[Senate Hearing 108-877]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-877

 
                            OVERSIGHT OF THE
                    TERRORISM RISK INSURANCE PROGRAM

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

  THE TERRORISM RISK INSURANCE PROGRAM, WHICH ESTABLISHED A TEMPORARY 
 FEDERAL PROGRAM OF SHARED PUBLIC AND PRIVATE COMPENSATION FOR INSURED 
    COMMERCIAL PROPERTY AND CASUALTY LOSSES RESULTING FROM ACTS OF 
         TERRORISM COVERED BY THE TERRORISM RISK INSURANCE ACT

                               __________

                              MAY 18, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                       Doug Nappi, Chief Counsel

                       Mark F. Oesterle, Counsel

                   Sarah A. Kline, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         TUESDAY, MAY 18, 2004

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johnson..............................................     2
    Senator Bennett..............................................     3
    Senator Reed.................................................     3
    Senator Allard...............................................     3
    Senator Sarbanes.............................................     4
    Senator Bunning..............................................     5
    Senator Dodd.................................................     6
    Senator Carper...............................................    18
    Senator Schumer..............................................    21
        Prepared statement.......................................    37
    Senator Nelson...............................................    37

                               WITNESSES

Brian C. Roseboro, Under Secretary for Domestic Finance, U.S. 
  Department of the Treasury.....................................     8
    Prepared statement...........................................    39
Donna Lee Williams, Delaware Commissioner of Insurance, on behalf 
  of the National Association of Insurance Commissioners.........    24
    Prepared statement...........................................    42
Richard J. Hillman, Director, Financial Markets and Community 
  Investment, U.S. General Accounting Office.....................    27
    Prepared statement...........................................    46
J. Robert Hunter, Director of Insurance, Consumer Federation of 
  America........................................................    29
    Prepared statement...........................................    67
    Response to a written question of Senator Santorum...........    99
John J. Degnan, Vice Chairman and Chief Administrative Officer, 
  The Chubb Corporation, on behalf of Council of Insurance Agents 
  & Brokers, The Financial Services Roundtable, Independent 
  Insurance Agents & Brokers of America, National Association of 
  Mutual Insurance Companies, National Association of 
  Professional Insurance Agents, Property Casualty Insurers 
  Association of America, Reinsurance Association of America, 
  Surety Association of America, and UWC--Strategic Services on 
  Unemployment & Workers' Compensation...........................    31
    Prepared statement...........................................    81
Christopher Nassetta, President and Chief Executive Officer, Host 
  Marriott Corporation, on behalf of the Coalition to Insure 
  Against Terrorism..............................................    33
    Prepared statement...........................................    88
Jacques E. Dubois, Chairman and CEO, Swiss Re America Holding....    35
    Prepared statement...........................................    97

                                 (iii)


           OVERSIGHT OF THE TERRORISM RISK INSURANCE PROGRAM

                              ----------                              


                         TUESDAY, MAY 18, 2004

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order. I would 
like to thank our panelists for being here this morning.
    Today, we are here to examine the Terrorism Risk Insurance 
Program. This program was put in place after the horrible 
events of September 11, 2001. Clearly, when we think of the 
events of September 11, we first think of the tragic and 
staggering loss of human life that occurred that day.
    While secondary to the human suffering, there was also 
considerable destruction of physical and financial assets. In 
the immediate aftermath, most of these losses were covered by 
the insurance industry. However, the insurance market had 
difficulty recovering and adjusting to the realities of the 
post-September 11 world. Many firms had depleted their reserves 
in meeting their significant liabilities. Going forward, the 
industry had to confront the difficulty of recapitalizing in 
the face of future terrorist acts. The lack of certainty caused 
significant dislocations to the insurance markets--most 
notably, due to the disappearance of reinsurance coverage. 
These problems, as policyholders soon became aware throughout 
the country, had a direct impact on both the cost and 
availability of insurance.
    The TRIA Program, which created a backstop using the 
resources of the Federal Government, was established to 
stabilize the insurance markets. It was meant to be a short-
term fix, intended to fill the gap while the private sector 
developed response to the potential loss from the terror 
attacks. The program is now in the second year of its 3-year 
term. While our discussions about the operation of the program 
can only be hypothetical, and hopefully will always only be 
hypothetical, it is a very important part of our oversight 
responsibilities to discuss and to examine it before we may 
ever need to rely on it.
    I look forward to hearing from the witnesses, and I thank 
all of you for being here today.
    Senator Johnson, do you have an opening statement?

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Yes, I do. Thank you, Chairman Shelby. I 
appreciate your work and Ranking Member Sarbanes' efforts for 
holding today's hearing on terrorism risk insurance. I am sure 
we all share the same feeling of relief since we passed the 
Terrorism Risk Insurance Act of 2002 following September 11 
that, in fact, no events have triggered the use of this Federal 
backstop. However, world events require us to remain vigilant 
against the possibility of another major attack. I am pleased 
that we are directing our attention to this program in advance 
of its expiration next year. This is a complicated topic, and I 
look forward to hearing from the witnesses about marketplace 
developments that may or may not have taken place to help us 
consider reauthorization of this program.
    I am pleased, Mr. Chairman, at the range of witnesses 
before us today. When we first considered this program more 
than 2 years ago, then-Chairman Phil Gramm did not mince words 
expressing his concern that we not create a permanent Federal 
program that would provide a crutch to the insurance industry 
and prevent the market from developing independently. While I 
do not believe that we have reached that point, I do believe 
that we should proceed deliberately and gather data from both 
industry and non-industry sources to see if reauthorization is 
really necessary. At the end of the day, this program is not 
about the profits of the insurance industry. It is about the 
ability of American businesses to have access to insurance 
protection. And for that reason, I believe that any extension 
of this program should include ``make-available'' provisions. 
That should be the very minimum required of an industry that 
enjoys this type of protection that we have provided.
    As we begin our deliberations, Mr. Chairman, I want to 
state at the outset that I believe very strongly that if we 
extend this program, group life should be part of that 
extension. Two years ago, I worked to include group life 
insurance in the Terrorism Risk Insurance Program. I was 
disappointed that the Bush Administration chose to focus its 
efforts on insuring buildings against terrorism, but was 
dismissive of the critical role that group life insurance plays 
for tens of thousands of families at the highest risk of 
terrorist attack.
    We saw vividly post-September 11 the sufferings of so many 
families. And while the most immediate grieving was for the 
loss of human life, the harsh reality is that many families 
lost their livelihood as well. In a time of loss, a life 
insurance policy can mean the difference between having to sell 
the family home, pulling the kids out of college, or even, in 
some cases, having enough money to put food on the table. It is 
critical that we create conditions that permit the private 
insurance markets to continue to offer group life insurance 
coverage to employees at high risk of attack.
    Since we implemented the Terrorism Risk Insurance Program, 
one of the most apparent market shifts has been the near-
complete disappearance of affordable reinsurance for group life 
policies. Although insurers have continued to offer this 
valuable coverage up to this point, even for high-risk 
concentration locations, we should pay careful attention to 
potential solvency issues that could arise in the case of 
another major attack.
    I look forward to hearing from today's witnesses.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman.
    I recall very clearly the effort to get this program in 
place after September 11 and the great frustration that I felt 
when, for a variety of reasons, there was continuing delay in 
getting it done. I had the feeling then, which I still believe, 
that failure to get this done prolonged the recession and had a 
contributory effect on the softness of the recovery because a 
lot of projects that would have been undertaken had terrorism 
insurance been in place were delayed. And I think, as the 
recovery now has traction and is coming on very strong, we 
would make a serious mistake if we allowed this program to 
expire. We would have significant economic difficulties as a 
result.
    I appreciate the hearings, and I look forward to hearing 
from the witnesses.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. No statement, Mr. Chairman. I have come to 
observe and possibly ask questions. Thank you.
    Chairman Shelby. Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. I want to thank 
you for holding this hearing. Many of us were on the Committee 
when we enacted the Terrorism Risk Insurance Act, and I 
appreciate the opportunity to revisit the program to review its 
implementation.
    I reluctantly supported the legislation passed in 2002. I 
believe in free markets, and, thus, I am loath to inject the 
Federal Government into private markets. I became convinced 
that the events of September 11, 2001, were indeed an 
extraordinary event that required a temporary backstop in order 
to give the markets time to adjust. And I emphasize the word 
``temporary'' here.
    I came around to supporting the TRIA legislation only after 
repeated assurances from the industry that this was a one-time 
thing, simply buying time for the private markets to regroup.
    I do not believe there is an ambiguity as to the 
Congressional intent that the program should be temporary. In 
fact, in the conference report, the purpose section begins this 
way, and I quote 
directly out of that section: ``The purpose of this title is to 
establish a temporary Federal program that provides for a 
transparent system of shared public and private compensation 
for insured losses resulting from acts of terrorism.''
    Now the industry is back with the same arguments. Once 
again we are being told that the markets just need a little 
more time to adjust. I am not sure why we should believe it 
this time, though. If this is to become a perpetual Government 
program, like flood insurance, the industry should be honest 
about it. Then we could have a legitimate debate about the role 
of the Federal Government in the insurance industry rather than 
threats of market chaos every few years.
    I will be following today's hearing carefully, and I will 
be interested in hearing what progress industry has made once 
again letting the free market take control.
    Again, Mr. Chairman, thank you for convening the hearing. I 
look forward to hearing about this topic.
    Chairman Shelby. Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Mr. Chairman, I want to thank you for 
calling the hearing. We are now a little short of halfway 
through the life of the Terrorism Risk Insurance Program, and 
oversight to determine how the program is working is very 
important.
    The Terrorism Risk Insurance Act came out of the work of 
this Committee, as a consequence of the September 11 attacks. 
It sought to establish a temporary Federal program with two 
purposes: The first was to ensure continued widespread 
availability of affordable property and casualty insurance for 
terrorism risk; the second was to create a transitional period, 
while preserving State insurance regulation and consumer 
protections, in which the private insurance markets could 
stabilize in the wake of the shock of September 11, resume 
pricing terrorism insurance, and build the capacity to absorb 
any future losses from acts of terrorism.
    The Department of the Treasury has the responsibility to 
implement the Terrorism Risk Insurance Program. That is, I 
guess, Secretary Roseboro, that is under your jurisdiction now. 
The Treasury has the obligation to gather information in a 
timely and effective manner about terrorism insurance coverage 
and pricing. It must use that information to make a series of 
determinations and recommendations under the statute.
    The most immediate determination is whether to extend to 
the program's third year the requirement that insurers make 
terrorism coverage ``available'' to property and casualty 
policyholders. And I welcome Under Secretary Roseboro here in 
order to discuss that and other issues.
    Mr. Chairman, I am going to have to go to another hearing, 
and I intend to return, but I do want to register--and 
presumably Secretary Roseboro will address this issue, the 
``make-available'' decision given to the Treasury Department 
for the third year of the program. The Senate bill had ``make-
available'' for the life of the program, all 3 years, when we 
first moved the legislation. In the course of the legislative 
process, including interaction with the House and with the 
Administration, it was provided that ``make-available'' was in 
the statute for 2 years, but the Treasury had the authority to 
``make-available'' the third year.
    That decision has to be made by September 1. From all we 
have heard, that is a very late date because it affects 
planning and availability and there is considerable concern, 
apparently, in the private sector with respect to that date.
    I am concerned that the Treasury Department waited until 
April 29 to publish a request for comments on the ``make-
available'' question. In a sense, we believe the Treasury 
Department is behind the curve here on that very important 
issue. I know you have received communications from our 
colleagues in the House about this matter, and it is the 
immediate issue facing us. And I think we need a prompt 
decision and recommendation from Treasury. You have the 
authority to proceed into the third year. It was given to you 
by the statute.
    I also appreciate, Mr. Chairman, the second panel that you 
have arranged. It is a wide-ranging panel in terms of its 
points of view, and I think that will be very much to the 
benefit of the Committee.
    Finally, I would be remiss, Mr. Chairman, if I did not note 
the leadership that Senator Dodd exercised on this issue when 
it was being considered in the Committee, on the Floor, and in 
Conference. And I believe it is fair to say that, without his 
efforts, the Terrorism Risk Insurance Act of 2002 would not 
have become law, and I want to register my deep appreciation to 
him for his very effective work on this issue.
    Thank you very much.
    Chairman Shelby. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman, for holding this 
very important oversight hearing today. I supported the 
Terrorism Risk Insurance Act when this Committee worked on it 
in the aftermath of September 11. It took us a long time to get 
the bill signed into law, too long if you ask me. But dogged 
determination by a majority of the Members of this Committee 
got the bill passed. I think our economy has been aided by this 
passage.
    I know some of my colleagues had real reservations about 
the bill. And I certainly understand why. Luckily, we have not 
been hit by another major domestic attack to see if this 
program actually works the way it was intended to after an 
attack. I think it has worked well absent an attack. Stability 
has been brought to the industry, and construction projects are 
going forward. Hopefully, we will never have to see if this 
program works after a major domestic attack.
    But I do believe it is very proper to reexamine the 
Terrorism Risk Insurance Act, especially with the ``make-
available'' provisions, as Senator Sarbanes has talked about, 
set to expire later this year and the bill expiring next year. 
It is time to see when and where we can improve this program, 
and what we can do to get the reinsurance industry back into 
the game.
    I am very happy to hear from all of our witnesses today. I 
am especially interested in, as I am sure all of my colleagues 
are and I suspect most of our witnesses, what Treasury has to 
say about ``make-available'' provisions that expire at the end 
of this summer. I know Treasury's comment period ends on June 
4. I would like to know if Treasury has an idea or timetable on 
when they will be making an announcement on the ``make-
available'' provision. Obviously, it is of great interest to 
everyone here. For the record, this Senator supports an 
extension.
    I would also like to hear from all of our witnesses on what 
they think of the program going forward. Should it be left to 
expire? Can the private market take over? Should the program be 
extended? Can it be improved? Should companies pay premiums? 
Should more lines, such as group life, be covered? Hopefully 
our witnesses will be able to give us insight on these 
questions.
    Once again, thank you, Mr. Chairman, for holding this 
hearing, and I welcome all of our witnesses before the 
Committee today.
    Chairman Shelby. Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Thank you very much, Mr. Chairman, and I 
would ask consent that the full context of my opening statement 
be put in the record.
    Chairman Shelby. Without objection, so ordered.
    Senator Dodd. Most of the comments that I would make have 
been made, and, first of all, let me thank you for doing this, 
Mr. Chairman. This is exactly the kind of oversight that should 
be occurring, and I think you and Senator Sarbanes have done a 
terrific job in this Congress in having good sets of hearings 
on a variety of issues and exactly the function of a 
legislative committee like this, once you pass a piece of 
legislation like this, then to go back at this juncture and 
actually review what happened. As Senator Bunning and others 
have pointed out, we were in unchartered waters when we did 
this. We did something we had never done before, and the good 
news is we have not had to test it in any real sense. It is 
very important to evaluate how things are proceeding, so I 
cannot emphasize enough the importance of having this type of a 
hearing.
    I appreciate Senator Sarbanes' very generous comments, but 
I thank him as well. He put a lot of time into this issue when 
we were drafting it. Senators Schumer, Reed, Corzine, and 
Bennett did a lot of work on this as well. And there are a lot 
of people, some of whom are gathered here in this room, Mr. 
Chairman. People like Nick Calio at the White House who was 
tremendously helpful. Nick is in the private sector today, but 
Nick did a tremendous job working with the Administration and 
getting us to the point where we were able to pass the 
legislation. I cannot emphasize enough how important that the 
Coalition to Insure Against Terrorism was in getting this done, 
and there are some people in the room here today who I thank 
immensely for their efforts.
    I am hopeful as well that we can, first of all, get the 
``make-available'' section done. Senator Bunning has it right. 
We have to do this. Just remember what we are doing here. I 
think all of us understood, particularly with large real estate 
projects, the idea of a 3-year bill was probably unrealistic. 
We all knew it at the time. But the political realities were 
that you could not get a 5-year bill. No one wanted to be a 
part of, or very few wanted to be part of, a 5-year bill, even 
though most understood that the private sector realities were 
that a bill of 3 years' limitation was probably not going to be 
adequate to cover the kind of fact situations as you develop 
larger projects. As Senator Sarbanes pointed out, the ``make-
available'' provision was to extend through the 3 years. It was 
only as a result of a compromise we had to strike that we moved 
it back.
    Now, my hope is that that will not delay on that and that 
will be accomplished, and then to evaluate whether or not we 
need to extend. We have all heard from various people who have 
come by to talk about the importance of extending beyond the 
sunset period here, and our witnesses can shed some light on 
that as to whether or not they think this is a wise thing to be 
doing.
    The good news is what we have not heard over the past 18 
months, and that is the public outcry from businesses and 
workers whose livelihoods are threatened by their inability to 
purchase coverage. And while we have not been hit with another 
attack, which we are all deeply grateful for, at least in this 
country, certainly there is a psychological impact that is 
occurring in terms of how people respond economically. And the 
purpose of this legislation was twofold: One, to cover against 
a catastrophic event, and two, to inject confidence into the 
market, to get people to act and do things. So it was not 
necessarily waiting for some event, but to say to people, look, 
we want you to continue doing what you are doing, it is 
critically important for the economy, and we want you to know 
that we are behind this; we are going to try and work with you 
through this period of time.
    To that extent, based on what I have heard, anyway, this is 
working pretty well. Obviously, we are going to hear from 
witnesses today who may shed some additional light on this. 
This was, I think, a very good effort, but it took too long. I 
think Senator Bennett made that point. We got bogged down in 
tort reform on this bill, which never should have happened. But 
it did, and people wanted to use this as some vehicle for a 
larger set of issues. Unfortunately, we spent a lot more time 
on this issue than we should have at the time, but, 
nonetheless, it is a good bill. It is working well, and, again, 
Mr. Chairman, I thank you immensely for giving us a chance to 
hear from Mr. Roseboro and other witnesses about where we stand 
today.
    But let me join Senator Bunning and others who have made 
the point: Let us get this ``make-available'' thing done. 
Fooling around with this too much longer is not helping the 
underlying purpose of the legislation. I know there are some 
people at Treasury who never liked the bill to begin with. But, 
that is not the point and they should not be calling the shots 
on this. And so let's not, you know, delay on this. Let us get 
that clear. Let us send a message where we are on that and move 
forward. That would be a tremendous help right now. If we get 
nothing else out of this but a clear signal from the 
Administration that the ``make-available'' provisions are going 
to go forward, that would be great news and would help 
tremendously.
    I am anxious to hear what you have to say, Mr. Roseboro, 
but I hope what you have to say includes that.
    [Laughter.]
    Chairman Shelby. Senator Dodd, we are glad you are here.
    Senator Sarbanes. There is the testimony for the witness.
    [Laughter.]
    Chairman Shelby. The first panel will be the Brian C. 
Roseboro. He is Under Secretary for Domestic Finance, the U.S. 
Department of the Treasury. Mr. Secretary, your written 
testimony will be made part of the record in its entirety. You 
proceed as you wish. We welcome you here today.

