[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



 
                        A REVIEW OF TRIA AND ITS


                        EFFECT ON THE ECONOMY:


                      HELPING AMERICA MOVE FORWARD

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     CAPITAL MARKETS, INSURANCE AND
                   GOVERNMENT SPONSORED ENTEREPRISES

                                AND THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 28, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-81








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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
  Subcommittee on Capital Markets, Insurance and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
EDWARD R. ROYCE, California          MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
JIM RYUN, Kansas                     STEVE ISRAEL, New York
VITO FOSSELLA, New York,             MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin                CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania      JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania        BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio              DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 28, 2004...............................................     1
Appendix:
    April 28, 2004...............................................    39

                               WITNESSES
                       Wednesday, April 28, 2004

Abernathy, Hon. Wayne A., Assistant Secretary for Financial 
  Institutions, United States Department of the Treasury.........     9
Hillman, Richard J., Director, Financial Markets and Community 
  Investment, United States General Accounting Office............    14
Serio, Hon. Gregory V., Superintendent, New York State Insurance 
  Department.....................................................    11

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    40
    Oxley, Hon. Michael G........................................    42
    Gillmor, Hon. Paul E.........................................    44
    Kanjorski, Hon. Paul E.......................................    46
    King, Hon. Peter T...........................................    48
    Abernathy, Hon. Wayne A......................................    49
    Hillman, Richard J...........................................    57
    Serio, Hon. Gregory V........................................    80

              Additional Material Submitted for the Record

Kelly, Hon. Sue W.:
    American Insurance Association, The Council of Insurance 
      Agents and Brokers, Independent Insurance Agents and 
      Brokers of America, Property Casualty Insurers Association 
      of America, Reinsurance Association of America and UWC 
      Strategic Service on Unemployment & Workers' Compensation, 
      prepared statement.........................................   107
    Coalition to Insure Against Terrorism, prepared statement....   115
    Group Life Coalition, American Council of Life Insurers, The 
      Financial Services Roundtable, prepared statement..........   136
    Letter to Secretary John W. Snow from various Members of 
      Congress...................................................   139
Mortgage Bankers Association, prepared statement.................   141
National Association of Insurance Commissioners, prepared 
  statement......................................................   146
The American Council of Life Insurance, prepared statement.......   148


                        A REVIEW OF TRIA AND ITS



                         EFFECT ON THE ECONOMY:



