76 211
107 th Congress
Rept. 107 300
HOUSE OF REPRESENTATIVES
1st Session
Part 2
TERRORISM RISK PROTECTION ACT
November 19, 2001.--Ordered to be printed
Mr. Thomas, from the Committee on Ways and Means, submitted the
following
R E P O R T
[To accompany H.R. 3210]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the bill (H.R.
3210) to ensure the continued financial capacity of insurers to provide
coverage for risks from terrorism, having considered the same, report
favorably thereon with an amendment and recommend that the bill as
amended do pass.
CONTENTS
A. Purpose and Summary
9
B. Background and Need for Legislation
9
C. Legislative History
10
II.
Explanation of the Revenue Provisions of the Bill
10
A. Study of Reserves for Property and Casualty Insurance for
Terrorist or Other Catastrophic Events
10
III.
Vote of the Committee
12
IV.
Budget Effects of the Bill
13
A. Committee Estimate of Budgetary Effects
13
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority
13
C. Cost Estimate Prepared by the Congressional Budget Office
13
V.
Other Matters To Be Discussed Under the Rules of the House
20
A. Committee Oversight Findings and Recommendations
20
B. Statement of General Performance Goals and Objectives
21
C. Constitutional Authority Statement
21
D. Information Relating to Unfunded Mandates
21
E. Applicability of House Rule XXI 5(b)
21
F. Tax Complexity Analysis
21
VI.
Changes in Existing Law Made by the Bill, as Reported
22
The amendment is as follows:
Strike all after the enacting clause and insert the following:
SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.
(a) Short Title.--This Act may be cited as the ``Terrorism Risk
Protection Act''.
(b) Table of Contents.--The table of contents for this Act is as
follows:
Sec. 1. Short title and table of contents.
Sec. 2. Congressional findings.
Sec. 3. Designation of Administrators.
Sec. 4. Submission of premium information to Administrator.
Sec. 5. Triggering determination and covered period.
Sec. 6. Federal cost-sharing for commercial insurers.
Sec. 7. Assessments.
Sec. 8. Terrorism loss repayment surcharge.
Sec. 9. Administration of assessments and surcharges.
Sec. 10. Study of reserves for property and casualty insurance for
terrorist or other catastrophic events.
Sec. 11. State preemption.
Sec. 12. Consistent State guidelines for coverage for acts of terrorism.
Sec. 13. Consultation with State insurance regulators and NAIC.
Sec. 14. Sovereign immunity protections.
Sec. 15. Study of potential effects of terrorism on life insurance
industry.
Sec. 16. Definitions.
Sec. 17. Extension of program.
Sec. 18. Regulations.
SEC. 2. CONGRESSIONAL FINDINGS.
The Congress finds that--
(1) the terrorist attacks on the World Trade Center and the Pentagon
of September 11, 2001, resulted in a large number of deaths and
injuries, the destruction and damage to buildings, and interruption of
business operations;
(2) the attacks have inflicted possibly the largest losses ever
incurred by insurers and reinsurers;
(3) while the insurance and reinsurance industries have committed to
pay the losses arising from the September 11 attacks, the resulting
disruption has created widespread market uncertainties with regard to
the risk of losses arising from possible future terrorist attacks;
(4) such uncertainty threatens the continued availability of United
States commercial property casualty insurance for terrorism risk at
meaningful coverage levels;
(5) the unavailability of affordable commercial property and
casualty insurance for terrorist acts threatens the growth and stability
of the United States economy, including impeding the ability of
financial services providers to finance commercial property acquisitions
and new construction;
(6) in the past, the private insurance markets have shown a
remarkable resiliency in adapting to changed circumstances;
(7) given time, the private markets will diversify and develop risk
spreading mechanisms to increase capacity and guard against possible
future losses incurred by terrorist attacks;
(8) it is necessary to create a temporary industry risk sharing loan
program to ensure the continued availability of commercial property and
casualty insurance and reinsurance for terrorism-related risks;
(9) such action is necessary to limit immediate market disruptions,
encourage economic stabilization, and facilitate a transition to a
viable market for private terrorism risk insurance; and
(10) in addition, it is necessary promptly to conduct a study of
whether there is a need for reserves for property and casualty insurance
for terrorist or other catastrophic events.
SEC. 3. DESIGNATION OF ADMINISTRATORS.
(a) In General.--Not later than December 1, 2001, the President shall
designate a Federal officer or officers to act as the Administrator or
Administrators responsible for carrying out this Act and the
responsibilities under this Act to be carried out by each such officer.
(b) Sense of Congress.--It is the sense of the Congress that in
determining the Administrator responsible for making any determinations,
for purposes of this Act, as to whether a loss was caused by an act of
terrorism and whether such loss was caused by one or multiple such
events, pursuant to section 5(b), the President should consider the
appropriate role of the Assistant to the President for Homeland
Security.
SEC. 4. SUBMISSION OF PREMIUM INFORMATION TO ADMINISTRATOR.
To the extent such information is not otherwise available to the
Administrators, the appropriate Administrator may require each insurer
to submit, to the appropriate Administrator or to the NAIC, a statement
specifying the aggregate premium amount of coverage written by such
insurer for properties and persons in the United States under each line
of commercial property and casualty insurance sold by such insurer
during such periods as the appropriate Administrator may provide.
SEC. 5. TRIGGERING DETERMINATION AND COVERED PERIOD.
(a) In General.--For purposes of this Act, a ``triggering
determination'' is a determination by the appropriate Administrator that
the insured losses resulting from the event of an act of terrorism
occurring during the covered period (as such term is defined in
subsection (b)), or the aggregate insured losses resulting from multiple
events of acts of terrorism all occurring during the covered period,
meet the requirements under either of the following paragraphs:
(1) Industry-wide loss test.--Such industry-wide losses exceed
$1,000,000,000.
(2) Capital surplus and industry aggregate test.--Such industry-wide
losses exceed $100,000,000 and some portion of such losses for any
single commercial insurer exceed--
(A) 10 percent of the capital surplus of such commercial insurer (as
such term is defined by the appropriate Administrator); and
(B) 10 percent of the commercial property and casualty premiums
written by such commercial insurer;
except that this paragraph shall not apply to any commercial
insurer that has been making commercial property and casualty insurance
coverage available for less than 4 years as of the date of the
determination under this subsection.
(b) Covered Period.--For purposes of this Act, the ``covered period''
is the period beginning on the date of the enactment of this Act and
ending on January 1, 2003.
(c) Determinations Regarding Events.--For purposes of subsection (a),
the appropriate Administrator shall have the sole authority for
determining whether--
(1) an occurrence or event was caused by an act of terrorism;
(2) insured losses from acts of terrorism were caused by one or
multiple events or occurrences; and
(3) whether an act of terrorism occurred during the covered period.
SEC. 6. FEDERAL COST-SHARING FOR COMMERCIAL INSURERS.
(a) In General.--Pursuant to a triggering determination, the
appropriate Administrator shall provide financial assistance to
commercial insurers in accordance with this section to cover insured
losses resulting from acts of terrorism, which shall be repaid in
accordance with subsection (e).