                 STATEMENT OF BRIAN C. ROSEBORO

              UNDER SECRETARY FOR DOMESTIC FINANCE

                U.S. DEPARTMENT OF THE TREASURY

    Mr. Roseboro. Thank you, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. I will just give a 
brief summary of the submitted written testimony and make 
myself available for your questions.
    Congress enacted TRIA in the fall of 2002 to address market 
disruptions for commercial property and casualty terrorism risk 
insurance caused by the terrorist acts of September 11, 2001. 
TRIA 
established a temporary Federal program of shared public and 
private compensation for insured commercial property and 
casualty losses resulting from acts of terrorism covered by the 
Act.
    By most indications, TRIA has been successful in achieving 
the fundamental goal of enhancing the availability and 
affordability of property and casualty terrorism risk 
insurance, particularly for economic development purposes. In 
terms of affordabilty, while information is still somewhat 
preliminary, accounts that we have seen indicate that premiums 
for terrorism risk insurance have decreased significantly 
throughout the early stages of TRIA and continue to do so.
    Despite TRIA's apparent success, there have been widespread 
reports that the ``take-up'' rates for TRIA coverage have been 
low. Whether this reflects a lack of interest in terrorism risk 
coverage at current prices, a lack of awareness of the 
availability of coverage, an assessment by businesses of low 
terrorism loss risk, or a combination of the above will require 
careful study and analysis of information reflecting as 
comprehensive a view of markets as possible.
    Treasury has the chief responsibility for implementing 
TRIA. Perhaps the most daunting, immediate administrative task 
was to prioritize and undertake the actions needed to make the 
program operational right away. One of the key factors in this 
regard was that TRIA became effective immediately on November 
26, 2002, when President Bush signed the Act into law.
    Treasury's first action was to issue promptly a series of 
three interim guidance notices. These interim guidance notices 
provided the basis for insurance companies to proceed with 
offering coverage by addressing issues such as compliance with 
TRIA's required disclosure and ``make-available'' requirements; 
determining which insurers were required to participate in the 
program and how their deductibles would be calculated; and the 
scope of coverage under the program.
    Even while the interim guidance process went forward, we 
began the next step in the implementation process to move 
forward with formal rulemakings that would incorporate and 
supersede our 
interim guidance. Subsequent rulemakings have addressed issues 
associated with State residual market mechanisms, claims 
processing, and litigation management. Overall, Treasury has 
published two interim final rules and three proposed rules, and 
three of these rulemakings have been finalized.
    In addition to the regulatory actions outlined above, 
Treasury has also created and staffed a Terrorism Risk 
Insurance Program office, or TRIP, to administer the Act. Among 
its accomplishments, the TRIP office has developed systems to 
handle claims processing, payments, and auditing of claims 
should an event ever occur.
    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. 
From the earliest days of the program, we have had procedures 
and resources at the ready to respond to any covered insurable 
event that might arise.
    Treasury still has some important tasks to complete. First, 
the Secretary of the Treasury is required to determine by 
September 1 whether to extend TRIA's ``make-available'' 
provisions into 2005, the third year of the program. Treasury 
is now developing a base of information from which the 
Secretary can make this required determination. As part of this 
process, on April 29, 2004, Treasury submitted to the Federal 
Register a request for comments on whether to extend the 
``make-available'' requirement. Comments will be accepted until 
June 4, 2004. We encourage any who have views on these 
questions to respond to this request for comments, with as much 
detail as they can provide.
    Second, Treasury is required to report to Congress by June 
30, 2005, on specific issues associated with the Act and its 
purposes, including the effectiveness of the program and the 
likely capacity of the property and casualty insurance industry 
to offer insurance for terrorism risk after termination of the 
program.
    Together with this analysis, Treasury is also required 
under TRIA to compile information on premium rates for property 
and casualty terrorism risk insurance. To assist in the 
evaluation of the Act's effectiveness, to meet TRIA's premium 
information collection requirement, and to ensure we do so with 
a comprehensive view of the markets as much as possible, 
Treasury has contracted with an outside research firm to 
conduct a comprehensive survey with a nationally representative 
sample of policyholders and insurers.
    Each company chosen for the survey is to be contacted at 
least twice and possibly three times to capture effects of 
changes in TRIA's insurer deductibles in successive program 
years. Surveys for the first wave were mailed out in late 2003 
and early 2004 to over 30,000 policyholders and almost 500 
insurers. This phased structure will allow us to move beyond 
snapshots and anecdotal evidence to obtain a broader and more 
dynamic view of the conditions in the marketplace.
    The completed survey results, as well as consultations with 
a wide range of interested parties, will form the basis for 
Treasury completing its report to Congress on the effectiveness 
of TRIA and the capacity of the property and casualty insurance 
industry to offer insurance for terrorism risk after 
termination of the program by the June 30, 2005, deadline set 
by Congress.
    While we hope that we will never be called upon to trigger 
coverage under TRIA, this program stands ready today, as it has 
from its earlier days, to meet its responsibilities. The basic 
goal of TRIA was to develop a temporary backstop for property 
and casualty terrorism risk insurance so that private markets 
would have a chance to adjust. We encourage insurance 
companies, State insurance regulators, other financial service 
providers, and other interested parties to think creatively in 
this regard, and to consider what methods can be employed to 
allow for broader private sector involvement in the market for 
managing property and casualty terrorism risk. Treasury looks 
forward to completing our review of the effectiveness of TRIA 
and considering the many complicated issues presented to us in 
a thoughtful manner with the best information that can be 
obtained in the weeks and months ahead.
    Thank you, and I will be happy to answer questions.
    Chairman Shelby. Thank you, Mr. Secretary.
    Secretary Roseboro, in your written testimony that you 
alluded to and that has been made part of the record, you 
highlight anecdotal reports of low take-up purchase rates for 
TRIA coverage. Why do you think there have been low take-up 
rates?
    Mr. Roseboro. At this point in the analysis----
    Chairman Shelby. By take-up rates, a lot of people know, 
but explain what you mean.
    Mr. Roseboro. By ``take-up,'' we mean the percentage of 
people who have availed themselves of paying for the terrorism 
risk insurance coverage provided under TRIP, and some of the 
private sector surveys that we have seen put that number 
between 25 to 30 percent in general. Some of the theories that 
we are looking at in terms of explaining this low ``take-up'' 
rate again have to do with risk perception by the businesses as 
to whether or not they believe they are in a targeted area, or 
targets themselves individually, if not in a targeted 
geographic location. How much of it has to do with the cost of 
the terrorism coverage is an important component that we will 
be examining, and that is one of the critical, important 
questions that we are asking in the surveys, and in our 
conversations with stakeholders and the industry as to what is 
driving that low participation rate.
    Chairman Shelby. Would you discuss in a little more detail 
this morning the process that the DOT will use to make the 
``make-available'' determination, the steps you will go 
through.
    Mr. Roseboro. The ``make-available'' determination, as a 
number of other Senators mentioned, is very important. As we 
have been discussing with people in the industry over the last 
several months, over the last year, the importance of coming to 
a decision on ``make-available'' sooner rather than later is 
understood. As I indicated, we have gone out for public 
comment, and I would characterize that as not an initial step, 
but a latter step in terms of looking to come to a 
determination. It is our intention once that comment period 
closes June 4, to come to a conclusion as soon as possible.
    Chairman Shelby. Are you confident that you will have at 
the Treasury the requisite information to make the judgment 
that you need to make here?
    Mr. Roseboro. For this initial step, yes, sir.
    Chairman Shelby. Secretary Roseboro, when TRIA was passed, 
it was supposed to be a stopgap measure that has been talked 
about here, that would allow the insurance industry some time 
to come to an understanding of how to price the risk of 
terrorism. The written statements of many of the witnesses 
indicate that the insurance industry is not yet willing or 
capable to step back into the field. In order to have a proper 
discussion about the future of the TRIA Program, I believe we 
need to have an understanding as to when if at all we can 
expect the insurance industry to provide terrorism coverage 
without Federal assistance. In order to address the question, I 
believe we need to examine the basics of the business of 
insurance.
    Secretary Roseboro, what are the principal factors 
considered by insurance firms, in your understanding, when they 
make the decision to insure a particular type of risk?
    Mr. Roseboro. This is a particularly daunting challenge 
still for the industry, and again, something that we will be 
focusing on significantly in our survey.
    Chairman Shelby. But this goes to the heart of what we----
    Mr. Roseboro. Absolutely. To form some type of actuarial 
basis to calculate the risk, and appropriate pricing for that 
risk for the type of outlier events we are looking at is still 
a major challenge, and in our conversations that answer is not 
there as of yet. Again, we will continue to look.
    In addition to the pricing issue, part of the review 
process is looking how the market has evolved and finding if 
there are other mechanisms to share risk. One of the areas, as 
an aside to that, we are looking at are the developments--and 
again, this is on the margin and not going to be an immediate 
solution--in the catastrophe bond market, where the 
securitization of risks of hurricanes and earthquakes is 
beginning to evolve. And again, that process is still just on 
the margin, and still very new.
    We were recently made aware that, I believe it was last 
year, a castastophe bond of that type and that family was 
utilized to hedge the risk of loss due to terrorism connected 
with the World Cup soccer matches in Germany in 2006, and that 
bond received an investment grade. Again, these securitizations 
are exceptions and on the margin.
    Chairman Shelby. Or perhaps the Olympic Games in Athens?
    Mr. Roseboro. Yes, although we have not heard of any 
catastrophe bond insurance taken out for the Olympics, but 
obviously that is of very much concern in terms of the dynamic 
of terrorism risk.
    Those are definitely some of the challenges the industry 
faces. There is no model that can predict a terrorist event, 
but those are the types of things we will be looking at and 
discussing with industry participants as to the likely 
evolution timeline of risk sharing, risk dispersion in the 
industry through financial----
    Chairman Shelby. Are you saying that insurance firms, right 
now as we sit here, cannot conduct such analysis? In other 
words, they do not have the right model yet, and if so, will 
they be able to at the end of the program? Will they ever be 
able to do this? I mean that terrorism is a new concept, a new 
phenomenon that insurance people have not had to deal with in 
the past.
    Mr. Roseboro. I would say right now I would doubt seriously 
if they are in a good position to have confidence in a 
particular model. A lot of good work that is going into this, 
but as to how long this process will take, that will be the 
focus of our surveys and discussions with the market as to what 
is a realistic expectation of how this can evolve.
    Chairman Shelby. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Thank you, Mr. Roseboro.
    We all know that the TRIA has a hard expiration date of 
December 31, 2005, and that has caused us and the industry some 
planning problems at least. One area I am particularly 
concerned about is the worker's compensation system. As 
Commissioner Williams of Delaware notes in her written 
testimony, ``worker's compensation coverage is defined by State 
laws, and State laws do not typically allow for exclusions for 
terrorism coverage.'' In my own State, the burden of worker's 
compensation is borne by one mutual insurance company created 
by the State. So without this Federal backstop or the ability 
to exclude coverage for terrorism, the worker's compensation 
program is going to be seriously compromised.
    What is your view on this issue, and what might be done to 
try to allay this situation?
    Mr. Roseboro. Several months ago, we started asking 
questions of people in the industry coming in to see us as to, 
besides other issues, whether or not there were any operational 
considerations that we had to factor in here in terms of policy 
renewals and looking forward. It was brought to our attention 
that the insurance business calendar does not necessarily sync 
up well with the calendar year the statute provided. So, we are 
well aware of that situation and are looking seriously at what 
problems this potentially could cause. If there are going to be 
significant problems, or there cannot be conditional exceptions 
worked out with the State regulators in terms of the insurance 
business cycle, then is there anything we need to do in terms 
of our timeline in making a decision? That is something that is 
at the front of our radar screen and we are looking to factor 
it into this process.
    Senator Reed. This area of worker's compensation, I ask you 
to spend particular attention, because unlike other insurance 
where the company itself can verify the terms and you can 
negotiate, typically as we all know, these are State laws which 
would require legislative action by States to make changes. My 
concern is that that will not take place, and we could find 
ourselves in a very difficult situation. I would urge you to 
pay particular attention to worker's compensation.
    When this issue came up 2 years ago or so, I was surprised 
when the worker's compensation insurers came to me, because we 
are talking about property insurance, but if you stop and think 
about it, if there is a catastrophic event in one particular 
area, one company, those survivors are typically covered by 
worker's compensation, so we have to think more seriously about 
that.
    We all understand there is an increased risk of terrorist 
incidents. In fact, the President has basically said, in 
response to questioning, that he anticipates something might 
happen. I do not think they are looking at this hard date as a 
planning guide in terms of their potential threat to the United 
States, the terrorists. Also, as you mentioned, the rolling 
expiration dates of policies, the Treasury study is not due 
until June of next year, and so valuable information that might 
be gleaned by that study, 6 months basically between then and 
the expiration date.
    From the Administration's point of view, what harm would 
there be in a short-term extension of the TRIA?
    Mr. Roseboro. Well, again, at this point we have drawn no 
conclusion about extension, nonextension, or whether a short-
term extension would be useful, whether an extension with 
modifications should be considered. But that is what we would 
be focusing on, those types of issues, in doing the analysis as 
to where it would be most useful, because again, it comes back 
to what has been the evolution in the market, keying in on 
availability and affordability of insurance. That is why we, 
when we reach out to the market, we are not only asking for 
``yes'' or ``no'' in terms of renewal, non-renewal, but also if 
there is to be a renewal, are there modifications that could 
continue, either that we can do, or that we could recommend to 
the Congress to do, that could enable the industry to continue 
to move forward if sufficient progress has not been made.
    Senator Reed. Just one final question, Mr. Roseboro. Can we 
presume that this recommendation to us will not be any earlier 
than next summer when the report is finished, or would you 
anticipate a recommendation to us sooner than that? We have a 
calendar which is too difficult.
