FROM THE OFFICE OF PUBLIC AFFAIRS January 29, 2003KD-3810 The Honorable Peter R. Fisher Under Secretary of the Treasury for Domestic Finance before the Worldwide Conventions and Business Forums Successfully Managing Terrorism Insurance Risk Westin New York at Times Square January 29, 2003 Implementing the Terrorism Risk Insurance Act of 2002 Good afternoon and thank you for inviting me to speak today on Treasury’s progress and plans for implementing the Terrorism Risk Insurance Act of 2002. President Bush worked hard to enact a Federal backstop for terrorism risk insurance. The market for terrorism risk insurance was severely disrupted by the events of September 11, 2001. Reinsurers had made clear that they were no longer going to cover terrorism risk or that the cost of limited terrorism coverage would be very expensive. Such widespread dislocations in insurance markets had a negative impact on businesses’ ability to finance economic activity, presenting a combination of higher insurance costs and higher financing costs associated with inadequate insurance coverage. On November 26, 2002, the President signed into law the Terrorism Risk Insurance Act (TRIA) of 2002. TRIA became effective immediately, which meant that terrorism exclusions on existing insurance policies were removed and all policy holders had the ability to secure coverage for terrorism risk. TRIA establishes a temporary Federal Program of shared public and private compensation for insured commercial property and casualty losses resulting from acts of terrorism. We need your help to make this Program work, to make terrorism risk insurance available to all property owners at reasonable rates. Key Features of TRIA TRIA effectively places the Federal government temporarily in the terrorism risk reinsurance business as the Program will sunset on December 31, 2005. The Federal reinsurance backstop for terrorism risk insurance established under TRIA is based on the concept of an insurance company deductible and excess loss sharing with Federal government. An insurance company must have suffered insured losses from acts of terrorism equal to its deductible before a claim with the Treasury can be filed. Once an insurance company has met its deductible, the Treasury will cover 90 percent of the losses above an insurance company’s deductible. Requiring insurance companies to retain a portion of terrorism risk – to “have skin in the game” – is important for maintaining underwriting discipline and allocating risk appropriately. An insurance company’s deductible will also increase throughout the life of the Program. More specifically, in Program Year 1 (i.e., calendar year 2003) an insurance company’s deductible would be equal to 7 percent of its direct earned premiums for commercial property and casualty insurance in calendar year 2002. The percentage of direct earned premiums used to calculate an insurance company’s deductible will rise to 10 percent in the second year of the Program, and to 15 percent in the last year of the Program. This increase in an insurance company’s deductible over the life of the Program is designed to phase out Federal government involvement and allow for a build-up of private sector capacity to insure against terrorism risk. Another key aspect of TRIA is the authority for the Treasury to recoup Federal payments under the Act via policyholder surcharges. There are both mandatory and discretionary aspects of the Treasury’s recoupment authority. The mandatory recoupment provisions are based on the concept of an “insurance marketplace aggregate retention” amount, which sets forth the amount of losses the insurance industry must absorb in any given year. The maximum “insurance marketplace aggregate retention” increases in each year of the Program, going from $10 billion in the first year of the Program to $15 billion in the final year of the Program. The Treasury also has the discretion to seek further recoupment based on consideration of specific factors described in TRIA. The maximum amount of any potential policyholder surcharge that can be imposed is 3 percent per year. Other key provisions of TRIA: • Limit the definition of “act of terrorism” to include only acts of terrorism that are related to foreign sources; Implementation Goals The Treasury has been guided by a number of goals as we have moved forward with implementing the Program. First, we have strived to implement TRIA in a manner that is fair and easily understood by all parties. In that regard we have tried to develop an approach that treats comparably all insurers that are required to participate in the Program. We have also tried to set forth a structure that provides the necessary information to policyholders in a useful and efficient manner. Second, we have relied as much as possible on the state insurance regulatory structure. Insurance is regulated by the states pursuant to the McCarran-Ferguson Act and, with the exception of certain programs, there is no Federal insurance regulatory authority as is the case with other financial institutions. We have been working closely with the National Association of Insurance Commissioners (NAIC) in implementing TRIA, and as part of this effort the NAIC has established a special task force to assist us. Third, we have sought to allow insurers to participate in the Program as part of their normal course of business. While TRIA requires insurers to meet certain requirements as part of participating in the Program – for example providing disclosures to policyholders and making available terrorism insurance coverage – we have tried to stress that insurers should incorporate these requirements into their normal business operations as much as possible. We have tried to strike what we believe is the appropriate balance between implementing TRIA’s mandated requirements on insurance companies in the most efficient way, while at the same time providing policyholders with the necessary information. Implementation Process Soon after TRIA was signed into law, the Treasury received numerous implementation questions from individuals, insurance companies, state regulators, and various trade groups. In deciding how to address these questions, we prioritized our efforts by focusing on the questions that were most common and most basic to the immediate implementation of the Program. In making these decisions we also worked closely with the NAIC. To assist the insurance industry in complying with TRIA, the Treasury has issued three Interim Guidance notices. Interim Guidance provides the Treasury the ability to respond promptly to implementation difficulties and to prevent confusion