[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
HOW MUCH ARE AMERICANS AT RISK UNTIL
CONGRESS PASSES TERRORISM INSURANCE
PROTECTION?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 27, 2002
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-57
U.S. GOVERNMENT PRINTING OFFICE
78-186 PS WASHINGTON : 2002
--------------------------------------------------------------------
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
------
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAY INSLEE, Washington
CHRISTOPHER COX, California JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
----------
Page
Hearing held on:
February 27, 2002............................................ 1
Appendix:
February 27, 2002............................................ 43
WITNESSES
Wednesday, February 27, 2002
Beck, Deborah B., Executive Vice President, Real Estate Board of
New York....................................................... 23
Hillman, Richard J., Director, Financial Markets and Community
Investment, General Accounting Office.......................... 7
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America........................................................ 28
Kramer, Lisa, President and CEO, Federation of Jewish
Philanthropies
Service Corporation............................................ 24
Mair, David L., President of the Risk and Insurance Management
Society; Director for Risk Management, U.S. Olympic Committee.. 20
Quinn, Kieran, President and CEO, Column Financial, Inc., a
subsidiary of Credit Suisse First Boston....................... 26
Schroeder, Alice D., Senior U.S. Nonlife Equity Insurance
Analyst, Morgan Stanley........................................ 31
Serio, Hon. Gregory V., Superintendent of Insurance, New York
State Insurance Department..................................... 10
Warshawsky, Mark J., Deputy Assistant Secretary for Economic
Policy, Department of the Treasury............................. 5
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 44
Oxley, Hon. Michael G........................................ 47
Biggert, Hon. Judy........................................... 48
Gutierrez, Hon. Luis V....................................... 50
Beck, Deborah B.............................................. 112
Hillman, Richard J........................................... 57
Hunter, J. Robert............................................ 142
Kramer, Lisa................................................. 24
Mair, David L................................................ 104
Quinn, Kieran................................................ 137
Schroeder, Alice D........................................... 171
Serio, Hon. Gregory V........................................ 77
Warshawsky, Mark J........................................... 51
Additional Material Submitted for the Record
Beck, Deborah B.:
``The Lack of Terrorism Insurance and Its Impact upon Tax
Revenue for New York,'' February 27, 2002.................. 119
Written response to questions from Hon. Luis V. Gutierrez.... 129
Hunter, J. Robert:
``How the Lack of Federal Back Up for Terrorism Insurance Has
Affected Insurers and Consumers,'' January 23, 2002........ 154
Kramer, Lisa:
Written response to questions from Hon. Luis V. Gutierrez.... 136
Coalition To Insure Against Terrorism, prepared statement........ 181
National Association of Insurance Commissioners, prepared
statement...................................................... 186
National Multi Housing Council, National Apartment Association,
prepared statement............................................. 196
Sullivan, Edward C., President, Building and Construction Trades
Department, AFL-CIO, prepared statement........................ 203
HOW MUCH ARE AMERICANS AT RISK
UNTIL CONGRESS PASSES TERRORISM
INSURANCE PROTECTION?
----------
WEDNESDAY, FEBRUARY 27, 2002
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 3:35 p.m. in
room 2128, Rayburn House Office Building, Hon. Sue W. Kelly,
[chairwoman of the subcommittee], presiding.
Present: Chairwoman Kelly; Representatives Weldon, Biggert,
Ney, Tiberi, Gutierrez, Inslee, and Maloney of NY.
Chairwoman Kelly. First of all I want to apologize to all
of you for the delay here. There is an unusual floor proceeding
going on and I had heard that we had a vote. About 20 minutes
ago I heard there was a vote in 5 minutes. And I thought, well,
we will just wait that 5 minutes and that would save everybody
time.
They are still arguing on the floor. So when they get that
argument over, we will go back and we will have to vote during
this hearing.
But that being said, I want to thank you all for your
patience and this hearing of the Subcommittee on Oversight and
Investigations will come to order.
I want to thank all Members of Congress who are present
today, and there are a couple in the back room here I think
that have come in. Without objection, all Members present will
participate fully in the hearing, and all opening statements
and questions are made part of the official hearing record.
On September 11th, our world fundamentally changed with the
cowardly acts of a handful of terrorists. We all carry with us
the memories of the destruction of that day which deprived
families of loved ones, people of their jobs, and a Nation of
one of its greatest landmarks.
In addition, the losses of September 11th represent the
single largest hit to our insurance industry in the history of
the United States.
Since then, our insurance markets are facing a new reality.
Insurers are being asked to insure terrorism risk when they
have no realistic way to determine the fair price for that
risk, or in the vast majority of cases, being able to obtain
any reinsurance for it.
This risk is one which no one ever anticipated. Moreover,
no one can presently calculate the proper odds for where or
when the next attack will occur. We do know, however, that our
Government officials believe that we should expect additional
and costly attacks.
Consequently, the vast majority of insurers have been
loathe to cover terrorism, especially for major buildings,
factories, or gathering places. Where terrorism insurance is
available or is required by law, insurers must charge high
premiums for it and offer very limited capacity to protect
against the risk of insolvency.
Today, nearly 6 months later, we continue to discover
further repercussions from the acts of terror on New York and
Washington. One such symptom is the pervasive risk transfer
that is currently occurring from reinsurers to insurers of
American businesses leaving such businesses vulnerable to
future terrorist attacks.
I think the GAO put it best in their report, and I am
quoting from that report:
``Since the September 11th attacks, the key dynamic taking
place in the insurance industry has been a shifting of the risk
for terrorism-related losses from reinsurers to primary
insurers and then to the insured. Reinsurers and insurers have
begun shedding their exposure to terrorism risk as insurance
contracts have come up for renewal, leaving policyholders
increasingly exposed to losses from a terrorist attack.''
The GAO goes on to say: ``Large companies, businesses of
any size perceived to be in or near a target location, or those
with some concentration of personnel or facilities, are
unlikely to be able to obtain a meaningful level of terrorism
coverage at an economically viable price.''
The focus of the GAO's inquiry was on the availability of
property and casualty insurance and reinsurance. That is
clearly important. But we also need to consider whether there
have been similar detrimental effects with respect to terrorism
coverage in the group life insurance area.
I hope we can get some enlightenment on that question, as
well.
It is clear that the current lack of terrorism coverage
acts as a chill factor restraining our economy, which is
struggling to recover from recession. Businesses, particularly
in cities and near targets, seeking to build are being required
to carry terrorism insurance.
However, I am informed that there is little or no terrorism
coverage available and hence some new construction is being
stopped before it can even start.
This is causing the loss of new jobs at a time when
creating jobs should be one of our highest priorities. In
short, the Senate's leadership failure to act on terrorism
insurance legislation is imposing a fear tax on America,
costing real jobs when the country is trying to pull out of a
recession.
In addition, since the Administration says that another
terrorist attack is extremely likely, we must plan for how the
Government should react to such an attack now, not after
another attack.
We have learned countless lessons from September 11 on
homeland security and distributions from September 11th
charities which could have avoided many problems with a little
more planning beforehand.
Acting now will preserve a private market mechanism to
provide terrorism coverage, capital, and a claims processing
system.
Waiting until Americans suffer the next terrorist attack to
respond is irresponsible, inefficient, and will ultimately cost
the Government much more than taking responsible action now.
Victims will most likely suffer months of additional delays
as Congress scrambles to create a bureaucracy to determine
which victims get compensated and in what amounts.
This can be especially harmful to small businesses which
cannot afford to wait months after a tragedy while Congress
decides whether or not and how to respond.
As a former small business owner, this concerns me greatly.
Under the leadership of Chairman Oxley, this subcommittee acted
quickly last year to pass legislation, H.R. 3210, the Terrorism
Risk Protection Act, to protect the U.S. economy, its
businesses, and its workers from the negative effects that are
materializing today. It is stuck in the Senate.
I sincerely hope that the Senate leadership will act
quickly to avoid a potential calamity. Today we will hear from
a list of very distinguished witnesses to gain a better
understanding of how the lack of Federal legislation has and
will affect commercial consumers, builders, lenders, investors,
workers, schools, hospitals, public entities, and private
institutions.
I would like to thank all of the witnesses for appearing
today, and for those of you who submitted written testimony for
the record, and for the witnesses who have extra written
testimony I thank you for submitting that for the record.
At this time, my good friend from Chicago is on the floor,
so I am going to go back to him for his opening statement. But
I am going to right now turn to Mr. Tiberi. Have you an opening
statement, Mr. Tiberi?
[The prepared statement of Hon. Sue Kelly can be found on
page 44 in the appendix.]
Mr. Tiberi. No.
Chairwoman Kelly. Mrs. Biggert.
Mrs. Biggert. Thank you very much, Madam Chairwoman, and I
appreciate your courtesy for allowing me to attend this
hearing.
Madam Chairwoman, January 1st has come and gone and, as
predicted, a major change in insurance and reinsurance coverage
is taking place that threatens our economy.
Months ago in the wake of 9/11, many Members here predicted
what has now in effect occurred. Most reinsurance renewals now
exclude coverage for terrorism, and most primary insurers will
exclude terrorism coverage in the coming months.
It is because we anticipated this outcome that we on this
subcommittee and the Full House acted quickly late last year to
pass a terrorism insurance bill. But sadly, our Senate
colleagues did not take quick action. They did not take any
action before the January 1st renewal deadlines, and not since
January 1st.
Unfortunately, as with so many other issues during this
Congress, when it comes to terrorism insurance and reinsurance
coverage, our colleagues across the Capitol seem to have their
heads buried in the sand.
It is my hope that some of our Senate colleagues might be
motivated by the comments made this morning by Federal Reserve
Chairman Alan Greenspan, who did not mince his words.
He said, quite simply, that passing a terrorism insurance
bill is critical to stabilizing the marketplace. Chairman
Greenspan is not alone in this view.
Even the General Accounting Office has noted that without a
terrorism insurance bill there will continue to be a
significant drag on our economy.
Unfortunately, this burden has fallen particularly hard on
one segment of the economy that can least afford to live
without terrorism coverage--our public self-insured risk pools.
These risk pools, more than 125 operating in 41 States,
help local governments, school districts, housing authorities,
and other public entities to provide necessary insurance
protection. They provide coverage to those most often at
greatest risk--police officers, firefighters and emergency
medical personnel, as well as teachers and students, municipal
employees, and many others.
We all know that these public entities cannot absorb the
costs of terrorism risk across their membership base. I have
heard from several risk pools in my State that are desperate
for help.
In Illinois, the Assisted Housing Risk Management
Association no longer has coverage for an act of terrorism.
That self-insured pool covers public housing authorities across
my State.
The Illinois School District Agency, a self-insured risk
pool covering public school districts in Illinois, has been
told that its July 1st renewal will have a terrorism exclusion.
And the Department of Insurance in Illinois is now allowing
the exclusion of terrorism coverage in new and renewable
policies.
So my State becomes one of the 45 States that are allowing
such exclusions to be written in to policies. The need for
Congress to act has never been greater. Large self-insured
pools and individual self-insurers such as the City of Chicago
will pay as much as four times their expiring premium to buy
the additional coverage necessary in the coming year.
Make no mistake, public self-insured risk pools are more
vulnerable than other entities. They provide enormous savings
to taxpayers. In choosing to do nothing, the Senate threatens
to undermine a system that our policemen, firemen, school
teachers, tradesmen, assembly line workers, commercial property
owners, and others depend on.
Without a Federal solution, our workers, businesses, and
public institutions will suffer. I hope that the members of
this panel will not hesitate to place the blame where it
belongs, with the Senate.
I thank you, Madam Chairwoman, and I yield back.
[The prepared statement of Hon. Judy Biggert can be found
on page 48 in the appendix.]
Chairwoman Kelly. Thank you, Mrs. Biggert.
We have been joined by Dr. Weldon. Dr. Weldon, do you have
an opening statement?
Dr. Weldon. Madam Chairwoman, if I could just for 30
seconds, I want to commend you on this very important hearing
and thank all of our witnesses for being here.
I am particularly interested in this issue not only on the
merits of the topic being discussed, but as well, the parallels
between this issue and natural disaster insurance and the whole
reinsurance issue.
I think there is a fair amount of common sense in that. So
I am looking forward to hearing the testimony of the witnesses.
Thank you.
Chairwoman Kelly. Thank you very much, Dr. Weldon.
Since there are no more opening statements, we will now
begin with our witnesses on our first panel.