    [Laughter.]
    Mr. Roseboro. We would hope to, again, factoring in those 
considerations which may, given their importance and the 
findings that we start to see in the next few months as survey 
information becomes available. We are not looking at being 
inflexible about our calendar. Again, we are working on that 
timetable now, but as with the ``make-available'' situation, if 
the evidence starts to point for decisions being needed to be 
made earlier, rather than later, because of complications to 
the industry which could undermine the support that the Act was 
set to foster, then we will adjust accordingly.
    Senator Reed. Thank you very much, Mr. Roseboro.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Let me just be sure I understand the timetable you are 
talking about, Mr. Roseboro. You have a comment period on the 
``make-available'' which expires June 4?
    Mr. Roseboro. Yes, sir.
    Senator Bennett. If I understood you correctly, you were 
viewing the end of that as not the beginning of your 
decisionmaking process, but rather toward the end?
    Mr. Roseboro. That is correct.
    Senator Bennett. I can understand that you do not want to 
make a decision before the comment period is up, and June 4 is 
coming right up. If you got a letter from some of us on this 
Committee--we are circulating drafts among us, Senator Dodd and 
I and others, urging you to act as quickly as you could after 
June 4--would you be appreciative of that kind of statement on 
our part?
    Mr. Roseboro. I would be appreciative of any letter from 
this Committee as a general rule.
    [Laughter.]
    Senator Bennett. Not to steal Senator Dodd's thunder, but I 
think you can anticipate such a letter signed at least by the 
two of us, and we are going to get as many additional 
signatures as we can find.
    I am encouraged by the fact that you are not using the 
comment period as a delaying tactic as sometimes happens, where 
a bureaucracy says, ``Well, the comment period will not even be 
over until June 4, and we are going to require 90 days to read 
to read all the comments.'' So, I want to underscore the fact 
that now is the time to be reading them, and close of business 
on June 5 would be a nice time for us to have a----
    [Laughter.]
    --a response.
    Mr. Roseboro. A little ambitious, but it certainly will not 
be months. It may not be days, but certainly not months.
    Senator Bennett. I understand that.
    I think all the other issues have been covered, Mr. 
Chairman. I just wanted to make that point.
    Chairman Shelby. Thank you.
    Senator Dodd.
    Senator Dodd. Thanks, Mr. Chairman.
    You had mentioned at the outset, the Terrorism Risk 
Insurance Program--the staff at Treasury deserves a great deal 
of credit, by the way. They have done a lot of work in a short 
period of time, Mr. Chairman, and sometimes we forget to 
recognize the people who do not appear as witnesses, who do not 
get to be quoted in the press about how these things are 
working, but they have done a very fine job. Out staffs have 
worked very closely with them, and we are very appreciative of 
the work. So please communicate to your staff how much we 
appreciate what they are doing.
    There is a draft of a letter moving around here, and that 
Senators Bennett Corzine, Schumer, and I will be sending to 
you, and we are circulating it among our colleagues to see if 
there is some additional interest. I think you received a 
similar letter from the House. Congressman Blount I think and 
others have expressed a similar interest. And again, June 4 is 
coming up pretty quickly, but just a couple of questions. One, 
are you receiving any comments in opposition to the----
    Mr. Roseboro. Yes, we have received comments in opposition, 
not only to ``make-available,'' but also, even though the 
comment period is about the ``make-available,'' we are 
receiving more comments about the renewal of TRIA or non-
renewal of TRIA----
    Senator Dodd. This is about ``make-available.''
    Mr. Roseboro. We have seen a few, yes, a few.
    Senator Dodd. But the overwhelming majority are in favor of 
the ``make-available?''
    Mr. Roseboro. Yes, and again, with the comment period still 
open I do not know what the----
    Senator Dodd. Give me a public policy argument as to why 
you would not want to extend the ``make-available'' period? 
What are they saying?
    Mr. Roseboro. Again, this is a snapshot, but as to those 
who would be against it, the reasoning ties to the overall 
program and the low ``take-up'' issue as some evidence that it 
is not needed. Is this just a barrier to whatever is needed or 
is the private sector market operating efficiently?
    Senator Dodd. But it mostly has to do with the underlying 
legislation?
    Mr. Roseboro. Yes. Most of the comments are directed more 
at the underlying legislation.
    Senator Dodd. I gather you understand the significance of 
trying to get an early answer on this. You do not have to wait 
until September 1. The law says by September 1.
    Mr. Roseboro. Absolutely, sir. Again, as we have been 
discussing this issue with industry participants over the 
months, we have heard and understand the significance of this 
issue to the industry.
    Senator Dodd. You are hearing us up here, obviously. From 
an industry standpoint it is very, very important.
    And the reauthorization issue, Mr. Chairman, I do not know 
how we are going to proceed on that, but again, this is a 
similar question. While it is not until June 2005, as we have 
all learned, for planning purposes, from a business standpoint, 
having some clear indication of what Congress is going to do 
one way or the other, it seems to me, becomes very, very 
important, and I do not know what the intentions are of the 
leadership in terms of these kind of issues. I do not know if 
the House is going to move on this or not. Obviously, they have 
an easier time of moving legislation because of the rules of 
the House, but would you agree, Mr. Roseboro, that it is 
important that by the end of this legislative session, that we 
have a clear indication of whether or not we should reauthorize 
this program beyond June?
    Mr. Roseboro. In terms of the overall program, we really 
feel strongly and believe that to offer you the best advice and 
counsel possible, we need to do this thorough analysis. We 
think the approach that we are taking, reaching out, again, to 
as many as 30,000 policyholders and 500 insurers, will give us 
a good basis in fact to give you a credible picture of the 
market, of the evolution that is going on in the market, and 
what the necessary needs will be. Until we have that, we will 
not be serving you well in terms of advising you on this issue.
    Senator Dodd. Let me jump quickly, Mr. Chairman, just ask 
about rates, and I know there is no definitive evidence at this 
point of who is buying terrorism insurance and the 
affordability of such insurance. Several studies have been 
conducted recently. In one study, Mr. Chairman, conducted 
Marsh, it states that take-up rates, that is who is purchasing 
terrorism insurance, are consistently rising as the prices 
continue to decline. I wonder if you would share with us 
whether or not you believe this analysis is correct, and 
whether or not you believe without the total backstop provided 
by TRIA, if this trend would continue? Are you familiar with 
the Marsh study?
    Mr. Roseboro. Yes, yes. Again, looking forward, the 
information that we collect in our study will help validate, 
invalidate, contradict, and supplement, some of these private 
sector snapshots to date.
    From a price perspective, the information we have is that 
prices have been coming down. However, this is relative. They 
are still higher than they were pre-September 11, not 
surprisingly.
    Senator Dodd. Is there any doubt in your mind what would be 
happening in the absence of TRIA. What would have happened?
    Mr. Roseboro. I think it would have been detrimental for 
the economy in the absence of TRIA. It was definitely necessary 
to have this program to provide stability and support for 
economic development. So in terms of TRIA's mission, we believe 
it was a success and fulfilled. As we look forward now, the 
critical issue, is whether the market is ready to stand on its 
own two legs or not, and that is the critical question we are 
asking now. But we absolutely believe TRIA was necessary, and 
did what Congress intended it to do.
    Senator Dodd. The overwhelming amount of evidence you are 
receiving to date from industry is that they would like to see 
this renewed, that it is critical for them to have this program 
remain in place for at least another couple of years?
    Mr. Roseboro. Definitely as to the ``make-available'' 
extension. Again, as to the broader surveys, it is not clear, 
whether the information we have received to date is truly 
representative, or rather it is the case of a vocal minority. 
We want to be very firm in terms of understanding the broader 
industry and its dynamics and effects.
    Senator Dodd. Thank you.
    Mr. Chairman, I would ask unanimous consent that this draft 
of a letter from Senator Bennett and I be included in the 
record.
    Chairman Shelby. Without objection, it will be made part of 
the record
    Senator Dodd. Thank you, Mr. Chairman.
    [The letter follows:]
    Chairman Shelby. Senator Allard.
    Senator Allard. Mr. Roseboro, I am going to paint a 
scenario, and I would like to have you comment on it. Right now 
our economy is doing well. We are in economic growth, and if 
you look at all the statistical figures, it seems to me that if 
we were ever to look at a time when we were beginning to turn 
this over to the private sector, you would do it during a time 
when the economy is doing well and growing. It seems to me that 
once a sector of businesses become dependent on some subsidy 
from the Federal Government, they do not like to change it 
because it means, in this case, if they do not get that 
subsidy, then there is going to be an increase in premiums 
which has an adverse impact on demand, and makes it more 
difficult for them to reach the bottom line, something like the 
Farm Program. We have seen what has happened with the Farm 
Program subsidies. I think there will always be a demand from 
the industry for this subsidy because it is going to make it 
more difficult for them to market their product because the 
price of it has to go up when you do that.
    What do you see us being able to do in the next year or 2 
or 3 years to make this turn over more to the private sector 
with less involvement from the Federal Government?
    Mr. Roseboro. In addition to assessing, as you characterize 
it, whether the need still exists and can the industry adapt 
without this type of support?
    Senator Allard. Let me just stop you right there. How are 
we going to measure needs, just by demand by the industry, or 
do you have some other way of measuring needs? I mean these 
things have to be thought about. Go ahead.
    Mr. Roseboro. Yes, absolutely. Again, there will be a 
number of factors in the broader survey that we will try to get 
a handle on as to the need. But, thinking back to the initial 
program and why it was necessary and what were the clear 
impediments, the questions as to whether economic development 
projects are being impeded because of the inability to attain 
this type of coverage is one of the obvious criteria we will 
look at, as well as how that has evolved over the last 3 years 
in going forward.
    Are there reasonable substitutes or adjustments that could 
be made outside of a renewal of TRIA that will work just as 
well, if not better, in terms of moving the industry forward if 
it still needs a boost? We would also be looking for those 
types of adjustments, whether they have to do with this 
financial information, or possibly invovle regulatory changes 
in terms of reserves. Those are the types of issues we will 
further explore in terms of alternatives, not looking at this 
as a binary decision, leave the TRIA as it is or not; but, what 
else could be done if it is assessed that the market still 
needs the support in order not to impede economic development.
    Senator Allard. Actually, the legislation says that you 
will make a decision by September 1, I think, is that correct?
    Mr. Roseboro. I think it uses the word by September 1.
    Senator Allard. By September 1. I understand the need to 
make a decision early so that companies can respond with their 
policies and whatnot as they go through a renewal period here, 
and I can understand that need. Then the program is supposed to 
stop, the way we have drawn it up, on December 31, 2005. How do 
you see us if we were to phase this out over time? How could we 
do that?
    Let us assume the decision is, we get into this year, it is 
obvious our economy is continuing to do well. What mechanisms 
could we put in the legislation that would phase this program 
down and move it so that we were before September 11, where we 
relied on the private sector to provide this coverage on its 
own without a subsidy from the Federal Government?
    Mr. Roseboro. That is a very good question, especially in 
regard with the September 1 ``make-available'' and how we are 
looking at just that process. We look at the decision that will 
be made by or before September 1 as not necessarily by any 
means determining what the final report or our evaluation will 
be by the June 30, 2005----
    Senator Allard. I am already making the assumption that 
things are going to go well and we need to phase it down.
    Mr. Roseboro. What we are talking about here is, if there 
is going to be a change in policy or whatever the policy 
outcome is going to be, preparing the market for that outcome, 
so that there will be no surprise to the market. Being able to 
communicate, that is having a continuing dialogue with market 
participants between now and that period will be important in 
order to minimize surprises as to any change in policy course, 
and whether to continue Government action or non-Government 
action. We will work very hard with the Congress as well to 
make sure that there is effective communication going on in 
order to manage expectations, operational issues, and policy 
issues with this regard.
    Senator Allard. I am not sure I got an answer on that.
    Mr. Roseboro. I was going to say, in terms of any specific 
prescriptions that Congress could take at this point we are not 
prepared to offer those.
    Senator Allard. Will you be prepared to offer those at some 
point in time?
    Mr. Roseboro. Potentially, as we begin to get the survey 
data in and get a better picture, a moving picture of where the 
industry is headed or not headed. I would expect that we would 
have communications with this Committee as to what our findings 
would be. While we may not necessarily make those findings 
public as we go along, that would be something in private we 
would be more than happy to share with the Committee to help 
shape expectations and prepare for whatever policy initiatives 
would be appropriate.
    Senator Allard. The debate that is going to go on here is 
whether we make this a permanent program or not I think, 
because I think the more we extend it, the more it is going to 
become a program, and like I said in my opening comment, I 
think the industry has to be honest with us. If they going to 
start planning on this as a permanent program, they had better 
make that clear, so that in this debate we can understand.
    But I think right now the way the legislation was designed, 
it is a temporary program, and I hope that you will be prepared 
to come forth at some point in time during this debate when we 
have it in this Committee--you are not ready today--but we have 
to have some idea of how we could put in place to phase this 
program, because right now that is the policy of the Congress, 
and that is what is passed, and I think we need to be prepared, 
as that as an eventual--I do not see how it cannot be a part of 
the debate, and if you are prepared to give us some 
recommendations, I think would add substantially to the debate, 
so I would encourage you to provide that to the Committee.
    Mr. Roseboro. I will work on that, Senator.
    Senator Allard. Thank you.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman.
    Let me go back and ask a question if I can, Mr. Secretary, 
about why do you think the private market has not responded and 
filled in the void over the last couple of years?
    Mr. Roseboro. From of the evidence we have seen to date--
and again, we do not necessarily believe it is enough data, 
which is why we want to continue to do the survey, to get a 
better handle on that question--there is, on the surface at 
least right now, several dynamics that are occuring: From the 
insurance side, an inability to model and adequately price 
coverage; from the policyholder side, behavior based on whether 
or not there is an expected value or a risk perception that 
there is not a need for coverage. Whether policyholder behavior 
has to do with a geographic area, as some not living in a major 
urban area may feel they have less need of this coverage than 
those living in a major urban area; to price sensitivity and 
the feeling that the coverage still is too expensive; or to the 