                      HELPING AMERICA MOVE FORWARD

                              ----------                              


                       Wednesday, April 28, 2004

             U.S. House of Representatives,
   Subcommittees on Capital Markets, Insurance, and
              Government, Sponsored Enterprises and
       Subcommittee on Oversight and Investigations
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to call, at 10:02 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard Baker 
and Hon. Sue Kelly [chairmen of the subcommittees] presiding.
    Present: Representatives Baker, Kelly, Royce, Gillmor, Ose, 
Shays, Hensarling, Garrett, Brown-Waite, Barrett, Kanjorski, 
Maloney, Gutierrez, Velazquez, Sherman, Moore, Capuano, Lucas, 
Crowley, Clay, Israel, Matheson, Miller, Emanuel, Scott and 
Bell.
    Chairman Baker. [Presiding.] I would like to call our 
subcommittees's meeting to order this morning. This morning, we 
have a joint meeting of the Capital Markets, Insurance and 
Government Sponsored Enterprises Subcommittee, together with 
the Oversight and Investigations Subcommittee chaired by Ms. 
Kelly, for the purpose of receiving comment on the advisability 
of an extension of and the effectiveness of the current 
Terrorism Risk Insurance Act adopted by the Congress in 2002.
    As all of us are painfully aware, the events of September 
11 brought about the necessity for change in many aspects of 
American life. One area not given a great deal of attention, 
but extremely important for the functioning of our commercial 
enterprises is that of our insurance network necessary to 
enable the production, distribution and sale of almost every 
commodity and many activities in daily life.
    Because of the enormous exposures created by the 
concentration of loss in this terrible event, it was necessary 
for the Congress to act to provide a backstop to the private 
marketplace to enable appropriate adjustments to be made in the 
free market system to prepare for what we hope will never 
happen again. As we approach the expiration mandated by the 
legislation of this network, it is now appropriate and 
advisable for the committee to hear comment as to whether the 
market is sufficiently prepared for a transition to a free 
market remedy, or whether it is appropriate for some extension 
of the current guarantees to be considered by the Congress in 
light of the difficulty of assessing the current risks.
    It is also appropriate to note that the legislation did 
require the Treasury Department to prepare an analytical study 
and assessment of the adequacy of the system and to make such 
report to the Congress by June 30 of the following year. It has 
been my observation that perhaps it would be advisable in light 
of that professional analysis to wait on the conclusion of that 
report and study before the Congress makes final 
determinations. The report requirements go to the very issues 
of whether extensions are warranted or not, and I believe would 
be greatly influential in the Congress's final determinations 
as to whether the market structures are adequate to face the 
long-term needs of insurance coverage.
    I am pleased this morning to have the witnesses before us 
who can give us informed insight on these matters and I look 
forward to their testimony.
    Mr. Kanjorski?
    Mr. Kanjorski. Mr. Chairman, we meet today for the first 
time in the 108th Congress to examine the effectiveness of the 
Terrorism Risk Insurance Act. As you know, I worked closely 
with you during the 107th Congress to enact this important 
economic stabilization law.
    Prior to the terrorist attacks on the World Trade Center 
and the Pentagon, most Americans took their security for 
granted. These attacks, however, altered how we each assess 
risk. This adjustment was especially apparent in the insurance 
industry.
    Prior to 2001, many insurers could not price for terrorism 
risk and offered it for free. Ultimately, the industry 
sustained approximately $40 billion in losses on September 11 
as a result of its poor economic judgment. Subsequently, it 
turned to the Congress to seek assistance in protecting the 
American public against future terrorism attacks, particularly 
in the short term.
    Terrorism insurance is critical to protecting jobs and 
promoting America's economic security. Unfortunately, 
reinsurers curtailed the supply of terrorism reinsurance and 
insurers began to exclude terrorism coverage from customers's 
policies in the wake of the 2001 terrorist attacks. Eventually, 
we belatedly approved the Terrorism Risk Insurance Act to 
address these pressing problems.
    Seventeen months have now passed since the Terrorism Risk 
Insurance Act became law. It is therefore an appropriate time 
for us to begin to examine the effectiveness of this statute. 
Because we crafted the law to last just 37 months, it is also 
an appropriate time for us to begin deliberations over the 
program's future.
    Today, Mr. Chairman, we will hear from several insurance 
experts on these important matters. I am especially pleased 
that our witnesses will report that the Terrorism Risk 
Insurance Act has worked to increase the availability of 
Terrorism Risk Insurance. As I understand, it has also lowered 
the cost of such insurance, contributed significantly to 
stabilizing the overall insurance marketplace, and advanced 
delayed economic development projects.
    We wisely designed the Terrorism Risk Insurance Act as a 
temporary backstop to get our nation through a period of 
economic uncertainty until the private sector could develop the 
models to price for terrorism reinsurance. I agreed with this 
decision. The reinsurance industry is dynamic and we should not 
disrupt the development of new products.
    Nevertheless, I now believe that we might have decided to 
sunset this program too soon. In designing the law, we sought 
to give insurers a transitional period. The General Accounting 
Office, however, has recently determined that the industry has 
made little progress to date in providing terrorism insurance 
without government involvement. This finding causes me 
significant concern.
    Although the law will expire at the end of 2005, many 
industry participants have also already called upon the 
Congress to act expeditiously in 2004 to extend the life of the 
Terrorism Risk Insurance Program in order to prevent short-term 
market disruptions. I agree.
    As I have previously noted, terrorism insurance plays an 
important role in the efficient functioning of our economy. We 
should therefore pursue appropriate action before the end of 
the 108th Congress to provide greater stability to our capital 
markets in the short term, while they work to develop private 
sector solutions to these problems for the long term. It is 
also my expectation that the Treasury Department will decide as 
soon as possible to extend the ``make available'' provisions of 
the law that require companies to offer terrorism insurance on 
the same terms and conditions as other property-and-casualty 
products.
    In debating any plan to extend the Terrorism Risk Insurance 
Act, we additionally ought to work to incorporate group life 
insurance into the federal backstop program. Group life 
products have characteristics similar to commercial property-
and-casualty insurance in that there is often an excessive 
concentration of risk within a small geographic area. Despite a 
lack of terrorism reinsurance, group life insurers have 
remained in the marketplace, fully exposed to future terrorism 
events. This reality has created significant anxiety in the 
life insurance industry and uncertainty for individuals who 
obtain life insurance through their employers.
    In closing, Mr. Chairman, time is of the essence. I stand 
ready to work with you and all other interested parties on 
these matters in the upcoming months. I am also looking forward 
to hearing from each of our witnesses to learn of their 
insights on these matters.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 46 in the appendix.]
    Chairman Baker. I thank the gentleman.
    The Chair of the Subcommittee on Oversight, Ms. Kelly?
    Chairwoman Kelly. Thank you. I want to thank you, my 
colleague, Mr. Baker, for being willing to hold this hearing. 
This is a very important issue for the people of America. I 
thank Mr. Kanjorski and Mr. Gutierrez for also their 
cooperation in holding this hearing.
    In the last 2 1/2 years, our country has been engaged in a 
war against terror that has permeated virtually every aspect of 
American life. Congress and the Administration have responded 
to our new realities with comprehensive reforms that seek to 
eradicate the threat posed by fanatical terror networks to our 
citizens, our economy and our way of life.
    Today's hearing highlights a law that has made a 
significant contribution to this effort. The Terrorism Risk 
Insurance Act ensures the availability of terrorism insurance 
that is crucial to our economic security. After 9-11, the 
marketplace for terrorism insurance vanished. With losses from 
the terrorist attacks exceeding $40 billion and uncertainty in 
the marketplace, insurers and reinsurers began to exclude 
terrorism coverage from commercial policies. Hospitals, office 
buildings, malls, stadiums, museums, and even small businesses 
located near these large facilities had difficulty finding 
terrorism insurance coverage. Without this insurance, 
commercial development stalled and workers missed out on jobs.
    As the availability of coverage continued to disappear and 
threaten our economic security, it was clear that the market 
for terrorism insurance would not return on its own. Something 
needed to be done to provide stability and avoid market 
disruptions. Congress, with strong support from the 
Administration, passed legislation to address the uncertainty 
in the market, protect American jobs, and strengthen the 
resiliency of our economy.
    TRIA established a 3-year program to pay the federal share 
of compensation for insured losses resulting from foreign acts 
of terrorism. In TRIA, our goals were clear: make terrorism 
insurance affordable and available to policyholders in the 
short term, while also giving the market time to develop 
resources and mechanisms to ensure viability beyond the 
expiration of the Act.
    Today, the committee will examine the effectiveness of TRIA 
and its impact on the economy. Thus far, the results of TRIA 
have been very positive. Terrorism insurance is widely 
available and a growing number of businesses are accessing this 
coverage. By enabling commercial policyholders to obtain 
terrorism insurance, TRIA has provided a boost to construction 
and job creation, strengthened economic growth and security, 
and reduced the impact of any future terrorist attack. Overall, 
TRIA has been an important stabilizing factor in the market, as 
we will hear from the General Accounting Office today.
    But as the program moves closer to expiration in 2005, we 
must examine the future of terrorism insurance and whether the 
private market will be able to make coverage available without 
a federal backstop. While there is no doubt that our country is 
better prepared today than it was prior to 9-11, we remain on 
heightened alert and still face the threat of terrorist 
activity. This uncertainty makes it difficult to determine 
methods to price coverage and to ensure a viable marketplace 
without a federal backstop. As a result, it remains unclear 
whether there will be a sustainable marketplace after TRIA 
expires.
    Given the state of the insurance marketplace and the 
continued war against terror, there is compelling reason to 
continue the federal backstop for terrorism insurance until we 
can ensure a viable marketplace that enables businesses to 
receive coverage. To begin with, it is crucial that the 
Treasury Department extend the requirement that private 
insurers continue to ``make available'' terrorism reinsurance.
    This provision, which sunsets at the end of 2004, 
guarantees that commercial policyholders have access to 
terrorism coverage. A wide range of businesses and 
organizations, from the transportation, energy and real estate 
industries to manufacturing, construction, entertainment and 
retail sectors, are rightfully concerned that the failure to 
extend the ``make available'' provision will ultimately impact 
their operations, business development and ability to create 
jobs. This clearly threatens both our economic growth and our 
security.
    When it comes to the security of our country and our 
economy, we must take every necessary precaution to defend the 
American people. The Administration is doing everything 
possible to strengthen our security, from efforts to secure our 
nation's borders, ports and major transportation systems to 
additional resources to dry up terrorist financing.
    The TRIA program is essential to the economic security of 
the American people. I want to thank Chairman Oxley and 
Subcommittee Chairman Baker for their cooperation in holding 
this important and timely hearing on terrorism insurance. Their 
leadership and perseverance, along with that of the President, 
is the reason that Congress was initially able to pass this 
monumental legislation, despite significant obstacles.
    I also want to commend the Treasury Department and the 
National Association of Insurance Commissioners for their 
collaborative work on these important issues under 
extraordinary circumstances. The Treasury Department and state 
insurance commissioners have been faced with an extremely 
difficult task of developing a reinsurance market through an 
unprecedented program. As we speak, businesses and insurers are 
beginning to make decisions that impact operations beyond the 
potential sunset of the ``make available'' language. As a 
result of these operational realities, I urge the Treasury 
Department to provide Congress with information on the future 
of TRIA in a timely manner in order to help the businesses make 
informed decisions about the future.
    We need to make informed decisions about the future of this 
program. I look forward to continuing to work with the public 
and private sectors to protect and preserve the economic 
security of the American people.
    Thank you for letting me speak.
    Chairman Baker. Thank you for your statement, Ms. Kelly, 
and your interest in this subject.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 40 in the appendix.]
    Mr. Gutierrez?
    Mr. Gutierrez. After listening carefully to the preceding 
opening statements, I find that my opening statement should be 
submitted for the record in its entirety, if it is okay with 
everybody on the committee.
    Chairman Baker. I do not think anybody is going to object.
    Mr. Gutierrez. Thank you, Mr. Chairman.
    Chairman Baker. Reluctantly so made part of the official 
record.
    Are there members with further statements? Mr. Israel? And 
then I will come to you, Mr. Scott.
    Mr. Israel?
    Mr. Israel. Thank you, Mr. Chairman. Let me thank you and 
Chairman Kelly and Ranking Members Kanjorski and Gutierrez for 
this hearing.
    I also want to take this opportunity to welcome Mr. Serio, 
the Superintendent of the New York State Insurance Department. 
Mr. Serio knows that my congressional district is less than 50 
miles from ground zero. In the aftermath of 9-11, one of the 
leading concerns for businesses in New York City and near New 
York City was the need to get back up on our feet and rebuild 
as quickly as possible. One of the major obstacles to doing 
that was in fact the apparent inability of the insurance 
industry to assess and absorb the risk of another large-scale 
terrorist threat.
    I was very proud to be a part of this committee when we 
acted quickly to create a federal government backstop for 
terrorism insurance in the event of another catastrophic 
occurrence. It is a profound example of what this committee can 
do when members from both sides of the aisle work together with 
each other and with industry to a common goal and a common 
sense goal.
    Mr. Chairman, I believe that TRIA has worked fairly well. 
It has in fact allowed businesses in my district and businesses 
in New York City, where many of my constituents work, to 
continue uninterrupted. However, as we have heard, we are now 
faced with the possibility of a sunset and we cannot allow this 
to happen. I was very proud to sign a letter written by Ranking 
Member Frank encouraging the Secretary of the Treasury to 
exercise his ability to extend the ``make available'' 
provisions of TRIA and I think that this is an important and 
necessary first step.
    But I do not believe it goes far enough. TRIA needs to be 
reauthorized. During the original consideration of this 
legislation, there was a great deal of debate regarding how 
long the authorization should last. The final product settled 
on three years, with the Department of the Treasury being 
required to issue a report in 6 months before the program 
expires, detailing any problems with the program.
    I fear that we may have painted ourselves into a bind with 
this language and on this timetable. By the time the report is 
submitted to Congress, I believe it is going to be too late for 
Congress to fully get and act upon the concerns that that 
report may raise. Indeed, I strongly believe that TRIA must be 
reauthorized before June of next year to allow industry 
adequate time to ensure the continuation of current policies.
    So in order to give us adequate time to consider this and 
any other concerns that may come to light in the Treasury 
report without disrupting the market, I am very proud to be 
working with Mr. Capuano on crafting a clean, quick, short-term 
extension of TRIA until December of 2006. I believe that by 
acting on such a measure, we will fulfill our responsibility to 
ensure the orderly continuation of the insurance market in 
high-risk areas, and at the same time allow ourselves 
sufficient time to conduct a full and necessary review of this 
new and important program.
    I look forward to working with Mr. Capuano and all members 
of this committee to ensure the continuity of our markets and 
the continuity of capital.
    I thank the Chairman and yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman. I certainly 
look forward to the testimony of this very distinguished panel.
    I want to thank the Chairman and Ranking Member of both the 
Capital Markets and Oversight Subcommittees, Mr. Kanjorski, Mr. 
Gutierrez, as well, for holding this hearing today on the 
Terrorism Risk Insurance Act. I also look forward to some very 
good information to be exchanged and questions asked in today's 
testimony.
    Access to terrorism insurance is very essential to business 
confidence and continued economic growth. From the written 
testimony, I understand that TRIA has been successful in 
providing an insurance backstop for consumers, thus enabling 
millions of dollars in business transactions to proceed. 
However, this law is only a temporary backstop for property and 
casualty insurance risk. According to the Bush Administration, 
the United States remains at a high state of alert and could be 
the target of terrorist actions this year, and especially 
because this being a very critical important election year.
    In my area of metropolitan Atlanta, we have the world's 
busiest airport located in my district. In addition to that, we 
have Fort McPherson that handles ForceCom, controls all the 
logistics and command for the forces in Iraq and in 
Afghanistan; also Fort Gillem, which handles all of the call-up 
and processing for our Reservists and National Guard in the 
eastern half of the United States east of the Mississippi, 
which is approximately 65 percent of those call-ups, all 
processed in my district.
    We also have the Centers for Disease Control located in my 
district. The World Congress Center, trade and convention 
facilities, and two of the highest recognized brand names in 
the world in Coca-Cola and CNN. And very, very important and 
critical financial service institutions and sensitive sites 
that are at risk, making Atlanta potentially high target and as 
a matter of fact has been on several lists of terrorist targets 
for terrorist attacks.
    So quite naturally, I am very concerned that businesses and 
my constituents in my district will come to expect a permanent 
terrorism insurance backstop, regardless if they use it now to 
make sure future business decisions. As we move forward in 
today's hearings, we should ask that if the law expires, how 
that will affect private markets.
    Thank you again, Mr. Chairman, and I await the statements 
from our panel.
    Chairman Baker. I thank the gentleman.
    Are there any other members? The gentleman is recognized.
    Mr. Garrett. I thank the chairman for holding this hearing 
today. As was previously indicated, obviously the visual 
effects of 9-11 are burned in our minds. The economic effects 
and the dollar and cents ones are sometimes a little bit harder 
for us to comprehend.
    Overall, though, of course all the numbers in the last few 
weeks and months are showing that the economy is turning around 
and things are picking up and we are on to a robust economic 
recovery. But the net effect of 9-11 was over $50 billion has 
been paid out in insurance claims due to that attack, the 
largest manmade insurance disaster in history. The effect of 
that was that many reinsurers were simply unable to price for 
future such risk due to the unique nature of those attacks. 
When an insurer is unable to price for a risk, well then they 
simply stop offering the insurance coverage. That was the 
impact of that attack.
    Now, when we recognize these possible negative impacts on 
the insurance market and therefore the economy, I have to 
commend the members of this committee here before me who acted 
quickly and responsibly to come up with a solution to it. This 
measure was necessary to simply stabilize the terrorism market 
in the United States.
    I join my colleagues on the other side of the aisle who 
have already pointed out that TRIA has been successful in 
accomplishing the goals that were laid out by Congress. It has 
provided a program that shares the commercial property and 
casualty losses between the federal government and the private 
insurance market in a way that obviously has worked and 
benefited this economy. For that reason, I share their concerns 
also and share their feelings that we should make available 
provisions and TRIA should be extended prior to the September 1 
deadline.
    One member has indicated already the issue of timing. My 
experience, having been in the industry, is that timing is a 
significant aspect for carriers because it is not an industry 
that can simply snap into a response on the spur of the moment; 
that notices will be going out not literally as we speak, but 
shortly as we speak, because of the nature of the business and 
the nature of renewals. So that is something that we all have 
to be mindful of, of how the industry actually respond to and 
how their paperwork actually flows with regard to any insurance 
product and market.
    Finally, I would just say this. Where I come from, I am 
from the State of New Jersey. I live in the metropolitan area. 
As I say, we still have the visual impact of 9-11 there, but 
also from an economic point of view many businesses are still 
recovering from that attack to this day. The importance 
therefore, of the reinstitution of TRIA is even more heavily 
important for my district as well.
    I thank you again, Mr. Chairman, for holding these hearings 
today.
    Chairman Baker. I thank the gentleman for his statement.
    Does any other member desire to make an opening statement? 
If not, this is a joint hearing with Ms. Kelly's subcommittee 
and Ms. Kelly is going to take the chair for our panel of 
witnesses.
    Chairwoman Kelly. [Presiding.] I am going to take the chair 
from here.
    Before we move to our panel, I would like to enter into the 
record several documents that include a letter that 18 
Republicans sent to Secretary Snow in support of extending the 
``make available'' provision; another letter on ``make 
available'' from the Real Estate Roundtable; a support letter 
requesting the extension of TRIA from the American Insurance 
Association, the Council of Insurance Agents and Brokers, the 
Independent Insurance Agents and Brokers, the Property-Casualty 
Insurers Association of America, the Reinsurance Association of 
America, and the UWC, Strategic Services on Unemployment and 
Workers Compensation.
    Another TRIA support letter from Group Life Coalition, the 
ACLI, and the Financial Services Roundtable; and a support 
letter from the Coalition to Insure Against Terrorism, which is 
a broad coalition of businesses and organizations from the 
transportation, energy and real estate industries, to 
manufacturing, construction, entertainment and retail sectors.
    With unanimous consent, I am entering these into the 
record. So moved.
    [The following information can be found on pages 139, 107, 
136 and 115 in the appendix.]
    We now turn to our panel. Our first witnesses representing 
the Department of Treasury, is Mr. Wayne Abernathy. Mr. 
Abernathy is the Assistant Secretary of Treasury for Financial 
Institutions, where he oversees Treasury's Terrorism Risk 
Insurance Program. I commend you, sir, for your work on such a 
difficult task and I look forward to your testimony.
    It is also a great pleasure to have the opportunity to 
welcome back to the committee again Mr. Greg Serio, 
Superintendent of Insurance back from the great State of New 
York. New York knows first-hand the threat and devastation of 
terrorism. In the aftermath of 9-11, many individuals responded 
in a way that represents the best of America's spirit. I 
believe that Superintendent Serio is one of those individuals. 
In addition to his work on terrorism insurance issues, Mr. 
Serio serves in the leadership of NAIC, and has been an active 
participant in the insurance roadmap the committee is 
exploring. We thank you very much for your valuable service and 
your testimony here today. It is a pleasure to see you.
    Our third witness is Richard J. Hillman, Director of 
Financial Markets and Community Investment at the General 
Accounting Office. I thank you, Mr. Hillman, for being here, 
and the GAO for their comprehensive report on the state of 
terrorism insurance.
    Without objection, your written statements will be made a 
part of the record. You will all be recognized for a 5-minute 
summary of your testimony. I just want to remind you that the 
lights in the boxes at the end of the table, the green light 
indicates that you have 5 minutes for your testimony; the 
yellow light means you have 1 minute remaining; and of course 
the red light means stop.
    With that, we will proceed with you, Mr. Abernathy, and 
thank you for being here.