(b) Amount.--Subject to subsection (c), with respect to a triggering
determination, the amount of financial assistance made available under
this section to each commercial insurer shall be equal to 90 percent of
the amount of the insured losses of the insurer as a result of the
triggering event involved.
(c) Aggregate Limitation.--The aggregate amount of financial
assistance provided pursuant to this section may not exceed
$100,000,000,000.
(d) Limitations.--The appropriate Administrator may establish such
limitations as may be necessary to ensure that payments under this
section in connection with a triggering determination are made only to
commercial insurers that are not in default of any obligation under
section 7 to pay assessments or under section 8 to collect surcharges.
(e) Repayment.--Financial assistance made available under this
section shall be repaid through assessments under section 7 collected by
the appropriate Administrator and surcharges remitted to the appropriate
Administrator under section 8. Any such amounts collected or remitted
shall be deposited into the general fund of the Treasury.
(f) Emergency Designation.--Congress designates the amount of new
budget authority and outlays in all fiscal years resulting from this
section as an emergency requirement pursuant to section 252(e) of the
Balanced Budget and Emergency Deficit Control Act of 1985 (2 U.S.C.
901(e)). Such amount shall be available only to the extent that a
request, that includes designation of such amount as an emergency
requirement as defined in such Act, is transmitted by the President to
Congress.
SEC. 7. ASSESSMENTS.
(a) In General.--In the case of a triggering determination, each
commercial insurer shall be subject to assessments under this section
for the purpose of repaying financial assistance made available under
section 6 in connection with such determination.
(b) Aggregate Assessment.--Pursuant to a triggering determination,
the appropriate Administrator shall determine the aggregate amount to be
assessed among all commercial insurers, which shall be equal to 90
percent of the lesser of--
(1) the amount of industry-wide losses resulting from the triggering
event involved; and
(2) $20,000,000,000.
(c) Allocation of Assessment.--
(1) In general.--The appropriate Administrator shall allocate the
aggregate assessment amount determined under subsection (b) among all
commercial insurers. The portion of the aggregate assessment amount that
is allocated as an assessment on each commercial insurer shall be based
on the percentage, written by that insurer, of the aggregate written
premium, for all commercial insurers, for the calendar year preceding
the assessment.
(2) Payment requirement.--Upon notification by the appropriate
Administrator of an assessment under this section, each commercial
insurer shall be required to pay to the appropriate Administrator, in
the manner provided under section 9 by the appropriate Administrator,
the amount equal to the assessment on such commercial insurer (subject
to the limitation under paragraph (3)).
(3) Annual limitation on amount allocated to each commercial
insurer.--
(A) In general.--Of any assessments under this section on a
commercial insurer, the portion required to be paid by any commercial
insurer during a calendar year shall not exceed the amount that is equal
to 3 percent of the aggregate written premium for such insurer for the
preceding calendar year.
(B) Multiple payments.--If any amounts required to be repaid under
this section for a calendar year are limited by operation of
subparagraph (A), the appropriate Administrator shall provide that all
such remaining amounts shall be reallocated among all commercial
insurers (in the manner provided in paragraph (1)) over such immediately
succeeding calendar years, and repaid over such years, as may be
necessary to provide for full payment of such remaining amounts, except
that the limitation under subparagraph (A) shall apply to the amounts
paid in any such successive calendar years.
(C) Administrative flexibility.--
(i) Timing of assessments.--Assessments under this section in
connection with a triggering demonstration shall be made, to the extent
that the appropriate Administrator considers practicable and
appropriate, at the beginning of the calendar year immediately following
the triggering determination.
(ii) Estimates and corrections.--If the appropriate Administrator
makes an assessment at a time other than provided under clause (i), the
appropriate Administrator may--
(I) require commercial insurers to estimate their aggregate written
premiums for the year in which the assessment is made; and
(II) make a subsequent refund or require additional payments to
correct such estimation at the end of the calendar year.
(4) Deferral of contributions.--The appropriate Administrator may
defer the payment of part or all of the assessment required under
paragraph (2) to be paid by a commercial insurer, but only to the extent
that the appropriate Administrator determines that such deferral is
necessary to avoid the likely insolvency of the commercial insurer.
SEC. 8. TERRORISM LOSS REPAYMENT SURCHARGE.
(a) Imposition and Collection.--If, pursuant to a triggering
determination, the appropriate Administrator determines that the
aggregate amount of industry-wide losses resulting from the triggering
event involved exceeds $20,000,000,000, the appropriate Administrator
shall--
(1) establish and impose a policyholder premium surcharge, as
provided under this section, on commercial property and casualty
insurance written after such determination, for the purpose of repaying
financial assistance made available under section 6 in connection with
such triggering determination; and
(2) provide for commercial insurers to collect such surcharge and
remit amounts collected to the appropriate Administrator.
(b) Amount and Duration.--The surcharge under this section shall be
established in such amount, and shall apply to commercial property and
casualty insurance written during such period, as the appropriate
Administrator determines is necessary to recover the aggregate amount of
financial assistance provided under section 6 to cover insured losses
resulting from the triggering event that exceed $20,000,000,000.
(c) Other Terms.--The surcharge under this section shall--
(1) be based on a percentage of the amount of commercial property
and casualty insurance coverage that a policy provides; and
(2) be imposed with respect to all commercial property and casualty
insurance coverage written during the period referred to in subsection
(b).
SEC. 9. ADMINISTRATION OF ASSESSMENTS AND SURCHARGES.
(a) Manner and Method.--The appropriate Administrator shall provide
for the manner and method of carrying out assessments under section 7
and surcharges under section 8, including the timing and procedures of
making assessments and surcharges, notifying commercial insurers of
assessments or surcharge requirements, collecting payments from and
surcharges through commercial insurers, and refunding of any excess
amounts paid or crediting such amounts against future assessments.
(b) Timing of Coverages and Assessments.--The appropriate
Administrator may adjust the timing of coverages and assessments
provided under this Act to provide for equivalent application of the
provisions of this Act to commercial insurers and policies that are not
based on a calendar year.
(c) Application to Self-Insurance Arrangements.--The appropriate
Administrator may, in consultation with the NAIC, apply the provisions
of this Act, as
appropriate, to self-insurance arrangements by municipalities
and other entities, but only if such application is determined before
the occurrence of a triggering event and all of the provisions of this
Act are applied uniformly to such entities.
(d) Adjustment.--The appropriate Administrator may adjust the
assessments charged under section 7 or the percentage imposed under the
surcharge under section 8 at any time, as the appropriate Administrator
considers appropriate to protect the national interest, which may
include avoiding unreasonable economic disruption or excessive market
instability.
SEC. 10. STUDY OF RESERVES FOR PROPERTY AND CASUALTY INSURANCE
FOR TERRORIST OR OTHER CATASTROPHIC EVENTS.
(a) In General.--The Secretary of the Treasury shall conduct a study
of issues relating to permitting property and casualty insurance
companies to establish deductible reserves against losses for future
acts of terrorism, including--
(1) whether such tax-favored reserves would promote (A) insurance
coverage of risks of terrorism and (B) the accumulation of additional
resources needed to satisfy potential claims resulting from such risks,
(2) the lines of business for which such reserves would be
appropriate, including whether such reserves should be applied to
personal or commercial lines of business,
(3) how the amount of such reserves would be determined,
(4) how such reserves would be administered,
(5) a comparison of the Federal tax treatment of such reserves with
other insurance reserves permitted under Federal tax laws,
(6) an analysis of the use of tax-favored reserves for catastrophic
events, including acts of terrorism, under the tax laws of foreign
countries, and
(7) whether it would be appropriate to permit similar reserves for
other future catastrophic events, such as natural disasters, taking into
account the factors under the preceding paragraphs.
