Under TRIA, Treasury is responsible for reimbursing insurers for a portion of terrorism losses under certain conditions. Payments are triggered when (1) the Secretary of the Treasury certifies that terrorists acting on behalf of foreign interests have carried out an act of terrorism and (2) aggregate insured losses for commercial property and casualty damages exceed $5,000,000 for a single event. TRIA specifies that an insurer is responsible (i.e., will not be reimbursed) for the first dollars of its insured losses—its deductible amount. TRIA sets the deductible amount for each insurer equal to a percentage of its direct earned premiums for the previous year. Beyond the deductible, insurers also are responsible for paying a percentage of insured losses. Specifically, TRIA structures pay-out provisions so that the federal government shares the payment of insured losses with insurers at a 9:1 ratio—the federal government pays 90 percent of insured losses and insurers pay 10 percent—until aggregate insured losses from all insurers reach $100 billion in a calendar year (see fig. 1). Thus, under TRIA’s formula for sharing losses, insurers are reimbursed for portions of the claims they have paid to policyholders. Furthermore, TRIA then releases insurers who have paid their deductibles from any further liability for losses that exceed aggregate insured losses of $100 billion in any one year. Congress is charged with determining how losses in excess of $100 billion will be paid. TRIA also contains provisions and a formula requiring Treasury to recoup part of the federal share if the aggregate sum of all insurers’ deductibles and 10 percent share is less than the amount prescribed in the act—the “insurance marketplace aggregate retention amount.” TRIA also gives the Secretary of the Treasury discretion to recoup more of the federal payment if deemed appropriate. Commercial property-casualty policyholders would pay for the recoupment through a surcharge on premiums for all the property-casualty policies in force after Treasury established the surcharge amount; the insurers would collect the surcharge. TRIA limits the surcharge to a maximum of 3 percent of annual premiums, to be assessed for as many years as necessary to recoup the mandatory amount. TRIA also gives the Secretary of the Treasury discretion to reduce the annual surcharge in consideration of various factors such as the economic impact on urban centers. However, if Treasury makes such adjustments, it has to extend the surcharges for additional years to collect the remainder of the recoupment. Treasury is funding TRIP operations with “no-year money” under a TRIA provision that gives Treasury authority to utilize funds necessary to set up and run the program. The TRIP office had a budget of $8.97 million for fiscal year 2003 (of which TRIP spent $4 million), $9 million for fiscal year 2004, and a projected budget of $10.56 million for fiscal year 2005—a total of $28.53 million over 3 years. The funding levels incorporate the estimated costs of running a claims-processing operation in the aftermath of a terrorist event: $5 million in fiscal years 2003 and 2004 and $6.5 million in fiscal year 2005, representing about 55 to 60 percent of the budget for each fiscal year. If no certified terrorist event occurred, the claims-processing function would be maintained at a standby level, reducing the projected costs to $1.2 million annually, or about 23 percent of the office’s budget in each fiscal year. Any funds ultimately used to pay the federal share after a certified terrorist event would be in addition to these budgeted amounts. More than a year after TRIA’s enactment, Treasury and insurance industry participants have made progress in implementing and complying with its provisions, but Treasury has yet to fully implement the 3-year program. Treasury has issued regulations (final rules) to guide insurance market participants, fully staffed the TRIP office, and started collecting data and performing studies mandated by TRIA. However, Treasury has yet to make the claims payment function operational and decide whether to extend the “make available” requirement through 2005. In its advisory role, NAIC has effectively assisted Treasury in drafting guidance and regulations and planning mandated studies. Insurance companies are also generally complying with TRIA requirements by making changes to their operations, such as revising premiums and policy terms. However, insurers do not yet know whether they will be required to “make available” terrorism insurance for policies issued or renewed in 2005. Additionally, they have voiced concerns about the time Treasury might take to certify an act of terrorism as eligible for reimbursement under TRIA and process and pay claims after an act was certified. To implement TRIA and make TRIP functional, Treasury has taken numerous regulatory and administrative actions, which encompass rulemaking, creating a new program office, and collecting and analyzing data. To date, Treasury has issued three final rules and one proposed rule, which provide uniform definitions of TRIA terms, explain disclosure requirements, determine which insurers are subject to TRIA, and establish a basic claims-paying process. Treasury has also created and staffed the TRIP office, which will oversee claims