feeling that there will still be help if a major terrorism 
event occurs again, impact whether or not the entity has bought 
the insurance.
    So we have heard of these different motivations, or 
theories about these different motivations from all sides. And 
again, that is why we feel it is important to do a thorough 
survey analysis of this process to get a handle on what is 
driving either the development or nondevelopment of the private 
sector coming back and being able to offer this product, which 
is in demand by some policyholders.
    Senator Carper. I recall when we debated this issue a 
couple of years ago, there were concerns relating to economic 
development, job creation, particularly with respect to the 
construction of major projects, stadiums, arenas, convention 
centers, that kind of thing. Have we taken a look to see what 
effect the adoption of this legislation has had on encouraging 
those projects to go forward?
    Mr. Roseboro. We have, and we will continue to do so. The 
evidence and information we have so far is that TRIA has been 
supportive of enhancing the economic development, allowing 
major projects go forward at a reasonable cost and reasonable 
financing. Again, the question is, is it still needed from here 
going forward? That is what we will be intentionally looking 
at, and taking several periodic surveys of the market to see if 
there is progress, if there is development, if there is a 
change in pricing structure, if there is a change in demand.
    But up to date, we would say TRIA has been very supportive 
of those types of projects.
    Senator Carper. All right. To change gears just a little 
bit if I could. I do not have a pure recollection of this, but 
I seem to recall some discussion 2 years ago when we were 
looking at the issue of whether or not group life insurance 
should enjoy participation in this program. My recollection--
you may have spoken to this during your testimony--is that we 
essentially said that Treasury should do a study of the effect 
or impact on group life insurance. Do you recall what the 
outcome was of that?
    Mr. Roseboro. Yes.
    Senator Carper. Just give us a little bit of background 
first, a little bit of a primer and then what happened.
    Mr. Roseboro. As I understand it, group life insurance was 
not included in TRIA in terms of coverage, but Treasury was 
tasked with the responsibility to a study whether or not it 
would be appropriate to include group life insurance. And then 
this is key in terms of what led to Treasury's conclusion on 
this. As the Act was written, the criteria that group life 
would have had to meet would have been that both the 
reinsurance as well as insurance available to consumers would 
have been unavailable. As was the case then, as I believe it is 
now as well, reinsurance is unavailable. There is a big problem 
with that without a doubt.
    However, group life insurance was still available, and 
actually still is now available at competitive rates, in still 
a pretty competitive market. Treasury ruled against adding 
group life into TRIA principally because, based on the Act, it 
did not fit the two-prong criteria of unavailable reinsurance 
and insurance to consumers, and insurance is available.
    However, part of the looking forward study, is to say that 
not only is it available now, but will it also continue to be 
available. So, as Treasury continues to look at the overall 
issue, we will continue to look at whether there are any 
changing dynamics on the group life side, that even though 
insurance is available now, there could be problems down that 
road, so that will be an aspect we will continue to look at.
    Senator Carper. Good. I am glad to hear that you are doing 
that, and thanks very much.
    Chairman Shelby. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Most of the things have been covered, but can you give us 
an update on the financial institutions, what steps they have 
been taking to guard against terrorist threats--the financial 
institutions that absolutely need this type of coverage if they 
are going to lend money to programs.
    Mr. Roseboro. That is something, sir, I will have to get 
back with you on, in terms of any general pattern. Again, there 
have been differences along geographic lines in terms of the 
financial institutions or other institutions taking up 
coverage, as opposed to not taking up coverage, depending on 
where they are located. But just in terms of coverage for the 
terrorist event, disrupting them, I promise I will have the 
office get back to you on any more specific patterns that we 
have seen. And that, again, is something that the first round 
of surveys that has just gone out may show, but and all of the 
answers have not come back yet.
    Senator Bunning. I would appreciate that because that has a 
great deal to do with whether the private sector obviously gets 
back into the business, which they are not presently doing. 
And, obviously, if the Federal Government gets out of the 
business, who is going to fill the gap. That is all of our 
concerns up here. The reason we passed this to start with was 
because we were convinced that the private sector was 
frightened about the prospects of covering so much of a project 
or a risk that they would not do it unless there was a backstop 
by the Feds.
    Mr. Roseboro. Yes. On that basis--I am sorry. I think I 
misunderstood the question--the financial institutions are 
there, again, but they are indicating to us that they need TRIA 
to stay there, and that is what we will continue to look at and 
broaden out, in order to see how widespread that is, whether or 
not there are any alternatives, how they would adjust their 
pricing, how they would continue to make the coverage available 
and whether or not there would be any geographic or industry 
significant changes in the absence of the Government backstop.
    Senator Bunning. In other words, can you give me a personal 
or a Treasury opinion if we did not renew or extend this 
program? Do you think that the private sector would get back 
into the business or not?
    Mr. Roseboro. Personally, again, from Treasury's 
standpoint, we really need to do the survey. Personally, I 
think it would be cherry-picking type of situations, where in 
some cases, yes; some cases, no.
    Senator Bunning. In other words, they would insure in 
Paducah, Kentucky, and they would not insure in New York City.
    Mr. Roseboro. Exactly. Or if they insure in New York City, 
it would be at rates that ensures policyholders would be 
tempted to go without coverage. Again, the biggest problem 
comes back to pricing. If they can be comfortable with pricing, 
I think you can see more people come into the market and 
competition evolve such that things would be back to more of a 
normal basis.
    Senator Bunning. I am looking forward to your survey and 
the return of the data from your insurers and your perspective 
buyers of that insurance without a backstop or with one because 
I think that is very important for this Committee to have.
    Thank you.
    Mr. Roseboro. Absolutely.
    Chairman Shelby. Mr. Secretary, thank you for your 
appearance here.
    Senator Schumer. Mr. Chairman.
    Chairman Shelby. Oh, we have Senator Schumer here with us.
    Thank you.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman, and I appreciate 
it, and thank you, Mr. Secretary. I apologize for being late.
    As you probably know, I was one of the people who pushed 
hardest for this insurance. Obviously, coming from New York 
City, it is crucial to us. Let me just make it clear. This is 
not an ``if'' situation for New York City and many other large 
cities. Without terrorism insurance, our economy will suffer, 
it will call into doubt whether new construction, whether 
rebuilding, whether the return of downtown New York will 
happen.
    And so what concerns me here is Treasury's attitude, which 
I guess I call, somewhat charitably, lackadaisical on this 
issue. Here is what I am worried about. Obviously, the renewal 
for the next year to ``make-available,'' you said earlier you 
would move on in the next 3, 4 weeks, after the comment period 
ends.
    Mr. Roseboro. As soon as possible, yes, sir, after the 
comment period ends.
    Senator Schumer. That is crucial. But I am really concerned 
that the time table for renewing the bill, as I understand it, 
the report will not be issued, and we will not even be able to 
get started on this until next summer, and insurance contracts 
are not written to, you know, if you say it is okay to have 
terrorism insurance on July 15, that does not mean, okay, by 
July 30, everyone signs up and everyone lives happily ever 
after. There are often 2-year contracts or longer. There is 
uncertainty. Builders will not plan to build.
    I am extremely concerned about the time table. Why can we 
not speed this up? Do you see any dangers of waiting until next 
summer to make a decision based on this information as to 
whether we should renew terrorism insurance?
    Mr. Roseboro. Treasury takes this critically--it is very, 
very important, sir.
    Senator Schumer. Well, we have not--in all due respect, and 
I will let you finish--we have not heard from Treasury. People 
go into Treasury and do not get any sense of alarm or any sense 
of real concern. We hear nothing. You have not taken a position 
on the ``make-available.'' You have not taken a position on 
whether we need to continue terrorism insurance. This took 
back-breaking work, and it happened at the last minute, and, 
frankly, the reason, I guess I am a little dubious, is that 
Treasury had to be pushed, and pushed, and pushed by some of us 
on both sides of the aisle, but by their friends in private 
industry to get this done at the last minute last time.
    I would like to hear your concern, and particularly I would 
like to hear whether you think it is essential or you think we 
could do fine without it, but more importantly I would like you 
to address the time table--why do we stretch out the time 
table? And even if we should renew it next fall--the fall of 
2005--we will do untold damage to the economy in large parts of 
the country.
    Mr. Roseboro. From the date the bill was signed, Treasury 
has stood ready to execute its responsibilities, and the policy 
staff, especially the career staff, has worked very hard to 
make sure there would never be a problem implementing, if 
needed. Fortunately, we have not needed it yet.
    As we have worked, given the Act's time tables given to us, 
we have made adjustments where proven necessary, to move things 
along. As discussed with the ``make-available'' provision, the 
Act indicates the Secretary decide by September 1. As we have 
been talking to people in the market----
    Senator Schumer. You mean for the ``make-available.''
    Mr. Roseboro. Yes, sir, ``make-available.'' We have been 
having discussions with people in the industry, the market, 
hearing from people on the Hill for months, if not over the 
last year, about the importance of this. We have been having 
discussions with people in the industry about the operational 
timing issues, which you mentioned, and we are well aware that 
the Act, as written, does not line up perfectly with the 
operational realities of the business cycle when decisions have 
to be made. So we have continued to work with State insurance 
regulators on possible scenarios. We have worked hard to gather 
the information necessary to provide the Committee and the 
Congress with the information it will need to make a judgment 
on going forward.
    Senator Schumer. Sir, I am asking you not whether you are 
providing information we need or talking to State insurance 
regulators, give me a reason why Treasury would not say 
forthwith that we should renew this bill, not just the ``make-
available,'' we should renew it, and we should renew it now, 
given that if we wait until the last minute--do you agree that 
if we wait until the last minute, we will disrupt the markets?
    Mr. Roseboro. That is what we are trying to determine, 
exactly where the markets are now and evolving to.
    Senator Schumer. Wait. You tell me one person in the 
industry who builds, who gives insurance, who tells you that 
waiting until next summer to begin renewing the bill will not 
disrupt the market. Can you name me a person?
    Mr. Roseboro. No one has told me that it will at this 
point. What the industry has engaged us on is the importance of 
the ``make-available'' decision, and that is where we have been 
focusing----
    Senator Schumer. Then, you and I are in different worlds 
here. No one in the industry has said to you that it would be a 
good idea to renew it this year, not next year--no one?
    Mr. Roseboro. The focus of industry contacts I have had, 
personally, has been directly for the ``make-available'' 
provision.
    Senator Schumer. What is your opinion on trying to get this 
renewed this year? Do you think we can afford to wait until the 
report is issued on June 30, 2005, to begin to decide this?
    Mr. Roseboro. At this point, given the information I have, 
I have no predisposition of whether or not it is necessary or 
not necessary to renew at this point. I see no evidence, at 
this point, that it is detrimental to the industry not to renew 
TRIA this year, sir.
    Senator Schumer. Can I send you some letters that say just 
the opposite of what you are saying?
    Mr. Roseboro. Please.
    Senator Schumer. And I would suggest you reach out to both 
the insurance industry and the real estate industry. Are you 
willing to ask them the question whether it would not be 
advisable to renew it this year?
    Mr. Roseboro. Absolutely, sir.
    Senator Schumer. My guess is you will hear an overwhelming 
loud and unqualified ``yes.'' If you heard that ``yes,'' just 
assume it, would the Administration be willing to push for 
renewal this year?
    Mr. Roseboro. With that ``yes,'' we, at Treasury, as again 
we have reached out for, we want to understand why. What are 
the dynamics calling for that?
    Senator Bennett. If I may, Senator, we have the witnesses 
that will make your point on the next panel----
    Senator Schumer. Thank you.
    Senator Bennett. --if you will let us get to them.
    Senator Schumer. But the witnesses on the next panel have 
about as much power over this as you or more.
    [Laughter.]
    This is the man with the juice.
    [Laughter.]
    Senator Bennett. The Chairman has returned.
    Chairman Shelby. I do not believe we have any other 
questions of you today, but we will leave the record open for 
any written questions because there is a lot of concern and a 
lot of interest, you can tell, by the audience that you brought 
with you today.
    Mr. Roseboro. I would be happy to respond to any of your 
follow-up questions.
    Chairman Shelby. We appreciate your appearance here today, 
and we look forward to working with you.
    Mr. Roseboro. Thank you very much, sir.
    Chairman Shelby. We are going to call up the second panel 
now.
    Ms. Donna Lee Williams, Commissioner, Delaware Department 
of Insurance; Mr. Richard Hillman, Director of Financial 
Markets and Community Investment, the U.S. General Accounting 
Office; Mr. J. Robert Hunter, Director of Insurance, Consumer 
Federation of America; Mr. Jack Degnan, Vice Chairman, the 
Chubb Corporation, testifying on behalf of the American 
Insurance Association and a coalition of property-casualty 
insurance trade associations; Mr. Christopher Nassetta, 
President and CEO of Host Marriott Corporation, who will be 
testifying on behalf of the Coalition to Insure Against 
Terrorism; and Mr. Jacques Dubois, Chairman and CEO of the 
Swiss Re America Holding Corporation.
    I welcome all of you to the Committee today. You have had 
the benefit of the Treasury's testimony here, through Mr. Brian 
Roseboro, and we will go from there.
    Please take your seat.
    Senator Schumer. Mr. Chairman, could I ask unanimous 
consent that my opening statement be placed in the record.
    Chairman Shelby. Absolutely. Without objection, Senator 
Schumer's opening statement will be made part of the record.
    Senator Carper, do you have something special----
    Senator Carper. Yes, we have a----
    Chairman Shelby. You have a special panelist.
    Senator Carper. Thank you. We have a special guest here 
from Delaware. I am pleased to welcome Donna Lee Williams, our 
Insurance Commissioner, who is nearing the end of her third 
term, and it looks like maybe her final term as our Insurance 
Commissioner. In some States, that is an appointed position. In 
our State, it is an elected position. She has been elected 
Statewide three times and has done I think a very fine job, and 
so I want to welcome here today.
    We are delighted that you are here. And she is here on 
behalf of The National Association of Insurance Commissioners 
and serves in a leadership role which enables her to come here 
and speak with special--I do not know if she brings the 
``juice,'' Senator Schumer, but brings a lot of thought and 
intellect to this job.
    Welcome, Donna Lee.
    Ms. Williams. Thank you very much.
    Chairman Shelby. I welcome all of the panelists again. Your 
written testimony will be made part of the record in its 
entirety.
    Ms. Williams, we will start with you. I hope you will sum 
up your testimony, briefly.

