does not fit within the 

conclusive control provisions, control 

may still exist for purposes of the 

Program if Treasury determines, 

pursuant to section 102(3)(C), that an 

entity directly or indirectly exercises a 

controlling influence over the 

management or policies of another 

entity. Section 102(3)(C) is contained in 

the interim final rule at section 

50.5(c)(2)(iii). In making a 

determination of whether controlling 

influence exists among insurers, section 

102(3)(C) of the Act requires Treasury to 

provide notice and an opportunity for a 

hearing. 

The Act’s definition of control in 

section 102(3)(A), (B) and (C) is almost 

identical to the definition of ‘‘control’’

contained in the Bank Holding 

Company Act (BHCA) at 12 U.S.C. 

1841(a)(2) and in the Savings and Loan 

Holding Company Act (SLHCA) at 12 

U.S.C. 1467a, except that the Act does 

not contain a presumption of no control 

for holding less than 5 percent of any 

class of voting securities, nor does the 

Act provide any of the other explicit 

statutory exemptions that are provided 

in the BHCA and SLHCA. The Act’s 

definition of control is also similar to 

the definition of control in the NAIC’s 

Model Insurance Company Holding 

Company Act (Model Act) except that 

the Model Act contains a presumption 

of control if an entity owns 10 percent 

of the voting securities of an insurance 

company instead of the 25 percent 

conclusive control threshold that is 

contained in the Act (and in the BHCA 

and the SLHCA). 

Owns, Controls or has the Power to Vote 

25 Percent or More of Voting Securities 

Under Section 102(3)(A) of the Act, 

‘‘an entity has ‘control’ over another 

entity if the entity directly or indirectly 

or acting through 1 or more persons 

owns, controls or has the power to vote 

25 percent or more of any class of voting 

securities of the other entity.’’ The 

interim final rule incorporates this 

statutory definition, but uses the word 

‘‘insurer’’ instead of ‘‘entity’’ to clarify 

that the definition of control does not 

include entities that are not insurers. 

One commenter asked for clarification 

that an affiliate itself must be an insurer 

to be treated as part of a consolidated 

entity with a related insurer. In view of 

the congressional intent that affiliated 

insurers be treated as a consolidated 

entity for purposes of calculating direct 

earned premiums, there is no reason to 

include non-insurer entities in the 

definition of ‘‘affiliate’’ because these 

entities do not have ‘‘direct earned 

premiums’’ as defined in the Act. 

Viewing a group of affiliates with both 

insurer and non-insurer entities, the 

direct earned premiums for the group 

should be no different whether or not 

the non-insurers are included in the 

group. For this reason, Treasury has 

decided to interpret the Act as generally 

excluding non-insurers from the 

definitions of affiliate and control at this 

time. Treasury could revisit this issue if 

it finds evidence that other corporate 

structures or arrangements are being 

used to thwart the goals and purposes 

of the Program. 

Five insurance industry commenters 

took the position that ownership of 25 

percent or more of the voting securities 

of an insurer should not automatically 

result in control. These commenters 

asserted that Treasury could and should 

by regulation change this statutory limit. 

One commenter referenced the NAIC 

Model Act language in support of 

creating a regulatory presumption. As 

noted above, unlike section 102(3)(A), 

the NAIC Model Act contains a 10 

percent statutory presumption not a 

threshold of conclusive control. Several 

of these commenters stated that a 25 

percent or more conclusive control limit 

could adversely affect the availability 

and affordability of coverage, and in 

particular, would have an adverse effect 

on their own companies if they were 

required to aggregate direct earned 

premiums. These commenters suggested 

various alternatives for Treasury to use 

instead of the 25 percent statutory limit. 

These included substituting other 

regulatory factors for the 25 percent 

limit and accepting a state 

determinations of ‘‘no control’’ based on 

state law even where there is ownership 

of more than 25 percent. 

Consistent with the statutory language 

in section 102(3)(A) and with other 

statutes containing similar language, 

Treasury interprets the 25 percent or 

more direct or indirect ownership of any 

class of voting securities to be an 

objective standard establishing 

conclusive control. Under the plain 

language of the statute, the 25 percent 

voting securities threshold is not a 

presumption, and is not subject to 

rebuttal. We also note that in addressing 

the rebuttable presumptions in the 

interim final rule in connection with 

section 102(3)(C), several commenters 

characterized the ownership of 25 

percent or more of any class of voting 

securities threshold in section 

102(3)(A), as well as the control 

provision in section 102(3)(B), as 

objective standards. For these reasons, 

Treasury has not made any change in 

the final rule to the 25 percent threshold 

in section 50.5(c)(2)(ii) of the interim 

final rule. 

Controls the Election of a Majority of the 

Directors or Trustees 

The interim final rule provides that an 

insurer controls another insurer for 

purposes of the Program if the insurer 

controls in any manner the election of 

a majority of the directors or trustees of 

the other insurer. In general, this 

regulatory provision incorporates the 

statutory language in section 102(3)(B). 

For the reasons stated above in 

connection with section 102(3)(A), 

Treasury interprets the section 102(3)(B) 

as another objective standard that 

establishes conclusive control for 

purposes of the Act. This standard is not 

a presumption and is not subject to 

rebuttal. 

Controlling Influence and Rebuttable 

Presumptions 

In addition to the conclusive control 

provisions in section 102(3)(A) and (B), 

the Act defines control to exist if, ‘‘the 

Secretary determines, after notice and 

opportunity for hearing, that the entity 

directly or indirectly exercises a 

controlling influence over the 

management or policies of the other 

entity.’’ Section 102(3)(C). In the interim 

41254 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

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 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41255

executive committee, chief executive 

officer, chief operating officer, chief 

financial officer or in any position with 

similar policymaking authority in 

another insurer;

In addition, if a State has determined 

that an insurer controls another insurer, 

and at least one of the factors listed 

above exists, then Treasury will 

presume controlling influence exists 

unless and until rebutted by the insurer. 

Further, if an insurer provides 25 

percent or more of another insurer’s 

capital in the case of a stock insurer, 

policyholder surplus (in the case of a 

mutual insurer) or corporate capital (in 

the case of other entities that qualify as 

insurers), and at least one of the factors 

listed above exists, then Treasury will 

presume a controlling influence exists 

unless and until rebutted by the insurer. 

Finally, if an insurer, at anytime 

during the Program Year, supplies 25 

percent or more of the underwriting 

capacity for that year to an insurer that 

is a syndicate consisting of a group 

including incorporated and individual 

unincorporated underwriters, and at 

least one of the factors in the above list 

exists, then Treasury will presume a 

controlling influence unless and until 

rebutted by the insurer. 

A few of the commenters objected to 

the second and third rebuttable 

presumptions in the interim final rule as 

inconsistent with the conclusive control 

provisions in section 102(3)(A) and (B). 

As a general matter, Treasury is directed 

by the Act to treat insurers comparably 

under the Program. Treasury views the 

provision by an insurer of 25 percent of 

an insurer’s corporate capital (or 

policyholder surplus), or supplying of 

25 percent of an insurer’s underwriting 

capacity for the Program Year, to 

indicate the functional equivalent of 

ownership of 25 percent of voting 

securities. As the administrator of the 

Program, Treasury also seeks to prevent 

loopholes in the regulations and 

elsewhere that may create opportunities 

to avoid or greatly minimize an insurer 

deductible merely on the basis of an 

insurer’s unusual corporate structure or 

arrangement where, in effect, the insurer 

exercises a controlling influence over 

another insurer in the same or similar 

manner as the more traditional 

corporate structures of other insurers. 