processing, payment, and auditing. Finally, Treasury has completed a TRIA-mandated assessment and is working on other reporting and data collection mandates. After TRIA became effective, Treasury officials said they moved quickly to provide immediate guidance to the insurance industry on time-sensitive requirements. Because the process required to issue final regulations would take a few months, Treasury published four sets of interim guidance in the Federal Register between December 2002 and March 2003. The first three sets of interim guidance were in a question-and-answer format to provide quick answers to specific questions, and the fourth interim guidance contained regulatory language. The purpose of the interim guidance was to help insurance companies and other entities determine if they were subject to TRIA and to help insurers quickly modify forms and policies and adjust operations by providing definitions and program parameters. Interim guidance in December 2002 covered requirements for disclosure (e.g., notification to policyholders), the “make available” provision, and which lines of property-casualty insurance were subject to TRIA. For example, the guidance explained that under TRIA insurers are required to send notices to their policyholders containing information about the availability and cost of terrorism insurance and the 90 percent federal share. Subsequent guidance provided information on topics such as how certain insurers should allocate direct earned premiums (which are used to determine what their deductibles would be), alternative methods for complying with TRIA’s disclosure requirement, and the application of TRIA to non-U.S. insurers. The interim guidance remained in force while Treasury drafted final rules. In addition to interim guidance, Treasury also published two interim final rules and a proposed rule. The first interim final rule laid the foundation of the program and key definitions for terms used in TRIA. The second interim final rule covered disclosure and “make available” requirements. The proposed rule addressed “state residual market insurance entities” and “state workers compensation funds”—two types of state-created entities that will be discussed below. The interim final rules had the force of law until they were superseded by final rules. As a result, Treasury officials stated, had a terrorist act occurred before final rules took effect, a regulatory structure would have been in place to allow a faster response than would otherwise have been possible. As of March 1, 2004, Treasury’s interim guidance, interim final rules, and proposed rule had been superseded by three final rules. The first final rule was published in the Federal Register on July 11, 2003, and addressed basic definitions of words used in TRIA, such as “insurer” and “property and casualty insurance.” Treasury officials said they completed this regulation first to provide a foundation for subsequent regulations, which would use these terms frequently. Although TRIA provided definitions for these terms, TRIA also specified that state insurance regulations be preserved where possible. According to Treasury officials, Treasury thus devoted much effort to ensure that TRIA’s definitions of property-casualty insurance terms would be consistently applied across jurisdictions—a difficult task because Treasury did not have existing uniform or consistent definitions of the terms used in TRIA. For example, the term “commercial property-casualty insurance” includes slightly different lines of insurance in each state’s definition. Treasury decided to use information that insurers submitted in annual statements to NAIC as the basis for defining property-casualty insurance. On October 17, 2003, Treasury issued its second final rule on disclosure and “make available” requirements for insurers (see fig. 2). These time-sensitive requirements, which insurers had to meet to be eligible to receive federal reimbursement for terrorist losses, had originally been spelled out in the interim final rule. Among other things, the rule stated that insurers that had used NAIC’s model disclosure forms to notify their policyholders about TRIA and terrorism insurance premiums had complied with TRIA disclosure requirements. The rule also clarified that insurers did not have to make available coverage for certain risks if the insurer’s state regulator permitted the exclusion of those risks and the insurer had made the same exclusion from coverage on all other types of policies. For example, Treasury’s explanations in the rule specifically used policy exclusions for NBC events to illustrate this point. (We discuss these exclusions in more detail later in this report.) The third final rule, also issued on October 17, 2003, instructed two kinds of insurers that are typically created by state governments—“state residual market insurance entities” and “state workers’ compensation funds”—on how TRIA provisions apply to them (see fig. 2). States establish residual market insurance entities to assume risks that are generally unacceptable to the normal insurance market, and state workers’ compensation funds are state funds established to provide workers injured on the job with guaranteed benefits. The other insurance companies operating in the state usually fund these state-created entities.