prior to the issuance of formal regulations. On January 22, we issued our third Interim Guidance, which addressed: first, the timing and method of satisfying the required disclosures; second, further clarification on how entities are to certify compliance with the disclosure requirements; and third, questions concerning non-U.S. insurer participation in the Program. Interim Guidance issued by the Treasury can be used by insurers in complying with the requirements of TRIA prior to the issuance of regulations, and such guidance remains in effect until superceded by regulations or subsequent notice. Regulations At the same time that we have been working on Interim Guidance, we also have been hard at work drafting regulations. As part of that process, the Treasury will be turning previously issued Interim Guidance into regulations and addressing new issues associated with the implementation of TRIA. Insurers and other interested parties will have an opportunity to submit formal comments on these regulations. We plan for the first regulation issued by the Treasury to set forth the structure of TRIA and clarify definitions used in the Act. Many of these definitions provide the key parameters for participation under the Program, such as the definition of insurer, insured loss, and property and casualty insurance. Again, comments will be requested on these and other issues. The regulations that follow will address other key issues of TRIA: • Procedures for claims processing (Sections 103(b) and 104), including Treasury’s role in the approval of settlements as directed by President Bush. The Treasury has addressed a fair portion of the disclosure and make available requirements of TRIA through Interim Guidance, which will form the basis for regulations on these issues. To the extent necessary, the Treasury will also provide further clarification on these issues in regulations. The Treasury has been working hard with the NAIC to address special issues associated with state residual insurance market entities and state workers’ compensation funds. In the Treasury’s second Interim Guidance we provided an initial list of what entities were covered under this category of insurer in TRIA. As part of regulations on this issue, the Treasury will be further refining that list and addressing how these entities should calculate their deductibles and how their special arrangements with servicing carriers should be treated. Another very important issue that the Treasury has been considering is the development of claims processing procedures and the necessary infrastructure to process claims. In that regard, the Treasury, acting in its capacity under the Program as a reinsurer, will be seeking to rely on best practices of other reinsurers in the area of claims processing. In addition to the general procedures for processing claims, those best practices would also include methods for auditing claims, and an issue that is very important to President Bush, the approval of settlements involving payments for insured losses under the Program. Finally, the Treasury will be considering the method and procedures for implementing any potential surcharges under TRIA. The Treasury will again look to best practices from the insurance industry and regulatory community as we develop policies and procedures in this area. Studies TRIA requires the Treasury to prepare, on an expedited basis, a study of the impact of terrorism risk on group life insurers and on the availability of group life insurance coverage and then to determine, in consultation with NAIC, whether to apply the Program to group life insurers. A request for public comments to assist this study was published in the Federal Register on December 11, 2002. The Treasury has been evaluating comments received as part of that request, and we are working toward completion of that study. Evaluating the Impact of TRIA In addition to the Treasury’s role in directly implementing TRIA, we also have a responsibility to evaluate how well TRIA is working in terms of improving the availability of terrorism insurance coverage. However, for TRIA to have the intended impact of improving the prospects for economic activity, insurance coverage for terrorism risk must not only be made available, but it also should be priced in a manner that is consistent with the underlying risk. The Federal role in absorbing catastrophic losses from acts of terrorism should make the price of insurance coverage more affordable for all property owners. Some of the initial reports we have received indicate that prices have been coming down, and terrorism risk insurance is once again being provided within standard insurance policies as opposed to a stand alone basis. We hope to hear more reports of improved pricing and availability of terrorism risk insurance in the coming months. TRIA also requires the Treasury to “assess the effectiveness of the Program and the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risk after termination of the Program, and the availability and affordability of such insurance for various policyholders, including railroads, trucking and public transit.” The Treasury takes this study requirement very seriously as it will not only provide a vehicle for evaluating TRIA, but also will provide a sense of what the state of the terrorism risk insurance market is on a going forward basis. The Treasury has already begun work on that study, and we hope to establish a baseline from which to monitor developments in the industry and evaluate the Program on an ongoing basis over its life. Conclusion President Bush made enacting TRIA a very high priority, with the ultimate goal of improving the prospects for economic activity in our Nation. For the benefits of TRIA to materialize, the Treasury, state insurance regulators, the insurance industry, and other interested parties must work together in implementing the Program. While implementing TRIA has proved challenging for the Treasury and the insurance industry, we have worked quickly in dealing with the immediate effective date and other time sensitive requirements of TRIA. The Treasury will continue to place a high priority on completing the implementation of TRIA and evaluating how well TRIA is working. We also expect the insurance industry to work hard to implement TRIA in a manner consistent with the Act and President Bush’s objective of improving the prospects for economic activity in our Nation. We look forward to working with the NAIC, state insurance regulators, the insurance industry, and other interested parties as we move forward. |
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