FROM THE OFFICE OF PUBLIC AFFAIRS

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Slide 1: Introduction

Slide 2:

Good morning and thank you for the opportunity to speak to you this morning on Treasury’s progress and plans for implementing the Terrorism Risk Insurance Act of 2002, otherwise referred to as TRIA.

On November 26, 2002, President Bush signed TRIA into law.

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

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

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

Slide 3:

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

• Providing coverage for commercial lines P&C losses including workers’ compensation.

• Coverage is triggered when the Secretary of the Treasury in consultation with the Secretary of State and the Attorney General certifies that an act of terrorism carried out by on behalf of a foreign interest has occurred:

• This terrorism generated loss must be greater than $5M

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

Slide 4:

One of the first things that had to be defined under the act was what constitutes a P&C insurer.

Although this was task more difficult than it first appeared to be “Insurer” for purposes of the act is any entity that is:

Licensed or admitted for primary or excess insurance in any state

A surplus lines carrier on the quarterly NAIC listing of alien insurers

Approved by a federal agency in connection with maritime, energy, or aviation activity

A State residual market or workers compensation fund

Altogether well over 2000 insurance companies are participating in the program.

But understandably programs with current federal exposure like the National Flood Insurance program are not included.

Also insurance products including assumed reinsurance, health and life insurance and for now group life insurance are excluded from the program.

Slide 5:

Like any program there are restrictions.

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

• The Federal Governments share under the program is equal to 90% of that portion of insured losses that exceed the insurer deductible.

• While there is a cap on total insured losses: if total losses exceed the cap Congress will determine the procedures for and source of payments for those excess losses.

• The program is scheduled to end on December 31, 2005

(Cite Riot Reinsurance Crime Insurance experience)

Slide 6:

There are provisions under the act whereby the Secretary can recoup certain government payments

Mandatory recoupment is triggered whenever there is a loss and the insurance industry paid losses are less than that year’s industry retention.

The annual industry retention is equal to the lesser of a fixed dollar amount or the aggregate insured losses which is defined as all losses associated with an act of terrorism that are within an insurer’s deductible and the 10% of insured loss quota share.

Under mandatory recoupment The Secretary will establish Terrorism Loss Risk Sharing Premiums of up to a 3% surcharge on all commercial policy premiums

In addition The Secretary can depending on economic conditions impose an additional discretionary recoupment program whereby additional surcharges on insurance premiums can be collected.

Slide 7:

To illustrate lets assume a loss covered by the program during the third year of the program of $20B. This Loss is greater than the insurance industry’s maximum aggregate retention that year of $15B.

Further assume that 100 insurance companies were exposed to that loss and that their collective direct earned premiums totaled $20B.

The third year deductible of 15% equals $3B for these 100 companies and their 10% quota share equals another $1.7B making the insurer’s share of the total paid losses for the companies involved $4.7B

Under this example Treasury would require all companies covered under the program to impose up to a 3% premium surcharge on all policy holders until an additional $10.3B had been recouped. This spreading of the risk allows The Treasury Department to recover government losses paid up to the insurance industry’s maximum aggregate retention.

Additionally depending on economic considerations the Secretary of the Treasury has discretionary authority to impose additional recoupment surcharges and could recoup up to the entire $20B loss.

Slide 8:

The Terrorism Risk Insurance Program or T.R.I.P. is itself under Treasury’s Department for Domestic Finance (headed by Under Secretary Peter Fisher) and the Office of Financial Institutions (headed by Assistant Secretary Wayne Abernathy).

TRIP’s responsibilities include all of the operational functions necessary to effectively implement and manage the program, including all claims management and processing functions, as well as all auditing functions

TRIP is in essence the insurance company created by the new law.

However 2 additional Treasury offices play an important part in the program.

Treasury’s Office of Economic Policy will be conducting studies associated with coverage issue under TRIA and the overall effectiveness of the program.

The office of Financial Institutions Policy will take the lead in promulgating rules and regulations.

TRIP will work closely with both offices as we coordinate our activities

Slide 9:

Already substantial progress has been made in implementing the program

The Office of Financial Institutions Policy has been extremely active in implementing the regulations necessary to support the new act

• They have issued
• 4 interim guidance notices
• 2 interim final rules
• 1 notice of proposed rulemaking
• A final rule.

