Re: 2015 TRIA Reauthorization Proposed Rules Comments (31 C.F.R. Part 50)

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1 th Street NW Suite 550 Washington, DC Fax May 31, VIA ELECTRONIC SUBMISSION ( Department of the Treasury Federal Insurance Office Room 1410 MT 1500 Pennsylvania Ave., N.W. Washington, DC Attn: Richard Ifft Re: 2015 TRIA Reauthorization Proposed Rules Comments (31 C.F.R. Part 50) Ladies and Gentlemen: The American Insurance Association (AIA) appreciates the opportunity to submit comments regarding the Terrorism Risk Insurance Program (TRIP) proposed rule changes. The comments are responsive to the Federal Insurance Office s (FIO) Federal Register notice dated April 1, This submission supplements comments provided by AIA on April 15, 2016 with respect to FIO s data collection efforts under the Terrorism Risk Insurance Act (TRIA), as amended by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA 2015). AIA represents approximately 325 major U.S. insurance companies that provide all lines of property-casualty insurance to U.S. consumers and businesses, writing more than $127 billion annually in premiums. Our membership includes U.S. insurers that write insurance only within the U.S., U.S. insurers that write insurance inside and outside the U.S., and the U.S. subsidiaries of multi-national insurers. Importantly, our membership includes a large number of companies that write commercial property-casualty lines of business that are covered by TRIA. As a result, AIA and its member companies have a strong interest in making sure that the Terrorism Risk Insurance Program is sound and supports a stable and vibrant private insurance market. 1 Federal Register, Vol. 81, No. 63 (April 1, 2016), 81 Fed. Reg

2 Executive Summary We have organized our comments by proposed rule section, and have responded to questions posed in the Federal Register notice as they correspond to the particular rule section. In brief, AIA s submission focuses on the following: (1) With respect to captive insurers, we support FIO s proposed data collection and analysis in advance of any proposed access restrictions to TRIA. However, we don t believe a definitional change is warranted at this time. Captives can and do serve a valuable role in addressing insurance gaps, but where FIO finds instances of such insurers organized solely or primarily to provide terrorism risk insurance coverage in a manner that undercuts competition and undermines the stability of the private market or the purpose of TRIA, all stakeholders should be made aware and be able to provide fully-informed input on future participation in TRIP. (2) As a supplement to April 2016 AIA comments on TRIA data collection, AIA s submission urges FIO to reform the data mechanism in the future to focus on information collection that will yield an analysis of the impact of TRIA on private market stability and the core mission of ensuring economic recovery following catastrophic terrorism. There is little need for granular data that evaluates low-risk areas or lines of insurance that are not likely to trigger the federal program. From this perspective, other provisions of TRIA such as the high insurer retentions or the continued utility of an aggregate loss certification threshold (as part of the act of terrorism definition) should be examined as well. (3) Proposed revisions that will generate more ambiguity or policyholder confusion should be avoided. Those revisions include the nature of clear and conspicuous disclosures and the existing rule of construction for identifying dates and calendar years. 50.4(g) Definition of captive insurer AIA suggests that FIO consider prior guidance classifying captives as insurers under TRIP. That guidance, which is codified in Treasury regulations, indicates that a qualifying state-licensed captive is considered an insurer under TRIA. 2 Ultimately, any restrictions on future access to TRIP by captives will depend on FIO s study of their use in the terrorism risk context. As FIO has underscored in its Federal Register notice, the interrelationship between the regulatory definitions of captive insurer and small insurer are intended to reinforce the scope of insurer participation in the data collection provisions under Sections and However, FIO notes that regulations may later be proposed regarding captives (see brief responses to the questions included in the Federal Register notice below). Alternatively, to 2 31 C.F.R. 50.5(f)(1)(i)(A); 68 Fed. Reg (July 11, 2003). 2

