March 2, 2004 

Dear Ms. L: 

I am writing in response to your letter in which you requested interpretations 

concerning the application of the Terrorism Risk Insurance Act of 2002 (the “Act” or 

“TRIA”)1

 and Treasury’s regulations implementing the Act to three questions raised by 

your clients, who include captive insurers.2

 

I. Interpretation of 31 C.F.R. § 50.5(d)(1)(iii) 

In your first inquiry, you have presented the following question: if a captive 

elects to exclude any direct earned premium in the calculation of its insurer deductible (as 

permitted under Treasury regulations for the types of hybrid policies described in your 

letter), does the captive still receive direct earned premium for purposes of being defined 

as an “insurer” under the Terrorism Risk Insurance Act? You correctly state that a 

captive insurer may decide not to include any of its direct earned premium in calculating 

its insurer deductible if the captive: (1) does not include the premium primarily 

attributable to non-Program insurance coverage (required to be excluded under 31 C.F.R. 

§50.5(d)(1)(ii)); and (2) opts to exclude the remaining premium attributable to the 

policies’ incidental commercial property and casualty insurance because it is less than 25 

percent of the total direct earned premium (see §50.5(d)(1)(iii)).3

 

 

 To meet the definition of “insurer” under the Act, an entity must “. . . 

receive direct earned premiums for any type of commercial property and casualty 

coverage. . . “.4

 Direct earned premium is defined as “. . . direct earned premium for 

property and casualty insurance issued by any insurer for insurance against losses 

[including losses from an act of terrorism] occurring at the locations described in section 

102(5)(A) and (B) of the Act.”5

 By their terms, these definitions include in the definition 

of “insurer” under the Act those entities that receive premiums for commercial property 

and casualty insurance, including from incidental commercial property and casualty 

 1

 P.L. 107-297, 116 Stat. 2372, 15 U.S.C. § 6701, et seq. 

2

 This response is being issued pursuant to 31 C.F.R. §50.9, which sets forth a procedure whereby 

persons actually or potentially affected by the Act or regulations may request an interpretation. 

3 Treasury adopted its rule permitting the exclusion of premium attributable to incidental 

commercial property and casualty 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. 

4

 P.L. 107-297, Sec. 102(6)(B); 31 C.F.R. §50.5(f)(2). 

5

 P.L. 107-297, Sec. 102(4); 31 C.F.R. §50.5 (published at 68 Fed. Reg. 48,280 (Aug. 13, 2003). 
insurance. No matter how an entity may elect to treat its direct earned premiums for 

purposes of calculating its insurer deductible under Treasury regulations, it would still 

qualify as an “insurer” under the Act (assuming the Act’s other criteria are met) because 

it receives direct earned premium within the meaning of the Act’s definition of an 

“insurer”. 

As you noted in your letter, in calculating its insurer deductible under the 

Program,

6

 an insurer can elect to exclude the direct earned premium it receives from the 

sale of incidental commercial property and casualty insurance coverage that is provided 

within a policy that also provides – primarily – personal property and casualty or nonProgram insurance.7

 However, we would like to emphasize that if an insurer elects to 

avail itself of this option (as permitted by §50.5(d)(1)(iii)), Treasury expects that the 

insurer should clearly be able to document how premium income was allocated among 

various coverages. 

II. Proposed Stand-Alone Terrorism Policy 

Your second inquiry addresses the issue of captives being formed or utilized to 

provide coverage only for “insured losses”(also sometimes referred to as TRIA-only 

coverage).8

 

In a notice of proposed rulemaking published at 68 Fed. Reg. 9,815 (Feb. 28, 

2003), Treasury solicited public comment on whether it should prescribe other criteria for 

certain insurers pursuant to its authority under section 102(6)(C) of the Act. In particular, 

Treasury asked whether criteria should be developed to prevent newly formed insurance 

companies from participating in the Program if these companies were established for the 

purpose of evading the Act’s deductible requirements. Treasury explained that 

“preventing evasion of insurer deductible requirements by special purpose entities formed 

to provide terrorism risk only coverage” was one objective additional criteria would 

serve.9

 In its final rule published at 68 Fed. Reg. 41,250 (Jul. 11, 2003), Treasury 

explained that it was not proposing additional criteria at that time but that it would 

continue to monitor developments in the market for terrorism risk insurance and the

market’s response to the Act.10 

 6

 Insurer deductible is based on a percentage of the insurer’s previous year’s direct earned 

premium. See 31 C.F.R. §50.5(g). 

7

 31 C.F.R. §50.5(d)(1)(iii). 

8

 One article has described this as a captive strategy to get around the Act. See Terrorism Act 

Presents New Questions for Captive Market, Bestwire (June 3, 2003). 

9

 Id. at 9,815. 

10 Id. at 41263. 

2
Your letter and others that we have received continue to raise issues surrounding 

the strategic use of captives as a means of avoiding the requirements of the Act and 

implementing regulations.11 As a result, Treasury is now again considering future 

rulemaking to address this issue and several related issues being raised vis-à-vis

captives.12 

The post-enactment formation or utilization of a captive insurer that will only 

provide stand-alone, single-risk TRIA-only coverage for losses from acts of terrorism

raises questions regarding the integrity of the Program. We believe that an entity 

considering forming a captive insurer for stand-alone, single risk terrorism insurance 

should be strongly cautioned and advised against undertaking such proposed action if it is 

doing so in order to avoid the Act’s deductible requirements. 

III. Eligibility for Payment Question 

Your third inquiry relates to the written request by one of your clients, NNN, an 

association of nonprofit organizations in California, for an interpretation as to whether a 

specified program would be eligible for federal payments under TRIA. That request is 

currently under consideration by Treasury. 

Thank you for your inquiry. For additional information or if you have any 

specific questions, please call the Program office at 202-622-6770. 

* * * 

This response addresses the application of the Act and regulations to the specific 

situation set forth in your request, as you have represented the facts to Treasury. If there 

is a change in any of the facts or assumptions presented, and such facts or assumptions 

are material to a conclusion presented in this response, then the requestor may not rely on 

that conclusion generally or as support for any proposed or subsequent activity. This 

response is provided by the Terrorism Risk Insurance Program as a means of stating its 

current interpretation of the Act and regulations. The Program may revise or revoke this 

interpretation upon its own initiative or upon the enactment of amendments to the Act or 

regulations. 

TERRORISM RISK INSURANCE PROGRAM

___________________________________ 

Jeffrey S. Bragg 

Executive Director 

 11 We also noticed that one of your clients recently presented “strategies for captives to avoid the 

Act’s mandatory participation provisions or to minimize potential post terrorism Act assessments on the 

captive” at a recent seminar. 

12 Under section 102(6)(C) of the Act, the Secretary may reasonably prescribe other criteria that an 

entity must meet to qualify as an “insurer” under the Program. 

3