                STATEMENT OF DONNA LEE WILLIAMS

         COMMISSIONER, DELAWARE DEPARTMENT OF INSURANCE

                        ON BEHALF OF THE

        NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

    Ms. Williams. I will do the best that I can, sir.
    Chairman Shelby. Sure.
    Ms. Williams. Lawyers and elected officials like myself 
tend to be long-winded.
    Today, I want to make three basic points. And again I thank 
the Chairman and the Committee for allowing the Nation's 
insurance commissioners the opportunity to testify regarding 
this issue. I want to make three basic points today.
    First, there is still a need for the Federal Government to 
provide appropriate financial back-up to the private insurance 
market in order to assure that segments of our Nation's economy 
do not falter due to a lack of insurance coverage for 
terrorism. The insurance marketplace is not yet ready to take 
on the risk of providing coverage for acts of terrorism on its 
own.
    Second, the Treasury Department should extend the ``make-
available'' requirements in TRIA so that businesses across 
America will know that they can purchase the terrorism 
insurance coverage they need to sustain a healthy economy.
    Third, Congress should act this year to extend coverage 
under the Terrorism Risk Insurance Program or enact a 
comparable Federal backstop for acts of terrorism, at least 
through 2006, because the commercial insurance markets are not 
yet prepared to underwrite sufficient terrorism coverage 
without a Federal backstop.
    Following the enactment of TRIA, the NAIC appointed a 
Terrorism Insurance Implementation Working Group of State 
Regulators that has worked very closely with the Treasury 
Department to successfully implement the Act's provisions, as 
well as to monitor the impact it has had on the insurance 
marketplace. Although we observe that the take-up rate for 
terrorism insurance coverage mandated under TRIA has not been 
widespread, coverage is available for those industries that 
want to purchase it. We believe the presence of the Federal 
backstop has provided a measure of comfort to the insurance 
industry, and has encouraged insurers to offer coverage for 
acts of terrorism that it might not have made available in the 
tragic wake of the tragic events of September 11.
    Congress can help us continue the progress made in 
restoring the market for terrorism insurance by doing two 
things. First, encourage the Secretary of the Treasury to make 
an early determination that he will impose the ``make-
available'' requirement of TRIA to all participating insurers. 
The second is for Congress to act this year to extend the 
expiration date contained in TRIA to a future date that is 
consistent with the business cycle for terrorism insurance 
renewals.
    Insurance regulators believe extending the ``make-
available'' requirement in TRIA through 2005 will help ensure 
marketplace stability by continuing the availability of 
terrorism insurance in all parts of the United States. If 
insurers were not required to offer coverage, areas of low risk 
of losses from acts of terrorism would probably experience 
little disruption. However, those areas of our Nation and 
prominent cities with attractive targets for terrorism activity 
might face availability and affordability problems. This would 
have a negative effect on their local and regional economies, 
particularly with real estate development.
    Earlier this month, insurance regulators began receiving 
contingency filings from the Insurance Services Office, the 
Nation's largest advisory organization. In the event Congress 
does not extend the TRIA program this year, these policy form 
filings would reinstate terrorism coverage limitations that 
were in effect prior to TRIA's enactment for any policies 
written for coverage that extends into 2006. In addition to 
protecting insurers from additional terrorism liability, these 
filings demonstrate the insurance industry is not willing to 
assume the risk of terrorism losses by themselves at this time.
    The NAIC's Terrorism Insurance Implementation Working Group 
believes TRIA's ``make-available'' requirement has contributed 
to the overall effectiveness of the program during the 
program's first 2 years. American businesses, both large and 
small, have been offered choices they might not otherwise have 
had. Through the ``make-available'' provision, TRIA has given 
them the opportunity to make an informed choice regarding the 
purchase of coverage for acts of terrorism.
    One of the elements the Treasury Department is required to 
consider is the capacity of the insurance industry to accept 
the risk of losses from acts of terrorism. The NAIC's data 
shows 2003 was a profitable year for property and casualty 
insurers. However, policyholder surplus declined each year from 
1999 through 2002. The Treasury Department must consider 
whether the industry is willing to put its capital at risk. We 
believe the answer is no.
    Insurers in the marketplace at large are finding it very 
difficult to accurately price coverage for acts of terrorism. 
Unknown frequency, coupled with the potential for severe 
losses, makes coverage for acts of terrorism one that insurers 
might choose to avoid, if given the opportunity. Until insurers 
and their reinsurers become more comfortable that Government 
efforts are adequate to protect citizens from terrorist acts or 
at least become more predictable than they are today, they will 
be reluctant to accept complete risk transfers from American 
businesses. In particular, those businesses viewed by insurers 
as having greater risk of terrorism losses will have trouble 
finding insurance.
    Consequently, the NAIC's Terrorism Insurance Implementation 
Working Group urges the Treasury to extend the ``make-
available'' requirement. The Working Group met in conference 
call yesterday. We are also preparing a draft in response to 
the request for comments issued by Treasury.
    In addition, the NAIC urges Congressional action this year 
on a Federal solution to ensure continued marketplace stability 
when TRIA expires at the end of 2005. Because some terrorism 
risks are largely uninsurable without a financial backstop, 
State regulators are very concerned that significant market 
disruptions will develop before TRIA's expiration. This is due, 
in part, to the deadlines contained in TRIA which do not match 
the business cycle for insurance renewals.
    As early as September of this year, insurers and their 
policyholders will be required to make decisions regarding 
coverage that goes well into 2006. At present, annual policy 
renewals with effective dates of January 2, 2005, or later must 
contemplate that there will be no Federal backstop for any 
losses occurring in 2006. For this reason, State regulators 
anticipate widespread insistence by insurers that conditional 
policy exclusions for terrorism coverage be included in renewal 
policies starting this year. We encountered this scenario in 
the aftermath of September 11, which prompted the creation of 
TRIA.
    To address this situation, Congress could simply change one 
line of TRIA. Extending the program termination date until 
December 31, 2007, would enable Congress to receive the report 
from Treasury on June 30, 2005 and allow roughly 15 months to 
digest and debate any future Federal role in backstopping acts 
of terrorism.
    Other alternatives would be to extend the coverage period 
in the program without extending the actual effective date of 
the law or to develop a different type of Federal backstop for 
acts of terrorism that provides some form of funding for the 
risk of losses resulting from the acts of terrorism.
    In summary, we strongly urge Congressional action to extend 
TRIA this year. We strongly urge Treasury to extend the ``make-
available.'' The State regulators stand ready to assist 
Congress in developing appropriate methods for continuing the 
Federal Terrorism Reinsurance Backstop. I thank you for 
recognizing the 
expertise in the State regulatory system and allowing us to 
participate in this debate.
    Chairman Shelby. Mr. Hillman.

                STATEMENT OF RICHARD J. HILLMAN

               DIRECTOR OF FINANCIAL MARKETS AND

                      COMMUNITY INVESTMENT

                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Hillman. Thank you, Mr. Chairman and Members of the 
Committee. 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 on the implementation of TRIA has two 
objectives.
    First, we described the progress made by Treasury and 
insurance industry participants in implementing TRIA.
    Second, we discussed the changes in the market for 
terrorism insurance coverage under TRIA.
    In short, 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.
    We also found that TRIA has enhanced the availability of 
terrorism insurance for commercial policyholders. However, most 
are not buying terrorism coverage, and those that have remained 
exposed to significant perils.
    Finally, we have learned that industry market participants 
have made no progress to date toward the development of 
reliable methods for pricing terrorism risk and little movement 
toward any mechanism that would enable insurers to provide 
terrorism insurance to businesses without Government 
involvement.
    More broadly, 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 benefitted commercial 
policyholders and major metropolitan areas perceived to be at 
greater risk to a terrorist attack.
    Prior to TRIA, we reported concerns that some development 
projects had already been delayed or cancelled 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 a 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 ``make-available'' coverage for terrorism be made on terms 
not differing from other coverage.
    However, despite increased availability of coverage, 
limited 
industry data suggest that only 10 to 30 percent of commercial 
policyholders are purchasing terrorism insurance. According to 
industry experts, purchases have been higher in areas 
considered to be at 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 the ones buying coverage. 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 may remain uninsured for 
significant risk arising from certified terrorist events, 
including losses involving 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 resulting from such events. 
As a result of these exclusions, even those policyholders who 
chose to buy terrorism insurance may be exposed to potentially 
significant losses.
    Nearly a year and a half after TRIA's enactment, we found 
that there has been little progress toward 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. According to 
industry sources, TRIA's ceiling on potential losses has 
enabled reinsurers to return cautiously to the market; that is, 
some reinsurers are offering coverage for terrorism risk within 
the limits of the insurers' deductibles and the 10-percent 
share that insurers would pay under TRIA.
    However, insurance experts said that without TRIA's caps on 
potential losses, both insurers and reinsurers likely still 
would be unwilling to sell terrorism 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 insurer insolvency. Not only has no private-sector 
mechanism emerged for supplying terrorism insurance after TRIA 
expires, but to date there has also been little discussion of 
possible alternatives for ensuring the availability and 
affordability of terrorism coverage after TRIA expires.
    Our report concluded Congress may benefit from an informed 
assessment of possible alternatives to TRIA, 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 risk after the termination of 
the program.
    As a result, as part of the response to the TRIA-mandated 
study, our report recommends to the Secretary of the Treasury 
that it consult with the insurance industry and other 
interested parties and identify for Congress an array of 
alternatives that may exist for expanding the availability and 
affordability of terrorism insurance after TRIA expires. These 
alternatives could assist Congress during its deliberations on 
how best to ensure the availability and affordability of 
terrorism insurance after December 2005.
    Mr. Chairman, this concludes my prepared statement. I would 
be pleased to respond to questions at the appropriate time.
    Chairman Shelby. Mr. Hunter.

                 STATEMENT OF J. ROBERT HUNTER

                     DIRECTOR OF INSURANCE

                 CONSUMER FEDERATION OF AMERICA

    Mr. Hunter. Mr. Chairman, thank you for bringing me back to 
this room where, as Federal Insurance Administrator, Senator 
Proxmire made me feel a little bit, I am sure, like Secretary 
Roseboro must have felt a few minutes ago. I served as Federal 
Insurance Administrator under Presidents Ford and Carter, and 
as Texas Insurance Commissioner--and I am an actuary, so if you 
have any actuarial questions, give me a call.
    September 11 was an awful day, as we know. The property 
casualty insurance paid losses from that day are now estimated 
to be between $30 and $35 billion before tax. After Federal tax 
considerations, that is about $20 billion that the industry has 
or will pay out from the September 11 event. To put that into 
perspective, the after-tax profits of the American 
International Group last year was $9.3 billion. The retained 
earnings of the property casualty insurance industry in 2000 
was $65 billion. The insurers do not need free reinsurance 
anymore.
    I bring that conclusion in part from my experience with the 
riot reinsurance program that I administered. The program kept 
insurance in the inner cities in the early 1970's when there 
was a great fear of writing insurance in the inner cities very 
similar to this situation. We charged at the Federal Insurance 
Administration actuarially sound premiums for reinsurance, and 
when the program was terminated taxpayers actually realized a 
profit from writing reinsurance. The private reinsurance market 
developed under our program because the price we charged was 
actuarially sound. It was not free. It is amazing how little 
competition you will get from the private sector when you 
charge zero for something.
    CFA has recently published a major study of the workings of 
TRIA, which I have attached to my written testimony, which I 
assume is in the record as well. Almost all insurers rely to 
some degree on the terrorism models that are out there 
including the Insurance Services Office model. ISO is a 
ratemaking organization. They show that four cities have high 
risk of terrorist attack: New York, San Francisco, Washington, 
and Chicago. And that five cities have moderate risk Boston, 
Seattle, Los Angeles, Houston, and Philadelphia, and the rest 
of the country is low risk according to the models.
    Terrorism insurance rates are very low in the low risk 
areas. For example, a $10 million building with $5 million of 
contents would pay only $300 to insure terrorism risk in 2005.
    Chairman Shelby. Where?
    Mr. Hunter. In the rest of the country, excluding the nine 
cities. In the five moderate-risk cities, the cost is $6,200 
for that building, and in the four high-risk cities, the cost 
would be $50,000 in that $10 million building with $5 million 
of contents. In the high-risk cities, costs would rise to an 
estimated $71,500 if TRIA expired. In other words, the rate 
would go up about 50 percent. In the lower-risk areas the 
change would be very modest, and in the moderate risk areas 
also, only $326 more.
    The private sector will cover all ISO-projected terrorism 
losses in all but the nine cities according to the model, 
except for the very unusual, nuclear and so on. Outside the 
nine cities there is not much risk of losses according to the 
ISO model. One hundred percent will be covered in the low-risk 
areas by the private sector in 2005. Commercial insurance 
buyers in most of the Nation are reluctant to buy taxpayer-
backed terrorism insurance. That is no surprise. Most reluctant 
are the rural areas. They do not expect to use it.
    We have done a lot of studies over time on why the flood 
insurance policies do not sell, and why earthquake insurance 
does not sell. I think lack of terrorism coverage is the same 
exact thing. People do not think it will happen to them is the 
primary reason. The second reason is, if it does happen, 
Congress is going to come along anyway and bail us out 
regardless of whether we buy it, so why buy it? That is a 
perception that research by Wharton and others shows.
    Industry experts have projected that terrorism insurance 
losses will be modest. ISO says that the average annual losses 
from terrorism for all property casual insurance will be $5.75 
billion a year. That is the average. To put that into 
perspective, the property casualty insurance premiums in 2003 
were $450 billion. Those losses would be 1.3 percent of 
premiums. Insurers are in an excellent financial position to 
cover terrorism losses. They have just gone through what is 
called a hard market. The profits are very high and expected to 
remain high for several years. Now is the time, as I think was 
earlier said, to consider eliminating free reinsurance.
    However, we do not think it is necessary to extend, but if 
you do there are four very quick principles that we think you 
should look at. First, focus on the nine cities where the risks 
are high. Second, increase the deductibles that insurers pay. 
We suggest a deductible of at least $50 billion after tax. The 
current deductibles are pretax.
    Third, increase the share of losses that insurers pay above 
the deductibles. And move those higher and higher year-by-year, 
if you have to go forward with the program, to phase out and 
make sure the private sector can build capacity. And fourth, 
ensure that taxpayers are reimbursed for backing up terrorism 
losses. Also, the Treasury Department should require that 
insurers pay premiums for the coverage the taxpayers are 
providing that are actuarially sound or maybe even a little 
higher than actuarially sound so that the private sector can 
compete.
    I will be happy to answer questions when the time is right.
    Chairman Shelby. Mr. Degnan.

                  STATEMENT OF JOHN J. DEGNAN

                    VICE CHAIRMAN AND CHIEF

         ADMINISTRATIVE OFFICER, THE CHUBB CORPORATION

                          ON BEHALF OF

                  THE AMERICAN INSURANCE ASSOCIATION,

                 COUNCIL OF INSURANCE AGENTS & BROKERS,

                   THE FINANCIAL SERVICES ROUNDTABLE,

           INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA,

          NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES,

         NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS,

           PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA,

                  REINSURANCE ASSOCIATION OF AMERICA,

                   SURETY ASSOCIATION OF AMERICA, AND

    UWC--STRATEGIC SERVICES ON UNEMPLOYMENT & WORKERS' COMPENSATION

    Mr. Degnan. Thank you, Mr. Chairman. Today, I appear 
representing the American Insurance Association and a broad 
coalition of virtually every other property and casualty trade 
association. We have made sadly obvious to the Chairman and 
others on the panel that we rarely speak in our industry with 
one voice, but today I have the opportunity to speak with one 
voice for the entire P&C industry. With that one voice we urge 
the Congress as strongly as we can to extent TRIA now for an 
additional 2-year period after December 30, 2005.
    I was surprised to hear Under Secretary Roseboro indicate 
that he had not heard that from the industry. I attended in 
March with many of the leaders of the P&C industry a meeting 
with Treasury Secretary Snow and Under Secretary Roseboro at 
which we strongly urged them, with as much urgency as we could 
convey, the need to do so this year. Doing that would allow 
sufficient time to assess the data from Treasury's mandated 
June 2005 TRIA study, and in that context a long-term solution 
for managing the uninsurable risk of catastrophic terrorism 
could be evaluated, and if feasible, developed and implemented.
    Although insurance losses were hardly the most serious 
implication of the tragic attack of September 11, that attack 
did result in the most expensive insured event in U.S. history, 
with losses estimated to be close to $35 billion. I am proud to 
note that insurers responded to the September 11 claim without 
the benefit of a single dollar of Federal assistance. This 
prompt and positive response has been credited by many with 
stabilizing financial markets in the immediate aftermath of the 
attack.
    September 11 awakened us all to the reality that we are in 
a war against terrorism. Recognizing both the new nature of 
terrorism risk and the destabilizing strain that tragic event 
placed on the private terrorism risk insurance market, Congress 
enacted TRIA in November 2002. While not perfect TRIA has 
ensured, and many of the witnesses I think share this view, 
market stability for our customers. Since TRIA's enactment, 
affordable terrorism insurance has been readily available to 
commercial policyholders, and TRIA has enabled billions of 
dollars of business transactions which were previously stalled 
to move forward without threatening the solvency of the 
commercial enterprises involved or their insurers. And it has 
kept Government administrative costs to a minimum.
    But the TRIA cannot address the underlying systemic 
problems of insuring terrorism. First, terrorism risk modeling 
is still in its infancy. Natural catastrophe modeling does 
help, but unlike terrorism natural catastrophes are predictive, 
both of method and of frequency and of severity. Only 
terrorists can control those variables in a terrorist risk.
    Second, terrorism is an interdependent risk. Nothing could 
have been done by the World Trade Center management at the time 
to prevent what happened on September 11 or to avoid security 
failures elsewhere. With terrorism, vulnerability unfortunately 
is measured by the weakest link in the chain.
    Third, another catastrophe terrorism event could bring 
financial ruin to the insurance industry. Under certain event 
scenarios, estimated insured losses could exceed $250 billion. 
That level would easily exceed the industry's entire commercial 
capacity. Capacity that is needed, by the way, to back all 
commercial risks, not just catastrophic terrorism.
    And finally, information necessary to evaluate terrorism 
risk to enable us to underwrite it often falls within the realm 
of sensitive intelligence data, and the insurers and 
policyholders simply do not have access to the classified data 
in the hands of the U.S. Government.
    If anything is certain about the risk of terrorism is that 
that risk will not fade away when TRIA expires at the end of 
2005. Neither war nor terrorism happens by chance. They are 
both premeditated. They are planned and executed with specific 
purpose. Terrorism today is essentially war carried out by 
individuals or organizations rather than sovereign nations. 
Because of these shared characteristics with war risk, 
terrorism defies normal underwriting and rating principles, 
limiting the ability of the private market to react.
    Accordingly, the TRIA backstop continues to be vital. We 
urge Congress to act today to extend TRIA for 2 more years. As 
some witnesses have said, there is a mismatch between the 
annual terms of insurance policies and TRIA's end date of 
December 31, 2005. Annual policies written after January 1, 
2005 will have a term that expires beyond the end of TRIA. As a 
result, unless the TRIA is extended in connection with the 
``make-available'' extension by Treasury which we support, 
insurers will still have to evaluate every policy issued in 
2005 as if there is no backstop. And because of State notice 
requirements, insurers will really have to begin informing 
policyholders as early as October 2004, even if the ``make-
available'' decision is issued, that there is uncertainty with 
respect to terrorism coverage for a full annual period and a 
policy renewing after January 1, 2005.
    Equally important, the backstop should be extended until 
the risk of catastrophic terrorism and how best to spread that 
risk and manage it are fully understood. As I have noted, and 
you have, Treasury's report to Congress is not due until just 6 
months before the program is scheduled to sunset, and the 
analysis and development of data and sound public policy on 
what is an important national economic security issue should 
not be held hostage by a date.
    In conclusion, September 11 proved that our national 
economy depends on a strong insurance industry. If the 
insurance industry were seriously compromised, all areas of the 
economy would suffer. TRIA's public-private partnership is 
working to stabilize the commercial insurance markets that 
underpin our free market economy in the face of a risk that 
remains essentially uninsurable. The aim, after all, of a 
terrorist is not only to hurt the insured, but also to wage war 
against the United States by targeting this country and its 
institutions. Without TRIA, a catastrophic attack could very 
well bring the insurance industry to its knees and 
significantly destabilize our economic infrastructure, 
achieving a primary aim of the terrorists. We simply cannot 
afford to let TRIA expire and leave this important measure to 
chance. A two-year extension is critical.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Nassetta, we have a vote on the floor, 
so if you and Mr. Dubois would briefly sum up your testimony we 
could move along.