3 reduce any ambiguity about the interrelationship between the definitions in 50.4(g) and 50.4(z), AIA would recommend one of two revisions (either of which we would support): Define the term captive insurer solely for purposes of data collection under and 50.52; or Exclude captive insurers from the small insurer exception under 50.51(e). Either revision would allow Treasury time to better understand captives, more fully investigate the role captives play within the TRIA-related insurance marketplace, and identify whether any specific exceptions should be considered (such as if any proposed regulations include provisions designed to restrict captive participation in TRIP). (1) What is the current role of captive insurers (both state-licensed entities and otherwise) in providing insurance in TRIP-eligible lines? Captives continue to provide a valuable risk transfer mechanism within the commercial insurance lines covered by TRIA, being used to fill gaps in insureds risk programs. Indeed, captive insurers may be established organizationally to fulfill a specific need under federal or state law, and access to TRIA may be an ancillary benefit of that organizational status. The role of captive insurers in the provision of TRIA-eligible coverages will vary by industry and by location (such as Tier 1 locations). As an example, the power generation industry utilizes captives to provide coverage for certain power generation assets. To the extent that captives fill a need established by statute, FIO should consider exempting that class of captive insurers from any proposed, future restrictions on access to TRIP. That being said, AIA believes that the use of captives solely or principally to provide terrorism risk insurance coverage should be subject to scrutiny to ensure that they are not used simply as a way to access the federal program without sufficient insurer retention, at the risk of individual financial solvency, and more importantly to the detriment of the program s objective to provide a speedy economic recovery following a catastrophic terrorism event. For that reason, we support inclusion of captive insurers in the data provisions of the regulations, so that FIO may collect and analyze the full range of terrorism risk insurance activities. AIA would be happy to meet with FIO to provide member company perspectives on captive insurer participation in TRIA. (2) Should captive arrangements that insure U.S.-based risks, other than those involving state-licensed insurers, participate in the Program? Upon what basis should such participation take place? If FIO is suggesting that TRIA should be open to entities that are not licensed in a state, it would be difficult to understand how participation would occur on equal regulatory footing (i.e., compliance and enforcement) with other commercial insurers currently subject to the program. To the extent that FIO is referencing other Alternative Risk Transfer (ART) methods or vehicles within the scope of captive arrangements, some additional information on ART mechanisms 3

4 would be useful in order to respond appropriately. Perhaps FIO could provide additional detail on the types of arrangements that have been proposed. (3) Should separate rules address the criteria for which captives, of any type, qualify for reimbursement under the Program? In response to this question, please address whether and/or how the relatively small TRIP-eligible premiums of such insurers should affect their insurer deductible. AIA s response to this question will largely depend on the data analysis that FIO conducts with respect to captives, and whether or not that analysis yields proposed revisions to captive access to the program. We have already expressed our general support for captive insurer participation on equal competitive and regulatory terms with other insurers, with the caveat that FIO s scrutiny should be properly focused on terrorism-only captive arrangements. To the extent that FIO, after its analysis, continues to permit participation by captive insurers in TRIP, those insurers should be treated no differently than other insurers with respect to participation in the TRIA Program. Creating separate rules for participation could make the private terrorism risk insurance marketplace less efficient and generate potential availability issues. Equally important, using separate criteria by which captives can qualify for participation could introduce unfair conditions and leave an imbalanced marketplace. (4) Given the relatively small size of some captive insurers, should some assessment be made of their capital and claims paying ability in connection with their participation in the Program? If so, how should Treasury consider and address such issues? Again, AIA s response to this question will depend on FIO collection and analysis of current data on the captive market for terrorism risk insurance. Currently, only state-licensed captives participate in TRIA. In that context, the state regulators that license the captive are already monitoring the captives capital and claims paying ability. TRIA was not intended to displace state regulation, but to provide a public-private partnership to address terrorism risk in the context of a catastrophic event on U.S. soil. From this perspective, it would be appropriate to partner with the state regulators and industry stakeholders to make sure that the analysis of captive insurer participation in TRIA aligns the regulatory interest in financial solvency and healthy competitive markets with the broader TRIA purpose of spurring a speedy economic recovery after a terrorist attack. (5) To what extent are captives being relied upon to insure so-called trophy risks that might be deemed to be subject to a heightened risk of terrorism? It is unclear whether FIO intends to include power generation plants within the scope of this question. To the extent such facilities are contemplated, AIA has already identified the existence of captive insurers that insure such risks pursuant to statute. We would be pleased to meet with FIO in the future to provide more information about this subject. 4