 STATEMENT OF HON. WAYNE A. ABERNATHY, ASSISTANT SECRETARY FOR 
    FINANCIAL INSTITUTIONS, UNITED STATES DEPARTMENT OF THE 
                            TREASURY

    Mr. Abernathy. Thank you, Chairwoman Kelly, Chairman Baker, 
Ranking Member Kanjorski, Ranking Member Gutierrez, members of 
the two subcommittees. It is a pleasure to be here today to 
report on the Terrorism Risk Insurance Program as we approach 
the mid-stream of that program as established by Congress.
    TRIA establishes a temporary federal program of insured 
commercial property and casualty terrorism losses. TRIA, in 
effect, places the federal government in the reinsurance 
business through December 31, 2005. TRIA has been successful in 
achieving the fundamental goals of enhancing the availability 
and affordability of commercial property and casualty Terrorism 
Risk Insurance. No longer are heard the concerns from real 
estate developers that new project financing has been frozen.
    Preliminary accounts indicate that premiums have decreased 
significantly throughout the early stages of TRIA and continue 
to do so. Reports are that the demand for this coverage is low, 
but coverage is available and those that desire coverage have 
been able to obtain it. Whether the low take-up rate reflects a 
lack of interest in terrorism coverage even with the federal 
backstop; a lack of awareness of the availability of coverage; 
an assessment by business of low terrorism loss risk, or some 
combination, will require careful study and analysis.
    Treasury has five main administrative goals: first, to 
ensure that the program was ready for use from the day it was 
signed into law; second, to implement TRIA in a transparent 
manner that is fair and easily understood; third, to rely as 
much as possible on the state insurance regulatory structure; 
fourth, to allow participation in a manner consistent with the 
normal course of business; and fifth, to ensure that benefits 
can be provided in the most expedited manner.
    As I have often reflected, implementing TRIA has been like 
building a house by starting with the roof. The coverage came 
first. TRIA's first action was to issue a series of interim 
guidance notices beginning on December 3, 2002, about 1 week 
after TRIA was signed into law. This allowed us to respond 
quickly to implementation issues and to prevent confusion prior 
to the issuance of formal regulations. Even while the interim 
guidance process went forward, we began formal rulemakings.
    It is important to stress that while we have been moving 
progressively through the rulemaking process, the program from 
the beginning has been and continues to be fully operational. 
These rules have been refinements and improvements on practices 
and operations, but from the earliest days we have had 
procedures and resources ``at the ready'' to respond to any 
covered insurable event that might arise.
    Treasury also created and staffed a Terrorism Risk 
Insurance Program office to administer the Act. TRIP office 
director Jeffrey Bragg brings deep experience from the property 
and casualty insurance market, as well as experience as a 
former administrator of the federal flood, riot and crime 
insurance programs. In almost no time, he has assembled an 
outstanding team of insurance professionals who have been 
willing at some sacrifice to interrupt successful private 
careers to help administer this important program.
    TRIA is an interesting hybrid. It provides a federal 
reinsurance backstop to insurance programs that are regulated 
almost exclusively at the state level. This would be 
unmanageable without the cooperation of the state insurance 
regulators. Throughout the implementation process, Treasury has 
consulted and worked closely with the NAIC and the NAIC's 
assistance has been invaluable.
    An important requirement of TRIA is to keep a careful eye 
on market conditions and report to Congress by June 30, 2005. 
Specifically, Treasury is required by the statute to assess the 
effectiveness of the program, the likely capacity of the 
industry after termination of the program, and the availability 
and affordability of such insurance for various policyholders.
    Together with this analysis, Treasury is also required to 
compile information on premium rates. To ensure that we do this 
with a comprehensive view, Treasury has contracted with an 
outside research firm to conduct a nationally representative 
survey. Companies chosen for the survey will be contacted 
several times to capture effects of changes in TRIA's insurer 
deductibles in successive program years. The first survey wave 
was mailed to over 30,000 policyholders and almost 500 
insurers. A second wave to collect 2004 data is planned for 
early this fall. The last survey wave is planned for January 
and February of 2005.
    This phased structure will allow us to move beyond 
snapshots and anecdotal evidence to a broader and more dynamic 
view of the conditions in the marketplace. Anything less would 
not provide the full and reliable information, the kind of 
basis that is needed to make a careful, trustworthy and 
responsible evaluation that is called for by Congress in the 
statute.
    The Secretary of the Treasury is required to determine by 
September 1, 2004 whether to extend TRIA's ``make available'' 
provisions into the third year of the program, that is, through 
December 31, 2005. Treasury is now developing a base of 
information from which to make this determination. We encourage 
any who have views on this question to share those views with 
Treasury with as much detail as they can provide.
    We must all remember that the basic goal of TRIA as called 
for by President Bush was to develop a temporary backstop for 
property and casualty commercial insurance against terrorism 
risk so that private markets would have a chance to adjust. We 
would encourage interested parties to think creatively and to 
consider methods to allow for broader private sector 
involvement in the market for managing property and casualty 
terrorism risk.
    Treasury looks forward to completing our review and 
considering the many complicated issues presented to us in a 
thorough manner, with the best information that can be 
obtained. Our obligations to the taxpayers and the need for the 
long-term health and vitality of our financial services markets 
require nothing less.
    While we hope that we will never be called upon to trigger 
the coverage under TRIA, the program stands ready today as it 
has from its earliest days to meet its responsibilities.
    Thank you.
    [The prepared statement of Hon. Wayne A. Abernathy can be 
found on page 49 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Abernathy.
    Mr. Serio?

 STATEMENT OF HON. GREGORY V. SERIO, SUPERINTENDENT, NEW YORK 
                   STATE INSURANCE DEPARTMENT

    Mr. Serio. Good morning, Madam Chair, Mr. Chairman, and 
members of the subcommittee. Thank you for the opportunity to 
come before you today to relate New York's experiences with the 
Terrorism Risk Insurance Risk. It is greatly appreciated.
    Let me get right to the point. TRIA is a success by any 
measure and has been very effective in stabilizing a tumultuous 
insurance marketplace in the aftermath of September 11 and it 
has been a key factor in stabilizing and reenergizing New 
York's economy. As we have opined several times over the past 2 
years, sometimes before these subcommittees, TRIA was and is an 
insurance buyers law, allowing the continuation of critical 
insurance coverages for those who needed to or wanted to 
maintain the level of coverage routinely available prior to 
September 11.
    The success of this initiative cannot and should not be 
measured simply by the number of businesses who have availed 
themselves of terrorism risk protections through TRIA. Some 
businesses chose to go without coverage for terrorism risk. 
That is their decision. Others chose to rely upon the already 
meaningful protections offered by the standard fire insurance 
policy widely available in the United States prior to September 
11, 2001, and still in place in New York and other states to 
this day.
    For those businesses that wanted or needed terrorism 
insurance protection, though, TRIA became their safety net. 
Coverages were required to be made available at the same limits 
and terms as the other property-casualty coverages, thus 
assuring all risk protection for those who needed it for 
lending agreements, contractual obligations, or frankly their 
own peace of mind.
    The businesses of New York who availed themselves of the 
opportunity to establish captive insurance companies, to better 
manage and frankly afford the terrorism risk coverage through 
the benefits of TRIA should also be counted among those who 
consider TRIA a success. Yet those who did the responsible 
thing by establishing self-insurance mechanisms to manage 
terrorism risk do not get included among those who opted to 
take up TRIA-provided terrorism coverage, even though the 
covering of risk placed through captives is one of the 
strongest provisions of the TRIA law and of the decisions made 
by the Treasury Department.
    President Bush, the Congress, especially the leadership 
shown by the House Financial Services Committee and these 
subcommittees before whom we appear today, together with the 
Treasury Department and the manner with which they have managed 
the TRIA program, are all owed a debt of gratitude in moving 
with singularity of purpose to help protect New York's 
businesses and those of the country.
    As the National Association of Insurance Commissioners 
indicated in a letter to Secretary Snow, and I believe you have 
a copy of it and I would appreciate it if that would be made a 
part of the record as well, we think the continuation of the 
``make available'' provision of TRIA beyond September 1 is 
crucial. Maintaining a steady flow of insurance to the business 
community will keep business and the economy moving without 
fear of or actual disruption caused by the lack of availability 
of all-risk insurance coverage.
    TRIA has been one of the main ingredients in the recovery 
and renewal of lower Manhattan and the New York economy and it 
should continue to provide that positive stabilizing element as 
we continue to strengthen. The restoration of the national 
economy and the economies of all major cities that depend upon 
insurance as a key component are also benefit from a decision 
to maintain the ``make available'' provision in TRIA.
    There is already much discussion taking place on the larger 
issue of the continuation of TRIA. As with the ``make 
available'' issue, early consideration and deliberation on the 
reauthorization of TRIA is also in everyone's collective best 
interest. Even as Treasury performs its due diligence on the 
law's effectiveness, there can and should be discussions on 
steps to be taken to ensure the continuity of coverage that is 
TRIA's hallmark along with the business cycle of insurance. 
Again, the mere potential for disruption should be avoided.
    Already there is a school of thought and a growing body of 
evidence that TRIA should be continued and improved. Straight 
reauthorization of the Act without deliberation on improving 
private participation in terrorism risk coverage, the 
availability of state-based options, better managing the still-
unaddressed concentration of risk issue, and other 
considerations would not be advisable.
    Rather, reconsideration of the group life insurance 
participation in TRIA, an issue on which we respectfully 
disagree with Treasury's final determination to leave group 
life out of the TRIA program, maintaining and expanding TRIA's 
protections for captive and other self-insurance mechanisms, 
and addressing straight-on the complexities of workers 
compensation issues in the terrorism risk context, that being 
heavy concentration risk with long-term liabilities making it 
particularly challenging, could all improve the TRIA Act.
    Knowing of and appreciating the federal government's 
concern over permanentizing TRIA, something we do not advocate 
at this point, is important to this discussion, but a public-
private partnership with meaningful federal government 
participation is critical to the continued stabilization of the 
commercial insurance marketplace, at least in the near term. 
That participation in fact should well be calibrated to the 
viability of long-term solutions to the terrorism and 
catastrophe risk and insurance challenges before us now.
    Short-term continuity of coverage through TRIA, together 
with productive discussions on long-term remedies, I believe is 
in everyone's best interest. To that end, New York, taken with 
the commissioners of the District of Columbia and the other 
states most affected by terrorism risk, have been meeting with 
congressional and Treasury staff, insurance brokers, carriers, 
and most importantly our respective business communities, to 
spearhead the discussion on appropriate changes and 
improvements at TRIA, greater private sector participation in 
the Terrorism Risk Insurance market and state options for 
improving these markets.
    Governor Pataki from New York, in a workers compensation 
reform bill that he submitted to the legislature just 2 weeks 
ago, provides one such option by calling for a change in the 
way workers compensation insurance is written in New York. By 
diffusing the concentration of risk, by allowing multiple 
insurers on a single workers compensation risk. Changing the 
statutory requirement on the risk coverage to allow a 
syndication of workers compensation risk may just be one way 
for us to effectively manage this issue, and one way that can 
serve as a catalyst for additional discussions along these 
lines.
    Thank you for allowing me to present these views this 
morning. I look forward to answering your questions.
    [The prepared statement of Hon. Gregory V. Serio can be 
found on page 80 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Serio.
    Mr. Hillman?

