NAII Questions Treasury AuthorityWashington

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The Treasury Department has no authority to promulgate financialstandards for federally approved insurers under the Terrorism RiskInsurance Act, the National Association of Independent Insurerssays.

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In comments filed with the Departments Office of FinancialInstitutions, the Des Plaines, Ill.-based association said thatwhile it understands Treasurys desire to standardize the financialcriteria for insurers participating in the Terrorism Risk InsuranceProgram (TRIP), the legislation does not grant Treasury thisauthority.

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Moreover, NAII says, the Terrorism Risk Insurance Program is notthe appropriate mechanism for establishing these standards.

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The issue involves the most recent interim guidance issued byTreasury relating to TRIP, which included a request for comments onthe advisability of establishing financial standards for federallyapproved insurers.

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Federally approved insurers, which qualify for the governmentterror reinsurance program, are those that are neither licensed bya state, nor listed on the Quarterly Listing of Alien Insurersmaintained by the National Association of Insurance Commissioners,nor a state residual market entity or workers compensationfund.

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Rather, these are insurers that are approved by a federal agencyto write insurance under certain federal programs and statutes tocover maritime, energy or aviation activities.

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These include the Price-Anderson Act (covering nuclearliability), the Aircraft Accident Liability Insurance Program ofthe Transportation Department, and the Longshoremens and HarborWorkers Compensation Act of the Labor Department.

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In its request for comments, Treasury noted that while some ofthese insurers have financial requirements, others do not. Becauseof the lack of uniform requirements, Treasury asked for input onwhat standards should be applied to these insurers.

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But NAII says that the terrorism insurance program is relativelyshort-term, and establishing standards in regulations used toimplement the act does not appear to be appropriate.

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“In constructing the federal terrorism risk insurance program,Congress specifically avoided the creation of a federal regulatorybody and instead elected to have the federal government stand inthe shoes of a reinsurer for purposes of covered acts,” NAIIsaid.

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The authority to regulate the business of insurance is grantedto the states, NAII added. Establishment of federal standards, evenin the potentially limited circumstances related to theimplementation of the program, would represent an unwarrantedintrusion into the regulation of insurance, NAII says.

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Turning to the issue of newly formed insurance companies, NAIIurges Treasury not to try to exclude these entities fromparticipating in the program.

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In its request for comments, Treasury sought input on theappropriate criteria for preventing participation in the program bynewly formed insurance companies deemed to be established for thepurpose of evading the insurer deductible requirement of thefederal terrorism reinsurance program. (The deductibles are tied toearned premiums.)

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NAII said it supports Treasurys efforts to treat allparticipants fairly, but the legislation does not include anyreference to when or for what purpose an entity was formed. Indeed,NAII said, the legislation clearly states that any insurer thatreceives direct earned premium for most commercial p-c risks notonly may participate in the program, but must participate.

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NAII notes that all companies within a group are consideredunder common ownership, the intent of which is to make sure thatthe situation that concerns Treasury will not occur frequently.

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However, NAII acknowledges, there are at least three scenarioswhere the issue could arise.

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First, NAII said, a new independent company could be formed toprovide coverage strictly for terrorism.

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Second, an existing reinsurer that is licensed as an insurer ina state could begin to write terrorism coverage on a primarybasis.

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Third, an existing state-licensed “shell company” could bepurchased and used to provide terrorism insurance.

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Rather than try to exclude these entities from participating inthe program, NAII said, Treasury should take the approach thatmakes sure that if they are formed, the deductible under theprogram will be calculated using a different approach for thesespecific purpose companies.

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For example, NAII said, the deductible calculation for newlyinformed insurers that do not have a full year of operations underthe program could be based on the annualized amount of current yeardirect earned premium.

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This is consistent with the provisions of the legislation, NAIIsaid.

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Another possible calculation for these insurers could be basedon capital or surplus. This approach, NAII says, would need to becalculated to approximate the same financial deductible percentageunder the appropriate year of the program that exists for companiesformed prior to enactment of the legislation.


Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.


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