(b) Report.--Not later than 4 months after the date of the enactment
of this Act, the Secretary of the Treasury shall submit a report to
Congress on the results of the study under subsection (a), together with
recommendations for amending the Internal Revenue Code of 1986 or other
appropriate action.
SEC. 11. STATE PREEMPTION.
(a) Covered Perils.--A commercial insurer shall be considered to have
complied with any State law that requires or regulates the provision of
insurance coverage for acts of terrorism if the insurer provides
coverage in accordance with the definitions regarding acts of terrorism
under the regulations issued by the Administrators.
(b) Rate Laws.--If any provision of any State law prevents an insurer
from increasing its premium rates in an amount necessary to recover any
assessments pursuant to section 7, such provision is preempted only to
the extent necessary to provide for such insurer to recover such losses.
(c) File and Use.--With respect only to commercial property and
casualty insurance covering acts of terrorism, any provision of State
law that requires, as a condition precedent to the effectiveness of
rates or policies for such insurance that is made available by an
insurer licensed to transact such business in the State, any action
(including prior approval by the State insurance regulator for such
State) other than filing of such rates and policies and related
information with such State insurance regulator is preempted to the
extent such law requires such additional actions for such insurance
coverage. This subsection shall not be considered to preempt a provision
of State law solely because the law provides that rates and policies for
such insurance coverage are, upon such filing, subject to subsequent
review and action, which may include actions to disapprove or
discontinue use of such rates or policies, by the State insurance
regulator.
SEC. 12. CONSISTENT STATE GUIDELINES FOR COVERAGE FOR ACTS OF TERRORISM.
(a) Sense of Congress Regarding Covered Perils.--It is the sense of
the Congress that--
(1) the NAIC, in consultation with the appropriate Administrator,
should develop appropriate definitions for acts of terrorism and
appropriate standards for making determinations regarding events or
occurrences of acts of terrorism;
(2) each State should adopt the definitions and standards developed
by the NAIC for purposes of regulating insurance coverage made available
in that State;
(3) in consulting with the NAIC, the appropriate Administrator
should advocate and promote the development of definitions and standards
that are appropriate for purposes of this Act; and
(4) after consultation with the NAIC, the appropriate Administrator
should adopt definitions for acts of terrorism and standards for
determinations that are appropriate for this Act.
(b) Insurance Reserve Guidelines.--
(1) Sense of congress regarding adoption by states.--It is the sense
of the Congress that--
(A) the NAIC should develop appropriate guidelines for commercial
insurers and pools regarding maintenance of reserves against the risks
of acts of terrorism; and
(B) each State should adopt such guidelines for purposes of
regulating commercial insurers doing business in that State.
(2) Consideration of adoption of national guidelines.--Upon the
expiration of the 6-month period beginning on the date of the enactment
of this Act, the appropriate Administrator shall make a determination of
whether the guidelines referred to in paragraph (1) have, by such time,
been developed and adopted by nearly all States in a uniform manner. If
the appropriate Administrator determines that such guidelines have not
been so developed and adopted, the appropriate Administrator shall
consider adopting, and may adopt, such guidelines on a national basis in
a manner that would supercede any State law regarding maintenance of
reserves against such risks.
(c) Guidelines Regarding Disclosure of Pricing and Terms of
Coverage.--
(1) Sense of congress.--It is the sense of the Congress that the
States should require, by laws or regulations governing the provision of
commercial property and casualty insurance that includes coverage for
acts of terrorism, that the price of any such terrorism coverage,
including the costs of any terrorism related assessments or surcharges
under this Act, be separately disclosed.
(2) Adoption of national guidelines.--If the appropriate
Administrator determines that the States have not enacted laws or
adopted regulations adequately providing for the disclosures described
in paragraph (1) within a reasonable period of time after the date of
the enactment of this Act, the appropriate Administrator shall, after
consultation with the NAIC, adopt guidelines on a national basis
requiring such disclosure in a manner that supercedes any State law
regarding such disclosure.
SEC. 13. CONSULTATION WITH STATE INSURANCE REGULATORS AND NAIC.
The Administrators shall consult with the State insurance regulators
and the NAIC in carrying out this Act. The Administrators may take such
actions, including entering into such agreements and providing such
technical and organizational assistance to insurers and State insurance
regulators, as may be necessary to provide for the distribution of
financial assistance under section 6 and the collection of assessments
under section 7 and surcharges under section 8.
SEC. 14. SOVEREIGN IMMUNITY PROTECTIONS.
(a) Federal Cause of Action for Damages From Terrorist Acts Resulting
in Triggering Determination.--
(1) In general.--If a triggering determination occurs requiring an
assessment under section 7 or a surcharge under section 8, there shall
exist a Federal cause of action, which shall be the exclusive remedy,
for damages claimed pursuant to, or in connection with, any acts of
terrorism that caused the insured losses resulting in such triggering
determination.
(2) Substantive law.--The substantive law for decision in any such
action shall be derived from the law, including choice of law
principles, of the State in which such act of terrorism occurred, unless
such law is inconsistent with or preempted by Federal law.
(3) Jurisdiction.--Pursuant to each triggering determination, the
Judicial Panel on Multidistrict Litigation shall designate one or more
district courts of the United States which shall have original and
exclusive jurisdiction over all actions brought pursuant to this
subsection that arise out of the triggering event involved.
(4) Offset for relief payments.--Any recovery by a plaintiff in an
action under this subsection shall be offset by the amount, if any,
received by the plaintiff from the United States pursuant to any
emergency or disaster relief program, or from any other collateral
source, for compensation of losses related to the act of terrorism
involved.
(b) Damages in Actions Regarding Insurance Claims.--In an action
brought under this section for damages claimed by an insured pursuant
to, or in connection with, any commercial property and casualty
insurance providing coverage for acts of terrorism that resulted in a
triggering determination:
(1) Prohibition of punitive damages.--No punitive damages intended
to punish or deter may be awarded.
(2) Noneconomic damages.--
(A) In general.--Each defendant in such an action shall be liable
only for the amount of noneconomic damages allocated to the defendant in
direct proportion to the percentage of responsibility of the defendant
for the harm to the claimant.
(B) Definition.--For purposes of subparagraph (A), the term
``noneconomic damages'' means damages for losses for physical and
emotional pain, suffering, inconvenience, physical impairment, mental
anguish, disfigurement, loss of enjoyment of life, loss of society and
companionship, loss of consortium, hedonic damages, injury to
reputation, and any other nonpecuniary losses of any kind or nature.
(c) Right of Subrogation.--The United States shall have the right of
subrogation with respect to any claim paid by the United States under
this Act.
(d) Protective Orders.--The United States or any appropriate
Administrator carrying out responsibilities under this Act may seek
protective orders or assert privileges ordinarily available to the
United States to protect against the disclosure of classified
information, including the invocation of the military and State secrets
privilege.