 STATEMENT OF RICHARD HILLMAN, DIRECTOR, FINANCIAL MARKETS AND 
 COMMUNITY INVESTMENT, UNITED STATES GENERAL ACCOUNTING OFFICE

    Mr. Hillman. I am pleased to be here today to discuss our 
report on the implementation of the Terrorism Risk Insurance 
Act of 2002 or TRIA and the Act's impact on the insurance 
market. Our report being released today on the implementation 
of TRIA has two objectives. First, we describe the progress 
made by Treasury and insurance industry participants in 
implementing TRIA. We found that Treasury has made significant 
progress in implementing the provisions of TRIA, but has 
important work to complete in order to comply with all of its 
responsibilities under the Act.
    Second, we discuss the changes in the market for terrorism 
insurance under TRIA. As requested, my testimony today focuses 
on the second of these two objectives, that is, how TRIA has 
affected the market for terrorism insurance, and more generally 
the economy.
    Additionally, I have included appendices to this statement 
that provide background information on TRIA and describe 
completed and ongoing engagements that GAO has under way for 
this committee that relates to increasing the insurance 
industry's capacity to provide insurance for terrorism and 
national catastrophe risks.
    In summary, it appears that Congress's first objective in 
creating TRIA, to ensure that business activity did not 
materially suffer from a lack of available terrorism insurance, 
largely has been achieved. Since TRIA was enacted in November 
2002, terrorism insurance generally has been available to 
businesses. In particular, TRIA has benefited commercial 
policyholders in major metropolitan areas perceived to be at 
the greatest risk to a terrorist attack.
    Prior to TRIA, we reported concerns that some development 
projects had already been delayed or canceled because of the 
unavailability of insurance and continued fears that other 
projects would also be adversely affected. We also conveyed 
widespread concern that general economic growth and development 
could be slowed by lack of available terrorism insurance. Since 
TRIA's enactment, terrorism insurance has generally been widely 
available even for development projects in perceived high-risk 
areas, largely because of the requirement in TRIA that insurers 
make available coverage for terrorism on terms not differing 
materially from other coverage.
    However, despite increased availability of coverage, 
limited industry data suggests that only 10 to 30 percent of 
the commercial policyholders are purchasing terrorism 
insurance. According to industry experts, purchases have been 
higher in areas considered to be high-risk of another terrorist 
attack. However, many policyholders with businesses or 
properties not located in perceived high-risk locations are not 
buying coverage, perhaps because they view any price for 
terrorism insurance as high relative to their perceived risk 
exposure.
    Some industry experts are concerned that those most at risk 
from terrorism are generally ones buying terrorism insurance. 
In combination with low purchase rates, should a terrorist 
event occur, these conditions could impede business recovery 
efforts for those businesses without terrorism coverage or 
cause financial problems for insurers.
    Moreover, we found that even policyholders who have 
purchased terrorism insurance remain exposed to significant 
risks arising from certified events, including losses from 
nuclear, biological or chemical agents or radioactive 
contamination. Since September 11, 2001, the insurance industry 
has moved to tighten longstanding exclusions from coverage for 
losses from such events. As a result, these exclusions and 
these policyholders who choose to buy terrorism insurance may 
be exposed to potentially significant losses.
    Nearly 1 1/2 years after TRIA's enactment, we found that 
there has been little progress towards Congress's second 
objective, to give private industry a transitional period 
during which it could begin pricing terrorism insurance and 
develop ways to cover losses after TRIA expires. Industry 
sources indicate that under TRIA insurance market participants 
have made no progress to date toward the development of 
reliable methods for pricing terrorism risks and little 
movement toward any mechanism that would enable insurers to 
provide terrorism insurance to businesses without government 
involvement.
    According to industry sources, TRIA's ceiling on the 
potential losses has enabled reinsurers to return cautiously to 
the market. That is, some reinsurers are offering coverage for 
terrorism risks within the limits of the insurer deductibles 
and the 10 percent share that the insurers would pay under 
TRIA. However, insurance experts said that without TRIA caps on 
the potential losses, both insurers and reinsurers likely still 
would be unwilling to sell terrorism insurance coverage because 
they have not found a reliable way to price their exposure to 
terrorist losses. Without being able to set appropriate prices, 
such losses could lead to their insolvency.
    Not only have no private sector mechanism emerged for 
supplying terrorism insurance after TRIA expires, but to date 
there also has been little discussion of possible alternatives 
for ensuring the availability and affordability of terrorism 
coverage after TRIA expires. Congress may benefit from informed 
assessment of possible alternatives, including both wholly 
private alternatives and alternatives that could involve some 
government participation or action. Such an assessment could be 
part of Treasury's TRIA-mandated study to assess the likely 
capacity of the property and casualty insurance industry to 
offer insurance for terrorism risks after termination of the 
program.
    As a result, as part of the response to the TRIA-mandated 
study, our report being released today recommends that the 
Secretary of the Treasury consult with the insurance industry 
and other interested parties and identify for Congress an array 
of alternatives that may exist for exploring the availability 
and affordability of terrorism insurance after TRIA expires. 
These alternatives could assist Congress during its 
deliberations on how best to insure the availability and 
affordability of terrorism insurance after December 2005.
    Madam Chair, Mr. Chairman, this concludes my statement. I 
would be pleased 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.
    Just to keep you all amused in the audience, I am going to 
pass the gavel back to my colleague, Mr. Baker.
    Chairman Baker. [Presiding.] I thank the gentlelady for her 
distinguished leadership of the committee. You have set a high 
standard for me to emulate, so I will do my best.
    Ms. Kelly does have obligations on the floor and I am going 
to yield my time for her to be recognized to go first to 
questions. Ms. Kelly?
    Chairwoman Kelly. Thank you very much.
    One of the problems that we know that the market is 
experiencing, Mr. Abernathy, is the fact that policyholders are 
having to make decisions about their policies this year, rather 
than next year for next year. I am concerned that this creates 
an uncertainty for many people. That uncertainty needs to be 
addressed.
    The ``make available'' provision is crucial, I believe, to 
our economic security. We need this decision as soon as 
possible to create a certainty in the market that people can 
deal with. How quickly will Treasury move on this issue?
    Mr. Abernathy. Chairwoman Kelly, we concur with that 
entirely, your sentiment on that. The decision needs to be made 
as soon as we possibly can. We want to make sure that the 
decision is made, however, based not upon anecdotal 
information, which is all that we have up to this point, and 
rather unspecific information. We have received so far a wide 
array of very unspecific inputs with regard to that issue that 
expresses sentiment, and that is important. But what we would 
like to have is greater detail in the information that is being 
provided and to make sure that it is of a more comprehensive 
nature. We think that can be done fairly quickly.
    Chairwoman Kelly. How quickly?
    Mr. Abernathy. What we are planning to do as far as 
gathering what we would feel is a comprehensive set of 
information that would allow us to make a good decision as 
quickly as possible is put out in the Federal Register a 
request for information from everybody. We figure we can get 
that request out most widely through the Federal Register and 
we plan to publish that tomorrow.
    Chairwoman Kelly. You are going to publish the request for 
comments tomorrow in the Federal Register. Is that what I 
understood you to say?
    Mr. Abernathy. That is right. It is very specific, saying, 
please give us information in these following areas that allows 
us to make that decision. We are having a fairly contracted 
comment period of just 30 days.
    Chairwoman Kelly. Since the Treasury has to complete this 
study, and you are going to get these comments, at the very 
least wouldn't it be prudent for Congress to think about 
extending, at least officially consider, extending TRIA for any 
policy that is written prior to 2005?
    Mr. Abernathy. That is a separate issue from the ``make 
available'' issue.
    Chairwoman Kelly. Right.
    Mr. Abernathy. I do not know that we have any particular 
comment to make with regard to what happens after 2005, because 
in that particular case we have even less information on which 
to make any kind of determination. We are engaged already, as I 
outlined in my testimony, in a fairly elaborate information-
gathering process that is designed to examine TRIA as the 
evolving statute that Congress intended.
    I think a fair way of looking at TRIA is that it is 
actually three programs. It changes every year. In the first 
year, you had one particular program with certain parameters, 
which have changed this year, and which are scheduled to change 
next year. For that reason, we believe that in order to get the 
kind of information you need to make recommendations with 
regard to what happens after 2005, you have to gather 
information on each of those periods.
    Chairwoman Kelly. I have a very short period of time left, 
but I would really like to hear very quickly from Mr. Serio and 
Mr. Hillman on those questions.
    Mr. Serio. On the ``make available,'' we think that it 
needs to be decided sooner than later. I think waiting until 
September 1 probably does not serve anybody's interest here. I 
know that Treasury is doing what they can to find out firm 
information. I think, though, that just by seeing the nature of 
the businesses that have taken the offer to buy terrorism 
insurance under TRIA shows that there has been a demonstrable 
interest in the coverage. I think if you focus it on, like the 
Coalition for Insurance Against Terrorism, there is a wide 
range of industries that have taken this up either through 
direct coverages or through captives, showing that there has 
been a significant, but targeted, use of TRIA.
    I think those same industries could well see the same need 
for that in a renewal period after September 1, and to that 
extent alone keeping it out there for them to buy we think is a 
worthwhile policy goal.
    But there is a merging of the issue of ``make available'' 
and the continuation of TRIA in some form. Even the ``make 
available,'' and if a decision was made by Treasury to move 
ahead with the ``make available,'' because of the business 
cycle, you are already into the question about the continuation 
of the program itself. So there really would be a very small 
window with respect to the effectiveness of a decision to 
continue to ``make available,'' which would then raise the 
question, particularly if you are in a 45-or 60-or 90-day 
renewal cycle, what will this get me in terms of terrorism 
protection for the year period of my policy that I am about to 
renew?
    I am assuming that ``make available'' is still there 
between September and December of 2004. That raises the 
question that when the policy does come up for renewal and you 
have that rollover into 2006, a question that I know both the 
GAO and us and all of you have been looking at is this question 
of whether that coverage stops dead on December 31, 2005. Our 
opinion is that it does without further amplification or 
clarification of that issue. That is what raises so much of 
this question and this uncertainty in the economy.
    If a business person is using their portion of business 
decision properly, they cannot simply take it as an article of 
faith that there may be a continuation into a 2006 policy year 
when they are in fact renewing that coverage. That will stop a 
business decision at the beginning of the process, not when the 
program expires.
    Chairwoman Kelly. Thank you.
    Mr. Hillman, did you want to add to that? My time is up, so 
if you could say something very quickly, I would appreciate it, 
if you would like to.
    Mr. Hillman. Yes, the ``make available'' decision is a very 
important issue, particularly for insurers. Timing is a 
significant aspect. There are paperwork flows, there are rate 
and form reviews that need to take place. The sooner that 
Treasury acts, the better.
    Chairwoman Kelly. Thank you.
    Mr. Chairman, I thank you for allowing me to do this. I 
have floor obligations and I will be back, but thank you.
    Chairman Baker. I thank the gentlelady.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Abernathy, I am going to take 30 seconds to review the 
history of terrorism reinsurance and to compliment the former 
member of the President's cabinet, Secretary O'Neill. I had the 
occasion within the first months of 9-11 to work with Mr. 
O'Neill in putting this package together with Mr. Baker and the 
Chairman. I think that he is an unsung hero, if you will; that 
he was here; he understood the problems of the industry, of the 
communities, of the economic development field. I think we 
moved expeditiously in the Congress within 3 months to 
structure a reinsurance bill, and then ran into some problems. 
Those problems I anticipate could occur again. I am leery of 
what may happen.
    If you will recall, although the Congress was prepared with 
a piece of legislation within 3 months, we had the piece of 
legislation go over to the White House for review and of course 
Treasury and the White House saw the piece of legislation as an 
engine to carry tort reform. As a result thereof, we had a 
delay of almost a year before we had the enactment of this 
statute, which I think I have seen estimates that in the State 
of New York something like $20 billion of commercial 
development was held up and discouraged from occurring because 
of the lack of insurance coverage.
    In anticipation that politics have not changed in this city 
and are not likely to change in the next several years, it 
seems to me that it is absolutely essential that the Congress 
and the Administration sends a message now to the insurance 
industry that we are going to take another 2-year extension or 
one-year extension of the Act as it exists, or even with some 
corrections, and one correction I think would be group 
insurance.
    But to not do that and to wait until the report is finally 
filed 6 months before the expiration of the Act would only 
create another engine. I do not see that that would be in 
anyone's interest, either from the industry standpoint, the 
economic standpoint of the country, and even from a political 