Before us today we have Mark Warshawsky, the Deputy
Assistant Secretary for Economic Policy at the United States
Department of the Treasury.
Then we will hear from Richard Hillman, the Director of
Financial Markets and Community Investments for the U.S.
General Accounting Office.
And finally, we have the Honorable Greg Serio, who is the
Superintendent from the great State of New York. He is with the
New York State Insurance Department. This is not Mr. Serio's
first time before this subcommittee and, Mr. Serio, we welcome
you back.
Thank you all for joining us here today to share your
thoughts on these issues. Without objection, your written
statements will be made part of the record. You will each be
recognized for a 5-minute summary of your testimony. There are
lights in front of you that will indicate how much time you
have. The green light signifies you are in your first 4
minutes. The yellow light will turn on when you have 1 minute
left. And the red light will turn on when your time has
expired. We hope you will observe the lights.
We will begin with you, Mr. Warshawsky. Thank you.
STATEMENT OF MARK J. WARSHAWSKY, DEPUTY ASSISTANT SECRETARY FOR
ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY
Mr. Warshawsky. Thank you. Madam Chairwoman and Members of
the subcommittee:
I appreciate the opportunity to present to you the views of
the Office of Economic Policy at the Treasury Department on the
impacts of the lack of terrorism risk insurance on the American
economy.
We appreciate the speedy action of the House in passing
legislation last year that would have created a temporary
Federal backstop for private insurance.
We look forward to continuing to work with you to restore
private insurance coverage for this risk. My testimony is
divided into three parts:
The effects of the terrorist attacks on the ability of a
business to insure against risk;
The impact on the economy; and
Our need in the face of the continued terror threat to move
legislation forward.
The impact of the terror attacks of September 11th and the
capacity of insurers and reinsurers has been very large.
Insured losses of both primary insurers and of reinsurers over
all principal lines of coverage now are estimated to be about
$40 billion.
These will be the largest insured losses in history, far
surpassing those from Hurricane Andrew in 1992. The capital of
the industry was in a sense hit doubly by the attacks. The
Stock Market declined sharply following the attacks, reflecting
general business uncertainty, and the insurers' investment
losses accelerated dramatically as a result, creating the
possibility of the failure of insurance companies.
In addition, the attacks revealed to the insurance industry
a potential for huge future losses which it had not priced
before and cannot yet readily model.
Terrorism risk is not like normal insurance which pools
many small risks. It is somewhat more comparable to traumatic
natural catastrophes such as hurricanes and earthquakes, but
unlike natural catastrophes terrorism risk does not have
predictable patterns and probabilities quantifiable by
sophisticated models.
As a consequence of their reduced capital base and the
inability to model terrorism risk, reinsurers have almost
entirely stopped assuming terrorism risk.
Primary insurers which rely on the ability to lay off huge
risks to reinsurers are also withdrawing from covering this
risk as their contracts expire.
Primary insurers are being allowed by insurance
commissioners in all States, with the exceptions of New York,
California, and Georgia, to exclude terrorism coverage above
certain small dollar amounts from smaller regulated commercial
policies in the future.
Insurance brokers report that terrorism coverage for large
commercial properties whose insurance policies are unregulated
is difficult or impossible to obtain. And, when available,
subject to the limits of coverage that are much lower than
customers need.
And premiums for these properties have increased
dramatically. The total policy costs with limited terrorism
coverage is reported to be roughly double the cost of a
property casualty policy without the terrorism coverage.
These insurance difficulties in turn are affecting the
financing of new real estate projects and the sales of existing
properties.
Financing is limited for new construction and the
acquisition of high-profile properties. Lenders are carefully
screening the location and size of buildings. Some are simply
refusing to lend to properties that are not fully insured.
Much commercial property development is financed through
the sales of securities backed by mortgages on the properties.
The securities depend on good ratings from rating agencies to
attract investors.
Rating agencies have indicated that they will substantially
downgrade new issues of securities backed by mortgages on high-
risk properties without adequate insurance coverage.
Those deemed high-risk include trophy assets, symbols of
America, structures for large gatherings of people, critical
infrastructure, and critical energy providing structures.
The implications of these insurance market conditions and
the economic consequences make it critical for Congress to
enact a Federal terrorism risk insurance backstop.
The lack of insurance coverage leading to inefficient risk
bearing and high premium rates imply a drag on our economy and
a burden to the nacient recovery, including the potential for
loss of even more jobs.
These costs are like a tax increase on the productive
capital, a disincentive to investment, and in the long run a
considerable burden for our workers and consumers.
Our enemies have stated that their intent is to cause both
economic and physical harm to us. And as the President has
warned, our enemies are persistent, clever, and should not be
underestimated.
We firmly believe that our Nation's battle against the
scourge of terrorism will ultimately be successful, and that
private insurance markets will stabilize in the long run.
But we now know how difficult and costly it can be for the
economy to adjust to terrorist events. We want to encourage
economic growth, and we bear a responsibility for assuring that
our citizens are adequately protected against terrorism.
Consequently, we urge that Congress pass a Federal backstop
now before the damage caused by lack of terrorism risk
insurance takes too great a toll on our recovering economy.
We know that you share with us a clear recognition of the
importance of this legislation, and we want to work with you to
create the best possible support for our economy and our
citizens.
I will be glad to answer any questions.
[The prepared statement of Mark J. Warshawsky can be found
on page 51 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Warshawsky.
Now we go to Mr. Hillman.
STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENTS, U.S. GENERAL ACCOUNTING OFFICE
Mr. Hillman. Thank you, Madam Chairwoman, and Members of
the subcommittee:
I am pleased to be here today to present the results of our
work on the availability of terrorism insurance in the wake of
the tragic events of September 11th.
As you requested, my testimony today describes how in the
absence of Federal action insurance companies and the
marketplace have reacted to the events of September 11th.
My testimony also provides GAO's initial observations on
the potential consequences these market changes may have both
in the event of another terrorist attack and, as we all hope,
in the absence of one.
On my first point, since the September 11th attacks, the
key dynamic taking place in the insurance industry has been a
shifting of risk from terrorism-related losses from reinsurers
to primary insurers and then to the insured.
The tragic events of September 11th brought to light the
huge potential insurance company exposures that they could face
in the event of another terrorist attack.
Faced with a continuing uncertainty about the frequency and
magnitude of future attacks, and at the same time warnings by
Government and military leaders of new attacks to come, both
insurers and reinsurers have largely determined that terrorism
is not an insurable risk at this time.
As a result, in the closing months of last year reinsurers,
followed by direct insurers, began announcing that they could
not afford to continue providing coverage for potential
terrorism losses.
Because reinsurance markets are global in scope, and
because reinsurance transactions are considered to be contracts
between sophisticated parties, neither the prices nor the
conditions of such coverage are subject to direct regulation.
As a result, after September 11th, reinsurers had little
difficulty excluding terrorism from coverage. Generally these
exclusions became effective on policy renewal dates, many of
which were clustered at the beginning of January.
Industry sources confirm that little reinsurance is being
written today that includes coverage for terrorism. As
reinsurers walk away from terrorism insurance, primary
insurers' exposures increase, at least in the short run.
Faced with this kind of exposure and the risks that they do
not believe can be priced, industry observers and participants
have told us that the primary insurers are beginning to emulate
their reinsurance counterparts and exclude terrorism coverage
from some commercial insurance policies.
However, a number of factors affect both the speed and the
extent to which primary insurers can insulate themselves from
terrorism losses. Direct commercial property casualty insurers
withdrawal has been slower and less complete than reinsurers
because, with the exception of some large risks, direct
insurers need regulatory approval to exclude terrorism.
Moreover, there are legal requirements in some States that
preclude insurers from excluding terrorism from coverage for
Workers Compensation and for fire following an event,
irrespective of its cause.
However, the rapid submission of the ISO exclusion language
in which the State insurance regulators and the generally rapid
positive response by regulators clearly indicate the urgency of
primary insurers' desire to be able to exclude terrorism from
commercial property casualty insurance coverage.
Over the next year, as insurance policies renew, a growing
share will likely exclude coverage for terrorism, absent some
intervening factor. Thus, risks that were formerly held by
reinsurers and insurers will gradually be shifted back to the
policyholders.
Now all policyholders are affected by this shift to the
same extent. Indeed, small, low-risk businesses and properties
may feel little effect. However, large risks and those where
there are factors that give rise to a perception of risk such
as location, concentration, or hazardous activity, are
experiencing problems obtaining insurance for terrorist events
and policyholders are thus bearing more of the risks of loss
themselves.
Regarding my second point, the effects of the risk shift
from reinsurers and insurers to businesses and property owners
can be invited into two parts:
What would happen in the event of another terrorist attack?
And what is happening even in the absence of another
attack?
Many of the most severe potential negative consequences
resulting from a lack of terrorism insurance coverage will only
become evident if another terrorist attack occurs.
The shifting of risk from reinsurers to primary insurers to
commercial property holders and other affected parties could
place more risks and economic burden on businesses and the
public at large should another terrorist attack similar to a
September 11th occur.
Consequently, a lack of such coverage in the event of
another attack could have more serious effects on businesses as
well as their employers, lenders, suppliers, and customers.
Another significant consequence of the insurers exiting the
market for terrorism coverage is the loss of their claims
handling mechanisms for effectively and efficiently responding
to victims of an attack.
However, even in the absence of an actual terrorist event,
there are growing indications that some sectors of the
economy--notably real estate and commercial lending--are
beginning to experience difficulties because some properties
and businesses are unable to find sufficient terrorism coverage
at any price.
Such large property owners or developers reported that they
are having to underinsure or go bare by self-insuring for
terrorist risk because of the lack of available coverage or
very limited coverage for the quoted prices.
Developers, financial institutions, and the insurance
industry observers have told us of cases where lenders or
investors were reluctant to commit resources to projects that
could not be insured against terrorist attacks because they
were unwilling to expose themselves to risks that insurers
could not price.
In my written statement are examples of these effects and
recent news articles have identified still others.
In summary, our Government leaders continue to warn of
imminent and credible terrorist threats. Should one of these
threats become a reality in a world where insurers ar no longer
the first line of protection for businesses, the economic
consequences could be very different from those following
September 11th.
As businesses both large and small are faced with uninsured
losses that threaten their ability to survive, Congress could
be faced with a time-critical decision to intervene or not.
Deciding whether Congress should act to help businesses obtain
insurance against losses caused by terrorism is properly a
matter of public policy. The consequences of continued
inaction, however, may be real and are potentially large.
Madam Chairwoman, this concludes my prepared statement and
I would be happy to respond to any questions.
[The prepared statement of Richard J. Hillman can be found
on page 57 in the appendix.]
Chairwoman Kelly. Thank you, very much. As perhaps you see
the lights up there, we have been called back not for one vote
but, as I understand it, for perhaps a series of votes.
Unfortunately, I had intended to start the hearing and let it
go right straight through, but if we have a series of votes I
am going to be unable to do that because we all have to be on
the floor to vote.
So I am going to temporarily recess the hearing for a brief
period until the voting is finished on the floor. I am sorry.
Procedurally, what is happening on the floor right now is very
interesting to people who are students of the Congress, but it
is taking your time and I apologize to people who have planes
to catch and so forth. We had hoped to get this done in a
timely manner. Apparently we are not going to be able to.
So I am temporarily going to recess this hearing. We will
come back when the votes have finished. Thank you very much for
your patience.
[Recess.]
Chairwoman Kelly. This hearing will now resume. Thank you
very much for your patience. I apologize for the time.
Let's go now to Mr. Serio.
STATEMENT OF HON. GREGORY V. SERIO, SUPERINTENDENT, NEW YORK
STATE INSURANCE DEPARTMENT.
Mr. Serio. Thank you, Madam Chairwoman. It is a pleasure to
be here, and I appreciate the opportunity to give you a sense
of what we have seen in the New York market.
As you might say, you can't get any closer than we have
been to the situation, and that continues even as the recovery
efforts continue at Ground Zero.
I am going to deviate from my prepared oral comments and
just give a sense of what we have found. It is very similar to
what has been testified to already.
The availability issue is one that we have seen coming for
some time. Back in December of 2001, the Insurance Department
surveyed the commercial property and casualty business
companies writing in New York, and this is what we found:
As far back as December, we knew that 54 percent of the
companies writing business in New York planned to reduce
coverage limits on both new and renewal business.