The controlling influence determination 

authority in section 102(3)(C) aids 

Treasury’s efforts to treat insurers 

comparably and helps preserve the goals 

and effectiveness of the Program. As 

described below, the final rule provides 

insurers with an opportunity for a 

hearing and a final determination on 

controlling influence.

Opportunity for Hearing 

Section 102(3)(C) of the Act 

authorizes Treasury to make a 

determination that an insurer directly or 

indirectly exercises a controlling 

influence over the management or 

policies of another insurer, after notice 

and opportunity for hearing. The 

statutory language providing an 

opportunity for hearing does not require 

a formal hearing on the record. In the 

interim final rule, Treasury provided an 

opportunity for an informal hearing to 

any insurer that (1) does not come 

within the conclusive control provisions 

of section 102(3)(A) or (B) and (2) 

wanted to rebut a presumption of 

controlling influence. The informal 

hearing procedure requires an insurer to 

provide Treasury with relevant facts and 

circumstances concerning the 

relationship and in support of the 

insurer’s contention that no controlling 

influence exists. The procedure also 

allows a supplementary oral 

presentation by the insurer, if deemed 

necessary by Treasury. Based on the 

information provided by the insurer, 

including any oral presentation, the 

factors listed in the regulation and other 

relevant facts and circumstances, 

Treasury would then make a final 

determination of whether a controlling 

influence exists. 

A few commenters contended that 

Section 554 of the Administrative 

Procedure Act (‘‘APA’’), 5 U.S.C. § 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 

41256 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

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—nonliability 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 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41257

mutuals), the interim final rule suggested 

other methods by which adjustments could 

be made by the insurer to calculate its DEP. 

Specific methods were suggested in the 

interim final rule for county or town mutual 

insurers, eligible surplus line insurers, and 

federally approved insurers.

Included Versus Excluded Lines of 

Coverage in General 

Several commenters were uncertain 

about whether the interim final rule’s 

list of commercial lines as reported on 

the specified lines of Statutory Page 14 

was exclusive or merely illustrative. 

Their uncertainty appears to arise from 

use of the word ‘‘includes’’ in section 

50.5(l) of the interim final rule that 

property and casualty insurance 

(‘‘includes commercial lines within the 

following lines of insurance.’’) These 

commenters suggested that Treasury 

clarify whether it intended for the list to 

be exclusive, or identify those lines of 

business that are excluded. 

As previously noted, Treasury 

consulted with the NAIC and others 

concerning the definition of commercial 

property and casualty insurance. 

Finding no uniform or consistent 

definition of the term, Treasury 

determined that the NAIC’s Statutory 

Page 14, provided the best available 

point of reference—not only for 

identifying the lines of coverage for the 

Program, but also for guidance in 

determining an insurer’s DEP for those 

lines of coverage. Treasury intended 

that the list of specified lines on 

Statutory Page 14 would be exclusive, 

and premiums reported on other lines 

would not be part of the Program. The 

final rule revises the previous language 

to clarify this. 

In its comment on the interim final 

rule, the NAIC suggested Treasury 

should add the following language from 

the Act: ‘‘* * * or any other type of 

crop or livestock insurance that is 

privately issued or reinsured’’ to section 

50.5(l)(2)(i) of the interim final rule. The 

NAIC commented that such an addition 

would prevent any uncertainty 

concerning the treatment of crop or 

livestock coverage that is not part of the 

Program. 

In developing the interim final rule, 

Treasury understood based on available 

information that privately issued or 

reinsured crop or livestock insurance 

was reported under Multiple Peril Crop 

insurance on Line 2.2 of Statutory Page 

14. It is now Treasury’s understanding, 

based on additional information from 

the NAIC, that privately issued or 

reinsured crop or livestock insurance is 

generally reported as Allied Lines 

insurance on Line 2.1 of Statutory Page 

14. Therefore, in the final rule, Treasury 

has added the specific statutory 

language and the appropriate reporting 

lines of Statutory Page 14 to section 

50.5(l)(2)(i) of the final rule. 

The Act and interim final rule 

exclude Federal flood insurance which 

is a line of single peril natural disaster 

insurance. Similarly, the interim final 

rule excluded earthquake insurance 

reported on Statutory Page 14. Treasury 

received no comments on the interim 

final rule regarding the treatment of any 

single peril natural disaster insurance. 

However, in light of information 

subsequently received in response to 

Treasury’s proposed rule concerning 

state residual market insurance entities, 

Treasury is considering issuing a 

proposed rule specifically requesting 

comment on the inclusion or exclusion 

in the Program definition of commercial 

property and casualty insurance of other 

single peril natural disaster insurance, 

such as stand alone, single peril wind 

insurance, if reported on included lines 

of Statutory Page 14. 

Personal Lines

One commenter asserted that 

Treasury’s determination that 

commercial coverage is incidental if its 

applicable premium is less than 25 

percent of a hybrid personal/

commercial lines policy premium 

would have adverse effects, suggesting 

that this could cause insurers to force 

incidental coverages off such personal 

policies, such as Homeowners 

insurance. Others commented that the 

incidental rule should only be used as 

a threshold calculation, or that insurers 

should be allowed to allocate personal/

commercial hybrid policy premiums 

according to their normal business 

methods and procedures. One 

commenter contended that Homeowners 

policies should not be included in the 

Program regardless of the percentage of 

commercial premium, and that 

allocation of commercial/personal 

premium would not be appropriate for 

Farmowners or Farm Properties policies 

since they are both considered by some 

states to be commercial lines. 

As discussed above, Treasury has 

suggested methods for the allocation of 

commercial portions of premiums in 

hybrid policies in an attempt to aid 

insurers by simplifying the adjustment 

and calculation of an insurer’s DEP. If 

the appropriate premium was included 

in the DEP and the other required 

conditions for Federal payment are met, 

commercial portions of hybrid policies 

are covered by the Program. The 25 

percent incidental provision was 

included in the interim final rule by 

Treasury to provide a threshold, so that 

those insurers that did not want to 

calculate an actual allocation of 

premiums on small incidental amounts 

of coverage, and did not intend to 

perfect their right to recover Federal 

payment on claims paid on such 

incidental commercial coverage, could 

then exclude those premiums from their 

DEP calculation if they wished to do so. 

In order to clarify this in the final rule, 

and to make it clear that an insurer can 

chose to allocate premiums below that 

amount, Treasury has modified the 

language in section 50.5(d)(1)(i–iv) of 

the interim final rule. 

Personal Versus Commercial Lines 

Four commenters asked for 

clarification with regard to whether 

coverage for one to four family rental 

units is personal or commercial 

insurance. One pointed out that such 

coverage is generally written under a 

Dwelling Properties insurance policy 

(which is considered to be a personal 

line). However, in other situations, 

under four family rental units are 

written as a commercial coverage. 