SEC. 15. STUDY OF POTENTIAL EFFECTS OF TERRORISM ON LIFE
INSURANCE INDUSTRY.
(a) Establishment.--Not later than 30 days after the date of
enactment of this Act, the President shall establish a commission (in
this section referred to as the ``Commission'') to study and report on
the potential effects of an act or acts of terrorism on the life
insurance industry in the United States and the markets served by such
industry.
(b) Membership and Operations.--
(1) Appointment.--The Commission shall consist of 5 members, as
follows:
(A) The appropriate Administrator, as designated by the President.
(C) 4 members appointed by the President, who shall be--
(i) a representative of direct underwriters of life insurance within
the United States;
(ii) a representative of reinsurers of life insurance within the
United States;
(iii) an officer of the NAIC; and
(iv) a representative of insurance agents for life underwriters.
(2) Operations.--The chairperson of the Commission shall determine
the manner in which the Commission shall operate, including funding,
staffing, and coordination with other governmental entities.
(c) Study.--The Commission shall conduct a study of the life
insurance industry in the United States, which shall identify and make
recommendations regarding--
(1) possible actions to encourage, facilitate, and sustain provision
by the life insurance industry in the United States of coverage for
losses due to death or disability resulting from an act or acts of
terrorism, including in the face of threats of such acts; and
(2) possible actions or mechanisms to sustain or supplement the
ability of the life insurance industry in the United States to cover
losses due to death or disability resulting from an act or acts of
terrorism in the event that--
(A) such acts significantly affect mortality experience of the
population of the United States over any period of time;
(B) such loses jeopardize the capital and surplus of the life
insurance industry in the United States as a whole; or
(C) other consequences from such acts occur, as determined by the
Commission, that may significantly affect the ability of the life
insurance industry in the United States to independently cover such
losses.
(d) Recommendations.--The Commission may make a recommendation
pursuant to subsection (c) only upon the concurrence of a majority of
the members of the Commission.
(e) Report.--Not later than 120 days after the date of enactment of
this Act, the Commission shall submit to the House of Representatives
and the Senate a report describing the results of the study and any
recommendations developed under subsection (c).
(f) Termination.--The Commission shall terminate 60 days after
submission of the report as provided for in subsection (e).
SEC. 16. DEFINITIONS.
For purposes of this Act, the following definitions shall apply:
(1) Act of terrorism.--
(A) In general.--The term ``act of terrorism'' means any act that
the appropriate Administrator determines meets the requirements under
subparagraph (B), as such requirements are further defined and specified
by the appropriate Administrator in consultation with the NAIC.
(B) Requirements.--An act meets the requirements of this
subparagraph if the act--
(i) is unlawful;
(ii) causes harm to a person, property, or entity, in the United
States;
(iii) is committed by a group of persons or associations who--
(I) are not a government of a foreign country or the de facto
government of a foreign country; and
(II) are recognized by the Department of State or the appropriate
Administrator as a terrorist group or have conspired with such a group
or the group's agents or surrogates; and
(iv) has as its purpose to overthrow or destabilize the government
of any country or to influence the policy or affect the conduct of the
government of the United States by coercion.
(2) Appropriate administrators.--The term ``appropriate
Administrator'' means, with respect to any function or responsibility of
the Federal Government under this Act, the Federal officer designated by
the President pursuant to section 3 as responsible for carrying out such
function or responsibility.
(3) Affiliate.--The term ``affiliate'' means, with respect to an
insurer, any company that controls, is controlled by, or is under common
control with the insurer.
(4) Aggregate written premium.--The term ``aggregate written
premium'' means, with respect to a year, the aggregate premium amount of
all commercial property and casualty insurance coverage written during
such year for persons or properties in the United States under all lines
of commercial property and casualty insurance.
(5) Commercial insurance.--The term ``commercial insurance'' means
property and casualty insurance that is not insurance for homeowners,
tenants, private passenger nonfleet automobiles, mobile homes, or other
insurance for personal, family, or household needs.
(6) Commercial insurer.--The term ``commercial insurer'' means any
corporation, association, society, order, firm, company, mutual,
partnership, individual, aggregation of individuals, or any other legal
entity that is engaged in the business of providing commercial property
and casualty insurance for persons or properties in the United States.
Such term includes any affiliates of a commercial insurer.
(7) Commercial property and casualty insurance.--The term
``commercial property and casualty insurance'' means property and
casualty insurance that is commercial insurance.
(8) Control.--A company has control over another company if--
(A) the company directly or indirectly or acting through one or more
other persons owns, controls, or has power to vote 25 percent or more of
any class of voting securities of the other company;
(B) the company controls in any manner the election of a majority of
the directors or trustees of the other company; or
(C) the appropriate Administrator determines, after notice and
opportunity for hearing, that the company directly or indirectly
exercises a controlling influence over the management or policies of the
other company.
(9) Covered period.--The term ``covered period'' has the meaning
given such term in section 5(b).
(10) Industry-wide losses.--The term ``industry-wide losses'' means
the aggregate insured losses sustained by all insurers, from coverage
written for persons or properties in the United States, under all lines
of commercial property and casualty insurance.
(11) Insured loss.--The term ``insured loss'' means any loss in the
United States covered by commercial property and casualty insurance.
(12) Insurer.--The term ``insurer'' means any corporation,
association, society, order, firm, company, mutual, partnership,
individual, aggregation of individuals, or any other legal entity that
is engaged in the business of providing property and casualty insurance
for persons or properties in the United States. Such term includes any
affiliates of an insurer.
(13) NAIC.--The term ``NAIC'' means the National Association of
Insurance Commissioners.
(14) Property and casualty insurance.--The term ``property and
casualty insurance'' means insurance against--
(A) loss of or damage to property;
(B) loss of income or extra expense incurred because of loss of or
damage to property; and
(C) third party liability claims caused by negligence or imposed by
statute or contract.
Such term does not include health or life insurance.
(15) State.--The term ``State'' means the States of the United
States, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, Guam, the Virgin Islands,
American Samoa, and any other territory or possession of the United
States.
(16) State insurance regulator.--The term ``State insurance
regulator'' means, with respect to a State, the principal insurance
regulatory authority of the State.
(17) Triggering determination.--The term ``triggering
determination'' has the meaning given such term in section 5(a).
(18) Triggering event.--The term ``triggering event'' means, with
respect to a triggering determination, the event of an act of terrorism,
or the events of such acts, that caused the insured losses resulting in
such triggering determination.
(19) United states.--The term ``United States'' means, collectively,
the States (as such term is defined in this section).
SEC. 17. EXTENSION OF PROGRAM.
(a) Authority.--If the appropriate Administrator determines that
action under this section is necessary to ensure the adequate
availability in the United States of commercial property and casualty
insurance coverage for acts of terrorism, the appropriate Administrator
may provide that the provisions of this Act shall continue to apply with
respect to a period or periods, as established by the Administrator,
that begin after the expiration of the covered period specified in
section 5(b) and end before January 1, 2005.
(b) Covered Period.--If the appropriate Administrator exercises the
authority under subsection (a), notwithstanding section 5(b) and section
16(9), the period or periods established by the appropriate
Administrator shall be considered to be the covered period for purposes
of this Act.