We knew that 12 percent planned to materially curtail the
number of policies written in certain lines of business. Eleven
percent had ceased writing or materially reduced the number of
policies written in New York. And 18 percent did so outside of
New York as well. So it is not just related to New York.
Twelve percent planned to cease writing or materially
reduce the number of policies in New York for 2002, and 24
percent of the companies responding said they planned to reduce
their writings outside of New York in 2002 as well.
Eighty-one percent of the insurers responding to our survey
are licensed in our Free Trade Zone, which is an area where you
can write sophisticated risks free of rate and form regulation,
but that they were going to exclude or limit coverage for acts
of terrorism. And that 83 percent indicated that their
reinsurers excluded or limited coverage for acts of terrorism.
So we knew that. And living in New York, and having our
offices just blocks from Ground Zero, we also found by local
meetings and public forums that the New York Insurance
Department has been undertaking over the last several weeks and
will continue to do so, we have found that a lot of what was
answered in our surveys in December are coming true now in the
market.
Our public forums have had one business after the other
coming before us, talking about difficulties in gaining
coverages, particularly going bare or particular difficulties
getting terrorism coverage.
We have met with local business groups. Some of the groups
are here today, and you will hear them in the second panel. In
speaking with business owners, one on one, and in walking tours
that I have done not just in Lower Manhattan but also in
Albany, on Long Island, and throughout Upstate New York, we are
finding that this is not a New York-centric problem; that it is
very much indeed a problem throughout all of New York and, by
our numbers, clearly one that is starting to affect other
States as well.
The second question that you had in the letter to us
inviting us to testify:
What is the impact on the economy?
Well, I can tell you that it hasn't been geographic in
nature. It is not sector-oriented. And let me just add one more
observation. It is not just limited to businesses. Governments
themselves have had tremendous difficulty getting insurance
coverages, particularly terrorism coverages, and largely
because they are what might be considered to be terrorist risks
or targets, but also because, as natural places of assembly for
large numbers of people, carriers are reluctant to write
Government risks, including public buildings of assembly,
bridges, and other types of publicly operated or Government-
operated facilities.
The economic viability of the insurance industry to absorb
losses, which was the third question in the letter to us,
really cuts to the heart of the matter.
That is, that if it is a man-made threat, as the Chair has
noted, that the threat of future and different terrorist acts
are still with us.
I have as much of a concern over what happens in the court
of natural disasters that might come up, and the ability of the
industry to weather those storms.
Hurricane season is just 3 months away and is before, by
the way, the next largest reinsurance renewal period, and I can
tell you that every Gulf State and every State on the East
Coast of the United States needs to be concerned about the
event of a natural disaster having that second shoe dropping
effect on the insurance community in the United States. And
that is something that certainly begs the question of some
action here in Congress.
Another point I would like to make is that we have been
looking at insurance companies not just as insurers and having
the capacity to cover risks, but also as participants in the
marketplace as businesses, and more importantly as investors in
the real estate market in New York and in other large cities.
I can tell you that there is an insurance company that is,
or has been known to be the single, or second-largest real
property owner in the City of New York. What are the
implications, when you consider that those investments that
they have serve as the admitted assets of those companies if
those assets are now suddenly challenged because they don't
have all-risk coverage or go bare for terrorism coverage?
So we have to take a look at that issue, as well.
The Department's response has been, since 9/11, first to
deal with the claims' issues at hand; but, second, to get to
the question of how do we maintain coverage going forward.
The most profound action that we have taken and one that
certainly raised the hackles of certainly the trade press in
the insurance community, was to deny--and I think I used the
term--I wasn't inclined to approve terrorism exclusions.
That is because, as I looked outside my window in Lower
Manhattan, and also from our perspective around the rest of the
State, terrorism coverage, or terrorism exclusions, I should
say, that are overly broad simply are in violation of the State
law.
They may work for other constituencies in other
jurisdictions, and maybe that is one of the beauties of the
State-based system of insurance regulation, but for New York
terrorism exclusions were not appropriate.
We have pushed back to the companies to give us more
definitive exclusions, more narrower language with respect to
those exclusions, but I can tell you that at the end of the day
we do not want to make businesses and consumers the last stop
on the ``Pass-The-Exposure Express.''
And for all of these reasons, we believe that time is now
passing for Congress to take action, and we believe that this
is nothing new. We are not talking about new ground. But that
it is something that, with the examples we have used in the
past, either permanent facilities or temporary facilities that
we have used in New York in the past, I think we can settle the
challenge that is in front of us.
Thank you.
[The prepared statement of Gregory V. Serio can be found on
page 77 in the appendix.]
Chairwoman Kelly. We thank you, Mr. Serio.
I am going to ask a couple of questions of you, Mr.
Warshawsky. In your written testimony you compare the current
economic impact of a lack of adequate terrorism coverage to a
tax on productive capital.
I wanted to know if you would elaborate that for us a
little bit.
Mr. Warshawsky. Sure. Basically it comes in two mechanisms.
The lack of adequate, or any insurance increases the risk
exposure of businesses. And as the risks increase, risk has a
cost. And the cost is either reflected in increased cost in
borrowing, or a decline in equity values, and therefore that
sums to an increased cost of capital like a tax on capital.
The other extent to which there is the tax of course is the
increase in the premium on any insurance which is purchased. So
those two summed together would be considered what I would call
quote, unquote, a ``tax'' on productive capital.
Chairwoman Kelly. Thank you. Another question for you.
In your written testimony, you note that those who argue
that the lack of a current dramatic impact proves legislation
is unnecessary, that they misunderstand the problem.
The witnesses that we have heard today of the three of you
seem to agree with that. I would like you to just elaborate a
bit on that, too, please.
Mr. Warshawsky. Sure. Basically there are sort of two
prongs to that, as well. The most significant one is going
forward. That is, that many properties, many businesses and
governments as we've just heard are exposed. They are either
inadequately insured or not insured at all.
And if there were to be another terrorist attack, then
there would be a need to hurry up and devise some other method.
So, you know, that does not speak to the current impact; it
speaks to the future impact, which I think is what I was
referring to as a misunderstanding of the fundamental problem.
That being said, I think we have found an impact already,
an economic impact, as we have discussed both in terms of real
estate development and other sectors of the economy, and so I
think the impact is there as well.
Chairwoman Kelly. Thank you.
Mr. Serio, you categorized the market effect of a lack of
available terrorism insurance as a slow death by a thousand
cuts. Interesting simile. Rather than a second capitation. And
yet, you feel that the Federal Government should act now?
Mr. Serio. My creativity aside----
[Laughter.]
Mr. Serio. I have to tell you, what we are really finding
in the marketplace--and this has been part of the concern that
we have had about the pass-through down to businesses and
consumers--as much as it has been a challenge to the primary
carriers to have them retain the risk for terrorism losses and
exposures, it has given us an opportunity to really get our
hands around not just the core of the issue, but also how
comprehensive the issue is to the overall primary insurance
market.
When it comes down and you have the pass-through to
individual businesses, it is diluted by each business, as well
as by each expiration of coverage and each renewal period, or
each renewal cycle for each type of business.
Something we have seen in our Department has been that we
have been getting calls, one business, one sector at a time,
and it has been difficult to really articulate or to illustrate
the burgeoning problem when we have had to do it one sector,
one business at a time.
So the primary carriers may feel that they are taking the
heat on this, but I think it has really allowed us to
illustrate quite clearly what the implications have been
arising from the lack of reinsurance for terrorism.
Chairwoman Kelly. The other thing I noticed, you picked a
number of different areas, but one that particularly stood out
with me was you noted that hospitals are having difficulty in
getting adequate terrorism coverage for their facilities.
What happens to these hospitals and their employees if they
can't get coverage? And what happens if there is another
terrorist attack? We in New York know how very vulnerable we
are to something like that, and how might this end up affecting
other health care costs in New York?
Mr. Serio. Actually the hospitals, and I have to appreciate
them coming forward, and I know they are here today, they
really were the first illustration of a major sector of
dysfunction with respect to getting coverage.
They had a renewal cycle back in November, and it has only
been recently that we have been starting to look at what is the
exponential impact, as you've suggested in the question, and
what happens if you have a health care facility that is only
covered for a portion of their true liabilities? And given the
health care industry in New York where there is a large public/
private interplay in the financing of hospitals and health care
facilities, you are talking about a broader exposure not just
in terms of general health care costs but also in terms of
public health care financing as well.
I think the hospital representative can probably better
demonstrate that, but that is part of that exponential concern
that we have that it will go far beyond just the bricks and
mortar of those hospitals to getting into actual health care
financing dilemmas and challenges for us if a hospital that is
underinsured were to have a loss.
Chairwoman Kelly. Thank you, very much.
My time is up. I am turning now to the Ranking Member, my
friend Mr. Gutierrez.
Mr. Gutierrez.
Mr. Gutierrez. Chairwoman Kelly, Members of the
subcommittee, and distinguished guests, I am pleased that we
are holding this important hearing today to discuss an issue
that is very present in people's minds since September 11th.
I am sure that all of us in this room let out a collective
sigh of relief and joy when the Winter Olympic Games concluded
without incident. As our Nation continues to recover from the
events of September 11th, I remain confident that the insurance
market will also recover.
Nevertheless, and not surprisingly, we all have different
views as to how long this recovery is expected to take and how
exactly it will happen.
Only last October we heard testimony about the fact that
there was great uncertainty as to what would happen if Congress
did not act to provide backup for terrorist insurance.
At the time, there was widespread belief that either the
industry would experience a devastating setback, or that the
potential consequences would at least be severe enough that
Congress should worry.
Well, Congress does worry. However, I also understand that
the terrorist attacks may have just only begun to effect the
market mechanisms to provide terrorism insurance.
While it is reassuring to know that the worst-case scenario
did not play out, many answers are still missing. For instance,
how much longer before the market corrects itself and the
current cycle changes?
What is the cost for this potentially long process?
Has the fact that Congress has not yet provided backup
legislation been as detrimental as it was feared in the Fall of
2001?
These are all valid questions that warrant honest answers.
Your acceptance to appear before this panel today brings us a
step closer in obtaining these answers and expediting a
solution to the current problems.
I want to thank our guests for joining us today and I, as
always, look forward to all of their testimony.
I would ask the Chairwoman Kelly to provide me an
opportunity to put in writing questions to the members that are
here before us, and to please excuse me for the remainder of
this hearing.
Chairwoman Kelly. Thank you, Mr. Gutierrez, for being here.
We understand you have other things that you need, that you
must do. And of course, by unanimous consent, we accept your
statement for the record.
Dr. Weldon.
Dr. Weldon. Thank you, Madam Chairwoman.
Let me begin with--it's Warshawsky? Is that correct?
Mr. Warshawsky. Yes.
Dr. Weldon. In your testimony you mentioned the similarity
between the losses incurred by acts of terrorism and
catastrophic risk like earthquakes and hurricanes. You also
mentioned that natural catastrophes have predictable patterns
that allow for the assumption and diversification of risk,
distinguishing them from terrorism.
However, in my State of Florida and in California, and
other States that have had catastrophic risk exposure in recent
years, the residential property insurance market seems similar
to the recent trends in the terrorism insurance market where
high premiums and relatively low coverage is being offered for
catastrophic risks.
Could you comment on this, particularly with respect to the
premium prices and the capacity of insurers to cover losses?
Mr. Warshawsky. Sure. Basically, as I said, there are
similarities and there are also differences between the two
types of risk. The similarity obviously is in the, at times,
very large losses that could be experienced.
The dissimilarities are twofold. One is that typically we
have only experienced the terrorism, major terrorism risk once,
but what we saw was there was a major--at the same time, of the
insured losses, there was a major decline in investment prices.
That introduced more of a risk to the insurer in terms of,
because both risks could happen at the same time. That is less
likely to happen because of the more and isolated nature of the
natural disasters.
The second difference is, it was my understanding that
insurers and reinsurers have devoted a lot of effort and
intelligence to trying to find patterns in natural disasters,
and I believe that that enables them to more accurately price
the risk.
That has been used, I'm told, for example in the issuance
of catastrophe bonds that have been used both in California and
in Florida. But that has not yet come online. I am not sure if
it is able to, but it certainly has not yet come online in this
risk.
Dr. Weldon. Do you see a parallel between some of the
withdrawal of coverage? There has been withdrawal of coverage
in the case of terrorism risk, and there has been some
withdrawal of coverage in the case of catastrophic risk. I know
in the State of Florida, prior to Andrew, we had 1200 companies
offering product. We now have, I believe, less than 200
offering homeowners insurance policies.