standpoint. This is something that we had some great bipartisan 
effort on. I can speak for my side of the aisle that we did not 
expect or appreciate the attempt to use this as a vehicle to 
carry an entirely different issue to get enacted into law when 
we had something that was very vital.
    Can you give us some assurances that you are going to be 
able to look at this in terms of whether or not we can get an 
extension of a year or 2 years and do it very quickly? I have 
discussed with the Chairman that I think we have a bipartisan 
agreement on this committee right now to enact an extension of 
at least 1 year, and possibly 2 years of the conditions that 
exist in the statute today. My own preference would be to see 
if we can perfect it and cover group insurance, but even if we 
cannot, we should act for two purposes, one to stabilize the 
market, as the New York Commissioner has indicated; and two, 
not to skew your eventual study, because at this point, with 
the shortness of the existence of this policy, things are going 
to change and the industry is going to change in anticipation 
of the end of the government program supporting reinsurance.
    So I guess I am putting you on the spot, but purposely. Are 
we going to go through this song and dance again of using this 
as an engine at the end of the period of time, to carry some 
other unrelated piece of legislation or issue? Or are we going 
to direct ourselves to doing what is proper for American 
industry and the insurance industry and the American population 
in terms of getting good effective legislation into the field 
as soon as possible to make sure there is no hiatus that could 
occur or the fear thereof?
    Mr. Abernathy. Thank you, Congressman. In a sense, you are 
putting me on the spot, but that is why I am here. I am here 
frankly to continue what I think has been a very successful 
cooperation between the executive branch and the Congress on 
the whole issue of Terrorism Risk Insurance.
    Frankly, it was the hard work of President Bush to convince 
a lot of members of Congress about the importance of Terrorism 
Risk Insurance, and I think in the end----
    Mr. Kanjorski. I am going to interrupt you, Mr. Abernathy. 
I sat in the White House and on those conference committees. 
That was not the intent. It was the full intent of this 
Administration to pass tort reform and it held up this 
legislation for almost a year. To make some argument that the 
President was instrumental, I was there when Mr. Lindsey was 
there and other aides of the President, and they were putting 
the brakes on this unless they could get tort reform. It was 
only with embarrassment at the end that the American industry 
and the insurance industry came in and said we absolutely need 
this and we are losing all this construction that it ever 
occurred.
    So it was not some magnificent leadership by the 
Administration, the President or anyone else. It was hardcore 
politics. I sat in the conference room for hours when it was 
debated, so do not give me the argument that it was the great 
leadership of the President putting this together and getting 
this done. It was almost in spite of the Administration's 
objectives and the use of this legislation for political 
purposes that held it up.
    Mr. Abernathy. I respectfully disagree with that, 
Congressman. I was involved with that exercise. I was a witness 
to putting together the legislation. Frankly, I think with 
regard to the tort issues, the only question on the part of the 
Administration was to make sure that this effort to provide 
Terrorism Risk Insurance did not open up an avenue for abusive 
lawsuits to have a free rein and access to the Treasury and the 
taxpayer's pocket. The legislation as it was finally enacted, 
we believe, closed that opportunity, to make sure that the 
backstop is available only for providing compensation for real 
victims of terrorism, and not creating opportunities for 
abusive lawsuits.
    I believe that it was only because President Bush pushed 
very hard against a number of people who were very skeptical 
about opening up a brand new federal program that in the end 
this program was able to be enacted. We look forward to 
continuing that cooperation with you throughout the life of 
this program and with a very careful and proper evaluation of 
what should take place after 2005 when the scheduled deadline 
of the Act is here.
    Mr. Kanjorski. If I may press you on that, what are we 
going to do? Is the Administration not going to take a position 
now in the next several months and are you going to leave it up 
to the Congress just to pass a reauthorization bill, or are you 
going to be supportive of a reauthorization bill for a limited 
period of time so that we can take this out of the political 
realm and get some certainty in the marketplace?
    Mr. Abernathy. We certainly concur with your desire to keep 
this out of the political realm. In our view, there is no left 
or right, Republican or Democrat view with regard to terrorism 
and fighting terrorism and its consequences, and taking away 
from the terrorists the potential fruits of what they seek, 
which is a disruption of our economy. But at that same time, we 
think that whatever decision is made ought to be made upon the 
best information that can be gained and is available. There is 
a process that the Act laid out for us to follow, and we are 
following that and intend in that process to continue close 
consultations with the Congress.
    Mr. Kanjorski. That seems to me to say that you have no 
intention of taking a position until you complete the study, 
which is 6 months before the expiration of the Act. Let me ask 
you this simple question, if the Congress of the United States 
enacts reauthorization within the next several months, is the 
President prepared to sign it, do you believe? Or would there 
be a recommendation from the Secretary that the Act be signed 
into law?
    Mr. Abernathy. Certainly, I am not in any position to make 
any statement with regard to that. Frankly, if Congress comes 
forward with proposals that Members seek the Administration's 
views on, we will be happy to enter into that discussion.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Abernathy, let me take a slightly different track, but 
with an eye toward a similar end goal as that of Mr. Kanjorski. 
In reviewing your written statement, you go, and this is really 
for the members's benefit so that they understand the scope of 
what is to be contemplated, the report to be issued by or 
before June 30, 2005 is assigned to assess the effectiveness of 
the program, likely capacity of the insurance industry, 
availability and affordability.
    To seek out those general goals, Treasury has already 
contracted with an outside research firm. The first survey for 
data went out in the fall of 2002 and 2003. A second wave is 
planned for 2004, later this year. A last wave is for early 
2005. The view is that in order to make the trustworthy and 
responsible evaluation called for, this process is necessary. 
You continue in this effort to consult with NAIC, a broad range 
of experts and on and on.
    The Secretary has been insistent we draw upon as many 
sources as is possible. The completed results, based on the 
surveys and these consultations, will conclude with the 
effectiveness of TRIA in a proper professional assessment. In 
coordination with that, you have the authority and 
responsibility to make available the determination this year, 
but the study that you are engaging in really will go to the 
validity of extension of ``make available'' as well as the 
possible extension of TRIA, and will only be arrived at subject 
to that lengthy public vetting process which you have described 
in your testimony.
    My point in coming to some conclusion on this matter is 
that the one thing the insurance industry has an abhorrence of 
is uncertainty and surprise. There is no apparent downside, in 
my view, to some extension, and we can talk about the time 
period later, because that only gives certainty that the 
current structure, which has received very positive comments 
from all participants. I have not heard criticism of the 
current methodology. So that it would seem to me that providing 
market assurance that current structures will continue until 
such time as the report is concluded, the Congress has the 
ability to understand and pass the statutory reforms, or to 
simply let TRIA dissipate, whatever the report may indicate.
    If we were to take that view and then look at the calendar, 
we have an August recess and normally a November adjournment 
date. That really leaves Congress a 90-day effective 
legislative period to respond to whatever those recommendations 
may conclude. It would seem highly advisable to me in light of 
that, and uncertainties associated with that calendar, that for 
the sake of market function we should at least go out a year 
and maybe two, because there is no disadvantage to having a 
longer period of certainty, as long as we make it clear in this 
regard. There will be one and only one extension. The study 
will be determinative. We are not going to come back and make 
this an annual extension program. The Congress wants to do this 
appropriately after the professional study by folks who 
understand it, in consultation with all stakeholders. We are 
going to come to a conclusion and that, dear industry, is going 
to be it.
    So we do not do it with the presumption that the Congress 
is in the business of insuring this risk in perpetuity, but 
that when we make the transition it shall be based on the most 
formal and comprehensive study possible.
    Is there a counter-view to that that you would like to give 
to the committee today? Or do you think those presumptions are 
based in relatively sound facts?
    Mr. Abernathy. I think those are concerns that we have 
heard from a number of sources. There are various different 
proposals that we have heard as to what should happen after 
2005, whether there should be some kind of temporary extension. 
One of the proposals that Mr. Serio made today that requires 
some very careful looking at is if you continue with the same 
structure of the program, the deadlines that are built in 
there, maybe you should allow in the third year that any 
insurance policy that is written during the third year would 
still be able to extend with the particular backstop coverage 
beyond that third year. That is something that is worthwhile 
looking at.
    Chairman Baker. But that would mean any new start would 
then be prejudiced in the third year. If you were going to 
start a new project, you would not have the availability of the 
program and that would create a market disruption between 
somebody who met the deadline and a new start. I cannot see 
that being helpful for economic growth.
    Mr. Abernathy. I think the suggestion is that that coverage 
would continue even beyond the third year if the insurance 
coverage were written during the third year. So that you would 
be starting the third year; your coverage would continue beyond 
there. I think that is something worthwhile looking at.
    Frankly, the problem that we have is, we do not have enough 
of a factual basis to be able to say which of these ideas 
really carry the most merit.
    Chairman Baker. That makes my point exactly. We have dealt 
the card to the Administration's efforts to do the thoughtful 
analysis, to come back to us with a report. What I am 
suggesting to you is that a 90-day legislative clock, subject 
to such a comprehensive study, is really not a clock that makes 
legislative sense. We need to remove the volatility and 
uncertainty from the markets. There is no apparent downside to 
at least a 1 year, and maybe longer extension, to make sure we 
have the legislative time to respond.
    I am to this extent agreeing with Mr. Kanjorski that there 
is no downside to making this determination in this Congress to 
provide that 1-year extension solely for the purpose of 
receiving your work, and that the downside of not doing that is 
to throw markets in some degree of uncertainty either in the 
near term or certainly by the end of 2005.
    I have used my time, so I will come back to you if 
circumstances permit us.
    Mr. Scott, you would be next.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Let me ask this question first. The Consumer Federation of 
America believes that there are only nine major cities that 
will not be covered by the private insurance market after the 
2005 expiration of TRIA. Is there a need to curtail and limit 
future extension of TRIA to just nine cities? And could you 
tell us who those nine cities are?
    Mr. Abernathy. Are you asking me, Mr. Scott?
    Mr. Scott. Yes, I am sorry.
    Mr. Abernathy. That is one of the suggestions that has been 
made. The CFA has made it. Others have made it. One of the 
questions of the program is, is Terrorism Risk Insurance 
availability really just an issue for certain parts of the 
country and not other parts of the country? That is one of the 
questions that is begged by the fact that the take-up rates, 
the participation rates in the program are so relatively low.
    Some questions are even asked as to whether it is an issue 
for entire cities? I think Mr. Serio could point out there are 
people in Manhattan that are not buying insurance. They just do 
not feel that there is a need. They might be right, they may be 
wrong. Who knows? There are some who say, well, we ought to 
make it mandatory for everybody and then have people whether 
they feel they are at risk or not participate in the pool 
because the bigger the pool, the more we are able to spread the 
risk.
    There are some who would say, well, why should I have to 
participate in somebody else's risk? These are all the kinds of 
questions that we need to address. Unfortunately, we have right 
now more questions than we have information to answer those 
questions.
    Mr. Scott. Could you share with us for the record what 
those nine cities are? Would you have that information?
    Mr. Abernathy. We do not have any list of any particular 
nine cities. I do not recall whether the CFA mentions the nine 
cities or not, that they recommend.
    Mr. Scott. Okay. The other part of my question is, if the 
Treasury has until September 1, 2004 to determine if it will 
extend the ``make available'' provision, how will that affect 
an insurer's ability to offer products for future terms?
    Mr. Abernathy. Thank you for asking that, because there has 
been a fair amount of confusion as to how the ``make 
available'' requirement will operate with regard to time frame. 
The law requires that any insurance policy offered during the 
whole year, through the end of the calendar year 2004, must 
make Terrorism Risk Insurance available regardless of what the 
decision is on September 1. So if on September 1 the decision 
is not to extend, people still under the statute are required 
throughout this calendar year to make their product available 
for their policies that extend beyond that.
    That is without prejudice to what that decision might be. 
If the decision on September 1 is, or before September 1, 
whenever we make that decision, and again I want to emphasize 
we are committed to making it as soon as we can gather enough 
information to do that, to make an informed decision. Should 
the decision be yea, extend it into the third year, that would 
then begin with January 1 and that requirement would continue 
throughout the remainder of the program.