               STATEMENT OF CHRISTOPHER NASSETTA

             PRESIDENT AND CHIEF EXECUTIVE OFFICER,

                   HOST MARRIOTT CORPORATION

                          ON BEHALF OF

           THE COALITION TO INSURE AGAINST TERRORISM

    Mr. Nassetta. I would be happy to. Thank you, Mr. Chairman. 
I am here today representing the Coalition to Insure Against 
Terrorism, or CIAT.
    I am the CEO of Host Marriott Corporation. We are the 
largest owner of hotels in the United States with interest in 
over 230 properties in 34 States and the District of Columbia. 
Like many other CEO's here today, since September 11 I think it 
is fair to say I have spent more time on insurance issues than 
I have in all of the years leading up to September 11. This 
occurred at the same time when our industry probably suffered 
the most catastrophic decline in operations in its recorded 
history.
    My real involvement with terrorism insurance started on 
September 11 when we lost our Marriott World Trade Center Hotel 
and suffered significant damage to our Marriott Financial 
Center Hotel. More importantly, we lost 2 employees at the 
World Trade Center Hotel and 11 of our guests were unaccounted 
for. I recognized at that moment what a critical issue this was 
for our company, our industry, and the broader economy as I 
witnessed the devastation of September 11 and realized that 
this war on terrorism, as we hear from most involved, is going 
to be a war that is waged over a very long period of time.
    While certainly an important issue for our company, as I 
mentioned, I am here representing CIAT. CIAT was formed 
following September 11 by a broad-based group of industry 
associations and companies to address the critical need for 
terrorism insurance. CIAT is a diverse membership group which 
covers private companies as well as public sector buyers of 
insurance. Sectors we represent include real estate, 
entertainment, transportation, utilities, and finance, just to 
name a few. As such, we are, in our view, the primary consumer 
of this very important insurance product.
    It is fair to say, following September 11, as we have heard 
today, terrorism insurance was very scarce, very expensive, and 
we were left with inadequate protection of our existing assets. 
We saw a significant slowdown of development and job losses as 
a result of that, and of course, the negative result that this 
had on our economy.
    My experience was that we were only able to obtain 
terrorism insurance at about 3.5 percent of prior levels. Our 
costs tripled, and it excluded biological, chemical, and 
radiological events. Thanks to the leadership of Congress and 
our President, TRIA passed in 2002 and has been a great 
success. Since then, costs have stabilized and capacity in the 
market has increased substantially.
    While TRIA has been a great success by many measures, it 
has not been an unqualified success in the sense that to date, 
as you have heard, no private reinsurance market of substance 
has really formed for that portion of the liability that is 
retained by the individual insurance companies, or for 
biological, chemical, or radiological events, even though these 
perils are technically covered by TRIA. Thus all policies today 
exclude biological, chemical, and radiological events with the 
exception of workers' compensation insurance which is regulated 
by the States.
    Some have argued even here today that we should let market 
forces solve the problem and that TRIA may stunt that 
opportunity. In my opinion, nothing is further from the truth. 
It is clear at this point that the insurance industry, and you 
are hearing from them here today, is unable to underwrite the 
risks currently, and certainly without TRIA we would not have 
any significant market.
    On behalf of CIAT, I would ask you to consider two issues. 
One, that we urge the Treasury Secretary to extend the ``make-
available'' date. Without that, I think hard evidence and 
anecdotal evidence suggest that we will not have the 
availability of terrorism insurance. Waiting until September is 
unacceptable in the sense that delay creates a lot of 
uncertainty in the market.
    Two, we should extend the overall program with a ``make-
available'' provision for 2 years. It is clear, as I have said 
and I think you have heard today, that the industry is just not 
prepared at this point to underwrite it. The insurance industry 
may never be able to underwrite it, but that is something to 
debate later. The increased uncertainty is ultimately going to 
create dislocation in the financial markets. It is going to 
ultimately increase the cost of capital, I think, and as a 
result of that, slow the economy and cause job losses. Keeping 
in mind that many of the insurance policies are longer than one 
year in length, this is not something that we are going to 
experience a few years from now. This is something that is very 
close. That uncertainty is going to have a real impact in the 
short-term.
    I think the extension of 2 years really, as people have 
talked about today, allows the markets to attempt to underwrite 
the risk. In my humble opinion, the markets may not be able to 
underwrite it longer term but an extension at least allows a 
reasonable period of time to debate the issue on Capitol Hill 
of whether this is a cost our society should bear in the sense 
that it really is something that starts with an act of war 
against our way of life. But the extension, in any event, 
allows the time to figure out whether this can be solved with a 
longer-term solution.
    We must ultimately protect our financial markets and our 
overall economy. TRIA is a critical component of protecting the 
economy against terrorism. It just does not seem appropriate, 
to me or, the many people I talked to, when we got this passed 
in the first instance, that is prudent to let TRIA lapse and 
then pick up the pieces and clean up a mess after the fact. It 
just does not seem to be the way we do things.
    Finally, I would say it seems a bit ironic and inconsistent 
that through OPIC we provide terrorism insurance for 
investments overseas until 2007 but if we do not extend TRIA, 
we would not be providing that same type of insurance for acts 
of terrorism on our own soil.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Dubois, we only have 3 minutes for 
you. We have 3 minutes till the vote ends and I am going to 
have to go, so they have eaten your time up. So welcome again 
to the Committee. We have your written testimony in the record 
and if you will sum up your two or three basic parts fast.