Mr. Warshawsky. Well, the comparison there certainly
motivated our analysis in terms of viewing this as the likely
trajectory of losses in the experience in the insurance market.
So following Hurricane Andrew, the dislocation was 18
months to 3 years, and I think here too that is something you
cannot project exactly what would happen, but something like
that would be expected here as well.
That is why Treasury proposed, the Administration proposed
a temporary insurance backup.
Dr. Weldon. Mr. Hillman, you state that another terrorist
attack will place the economic loss on policyholders because
insurers have withdrawn or limited their risk to such
exposures.
Would you agree that this is the same dynamic that is
occurring regarding catastrophic risks from hurricanes and
earthquakes?
Mr. Hillman. Certainly with terrorism insurance this risk-
shifting process that is taking place is much more dramatic
than what has been experienced in the past associated with
natural disasters for very similar reasons that my friend from
Treasury has stated:
That there are opportunities to develop sophisticated
modeling methods with which to determine with some
predictability the prices for natural catastrophe insurance.
That today does not exist for terrorism insurance, and
therefore you are finding reinsurers and primary insurers in
the industry fleeing from the marketplace.
Dr. Weldon. Mr. Serio, I believe you may have commented on
this in your opening statement. I got here a little late, but
in addition to the exposure to terrorism, New York obviously
also experienced some exposure due to catastrophes such as
hurricanes. I grew up in New York and I remember some of the
hurricanes that came through there.
New York has consolidated its response to these risks in
its Emergency Management Office. What have been the impacts of
the September 11th attacks on New York's ability to respond or
prepare for other disasters such as a natural disaster?
Mr. Serio. I think--and getting the Insurance Department
more directly involved with the Emergency Management
infrastructure I think has given us a new perspective on that
very question--I think the direct answer to your question is in
how the Emergency Management infrastructure responded to the
crash of Flight 587 in the Rockaways just 2 months after the
World Trade Center disaster.
I can say that both the State Emergency Management
apparatus and the City Emergency Management apparatus, which
you may know was destroyed entirely in Building 7 of World
Trade, is now up and running in temporary quarters in Brooklyn,
but never had there been a default in the interface between the
City and State Emergency Managers, and I think that is in large
part the reason why the response to World Trade and American
Airlines was so good.
And so as we approach hurricane season, I think that the
State of New York and its localities are in a good position to
respond to a natural disaster.
The industry I think is also in a good position to respond
to a natural disaster because of what they learned from World
Trade.
I think their concern is certainly more financial than
procedural in terms of their ability to get in and to handle a
large risk, something in the order of whether it's an Andrew at
$19 billion or something like World Trade which is
substantially more.
Dr. Weldon. I was very interested in your comments about
the nature of the real estate investments for some of the
insurance companies.
Do you feel that the reinsurance market as it currently
exists today is adequately serving the insurance needs of the
major insurers in the City and State of New York?
Mr. Serio. Up to this point in time, we have not been
receiving complaints from the primary insurance market as to
the inability or the failure of their reinsurers to pay.
Out of the $15 billion that has either been claimed or paid
up to this point, that still has largely come out of the
primary carriers, although the reinsurers as their layers start
to--the attachment points start to be met, they have been
paying them and we have not had any unusual deviations from the
normal practice of timely payment of reinsurance recoverables.
So they seem to be doing as well a job in paying their
primary carriers as the primary carriers are in paying their
insureds and their commercial insureds.
Dr. Weldon. Do either of the other two witnesses want to
comment on the status of the reinsurance industry and the
impact of this disaster on that? Did you have anything to add
to what Mr. Serio said?
Mr. Warshawsky. Nothing to add.
Mr. Hillman. Nothing.
Dr. Weldon. Thank you very much, Madam Chairwoman, for this
very interesting hearing that we have had.
Chairwoman Kelly. Thank you, Dr. Weldon.
I would like to ask a couple of other questions here. I
would like to go on with what Mr. Serio was saying.
Mr. Serio, on page 13 you testified about the dangerous
risk shifting to policyholders and the resulting economic drag.
What about the effects on group life and workers
compensation markets that are so important for protecting our
citizens? And how are those markets now being affected by this
situation?
Mr. Serio. The over-concentration-of-risk issue has really
come home to roost in the group life and in the workers
compensation area.
We have a situation not just in New York but frankly
country-wide where reinsurance for workers compensation has, I
think one commentary said, it has evaporated.
There is significant concern for catastrophic reinsurance
for workers compensation. Already in New York and in other
States the rating services, the New York State Compensation
Insurance Rating Board has already approached the Department
for an emergency rate increase to cover the catastrophic
reinsurance expense that they are incurring right now. We are
in discussions with them on that question.
But if it is reinsurance which is not usually part of the
rate base for workers compensation, what we may end up with is
either a workers compensation environment where if they cannot
get adequate recoveries for their rates, they will
significantly curtail the writing of workers compensation
business.
In turn, the residual markets will once again become
primary carriers and the primary writers in those markets, and
I do not think that is good for business. And frankly, it is
not good for the State that sponsors the residual market.
Chairwoman Kelly. Thank you, very much. It does not paint a
very rosy picture.
Mr. Hillman, the GAO report concludes that the potential
negative consequences of not having terrorism insurance are
cause for concern.
It seems to me like it may be a very nice way of saying we
should be concerned. If you say that the consequences of
continued inaction may be real and are potentially large, what
are the benefits right now of putting in a contingent Federal
backstop in place versus the cost of just waiting around until
another terrorist attack happens and considering how to respond
at that point?
Mr. Hillman. The decision rests with the Congress as to
whether or not they ought to implement a plan, but there are at
least several reasons that I could think of as to why it would
be better to act now.
Number one, simply it would be a prudent act to develop a
plan when you have the time to develop a plan right. Under a
crisis in the event of another attack would not be the right
time to be thinking about how to deal with the terrible
situation.
Second, you want to keep insurers capital and their claims
processing capacity in the game. What we have found from the
results of our study is that the claims processing capability
of the insurance industry will be quickly evaporating as they
insulate themselves from this market.
In the event of another attack, then, it may require the
Federal Government to institute new claims' processing
capabilities, which is a daunting task.
Finally, acting now would strengthen confidence in all the
markets, its participants, lenders, businesses, and insurers,
and that could only be good for the economy.
Chairwoman Kelly. Mr. Hillman, do you think that the need--
and this is not a trick question--do you think the need for
legislation at this point is more about insuring the solvency
of the insurance industry? Or more about preventing a risk
transfer to the vulnerable policyholders, stopping economic
drag, and creating an efficient response mechanism to future
terrorist attacks?
Mr. Hillman. With this risk shifting that we have been
talking about, more risks are first going to be placed off of
reinsurers and onto insurers.
In the event of another attack, that could mean then that
these primary insurers could have more solvency issues than we
have seen in the past.
If an attack would occur later, the insurers themselves
would become insulated. And then the problem is going to rest
with businesses, and it is going to rest with their employees,
their lenders, their suppliers, creating much more economic
concern than the major concerns of a September 11th.
Chairwoman Kelly. It sounds as though you are describing,
all of you are describing a ripple effect that is gaining with
each wave out. Am I correct in that assumption?
Mr. Hillman. [Nods in the affirmative.]
Mr. Warshawsky. [Nods in the affirmative.]
Mr. Serio. [Nods in the affirmative.]
Chairwoman Kelly. You can do something besides nod so we
can get this on the record.
Mr. Hillman. Yes.
Mr. Serio. Yes.
[Laughter.]
Mr. Warshawsky. Well, let me do more than nod. Basically
sort of the ripple comes in at least two ways. One is, as the
insurance contracts expire the lack of terrorism risk insurance
becomes more and more widespread.
The second ripple effect is through the investment process.
What we have noticed is progressively the rating agencies for,
we've focused on commercial-backed, commercial mortgage-backed
securities, there is a progressive realization and work in that
area, and that is another ripple effect.
I think that can be repeated in other sectors of the
economy in other aspects.
Chairwoman Kelly. Thank you, very much.
Mr. Serio.
Mr. Serio. Yes. If I could just add to that, and this is
something that I don't think people are seeing just yet, is the
wave or the ripple that comes up. People are concerned about
the size of the wave, but I think as Dr. Weldon being from both
New York and Florida knows, it is the undertow that is actually
more dangerous.
What we are concerned with is not so much the wave as it
goes down toward the businesses and the consumers, but what is
that backlash, or what is that undertow back from the consumers
and the businesses?
That is really where you are going to see the real economic
impact if we do not deal with the ripple or the wave as it
comes up in the first instance.
Chairwoman Kelly. I want to thank you all. There are no
more questions, I don't believe--Dr. Weldon?
Dr. Weldon. No.
Chairwoman Kelly. I want to note that there are some
Members who may have additional questions. They may wish to
submit these questions in writing. So without objection, the
hearing record will remain open for 30 days for Members to
submit written questions to the witnesses and to place their
responses in the record.
The first panel is excused with our grateful thanks for
your spending so much time. We are greatly appreciative. If the
second panel will take their seats at the witness table, I will
begin the introductions.
While the second panel is taking their seats, I would like
to note that I have written testimony that has been submitted
by Edward C. Sullivan, the President of the Building and
Construction Trades Department of the AFL-CIO. He says in that
testimony that:
``Every day that goes by between now and the time Congress
completes action on terrorism insurance legislation presents an
increasing threat to our members whose livelihood is dependent
upon a robust and healthy atmosphere for building and
construction. Every day that goes by without a Federal
terrorism insurance law on the books presents a serious and
escalating threat to the building and construction industry as
a whole, and likely to downstream industries like suppliers.
This translates into a threat to our economy and a loss of jobs
for our members. A Federal backstop for terrorism insurance can
do away with both of these threats, and it is as simple as
that.''
We will insert, with unanimous consent, the entire
statement of Edward C. Sullivan into the record.
[The prepared statement of Edward C. Sullivan can be found
on page 203 in the appendix.]
Chairwoman Kelly. And now I would like to introduce the
second panel. For our second panel, we will begin with David
Mair--am I pronouncing that correctly?
Mr. Mair. Yes, ma'am.
Chairwoman Kelly. Thank you. David Mair, President of the
Risk Insurance Management Society, and Director for Risk
Management for the U.S. Olympic Committee.
Next we will listen to Deborah Beck, the Executive Vice
President of the Real Estate Board of New York.
Then we will hear from Lisa Kramer, who is the President
and CEO of the Federation of Jewish Philanthropies Service
Corporation.
Next we will hear from Kieran Quinn, the President and CEO
of the Column Financial, Incorporated, a subsidiary of Credit
Suisse First Boston.
After Mr. Quinn we will hear from Robert Hunter, the
Director of Insurance for the Consumer Federation of America.
Mr. Hunter has been before the subcommittee before and we
welcome you back, Mr. Hunter.
Finally, we will hear from Alice Schroeder, Senior U.S.
Nonlife Equity Insurance Analyst for Morgan Stanley.
I want to thank you all for taking so much time out of your
busy schedules to join us here today, and I really appreciate
your being here and staying with us for this long period of
time that unfortunately this has been that we have had with the
floor delay.
So without objection, your written statements will be made
part of the record. You will each be recognized in turn for a
5-minute summary of your testimony, and we will begin with you,
Mr. Mair.
STATEMENT OF DAVID I. MAIR, PRESIDENT, RISK AND INSURANCE
MANAGEMENT SOCIETY, ASSOCIATE DIRECTOR FOR RISK MANAGEMENT,
U.S. OLYMPIC COMMITTEE
Mr. Mair. Thank you, Madam Chairwoman.
As you indicated, my name is David Mair. I am the Director
of Risk Management for the United States Olympic Committee, and
the President of the Risk and Insurance Management Society.
RIMS is the largest professional organization for risk
managers worldwide. Some will come to you, Madam Chairwoman,
and suggest to you that they represent the consumers of
commercial property and casualty insurance.
I am here today because we are the consumers and appreciate
the opportunity to share directly with you our story of what
has happened in the months since September 11th.
Insurance is a key part of the infrastructure, the
financial infrastructure for business in the United States. It
provides the capability to address the costs of unforeseen and
unpredictable and preventable events, and it provides coverage
for companies both large and small.
There are many in the fall who looked and said: ``This is
an insurance industry issue.'' I want to submit to you today
that it was not then nor is it now. This is an issue for
policyholders.
