NYSID Limits Fully-earned Premium on Terrorism Coverage

March 20, 2003

The New York State Insurance Department has adopted, on an emergency basis, amendments to Regulations 41 and 57, the effect of which is to limit fully-earned premium policy provisions with respect to terrorism coverage as defined under the federal Terrorism Risk Insurance Act (TRIA).

The premium for the TRIA coverage cannot be fully-earned. This prohibition applies to TRIA coverage provided in policies that are subject to these rules, issued or renewed on or after the effective date of the rulemaking (March 13, 2003), where the premium for the coverage is divisible from the remainder of the policy premium. Policies not issued under TRIA are not affected.

In relation to regulation 41 the NYSID gave the following explanation for imposing the new restrictions:
It has come to the Superintendent’s attention that some insurers participating in the Terrorism Insurance Program outlined in TRIA are issuing policies containing cancellation provisions that provide that premiums are fully earned upon policy issuance.This treatment of unearned premiums unjustly enriches such insurers and is contrary to TRIA’s goal of making coverage more affordable. Treating premiums as fully earned upon policy issuance violates fundamental insurance premium recognition rules, which generally provide that a policy premium is earned evenly over the entire policy period. In addition, this approach is inconsistent with most rating rules filed and approved by the Department for all lines of business covered by these amendments.

The insurance community is greatly aided by the federal backstop for terrorism losses through TRIA. The benefit of affordable and available insurance coverage for acts of terrorism should be provided to the insurance consumers for whom TRIA was designed. These amendments prohibit the continuation of the inequitable practice of treating premiums as fully earned upon policy issuance, which results in an excessive rate in violation of the rating principles embodied in Article 23 of the Insurance Law. It is essential that these amendments be promulgated on an emergency basis in order to mitigate the damage done to the citizens and business owners of the State of New York. Although excess line insurance is not subject to Article 23, these amendments apply equally to the excess line market in order to ensure availability and affordability of coverage and to maintain a level playing field.

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