                 STATEMENT OF JACQUES E. DUBOIS

                        CHAIRMAN AND CEO

              SWISS RE AMERICA HOLDING CORPORATION

    Mr. Dubois. Thank you, Mr. Chairman, let me do that 
quickly.
    Swiss Re has a keen interest in this law for two reasons. 
We believe that U.S. terrorism risk stems in large measure from 
terrorist efforts to influence Government policy. As a result, 
we feel very strongly that Government must play a partnership 
role with the insurance industry in coping with these losses. I 
would further add that we are not optimistic that this would be 
temporary or could be temporary in nature.
    Second, I would say that TRIA has worked. TRIA has provided 
protection limiting insurer losses in the event of an 
additional terror attack or attacks. This allows the insurance 
industry to perform its traditional roles in bearing risk 
against losses from hurricane, windstorm, floods, fire, auto, 
et cetera.
    As a reinsurer, we are not required to provide terrorism 
reinsurance coverage, and for the most part we do not at this 
time with two exceptions. We provide partial protection to 
clients for the TRIA retention exposure, and we provide modest 
catastrophe recovery for our group life clients. Our position 
is that the insurance and reinsurance market is not currently 
prepared to absorb terrorism risk regardless of any limited 
improvement in modeling whatsoever. The possible losses are 
just too high.
    Swiss Re is currently sponsoring with nine other 
organizations a study by the RAND Corporation aimed at 
assessing terrorism risk and loss potentials. What we are 
learning there is really horrifying. I would not want to live 
in the tenth city.
    Chairman Shelby. Would you furnish us a copy of that for 
the record, the RAND study?
    Mr. Dubois. Yes, we will do so, sir.
    In addition, Swiss Re also assisted in a study by RMS, a 
leading modeling organization, which also analyzed terrorism 
scenarios. This study found that insured losses of $55 billion 
are possible for workers' compensation and life insurance lines 
of business.
    In a LOMA study, a research and education association for 
the life and financial services industries, a study on 
terrorism events, including that of a smallpox attack, 
indicated a possible death count of 30 million people, 
approximately 12 times the number of deaths in the United 
States annually. Just as with September 11, the possible costs 
of these horrific losses have not been factored into insurance 
prices and cannot be absorbed by the industry.
    In the interest of time let me just comment that we very 
much support the group life insurers in seeking inclusion in 
the TRIA legislation. We are the largest group life reinsurer 
and we do not have a way to model because of the impossibility 
of forecasting frequency and severity, and we urge the 
extension of TRIA.
    Thank you.
    Chairman Shelby. We are going to leave the record open for 
questions because of the vote on the floor. We have a number of 
questions. We have a number of Members of the Banking Committee 
that are on the Floor. They could not be here. They are in the 
debate there.
    Gentlemen and Ms. Williams, thank you for appearing before 
the Committee. We think this is a very important issue.
    The hearing is adjourned.
    [Whereupon, at 11:51 a.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follows:]
            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
    Mr. Chairman, thank you holding this hearing today. The world is a 
different place than it was before September 11, 2001. New York has 
been profoundly affected by the horrific events of that day. The 
enactment of the Terrorism Risk Insurance Act has been vital to New 
York. It has translated into thousands of jobs and desperately needed 
economic activity for New York City, the region, and the entire 
country.
     Back in 2002, Senators Dodd, Sarbanes, Reid, and I argued with our 
colleagues who argued that the free market would solve the issue of 
terrorism insurance. The Treasury and some Congressional Republicans 
were against the bill then and it appears they still are.
     I am concerned about the consequences of not reauthorizing the 
Act, which I believe could be very significant and disruptive to the 
economy. I am not confident that the private sector will do this 
without governmental involvement. How can the Treasury not support 
reauthorization of this Act, which is a job producer and economic 
stimulator? We cannot let ideology stand in the way of economic 
revitalization.
     If Treasury does not want the Act extended, tell us so. The Act 
has been a success for New York and for the country. We should not 
endanger that success by creating uncertainty and instability about the 
availability of terrorism insurance. I believe that the cost of this 
uncertainty and resulting instability is too high a price to pay. Can 
we as a country afford that cost if the terrorists should strike again 
here? I do not think we can and will do all I can to ensure against 
such a result.
     We are not over the threat of terrorist attacks. The President has 
repeatedly told us that the war on terrorism is a long-term 
undertaking. I believe that terrorism risk insurance is a basic part of 
that undertaking. It will allow us to keep economic activity on track 
in this brave new world. The Government/private sector responsibilities 
in the Act will make that possible.
     I know firsthand the aftermath of the September 11 attacks and 
hope and pray that no area in the United States will have to experience 
such a tragedy in the future. I believe that if such a tragedy should 
occur, Americans must be provided the tools with which to rebuild their 
lives. Terrorism insurance is one of those tools.
     I look forward to hearing today's testimony and working with the 
Committee toward reauthorization of this important legislation.
                               ----------
                PREPARED STATEMENT OF E. BENJAMIN NELSON
               A U.S. Senator from the State of Nebraska
                              May 18, 2004
    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to appear before your Committee today to offer my comments 
on the Terrorism Risk Insurance Act that we enacted into law almost 2 
years ago. I strongly supported passage of the bill at that time, and I 
believe that, if we begin soon, we can pass a reauthorization of that 
Act, and even improve it, yet this year. I recognize that may be a 
daunting task, but I believe we can and should act before the end of 
this Congress. And we need to strengthen the Act by adding coverage, 
with a second pool, for the group life and health carriers.
    I would like to commend you, Mr. Chairman and Members of the 
Committee, and especially Senator Dodd, who worked so hard on passing 
this measure in the last Congress, for your leadership on this 
important issue 2 years ago--it was critical to act as we did. And I 
also applaud you for your leadership in revisiting the issue at this 
critical time.
    Mr. Chairman, in the wake of the tragic events of September 11, 
this Nation has endured the wrenching emotional effects of the loss of 
life and human suffering resulting from those evil acts. The Nation's 
soul has been affected, forever. None of us will ever forget our grief 
over the human losses of that day, nor should we.
    But we all can understand also the extent of economic disruption 
and loss which has ensued in the aftermath of that day. While it pales 
in comparison to the emotional costs wrought by the terrorists, the 
cost to our economy has been enormous. Investment has been curtailed. 
Construction projects have been postponed or cancelled. Jobs have been 
lost. Our entire economy has suffered.
    But it could have been so much worse, Mr. Chairman. In the weeks 
and months following September 11, Congress and the President came 
together to provide a measure of protection for our Nation's critical 
economic infrastructure. Recognizing the effect that massive terrorist 
attacks could have on the ability of the Nation's insurance carriers to 
pay claims resulting from such attacks, and the difficulty in 
predicting such events, Congress moved to provide Federal ``backstop'' 
legislation, in effect, a guarantee that would help insurers cover 
excessive loses in the event of another even more catastrophic event. 
Unfortunately, such events are no less likely today than they were in 
the days, weeks, and months following September 11.
    As the Government Accounting Office has recently reported, the 
Terrorism Risk Insurance Act has served us well since its enactment. In 
the troubled time after September 11, it has provided a stabilizing 
effect on the property and casualty industry and affordable protection 
for American businesses. Had we failed to provide this Federal backstop 
when we did, Mr. Chairman, the effect on our economy would have been 
disastrous. In the months following September 11, while the Congress 
debated whether to provide this protection, lending on commercial real 
estate projects in high-threat areas was severely curtailed. Disruption 
in the property/casualty industry loomed. Reinsurance was scarce or 
nonexistent. Workers' compensation programs were threatened. The 
banking and securities industries were adversely 
affected.
    But following enactment of TRIA, construction projects could 
resume, with the assurance that catastrophic losses could be covered. 
Lending on commercial real estate projects could again be secured. 
Construction jobs returned. The economy began to right itself. Of 
course, there were those at the time who resisted pledging the Federal 
Government's backing for possible catastrophic losses. But the Congress 
ultimately did the right thing, recognizing that there was no 
alternative. The industry simply could not accurately assess the risk, 
and certainly could not charge premiums sufficient to adequately cover 
the catastrophic risks.
    Critics of the legislation point out that the relatively low take-
up rate is an indication that the legislation is not necessary. That 
criticism, I believe, is misplaced. The take-up rate is a poor 
measurement of the need for the Federal backstop. Commercial interests 
located outside of high-risk areas such as New York, Washington, Los 
Angeles, and other major metropolitan areas naturally do not consider 
the high cost of coverage to be justified, given the low risk of a 
terrorist attack in those areas. And the cost of coverage remains very 
high. But it is worth providing this protection to those who 
desperately need it. It is essential to our economy that commercial 
interests in relatively high-threat areas continue to have this 
coverage available.
    Since enactment, there has also been criticism, Mr. Chairman, that 
the industry has failed to develop private solutions to the challenges 
presented in this new, post-September 11 environment. Of course, TRIA 
was originally conceived and passed as a temporary program, a bridge to 
a time when the risk of terrorist acts would abate, and the market 
could adjust accordingly. While I still believe that it may be 
possible, over the long-term, to achieve these goals, is there any 
among us who believes that the risk of another attack has diminished? 
It has been reported in the media that some 30 planned attacks have 
been thwarted by Homeland Security efforts since September 11. I hate 
to say it, but I believe that another attack or series of attacks on 
our soil is almost inevitable, and that there is a possibility that 
future events could make September 11 pale by comparison. It is 
essential that we extend the Act. It is completely unrealistic to 
expect that the industry can, in 2 or 3 years' time, adequately 
restructure itself to ensure its ability to cope with such catastrophic 
losses. In fact, to expect the industry to ever be able to adequately 
assess the risk of a major terrorism incident--where, when, how, and 
with what results--in the high-threat environment that we face today, 
is unrealistic. Only when we have won the war on terrorism will the 
threat abate. And who can say when that will be? And in the meantime, 
how can the industry assess premiums to build adequate reserves to 
cover what could be incomprhensible losses? In the end, it all comes 
down to, how do you adequately assess the risk? It is impossible, Mr. 
Chairman, in a terrorist environment.
    We need to reauthorize TRIA. And we should do so yet this year. 
While I am confident that Treasury will exercise its authority to 
extend the make available provisions of the Act through next year, the 
problem with expiration of the Act at the end of 2005 begins to 
manifest itself at the end of this year. Policies are generally written 
for the term of one year. Obviously, those policies written after 
December 31, 2004, will extend into 2006, leaving backstop coverage 
unavailable for the latter part of the term of those policies.
    As the Members of this Committee are aware, the House Financial 
Services Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises held a joint hearing with the Subcommittee on 
Oversight and Investigations on April 28 to begin consideration of the 
issue in the House. At that hearing, the Superintendent of the New York 
Department of Insurance, Mr. Greg Serio, expressed the strong support 
of the National Association of Insurance Commissioners for 
reauthorization this year. Mr. Chairman, I am a former insurance 
commissioner and former head of the NAIC, as well as a former insurance 
company executive, and I can certainly understand and appreciate, from 
a regulator's point of view, the concerns about the safety and solvency 
of the industry. I applaud the regulators for supporting the early 
reauthorization of TRIA.
    I will concede, Mr. Chairman, that TRIA, as we enacted it 2 years 
ago, is not perfect. There were those of us who sought to include the 
group life industry within the coverage of the Act. I worked long and 
hard to include coverage for group life when we passed the first bill, 
and was disappointed in the determination of the Treasury that coverage 
under the Act would not be provided. And problems also remain for 
workers' compensation carriers under the law. We need to look at those 
issues.
    Mr. Chairman, I believe we should attempt to address these 
shortcomings as we undertake to devise reauthorization language. I know 
that this approach will compound our efforts to pass legislation yet 
this year. But I also believe that the success of TRIA, and the 
continuing high-threat level over the past 2 years, may work to 
convince many of our reluctant colleagues of the need to act this year.
    As to the question of coverage for group life insurance, it seems 
obvious that the concentration of risk issues which justify coverage 
for property and casualty carriers under the Act extend as well to 
group life coverage. Employers with large numbers of employees in 
concentrated locations need this protection if they are to continue to 
provide this important employee benefit. For many of America's workers, 
group life insurance may be the most significant protection for their 
families in the event of the premature loss of the family breadwinner. 
Group life insurance today covers nearly 160 million Americans, and 
represents 40 percent of all life insurance in force, $6 trillion of 
protection for American families. The Committee is aware, I know, that 
the reinsurance market for group life has also been severely disrupted, 
and in most cases is no longer available, or priced too high to be 
realistic.
    And the same concentration of risk issues work severe. Difficulties 
in the workers' compensation area. Carriers are required by statute to 
provide ``all risk'' coverage, and thus they are now faced with the 
possibility of concentrated catastrophic losses which could result from 
nuclear, biological, chemical, or radiological attack. This has caused 
disruption in underwriting for workers' compensation since September 
11, and those problems have not been alleviated by TRIA. We need to 
work with the industry as we develop reauthorization language, and we 
should do it this year.
    Mr. Chairman, I appreciate the opportunity to give this Committee 
my views on this important, indeed vital, issue. I urge the Committee 
to move forward with all due speed in expanding coverage and 
reauthorizing the Terrorism Risk Insurance Act. Thank you for your 
consideration of my views.
                               ----------
                PREPARED STATEMENT OF BRIAN C. ROSEBORO
                  Under Secretary for Domestic Finance
                    U.S. Department of the Treasury
                              May 18, 2004
    Thank you, Chairman Shelby, Ranking Member Sarbanes, and Members of 
the Committee on Banking, Housing, and Urban Affairs for this 
opportunity to testify today on the implementation of the Terrorism 
Risk Insurance Act (TRIA) of 2002.
    The market for property and casualty terrorism risk insurance was 
significantly affected by the terrorist attacks of September 11, 2001. 
In the aftermath of September 11, reinsurers by and large refrained 
from offering coverage for property and casualty terrorism risk or 
offered reinsurance coverage at costs that were generally considered 
prohibitive. This then caused property and casualty insurers in general 
to respond by excluding terrorism coverage from commercial property and 
casualty insurance policies, leaving many American businesses exposed 
and uninsured. Perhaps the most notable negative impact of this 
development was the drag it created on businesses' ability to finance 
new job-creating economic activity in the midst of our economic 
downturn caused in part by the events of September 11.
    To address this condition, Congress enacted TRIA in the fall of 
2002. TRIA establishes a temporary Federal program of shared public and 
private compensation for insured commercial property and casualty 
losses resulting from acts of terrorism covered by the Act. TRIA in 
effect places the Federal Government in the property and casualty 
terrorism risk reinsurance business through December 31, 2005.
    By most indications, TRIA has been successful in achieving the 
fundamental goal of enhancing the availability and affordability of 
property and casualty terrorism risk insurance, particularly for 
economic development purposes. No longer are heard the same level of 
concerns from real estate developers, for example, that new projects 
are on hold because financing has been frozen by a lack of terrorism 
risk insurance. In terms of affordability, while the information is 
still somewhat preliminary, accounts that we have seen indicate that 
premiums for terrorism risk insurance have decreased significantly 
throughout the early stages of TRIA and continue to do so.
    Despite TRIA's apparent success, there have been widespread reports 
that the ``take up'' rates for TRIA coverage have been low, or in other 
words, the demand for this coverage has been low. Whether this reflects 
a lack of interest in terrorism risk coverage at current prices, a lack 
of awareness of the availability of coverage, an assessment by 
businesses of low terrorism loss risk, or some combination of the above 
will require careful study and analysis of information reflecting as 
comprehensive a view of markets as possible.
Treasury's Implementation of TRIA
    Treasury has the chief responsibility for implementing the Federal 
reinsurance backstop that was established under TRIA. In broad terms, 
as Treasury has undertaken the overall implementation of TRIA, we have 
focused on five main administrative goals: Ensuring that the program 
was operable immediately; implementing the program in a transparent 
manner; relying on the State insurance laws and regulatory structure as 
much as possible; allowing insurers to participate in program through 
their normal course of business where possible; and ensuring that 
insurance benefits, if needed, can be provided in an expedited manner.
    Perhaps the most daunting, immediate administrative task was to 
prioritize and undertake the actions needed to make the program 
operational right away. One of the key factors in this regard was that 
TRIA became effective immediately on November 26, 2002, when the 
President signed the Act into law. The instant effective date of TRIA 
meant that terrorism exclusions on existing insurance policies were 
removed and all policyholders had the ability to secure coverage for 
terrorism risk. In addition to the effective date, Treasury also had to 
address the wide range of businesses, insurance companies, and types of 
policies that are affected by TRIA.
    To address the immediate effective date of TRIA and provide the 
necessary guidance to the insurance industry and others to make the 
program operational, Treasury's first action was to issue promptly a 
series of three interim guidance notices. The first interim guidance 
notice was issued on December 3, 2002, about 1 week after TRIA was 
signed into law. Other interim guidance notices were issued on December 
18, 2002, and January 22, 2003. Treasury relied on the process of 
issuing interim guidance notices because it provided us with the 
ability to respond quickly to implementation issues, and to prevent 
confusion prior to the issuance of formal regulations. These interim 
guidance notices provided the basis for insurance companies to proceed 
with offering coverage by addressing issues such as: Compliance with 
TRIA's required disclosure and ``make available'' requirements; 
determining what insurers were required to participate in the program 
and how their deductibles would be calculated; and the scope of 
coverage under the program.
    Even while the interim guidance process went forward we began the 
next step in the implementation process of preparing formal rulemakings 
that would incorporate and supercede our interim guidance. In general, 
the first rules were issued as interim final rules, as authorized in 
the statute, because of the immediate operational needs. The first 
interim final rule was issued on February 28, 2003. That rule and an 
interim final rule that was issued on April 18, 2003 took many of the 
issues that were addressed in interim guidance notices and transformed 
them into formal implementing regulations. Subsequent rulemakings have 
addressed issues associated with State residual market mechanisms, 
claims processing, and litigation management. Overall, Treasury has 
published two interim final rules and three proposed rules, and three 
of these rulemakings have been finalized.
    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 put forward as refinements to and improvements on practices 
and operations, but from the earliest days of the program, we have had 
procedures and resources ready to respond to any covered event that 
might arise.
    In addition to the regulatory actions outlined above, Treasury has 
also created and staffed a Terrorism Risk Insurance Program (TRIP) 
office to administer the Act. Among its accomplishments, the TRIP 
office has developed systems to handle claims processing, payment, and 
auditing of claims should a covered event occur. The TRIP office has 
been working to provide detailed operating procedures for claims 
filing, processing, and payment that are separate from the claims 
procedures regulation. Also, the TRIP office has been consistently 
responding to requests for interpretation of the Act and its 
regulations from insurers; many of those interpretations have been made 
available to the general public on the TRIP website (www.treas.gov/
trip).
    TRIA created an interesting hybrid program jurisdictionally; it 
provides a Federal reinsurance backstop to commercial property and 
casualty insurance entities that are regulated almost exclusively at 
the State level. This type of program would likely be unmanageable 
without the cooperation of the State insurance regulators--cooperation 
among themselves and cooperation with the Federal Government. 
Throughout the implementation process, Treasury consulted and worked 
closely with the NAIC, and the NAIC's assistance has been invaluable in 
implementing TRIA. We look forward to continuing to work closely with 
the NAIC regarding Treasury's remaining responsibilities under TRIA.
Comprehensive Market Information and Analysis Requirement
    An important requirement of TRIA is to implement the Act with a 
careful eye on market conditions and developments, and report to 
Congress. In particular, Treasury is required to report to Congress by 
June 30, 2005, on an itemized list of issues associated with the Act 
and its purposes. Specifically, Treasury is required to assess----

 The ``effectiveness of the Program;''
 The ``likely capacity of the property and casualty insurance 
    industry to offer insurance for terrorism risk after termination of 
    the Program;'' and
 The ``availability and affordability of such insurance for 
    various policyholders, including railroads, trucking, and public 
    transit.''

    Together with this analysis, Treasury is also required under TRIA 
to compile information on premium rates for property and casualty 
terrorism risk insurance.
    To assist in the evaluation of the Act's effectiveness and to meet 
TRIA's premium information collection requirement--and to ensure that 
we do so with as comprehensive a view of the markets as possible--
Treasury has contracted with an outside survey research firm to conduct 
a comprehensive survey with a nationally representative sample of 
policyholders and insurers. Some of the information being collected 
through the surveys includes the cost of terrorism risk insurance as 
compared to total insurance within eligible lines, basic financial 
data, insurance deductibles and limits for terrorism as compared to 
nonterrorism insurance, use of reinsurance and self insurance, and the 
types of risk management programs.
    Each company chosen for the survey will be contacted at least twice 
and possibly three times (depending on its policy renewal dates) in 
order to capture effects of changes in TRIA's insurer deductibles in 
successive program years. The first survey wave collected data from 
2002 and 2003. Surveys for the first wave were mailed out late in 2003 
and early 2004 to over 30,000 policyholders and almost 500 insurers. A 
second survey wave to collect 2004 data is planned for early this fall, 
and 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 obtain a broader and more dynamic view of the 
conditions in the marketplace. We believe anything less would not 
provide to the Secretary the full and reliable information needed to 
make the careful, trustworthy, and responsible evaluation called for by 
Congress in the statute.
    The completed survey results, as well as consultations with a wide 
range of interested parties, will form the basis for Treasury 
completing by the June 30, 2005 statutory deadline its report to 
Congress on the effectiveness of TRIA and the capacity of the property 
and casualty insurance industry to offer insurance for terrorism risk 
after termination of the program.
Determination on Extending the ``Make Available'' Requirement
    The Secretary of the Treasury is required by TRIA to determine by 
September 1, 2004, whether to extend the ``make available'' provisions 
into the third year of the program (that is, through December 31, 
2005). The ``make available'' provisions of TRIA require that, from the 
date of enactment (November 26, 2002) through the last day of the 
second year of the program (December 31, 2004), each insurer must make 
available, in all of its commercial property and casualty insurance 
policies, coverage for insured losses under the Act. In this regard, 
TRIA also requires that such insurance coverage must not differ 
materially from the terms, amounts, and other 
coverage limitations applicable to losses arising from events other 
than acts of terrorism.
    TRIA requires that Treasury's determination on whether to extend 
the ``make available'' requirements through the third year of the 
program be based on the same statutory factors described above that are 
to be considered in Treasury's overall study of the effectiveness of 
TRIA.
    Treasury is now developing a base of information from which the 
Secretary can make this required determination, consistent with the 
terms of the Act. As part of the information gathering process, on 
April 29, 2004, Treasury submitted to the Federal Register for 
publication a request for comments regarding the Secretary's 
determination of whether to extend the ``make available'' requirements 
of the Act into the third year of the program. Comments will be 
accepted through June 4, 2004. We encourage anyone who has views on 
this question to respond to this request for comments with as much 
detail as they can provide.
    In making this determination, however, while examining similar 
issues as those outlined for the larger examination due by June 2005, 
Treasury will be looking at those issues with the specific, narrow 
focus of the ``make available'' question, and with the use of much less 
information than will be available for the larger, broader study. 
Therefore, each examination will be conducted independently of the 
other.
Conclusion
    We must all remember that the basic goal of TRIA was to develop a 
temporary backstop for property and casualty terrorism risk insurance 
so that private markets would have a chance to adjust. We encourage 
insurance companies, state insurance regulators, other financial 
services providers, and other interested parties to think creatively in 
this regard, and to consider what methods can be employed to allow for 
broader private sector involvement in the market for managing property 
and casualty terrorism risk. Treasury looks forward to completing our 
review of the effectiveness of TRIA 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 
markets, require nothing less.
    In summary, while we hope that we will never be called upon to 
trigger coverage under TRIA, the program stands ready today--as it has 
from its earliest days--to meet its responsibilities. The extensive 
work done by Treasury in developing the basic framework of TRIA through 
interim guidance notices and regulations, the proposed claims 
regulations, the drafting of claims forms and review with industry 
organizations and the NAIC, and contingency procurement plans, all have 
contributed to an effective program that the Treasury will continue to 
refine over the life of the program. We look forward to moving forward 
with the implementation process and evaluating the effectiveness of the 
program in the weeks and months ahead.
                               ----------
                PREPARED STATEMENT OF DONNA LEE WILLIAMS
                   Delaware Commissioner of Insurance
                            on behalf of the
            National Association of Insurance Commissioners
                             May, 18, 2004
Introduction
    My name is Donna Lee Williams. I am the Commissioner of Insurance 
for the State of Delaware, and this year I am serving as Chair of the 
Terrorism Insurance Implementation Working Group of the National 
Association of Insurance Commissioners (NAIC). Speaking for myself and 
my fellow insurance commissioners, we appreciate the opportunity to 
testify regarding the role of the Federal Government in making sure 
that insurance against acts of terrorism remains available to American 
consumers and businesses.
    Today, I want to make three basic points:

 First, there is still a need for the Federal Government to 
    provide appropriate financial back-up to the private insurance 
    market in order to assure that segments of our Nation's economy do 
    not falter due to a lack of insurance coverage for terrorism. The 
    insurance marketplace is not yet ready to take on the risk of 
    providing coverage for acts of terrorism on its own.
 Second, the Treasury Department should extend the ``make 
    available'' requirements in TRIA so that businesses across America 
    will know they can purchase the terrorism insurance coverage they 
    need to sustain a healthy economy.
 Third, Congress should act this year to extend coverage under 
    the Terrorism Risk Insurance Program (TRIP), or enact a comparable 
    Federal backstop for acts of terrorism, at least through 2006 
    because the commercial insurance markets are not yet prepared to 
    underwrite sufficient terrorism coverage without a Federal 
    backstop.