Treasury’s designation in section 

50.5(l)(1) of the interim final rule of the 

specific lines of commercial coverage 

from Statutory Page 14 was made, in 

part, to provide greater clarity for 

insurers in cases where various States 

may not treat certain types of coverage 

consistently as commercial coverage. In 

general, it is our understanding that 

premium income for one to four family 

rental unit insurance coverage generated 

from policies insuring property owned 

for business purposes (e.g. to generate 

income for the property owner) is 

reported on Lines 1 (Fire) 2.1 (Allied 

Lines) and 17 (Other Liability) of 

Statutory Page 14. Based on section 

50.5(l)(1) of the final rule, such 

insurance coverage would be considered 

commercial property and casualty 

insurance coverage that is included in 

the Program. Treasury also addressed 

the issue of personal lines in the context 

of adjustments to DEP in section 

50.5(d)(1) of the interim final rule and 

through adjustments to that section in 

the final rule. To the extent that one to 

four family rental units have a personal 

coverage component, the suggested 

methods of adjusting and calculating the 

appropriate DEP may be used by an 

insurer. 

Another commenter stated that farm 

residences should be considered 

commercial. For purposes of the 

Program, Treasury does not agree, but 

considers any owner occupied residence 

to be basically a personal coverage. 

Therefore, where a farm residence is 

covered in a hybrid farm policy, the 

suggested methods of adjusting and 

41258 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

calculating the appropriate DEP can be 

utilized. 

Other Non-Covered Lines 

One commenter suggested that 

Treasury consider extending the 

commercial/personal allocation to other 

hybrid contracts containing premiums 

for excluded lines of coverage such as 

Medical Malpractice in combination 

with Hospital General Liability 

coverage. Such insurance lines are not 

within the scope of the definition of 

commercial property and casualty 

insurance of the Act and are not 

included in the Program. Therefore, 

premiums in hybrid policies applicable 

to those exceptions do not need to be 

included in an insurer’s DEP. Any 

allocation of premium for such 

exclusions should be calculated by 

insurers either using methods suggested 

by Treasury, or other similar methods in 

accordance with the insurer’s normal 

business methods and procedures. 

Another commenter suggested that 

Treasury should exclude premiums 

reported on the specified lines on 

Statutory Page 14, but earned from 

retroactive insurance programs such as 

certain Novations, Adverse 

Development Cover, or Loss Portfolio 

Transfer Programs. Retroactive 

insurance is insurance covering only 

events that occurred prior to the 

inception date of the policy, but there 

appears to be no differentiation in the 

Statutory Page 14 reporting to indicate 

that such premiums relate to risks from 

prior years. Treasury takes the position 

that such retroactive premiums are not 

within the time period of the definition 

of ‘‘insured losses’’ if they are associated 

with losses that occurred prior to 

enactment and the effective date of the 

Act (November 26, 2002). Such 

premium income may be removed in an 

insurer’s calculation of its DEP. 

Treasury has modified the language in 

the final rule (section 50.5(d)(1)(i–iv) of 

the interim final rule) to clarify the 

nature of the allocation provisions with 

regard to hybrid policies and other 

policies with coverage of losses outside 

the scope of insured losses under the 

Program. 

Fidelity Insurance 

Treasury did not include Line 23 

(Fidelity) of Statutory Page 14 in its list 

of specified lines considered to be 

commercial ‘‘property and casualty 

insurance’’ covered under the Act in its 

initial interim guidance or in its interim 

final rule. Comments were received 

from five different commenters, two in 

support of Treasury’s position, and 

three in opposition.

One of the commenters advocating the 

inclusion of fidelity insurance argued 

that it can also have a distinct property 

component as in cases where coverage 

is provided for the destruction of money 

and securities, such as those held in 

bank or corporate vaults. The 

commenter pointed out that it had 

losses associated with fidelity policies 

arising from the September 11 terrorist 

attacks totaling some $20 million due to 

the destruction of cash on the premises 

of its insured. Another commenter 

emphasized that fidelity has always 

been considered by state regulators, 

insurers, and policyholders to be a 

commercial property and casualty line. 

Those opposed to the inclusion of 

fidelity insurance contend that it is a 

line of insurance that by itself faces low 

exposure to terrorism losses. One 

commenter had indicated previously 

that it had provided terrorism coverage 

for all of its fidelity policies prior to the 

Act, but needed to confirm whether 

fidelity insurance was covered under 

the Program in order to know how much 

reinsurance coverage would be needed 

to cover its deductible exposure. 

Commenters also pointed out that if 

Treasury were to reverse itself and now 

include fidelity insurance as a covered 

line, problems associated with the 

timing of the disclosure requirements 

and other issues would need to be 

addressed. 

After considering the comments, 

Treasury has determined that fidelity 

insurance is not covered under the Act, 

and thus has not inserted Line 23 

(Fidelity) in the specified lines on 

Statutory Page 14 that make up 

commercial property and casualty 

insurance covered under the Act. In 

making the overall determination of 

what lines of coverage are included and 

excluded in the definition of property 

and casualty insurance, Treasury relied 

on specific guidance provided by 

Congress in section 102(12) of the Act. 

Section 102(12)(A) expressly includes 

excess insurance, workers’

compensation insurance, and surety 

insurance. Traditional surety insurance 

and fidelity insurance share a similar 

characteristic in that they guarantee 

against losses associated with the 

performance of third parties. Treasury 

maintains the position that if Congress 

had intended fidelity insurance to be 

covered, it would have specifically 

included it as it did surety insurance. 

Treasury relied on a similar rationale for 

excluding group accident coverage, a 

line of coverage that shares some of the 

same risk characteristics as workers’

compensation coverage, from the list of 

specified lines on Statutory Page 14 that 

make up commercial property and 

casualty insurance covered under the 

Act. 

Through the comment process, 

Treasury has been made aware that the 

traditional fidelity insurance coverage 

has been expanded in recent years by 

some insurers to include coverage to 

non-employee ‘‘insiders,’’ as well as to 

property coverage for loss of firm assets, 

including cash, due to crime. Although 

Treasury is making no change to the 

interim final rule definition with regard 

to fidelity in the final rule, Treasury will 

continue to evaluate this wrap-around 

or hybrid-type coverage which could 

include other types of coverage that are 

generally covered by the Act, but not 

reported as such. In this regard, 

Treasury will evaluate whether and how 

the designation of included and 

excluded lines has affected the 

availability of coverage for terrorism 

insurance risk, and whether any further 

change in the Program might be 

warranted. 

Other DEP-Related Comments 

On behalf of county or town mutual 

insurers that do not report on Statutory 

Page 14, one commenter suggested that 

Treasury’s suggestion that they convert 

direct premium or other types of 

payments such as assessments or 

contributions into DEP, would lead to 

inconsistencies in the Program because 

states have varying reporting 

requirements. The result would be that 

DEPs would vary significantly from 

state to state, which would be ‘‘bad from 

a public policy perspective, but leaves 

insurers on uncertain ground despite 

their best good faith efforts at 

compliance.’’ Treasury has consulted 

with the NAIC on this issue and we 

understand that the NAIC plans to 

develop a recommended conversion 

method that States in turn could 

recommend to county or town mutual 

insurers. 

Another commenter requested that 

Treasury give insurers assurance that 

‘‘fronted’’ premiums received by an 

insurer would not be included in DEP 

and thus raise its deductible, if the 

insurer assuming the risk (captive or 

otherwise) is also an insurer under the 

Program. The commenter explained that 

‘‘fronting’’ is a credit enhancement 

procedure that is sometimes employed 

by business customers and their 

insurers to expand available insurance 

capacity, and is recognized by state 

regulators. However, fronting 

arrangements are not addressed in the 

Act, and the Act does not appear to 

provide any basis to exclude ‘‘fronted’’

premiums from DEP. If one insurer 

‘‘fronts’’ for another by receiving 

premiums but passes the risk to another, 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41259

it remains the ‘‘insurer’’ under the Act 

and the premiums it receives become 

part of its DEP. This is not unlike 

situations where primary insurers report 

DEP on policies that they subsequently 

reinsure, and reinsurance is specifically 

excluded from the Act. Therefore, 

Treasury will not provide assurance that 

fronted premiums will not be included 

in DEP. 