The buck has now stopped with those consumers of insurance
in cities and towns across America. Companies both large and
small now assume nearly all of the risk of owning commercial
properties and of operating businesses in the United States.
These companies are now working and living in a Nation that has
been targeted for terror by a most unpredictable type of an
enemy.
Some have said to you that this is a very complex
situation, and it is, but it is also yet one that I think can
be summarized with a fairly simple analogy.
We have been placed on the interstate highway system in our
automobiles at highway speed with the protective steel
sidebeams having been taken out of our cars and our seat belts
taken away.
If nothing happens to us in the United States, we are all
going to be fine in this situation. However, if that truck,
known as terrorism today, broadsides us in an intersection, the
results are going to be devastating.
That is the situation that we are in today in the absence
of insurance for terrorism.
In November of 2000, the press was coming to us with the
Olympic Games coming up and asking, ``How is this going to
impact you?'' I had the luxury, in mid-November, of being able
to say to members of the press the United States Olympic
Committee is going to be fine. We have policies that expire
after the Olympic Games, which have now just concluded.
However, at the end of November that situation changed
dramatically when one of our carrier's rating was downgraded,
forcing us back into the insurance marketplace trying to find
general liability coverage for the Olympic team going to the
games in Salt Lake City.
The insurance marketplace, at a time it was already
concerned about terrorism coverage, looked at the headlines
which said ``Olympics'' and ``Security'' in the same banner
headlines day after day after day, and they were rightly
concerned.
We went 70 days without being able to find coverage, and
finally were able to place it on February the 9th, the day of
opening ceremonies for the Olympic games.
We were, however, able to place that at 45 percent of our
expired limit. We couldn't get any more. We placed it at a 250
percent rate increase without terrorism coverage.
Later that same day, we were able to find stand-alone
coverage by going to the same carrier that had been downgraded,
which no longer met our requirements, and basically calling in
a favor. Because we already had a 3-year guaranteed rate
program that simply we couldn't utilize because of the
downgrade, nor could we get excess coverage written over the
top of that.
We were able to place that terrorism coverage at 5 percent
of our expired limit for 100 percent of the expiring premium.
Some will tell you, Madam Chairwoman, Mr. Weldon, that
there is coverage available in the marketplace today, and that
it may be affordable. Well, in our membership we have 900
companies that represent small businesses, companies with less
than 500 employees. They can't take that same rate increase
that we incurred only because we were concerned about America's
athletes and the interests of America's Olympic teams at the
games.
In small businesses, as you know, that comes right off the
owner's dining room table. It comes right out of the pockets of
their family, their disposable income, and what they can afford
to pay their work force.
Is there a drag? Yes. Is it happening slowly? Absolutely.
This is a crisis that is happening in slow motion.
My father is a small businessman in Oklahoma. His insurance
coverages does not renew until July. He has not seen the impact
of this yet. But he will.
Large businesses have been looked at with the comment that
there are all kinds of alternative risk financing vehicles that
they can utilize, and that is generally true. But those same
large vehicles go to the reinsurance community and are buying
insurance which is today not available.
It simply cannot be found at any price.
The Congress has had its own experience. When Anthrax was
found in the Senate office buildings, that building was closed
for a matter of months at a cost of millions of dollars, with
the Federal Treasury serving as the backstop.
Imagine what would have happened had that been a mid-sized
business somewhere. Without the availability of terrorism
insurance, they would have been unable to afford that cost, and
they simply would of had to close their doors and go away with
a loss of jobs there.
There are some who will tell you that, in an attempt to
deflect the focus, this is a simple issue. It's an issue of
increased prices. It's an issue of whether or not claims costs
from September 11th will be paid.
It is simply not that easy, nor that simple, at one level.
More important is whether the terrorism coverage that will
exist will be there to respond, and today it simply is not.
I am a risk manager. My job is to identify the causes for
loss and prevent them to the greatest degree that I and my
colleagues can, in our businesses.
The environment we are in today is similar to looking at a
national forest and saying: ``I don't see smoke, therefore
there's no fire.'' We should more appropriately be looking to
see whether there are unattended campfires ready to catch and
set fire to the woods around us. Unfortunately, it is the
terrorists lurking in the shadows who hold the matches.
Again, we are in a car on the highway. The steel beams have
been taken away from us. We are simply waiting to see, by
action of the Congress, by action of the Senate, whether those
steel beams will be put back in the car before something
happens.
I thank you for the time, and I will appreciate the
opportunity to answer questions as you ask them.
[The complete statement of David I. Mair can be found on
page XX in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Mair.
Ms. Beck.
STATEMENT OF DEBORAH B. BECK, EXECUTIVE VICE PRESIDENT, REAL
ESTATE BOARD OF NEW YORK
Ms. Beck. Chairwoman Kelly, thank you for the opportunity
to appear on behalf of the real estate industry.
My association represents over 5,000 owners, builders,
institutional owners, and investors, as well as others involved
in New York City real estate.
Our members also have interests across the Nation and
globally. You may have seen the New York Times piece today,
which unfortunately missed the point where terrorism insurance
for large commercial properties is concerned.
I am here to confirm that every day without legislative
action is putting America's economy further at risk. Lenders
demand terrorism coverage for making or renewing large-scale
loans. Limited availability is stopping them from doing so.
Investment in real estate is faltering as the risk of loss
from terrorism is being transferred from insurers to commercial
property owners.
As of January 1st, 70 percent of reinsurance for terrorism
ceased. By July 1st, there will be none. Without reinsurance,
the primary carriers will not cover terrorism risks for large
urban or suburban, or for other properties near what are
considered to be terrorism targets.
While lenders insist on full terrorism coverage, only four
companies are offering it, limited in the aggregate to $10
billion.
In New York City alone, high-rise office and residential
buildings have a replacement cost of $300 billion, not
including our valuable religious institutions, universities,
hospitals, and the like.
Here are some specifics of pending defaults, stymied sales,
stymied refinancings, and deferred construction projects, a
direct result of the lack of terrorism coverage. There are more
details in my written submission.
A real estate portfolio with property in cities like
Chicago, Boston, and New York, and elsewhere, carried blanket
coverage of a billion dollars before September 11. Since then,
for this owner and in general blanket coverage is no longer
available on renewal. Now, the owners are technically in
default on their loan.
Owners of a $3 billion mixed portfolio in the Mid-Atlantic
and New England States operate by building and then borrowing
against completed projects to finance future ones. They cannot
get adequate permanent financing on a recently completed fully
occupied building because terrorism insurance is not available.
The company has 2,000 employees, some of whose jobs are now at
risk.
A bank agreed to refinance a $200 million mortgage, but in
January suddenly withdrew from the transaction over the
terrorism insurance issue just before closing. In this and in
another similar case, lenders are stalling by discussing
everything but terrorism insurance.
Mortgage brokers we have spoken to assume the lenders want
to be ready to lend and hope that Government will resolve the
terrorism insurance issue before they must decide whether to
commit. An East Coast and Chicago hotel builder with projects
averaging $300 million cannot finance without terrorism
coverage and so will not start any new construction. Hotel
industry unemployment will increase.
Inadequate terrorism coverage may kill the sale of a Times
Square building priced at close to $600 million, and the Mall
of America is at risk of default because of the terrorism
insurance problem.
A major university has no coverage for terrorist incidents
involving its laboratories. Its' research may have to be
restricted at a potential cost of scientific advances. I add
here that any terrorism insurance now written specifically
excludes nuclear, chemical, and biological acts, the very type
of assaults the public fears the most.
There have been, or soon will be, similar cases in every
district represented on this panel. For all its urgency, the
lack of terrorism insurance has remained a silent crisis.
Owners have not complained publicly because they do not want to
frighten the public or their tenants, investors, lenders, and
potential purchasers.
In addition, policy renewals are staggered so many pre-9/11
policies will remain in effect for several more months. Those
covered owners are terribly concerned by the current lack of
adequate coverage and hope Congress will address the problem
quickly.
In summary, these are the grim prospects if steps are not
taken:
Sales of high value property will be few. Prices will drop.
Property tax assessments and recording sales tax revenues will
also drop and localities will face harsh budgetary choices.
I am inserting for the record an analysis by Cushman &
Wakefield of likely lost tax revenues for New York City and New
York State alone this year if Congress fails to act.
Owners in default will have to renegotiate, pay higher
interest rates, and be compelled to take larger equity
positions. Owners will not have funds to make needed
improvements or do transactions. Construction and
rehabilitation work for the trades will fall off. Lenders will
loan less, declare owners in default, and maybe foreclose. Bank
profits will drop.
The Senate must act on legislation now. Only the Federal
Government can provide temporary backup terrorism insurance
coverage. This initiative would not be a bailout for the
insurance industry, but an effective defense to protect us,
your constituents, from the economic aftershock of 9/11.
I would be happy to answer your questions.
[The prepared statement of Deborah B. Beck can be found on
page 23 in the appendix.]
Chairwoman Kelly. Thank you, Ms. Beck.
We go now to Ms. Kramer.
STATEMENT OF LISA KRAMER, PRESIDENT AND CEO, FEDERATION OF
JEWISH PHILANTHROPIES SERVICE CORPORATION
Ms. Kramer. Thank you. Good afternoon, Chairwoman Kelly,
Dr. Weldon, and Members of the subcommittee:
I am the President of FOJP Service Corporation. FOJP is a
non-profit membership corporation. We serve as risk management
advisors to United Jewish Appeal, Federation of Jewish
Philanthropies of New York and its beneficiaries, among which
are six major academic medical centers, many long-term care
facilities, and 110 social service agencies, community centers,
Ys, and camps.
These institutions are at the forefront of providing
cutting edge medical care, a broad array of mental health
services, cultural, educational, and physical fitness programs,
services for the elderly and for immigrants, camping and
daycare for the young and the elderly, and employment
counseling and training for those seeking jobs.
Services are provided on a non-sectarian basis to a
population that reflects the diversity that New York State is
known for, and often to people who have nowhere else to turn.
Our facilities provide services and health care to millions of
people year-in and year-out.
In its capacity as risk management advisor to these
institutions, FOJP works with leading insurance brokers to
procure lines of property and casualty insurance coverage that
are essential to protect the institutions from liabilities and
losses.
In May of 2001, through two of the largest insurance
brokers in the world, FOJP began the process of marketing the
renewal of the all-risk property insurance that covers loss of
or damage to the real property of its client institutions,
property valued in excess of $8.5 billion.
The renewal date was November 1st, 2001. In July of 2001,
each of our brokers was assigned seven of the world's largest
and most respected property insurers to which to market FOJP's
coverage.
Sealed bids were due on September 17th. The brokers were
actively in the process of seeking renewal quotations when the
attacks of September 11 took place. An already hardening
property casualty insurance market became a nightmare for
insurance consumers.
FOJP stopped the competitive bidding process and used one
broker to scratch and claw the worldwide insurance market for a
renewal program. Before the November 1 renewal, FOJP's clients
enjoyed property insurance limits of over $8 billion. Following
the November 1 renewal, and despite the extraordinary efforts
of one of the world's largest insurance brokers, 16
international insurance companies in combination provided a
program with significantly less coverage and dramatically
increased costs.
Most alarming, however, was that terrorism exclusions were
added to the policies. Upstate hospitals, particularly in
Buffalo and Albany, have seen their insurance limits
drastically reduced, both their deductibles and premiums
dramatically increased, and all had terrorism exclusions
inserted in their policies as well.
The combination of significantly reduced limits and
terrorism exclusions experienced by the FOJP program has become
commonplace, posing a serious threat to the ability of non-
profit health care and social service institutions to continue
to provide the services that are so important to the poor, the
aged, the sick, the disabled, and to those of us who are lucky
enough to enjoy cultural and educational services without the
burden of sickness or disability.
Each of FOJP's largest hospital clients has over $500
million in long-term debt, as well as more than $100 million in
short-term loans for new construction. In the event that one
single terrorist act even far below the magnitude of September
11 seriously damages or destroys any significant property in
the United States, the effects of such a scenario could be far-
reaching and devastating.
Lender agencies will realize that they are the insurer of
last resort. Institutions will be unable to rebuild because of
terrorism exclusions, and there will be defaults to private
mortgagees and Government lenders.
Lenders may respond by requiring terrorism coverage before
lending any additional money to similar institutions. The
institutions will then face the choice of foregoing essential
programs necessary to fulfill their mission, or paying
exorbitant terrorism premiums for insufficient coverage.