SEC. 18. REGULATIONS.
The appropriate Administrators shall issue any regulations necessary
to carry out this Act.
I. SUMMARY AND BACKGROUND
A. PURPOSE AND SUMMARY
The bill, H.R. 3210, as amended (the ``Terrorism Risk Protection
Act''), serves to ensure the continued financial capacity of insurers to
provide coverage for risks from terrorism.
The revenue provisions of the bill provide for a study relating to
tax reserves for property and casualty insurance for terrorist or other
catastrophic events.
B. BACKGROUND AND NEED FOR LEGISLATION
The terrorist attacks of September 11, 2001, in addition to causing
injuries and loss of life, have caused destruction and damage to
buildings and interruption of business operations. The attacks resulted
in new uncertainties with regard to the risk of losses arising from
possible future terrorist attacks, necessitating a study of issues
relating to tax reserves for property and casualty insurance for
terrorist or other catastrophic events.
C. LEGISLATIVE HISTORY
H.R. 3210, the ``Terrorism Risk Protection Act,'' was introduced
November 1, 2001, by Mr. Oxley, and referred to the Committee on
Financial Services, and in addition to the Committees on Ways and Means,
and the Budget. The bill was marked up in the Financial Services
Committee of the House on November 7, 2001, and ordered to be reported
as amended. The bill, as introduced, includes a provision relating to a
tax reserve for terrorism coverage under commercial lines of business
that is within the jurisdiction of the Committee on Ways and Means of
the House.
COMMITTEE ACTION
The Committee on Ways and Means marked up the revenue provisions of
the bill on November 16, 2001, and reported the provisions, as amended,
on November 16, 2001, by a voice vote, with a quorum present.
II. EXPLANATION OF THE REVENUE PROVISIONS OF THE BILL
A. STUDY OF RESERVES FOR PROPERTY AND CASUALTY INSURANCE FOR TERRORIST
OR OTHER CATASTROPHIC EVENTS (SEC. 10 OF THE BILL)
Present Law and Background
Present law
In determining taxable income, a property and casualty insurance
company includes its underwriting and investment income or loss (sec.
832(b)(1)(A)). Underwriting income generally means the premiums earned
on insurance contracts during the taxable year, reduced by the amount of
the deduction allowed for additions to reserves for losses incurred and
for expenses incurred (sec. 832(b)(2)). The amount of premiums earned
means gross premiums for the year, reduced by the increase in unearned
premiums (those which are treated as earned in a future year).\1\
The amount of losses incurred includes the increase in discounted
unpaid losses (sec. 832(b)(5)(A) (ii)). Unpaid losses are discounted
separately for each line of business, applying tax discounting rules
that take account partially of the time value of money (sec. 846). In
general, unpaid losses mean the amount of unpaid losses reflected on the
annual statement approved by the National Association of Insurance
Commissioners that the taxpayer is required to file with insurance
regulatory authorities of a State. Generally, this amount includes
losses incurred that have been reported to the company, and also losses
that have been incurred but not reported, but not losses that have not
been incurred.
\1\Section 832(b)(4). A property and casualty insurance company
generally is required to reduce its deduction for increases in unearned
premiums by 20 percent, to limit mismatching of income and expenses.
Description of H.R. 3210 as introduced
Non-tax provisions
The bill, as introduced, provides for temporary Federal government
cost-sharing for commercial insurers of up to $100 billion, for 90
percent of the amount of insured losses resulting from acts of terrorism
in the event of a ``triggering determination'' during the period from
date of enactment to January 1, 2003. The financial assistance is to be
repaid through assessments and surcharges. The bill provides for
assessments by a Federal government administrator against property and
casualty insurers, and surcharges against property and casualty
insurance policyholders, following the occurrence of a triggering
determination. The triggering determinations include the events that (1)
industry-wide terrorism losses exceed $1 billion for the year; and (2)
industry-wide losses exceed $100 million for the year and exceed 10
percent of the capital surplus of, and 10 percent of the commercial
insurance premiums written by, any single insurer (among other
criteria).
Tax provisions
The bill as introduced provides a permanent rule allowing an
additional deduction to property and casualty insurers for increases in
a ``terrrorism commercial business reserve.'' Under the bill, the
terrorism commercial business reserve means an amount held in a
segregated account (or other separately identifiable arrangement or
account) that is set aside to pay or to reinsure future unaccrued claims
arising from declared terrorism losses, or to pay other claims if
directed by a State insurance commissioner to avoid the company's
insolvency. An increase in the reserve for any taxable year is treated
as deductible, and a decrease in the reserve for a taxable year is
includable in the company's income.
The amount of the reserve allowed to any particular property and
casualty insurance company is determined as that company's allocable
share of a national limit of $40 billion ($13.34 billion for 2002). The
$40 billion amount is a cumulative total, and is increased for inflation
after 2002. The company's share of this national limit for any calendar
year is determined by the ratio of (1) the company's net written
premiums for commercial lines of business that cover declared terrorism
losses, to (2) net written premiums for all companies for commercial
lines of business that cover declared terrorism losses.
If in any taxable year, a company's deduction exceeds its share of
the national limit, then the excess is included in income for the next
taxable year. If the excess is distributed out of the account for the
reserve, then the excess is not taken into account in determining the
opening balance of the reserve for the next year.
Under the bill, a declared terrorism loss means the amount of losses
and loss adjustment expenses incurred in commercial lines of business,
as well as any nonrecoverable assessments, surcharges, or other
liabilities that are borne by the company, that are attributable to a
declared terrorism event. A declared terrorism event means any event
declared by the President to be an act of terrorism against the United
States for purposes of this provision.
Effective date. --The tax provisions of the bill are effective for
taxable years beginning after December 31, 2001.
Reasons for Change
The Committee believes that changes in the market for property and
casualty insurance covering risks of terrorist acts following the events
of September 11, 2001, necessitate a prompt study of the issues relating
to permitting property and casualty insurance companies to establish
deductible reserves against losses for future acts of terrorism (as well
as for other future catastrophes, such as natural disasters).
Explanation of Provision
The provision deletes the tax provisions of H.R. 3210 as introduced.
The provision requires the Secretary of the Treasury to conduct a
study of issues relating to permitting property and casualty insurance
companies to establish deductible reserves against losses for future
acts of terrorism. No later than 4 months after the date of enactment,
the Secretary is required to report to Congress the results of the
study, with recommendations for changes to the Internal Revenue Code of
1986 or other appropriate action. The issues to be studied include--
(1) Whether such tax-favored reserves for property and casualty
insurance companies would promote insurance coverage of risks of
terrorism and the accumulation of additional resources needed to satisfy
potential claims resulting from such risks,
(2) The lines of business for which such reserves would be
appropriate, including whether the reserves should be applied to
personal or commercial lines of business,
(3) How the amount of such reserves would be determined,
(4) How such reserves would be administered,
(5) A comparison of the Federal tax treatment of such reserves and
of other insurance reserves permitted under present Federal tax law,
(6) An analysis of the use of tax-favored reserves for catastrophic
events, including acts of terrorism, under the tax laws of foreign
countries, and
(7) Whether it would be appropriate to permit similar reserves for
other future catastrophic events, such as natural disasters, taking into
account the factors under the preceding paragraphs.