D. Insured Loss (Section 50.5.e) 

Treasury incorporated the statutory 

definition of ‘‘insured loss’’ found in 

section 102(5) of the Act in section 

50.5(e)(1) of the interim final rule. 

Section 50.5(e)(2) of the interim final 

rule clarified the meaning of insured 

loss as it relates to section 102(5)(B) of 

that Act as follows: 

(i) A loss that occurs to an air carrier 

(as defined in 49 U.S.C. 40102), to a 

United States flag vessel, or a vessel 

based principally in the United States, 

on which United States income tax is 

paid and whose insurance coverage is 

subject to regulation in the United 

States, is not an insured loss under 

section 102(5)(B) of the Act unless it is 

incurred by the air carrier or vessel 

outside the United States. 

(ii) An insured loss to an air carrier or 

vessel outside the United States under 

section 102(5)(B) of the Act does not 

include losses covered by third party 

insurance contracts that are separate 

from the insurance coverage provided to 

the air carrier or vessel. 

One commenter took exception to 

Treasury’s clarification that such 

extraterritorial insured third party losses 

to United States air carriers and vessels 

are not insured losses, and cited 

legislative history of the Act to indicate 

an intent on the part of Congress to 

provide extraterritorial coverage to 

United States air carriers and vessels 

without limitation. 

After reviewing the comments 

including the legislative history cited by 

the commenter, Treasury has 

determined not to change the position it 

took in the interim final rule. Therefore, 

for purposes of the Program, an insured 

loss is ‘‘any’’ loss, including a third 

party liability loss, if it occurs within 

the geographic boundaries of the United 

States; but, if the loss occurs outside of 

the geographic boundaries of the United 

States (extraterritorial) to a United 

States air carrier or vessel, then only 

that portion of the loss ‘‘to’’ that air 

carrier or vessel is an insured loss 

eligible for the backstop. To further 

clarify, ‘‘to’’ in this context means 

insured losses that are incurred by 

United States air carriers and vessels 

(e.g., through United States air carriers’

or vessels’ property and liability 

insurance coverage), not losses that are 

incurred by other entities that are 

covered by third party insurance 

contracts that are separate from the 

insurance coverage provided to the air 

carrier or vessel. 

Treasury’s position is consistent with 

how third party liability losses are 

generally treated under the Program 

(including how such losses are treated 

for foreign air carriers and foreign flag 

vessels) in that such losses would be 

considered insured losses if they are 

incurred within the geographic scope of 

the United States. The extension of 

coverage provided to United States air 

carriers and vessels under the Act is 

related directly to those entities and 

their potential insurance exposures, 

which are fully covered under the 

interim final rule. Treasury does not 

believe that granting broader third party 

indemnification on an extraterritorial 

basis and creating greater exposure for 

United States taxpayers is consistent 

with congressional intent for the 

Program. 

E. Insurer (Section 50.5.f) 

The interim final rule incorporated 

the statutory definition of ‘‘insurer’’ as 

generally reflected in previously issued 

interim guidance that was published at 

67 FR 78864. In accordance with section 

103(a)(3) of the Act, each entity that 

meets the definition of ‘‘insurer’’ under 

the Act as implemented by Treasury 

must participate in the Program. To 

participate in the Program, an entity, 

including an ‘‘affiliate’’ of an insurer 

(see further discussion in part B of this 

preamble), must itself meet all of the 

requirements of section 102(6)(A) and 

(B) and, as the Treasury may prescribe, 

(C). This means that to be an insurer, an 

entity must: (1) Fall within one of the 

categories in section 102(6)(A) described 

below; (2) receive direct earned 

premiums as required by section 

102(6)(B); and (3) meet any additional 

criteria established by Treasury 

pursuant to section 102(6)(C). 

The categories of insurers in Section 

102(6)(A) that were directly addressed 

in the interim final rule include:

(i) Licensed or admitted to engage in the 

business of providing primary or excess 

insurance in any State (‘‘State’’ includes the 

District of Columbia and territories of the 

United States);

(ii) Not so licensed or admitted, but is an 

eligible surplus line carrier listed on the 

Quarterly Listing of Alien Insurers of the 

National Association of Insurance 

Commissioners; 

(iii) Approved for the purpose of offering 

property and casualty insurance by a Federal 

agency in connection with maritime, energy 

or aviation activity; and 

(iv) A State residual market insurance 

entity or State workers’ compensation fund.

The interim final rule provides that an 

entity that falls within two categories 

will be considered by Treasury to fall 

within the first category that it meets 

under section 102(6)(A)(i)–(iv). All 

entities that are licensed or admitted by 

a State’s insurance regulatory authority, 

such as captive insurers, risk retention 

groups, and farm and county mutuals, 

fall under section 102(6)(A)(i). 

The interim final rule also specified 

that the scope of insurance coverage 

(insured losses) under the Program for 

federally approved insurers under 

section 102(6)(A)(iii) is only to the 

extent of federal approval of the 

commercial property and casualty 

insurance coverage approved by the 

Federal agency in connection with 

maritime, energy or aviation activity. 

Therefore, insured losses under other 

insurance coverage that may be offered 

by a federally approved insurer under 

section 102(6)(A)(iii) would not be 

covered by the Program. 

In addition to falling within a 

category in section 102(6)(A), an 

‘‘insurer’’ must meet the requirements 

in section 102(6)(B) unless statutorily 

excepted. Therefore, an ‘‘insurer’’ must 

receive ‘‘direct earned premiums’’ (as 

defined) on any type of commercial 

property and casualty insurance (as 

defined). In addition, an ‘‘insurer’’ must 

meet any additional criteria prescribed 

by Treasury under section 102(6)(C). 

The interim final rule did not prescribe 

additional criteria under section 

102(6)(C). However, under a separate 

notice of proposed rulemaking 

published at 68 FR 9814 Treasury 

solicited public comment on whether 

the Secretary should prescribe other 

criteria for certain insurers pursuant to 

the authority provided by section 

102(6)(C) and, if so, what criteria 

Treasury should prescribe. 

Captive Insurers 

Treasury received six comments that 

addressed the treatment of captive 

insurers under the Program. The 

majority of these objected to Treasury’s 

mandatory inclusion of captive insurers 

as a State licensed or approved insurer 

under Section 102(6)(A)(i). These 

commenters suggested that captives 

should be allowed to opt-in to the 

Program as opposed to being mandatory 

participants. In support of this position, 

commenters offered the following 

points: many captive insurers were 

created to operate outside of the 

traditional insurance marketplace, and 

thus they should not be treated as other 

insurance companies; some types of 

commercial coverage provided by 

41260 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

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 optout 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 statelicensed 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 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41261

suggested that Treasury’s treatment of 

federally approved insurers (see next 

section) should be broadened to include 

all types of coverage provided by this 

category of insurers. 

The issue of Treasury’s treatment of 

federally approved insurers is, for the 

most part, separable from the 

fundamental question of whether joint 

underwriting associations are State 

licensed or admitted insurers. With 

regard to joint underwriting associations 

operating in the United States, if such 

entities are considered to be State 

licensed or approved insurers, then they 

must participate in the Program as 

insurers in this category under the Act. 