5 50.4 (z) Definition of small insurer AIA has already commented on different proposed alternatives to exclude captives from the proposed data collection exception for small insurers, but we have some concerns about the threshold used to define small insurer. If the threshold is meant to be an indicator of individual insurer financial solvency, FIO should consider a definition (with input from affected stakeholders, including the state regulatory community) that aligns with accepted state thresholds for regulatory intervention. Alternatively, a more appropriate construct might be to consider the notion of an exempt insurer, with the principal consideration being the amount of terrorism risk coverage that the insurer writes. Where the amount of coverage is de minimis, an exemption should apply, at least with respect to data collection obligations (see also comments below) Rule of Construction for Dates AIA agrees with the comment submission that suggests that the rule of construction should be clarified to distinguish between calendar years based on a 1-second gap (rather than the potential for a 1-minute gap). 3 While seemingly innocuous, this change would correct a potential ambiguity in the rules (b) Reformulation of clear and conspicuous disclosures AIA also agrees with the same comment submission referenced above about the potential policyholder confusion that could be generated by requiring a restatement of the formula to derive annual terrorism premium. 4 In short, where a policy period is anything other than 1 year, a requirement to state the annual terrorism risk premium in dollar terms will result in a difference between the stated policy premium and the annual premium. AIA recommends deleting this proposed modification. 5 On a related point, AIA believes that better guidance could be provided on insurers use of producers in complying with TRIA s three-part disclosure requirement. Specifically, we respectfully recommend that 50.12(d) and 50.12(e) be combined and revised as set forth below. 3 See Comment of Jason Schupp, NA, pp. 4 5 (May 14, 2016), Docket ID TREAS-TRIP See Comment of Jason Schupp, NA, pp In connection with FIO s proposal on clear and conspicuous disclosures, we respectfully request that FIO review the continued inclusion of the term purchase in Section 103(b)(3) (which still reads.. at the time of offer, purchase, and renewal of the policy. ). AIA believes that the word was unintentionally retained in TRIA despite TRIPRA 2015 s technical amendments that removed purchase from every provision requiring policyholder disclosures. See TRIPRA (b)(2)(b), (C). Those amendments were made in response to comments that triplicate disclosure requirement was unnecessary and contrary to industry practice. 5

6 (d) Use of producer. If an insurer normally communicates with a policyholder through an insurance producer or other intermediary, an insurer may provide disclosures through such producer or other intermediary. If an insurer elects to make the disclosures through an insurance producer or other intermediary, the insurer remains responsible for ensuring that the disclosures are provided by the insurance producer or other intermediary to policyholders in accordance with the Act. (d) Demonstration of compliance and use of producer. An insurer may demonstrate that it has satisfied the requirement to provide clear and conspicuous disclosure as described in through use of appropriate systems and normal business practices that demonstrate a practice of compliance, including where an insurer normally communicates with a policyholder through an insurance producer or other intermediary. 6 Contractual agreements with producers to deliver policies and other documents to policyholders are common industry practice. This change in guidance would better inform insurers that this practice will meet the carrier s compliance obligations under TRIA, and therefore avoids future uncertainty as to compliance at the time of a covered event. Avoiding this uncertainty will further the purpose of TRIA in ensuring that policyholders with terrorism coverage in their policies and insurers who have provided the coverage will have the protection of TRIA in case of a program-triggering event Section 111 Annual Data Collection The proposed rule suggests March 1 as an annual reporting deadline. AIA s member companies (and other non-member companies that participate in TRIA) have responded that March 1 is not a good date, precisely because companies already have other data obligations with respect to the NAIC annual statement. Alternatively, FIO should consider either pushing the deadline to mid-april or to later in the year (October/November), which will leave a longer lead time for analysis of data for subsequent reports. The proposed rule also suggests that FIO can exercise its discretion to exempt small insurers from the annual data collection authority. We would urge FIO to use this discretion to provide a more focused data collection effort that: (1) establishes an exemption for insurers that do not write significant terrorism risk insurance coverage (with the definition of significant open to stakeholder input); and (2) focuses data collection on the type of information that will be 6 This revised rule 50.12(d) referring to the general disclosure requirement would be equally applicable to the cap disclosure requirement under Section Cap Disclosure. Subsection (d) thereof would then read: (d) Other applicable rules. The cap disclosure is covered by the rules in 50.12(a), (c), (d) and (e), and (f) (relating to clear and conspicuous disclosure). 6

