National Association of Independent Insurers analysis of HR 3210. Received 11-26-02 from Dan Hartford of Hartford Steam Boiler.

Executive Summary

The Senate approved H.R. 3210, the Terrorism Risk Insurance Act of 2002, on Nov. 19. President Bush is expected to sign the legislation on Nov. 26. The new legislation creates a high-level federal backstop for losses related to foreign acts of terrorism. The legislation creates new obligations for insurers writing commercial policies, including mandatory offer of terrorism coverage, policyholder notice and disclosures, and submission of premium information. The NAIC is currently developing a model bulletin relating to insurer obligations under the new legislation. NAII is preparing to host an informational compliance seminar for members in mid-December.

Terrorism Risk Insurance Act of 2002

Legislative Summary

After over a year of negotiations, the Senate overwhelmingly gave final approval to H.R. 3210, the Terrorism Risk Insurance Act of 2002, on Nov. 19 by an 86 to 11 vote. The House previously approved the language by voice vote on Nov. 14, and President Bush is expected to sign the bill into law on Nov. 26. The text of the legislation is available on NAII's Web site at

The new legislation establishes a three-year high-level federal backstop for losses related to acts of foreign terrorism. Highlights of the new legislation include

The Terrorism Risk Insurance Act establishes a three-year program within the Department of the Treasury, to provide coverage for losses incurred from foreign acts of terrorism from the date of enactment to Dec. 31, 2005

The program covers most commercial property and casualty policies, including workers' compensation. Workers' compensation policies would also receive a federal backstop for losses resulting from acts of war. Covered insurers are required to

  1. participate in the federal program
  1. Municipalities or other entities participating in self-insurance arrangements, such as self-insurance pools or risk-retention groups, may participate in the program if the Secretary of the Treasury makes the determination to allow such participation prior to any act of terrorism in which the entity suffers insured losses

·The program provides for individual insurer and aggregate industry retention

levels. Individual insurer retention levels are based on a percentage of direct

earned premiums from the previous calendar year, and rise from one percent for the

remainder of 2002; to seven percent in 2003; 10 percent in 2004 and 15 percent in

2005

· Losses above an insurer's deductible will be reimbursed by the federal government

on a 90/10 cost sharing arrangement. Losses covered by the program will be capped at

$100 billion for both the government and insurers. For losses above $100 billion,

Congress will determine the procedures for and the source of any payments

· In any year in which the government pays for insured losses, the Secretary of the

Treasury will be required to recoup the difference between total of the individual

insurers' retention levels and the industry aggregate retention level. The industry

aggregate for the remainder of 2002 and 2003 is $10 billion; $12.5 billion for

2004; and $15 billion for 2005. Federal funds will be recouped through a surcharge

of up to three percent annually on commercial policies

· Enactment of the federal legislation immediately nullifies and pre-empts any

exclusion or policy provision which excludes or limits coverage for losses from

foreign acts of terrorism

· Covered insurers are required to make terrorism coverage available on all covered

policies on terms and conditions that do not differ materially from the underlying

terms of the contract. This mandatory offer is required during the first two years

of the program and the Secretary of the Treasury has discretion to extend this

requirement to the third year of the program.

· Insurers are required to notify policyholders of the availability of terrorism

coverage, the cost of such coverage and the federal share of any covered loss

· During the transition period and first year of the federal program, the

legislation pre-empts state prior approval laws; however, states retain the right to

review any rate and overturn such rate if the commissioner deems it inadequate,

excessive or unfairly discriminatory.

· The legislation requires the Department of the Treasury to study the impact of

potential terrorism losses on the group life market, life insurance and other

insurance, including personal lines and report to Congress on its findings. The

study of group life is an expedited study and Treasury is granted the authority to

extend coverage to the group life market, if it deems such action appropriate.

Treasury is directed to complete the study of other insurance within nine months of

enactment; however, unlike group life, the department is not granted unilateral

authority to extend program coverage to other lines.

· The legislation creates an exclusive Federal cause of action, governed by

applicable state law, for all suits for property loss, personal injury or death

arising out of a terrorist event; consolidates claims into a single Federal district

court assigned by the Judicial Panel on Multi-district Litigation; and includes a

provision to ensure that the Federal government is not directly or indirectly

responsible, in its role as a reinsurer, for payment of any punitive damages

Impact on

Enactment of the new legislation imposes many new requirements upon covered insurers.

President Bush is expected to sign the legislation on Nov. 26 and on that date, all

approved exclusions for foreign acts of terrorism are immediately null and void, as are

any contract terms excluding or limiting coverage for such losses. Insurers will be

required within 90 days to provide notice and disclosure to all covered policyholders

making terrorism coverage available, disclosing the cost of such coverage and

describing the federal share of any covered loss. For any policy written or renewed

within 90 days of enactment, insurers will be required to provide such notice at the

time of purchase or renewal. In the case of policies written or renewed after 90 days

of enactment, such disclosures must be made as a separate line item. Failure to

provide proper disclosure jeopardizes the ability of the insurer to seek federal

reimbursement for covered claims. In addition, the Secretary of the Treasury may

assess civil penalties on participating insurance companies for submission of false or

misleading information or failure to repay the Secretary for any amount required to be

repaid

There are a number of serious implementation issues impacting insurers that require

immediate attention. NAII staff has met with the staff of the House Financial Services

Committee and the Department of the Treasury in an attempt to address these issues.

NAII raised a host of issues including waiver of penalties for good faith compliance

with the notification requirements, clarification of the definition of direct earned

premiums, treatment of non-participating insurers allocated a share of covered

terrorism losses through state residual market plans, issues relating to disclosures

including model language, separate line items, and timing, and claims processing

procedures. Staff will continue to work with Treasury and congressional staff on

expeditious and effective guidance.

In an effort to assist member companies, NAII will be setting up an informational and

compliance seminar in early to mid-December. Further details on this important event

will be provided in the near future.

State and NAIC

The NAIC's Catastrophe Insurance Working Group is developing a model bulletin for use

by the states, to be sent by the state insurance departments to all insurers. The

bulletin will include background information on the federal legislation and several

specific sections containing guidelines for insurer filings. For example, there will

be information on department expectations relative to submission of rates, policy form

language and disclosure notices. Indications are the states will direct that rates and

forms be filed within 30 days after they are implemented. At this point it appears the

NAIC's bulletin will also include sections on workers' compensation, provisions for

standard fire policy states, filing transmittal documents and draft notices for

potential use with policyholders

NAII has participated in the Working Group deliberations. Given the fluid nature of

the discussions we thought it would create more confusion by disseminating the NAIC

draft at this time. As soon as the NAIC bulletin is complete, we will send it to

members immediately. The NAIC is attempting to finish its work on the bulletin by the

end of this week

If you have any questions on the federal legislation please contact Julie Gackenbach at

(202) 639-0473 () or Don Griffin at (847) 297-7800 (

). If you have any questions regarding state or NAIC action,

please contact Bob Zeman at (847) 297-7800 () or Don Griffin

T:\Word\AGRIP\Terrorism Reinsurance\NAIIAnalysis.doc