The federally approved issue is not 

reached in this situation. 

Treasury acknowledges that certain 

joint underwriting associations and 

other entities may not fit neatly within 

what is traditionally thought of as the 

‘‘State licensed or admitted’’ market. To 

provide more clarity in the category of 

‘‘State licensed or admitted,’’ the final 

rule provides that, with regard to joint 

underwriting associations and other 

pooling arrangements, such entities 

must meet all three of the following 

criteria to be an insurer under the 

Program:

• 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 MARADapproved 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 

41262 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

financial responsibility, and the 

Minerals Management Service has 

procedures in place (30 CFR 253.29) 

regarding eligibility criteria under their 

program. To further understand the oil 

and gas drilling industry’s concerns, the 

Minerals Management Service provided 

Treasury with a list of insurers that had 

been approved to provide coverage 

under the oil spill financial 

responsibility program. Treasury, in 

consultation with the NAIC, identified 

102 out of 105 insurers that were 

approved by the Minerals Management 

Service as being eligible participants 

under the Act because they either were 

State licensed or admitted or were on 

the NAIC’s Quarterly Listing of Alien 

Insurers. Thus, as it relates to insurance 

coverage for offshore drilling interests, 

Treasury’s interpretation with regard to 

federally approved insurers does not 

appear to have caused disruptions in 

insurance coverage. Treasury did not 

receive any comments from insurers 

providing coverage for offshore drilling 

interests objecting to the treatment of 

federally approved insurers. 

Treasury also received comments 

regarding the treatment of federally 

approved insurers under the 

Department of Labor’s authority to 

authorize workers’ compensation 

coverage under the Longshore and 

Harbor Worker’s Act (33 U.S.C. 901) and 

its extensions. The Department of Labor 

authorizes both insurance carriers (20 

CFR 703.101) and self-insurers (20 CFR 

703.301) for the purpose of meeting the 

requirements of the Longshore and 

Harbor Worker’s Act. Insurers that are 

authorized under 20 CFR 703.101 

clearly meet the criteria of section 

50.5(f)(1)(C) of being ‘‘approved or 

accepted for the purpose of offering 

property and casualty insurance by a 

Federal agency in connection with 

maritime, energy, or aviation activity.’’

In this regard a key element is that such 

insurers are ‘‘offering’’ insurance 

coverage.

In contrast, the Department of Labor 

and other Federal agencies may approve 

self insurance as an acceptable means of 

meeting the financial requirements or 

responsibilities of their respective 

programs. In this regard, self insurance 

is just another means of establishing 

financial responsibility and is not a 

substitute for the requirement that 

insurance is being ‘‘offered.’’ Thus, self 

insurance arrangements approved by 

Federal agencies are not included under 

section 50.5(f)(1)(C). However, Treasury 

may consider self insurance 

arrangements for inclusion in the 

Program through Treasury’s general 

authority to consider such arrangements 

under section 102(6)(A)(v) of the Act, 

which is also described in section 

50.5(f)(1)(E) of the interim final rule. 

Treasury has not yet taken any action 

regarding the inclusion of self insurance 

arrangements under the Act. 

In addition to the general concerns 

noted above regarding the treatment of 

federally approved insurers, airline 

insurance pools and other commenters 

(e.g., those addressing issues related to 

nuclear insurers) noted that Federal 

approval may be for amounts of 

insurance coverage that is less than 

what is normally provided by the 

insurance industry. For example, 

commenters noted that standard airline 

liability limits are $1.5 billion, while the 

Federal Aviation Administration’s 

required liability coverage is much 

lower. Likewise, commenters noted that 

policy limits on nuclear property 

coverage generally exceed the mandated 

requirements of $1.06 billion per 

licensee. 

After consideration of these 

comments by the maritime industry and 

their mutually owned insurance 

companies and others, Treasury has 

decided not to make any changes to the 

interim final rule’s treatment of 

federally approved insurers for the 

following reasons. 

First, the interim final rule’s treatment 

of federally approved insurers is in 

accord with the statutory language of 

the Act in section 102(6)(A)(iii) 

(‘‘approved for the purpose of offering 

property and casualty insurance by a 

Federal agency in connection with 

maritime, energy or aviation activity’’). 

While some commenters pointed to 

congressional intent supporting a 

broader interpretation, no express 

language in the Act’s legislative history 

supports this view. Moreover, 

Treasury’s treatment of federally 

approved insurers in the interim final 

rule is consistent with the underlying 

reason for the Federal government 

providing Federal agencies with the 

authority to approve insurers. In 

general, the Federal government 

provides agencies with approval 

authority to address important national 

interests or to protect the Federal 

government’s interests. For example, the 

Federal government requires that 

airlines maintain a minimum amount of 

liability insurance coverage. In contrast, 

the Federal government has no similar 

overall liability requirements for ocean 

going vessels, but such vessels are 

required to demonstrate financial 

responsibility for oil spills. As an 

example of protecting the Federal 

government’s interest, MARAD 

approves insurance coverage for vessels 

that were built with a government 

subsidy or guarantee. MARAD could 

have been granted broader insurance 

approval authority than just federally 

subsidized vessels if there were a clear 

national interest in ensuring that all 

ocean going vessels in U.S. waters had 

adequate overall liability insurance 

coverage. 

Second, Treasury’s treatment of 

federally approved insurers is consistent 

with Treasury’s consideration of a preexisting 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 preexisting regulatory nexus or structure 

for the administration of the Program. 

Ongoing Data Requirements. As 

Program administrator, Treasury has 

chosen not to impose new ongoing data 

reporting requirements on insurers. That 

does not mean that validating and 

collecting certain data is not important 

to the Program. The calculation of an 

insurer’s DEP forms the basis for an 

insurer calculating its deductible under 

the Program, and in the event that 

insurers would submit a claim for 

payment under the Program, Treasury 

would expect to validate an insurer’s 

calculation of its deductible. Treasury 

believes that the existing ongoing data 

reporting requirements of the State 

insurance regulators and the 

consolidated reporting requirements as 

implemented by the NAIC form a sound 

basis for the administration of the 

Program. Therefore, there was not a 

pressing need to implement new 

ongoing data reporting requirements 

through Treasury (and to create 

additional paperwork burdens for the 

insurance industry) for this temporary 

government Program. 

However, such ongoing data is useful 

and important, especially as it relates to 

foreign insurers that are providing 

coverage on global risk policies. Global 

risk polices (e.g., such as those provided 

to ocean going vessels) have historically 

not allocated premium income to reflect 

the scope of insured losses covered 

under the Act, which is a key measure 

in calculating an insurer’s deductible. 

Treasury has determined to utilize data 

collected by the NAIC from insurers on 

the Quarterly Listing of Alien Insurers 

that captures the amount of premium 

income related to the scope of insured 

loss under the Act. Federal agencies 

approving insurers under section 

102(6)(A)(iii), while generally having 

some type of financial criteria for 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41263

approving insurers, do not have in place 

any type of ongoing data reporting 

requirements similar to that of the 

NAIC. 