7 relevant to evaluating the program (a terrorism risk insurance catastrophic loss backstop) in the context of the private terrorism risk insurance marketplace. Data collection therefore should concentrate on those lines of insurance that are most immediately impacted by a catastrophic event and that would aid in an expedited economic recovery (i.e., workers compensation insurance and commercial property insurance) and those events that would actually trigger a flow of federal dollars (i.e., high-risk areas or types of events that would cause catastrophic losses on a national scale) Claims Data Collection The proposal requires monthly claims reporting if a single TRIA claim exists. This represents a substantial increase in the frequency of post-loss reporting. FIO proffers no rationale for the increased frequency in claims reporting other than to note its benefit to the Office in keeping track of TRIA-related claims. We would suggest deleting the requirement, and relying on the current post-loss reporting construct (b) (read in conjunction with 50.4) Certification determination FIO proposes to include decision-making authority to not certify an act as an act of terrorism covered by TRIA. Inclusion of this proposed language would set up a conflict between the consultation process and the definition of an act of terrorism (i.e., consultation is a condition precedent to certification). Under 50.4(b), consultation is only required in order for the Secretary of Treasury to certify an act of terrorism. Proposed (by using the standard of whether to certify ) seems to suggest that consultation is required before the Secretary can make either (a) a decision to certify an act of terrorism; or (b) make a decision to not certify an act of terrorism. To maintain consistency with TRIA s statutory language, AIA would recommend omitting this proposed revision Certification determination - $5 million aggregate loss threshold FIO proposes new language to enhance the collection of post-loss information with respect to the $5 million aggregate loss threshold aspect of the act of terrorism definition. While not included as an adopted revision in TRIPRA 2015, AIA has consistently called for the elimination of this threshold. Originally, the threshold was included as a means of distinguishing vandalism from acts of terrorism. In the interim, based on our experience with post-9/11 acts, the threshold has been more of an impediment to practical application of TRIA than a worthwhile definitional component (similar to the discarded foreign vs. domestic act of terrorism distinction that existed in the original TRIA). A more useful way of looking at the threshold would be to view it in the context of the TRIA aggregate loss program trigger. In that way, insurers and policyholders could look to the terrorism risk language of the policy as determinative, and we might avoid political pressure on federal decision makers to certify or not certify an event as a covered act of terrorism. 7

8 50.63 Notification of certification determination AIA suggests reformulation of the proposed rule to trigger notification upon an actual certification decision. There may be some acts that clearly will not meet the definition outlined in TRIA. In those instances, Congress should be notified along with the public and other stakeholders. * * * AIA sincerely appreciates FIO s request for public input on the proposed revisions to the TRIA rules. All stakeholders benefit from a well-functioning program for terrorism risk insurance that provides stability for the private terrorism risk insurance market, and helps quicken the pace of business and economic recovery in the event of terrorism on U.S. soil. Respectfully submitted, J. Stephen ( Stef ) Zielezienski Senior Vice President & General Counsel American Insurance Association 8