    Mr. Scott. And one more, if I may, Mr. Chairman. Should the 
Treasury Department reconsider its decision to include group 
life insurance in TRIA, given that it is a basic benefit for 
venerable, highly concentrated workers?
    Mr. Abernathy. That was one of the early mandated questions 
that was put to Treasury. That was one where our hands were 
fairly tied. The Act did not say whether we thought it was 
advisable or not to extend coverage to group life. The Act said 
investigate whether or not two specific things are happening: 
Is insurance available for group life, initially primary 
insurance?; and is insurance group life reinsurance available? 
Our study verified that group life reinsurance coverage had by 
and large receded. There was little if any reinsurance being 
made available for group life.
    On the other hand, primary group life insurance has shown 
no significant receding from the markets. That still seems to 
be as available to day, with little change, as it was on 
September 10. Because of that, the test under the statute was 
not made, so we could not include it in the program.
    Mr. Scott. A question on the timing of the Treasury survey 
wave. If the last Treasury survey wave is sent to stakeholders 
in February 2005, in your opinion does that provide enough 
information for analysis to be made to make a recommendation 
regarding the expiration of TRIA later that same year?
    Mr. Abernathy. That is a very good question. We hope so. We 
felt because of the structure of TRIA, it is really three 
separate programs. We are right now in program two of TRIA that 
operates under different numbers than last year. Next year, it 
will be operating under yet a different set of numbers. The 
purpose for that is to try to increase the space within which 
the private markets operate.
    So in order to be able to evaluate, as the law says, what 
is going on on the ground, we need to test in each of those 
years. We are hoping that we will get enough of a test in 
January and February that we will be able to make some 
determination as to how the program is operating in its third 
year and whether the take-up rates, the market participation 
rates are changing at all. That is early in the year, but I 
think that is the best we can do, given the time frames 
provided for under the Act.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Scott.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    As I often do, I find myself concurring with Chairman Baker 
with respect to the need for certainty. No editorial comment 
from my colleague there.
    [Laughter.]
    Chairman Baker. I did not want to interrupt.
    [Laughter.]
    Mr. Hensarling. The need to bring certainty into this facet 
of the insurance market, the need for quick action, and also 
the need to ensure that Congress is not faced with a series of 
renewals or extensions is important because I have a concern 
about the federal government becoming a permanent fixture in 
the property and casualty reinsurance business, and giving the 
taxpayer this type of exposure.
    Can anybody give me at this point, any of you gentlemen, 
some sliver of hope that, particularly with respect to the 
latter concern of the federal government being a permanent 
fixture in this market, any sliver of hope that this will not 
be the case? Starting with you, Mr. Abernathy?
    Mr. Abernathy. That was the design of the statute. When the 
statute was enacted, there was the concern that we might be 
creating a permanent federal program. For that reason, it is 
structured so that each year the coverage provided by the 
federal government declines. The space that is not insured by 
the federal government increases, with the hope that that would 
be a glide-path to get the federal government out of the 
program, particularly in the third year.
    In fact, the design of the third year is to have as little 
effective federal involvement in the marketplace as possible. I 
have met with some insurance people who already say they think 
under the second year, there really is not any federal program. 
Some of the major insurers, they say, act as if there is no 
TRIA now because of the various deductibles that would pretty 
much cover anything they are doing anyway and they are carrying 
significant risk on their own.
    Mr. Hensarling. Any comment, Mr. Serio?
    Mr. Serio. I do not know that anybody has an interest in 
having the federal government as a permanent fixture in this 
business either. But I think, as Mr. Abernathy said, it is that 
glide-path that we are working on. When you get back into the 
insurance economics of this, there has to be enough capacity 
that has been built up in this marketplace not just to pay for 
an event, they handled 9-11 very well, the problem was having 
enough capacity to cover a future risk that they have to be 
responsible for up front because the financial regulator 
requires that.
    So depending up what other things we can put in place 
working with private industry in terms of giving them the 
opportunity to build that kind of capital base, that they are 
not currently allowed to build, will go a long way towards 
allowing the federal government to glide out of and to get out 
of this reinsurance program.
    Mr. Hensarling. On a slight refinement on the question, if 
I understood your testimony correctly, I think you stated that 
there was really not much progress in establishing a viable 
terrorism reinsurance market and that so far there has not been 
a reliable way in which to assess the risk. We have obviously 
had some passage of time since 9-11, so my question is what has 
to happen to be able for the participants to be able to assess 
this risk and when might this happen?
    Mr. Hillman. Based upon the results of our work, what we 
have generally come to the conclusion is that the problem that 
insurers and reinsurers are having right after the terrorist 
attacks on September 11 are the same problems that they are 
having today. They simply have an inability to determine the 
frequency or severity of another terrorist attack. 
Understanding the enormity of possible losses associated with 
such an event, they are pulling themselves away from the market 
and will be unable to do so until such time that there would be 
reliable information for them to be able to make some of those 
assessments. Hopefully, that information will never come to 
bear.
    Mr. Hensarling. I think all you gentleman have given 
evidence about the low take-up rates. Obviously, there are 
primarily a couple of reasons why somebody does not purchase a 
service or a product. I do not care what a set of golf clubs 
costs because I am not a golfer, so I am not going to buy a set 
of golf clubs. Which I guess begs the question why Chairman 
Oxley allowed me on this committee, but I do not have time to 
pursue that.
    [Laughter.]
    Another reason I might not buy something is because I do 
not like the price. As much as I may want a new pickup truck, 
they just might have priced me out of the market. I think 
several of you gentlemen gave evidence that supposedly now with 
TRIA in place that relative to the risk, this insurance is 
affordable. So why aren't people taking it up? Obviously right 
after 9-11, a number of real estate developments and projects 
and construction were held up, but is that true today and why 
do we see such a low participation rate?
    Mr. Abernathy. We do not have any evidence that has been 
brought to our attention that development projects are now 
being put on ice because of lack of Terrorism Risk Insurance. 
So far as we can tell, that phenomenon has now disappeared with 
the current availability of the insurance coverage. With regard 
to why the take-up rates are so low, that is a very interesting 
issue. I think we can only speculate. We have a number of 
anecdotal pieces of evidence as to why people are not picking 
up the coverage, but we want to get a more comprehensive view 
and that is why we are engaging in our various surveys.
    Mr. Serio. Again, maybe it is a mistake to call it a low 
take-up rate. I think the take-up rate has been appropriate to 
those who either feel they need it or want it. Some have been 
very comfortable with the protections that are afforded in the 
standard fire policy that has been on the market for years. 
That does provide some terrorism coverage. But for those who 
have a contractual obligation to have this all-risk coverage 
need access to a terrorism risk coverage. That is what TRIA has 
provided.
    Going back to Mr. Scott's question, it is not just a 
question of geography of those who may need it. It is not just 
businesses in New York City, but there are some businesses in 
New York who do not have it. But depending upon the nature of 
the business they are in, if they were neighbors to that Army 
base in greater Atlanta, they may well need access to coverage 
because they do not have other market alternatives. It goes 
both to the location of the risk, as well as to the nature of 
the risk and where they are relative to other trophy or 
sensitive locations, as they call them, that you want to make 
sure they have equal access to insurance coverage as somebody 
who is not in that type of sensitive location.
    Mr. Hillman. I think that is important to not understate 
the importance of TRIA being able to provide for terrorism 
coverage for high-risk target properties. That is exactly what 
the Act has done and it has been extremely successful from that 
standpoint. Why other commercial policyholders are not 
accepting terrorism insurance could be for a variety of 
reasons. As the Assistant Secretary from Treasury said, we have 
anecdotal information ourselves which suggests that they may 
just perceive their overall risk exposure to be such that any 
amount that they might pay might be too high.
    Mr. Hensarling. My time is up. Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Gentlemen, I am not going to repeat a lot of things that 
have been said. We have had a lot of good questions and a lot 
of good answers already. But Mr. Abernathy, I would like to 
make sure that I understand what the law was when we passed it. 
There is nothing in the law that I remember that says you 
cannot make interim reports or other reports prior to the June 
2005 deadline. Is that correct?
    Mr. Abernathy. That is correct, sir.
    Mr. Capuano. So there is nothing here that I am aware of 
that would prohibit you or your agency from making 
recommendations or taking actions today.
    Mr. Abernathy. Nothing whatsoever.
    Mr. Capuano. Okay. If that is the case, I feel the same 
way, we all agree, I think, that business decisions will have 
to be made before we have the answers to all of the questions 
that have been asked today that no one can be expected to have 
the answers to. Do we agree on that?
    Mr. Abernathy. I think those types of business decisions 
are made all the time. There is always an element of 
uncertainty that you have to cope with.
    Mr. Capuano. I agree with you. But with all the questions 
that you are looking for answers for, which I do not disagree 
with you, I think your approach to it on some levels is 100 
percent correct. We would like to get as many answers as we can 
before we make decisions. I totally agree. But there is no hope 
of that before certain decisions relative to terrorism 
insurance have to be made by the end of this year. Is that a 
wrong assumption?
    Mr. Abernathy. We are going to do our best to have a good 
body of evidence that is focused on the specific ``make 
available'' issue as soon as we possibly can. Fortunately, that 
is a very narrow question and we are confident that we can get 
enough information to make a reasonably sound decision well in 
advance.
    Mr. Capuano. Would you also be able to make available 
information that is also tied directly to the existence or 
extension of TRIA? Or do you think that they are two completely 
separate issues?
    Mr. Abernathy. They are not completely separate, because as 
we make that decision with regard to ``make available,'' the 
Act says we are to look at the same factors that we are 
supposed to evaluate in connection with the June 2005 report.
    Mr. Capuano. Okay. So there is a fair amount of overlap 
both in your provisions and into the business decisions that 
have to be made by insurers and people who are looking to buy 
insurance.
    Mr. Abernathy. There is some overlap, but again the ``make 
available'' decision is a very narrow decision, and whatever 
that decision is I do not think should be seen as in any way 
suggesting what recommendations we might make next year.
    Mr. Capuano. Okay, fair enough. I think we just disagree, 
because I would argue that there is a lot more overlap relative 
to business decisions that have to be made than you seem to 
agree. But that is fair enough. At least there is some, we 
agree with that.
    All that being said, I have been actually happily surprised 
at the general consensus that I have heard today by the members 
of the committee that we are all in agreement that we have to 
head towards extending this provision. I would have to agree 
with some of the concerns that were made that I am not sure 
that I want this permanent. I am not so sure that I like all 
the provisions. I am sure I do not like all the provisions that 
are there. But I also am not sure that it is time to tinker 
with it because we have so many questions that are left 
unanswered. If we tinker with it, you skew the answers and 
maybe changing something that you do not want to change, et 
cetera, et cetera.
    So I would urge you in your agency to look at this a little 
bit more quickly and to take back what you have heard here 
today that we went ahead on a general consensus, again not by a 
vote, but a general consensus is I think it is fair to say that 
we want to head towards extending TRIA for at least a year, 
maybe longer, not because we love every aspect of it. We still 
have questions and concerns, and I think we will have some 
serious disagreement when the time comes because we do not have 
the answers to those questions.
    I would particularly urge you, though I know that your 
agency would never be influenced by politics, it is an election 
year, and not that those things would ever have an influence on 
a decision such as this, but in an election year when you have 
a bipartisan consensus, take advantage of it. All the things 
can be lining up to get this thing done reasonably smoothly so 
that we can get to the arguments.
    I do think that there will be a time for us to have these 
discussions and arguments and I hope it will be next year, if 
you want the truth, but I think it is important that we get 
beyond all the internal problems we have, allow people to make 
business decisions so it will give people like you and us the 
time to make thoughtful reads of the information we get, maybe 
a lot of the information, as you know, will lead to more 
questions that we will have to search out.
    I look at a consensus here. I look at the fact that the Sox 
just beat the Yankees six out of seven, and I have to tell 
you----
    Unknown. Mr. Chairman, Mr. Chairman. Could we get back to 
the subject at hand, Mr. Chairman?
    [Laughter.]
    Mr. Capuano. It just tells me that everything is lined up 
right.
    [Laughter.]
    And if everything is lined up right, we should take 
advantage of it.
    Unknown. I object, Mr. Chairman.
    [Laughter.]
    Mr. Capuano. Thank you, Mr. Chairman. I yield back.
