CBI’s Comments on Treasury’s Proposed Rules for TRIA
Definitions of “Act of Terrorism” and “Insured Loss”
Last month U.S. Treasury published a Notice of Proposed Rulemaking and Request for Comments with respect to the Terrorism Risk Insurance Program. Treasury has proposed specific wording changes to the definitions of:
· “Act of terrorism” in order to clarify the methodology for computing the $5 million threshold for certification; and
· “Insured loss” in order to clarify that amounts paid by the policyholder (such as a deductible) are not included within an insurer’s reporting of insured loss.
CBI has filed comments agreeing with the overall purpose of Treasury’s proposed changes but urging a different approach.
Calculation of the $5 million threshold
In determining whether the $5 million certification threshold has been reached, Treasury proposes to include in its computation (a) the amount of losses that would be excluded as a result of any certification; and (b) the amount of loss retained by policyholders through deductibles and self-insured retentions.
CBI is particularly concerned that Treasury’s proposal rule would increase the likelihood of unnecessarily triggering terrorism exclusions following a small-scale terrorist attack that the insurance industry is well prepared to manage. In addition, CBI points out that the proposed rule would be impractical and likely impossible from a data collection standpoint.
In its comments, CBI urges Treasury to instead consider only “insured loss determined as if the act had been certified by the Secretary” in ascertaining whether the $5 million certification threshold has been satisfied.
Exclusion of Retentions from Insured Loss
In an effort to clarify that insured losses eligible for reimbursement through the backstop are limited to loss amounts paid by the insurer under the policy, Treasury’s proposed rule risks introducing considerable confusion.
For example, Treasury’s proposal would open the backstop to cover credit risk voluntarily assumed by insurers under complex and sophisticated insurance programs. The proposal also threatens to contradict established rules for the treatment of reinsurance where that reinsurance is provided through the policyholder’s captive.
Perhaps most concerning, Treasury’s proposed rule invites gaming of the Program through the strategic use of side agreements, deductible waivers and other devices.
In its comments, CBI urges Treasury to expand on its proposal to clarify that credit risk assumed by an insurer under an insurance program should be hedged through collateral, letters of credit or bonds — not through the backstop. Further, CBI proposes provisions to discourage misuse of the program through clever but artificial tactics.