A leading writer of terrorism coverage recently quoted the
FOJP program a premium of over $4.2 million for only $50
million in coverage. Premiums of this size are simply not
affordable in the current fiscal environment.
Leaving aside the day-to-day financial stress non-profit
institutions bear in providing services, basic insurance costs
are rising precipitously. There is no money in any budget to
pay the premiums that are being quoted for terrorism coverage,
if such coverage could be found at all. And even if the money
could be found, the limits being offered are seriously
inadequate.
If one of our insured hospitals were to be seriously
damaged or destroyed by a terrorist act, $50 million in
coverage would make but a small dent in the hospital's
financial obligations and rebuilding costs.
The issue of insurance coverage for property loss caused by
acts of terrorism is a serious one. Coverage is either
unavailable or coverage that is available is inadequate in
limits and unaffordable in price.
We need Congress to act, and to act quickly. Thank you.
[The prepared statement of Lisa Kramer can be found on page
24 in the appendix.]
Chairwoman Kelly. Thank you, Ms. Kramer.
We move now to Mr. Quinn.
STATEMENT OF KIERAN P. QUINN, PRESIDENT AND CEO, COLUMN
FINANCIAL, INC., A SUBSIDIARY OF CREDIT SUISSE FIRST BOSTON
Mr. Quinn. Good afternoon, Madam Chairwoman, and Members of
the subcommittee:
I appreciate the opportunity to be here today to discuss
terrorism and its effects on the commercial real estate finance
industry.
In 2002, Column Financial closed 549 individual loans for a
total of $5.8 billion. The smallest loan was about a million
dollars. The largest loan was $480 million.
Since 1/1, we have turned down roughly 9 to 10 loans valued
at approximately $500 million only because they lacked
terrorism insurance. Today we will not consider any loan in
excess of $50 million without full terrorism insurance
coverage. We will scrutinize all loans in excess of $20 million
if they have any terrorism exclusions. And we have been
anticipating we will receive all-risk policies on smaller
loans. It is early in the year. We have not seen everything
yet.
My competitors are also turning down loans because of the
lack of terrorism insurance. High risk office buildings in high
profile cities such as New York, Washington, Chicago, LA, will
be extremely difficult to finance without terrorism insurance.
My fear is if another attack occurs, the insurance markets
may shut down. To put the finance industry, the commercial real
estate finance industry in perspective, our total outstanding
commercial mortgage debt equals $1.7 trillion. Property taxes
alone provide almost half of all Government funding, and more
than 70 percent of the local tax bases throughout the country.
The real estate industry contributes approximately 11
percent of the Gross Domestic Product. 2001 was a record-
setting year for commercial and multi-family loan production.
New CMBS totaled over $76 billion in the U.S. alone.
Many of these loans were already in the pipeline before
September 11th, but more importantly most lenders and
originators continued to lend with the assumption that Congress
would act and pass terrorism reinsurance backstop.
Loan production volumes for 2002 will be at risk if
terrorism insurance coverage remains unavailable. During 2001,
commercial real estate finance activity in Chicago alone was
$10 billion. In Los Angeles, it was $10 billion. In New York,
it was $12 billion.
This could represent a loss of business for lenders and
developers. It could also represent a loss of future
construction jobs and a current loss of transfer taxes to the
localities.
Furthermore, pension funds and life insurance companies
invest directly in commercial real estate as owners, and many
of their investors, including average Americans who rely on
fixed incomes, will see an industry downturn effect seriously
adversely affect their retirement savings.
Currently there is a risk transfer occurring from the
insurance industry to commercial business. Forty-six States
have approved exclusions for terrorism, war, and military
action and the use of nuclear, biological, or chemical
material. This risk is being transferred to borrowers and to
lenders, thus making the lenders the insurers of last resort.
If this situation remains, lenders will not be able to
continue to make loans. I am here to say that lending capacity
in 2002 is being dramatically affected by the lack of available
terrorism insurance coverage.
My company is not the only lending institution affected.
Several Manhattan high rise projects whose collective values
equal about a billion dollars have lost funding because
terrorism insurance could not be obtained.
Another company has established a policy to exclude funding
consideration for all loans excluding $25 million without
terrorism insurance. Many servicers of commercial mortgage-
backed securities have concerns about insurance coverage on
existing issuances on existing properties.
If the same insurance coverage is not available when
policies are renewed, there is a possibility that loan
covenants will be violated because the required all-risk
coverage may not be provided.
Another major commercial mortgage lender with a $10 billion
mortgage portfolio who originates large loans for
securitization has decided to protect itself by requiring
terrorism insurance on all new loans.
Borrowers frequently are unable to obtain the required
terrorism insurance, making it impossible for the lender to
close the loan.
The rating agencies are reacting to the lack of available
terrorism insurance. Fitch & Moody's are in the process of
creating new criteria to categorize this risk.
If Congress fails to pass legislation, these new guidelines
could cause rating downgrades in new and existing deals.
In addition, special scrutiny is being given to the sort of
small, run-of-the-mill properties in close proximity to these
high profile properties because we don't know where the next
attack is coming.
I am a commercial real estate lender. I am paid and trained
to assess and price risk. But I am trained to deal with certain
types of risk, and this is one I have no training to assess and
deal with.
I can assess the risk of a K-Mart bankruptcy. I can assess
the risk of a building burning down and collecting on
insurance. But if I cannot assess the risk, and my borrower
cannot obtain insurance, I cannot make the loan.
I submit that the time to act is now, before another
terrorist incident occurs. Act now while we have the luxury of
being able to give careful consideration of how a program
should be crafted.
The need and purpose of Government reinsurance backstop is
to stabilize and restore confidence to the markets. If and when
another attack occurs, the Federal backstop will ensure against
market disruption and panic.
I urge Congress to pass terrorism reinsurance backstop
legislation, and I applaud the Financial Services Committee for
taking the lead in this area.
Thank you.
[The prepared statement of Kieran P. Quinn can be found on
page 137 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Quinn.
We move to Mr. Hunter now.
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA
Mr. Hunter. Thank you, Madam Chairwoman.
Chairwoman Kelly. Mr. Hunter, will you please push the
button to turn on the microphone.
Mr. Hunter. Yes. Thank you.
Chairwoman Kelly. Thank you.
Mr. Hunter. Thank you very much. It is nice to be back
before you.
You will remember that CFA was one of the early and
strongest supporters of the bill that passed this subcommittee
unanimously, or the Full Committee, and went to the floor of
the House, because as I testified before the Senate I was very
afraid of what might happen after January 1.
We did not support the ultimate bill because we thought the
tort restrictions were too Draconian, but we did think that the
Committee, particularly Chairman Oxley and Chairman Baker, did
a great job here at the Committee level.
Because of the lack of Congressional action last year, we
got to test whether the crisis that we feared would happen, and
what would happen. There were many dire predictions, and we now
can test did all these dire predictions come true? And the
answer is, they did not.
Terrorism coverage, which was obtainable immediately after
the September attacks, is becoming more widely available in
larger amounts. Premiums are falling as more insurers enter the
market. That is a quote from this morning's New York Times.
The world's largest commercial insurer, AIG, has just asked
the Federal Government not to offer airlines war and terrorism
insurance anymore because, as Mr. Greenberg put it, we as
taxpayers do not want to compete with our own Government for
business that the commercial sector can underwrite.
Ground Zero's cleanup and construction project at the World
Trade Center has been written in a wrapup policy by Liberty
Mutual.
The capital markets raised $24 billions in 10 weeks, which
is breathtaking, said Alice Schroeder of Morgan Stanley. More
money was raised in new capital than actually was paid out as a
result of September 11th, when you consider taxes.
Lloyds of London says that new capacity has helped brokers
obtain higher limits of $50 million to $100 million easy to
obtain for good risks, he said, for terrorism. And by using
capacity in Bermuda and the U.S. markets, brokers can obtain
$200 million, the Lloyd's broker said. Lloyd's now comfortably
places $200 million of coverage for any one building.
Insurers are developing ways to rate terrorism coverage,
including new computer models which have been developed for
that purpose. Some larger commercial accounts are using the
Liability Risk Retention Act to cover the liability part of the
terrorism risk, for example airlines are doing that in Vermont.
Captive insurance companies are forming to cover terrorism,
for instance, for the construction trades. Banks are freely
loaning money, and Mr. Greenspan this morning confirmed that.
He said, quote: ``To date there does not appear to be the case
that there are any widespread problems. We have not seen any
impact of that nature on the banks.''
And I could go on with many, many more positive things. So
CFA undertook a major study of the insurance market. We found
that the insurance market is wealthy and overcapitalized. High
rates are a serious problem for mid-sized and larger commercial
insureds, but that is much more related to the economic cycle
of the insurance industry than terrorism.
The larger firms are finding alternative ways to deal with
the problem such as self-insurance and creation of captives,
and even securitization of risk.
The rate problem is caused by their classic turn in the
economic cycle, but the hard market is anticipated to be short
because of the excess capital in the insurance industry.
Banks are freely loaning money. GAO has today released its
report. It points to real estate and commercial lending as
potential trouble spots. It cited ten examples of problems,
eight of which are in these areas. The others are terror
targets, a mall in an airport. Of the ten, four are located in
New York, maybe more, at least four.
CFA agrees there are problems developing in certain areas,
but as GAO says, quote: ``The extent of negative economic
impacts of a lack of terrorism coverage is not yet clear.
Ultimate impact on the economy cannot be gauged.''
This is not to say there are no problems. High prices are a
serious problem because of the cycle turn. In the mid-1970s and
mid-1980s, we experienced crises like this. The mid-1980s
crisis was much worse than the one we are currently in. You may
remember that Time Magazine had a cover that said ``Sorry,
America, Your Insurance Has Been Cancelled.''
The price increases in the hard market caused by this cycle
term began in late 2000. The terrorist attack sped up these
price increases into what many seasoned industry analysts see
as price gouging today. But terrorism did not cause the price
increases.
What should Congress do today?
One, I think you should not rush into passing a full backup
bill. You should continue to have the GAO review what the
problem is, and to look at the problems and see what the limits
are. Real estate trophy risks, other trophy targets,
particularly in New York City. You should document that.
Congress should be prepared to act if an event occurs
quickly, just as you did with the airlines. GAO raises the
important question of how to deliver payments, but there are
ways to do that. Even the insurance companies do not have
adjusters to cover say major earthquakes, and there are
services available for ways to deliver money if you decide to
do something after the fact.
You may decide to target the ultimate bill, if there is
one, to the specific risk. the terrorist targets and the trophy
risks. Those are the problems. So maybe something like a
coverage only in excess of a $500 million retention per entity.
Big business wants an all-industry bailout rather than a
specific backstop. I don't think they need it.
Second, if any Federal backup bill is required, the House
version is the right way to go in terms of a payback mechanism.
We totally agree with that.
Third, we think you should consider developing private
sector alternatives. For example, expanding the Liability Risk
Retention Act to cover property insurance. Why shouldn't the
wholes of these aircraft be able to be covered by the airlines,
just like they are going to cover their liabilities? The Risk
Retention Act is a very important tool to give alternatives to
the private sector.
And finally, any bill that does pass you have to address
rate gouging. If you pass a backup bill, it would be foolish to
not have a price reduction as part of the bill. I would be
happy to answer questions at the appropriate time.
[The prepared statement of J. Robert Hunter can be found on
page 142 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Hunter. I read your
testimony. I found it very interesting, but it certainly seems
to me you may not have interviewed the other panelists.
We move now to Ms. Schroeder.
STATEMENT OF ALICE D. SCHROEDER, SENIOR U.S. NONLIFE EQUITY
INSURANCE ANALYST, MORGAN STANLEY.
Ms. Schroeder. Thank you. Good afternoon, Madam Chairwoman
and Members of the subcommittee:
I appreciate the opportunity to appear before you today. As
an equity analyst, I am an observer of the industry, but I also
represent the owners of the companies who supply capital to the
industry, and I am the only representative of the owners of the
insurance companies here today.
The risk of terrorism which was formerly borne by insurers
is now being distributed more broadly throughout the economy.
This afternoon the financial institutions research team of
Morgan Stanley issued a report on this subject.
We have analyzed the real estate, banking, asset
management, and insurance industries to discuss and understand
how the risk has shifted out of the insurance industry toward
other sectors of the economy.