Ability to Impose Surcharges or Take 

Enforcement Actions. Many of the 

insurers approved by Federal agencies 

may be outside the direct jurisdiction of 

the United States. Treasury has little 

leverage vis a vis these insurers and this 

could make it difficult for Treasury to 

impose surcharges in the case of any 

recoupment under the Act or to take 

enforcement actions if needed. In 

contrast, if an insurer on the NAIC’s 

Quarterly Listing of Alien Insurers is not 

in compliance with provisions of the 

Act, the insurer could suffer the 

consequences of losing its NAIC listing 

for poor character, which in turn could 

adversely affect its U.S. business 

operations. It is possible that a Federal 

agency could also revoke approval for 

noncompliance with provisions of the 

Act. However, the limited nature of a 

Federal agency’s approval authority 

could somewhat lessen the impact of 

any such action and Treasury has no 

authority to require such action by 

another federal agency. 

Comparability Among Federally 

Approved Insurers. Treasury strongly 

believes that all federally approved 

insurers should be treated in a similar 

manner that is consistent with the 

statute. For example, such consistency 

implies that the mandatory participation 

requirements of the Act should be 

applied to all federally approved 

insurers in a similar fashion. In that 

regard, Treasury would find it difficult 

to justify one group of federally 

approved insurers having broader access 

to the Program than the current interim 

final rule provides, while other groups 

stayed with the current approach in the 

interim final rule. 

Treasury has considered carefully the 

concerns raised by commenters 

regarding the interim final rule’s 

treatment of federally approved 

insurers. At this time, Treasury has 

decided that no changes to the rule are 

warranted. It appears that many of the 

insurers that have been approved by a 

Federal agency also qualify to 

participate in the Program based on 

other criteria. Treasury also notes that 

obtaining a listing on the NAIC’s 

Quarterly Listing of Alien Insurers is an 

option that insurers can employ if they 

are not satisfied with the treatment of 

federally approved insurers under the 

interim final rule. Obtaining such a 

listing would satisfy the concerns we 

noted above, while at the same time 

imposing limited burden on insurers. It 

is our understanding that perhaps the 

major obstacle to obtaining a listing is 

setting up the necessary trust fund.

Treasury will continue to evaluate 

this issue as the Program matures. While 

Treasury does not plan on making any 

changes to the treatment of federally 

approved insurers at this time, Treasury 

would be open to considering 

alternatives if the three key factors listed 

above ‘‘ ongoing data reporting 

requirements, ability to impose 

surcharges or take enforcement actions, 

and comparability among federally 

approved insurers—could be addressed. 

Other Insurer Criteria 

Under a separate notice of proposed 

rulemaking published at 68 FR 9814 

Treasury solicited public comment on 

whether the Secretary should prescribe 

other criteria for certain insurers 

pursuant to the authority provided by 

section 102(6)(C) and, if so, what criteria 

Treasury should prescribe. Specifically, 

Treasury solicited comment on whether 

criteria should be developed to prevent 

newly formed insurance companies 

from participating in the Program if 

such companies were established for the 

purpose of evading the Act’s deductible 

requirements. 

A few commenters raised concerns 

that developing such criteria could limit 

the development of new structures to 

provide terrorism risk insurance 

coverage. One commenter 

acknowledged the concerns raised by 

Treasury and supported the interim 

final rule’s treatment of the deductible 

requirements for newly formed 

insurance companies in section 

50.5(g)(2) as an appropriate safeguard. 

Another commenter suggested a set of 

general criteria that Treasury could look 

to as it considers this issue. As Treasury 

noted in the preamble to interim final 

rule, we are seeking to balance the goals 

of encouraging new sources of capital in 

the market for terrorism risk insurance 

while also maintaining the integrity of 

the Program. Treasury is not proposing 

any additional criteria at this time, but 

we will continue to monitor 

developments in the market for 

terrorism risk insurance and the 

market’s response to the Act. 

Treasury also solicited comments on 

whether additional criteria should be 

proposed for federally approved 

insurers. Some commenters suggested 

that additional financial criteria could 

be applied if necessary, while one 

commenter suggested that the Act does 

not give Treasury the authority to 

regulate insurance. Given that the final 

rule retains the interim final rule’s 

treatment of federally approved 

insurers, the scope of potential 

problems related to the financial 

integrity of such insurers is somewhat 

limited. Thus, Treasury is not proposing 

any additional criteria at this time, but 

we will continue to study and monitor 

this issue. 

F. Insurer Deductible (Section 50.5.g) 

The interim final rule incorporated 

the statutory definition of ‘‘insurer 

deductible’’ found in section 102(7) of 

the Act and set forth a procedure 

specifying how newly formed insurance 

companies would calculate their 

deductible under the Program. In 

particular, the interim final rule 

specified that for an insurer that came 

into existence after November 26, 2002, 

the insurer deductible will be based on 

data for direct earned premiums for the 

current Program Year. If the insurer has 

not had a full year of operations during 

the applicable Program Year, the direct 

earned premiums for the current 

Program Year will be annualized to 

determine the insurer deductible. 

The two commenters who addressed 

this issue both indicated support for 

Treasury’s determination that premiums 

for new insurers would be annualized in 

the calculation of their insurer 

deductible, and the language of the 

interim final rule is incorporated 

without change into the final rule. 

III. Procedural Requirements 

The Act established a Program to 

provide for loss sharing payments by the 

Federal Government for insured losses 

resulting from certified acts of terrorism. 

The Act became effective immediately 

upon the date of enactment (November 

26, 2002). Preemptions of terrorism risk 

exclusions in policies, mandatory 

participation provisions, disclosure and 

other requirements and conditions for 

federal payment contained in the Act 

applied immediately to those entities 

that come within the Act’s definition of 

‘‘insurer.’’ Treasury has issued and will 

be issuing additional regulations to 

implement the Program. This final rule 

provides critical information concerning 

the definitions of Program terms that 

lays the groundwork for Treasury’s 

implementation of the Program. No one 

can predict if, or when, an act of 

terrorism may occur. There is an urgent 

need for Treasury, as Program 

administrator, to lay the groundwork for 

Program implementation through 

regulations to provide clarity and 

certainty concerning which entities are 

required to participate in the Program; 

the scope and conditions of Program 

coverage; and other implementation 

issues that immediately affect insurers, 

their policyholders, State regulators and 

other interested parties. This includes 

the need to supplement, or modify as 

41264 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

necessary, the previously issued interim 

final rule. 

Accordingly, pursuant to 5 U.S.C. 

553(d)(3), Treasury has determined that 

there is good cause for the final rule to 

become effective immediately upon 

publication. 

This final rule is a significant 

regulatory action and has been reviewed 

by the Office of Management and 

Budget under the terms of Executive 

Order 12866. 

It is hereby certified that this final 

rule will not have a significant 

economic impact on a substantial 

number of small entities. The Act 

requires all licensed or admitted 

insurers to participate in the Program. 

This includes all insurers regardless of 

size or sophistication. The Act also 

defines property and casualty insurance 

to mean commercial lines without any 

reference to the size or scope of the 

commercial entity. Although the Act 

affects small insurers, the proposed rule 

also gives insurers flexibility in 

calculating their direct earned premium 

for policies that have both commercial 

and personal exposures, and it provides 

a safe harbor to exclude policies that 

have incidental coverage for commercial 

purposes. Accordingly, any economic 

impact associated with the proposed 

rule flows from the Act and not the 

proposed rule. However, the Act and the 

Program are intended to provide 

benefits to the U. S. economy and all 

businesses, including small businesses, 

by providing a federal reinsurance 

backstop to commercial property and 

casualty insurance policyholders and 

spreading the risk of insured loss 

resulting from an act of terrorism. 

