This comment letter focuses on the proposed rule changes for the Terrorism Risk Insurance Act regulations with respect to the definitions of: • Act of terrorism; and • Insured loss in accordance with Treasury’s Notice appearing at 85 FR 71588 (November 10, 2020).

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2019 TRIA Reauthorization Proposed Rules Comments
Centers for Better Insurance Submission on Proposed Rule Changes
The Centers for Better Insurance, LLC (CBI) is an independent organization committed to
enhancing the value the insurance industry delivers to all stakeholders (including policyholders,
employees, and society at large). CBI does so by making available unbiased analysis and insights
about key regulatory issues facing the industry for use by insurance professionals, regulators, and
policymakers. Additional information regarding CBI is available on the web at www.betterins.org
or by email request at info@betterins.org.
This comment letter focuses on the proposed rule changes with respect to the definitions of:
• Act of terrorism; and
• Insured loss
CBI is submitting separate comment letters with respect to certain other matters of relevance to
the issues raised in Treasury’s Notice appearing at 85 FR 71588 (November 10, 2020).
Definition of Act of Terrorism
CBI agrees with Treasury’s view that the current regulations could be modified to improve public
understanding of the methodology Treasury uses to compute whether the monetary threshold
for certification has been satisfied. However, CBI believes the methodology proposed by Treasury
could be configured in a manner that better suits the interests of policyholders, insurers, and the
Program.
The proposed rule would amend the definition of act of terrorism at 31 CFR § 50.4(b)(2)(ii) as
follows:
Property and casualty insurance losses resulting from the act, in the aggregate, do
not exceed $5,000,000. For these purposes, property and casualty insurance
losses include any amounts subject to payment under a property and casualty
insurance policy, even if the policyholder declined to obtain terrorism risk
insurance under the policy or is otherwise ultimately responsible for the payment.
Treasury’s proposed rule makes two clarifications as to the method for computation of the
threshold amount: (a) whether to measure losses before or after the effect of certification; and
(b) whether to include deductibles and similar arrangements linked to the insurance contract but
not part of insured loss.

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Impact of Certification
The first clarification serves to resolve an apparent circularity in logic that can occur with respect
to policies containing a standard terrorism exclusion. In the absence of a certification, a standard
terrorism exclusion (if attached to the policy) would not act to bar coverage. Accordingly, prior
to certification property and casualty insurance losses under policies containing a terrorism
exclusion would be payable and therefore count toward the $5 million certification threshold.
However, upon certification these exclusions become operative thereby baring coverage. In the
case of a small-scale act of terrorism, the post-certification operation of terrorism exclusions
could bring the total amount of payable loss under the $5 million threshold. In other words,
certification itself could seemingly disqualify an event from certification.
There are two ways to solve this problem. Either calculate losses before the hypothetical
application of any terrorism exclusions (as Treasury proposes) or calculate losses after the
hypothetical application of any terrorism exclusions. CBI strongly urges Treasury to implement
the latter approach which is the more advantageous to small businesses, insurer, and the
Program.
The Secretary’s decision to certify an act of terrorism carries with it two main implications: (1)
the backstop opens to reimburse insurers for insured losses in excess of their individual
deductibles; and (2) policyholders that did not take advantage of the program’s make available
requirement lose coverage for losses resulting from the attack.
Regardless of an insurer’s individual deductible, the backstop makes no payment to any insurer
until the $200 million dollar program trigger has been satisfied. While captives often have
program deductibles that could be satisfied with corporate pocket change, traditional insurers
have individual deductibles typically measured in the hundreds of millions and many times
billions of dollars. It is difficult to image a realistic terrorist attack scenario involving $5 million or
even $50 million of property and casualty insurance losses that implicates the possibility of a
payout under the backstop given the program trigger and individual insurer deductibles.
For small-scale attacks, the only practical consequence of the Secretary’s decision to certify an
act of terrorism would be the activation of terrorism exclusions. That is, certification of small-
scale events under the program does nothing but strip away otherwise available insurance
coverage to victims of the terrorist attack. Obviously, that outcome is undesirable for insureds.
Likewise, responsible insurers have no interest in denying coverage for losses from a small-scale
terrorist attacks that they can easily absorb and for which the Program is unnecessary.
Accordingly, Treasury should modify its proposed rule to make it less likely small-scale attacks
satisfy the threshold by counting only losses that would be payable after the hypothetical
application of any terrorism exclusions.