Collectively we estimate that there are approximately $12
billion of assets exposed in the commercial area in the United
States, excluding homes and personal assets--excuse me, $12
trillion, which obviously greatly exceeds any capacity that the
insurance industry could possibly hope to provide for terrorism
coverage.
There is no possible way the insurance industry could deal
with that.
Lenders have shown varying degrees of concern about the
lack of coverage in their portfolio, depending on their
business mix, with many beginning to demand coverage. Others,
we are aware, have begun to ask borrowers to explicitly self-
insure, shifting the risk directly to their customers.
Property and business owners are seeking insurance
coverages, but they are generally not finding it for the higher
risk properties, and for large groups of employees for workers
compensation.
Many, however, still have coverage which will expire later
in the year. And those who have already lost coverage appear to
have varying levels of concern depending on how they assess
their own risk.
Mathematically, the effects of customers and insurers to
avoid the risk collectively does not protect the economy
against terrorism. The risk has only been redistributed.
We think you need to understand the assumptions that are
being made by participants in the economy in thinking about
this, as we have discussed them with many people.
It appears that many are assuming that if there were
another event, the Federal Government would provide essentially
unlimited post-event funding; that the funding would be in
proportion to economic losses regardless of insurance coverage;
and that any capital destroyed, any debts owed, and any
insurance claims owed would all be paid by the Government.
It also appears that some may be assuming that any further
attacks would be an act of war. In other words, that insurance
coverage might not even apply.
We also believe there are other reasons why there has not
been more panic and visible economic disruption, including the
fact that insurance policies renew throughout the year, and
that many people are assessing their individual risk odds as
low. But it is important to separate panic behavior from real
economic disruption.
As analysts, we deal in facts and data. And the economic
disruption is the fact that significant risk has been shifted
from insurers to their customers. That is a fact. It is a
simple economic fact that we believe cannot be disputed.
Even if every exposed party retains its own risk
collectively and has no complaints about doing so, the risk
remains in the economy and has not been addressed.
We believe, however, that complaints about the disruption
will worsen over time because as more insurance policies renew,
more coverage will be lost. And the limited insurance capacity
that is available is being used now by those whose coverages
are expiring early in the year. So you have some inequities
that may result from that.
The insurance industry will develop over time some
additional capacity for terrorism coverage, but it will fall
far short of the requirements.
For example, the $20 billion of capital that was raised by
the industry last fall was all raised by investors for the
reinsurance industry, and that money is not being used to cover
terrorism, and those investors certainly had no intention of
covering terrorism risk.
The rating agencies commented that there was a rating
threat here, but so far there have been no downgrades. We
expect that over time that may change.
And finally, institutional investors currently are in a
state of ignorance, not seeing disclosure. They would certainly
like to know more about their investments and what the status
of the equities that they own have.
The SEC is considering this issue, but we are certainly in
favor of disclosure.
So to sum up here, a brief perspective on the insurance
industry. From the point of view of an equity investor,
insurance companies generally destroy rather than create value
for their shareholders.
They compete for market share ferociously and are quick to
underprice their product, given the opportunity. From our
perspective, customers get an extremely good deal subsidized by
shareholders, and if insurers could gain market share by
covering terrorism, we believe they would be doing it right now
if there were any way to underwrite terrorism successfully. We
simply do not believe there is.
The shortage of insurance capacity, along with the simple
and obvious mathematics of terrorism losses, indicate to us
that there is a problem here that needs to be solved. So on
behalf of the shareholders who provide critical risk capital to
this industry, we urge your careful consideration of these
issues.
One thing to especially keep in mind is whether the
shareholders will recapitalize the industry if there is another
event.
Thank you.
[The prepared statement of Alice D. Schroeder can be found
on page 171 in the appendix.]
Chairwoman Kelly. We thank you very much, Ms. Schroeder.
Mr. Mair, I would like to ask you a question or two.
As the representative of the commercial consumers, the
businesses most directly affected by a lack of terrorism
coverage fall into your category, and I wonder if you could
explain to us the risk transfer that is occurring from insurers
to the businesses and the vulnerability of commercial
policyholders to another terrorist attack from your perspective
if they fail to obtain terrorism coverage.
Mr. Mair. As I said, Madam Chairwoman, the RIMS membership
includes approximately 84 percent of the Fortune 1000, and on
the smaller end, over 900 businesses with less than 500
employees.
Those small organizations rely on insurance coverage to
recover from catastrophe. In the absence of that, those
companies simply do not have the resources to reopen their
doors again.
By example, in the middle sector in my organization, every
dollar that I pay for insurance is a dollar that the U.S.
Olympic Committee cannot use to train athletes. It is a dollar
that a company of my size cannot use to pay an employee to pay
for health benefits.
On the uppermost end, these are companies that have the
ability to retain more of that risk, to spread more of it
across multiple properties, but still yet those are going to
have an impact should those losses materialize, or should those
higher costs continue to be absorbed by those organizations.
Simply put, those are going to be transferred through the
chain, through the supply chain, to the ultimate buyers, to the
consumers.
Chairwoman Kelly. Thank you.
Mr. Mair, your fellow panelists here, Mr. Hunter, in his
testimony wrote that larger firms are finding alternative ways
to deal with the problem such as self-insurance, creation of
captive insurance companies, and securitization.
You represent the companies you spoke of, the Fortune 500
and Fortune 100 companies, and a lot of smaller businesses. Do
you find this to be the case? Or are there large companies that
are in need of this Federal legislation?
Mr. Mair. Let me answer those questions in reverse order.
There are clearly large companies that need this
legislation. It is dynamic, it is required, and it is required
today.
The same companies that are banding together to form
captives, to use alternative risk transfer vehicles, still look
to the reinsurance markets. They are not banding together and
creating those captives for unlimited losses. They are all
capped within working layers of loss that are predictable and
understandable and fundable.
Where the reinsurance industry has pulled itself away,
where it has left, they are left with the fullness of that
liability. And none of them, even the largest, have the ability
to absorb that on their own.
And by the way, I really disagree with something. You
mentioned Mr. Hunter's testimony. I have to tell you on behalf
of the consumers of insurance, I really strongly disagree with
the Consumer Federation of America's assertions. I think they
have looked at the right fact patterns, but at best hit the
outer ring of the bullseye.
Chairwoman Kelly. Thank you, very much.
Ms. Schroeder, how many investors do you think are aware
that their investments may no longer be protected by terrorism
insurance? And if the Senate fails to act, is this not putting
both the investors and the lenders at a significant risk?
Ms. Schroeder. Yes. Investors are in a state of ignorance
right now because they know there is risk, but there is no
disclosure of lack of insurance. So there is a creeping miasma
of risk out there and concern, but they don't know which
companies to apply it to because, while insurance coverage has
been withdrawn, they do not know yet if the policy has expired
for the company that they happen to own, for example.
They know that risk is rising, and they are. generally
speaking, aware. There are certainly varying levels of
awareness among investors however, and we believe investors are
becoming more aware of that. For example, Lehman and Morgan
Stanley this week have both issued major reports on this
matter, the first to be issued.
So we expect that over time investors are going to become
more and more concerned.
Chairwoman Kelly. Thank you.
Ms. Beck, why do you think some real estate transactions
are occurring in the face of the unavailability problem?
Ms. Beck. Well, I know of one in Chicago that took place
and was sufficiently interested to find out how, since it was a
large transaction. And I did call and found out that the owners
have a blanket policy in effect until early summer. Because of
their relationship with the insurance company that had provided
the blanket, they were able to include the new purchase in the
pre-9/11 existing blanket policy.
But, as I mentioned on renewal, now there is no blanket
coverage being provided for large portfolio owners. I might
also, if I may ask your indulgence, comment on Mr. Hunter's
analysis of the situation.
I wish I were as sanguine as he that if we waited long
enough the free market would come up with a solution. I just
wonder--and this may be a little unfair, Mr. Hunter--but I just
wonder if you were hanging over a cliff, if you would like to
wait there while someone created a business to rescue you.
Chairwoman Kelly. Thank you, Ms. Beck.
Mr. Hunter, do you want to attempt an answer here?
[Laughter.]
Mr. Hunter. Sure. Well, actually I think there are some
problems. I said that. And I think the Congress needs to
reconsider how to address the real problems that may exist in
certain limited parts of the economy. That is just not the kind
of situation that was predicted; it is not happening; and you
cannot create it. It is just not there.
Chairwoman Kelly. Well, Mr. Hunter, it has been 6 months
since 9/11----
Mr. Hunter. And one-third of the direct insurance is now
written because 25 percent of the commercial business comes up
on January 1 of the direct business, not the reinsurance.
Seventy percent of the reinsurance expired on January 1, but 25
percent of policies attached on January 1, the direct policies,
and since then about--so we're at about a third of the policies
out there and we're not hearing anything.
Ms. Beck. May I comment?
Chairwoman Kelly. Ms. Beck, yes.
Ms. Beck. Thank you, Madam Chairwoman.
I think that when Mr. Hunter says that the policies have
been written, he is not aware perhaps that acts of terrorism
have been excluded from coverage.
In the States that are not covered by the ISO exclusion,
which permit States to allow insurers to exclude terrorism
coverage--in the States that still are not approving that
exclusion, you have 35 percent of the commercial property
market.
In our market in New York, I know for certain that several
billion dollars worth of real estate is either grossly under-
insured for terrorism, or has had no coverage for terrorism in
those same 3 months. And I know that in a survey that you did,
Mr. Hunter, you may not have had access to nor would it
necessarily have been disclosed to you, because, as I mentioned
in my testimony, property owners are frightened to make public
this fact, either to potential terrorists or to their investors
or lenders or anyone else, for that matter, including their
tenants who also might be frightened knowing that there is no
coverage for acts of terrorism.
Furthermore, anybody who has renewed insurance is not
getting coverage for the very risks that I think our Government
is most concerned about: bioterrorism, chemical or nuclear
terrorist acts.
I do not question that what you have in your study is
correct, but it is missing are some of the most critical
underlying facts affecting the large commercial properties.
Chairwoman Kelly. Ms. Schroeder, did I see your hand on
that?
Ms. Schroeder. Yes. I was just going to add that there has
been some evidence from the NCCI which runs the Workers
Compensation Pool that since January 1 it has become very, very
difficult for large employers to buy workers compensation
because you cannot exclude terrorism coverage from that
product. And that is a very significant shift since January 1,
which would indicate that the lack of reinsurance coverage is
what is triggering the primary companies to stop selling the
product to large employers.
Chairwoman Kelly. Thank you.
I am out of time, so I am going to turn to Dr. Weldon.
Dr. Weldon.
Dr. Weldon. Yes. I have a question for Mr. Hunter. Those
tort provisions, you referred to them as being Draconian, I
would like you to amplify on that just a little bit, because I
thought if we were going to be putting basically the Treasury
of the United States at risk for coverage for these things, it
was reasonable to place some restrictions on the trial bar to
raid the Treasury.
And I am just a little shocked to hear that from you. You
know, you go to buy a ladder at K-Mart or Wal-Mart, it is about
twice the price it should be because of the insurance on the
ladder and all that.
So from a consumer perspective, can you explain where you
are coming from on that issue?
Mr. Hunter. Sure. Well, I supported tort restrictions as it
passed this Committee. There were restrictions.
Dr. Weldon. OK.
Mr. Hunter. And I supported that.
Dr. Weldon. So when the question was before the Committee--
--
Mr. Hunter. It went to the floor and they tacked on a whole
new set of much broader restrictions that went way beyond just
terrorism, and I was opposed to that. I thought it was--first
of all, it was non-germane, and second, it was Draconian.
Dr. Weldon. Ms. Kramer, did I understand your testimony
correctly that you now have a lot of exposure; that you just
cannot get insurance?
Ms. Kramer. Well, that is absolutely right. We cannot get
coverage for terrorism. And that applies not only to the
hospitals and agencies in the FOJP program, but as I mentioned
we've talked to the hospitals in Upstate New York and I know
from personal experience hospitals outside of New York City and
New York State are experiencing the same thing.
I want to just comment for a moment on both what Mr. Mair
said and also what Mr. Hunter said. Mr. Mair made the point
that the problem may be up at the reinsurance level. We have a
captive, but that captive is in no way, shape, or form able to
subsidize and take care of terrorism coverage.
When we go to our insurance companies, the primary carriers
happen to be excess and surplus lines companies and they do not
even need approval. They do not need the approval of the
Superintendent of Insurance in New York for excluding
terrorism.