The collection of information 

contained in § 50.8 of this final rule has 

been reviewed and approved by the 

Office of Management and Budget 

(OMB) in accordance with the 

requirements of the Paperwork 

Reduction Act (44 U.S.C. 3507(j)) under 

control number 1505–0190. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a valid control number 

assigned by OMB. 

This information is required in order 

for Treasury to determine whether an 

insurer has rebutted a presumption that 

the insurer exercises a controlling 

influence over the management or 

policies of another insurer. The 

collection of information is mandatory 

with respect to an insurer seeking to 

rebut a presumption. The estimated 

average burden associated with the 

collection of information in this final 

rule is 40 hours per respondent. 

Comments concerning the accuracy of 

this burden estimate and suggestions for 

reducing this burden should be directed 

to the Office of Financial Institutions 

Policy, Room 3160 Annex, Department 

of the Treasury, 1500 Pennsylvania 

Ave., NW., Washington, DC 20220 and 

to OMB, Attention: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503.

List of Subjects in 31 CFR Part 50 

Terrorism risk insurance.

Authority and Issuance

■ 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 means, with respect to 

an insurer, any entity that controls, is 

controlled by, or is under common 

control with the insurer. An affiliate 

must itself meet the definition of insurer 

to participate in the Program. 

(2) For purposes of paragraph (c)(1) of 

this section, an insurer has control over 

another insurer for purposes of the 

Program if: 

(i) The insurer directly or indirectly or 

acting through one or more other 

persons owns, controls, or has power to 

vote 25 percent or more of any class of 

voting securities of the other insurer; 

(ii) The insurer controls in any 

manner the election of a majority of the 

directors or trustees of the other insurer; 

or 

(iii) The Secretary determines, after 

notice and opportunity for hearing, that 

an insurer directly or indirectly 

exercises a controlling influence over 

the management or policies of the other 

insurer, even if there is no control as 

defined in paragraph (c)(2)(i) or (c)(2)(ii) 

of this section. 

(3) An insurer described in paragraph 

(c)(2)(i) or (c)(2)(ii) of this section is 

conclusively deemed to have control. 

(4) For purposes of a determination of 

controlling influence under paragraph 

(c)(2)(iii) of this section, if an insurer is 

not described in paragraph (c)(2)(i) or 

(c)(2)(ii) of this section, the following 

rebuttable presumptions will apply: 

(i) If an insurer controls another 

insurer under any State law, and at least 

one of the factors listed in paragraph (c) 

(4)(iv) of this section applies, there is a 

rebuttable presumption that the insurer 

that has control under State law 

exercises a controlling influence over 

the management or policies of the other 

insurer for purposes of paragraph 

(c)(2)(iii) of this section. 

(ii) If an insurer provides 25 percent 

or more of another insurer’s capital (in 

the case of a stock insurer), policyholder 

surplus (in the case of a mutual insurer), 

or corporate capital (in the case of other 

entities that qualify as insurers), and at 

least one of the factors listed in 

paragraph (c)(4)(iv) of this section 

applies, there is a rebuttable 

presumption that the insurer providing 

such capital, policyholder surplus, or 

corporate capital exercises a controlling 

influence over the management or 

policies of the receiving insurer for 

purposes of paragraph (c)(2)(iii) of this 

section. 

(iii) If an insurer, at any time during 

a Program Year, supplies 25 percent or 

more of the underwriting capacity for 

that year to an insurer that is a syndicate 

consisting of a group including 

incorporated and individual 

unincorporated underwriters, and at 

least one of the factors in paragraph 

(c)(4)(iv) of this section applies, there is 

a rebuttable presumption that the 

insurer exercises a controlling influence 

over the syndicate for purposes of 

paragraph (c)(2)(iii) of this section. 

(iv) If paragraphs (c)(4)(i) through 

(c)(4)(iii) of this section are not 

applicable, but two or more of the 

following factors apply to an insurer, 

with respect to another insurer, there is 

a rebuttable presumption that the 

insurer exercises a controlling influence 

over the management or policies of the 

other insurer for purposes of paragraph 

(c)(2)(iii) of this section: 

(A) The insurer is one of the two 

largest shareholders of any class of 

voting stock; 

(B) The insurer holds more than 35 

percent of the combined debt securities 

and equity of the other insurer; 

Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 41265

(C) The insurer is party to an 

agreement pursuant to which the 

insurer possesses a material economic 

stake in the other insurer resulting from 

a profit-sharing arrangement, use of 

common names, facilities or personnel, 

or the provision of essential services to 

the other insurer; 

(D) The insurer is party to an 

agreement that enables the insurer to 

influence a material aspect of the 

management or policies of the other 

insurer; 

(E) The insurer would have the 

ability, other than through the holding 

of revocable proxies, to direct the votes 

of more than 25 percent of the other 

insurer’s voting stock in the future upon 

the occurrence of an event; 

(F) The insurer has the power to 

direct the disposition of more than 25 

percent of a class of voting stock of the 

other insurer in a manner other than a 

widely dispersed or public offering; 

(G) The insurer and/or the insurer’s 

representative or nominee constitute 

more than one member of the other 

insurer’s board of directors; or 

(H) The insurer or its nominee or an 

officer of the insurer serves as the 

chairman of the board, chairman of the 

executive committee, chief executive 

officer, chief operating officer, chief 

financial officer or in any position with 

similar policymaking authority in the 

other insurer. 

(5) An insurer that is not described in 

paragraph (c)(2)(i) or (c)(2)(ii) of this 

section may request a hearing in which 

the insurer may rebut a presumption of 

controlling influence under paragraph 

(c)(4)(i) through (c)(4)(iv) of this section 

or otherwise request a determination of 

controlling influence by presenting and 

supporting its position through written 

submissions to Treasury, and in 

Treasury’s discretion, through informal 

oral presentations, in accordance with 

the procedure in § 50.8. 

(d) * * * 

(l) State licensed or admitted insurers.

For a State licensed or admitted insurer 

that reports to the NAIC, direct earned 

premium is the premium information 

for commercial property and casualty 

insurance coverage reported by the 

insurer on column 2 of the NAIC Exhibit 

of Premiums and Losses of the Annual 

Statement (commonly known as 

Statutory Page 14). (See definition of 

property and casualty insurance). 

(i) Premium information as reported 

to the NAIC should be included in the 

calculation of direct earned premiums 

for purposes of the Program only to the 

extent of commercial property and 

casualty coverage issued by the insurer 

against an insured loss under the 

Program.

(ii) Premiums for personal property 

and casualty insurance coverage 

(coverage primarily designed to cover 

personal, family or household risk 

exposures, with the exception of 

coverage written to insure 1 to 4 family 

rental dwellings owned for the business 

purpose of generating income for the 

property owner) or for insurance 

coverage for any loss that would not be 

an insured loss under the Program, 

should be excluded in the calculation of 

direct earned premiums for purposes of 

the Program. 

(iii) Personal property and casualty 

insurance coverage that includes 

incidental coverage for commercial 

purposes is primarily personal coverage, 

and therefore premiums may be fully 

excluded by an insurer from the 

calculation of direct earned premium. 

For purposes of the Program, 

commercial coverage is incidental if less 

than 25 percent of the total direct 

earned premium is attributable to 

commercial coverage. Property and 

casualty insurance coverage for any loss 

that would not be an insured loss under 

the Program that includes incidental 

coverage for an insured loss under the 

Program is primarily non-Program 

coverage, and therefore premiums may 

be fully excluded by an insurer from the 

calculation of direct earned premium. 