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Impact of Policyholder Obligations
The second clarification proposed by Treasury is intended to include “all losses associated with
property and casualty insurance policies” such as “policy deductibles or fronting arrangements”
in the computation of the $5 million threshold. This proposal, too, would make certification of
small events more likely resulting in less coverage available to victims. For that reason alone,
Treasury should abandon its proposed approach.
Moreover, the approach proposed by Treasury would be impossible to administer. With rare
exceptions, losses that are expected to remain wholly within a deductible are not reported to
insurers. In fact, policyholders often prefer not to notify the insurer of a loss falling below a
deductible amount out of concern reporting of the loss may count against it on renewal.
Accordingly, Treasury would have no means to collect the data necessary to tabulate the amount
of losses “associated” with property and casualty insurance but never reported to the insurer.
Further, policyholders would likely be unwilling to cooperate with any voluntary collection of
such data because the only outcome from reporting losses would be an increased likelihood of
certification with the resulting loss of coverage under policies with a terrorism exclusion.
For these reasons, Treasury should implement a rule providing clarification on the points it has
identified but doing so in a way that is practical and considers the best interests of potential
victims of terrorism, responsible insurers, and the Program. This could be done through the
following amendment to 31 CFR § 50.4(b)(2)(ii):
Property and casualty insurance losses resulting from the act, in the aggregate, do
not exceed $5,000,000. For these purposes, property and casualty insurance
losses consist of insured loss determined as if the act had been certified by the
Secretary.
Other Issues
Should Treasury decide to continue with the clarifications as proposed, CBI raises two concerns
with the wording.
Treasury has until now been careful not to use the expression “terrorism insurance” when
describing the coverage insurers are required to make available under the program. As explained
in 31 CFR § 50.22, an insurer may satisfy the make available requirement of the program by
offering coverage subject to general exclusions or other terms in the policy. Specifically, “if an
insurer does not cover all types of risks, . . . such as nuclear, biological, or chemical events, then
the insurer is not required to make such coverage available.” Accordingly, the regulations and
statute refer to a requirement to make available “coverage for insured losses that does not differ
materially from the terms, amounts, and other coverage limitations applicable to losses arising

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from events other than acts of terrorism.” 31 CFR § 50.21. While that may be an unwieldy
description of the make available requirement, it is more accurate than suggesting insurers must
offer “terrorism insurance” which could imply an affirmative grant of coverage.
Treasury’s commentary on this proposal seems to conflate the program’s treatment of
deductibles and “fronting arrangements”. The program has always been agnostic as to where the
ultimate economic loss falls. Instead, the program has looked to whether the loss is covered by
“property and casualty insurance” issued by an “insurer”. Amounts paid by the policyholder as a
deductible are not “covered” by the insurance while losses paid under a fronting arrangement by
an insurer probably are. Further, in first party insurance the policyholder is not thought of as
“responsible for the payment” of retained losses – the policyholder simply does not receive
payment from the insurer for that portion of loss. In fact, the policyholder may not make a
payment to anyone if, for example, it decides not to repair or replace the damages property.
Accordingly, the concept of “responsible for the payment,” if used, would not encompass first
party insurance deductibles as Treasury seems to contemplate.
Definition of Insured Loss
The proposed rule adds a clarifying exclusion to the definition of insured loss in 31 CFR §
50.4(n)(3):
(iv) Amounts paid by a policyholder as required under the terms and conditions of
property and casualty insurance issued by an insurer.
Treasury expresses in its commentary the sensible understanding that “insured losses ‘covered’
means insured losses paid by insurers under insurance policies within the scope of the Program.”
A policyholder’s own obligation to fund some or all of the loss is not considered “covered” by the
insurance policy and therefore should be excluded from the definition of insured loss.
It does not appear, however, Treasury’s proposed rule would accomplish this objective. An
appropriately crafted clarification is especially important and necessary because the Program is
awash in highly engineered financial structures specifically designed to optimize recovery from
the backstop.
For example, Treasury recognizes that under some insurance policies the insurer may be
obligated to pay a third party an amount falling within the policyholder’s deductible (e.g., a
deductible under workers compensation insurance). In such a case, the policyholder is
responsible to reimburse the insurer. Treasury reasons (in footnote 19) that if the policyholder
honors its obligation to reimburse the insurer, the deductible is not included within the definition
of “insured loss.” However, if the policyholder fails to reimburse the insurer for the amount paid
on its behalf the amount of the deductible is included within “insured loss”.