Then you move to the reinsurers and their prices are, when
you can get a little bit of coverage, are exorbitant. The
hospitals and the agencies in our program, the hospitals
particularly, are cash-strapped. They have only got a few weeks
of cash on hand.
In the September 11th attack, two of our hospitals were
seriously affected and, fortunately, because of our program pre
the last renewal, had coverage for major business interruption
losses.
In addition, our agencies throughout the city who had to
gear up to take care of victims of September 11th and their
families, their services were also interrupted. So you are
talking about thousands of people in the City of New York who
are not getting the health care services, or access to it, let
alone social service agency services all because of a terrorist
act. And that one was covered. The next one is not.
Dr. Weldon. Does your organization consider itself at
higher risk to be targeted in light of the virulent anti-
semitic sentiments of these terrorists?
Ms. Kramer. Well, bear in mind that the agencies and the
hospitals are non-sectarian, and therefore offer their services
to people of all walks of life, all religions, races, and so
forth.
Dr. Weldon. But the name on the door is----
Ms. Kramer. The name on the door of my organization, FOJP
Service Corporation, of course, has Federation of Jewish
Philanthropies in the title. But the hospitals and the agencies
are not necessarily, you know----
Dr. Weldon. Labeled that way.
Ms. Kramer.----labeled.
Dr. Weldon. OK. Mr. Hunter, do you want to comment on this
situation? We have got a major charitable organization in this
country that is exposed.
Mr. Hunter. Yes. Obviously I think the major kinds of risks
that are exposed, particularly if they are targets, I think
Congress should consider if there is some role for Congress
maybe coming in at the high level as an excess carrier, because
I think you can get lower levels of terrorism coverage for
terror.
But I do not think you need to take that and then expand
that to a general bill the way the current bill stands as it
passed the House. I do not think you need that kind of general
coverage anymore. I do not think it is necessary, based upon
what we are learning.
Dr. Weldon. I see some people who want to respond to that.
Ms. Beck. I would like to mention that I have been
discussing the issue with representatives of another major
religious organization that is not affiliated with Ms.
Kramer's, but has many, many properties throughout the country.
I have given its name to the General Accounting Office, because
I just learned on Monday that they were prepared to talk to the
GAO. Unfortunately, my message did not get to the staff in
Chicago. The insurance dilemma is a widespread problem for
religious institutions of all denominations across the country.
I think that we are very fortunate that Ms. Kramer is here
today, because in her example she had insurance that was to be
renewed, I believe you said on November 1st, and that is really
germane here, because we have this staggered schedule of
renewals coming up.
And there are still a large number of entities that have
insurance written before 9/11. But what you are hearing today
is analagous to the Galapagos Islands, tips of volcanic
mountains. In the ocean, if the Pacific starts receeding you
are going to see this problem in stark relief--and it will
worsen if Congress does not act--creating some reinsurance
mechanism must be done, and done very quickly.
Mr. Hunter. You know, Mr. Weldon, if that is true that
there are many religious institutions with this problem, that
is a classic example of why you would want to look at the Risk
Retention Act as possibly expanding it. Because the Risk
Retention Act which helped solve the liability crisis of the
mid-1980s and the mid-1970s, is limited to liability insurance.
And it allows groups to get together all over the country and
form to either buy insurance as a group, or to self-insure
themselves.
And it is a very good tool, because it offers alternatives.
It also kind of scares the insurance companies into making more
reasonable bids. And it is something that should be looked at,
because Congress in both the last crises we had like this used
that tool, and I think it would be a perfect tool if you
expanded that to property and workers comp here.
Dr. Weldon. Did you want to comment on that, Ms. Schroeder?
Ms. Schroeder. Yes. I just do not view that as a feasible
solution because the kind of small events that a risk retention
group could handle, you could already buy adequate coverage
for.
The kind of large events that you need coverage for, no
risk retention group could possibly capitalize. So economically
I think it is a good idea, but I think you already have
capability to cover those kinds of risk.
The insurance industry is happy to provide capacity for
small, reasonable acts of terrorism that they have the capacity
to cover. It is the large events that they do not have the
capital for. And if the entire insurance industry does not have
the capital, how can a risk retention group made up of non-
profits do it?
Ms. Beck. And that is our point, as well. We were
approached by several hospitals as though we had the capital to
invest in starting up a risk retention group, and there might
be one or two hospitals in the New York State or New York City
area that have some capital to throw at this problem. But these
are, as I said, cash-strapped institutions. They are not-for-
profit and they cannot afford to self-insure or go into a risk
retention group, and there is no affordable coverage being made
available from any of the insurers or reinsurers.
Our concern is that, as the cost of this coverage has
become prohibitive--covering the expense takes money as it is
transferred to an operation that previously did not cost near
this much in terms of funds.
That situation is simply going to raise the cost of health
care in New York and elsewhere. How else are you going to pay
for the physicians and the services?
Mr. Mair. Mr. Weldon, if I might, before you conclude your
time, Mr. Hunter cited three sources in saying to you that
there is coverage available. He cited today's New York Times in
which Joe Treaster indicated that there was coverage widely
available at reduced costs.
I spoke with Mr. Treaster in an interview for that article
yesterday, and what he indicated to me was he was able to find
one program in which the cost had gone from 20 cents on the
dollar to 5 cents on the dollar.
With all due respect to Mr. Treaster, you can sell me the
Hope Diamond at half its value and I still cannot afford it. It
does not become available.
Mr. Hunter also made reference to Lloyd's, and the fact
that coverage was available there. Lloyd's is beginning to
exclude fire-following coverage, an issue that is growing in 30
States now in which that coverage remains even following the
terrorism exclusion.
That does not suggest to me that coverage is available.
And he cited, as well, Hank Greenberg, Chairman of AIG,
saying that on the aviation side that Government need not do
anything. Well, in that same New York Times article, Mr.
Greenberg is cited as saying that Congress not acting is like
going to war without an army, and urged the Congress to act.
I concur with Mr. Greenberg in that respect. And again,
thank you for allowing me to interrupt.
Dr. Weldon. By the way, the way I deal with the New York
Times is that I just don't read it.
[Laughter.]
Dr. Weldon. If the Chairlady would just indulge me for one
little question, could you, Ms. Schroeder, could you just
explain to me how insurance companies destroy equity?
Ms. Schroeder. Yes. How they destroy equity is they sell
the product too cheaply. Insurance is a derivative, and by that
I mean that the premium they charge is a fraction of the risk
that they take on.
So when they underprice the product, they can destroy
massive amounts of value. Over the last 10 years, insurance
companies have earned on average on their capital 8.5 percent,
which is about what a corporate bond would earn. And that is on
average.
That is during a period when they got big windfall gains
from being invested in equities. And if you took those windfall
gains away, they would have lost money.
They also got big windfall gains from basically deflation
of their costs that were nothing that they did.
The risk that an investor takes on from investing in a
stock, they need to get paid for that risk more than a bond. So
value destruction is if you only get paid what you get for
owning a bond when you're taking the risk of an equity, and
especially when that return you did get came from something
that was an accident like the equity market, not from the basic
business of selling insurance.
The insurance companies typically lose something like 10
cents for every dollar of premium that they sell on the basic
business of selling insurance. So customers get a $1.10 worth
of claims and expenses for every $1 they give to the insurer
for premiums.
Dr. Weldon. Thank you, very much. I will go sell all my
insurance stocks immediately.
[Laughter.]
Ms. Schroeder. Most people do.
[Laughter.]
Dr. Weldon. Just kidding about selling those stocks.
Mr. Hunter. They're up at a rate of 15 percent since
September 10th.
Ms. Schroeder. And where are they from 1998?
Chairwoman Kelly. Thank you very much, Dr. Weldon.
I want to go to Ms. Kramer just for a second. Ms. Kramer, I
want to tell you that because of the area that I represent in
New York, I am well aware of the Federation of Jewish
Philanthropies and all of the good work that you do. You are
all over my District doing wonderful things, which is why I am
so concerned about your risk.
According to the GAO report, that exclusion that is being
used by the insurers excludes not only terrorism but also the
commission of any dangerous or violent act intended to
intimidate any segment of the population, or to express any
opposition to a philosophy or ideology.
I am concerned, ma'am, that you are able to get insurance
to keep on doing those good works in the face of potential for
criminal activity for bioterrorism, things like that.
I would like you to speak to that, because I think that
your risk is increased in that regard.
Ms. Kramer. Well, let me say two things.
First with regard to the hospitals in our program, we have
more than just Jewish hospitals. Right in New York City, you
know, we have got hospitals from other religious affiliations
as well as I commented on Upstate New York.
Now second, we have already encountered not only difficulty
but it has been impossible to get bioterrorism coverage. So
what do we see? We see hospitals all over the United States
preparing their disaster recovery plans so that they can treat
the public in the event of a bioterrorism attack. But who is
there for them?
And so at the cost of treating the public, there will be no
coverage and no money available to rebuild or to cover property
that is damaged, or people's lives and health that is injured,
and that is the problem. Where will the money come from for
them?
So my concern is that we have already seen and encountered
the difficulty. We cannot get bioterrorism coverage.
Chairwoman Kelly. So as long as the Senate does not act on
this bill, you are continuing at risk?
Ms. Kramer. We are.
Chairwoman Kelly. And so are the people, the women, the
children, the families that you serve?
Ms. Kramer. All of those segments of the population are
extremely vulnerable right now, and that is why we think it is
important that Congress act now as opposed to putting this off
any longer.
Chairwoman Kelly. Thank you very much.
I just want one final question to you, Mr. Quinn.
Mr. Hunter says that there is little if any problem with
loans in the current market for terrorism insurance. I would
like you to tell me if you agree or disagree with that
statement.
Mr. Quinn. I strongly disagree. I think he made a comment
earlier that banks are lending. Banks make all types of loans--
consumer loans, lines of credit to buy inventories and to
finance accounts receivables. The world that I live in lends on
commercial properties, a specific loan on a specific asset.
It even goes broader than that. The financial markets that
we operate in rely on confidence. Insurance is a critical
component of the collateral that I lend on and the confidence
behind the industry that I work with. It is vital to everything
that we do.
Chairwoman Kelly. What effect would another terrorist
attack have on your business and on your industry if Congress
fails to pass this terrorism insurance protection?
Mr. Quinn. If I cannot get insurance on these properties, I
cannot make loans. I am the permanent lender. I am the one who
takes the construction lender out, or the bank loan out. All
these loans will back up at the banks and they will be unable
to make any new loans, and construction will grind to a halt.
Chairwoman Kelly. As I would assume, Ms. Beck, real estate
transactions would also, because the banks cannot do the loans
on those, either.
Ms. Beck. Well, we are already seeing that. But I think
that, while lenders are making commitments on a lower loan-to-
value ratio now than since the early 1990s when they had to
foreclose on a number of properties because of our economic
decline at that time, I think lenders will face a real problem
if owners cannot get the terrorism insurance and the building
is, in fact, destroyed. The lender generally having a non-
recourse loan will be totally out-of-pocket for that particular
piece of property.
I hope we will not have any further terrorism incidents.
Were that so, the FISC will be protected even with legislation
passed by the Congress, because we comtemplate backup insurance
in the event of an attack. FISC is not saying, ``We are going
to hand out money now.''
This is a very important distinction to make in talking
about this subject. We have a Financial Committee at the Real
Estate Board of Lenders and Mortgage Brokers that meets
monthly. From what I am hearing, since January first, no large
loans have been made on either renewals or on transactions.
This is very, very serious. I cannot promise that we can
get you all the data, but we are hearing in our private
meetings that this crisis is just going to continue to get
worse and worse. Without congressional action, you can expect a
domino effect that will be increasingly evident as the months
pass.
Chairwoman Kelly. Well, certainly there does seem to be a
concern when you have the Administration confirming the
likelihood at or near 100 percent of our having another
terrorist attack. There certainly is a concern.
There are, I am sure, questions from other Members who have
not been able to get to this hearing today. I want to make a
note of that and say that, without objection, I am going to
hold the hearing record open for 30 days so that Members can
submit written questions to the witnesses and we can place
their responses in the record.
I want to especially thank this panel for honoring us with
the time that it took for us to get through this hearing, and
for being so very patient with that delay and with the quality
of your answers here today.
This panel is excused with the subcommittee's great thanks.
With that, this hearing is adjourned.
[Whereupon, at 6:20 p.m., the hearing was adjourned.]
A P P E N D I X
February 27, 2002
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