December 1, 2003 

Dear Mr. M: 

This letter is written in response to your recent letter in which you requested an 

interpretation concerning the application of the Terrorism Risk Insurance Act of 2002 

(the “Act”) and Treasury’s regulations implementing the Act, to the calculation of an 

insurer’s deductible once an insurer is no longer an “affiliate” of other insurers.1

Background 

As specified by the Act and the implementing regulations, the amount of federal 

payment for an insured loss resulting from a certified act of terrorism is to be determined 

based upon insurance company deductibles and excess loss sharing with the Federal 

Government. An insurer’s deductible is calculated based on a percentage of the value of 

direct earned premiums collected over certain statutory periods.2

 Once an insurer has met 

its individual deductible, the federal payments cover 90 percent of insured losses above 

the deductible, subject to an annual industry-aggregate insured loss limit of $100 billion. 3 

In calculating its direct earned premium, an insurer must also include the direct 

earned premium of the insurer’s “affiliates.” 4 The direct earned premium of the affiliated 

insurers is combined and used to calculate one deductible that must be jointly or severally 

met by the affiliated insurers before the Federal Government shares in compensating the 

insurer for the insured loss.

Questions Presented 

 

You have asked for an interpretation concerning how an insurer calculates its 

direct earned premium after an insurer disaffiliates from a group of insurers. You have 

used the example of a subsidiary “spinning off” from its parent company. The questions 

presented are as follows: Will the now-disaffiliated insurer’s deductible be based on the 

affiliated group’s combined, prior year’s direct earned premium because during that 

previous year the insurer was part of the affiliated group of insurers or will the insurer’s 

deductible be based on its own individual, prior year’s direct earned premium? 

1

 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. 

2

 See §102(7) of the Act; see also 31 C.F.R. §50.5(g). 

3

 See §103(e)(2) of the Act. 

4

 See generally, 68 FR 41250 (Jul. 11, 2003); see also §102(2), (4) and (6)(“The term ‘insurer’ 

means any entity including any affiliate thereof – "); 31 C.F.R. §50.5(c)(1), (d) and (f).

 
Discussion 

In such a circumstance as presented, assuming that the insurer has sufficiently 

divorced itself from the control shared with its former affiliates, it is Treasury’s current 

view that the insurer’s deductible would be based on its own individual prior year’s direct 

earned premium. For purposes of determining an insurer’s direct earned premium and its 

calculation of its deductible, Treasury will likely examine an insurer’s affiliations, if any, 

as of the date when an act of terrorism occurs (which may be different from when the act 

of terrorism is certified). Treasury’s examination will depend on the facts and 

circumstances surrounding the divestiture to ensure that the corporate transaction was not 

done solely for the purpose of circumventing the purposes of the Act and regulations. 

* * * 

 Treasury reserves the right to revise the view expressed in this letter when 

presented with an actual situation, upon its own initiative, or upon the enactment of 

amendments to the Act or regulations. 

Dated: December 1, 2003 

TERRORISM RISK INSURANCE PROGRAM 

___________________________________ 

Jeffrey S. Bragg 

Executive Director