Slide 10:

The final rule published in the federal register on July 11 set forth key definitions that Treasury will use in implementing the program.

Among other things this rule addresses:

• Guidance on the Lines of Insurance covered under the act
• Which entities are eligible for participation
• Control and affiliation issues

The Insurance industry generally and the OII specifically have been very helpful in representing your views to the Treasury Department on these and other issues. However I urge all of you to review these regulations closely to make certain you are in compliance with the act and can take advantage of this important federal protection.

Slide 11:

One of the most debated issues in the new regulations was the definitions of affiliate and what constitutes control. The issue is important when it comes to determining the appropriate deductible for any affiliated insurance group.

Conclusive Control Exists

• if an insurer has power to vote 25% or more of any class of voting securities of the other insurer.

• if an insurer controls the election of a majority of the Directors or Trustees of the other insurer.

Presumptive Control Exists

• If the Secretary of the Treasury determines that an insurer exercises a controlling influence over another insurer.

• In determining presumptive control The Secretary will consider approximately 11 other factors outlined in the regulations the presence of any 2 leading to a determination of presumptive control

Slide 12:

We can however gain some comfort in the fact that these rules envision that there will be some confusion over issues like the definition of an insurer or what constitutes controlling interest.

We have received many questions on these and many other topics. So if after reviewing these regulations in some detail you still have questions you may request an interpretation of the regulations as they apply to your specific situation.

In submitting your request it is not necessary to compose a lengthy dissertation and we will make every effort to respond to your issues in a timely manner

Slide 13:

The ink is not yet dry on there final rules and we are already working to finalize a second set of rules which will address such issues as:

• Make available requirements
• Disclosure requirements
• State residual markets

Unfortunately this process is really never ending. Thousands of pages of rules, definitions, procedures, and regulations will be drafted, debated, and finalized over the next 3 years. And believe me there are still many issues to deal with.

Slide 14:

Even though much has been accomplished, considerable, considerable work remains. Many in the industry have expressed concerns over such program issues as:

• Adverse selection
• Continued lack of reinsurance availability
• Huge exposures particularly in worker’s compensation
• Availability/Affordability

In fact most of these issues have been volatile at various and numerous times in the past. And TRIA was passed in part to address them. These issues are in fact characteristic of other past Federal Insurance programs.

I believe that over time the free market will help solve these problems while TRIA contributes over time to help build capacity and stabilize the market.

Slide 15:

Right now, what keeps me awake at night are operational issues. We have a huge amount of work ahead of us and not very much time to accomplish it.

In addition to having a tremendous amount to accomplish to get our program up and running we have also had to put emergency procedures in place so that should there be a loss before we are fully operational we will be able to respond to that loss.

In essence this means working on a duel approach to make certain we are prepared.

So as we go about implementing all of issues you see before you and more let me describe the last bullet on the slide in more detail.

Through out my career both in the private sector (with PMSC, IMSG and REM) and with my government service I have been a strong advocate of outsourcing functions that can be better handled by others with more experience and expertise.

I have also where possible created partnerships between the government and private sector insurance industry which draws on the strengths of both entities to create a more successful program. That was why we created the Write Your Own program for the National Flood Insurance Program many years ago.

Therefore it should come as no surprise that in implementing this program we will not be creating a huge infrastructure.

Rather we will establish a virtual company that permits us to form new partnerships with the private insurance sector, harnessing that Insurance Industry’s talents and skills to make this an effective streamlined operation.

Slide 16

In addition to the overall operational issues we just discussed we also know there are many specific claims issues to deal with including the speed with which we will be able to reimburse insures all the way down the list to the mechanisms by which we will audit our own payments.

Hopefully it will come as good news to you that we intend that claims made under the program will be processed and paid in manner highly consistent with what you now experience with the reinsurance industry.

In implementing all of the requirements necessary to pass our own audits, as well as the as sure as you are sitting here expected GAO audits, we will be mindful of current insurance industry practices standards and needs. We will do our best to meet those needs and protect the people’s assets without overreaching.

Conclusion:

Ladies and gentlemen like all of you I sincerely hope and pray that this program will never be tested. But with your help we can at least try to be prepared should our nation ever again be required to call upon our industry to respond to the needs of our insured’s

Once again I look forward to working with you on this new venture and in closing thank you for future support and your time today

Related Documents:

• Terrorism Risk Insurance Program Slides