III. VOTE OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of the House
of Representatives, the following statements are made concerning the
votes of the Committee on Ways and Means in its consideration of the
revenue provisions of the bill, H.R. 3210.
MOTION TO REPORT THE BILL
The bill was ordered reported by voice vote, with a quorum present.
IV. BUDGET EFFECTS OF THE BILL
A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS
In compliance with clause 3(d)(2) of the rule XIII of the Rules of
the House of Representatives, the following statement is made concerning
the effects on the budget of the revenue provision of the bill, H.R.
3210, as reported.
The revenue provision of the bill, as reported, is estimated to have
no effect on budget receipts for fiscal years 2002 2006.
B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX EXPENDITURES BUDGET
AUTHORITY
In compliance with clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives, the Committee states that the revenue
provisions of the bill involve no new or increased budget authority (as
detailed in the statement by the Congressional Budget Office (``CBO'');
see Part IV.C., below). The Committee further states that the revenue
provisions involve no increased tax expenditures. (See Part IV.A.,
above.)
C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET OFFICE
In compliance with clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, requiring a cost estimate prepared by the CBO,
the following statement by CBO is provided.
U.S. Congress,
Congressional budget Office,
Washington, DC, November 19, 2001.
Hon. William ``Bill'' M. Thomas, Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has prepared the
enclosed cost estimate for H.R. 3210, the Terrorism Risk Protection Act.
If you wish further details on this estimate, we will be pleased to
provide them. The CBO staff contacts are Mark Hadley and Megan Carroll
(for federal costs), Susan Sieg Tompkins (for the state and local
impact), and Jean Talarico (for the private-sector impact).
Sincerely,
Dan L. Crippen, Director.
Enclosure.
H.R. 3210--Terrorism Risk Protection Act
Summary: H.R. 3210 would require an administrator appointed by the
President to provide up to $100 billion in financial assistance to
commercial property and casualty insurers for losses from terrorist acts
committed after enactment of the bill and prior to January 1, 2003. (The
administrator would have the authority to extend the program for two
more years.) The administrator would provide such assistance only after
insured losses exceed $1 billion for the entire industry (or lesser
amounts if individual insurance companies are particularly affected as
specified by the bill). After either threshold is met, the administrator
would pay insurance companies 90 percent of subsequent covered losses.
Under the bill, if insured losses from a terrorist act required the
administrator to provide financial assistance, the administrator could
recoup that cost through charges assessed on the insurance industry and
purchasers of commercial property and casualty insurance.
CBO cannot predict how much insured damage terrorists would cause in
any specific year. Instead our estimate of the cost of financial
assistance provided under H.R. 3210 represents an expected value of
payments from the program--a weighted average that reflects the
probabilities of various outcomes, from zero damages up to very large
damages due to possible future terrorist attacks. The expected value can
be thought of as the amount of an insurance premium that would be
necessary to just offset the risk of providing this insurance; indeed,
our estimate of the expected cost for H.R. 3210 is based on premiums
collected for terrorism insurance in the United Kingdom and insurance
practices in the United States.
On this basis, CBO estimates that enacting section 6 of H.R. 3210
would increase direct spending by about $7.3 billion over the 2002 2006
period and by $8.5 billion over the next 10 years. Under the bill, the
administrator could recoup the cost of providing financial assistance
through assessments and surcharges; hence, over many years, CBO expects
that an increase in spending for financial assistance would be nearly
offset (on a cash basis) by a corresponding increase in governmental
receipts (revenues). We assume, however, that the administrator would
not impose any assessments or surcharges until one year after federal
assistance is provided and that those amounts would be collected over
several years. Thus, CBO estimates that H.R. 3210 would increase
governmental receipts by about $1.4 billion over the 2002 2006 period
and by $5.3 billion over the next 10 years. Because H.R. 3210 would
affect direct spending and receipts, pay-as-you-go procedures would
apply.
H.R. 3210 contains several intergovernmental and private-sector
mandates, as defined in the Unfunded Mandates Reform Act (UMRA), on
insurers and policy holders of commercial property and casualty
insurance. CBO estimates that the aggregate net costs of complying with
those mandates would not exceed the annual thresholds established by
UMRA ($56 million for intergovernmental mandates and $113 million for
private-sector mandates in 2001, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated budgetary
impact of H.R. 3210 is shown in the following table. The costs of this
legislation fall within budget function 370 (commerce and housing
credit).
By fiscal year, in millions of dollars--
2002 2003 2004 2005 2006
CHANGES IN DIRECT SPENDING
Estimated budget authority 800 1,700 2,200 1,700 900
Estimated outlays 800 1,700 2,200 1,700 900
CHANGES IN REVENUES
Assessments and surcharges 0 100 200 500 600
Basis of estimate: For this estimate, CBO assumes that H.R. 3210 will
be enacted by the end of 2001 and its provisions will remain in effect
until December 31, 2004. We estimate that H.R. 3210 would increase
direct spending by $8.5 billion and governmental receipts by $5.3
billion over 2002 2011 period.
Direct spending
H.R. 3210 would require the administrator to provide up to $100
billion in financial assistance to commercial property and casualty
insurers for losses above certain thresholds due to future terrorist
acts. Under the bill, the administrator would provide such assistance as
a result of terrorist acts that occur before January 1, 2003, but the
administrator could extend the program to cover events through calendar
year 2004. (If the program is extended beyond 2002, we interpret the
$100 billion as being an annual limit.) For this estimate, CBO assumes
that the administrator would extend the program through 2004.
By offering financial assistance to commercial property and casualty
insurers for acts of terrorism, H.R. 3210 would expose the federal
government to potentially huge liabilities. For any year, CBO has no
basis for estimating the likelihood of terrorist attacks or the amount
of insured damage they may cause. Instead, our estimate of the cost of
these provisions reflects how much the government might be expected to
pay to insurers on average.
In the following sections, we describe our method for estimating the
expected-value cost of providing financial assistance under H.R. 3210,
explain how we convert that expected-value cost to annual estimates of
cash outlays, and discuss some of the reasons why the cost to the
federal government is so uncertain.
Terrorism Insurance in the United Kingdom. --Because very limited
information is available about how the insurance industry would set
premiums for terrorism insurance in the United States, we examined the
government-backed insurance pool that spreads the risk of terrorist acts
among insurers in the United Kingdom (this program is called Pool Re).
CBO could not estimate the cost of H.R. 3210 to the federal
government by examining the U.S. insurance industry's perception of the
likelihood of terrorist acts. Representatives of the insurance industry
have testified that estimating the risk of terrorist acts is nearly
impossible because sufficient historical data do not exist. We explored
the possibility of using premiums paid in the U.S. for terrorism
insurance prior to September 11, 2001, to estimate the minimum premium
required to compensate the government for its risk; however, such
information is not available. This led us to examine the United
Kingdom's experience with terrorism insurance.
In 1993, the British government created Pool Re to provide terrorism
reinsurance (insurance for insurance companies) to the commercial
property insurance market in the United Kingdom. Participating insurers
must offer terrorism coverage at risk-based rates established by Pool Re
and then remit any premiums collected from their customers to the pool.