    Chairman Baker. Mr. Capuano, that is y'all's problem.
    [Laughter.]
    Mr. Royce?
    Mr. Capuano. Mr. Chairman, could I get a translation of 
that ``y'all'' thing?
    [Laughter.]
    Chairman Baker. It would take longer than you have for me 
to explain.
    [Laughter.]
    Mr. Royce?
    Mr. Royce. Thank you, Chairman Baker.
    Unfortunately, I believe that we are in the beginning 
stages of a very long and protracted war against radical 
terrorists of the Wahabi sect, of the most extreme branch of a 
sect that are very nihilistic in terms of how they are going to 
conduct a war that they have declared, basically. I think it is 
critical that we think about how our economy and about how our 
financial system deals and prepares for such a reality over the 
long term.
    The marketplace should and can be one of the greatest tools 
in mitigating our country's vulnerability to damaging terrorist 
attacks. By and large, I think the behavior in the market is 
rational. As a result, participants will make financial 
decisions based upon their expectations of a risk-weighted 
return. If the marketplace truly believes it would bear the 
brunt of losses due to terrorism, would it take some necessary 
precautions to limit downside risks over the long haul? In 
other words, maybe firms would strategically locate offices in 
various locations, instead of in one high-risk location.
    Terrorism is a terrible problem we face, but we should not 
ignore its effects. I think the value of some assets change as 
a result of the threat of terrorism. Less attractive assets 
such as high-profile assets probably are going to have less 
value. Many I think out in the market probably see more value 
in technology firms producing homeland security products and 
services. So the marketplace can force society to better 
prepare and defend against terrorism if we are looking at this 
over the long haul.
    If Congress were to reauthorize TRIA, would it be signaling 
to the market that business could continue as usual? Is this an 
acceptable outcome? Congress would be inviting moral hazard 
through adverse selection. Behavior would change as a result of 
the taxpayer backstopping losses that this legislation, if it 
is permanent, would constitute.
    At the time of its creation, I believed that some form of a 
federally guaranteed insurance backstop for terrorism was an 
acceptable step. It was. Today, however, by extending this, 
would we signal permanence? In the long run, would this create 
serious distortions in the economy and would it basically, 
looking out over time, assuming the premise is right that this 
is a 20-year struggle, would it increase our vulnerability to 
terrorism? Could this harm our ability to absorb economic 
shocks over the next 20 years, resulting from an attack?
    I appreciate that this subject presents many, many 
problems. I know there are no easy answers to this. But Mr. 
Abernathy, those are just some of the thoughts that I have as I 
try to contemplate what is in store for us over the next 
generation. But getting back to a question to you, are you 
concerned that extending TRIA could create the perception of a 
permanent government backstop? And could that create 
distortions in the marketplace?
    Mr. Abernathy. I think all who stepped forward to create 
the very program that we have now carried with them the concern 
that by creating this federal program, are we creating some 
sort of moral hazard that will remove some of the motivation 
that people have to mitigate some of the risks that they have. 
We have certainly seen that with regard to the flood insurance 
program. We have gone through reform after reform to try to 
increase the incentive to mitigate the risk from flood 
insurance and there are continual concerns that people are 
still acting in ways that would be different if they did not 
have a federal flood insurance backstop program. That was the 
concern I think that everybody had when we were going forward 
with this Terrorism Risk Insurance. Are we taking away some of 
the incentive that people may have to mitigate their risks?
    We take comfort that the Act as written makes it very clear 
that this is a temporary program. It is structured as a 
temporary program. When people come and present their various 
ideas for extending this or that aspect of the program, one of 
the questions that needs to be asked is, does the extension 
contemplate continuing along that glide-path that removes the 
federal government out of that or do you level off that glide-
path?
    I do not know what the answer is to that, frankly, because 
the discussions are continuing. But usually when I put that 
question to people, they do not have an answer. The last time I 
put it to someone, they said, well frankly, we think that the 
federal reinsurance is too little at this point. We think year 
two is too stingy in terms of federal support. So I do not know 
what the answer is to that question other than it is a 
continual risk that we have to work against.
    Mr. Royce. Thank you, Mr. Abernathy.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Miller?
    Mr. Miller of North Carolina. I apologize for getting here 
late and I do not know what kind of questions you may have 
answered before I got here, but Mr. Abernathy you talked for a 
moment about the two statutory analyses required for the 
Department of Treasury to extend TRIA to group life insurance.
    Mr. Abernathy. Yes, sir.
    Mr. Miller of North Carolina. You said that Treasury's 
analysis was that there was a ready supply still of primary 
group life coverage, although there was not an adequate and 
affordable catastrophic reinsurance.
    Mr. Abernathy. That is correct. That was our finding.
    Mr. Miller of North Carolina. So there was one step 
satisfied, one of the criteria satisfied, and not the other, 
and the statute requires that both be satisfied.
    Mr. Abernathy. That is right.
    Mr. Miller of North Carolina. I am curious as to the effect 
of the lack of availability of catastrophic reinsurance. Are 
insurance regulators who are charged with concerns for solvency 
looking at the possibility of catastrophic loss and the effect 
it might have on group life insurance?
    Mr. Abernathy. I am not sure I understand the question, 
Congressman.
    Mr. Miller of North Carolina. Solvency concerns are usually 
by the states.
    Mr. Abernathy. Yes, that is right.
    Mr. Miller of North Carolina. Do you know if the regulators 
who are concerned with solvency are looking at the possibility 
now of catastrophic losses and effect they might have on the 
solvency of primary group life coverage?
    Mr. Abernathy. I do not have any primary evidence or 
information on that. I would defer to Mr. Serio about that and 
his colleagues.
    Mr. Miller of North Carolina. Okay.
    Mr. Serio. Yes, we are in fact looking at that. That is 
what has given us so much concern about the decision. The group 
life industry's ability to continue to provide primary coverage 
was good. It shows you the internal strength of the life 
insurance industry, but it is putting that capital at risk for 
an extraordinary event like the terrorist event that has a 
large number of casualties.
    That would be putting a lot of that capital at risk, and 
that does concern the financial regulators, which is why we 
have been promoting the idea, along with many of you here 
today, of including group life in it simply because without the 
reinsurance they are essentially assuming that risk themselves. 
They are keeping that risk and retaining that themselves as 
opposed to being given an opportunity to spread that risk like 
most other lines of insurance do. That is why it is critical 
that that be a part of the TRIA program.
    Mr. Miller of North Carolina. Okay. I am sorry. You are 
concerned about potential effect on solvency and also the 
ability to pay claims?
    Mr. Serio. Sure. Given the fact that it is so hard to make 
estimates as to what a possible size of an event might be or an 
impact might be, the whole point of the TRIA Act was to provide 
that definitive backstop on property-casualty, to evaluate its 
impact and possible benefit to group life. We think it is a 
necessary and appropriate backstop so we do not get into that 
question, of where you do have an event that had a significant 
life loss.
    Group life has the same concentration of risk character 
that worker compensation has. That is what has given us so much 
concern about this, that you will have thousands of lives in 
one location that this could be affected at once.
    Mr. Miller of North Carolina. Okay. Is the concern that 
your Department has shared by the primary group life insurers 
themselves?
    Mr. Serio. We have in fact been in significant discussion 
with them. The NAIC commissioners have been very concerned 
about it. We have discussed it with them and they are 
concerned. The industry is concerned about not having been 
included within the TRIA provisions.
    Mr. Miller of North Carolina. Okay. Do you favor, then, 
changing the statutory criteria so it no longer requires that 
both criteria be met to include group life insurance in TRIA?
    Mr. Serio. I think to clarify those provisions to get TRIA 
back to its original purpose of being that reinsurance backstop 
I think would be adequate for including group life in any 
clarification, and the statutory language would go a long way 
to that.
    Mr. Miller of North Carolina. Thank you.
    Chairman Baker. I thank the gentleman.
    Mr. Shays?
    Mr. Shays. Thank you all very much.
    I want to just say that I disagree with Mr. Kanjorski's 
interpretation of the Administration's participation in this 
effort. I obviously was very concerned about this issue, being 
from one of the financial capitals of the world, the Fairfield 
County, New York area, with lots of reinsurers and so on. I 
felt the Administration was paying a tremendous amount of 
attention to this issue.
    I also do not believe that trying to deal with tort reform 
has a political purpose. I think it is just essential that 
ultimately we deal with that issue, but I realize it related 
primarily to the issue of terrorism and tort reform, et cetera.
    I want to be as clear as I can be, and I have a number of 
questions, but I believe Mr. Serio says we need to continue 
this, but we need to have the government and the insurance 
industry work this out. That is basically, I sense, the 
position of GAO.
    Mr. Hillman. Our view is that it is important to look at 
alternatives as soon as possible because we see no viable 
alternative coming forth from the industry itself.
    Mr. Shays. Right. And from New York we hear basically let's 
continue this, at least in the short run.
    Mr. Serio. Right. That is correct.
    Mr. Shays. And from Treasury, I am getting an Alan 
Greenspan kind of answer. I am a little unclear. I get a sense 
you do not want it to be permanent, and you are kind of a 
little neutral here and we have to work it out.
    Mr. Abernathy. We are trying to operate within the 
parameters that the statute sets forward. The statute declares 
in a multitude of places that this is a temporary program with 
a glide-path----
    Mr. Shays. But you are not speaking definitively.
    Mr. Abernathy. No, we are.
    Mr. Shays. You are kind of still trying to sort this out 
yourselves.
    Mr. Abernathy. That is correct, because the statute also 
says we should consider what should take place after 2005.
    Mr. Shays. Right. I know what the statute says, but I also 
know the Administration has opinions----
    Mr. Abernathy. Yes.
    Mr. Shays.--and has never been electing to show them, as it 
should not.
    Let me see, on GAO's statement basically it says, in 
summary it appears the Congress's first objective in creating 
TRIA was to ensure that business activity did not materially 
suffer from a lack of available terrorism insurance largely has 
been achieved. I agree with that. Then you say, while TRIA, on 
page three actually, has improved the availability of terrorism 
insurance particularly for high-risk properties in major 
metropolitan areas, most commercial policyholders are not 
buying the coverage. That interests me because I was told 
basically, and this speaks to why we need to continue to debate 
this issue, that the whole marketplace would literally fall 
apart; that new buildings would not be built; existing 
buildings would not get refinanced because there was no 
terrorism insurance available.
    So explain to me how we are able to see so many not have to 
buy the terrorism insurance and still get the financing they 
need.
    Mr. Hillman. That was an interesting outcome of our study 
as well, Congressman. It seems that perhaps most folks view 
their risk exposure to be so low that almost any price that 
they might have to pay for terrorism insurance would be too 
high.
    Mr. Shays. Right. But I thought that those financing 
buildings, the banking community, would have demanded it. What 
that implies is the banking community did not demand it. Maybe 
Mr. Abernathy would speak to this.
    Mr. Abernathy. I think the financing community, bankers or 
others who are providing funding for economic development 
projects are making those same sorts of assessments. In some 
cases where they believe there might be a significant terrorism 
risk because of the trophy nature of the project or where it 
may be located, they are looking to whether or not there is 
availability of insurance being applied. In other cases where 
they believe the risk is low or nonexistent, they are not 
demanding that there be that kind of coverage.
    Mr. Shays. Is that somewhat a surprise to you? It is 
logical in hindsight, but is it surprising?
    Mr. Abernathy. It is a surprise in the sense that we did 
not predict that before we got into the program. I do not know 
that we knew what to expect would be the market reaction.
    Mr. Shays. Let me ask another question. I always had 
anticipated that this would not be permanent, but that we would 
basically allow a hand-off that there would be a building up of 
reserves by the insurance industry and therefore be able to 
deal with it through their own capabilities. But I am being 
told that they have not built up their reserves. I need that 
explained to me.
    Mr. Serio. Yes, this really goes to what happened as we 
came out of 9-11. When you have $40 billion in losses mostly 
paid within an 18-month period, still some left outstanding, 
you had a serious drain on the reserves in the capital of the 
marketplace. There are a number of estimates as to how much of 
the total commercial property-casualty market was absorbed by 
9-11.
    There are a couple of different ways to regain capital: 
investment income, the development of surpluses, a whole 
pulling back on writing new business, and rates. Frankly, they 
have had to go and replenish their rate structure or their 
reserves through rate alone, and that is why you have such 
pressure to raise rates.
    Mr. Shays. I realize my light is out, so rates went up for 
non-terrorist coverage?
    Mr. Serio. Rates went up across the board. Absolutely.
    Mr. Shays. Unrelated to terrorism coverage.
    Mr. Serio. That is correct, and related to terrorism 
because of the need to replenish that capacity. What we are 
suggesting is that if you give the industry an opportunity to 
create some ability to have catastrophe capacity in hand, you 
do not have that whipsaw effect on the market going forward 
after an event has occurred. Whether you are talking about a 
