[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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