After a small deductible, Pool Re pays 100 percent of the costs of a
terrorist act. If claims from terrorist acts exhaust the pool's
resources, the British government is liable for the shortfall.
Calculating the Expected Value of Claims. --Over the 1993 2000
period, annual premiums collected by Pool Re have ranged from about $530
million in the early years of the program to about $75 million in 2000.
On average, annual premiums have been roughly $325 million. The pool has
reduced its premium rates in recent years as the number of terrorist
attacks in the United Kingdom (and the perceived threat of future
attacks) dropped. For this estimate, CBO assumes that the average
premiums over the eight-year period accurately reflect the terrorist
risk to covered losses in the United Kingdom. In some years, there may
be many costly attacks; in others, there may be none.
To compare premiums collected by Pool Re to those that would be
required to compensate the federal government for its risk under H.R.
3210, we made adjustments to account for differences between Pool Re and
the proposed U.S. program. CBO expects that, if premiums were charged to
cover the potential costs of H.R. 3210, they would have to be
significantly larger than those collected by Pool Re. Pool Re covers
losses only for property damage and business interruption, while the
program proposed under the bill also would cover casualty and related
risks. Based on information from the insurance industry about the
relative proportion of property and casualty insurance, we estimate that
including these lines would roughly double the premiums required under
Pool Re. In addition, CBO increased the average premium amount for Pool
Re by a factor of 7 to account for differences in the sizes of the two
countries' economies and insurance markets. We did not make any
adjustments for differences in the risk of terrorist acts that each
country faces because we cannot quantify such differences.
After making the adjustments described above, CBO estimates that the
expected-value cost of a federal program that is analogous to Pool Re
would be about $4.5 billion a year. However, two key differences between
Pool Re and the program outlined in H.R. 3210 require additional
adjustments. First, H.R. 3210 would require the industry to absorb
losses of $1 billion before the administrator would provide any
assistance. By comparison, deductibles required by Pool Re are
negligible. Second, H.R. 3210 would cap federal assistance at $100
billion a year; coverage under Pool Re has no cap.
To make these further adjustments, we assumed that the probability of
terrorist attacks is skewed toward events that would cost less than $4.5
billion a year. After taking into account the $1 billion industry-wide
deductible and the $100 billion cap on federal assistance, CBO estimates
that the administrator would need to charge about $3 billion annually
for coverage over the 2002 2004 period to fully compensate the
government for the risk it would assume under H.R. 3210. Assuming the
program operates for three years, the expected cost to the
government would total $9 billion. Those outlays, however,
would be spread out over many years, as explained below.
Timing of Federal Spending .--To estimate federal spending for this
program on a cash basis, CBO used information from insurance experts on
historical rates at which property and casualty claims are paid. Based
on such information, CBO estimates that the expected value of federal
spending under H.R. 3210 would total $8.5 billion over the 2002 2011
period, and about $500 million after 2011. In general, following a
catastrophic loss, it takes many years to complete insurance payments
because of disputes over the value of covered losses by property and
business owners. For this estimate, we assumed that financial assistance
to property and casualty insurers would be paid over several years, with
most of the spending occurring within the first five years.
Costs Are Uncertain .--While this estimate reflects CBO's best
judgment on the basis of available information, costs are a function of
inherently unpredictable future terrorist attacks. As such, actual costs
could cover an extremely broad range. Moreover, there is a greater risk
that our estimated costs are too low rather than too high.
Our expected losses under this program could be too low because we
assumed losses would have to exceed $1 billion before the administrator
would provide assistance. Under the bill, however, the administrator
also could provide assistance if aggregate losses exceed $100 million
and at least one company is particularly adversely affected. In
addition, there are a number of differences between Pool Re and the
program that would be established under this legislation that are
unknown--for example, the difference between U.S. and British tort
law--but these differences would push the likely cost of the bill
higher.
Revenues
CBO estimates that under H.R. 3210 the administrator would collect
$5.3 billion over the 2002 2011 period through assessments on the
insurance industry and surcharges on policy holders.
Assessments .--If a terrorist act requires the administrator to
provide financial assistance, the administrator would recoup that cost
through charges paid by the insurance industry and purchasers of
commercial property and casualty insurance. The first $18 billion of
financial assistance could be recovered by assessing each insurer based
on its portion of aggregate property and casualty insurance premiums for
the preceding calendar year. Each company's assessment would be limited
to 3 percent of aggregate premiums. The administrator could delay when a
company would be required to pay the assessment if such a delay were
necessary to prevent the insurer from becoming insolvent. Because we
assume the probability of terrorist attacks would be skewed toward
events that would cost less than $4.5 billion, we anticipate that
assessments would account for most of the amounts the administrator
would collect. On an expected-value basis, CBO estimates that
assessments to recover the cost of federal assistance would generate
revenues totaling $4.3 billion over the next 10 years.
Surcharges .--The administrator would recover any assistance provide
between $20 billion and $100 billion by imposing a surcharge on all
premiums for commercial property and casualty insurance. Surcharges
would apply to insurance sold following a terrorist attack that
necessitated federal assistance. H.R. 3210 would require the
administrator to impose surcharges for as long as is necessary to
recover the aggregate financial assistance. Thus, the government could
collect surcharges for many years depending on the level of financial
assistance. We estimate that surcharges would total $1 billion over the
next 10 years.
Timing .--CBO expects that the administrator probably would not
recoup the entire cost of financial assistance during the 2002 2011
period. Based on information from the insurance industry on aggregate
premiums collected in recent years, CBO estimates that the administrator
could recoup no more than about $10 billion a year. The bill would allow
the administrator to reduce annual charges to avoid unreasonable
economic disruption, excessive market instability, or undue burdens on
small businesses. Therefore, if annual losses are very high, we expect
that the administrator would limit annual collections by spreading them
over many years. CBO assumes it would take the administrator at least 10
years to recoup the costs of any financial provided under H.R. 3210.
Thus, we estimate that many of the collections from assessments and
surcharges would occur after 2011.
Risk of Insolvency .--In addition, although the bill would allow the
administrator to delay when an insurance company pays its assessment,
the bill would not provide the administrator with the authority to
increase the assessment on the remaining insurance companies if a
company is unable to pay. Thus, the federal government also would bear
the risk that an insurance company would become insolvent during the
assessment period. Historically, the credit risk of insurance companies
has been very low, but the government would be exposed to such risk only
following a very costly attack. Because we expect the probability of
such a costly attack is very low, we included a small adjustment for the
risk of insolvency in our estimate.
Credit Reform Does Not Apply .--The provisions of the Federal Credit
Reform Act do not apply to H.R. 3210. Under that act, a direct loan is
defined as a defined as a disbursement of funds to a nonfederal borrower
under a contract that requires the repayment. A disbursement cannot be
considered a direct loan, however, if the duty to repay the government
arises from an
exercise of sovereign power, tort liability, or some other
noncontract obligation. H.R. 3210 would require insurance companies and
potentially policy holders to compensate the government for its costs,
but it would do so through an exercise of sovereign power, not through
loan repayment contracts. Therefore, CBO believes that the financial
assistance and subsequent collections would not constitute a loan
program.