terrorism event or any other kind of catastrophic event, there 
is always a need to be able to replenish those reserves, unless 
you are allowed to maintain them on hand. What we are 
suggesting is that more should be allowed to be held on hand 
for those types of events.
    Mr. Shays. Could I have a quick follow-up? It will be very 
short. I just need to be clear. Are we basically saying that 
companies that are not required, who are not buying terrorism 
insurance, then will not be covered for a terrorist act? That 
now there is written in the policy, you have no coverage for 
terrorism?
    Mr. Serio. It depends on where you are. There are some 
policies in some states that have general terrorism exclusions, 
particularly on domestic terrorism which is not covered by 
TRIA. There are others. I mentioned earlier the standard fire 
policy provides coverage for terrorism if it results in a fire 
type of loss. That terrorism will in fact be covered, but there 
are policies that do exclude terrorism.
    Mr. Shays. Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Hillman, in the event of a terrorist attack by a non-
foreign-based group, TRIA will not apply. Is there any evidence 
that the private market, and I know that Mr. Serio just touched 
on this, but I would like you to explain it more. Is there any 
evidence that the private market is offering coverage for acts 
of domestic terrorism?
    Mr. Hillman. To some extent in a limited degree insurance 
is being made available for those types of in-country events.
    Ms. Velazquez. Mr. Serio, would you like to comment on 
that?
    Mr. Serio. We are seeing that it really depends upon the 
risk and the location of the risk, where there is some coverage 
being provided. That all-risk coverage has been provided. I 
think, in fact, TRIA probably has provided some relief by 
giving a backstop for international or foreign terrorism risks, 
and provided some capacity relief so that domestic coverage 
could be maintained.
    Ms. Velazquez. Mr. Abernathy, I also understand that many 
insurers are excluding coverage for certain types of terrorist 
attacks. In the event of a nuclear, chemical or biological 
attack by a foreign interest, would losses generally be covered 
by TRIA?
    Mr. Abernathy. They would be covered by TRIA, but we have 
left it up to the various states to determine whether or not 
those particular events can be excluded. In the administration 
of the Act, we have relied as much as we possibly can upon the 
state regulators. Where states allow those exclusions, we do 
not supersede that local decision.
    Ms. Velazquez. Thank you.
    Mr. Serio, given the variety of means in which property 
damage could be inflicted during a terrorist attack, are you 
seeing insurers in New York State offering insurance products 
that will carve out certain types of terrorist attacks? If so, 
what types and why is this happening?
    Mr. Serio. They have tried. I am not sure we have allowed 
it. We have allowed some exclusions in New York, but only so 
much that they are already being covered by TRIA. So yes, the 
carriers have come in. They have made application for 
exclusions on certain types of hazards, nuclear among others.
    Ms. Velazquez. And there is an intervention on your part, 
your office?
    Mr. Serio. Thank you for your patience. If a policyholder 
wants coverage through TRIA, they have to be afforded that 
opportunity to have it. Okay? The exclusion is only essentially 
on a make available basis as well. They can essentially deny 
the coverage or a policyholder can pass on the coverage, if you 
will. So in that case, an exclusion will be allowed. But again, 
it is at the buyer's discretion, not at the company's 
discretion.
    Ms. Velazquez. Thank you.
    Mr. Hillman, I understand that the take-up rates of 
terrorism insurance have been low. Could you discuss whether 
the size of the business appears to be a determinant on whether 
it purchases terrorism insurance. For instance, are smaller 
businesses more or less likely to purchase this insurance than 
larger firms?
    Mr. Hillman. We have limited information on why the take-up 
rate is as low as it is, but it does have an awful lot to do 
with the extent to which you see a tremendous risk from a 
geographical location standpoint, from a concentration 
standpoint, as to whether or not policyholders find themselves 
having to provide that coverage and, as we discussed, whether 
or not financiers are willing to provide funds for developments 
and the like.
    Ms. Velazquez. Okay. Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentlelady.
    Ms. Maloney?
    Mrs. Maloney. Thank you so much, Mr. Chairman and Mr. 
Kanjorski for holding this hearing on truly one of the most 
important issues, I believe, before this body. I certainly join 
with all of my colleagues in representing from my home state, 
and applauding his testimony today, Superintendent of Insurance 
Greg Serio. He is a major leader in our own state, and actually 
has been a national leader by the amount of time that you have 
been willing to come to Congress and speak across the country 
on this. On behalf of my constituents, I thank you very, very 
much.
    I just want to say that after 9-11 I have never seen this 
Congress so bipartisan. We came together. We passed a whole 
series of legislation reacting to the disaster. All of the 
initiatives were tremendously important. But the bill that has 
the most significant long-term recovery, the biggest impact on 
New York City's economy, the site of the terrorist attack, was 
terrorism insurance. You can ask any professional, any 
business, any person. Most professionals, most people, most 
people working at ground zero, everyone believes that this 
legislation is truly the economic stimulus bill for the New 
York region.
    We could not move forward until we could get this insurance 
for our contractors, our legislators. I really compliment very 
much GAO, and I have in my testimony many of the examples that 
you had in that excellent report that you did, that showed the 
vital, vital need for this.
    I am very proud to have been part of a letter that 30 
Democratic members of this committee signed urging Treasury to 
extend the ``make available'' provisions of TRIA as soon as 
possible so that the insurers and consumers will know whether 
coverage will be available next year.
    This is very, very important. We need it now. We need a 
confirmation that this is going forward, and we need it as soon 
as possible so that we do not experience another period where 
the construction cranes are on mothballs and the workers are 
not called to be at the job sites. It is absolutely critical. I 
applaud every member of Congress that supported it in a 
bipartisan way, and the President. I urge him to show some 
leadership for the country and the city and other targeted 
areas that have suffered and those that are threatened by 
terrorist attack. We cannot wait for the study in six months. 
We really need it now. Maybe we need another GAO study right 
away.
    I just read one report that the original TRIA and the 
effort to extend it have been opposed by some consumer groups. 
I found this very, very unusual, because I have a great 
admiration for the Consumer Federation of America. My 
understanding is that this consumer group, a group that I 
regard very highly, has done an analysis where they use a model 
that quantifies possible future terrorist attacks, putting 
their likelihood at occurring every 6.9 years at a cost of $40 
billion each. I just want to ask if anyone if familiar with 
this model, what do you think of this model that was done by 
the Consumer Federation. I would like to know, have private 
insurance companies been able to come up with models that can 
be used to underwrite future attacks?
    All I can tell you is the City of New York's economic 
development office, the Mayor's office, the individual 
insurers, businesses, everyone said they could not do anything 
until they got the reinsurance program passed. Building did not 
start because people could not get insurance. If you could get 
it, it jumped 20, 30, 40, 50 percent, which is terribly, 
terribly unfair.
    I heard you testify earlier, Mr. Abernathy, that you are 
not going to complete this study particularly fast. I think we 
need it right away. I want to add that my district, I represent 
New York, I lost 500 constituents in 9-11, including the former 
Commissioner of, I cannot even talk about it, of Insurance for 
New York. But my home workers were very affected by group life 
insurance policies that also are part of this. And also in my 
home state, we have many insurance companies that hold these 
risks. I am interested in the issue, not only the group life 
insurance issue, from both the insurer and the insuree 
perspective.
    I was wondering also, Mr. Abernathy, if you could comment 
on the decision of Treasury not to include group life under 
TRIA last year, and your thoughts for this market going 
forward. So I would like those questions answered. Also, again, 
I cannot compliment enough your statements, and I quoted many 
of your statements in my opening statement which I would like 
to put in the record.
    Thank you.
    Mr. Abernathy. Yes, Congresswoman, I would be glad to 
comment. I believe there are two areas you want me to talk 
about, our group life decision and what our views are with 
regard to going forward with regard to the Act overall.
    With regard to group life, that was a decision that the 
statute gave us that was very narrowly defined. The question 
that the statute put before us is, Treasury should determine, 
based upon the evidence, whether or not group life insurance, 
primary insurance is available, and whether or not group life 
reinsurance was available. The statute says if both are not 
available, then we must include them under the program.
    We consulted with people in the industry, with supervisors 
around the nation, and the decision was pretty clear. There is 
very little evidence that there is much, or at least at the 
time of the decision, that there was much in the way of group 
life reinsurance available. At the same time, there was very 
little evidence that there had been any reduction in 
availability of primary group life insurance. So the test under 
the statute was not met, so we could not include them within 
the program.
    With regard to going forward, our view is that the statute, 
while stating in many places that it is a temporary statute, 
also makes it clear that we should evaluate how it is doing. 
Not only how the Act is doing, but how is the marketplace 
faring, and that we should, based upon what is going on on the 
ground, make recommendations to the Congress no later than June 
of next year on the variety of issues that are involved. 
Frankly, the more we dig into this whole question, the more 
questions we find. We find more questions than answers, but we 
are going through a process that is trying to bring as much 
information together so we can start answering some of those 
questions.
    Mrs. Maloney. GAO, you testified that the take-up rate is 
only 10 to 30 percent. What steps might we take as a Congress 
or as an insurance superintendent to increase this and thereby 
spread the risk? I am surprised at that, but on the other hand 
there are only a few areas that are the terrorist risk areas, 
Chicago, New York, Washington, Detroit. These are the areas. 
But if we do not have it in New York, I think Serio and others 
can testify, you are not going to be able to build or do 
anything. It will just kill our economy.
    We have been called to a vote and I would like, Mr. Serio, 
if you could answer the Consumer Federation question, and GAO, 
I may have to run out before you can even answer it, to vote.
    Chairman Baker. The gentlelady's time has expired. Mr. 
Shays want to get something on the record as well.
    Mrs. Maloney. Maybe he could answer in writing, if we do 
not have time, because I think these are important questions.
    Mr. Shays. Just a quick question. Thank you, Mr. Chairman.
    The 10 to 30 percent in the GAO study, I realize I did not 
ask a very needed question that was triggered by Ms. Maloney. 
Are we seeing insurance at 60 or 70 percent in the greater New 
York area and 5 percent elsewhere? How does it look 
geographically?
    Mr. Hillman. The several studies that looked at this issue 
that we gathered information from did not provide specifics on 
this, but it is clear from the studies that we did see that 
there is a greater concentration of purchasing the insurance in 
the Northeast area than in other parts of the country.
    Mr. Shays. Could we ask GAO to tell us, to nail that down a 
little better? It is very important.
    Mrs. Maloney. Will the gentleman yield for half a second?
    Mr. Shays. I yield.
    Mrs. Maloney. What can we do to spread the risk?
    I yield back.
    Mr. Shays. That is another issue which I think you will 
need to answer in writing as well. But I just need to know, are 
we seeing a lot more terrorism insurance being written in the 
Northeast, and if so how much.
    Mr. Hillman. We can provide that information for the 
record.
    Mr. Shays. Thank you. I appreciate that.
    Thank you, Mr. Chairman.
    Chairman Baker. For general membership purposes, I have 
been requested that we leave the hearing record open for at 
least 30 days for exactly these purposes, to have additional 
questions posed to our expert panel.
    One thing I would like to get on the record which was not 
discussed today, in response to concern about a permanent 
reinsurance program, is the Act also has, and I recognize it is 
conditioned, but there is a conditioned repayment obligation 
which is unique to this particular extension of credit. The 
view was that it was as a result of a catastrophic event, the 
capital on hand may be impaired and that it would be a cyclical 
problem that hopefully over time markets would rebuild and then 
be able to face future obligations with more resiliency.
    So that in essence, it is a short-term cash problem, and 
that the United States government would step in to keep 
economic function performing without interruption and advance 
the capital necessary to get us by the window. But at such 
future as the Treasury would determine that the industry had 
recovered, and that there was an ability to repay the funds 
advanced, with certain limitations on the premium increases 
that could be assessed, taxpayer money could be regained at the 
end of the day because we would not want to write a $10 billion 
check from the United States Treasury and have the industry 
show a $10 billion net profit. My constituents would understand 
that pretty quickly.
    So it is unique in that regard, and were we to extend it, 
it would be my intent to make sure that that repayment 
provision is also revisited to ensure it has the necessary 
capabilities to be enforced in an appropriate window by 
Treasury determination. I think that was important to add to 
our consideration of this issue.
    Having said that, we do have a vote pending. If there are 
no further comments by our panelists, I want to thank you for 
your time and participation. Each of you has helped 
immeasurably in the committee's consideration of this difficult 
issue.
    Our meeting stands adjourned.
    [Whereupon, at 12:03 p.m., the subcommittees adjourned.]

                            A P P E N D I X



                             April 28, 2004
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