For purposes of the Program, coverage 

for an insured loss is incidental if less 

than 25 percent of the total direct 

earned premium is attributable to such 

coverage. 

(iv) If a property and casualty 

insurance policy covers both 

commercial and personal risk 

exposures, insurers may allocate the 

premiums in accordance with the 

proportion of risk between commercial 

and personal components in order to 

ascertain direct earned premium. If a 

property and casualty insurance policy 

covers risk exposures for both insured 

losses and losses that would not be 

insured losses under the Program, 

insurers may allocate the premiums in 

accordance with the proportion of risk 

between the insured loss and noninsured loss components in order to 

ascertain direct earned premium.

* * * * *

(f) Insurer means any entity, including 

any affiliate of the entity, that meets the 

following requirements: 

(1)(i) The entity must fall within at 

least one of the following categories: 

(A) It is licensed or admitted to 

engage in the business of providing 

primary or excess insurance in any 

State, (including, but not limited to, 

State licensed captive insurance 

companies, State licensed or admitted 

risk retention groups, and State licensed 

or admitted farm and county mutuals), 

and, if a joint underwriting association, 

pooling arrangement, or other similar 

entity, then the entity must: 

(1) Have gone through a process of 

being licensed or admitted to engage in 

the business of providing primary or 

excess insurance that is administered by 

the State’s insurance regulator, which 

process generally applies to insurance 

companies or is similar in scope and 

content to the process applicable to 

insurance companies; 

(2) Be generally subject to State 

insurance regulation, including 

financial reporting requirements, 

applicable to insurance companies 

within the State; and 

(3) Be managed independently from 

other insurers participating in the 

Program; 

(B) It is not licensed or admitted to 

engage in the business of providing 

primary or excess insurance in any 

State, but is an eligible surplus line 

carrier listed on the Quarterly Listing of 

Alien Insurers of the NAIC, or any 

successor to the NAIC; 

(C) It is approved or accepted for the 

purpose of offering property and 

casualty insurance by a Federal agency 

in connection with maritime, energy, or 

aviation activity, but only to the extent 

of such federal approval of commercial 

property and casualty insurance 

coverage offered by the insurer in 

connection with maritime, energy, or 

aviation activity; 

(D) It is a State residual market 

insurance entity or State workers’

compensation fund; or 

(E) As determined by the Secretary, it 

falls within any other class or type of 

captive insurer or other self-insurance 

arrangement by a municipality or other 

entity, to the extent provided in 

Treasury regulations issued under 

section 103(f) of the Act. 

(ii) If an entity falls within more than 

one category described in paragraph 

(f)(1)(i) of this section, the entity is 

considered to fall within the first 

category within which it falls for 

purposes of the Program.

* * * * *

(l) Property and casualty insurance

means commercial lines of property and 

casualty insurance, including excess 

insurance, workers’ compensation 

insurance, and surety insurance, and 

(1) Means commercial lines within 

only the following lines of insurance 

from the NAIC’s Exhibit of Premiums 

and Losses (commonly known as 

Statutory Page 14): Line 1—Fire; Line 

2.1—Allied Lines; Line 3—Farmowners 

Multiple Peril; Line 5.1—Commercial 

41266 Federal Register / Vol. 68, No. 133 / Friday, July 11, 2003 / Rules and Regulations 

Multiple Peril (non-liability portion); 

Line 5.2—Commercial Multiple Peril 

(liability portion); Line 8—Ocean 

Marine; Line 9—Inland Marine; Line 

16—Workers’ Compensation; Line 17—

Other Liability; Line 18—Products 

Liability; Line 19.3—Commercial Auto 

No-Fault (personal injury protection); 

Line 19.4—Other Commercial Auto 

Liability; Line 21.2—Commercial Auto 

Physical Damage; Line 22—Aircraft (all 

perils); Line 24—Surety; Line 26—

Burglary and Theft; and Line 27—Boiler 

and Machinery; and 

(2) Does not include: 

(i) Federal crop insurance issued or 

reinsured under the Federal Crop 

Insurance Act (7 U.S.C. 1501 et seq.), or 

any other type of crop or livestock 

insurance that is privately issued or 

reinsured (including crop insurance 

reported under either Line 2.1—Allied 

Lines or Line 2.2—Multiple Peril (Crop) 

of the NAIC’s Exhibit of Premiums and 

Losses (commonly known as Statutory 

Page 14); 

(ii) Private mortgage insurance (as 

defined in section 2 of the Homeowners 

Protection Act of 1988 (12 U.S.C. 4901) 

or title insurance; 

(iii) Financial guaranty insurance 

issued by monoline financial guaranty 

insurance corporations; 

(iv) Insurance for medical 

malpractice; 

(v) Health or life insurance, including 

group life insurance; 

(vi) Flood insurance provided under 

the National Flood Insurance Act of 

1968 (42 U.S.C. 4001 et seq.) or 

earthquake insurance reported under 

Line 12 of the NAIC’s Exhibit of 

Premiums and Losses (commonly 

known as Statutory Page 14); or 

(vii) Reinsurance or retrocessional 

reinsurance.

* * * * *

■ 4. Section 50.8 is added to Subpart A 

to read as follows:

§ 50.8 Procedure for requesting 

determinations of controlling influence. 

(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, DC 20220, giving a detailed 

explanation of the facts and 

circumstances and the reason why an 

interpretation is needed. A requester 

should segregate and mark any 

confidential business or trade secret 

information clearly. Treasury in its 

discretion will provide written 

responses to requests for interpretation. 

Treasury reserves the right to decline to 

provide a response in any case. Except 

in the case of any confidential business 

or trade secret information, Treasury 

will make written requests for 

interpretations and responses publicly 

available at the Treasury Department 

Library, on the Treasury Web site, or 

through other means as soon as 

practicable after the response has been 

provided. Treasury will handle any 

subsequent request for information that 

had been designated by a requester as 

confidential business or trade secret 

information in accordance with 

Treasury’s Freedom of Information Act 

regulations at 31 CFR Part 1.

Dated: July 7, 2003. 

Wayne A. Abernathy, 

Assistant Secretary of the Treasury.

[FR Doc. 03–17585 Filed 7–10–03; 8:45 am] 

BILLING CODE 4810–25–P

DEPARTMENT OF THE TREASURY

Fiscal Service 

Bureau of the Public Debt 

31 CFR Part 348 

Regulations Governing Depositary 

Compensation Securities

AGENCY: Bureau of the Public Debt, 

Fiscal Service, Treasury.

ACTION: Final rule.

SUMMARY: The Bureau of the Public Debt 

(Public Debt) is issuing regulations 

governing Depositary Compensation 

Securities that will be used to 

compensate financial agents for work 

performed on behalf of the Department 

of the Treasury.

EFFECTIVE DATE: July 11, 2003.

ADDRESSES: You can download this final 

rule at the following World Wide Web 

address: http://

www.publicdebt.treas.gov. You may also 

inspect and copy this rule at: Treasury 

Department Library, Room 1428, Main 

Treasury Building, 1500 Pennsylvania 

Ave., NW., Washington, DC 20220. 

Before visiting the library, you must call 

(202) 622–0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: For 

information contact Ann Fowler in the 

Office of the Chief Counsel, Bureau of 

the Public Debt, at 304–480–8692, or at 

CHCOUNSEL@bpd.treas.gov.

SUPPLEMENTARY INFORMATION: The 

former 31 CFR part 348 is being 

reinstituted and revised to provide for