Pay-as-you-go considerations: The Balance Budget and Emergency
Deficit Control Act sets up pay-as-you-go procedures for legislation
affecting direct spending or receipts. The net changes in outlays and
governmental receipts that are subject to pay-as-you-go procedures are
shown in the following table. Only the effects in the current year and
the following four years are counted for pay-as-you-go purposes.
By fiscal year, in millions of dollars--
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Changes in outlays 800 1,700 2,200 1,700 900 500 300 200 100 100
Changes in receipts 0 100 200 500 600 700 800 800 800 800
Intergovernmental and private-sector impact: H.R. 3210 contains
several intergovernmental and private-sector mandates as defined by
UMRA. CBO estimates that the costs to comply with all of the mandates in
the bill would not exceed the thresholds established by UMRA ($56
million for intergovernmental mandates and $113 for private-sector
mandates in 2001, adjusted annually for inflation).
Assessments and surcharges
The bill would require the administrator, through the use of the
federal government's sovereign power, to recoup the costs of financial
assistance provided to certain insurers through assessments paid by the
insurance industry and surcharges paid by purchasers of commercial
property and casualty insurance. This requirement to repay the federal
government for financial assistance received would be both an
intergovernmental and private-sector mandate under UMRA because both
private entities and state and local governments would be affected.
Specifically, section 7 would require commercial property and
casualty insurers as well as self-insured risk pools to pay back,
through assessments, 90 percent of either total industry-wide losses or
$20 billion, whichever is less. Taken individually, some insurers may
benefit from the financial assistance while others face only the cost of
the assessment. But for the insurance industry as a whole, the cost of
the assessment would be no greater than the financial assistance
received, so the net cost of this mandate would be zero.
In addition, section 8 would require purchasers of commercial
property and casualty insurance to repay, in the form of a surcharge,
any federal assistance provided to certain insurers between $18 billion
and $100 billion. Some purchasers of commercial property and casualty
insurance would not receive a direct benefit under the bill or
protection from higher premiums in its absence. Therefore, the surcharge
would be a mandate that imposes costs on both private-sector purchasers
and state and local governments (in their capacity as purchasers of
insurance). CBO estimates that the expected value of the surcharges on
policyholders would total less than $120 million annually over the next
five years.
Preemptions
Section 12 would preempt certain state insurance laws by providing
that any insurer that complies with the provisions of the bill would be
deemed to comply with any state law that regulates insurance for acts of
terrorism. This section also would expressly preempt any state laws that
limit the amount an insurer could add to premiums to recover any
assessments, and laws that require certain actions by insurers in order
for rates or policies to be effective.
Section 13 of the bill would require states to adopt uniform
guidelines for maintaining certain reserves and disclosing premium
costs. Should states fail to adopt these guidelines, the administrator
could adopt them on a national basis, superseding any related state
laws. Neither the preemptions in section 12 nor the requirements of
section 13, which are intergovernmental mandates as defined by UMRA,
would impose significant costs on state, local, or tribal governments.
Previous CBO estimate: On November 16, 2001, CBO transmitted a cost
estimate for H.R. 3210, the Terrorism Risk Protection Act, as ordered
reported by the House Committee on Financial Services on November 7,
2001. CBO estimates that the effects on direct spending would be the
same under the two versions, but the revenue provisions and their
estimated effects would differ. Both versions would increase
governmental receipts from assessments and surcharges by an
estimated $5.3 billion over the 2002 2011 period. However, the
version of the bill ordered reported by the Committee on Financial
Services also included provisions that the Joint Committee on Taxation
estimated would reduce tax revenues from non-life insurance companies by
$21.4 billion over that period. Hence, we estimated that enacting that
version would have the net effect of reducing governmental receipts by
$7.1 billion over the next 10 years. Because the House Committee on Ways
and Means did not include those provisions, CBO estimates that its
version of H.R. 3210 would increase governmental receipts by $5.3
billion over the 2002 2011 period.
In addition, while our estimate of total assessments and surcharges
under both versions is the same, we estimate that, under the version
ordered reported by the House Committee on Ways and Means, a greater
proportion of the collections would come from surcharges that under the
House Committee on Financial Services' version. While the mandates in
both versions of the bill are the same, the higher surcharges would
increase the cost of the mandate on purchasers of insurance. However,
the aggregate costs of the mandates in both versions would not exceed
the thresholds established in UMRA.
Estimate prepared by: Federal costs: Mark Hadley, Megan Carroll, and
Ken Johnson; impact on State, local, and tribal governments: Susan Sieg
Tompkins; impact on the private sector: Jean Talarico.
Estimated approved by: Robert A. Sunshine, Assistant Director for
Budget Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS
With respect to clause 3(c)(1) of rule XIII of the Rules of the House
of Representatives (relating to oversight findings), the Committee
advises that it was a result of the Committee's oversight review of any
conditions or circumstances that may indicate the necessity or
desirability of enacting new or additional legislation within its
jurisdiction that the Committee determined that it is appropriate and
timely to enact the study relating to tax reserves for property and
casualty insurance for terrorist or other catastrophic events that is
provided for in the bill, in light of the events of September 11, 2001.
B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES
With respect to clause 3(c)(4) of rule XIII of the Rules of the House
of Representatives, the Committee advises that the bill contains no
revenue measure that authorizes funding, so no statement of general
performance goals and objectives for which any measure authorizes
funding is required.
C. CONSTITUTIONAL AUTHORITY STATEMENT
With respect to clause 3(d)(1) of the rule XIII of the Rules of the
House of Representatives (relating to Constitutional Authority), the
Committee states that the Committee's action in reporting this bill is
derived from Article I of the Constitution, Section 8 (``The Congress
shall have Power To lay and collect Taxes, Duties, Imposts and Excises *
* *''), and from the 16th Amendment to the Constitution.
D. INFORMATION RELATING TO UNFUNDED MANDATES
This information is provided in accordance with section 423 of the
Unfunded Mandates Act of 1995 (P.L. 104 4).
The Committee has determined that the revenue provisions of the bill
do not contain Federal mandates on the private sector. The Committee has
determined that the revenue provisions of the bill do not impose a
Federal intergovernmental mandate on State, local, or tribal
governments.
E. APPLICABILITY OF HOUSE RULE XXI 5(B)
Rule XXI 5(b) of the Rules of the House of Representatives provides,
in part, that ``A bill or joint resolution, amendment, or conference
report carrying a Federal income tax rate increase may not be considered
as passed or agreed to unless so determined by a vote of not less than
three-fifths of the Members voting, a quorum being present.'' The
Committee has carefully reviewed the revenue provisions of the bill, and
states that those provisions of the bill do not involve any Federal
income tax rate increases within the meaning of the rule.
F. TAX COMPLEXITY ANALYSIS
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the Joint
Committee on Taxation (in consultation with the Internal Revenue Service
and the Department of the Treasury) to provide a tax complexity
analysis. The complexity analysis is required for all legislation
reported by the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation includes a
provision that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals or small
businesses.
The staff of the Joint Committee on Taxation has determined that a
complexity analysis is not required under section 4022(b) of the IRS
Reform Act because the revenue provisions of the bill contain no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In compliance with clause 3(e) of rule XIII of the Rule of the House
of Representatives, the Committee states that no changes in existing law
are made by the revenue provision of the bill, as reported.
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