Moreover, NAII said, the Terrorism Risk Insurance Program is not the appropriate mechanism for establishing these standards.

The issue involves the most recent interim guidance issued by Treasury relating to TRIP, which included a request for comments on the advisability of establishing financial standards for federally approved insurers.

Federally approved insurers, which qualify for the government terror reinsurance program, are those that are neither licensed by a state, nor listed on the Quarterly Listing of Alien Insurers maintained by the National Association of Insurance Commissioners, nor a state residual market entity or workers' compensation fund.

Rather, these are insurers that are approved by a federal agency to write insurance under certain federal programs and statutes to cover maritime, energy or aviation activities.

These include the Price-Anderson Act (covering nuclear liability), the Aircraft Accident Liability Insurance Program of the Transportation Department, and the Longshoremen's and Harbor Workers' Compensation Act of the Labor Department.

In its request for comments, Treasury noted that while some of these insurers have financial requirements, others do not. Because of the lack of uniform requirements, Treasury asked for input on what standards should be applied to these insurers.

But NAII says that the terrorism insurance program is relatively short-term, and establishing standards in regulations used to implement the act does not appear to be appropriate.

"In constructing the federal terrorism risk insurance program, Congress specifically avoided the creation of a federal regulatory body and instead elected to have the federal government stand in the shoes of a reinsurer for purposes of covered acts," NAII said.

The authority to regulate the business of insurance is granted to the states, NAII added. Establishment of federal standards, even in the potentially limited circumstances related to the implementation of the program, would represent an unwarranted intrusion into the regulation of insurance, NAII said.

Turning to the issue of newly formed insurance companies, NAII urges Treasury not to try to exclude these entities from participating in the program.

In its request for comments, Treasury sought input on the appropriate criteria for preventing participation in the program by newly formed insurance companies deemed to be established for the purpose of evading the insurer deductible requirements.

Federal terrorism reinsurance covers 90 percent of an insurers claims that exceed a percentage of earned premiums (7 percent this year). With a new company the premium figure would be zero.

NAII said it supports Treasury's efforts to treat all participants fairly, but the legislation does not include any reference to when or for what purpose an entity was formed.

NAII said, the legislation clearly states that any insurer that receives direct earned premium for most commercial p-c risks not only may participate in the program, but must participate.

NAII noted that all companies within a group are considered under common ownership, the intent of which is to make sure that the situation that concerns Treasury will not occur frequently.

However, NAII acknowledged, there are at least three scenarios where the issue could arise.

First, NAII said, a new independent company could be formed to provide coverage strictly for terrorism.

Second, an existing reinsurer that is licensed as an insurer in a state could begin to write terrorism coverage on a primary basis.

Third, an existing state-licensed "shell company" could be purchased and used to provide terrorism insurance.

Rather than try to exclude these entities from participating in the program, NAII said, Treasury should take the approach that makes sure that if they are formed, the deductible under the program will be calculated using a different approach for these specific purpose companies.

For example, NAII said, the deductible calculation for newly formed insurers, that do not have a full year of operations under the program, could be based on the annualized amount of current year direct earned premium.

This is consistent with the provisions of the legislation, NAII said.

Another possible calculation for these insurers could be based on capital or surplus. This approach, NAII said, would need to be calculated to approximate the same financial deductible percentage under the appropriate year of the program that exists for companies formed prior to enactment of the legislation.