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In fact, the inability of an insurer to obtain amounts owed by its policyholder is a credit risk
assumed by the insurer in structuring the insurance policy, not an insurance risk assumed under
the insurance policy. The insurer is fully capable of managing its credit risks by demanding
collateral, a letter of credit or a bond. Congress did not enact TRIA because insurers were unable
to manage credit risk willingly assumed – but because of a need to stabilize the market for
insurance risk relating to terrorism. There is no reason an insurer’s mismanagement of its own
credit risk under complex financial arrangements should become the Program’s problem or be
passed onto small businesses, nonprofits, local governments, and other commercial
policyholders through policyholder surcharges.
Treasury’s proposed rule could undermine concepts previously established under the program.
For example, large policyholders may set up an onshore or offshore captive that issues
reinsurance of some or all of the risk under an insurance policy issued by an unrelated insurer.
Under 31 CFR § 50.71(b)(1), we have long understood in such a situation any reinsurance
recovery under such an arrangement would be disregarded for the purposes of the program
(unless deemed an easily avoidable “excess recovery”). Under the proposed rule, it may be that
reinsurance recoveries from a captive would be seen to reduce “insured loss” as “amounts paid
by a policyholder” especially if the reinsurance agreement is referenced in the policy or an
integral part of the insurance program. Another example where Treasury’s proposed rule may
unsettle previously settled concepts occurs with respect to retrospective premium arrangements
or similar loss sensitive programs. In such cases, Treasury’s proposed rule may be understood to
require reduction of “insured loss” to account for amounts the policyholder pays through ex post
premium adjustments.
Finally, it is easy to see how Treasury’s proposed rule could be gamed. For example, the insurer
and policyholder could establish a deductible arrangement through a side agreement purporting
to exist outside of the policy. Because the amounts to be paid by the policyholder would not be
under the “terms and conditions of the property and casualty insurance”, the insurer may feel
comfortable submitting the reimbursable amount to Treasury as “insured loss.” Such collusions
need not be complex. The insurer could issue a policy that simply waives collection of any
deductible in the event of a certified act of terrorism.
Treasury’s proposed rule heads in the right direction but does not and perhaps should not try to
contemplate the full range of sophistication, complexity and ingenuity within the bespoke
financial structures that dominate the Program. In the absence of supervision of unusual
transactions (or at least some kind of oversight over the underlying transactions to which the
Program is bound), Treasury must issue clear caution to contain aggressive financial creativity.

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The following amendments to the proposed rule would better clarify Treasury’s stated intent and
offer some protection against misuse of the program:
(iv) Amounts paid or payable by a policyholder as required under the terms and
conditions of property and casualty insurance issued by an insurer or under terms
and conditions of any other agreement related to such property and casualty
insurance (other than reinsurance); or
(v) Amounts that would have been paid or payable under paragraph (n)(3)(iv) if
the act had not been certified under the Program; or
(vi) Obligations of the insurer incurred or rights of the insurer foregone for the
purposes of avoiding the requirements of the Program.
Treasury may also wish to remind participating insurers of the availability to request general
interpretations with respect to specific structures and arrangements. 31 CFR § 50.8.