    Following enactment of the Terrorism Risk Insurance Act (TRIA), the 
NAIC appointed a Terrorism Insurance Implementation Working Group of 
State regulators that has worked closely with the Treasury Department 
to successfully implement the Act's provisions, as well as to monitor 
the impact it has had on the insurance marketplace. Although we observe 
that the take-up rate for terrorism insurance coverage mandated under 
TRIA has not been widespread, coverage is available for those 
businesses and industries that want to purchase it. We believe the 
presence of the Federal backstop has provided a measure of comfort to 
the insurance industry, and has encouraged insurers to offer coverage 
for acts of terrorism that might not have considered otherwise in the 
wake of the tragic events of September 11.
    The NAIC's Terrorism Insurance Implementation Working Group 
believes there are two ways that Congress can help to continue the 
progress that has been made in restoring the market for terrorism 
insurance. The first is to encourage the Secretary of the Treasury to 
make an early determination that he will impose the ``make available'' 
requirement in Section 103(c)(2) of TRIA to all participating insurers 
for the third year of the Terrorism Risk Insurance Program (TRIP). The 
second is for Congress to act this year to extend the expiration date 
contained in TRIA Section 108(a) to a future date that is consistent 
with the business cycle for terrorism insurance renewals.
Congress Should Extend the ``Make Available'' Requirement
    Insurance regulators believe that extending the present ``make 
available'' requirement in TRIA through 2005 will help ensure 
marketplace stability by continuing the availability of terrorism 
insurance in all parts of the United States. If insurers are not 
required to offer coverage, areas that face low risk of losses from 
acts of terrorism would probably experience little disruption. However, 
those areas of our Nation and prominent cities with attractive targets 
for terrorist activity might face availability and affordability 
problems. This would have a negative impact on their local and regional 
economies, particularly real estate development.
    During the first week of May 2004, insurance regulators began 
receiving contingency filings from Insurance Services Office, Inc., the 
Nation's largest insurance advisory organization. In the event Congress 
does not extend the TRIA program this year, these policy form filings 
would reinstate terrorism coverage limitations that were in effect 
prior to TRIA's enactment for any policies written for coverage that 
extends into 2006. In addition to protecting insurers from additional 
terrorism liability, these filings demonstrate the insurance industry 
is not willing to assume the risk of terrorism losses by themselves at 
this time.
    The NAIC's Terrorism Insurance Implementation Working Group 
believes TRIA's ``make available'' requirement has contributed to the 
overall effectiveness of the program during its first 2 years. American 
businesses--both large and small--have been offered choices they might 
not otherwise have had. Through the ``make available'' provision, TRIA 
has given them the opportunity to make an informed choice regarding the 
purchase of coverage for acts of terrorism.
    There are many who believe that the U.S. economy remains vulnerable 
to terrorist attack. This is evidenced by an increased take-up rate for 
terrorism coverage observed in a recent survey conducted by Marsh, Inc. 
In its fourth quarter 2003 survey, Marsh found that 32.7 percent of 
companies surveyed purchased terrorism coverage, compared with 23.5 
percent in the second quarter and 26.0 percent in the third quarter.
    One of the elements the Treasury Department is required to consider 
is the capacity of the insurance industry to accept the risk of losses 
from acts of terrorism. Insurance capacity is generally measured by 
determining the amount of capital and surplus available to insurers to 
support their writings. Using that measure, NAIC data shows 2003 was a 
profitable year for property and casualty insurers, with aggregated 
policyholder surplus increasing approximately 26 percent to $375 
billion. It should be noted however, that policyholder surplus declined 
each year from 1999 to 2002, and the $375 billion figure is only 4.3 
percent higher than the $360 billion in policyholder surplus held in 
1999. Furthermore, less than half of those funds are used to support 
commercial lines writings. As part of considering whether the insurance 
industry has sufficient capacity to underwrite the risk of terrorism 
losses, the Treasury Department must consider whether the industry is 
willing to put its capital at risk. We believe the answer is no.
    Insurers and the marketplace at large are finding it very difficult 
to accurately price coverage for acts of terrorism. Unknown frequency, 
coupled with the potential for severe losses, makes coverage for acts 
of terrorism one that insurers might choose to avoid if given the 
opportunity. Until insurers and their reinsurers become more 
comfortable that Government efforts are adequate to protect citizens 
from terrorist acts, or at least become more predictable than they are 
today, they will be reluctant to accept complete risk transfers from 
American businesses. In particular, those businesses viewed by insurers 
as having a greater risk of terrorism losses will have trouble finding 
insurance.
    Consequently, the NAIC's Terrorism Insurance Implementation Working 
Group urges the Treasury Department to extend the ``make available'' 
requirement into Program Year Three of TRIA. This action will help 
avoid market disruptions which might otherwise occur, and will ensure 
the insurance market's continued role supporting economic development.
Congress Should Extend the Terrorism Risk Insurance Program
    The NAIC urges action by Congress this year on a Federal solution 
to ensure continued marketplace stability when TRIA expires at the end 
of 2005. Because some terrorism risks are largely uninsurable without a 
financial backstop, State regulators are very concerned that 
significant market disruptions will develop before TRIA's expiration. 
This is due in large part to the deadlines contained in TRIA, which do 
not match the business cycle for insurance renewals.
    The commercial insurance business cycle operates in such a way that 
insurers and their policyholders will be required to make decisions as 
early as September 2004 regarding coverage well into 2006. At present, 
annual policy renewals with effective dates of January 2, 2005 or later 
must contemplate there will be no Federal backstop for any losses 
occurring in 2006. For this reason, State insurance regulators 
anticipate widespread insistence by insurers that conditional policy 
exclusions for terrorism coverage be included in renewal policies 
starting later this year. This is the same situation we encountered in 
the aftermath of September 11, which prompted enactment of TRIA.
    To address this situation, Congress could simply change one line of 
TRIA. If Section 108(a) were changed to read ``The Program shall 
terminate on December 31, 2007,'' then Congress would be able to 
receive the report from the Treasury on June 30, 2005, and would thus 
have roughly 15 months to digest and debate the future Federal role 
related to acts of terrorism before reaching another milestone for 
insurers and American businesses.
    An alternative to extending the expiration date of TRIA would be to 
extend the coverage period in TRIA without extending the actual 
effective date in the law. This could be accomplished by amending 
Section 108(a) as follows: ``The Program shall terminate on December 
31, 2005, however, the Program shall continue to provide shared public 
and private compensation for insured losses resulting from acts of 
terrorism for policies or contracts issued or renewed before December 
31, 2005, until the policy expiration date or 1 year from their 
inception or renewal date, whichever is less.''
    Another alternative is to develop a different type of Federal 
backstop for acts of terrorism that provides some form of funding for 
the risk of losses resulting from acts of terrorism.
    The NAIC stands ready to assist Congress in developing an 
appropriate method for continuing the Federal terrorism reinsurance 
backstop.
Workers' Compensation and Group Life Insurance
    There are two major types of insurance that cause insurers special 
concern about whether they can continue to underwrite them without some 
form of assistance from the Federal Government. The first is workers' 
compensation, which is a property-casualty product that provides 
coverage for work-related injuries and illness. It 
covers lost wages, provides unlimited medical benefits and, in most 
States, provides rehabilitation benefits to get injured workers back on 
the job. In the event of death on the job, worker's compensation 
provides a monetary death benefit to the surviving spouse and children. 
It also provides employers with liability coverage if an employee 
pursues legal action against an employer in court. Workers' 
compensation is currently included under TRIA.
    State laws do not allow an insurer to exclude or limit worker's 
compensation coverage, except as permitted by State law. As a result, 
an insurer underwriting this risk without adequate reinsurance is 
subject to a large potential loss if there are a significant number of 
employees at a single location. The American Academy of Actuaries 
estimates that ``a modest-sized insured with 200 employees could easily 
generate a terrorism related event of $50 million. This presumes death 
of all employees and typical death benefit of $250,000 per 
employee.\1\''
---------------------------------------------------------------------------
    \1\ American Academy of Actuaries, P/C Extreme Events Committee May 
4, 2004 Report, P/C Terrorism Coverage: Where Do We Go Post-Terrorism 
Risk Insurance Act?, Page 14.
---------------------------------------------------------------------------
    The second type of coverage causing insurers special concern is one 
that is not currently included in TRIA--namely group life insurance. 
Like workers' compensation, this insurance coverage is vulnerable to 
risk concentration problems. For example, if a business has 1,000 
employees at a given location, the pricing employed by life insurers 
for group products probably assumes that three or four employees might 
die in a given year. If instead, a location with 1,000 employees is hit 
by a terror attack and all of them die, the insurer has an enormous 
financial exposure from a single occurrence.
    Unlike workers' compensation, there is no statutory requirement for 
group life that prohibits an insurer from limiting available coverage 
for acts of terrorism in some fashion. However, the employer, the 
insurer, the insurance industry in general, and the American economy 
would suffer if an insurer is only able to pay a fraction of the policy 
face amount in a mass casualty situation. Furthermore, State insurance 
regulators are not inclined to approve exclusionary or limiting 
language in those States that have approval authority over the wording 
in group life insurance contracts. Although there is some level of 
private reinsurance available for group life coverage, it is not 
sufficient to cover a catastrophic terrorism loss situation. While the 
NAIC has not taken on formal position on whether group life should be 
included in TRIA or another form of Federal backstop, I wanted to alert 
you that regulators have heard these concerns expressed by group life 
insurance underwriters.
Conclusion
    We strongly urge Congressional action to extend TRIA this year, or 
enact an alternative form of Federal backstop for acts of terrorism, in 
order to avoid market disruptions likely to occur in the absence of a 
Federal backstop program. Such 
action will ensure the insurance market's continued role supporting 
economic development. In addition, it will allow Congress adequate time 
to fully evaluate the Treasury Department's June 2005 report and 
recommendations.










































                 PREPARED STATEMENT OF J. ROBERT HUNTER
         Director of Insurance, Consumer Federation of America
                              May 18, 2004
    Good morning, Mr. Chairman and Members of the Committee. I am J. 
Robert Hunter, Director of Insurance for the Consumer Federation of 
America. CFA is a nonprofit association of 300 organizations that, 
since 1968, has sought to advance the consumer interest through 
research, advocacy, and education. I am a former Federal Insurance 
Administrator under Presidents Ford and Carter and have also served as 
Texas Insurance Commissioner.
    I have drawn many of my conclusions regarding the Terrorism Risk 
Insurance Act of 2002 (TRIA) based on my experience administering a 
similar Federal reinsurance plan, the Riot Reinsurance Program. This 
program kept insurance in the inner cities in the early 1970's, when 
riots threatened the withdrawal of property insurance from the Nation's 
inner cities. We charged insurers actuarially sound premiums for the 
reinsurance and, when the program was terminated, taxpayers actually 
realized a profit from the transaction.
    The Nation's terrorism insurance law is not necessary to ensure the 
availability of affordable terrorism coverage for most areas of the 
country and should be allowed to expire. CFA reached this conclusion 
after undertaking a major study of the workings of TRIA and of current 
market conditions for property/casualty insurance. A copy of the report 
is attached to this testimony.
    We found that insurance experts have set terrorism insurance rates 
for the third year of the program, 2005, at quite low levels in most of 
the country and that, according to insurance risk models, private 
insurers will be completely responsible for all terrorism insurance 
losses in all but nine large cities by 2005.
    The study clearly documents that the insurance industry is more 
than ready to stand on its own two feet and that taxpayer back up 
should end. The ability of the industry to insure against terrorism is 
enormous and growing, profits are quite substantial, and the financial 
condition of insurers overall is rock solid. Profits leapt ten-fold in 
the last year, and surplus (retained earnings) skyrocketed by $65 
billion!
    However, if Congress decides to keep some form of back up, it 
should only target the few areas of the country where getting 
affordable terrorism coverage might be a problem. Congress should also 
require insurers to broaden the amount of coverage they offer, pay for 
the reinsurance that taxpayers provide, only back up truly large 
terrorism events, and increase incentives for the further development 
of a private terror insurance market.
Background on TRIA and Major Findings
    TRIA created a 3-year program in which the Federal Government 
covers 90 percent of all terrorism-related insurance losses (up to $100 
billion a year) after individual insurance companies pay an initial 
deductible. Insurers, who are required to offer terrorism coverage, 
must repay very little or no assistance. The Act ends on December 31, 
2005, unless renewed by Congress.
    The CFA study, The Terrorism Risk Insurance Act: Should It Be 
Renewed?, assesses current prices for terrorism insurance and the 
increasing ability of the property/casualty insurance industry to cover 
terrorism losses without taxpayer back up.\1\ CFA based its analysis in 
large part on a determination by the Insurance Services Office (ISO) 
that the risk of terrorism in the United States varies geographically:
---------------------------------------------------------------------------
    \1\ The report can be found at: http://www.consumerfed.org/
terrorism_insurance_report.pdf.

 Areas with a high risk of attack are: New York City; San 
    Francisco County; Washington, DC; and Cook County, Illinois 
    (Chicago);
 Areas with a moderate risk of attack are: Suffolk County, 
    Massachusetts (Boston); King County, Washington (Seattle); Los 
    Angeles County; Harris County, Texas (Houston); and Philadelphia 
    County.
 The remainder of the country is at a low risk of attack.

    The report has several major conclusions:

    1. Terrorism insurance rates are relatively low in most areas of 
the country and will continue to be so when TRIA expires, as industry 
experts have concluded that most of the country has no significant 
terrorism risk under TRIA. Based on data collected by ISO, CFA 
estimates that terrorism insurance rates will be extremely low in these 
areas when TRIA expires. For example, in the lowest risk areas of the 
country, CFA calculates that a $10 million building with $5 million in 
contents would cost only $300 to insure against terrorism once the law 
expires, the same cost as in the final year of TRIA. In moderate risk 
areas, this cost would only be $6,526 when TRIA expires, $326 more than 
during the last year of the program.
    2. The private sector will cover all terrorism losses in all but 
nine large cities by 2005, before TRIA expires. Even in those nine 
areas, insurers will be covering the vast majority of the risk. This is 
according to the calculations of the ISO model regarding the risk of 
terrorist attacks, including attacks using weapons of mass destruction 
(WMD) and other catastrophic possibilities. This means that the 
insurance industry should have the capacity to cover all but perhaps 
the most risky areas of the country without help from taxpayers. In the 
five moderate-risk cities mentioned above, private insurers will be 
covering 95 percent of the risk by 2005. In the four high-risk areas of 
the country, insurers will be covering 70 percent of the risk.
    3. Commercial insurance buyers in most of the Nation are reluctant 
to buy taxpayer-backed insurance coverage. This is because of the 
perception that terrorism will not impact them and that, even at very 
affordable rates, the price is too high. According to a recent survey 
by the Council of Insurance Agents and Brokers, half of the commercial 
brokers they questioned said that only 20 percent of their clients are 
actually buying federally backed terrorism insurance.
    4. Industry experts have projected that terrorism insurance losses 
will be relatively modest. ISO has projected terrorism insured losses 
annually to be $5.75 billion before tax considerations. To put this 
projection into perspective, industry losses on September 11 have 
recently been lowered to $30 to $35 billion before tax considerations 
(about $20 billion after taxes). ISO thus projects a September 11 level 
of loss just about every 6 years.
    5. Insurers are in an excellent financial position to cover all 
terrorism losses after TRIA expires. The profits of insurers selling 
TRIA-backed terror coverage are excellent, as is the financial solidity 
of the industry. The return on equity for four of the five top stock 
insurance groups exceeded a very substantial 16 percent in 2003. These 
profits are expected to remain good for some years to come, as the 
industry continues to benefit from a ``hard market'' cycle that has 
kept premiums and profits high. Overall, the property/casualty 
insurance industry added 22 percent to policyholder surplus in 2003 (a 
whopping $65 billion) according to A.M. Best and Co. Meanwhile, 
financial soundness, which is measured by the amount of surplus the 
industry has compared to the coverage it has extended (net written 
premium), is very strong.
Public Policy Recommendations
    Based on the relatively low risk of terrorism attacks and low rates 
in much of the country, as well as strong industry profitability and 
financial soundness and the growing capacity of insurers to offer 
terrorism coverage, CFA found no compelling reason to extend TRIA at 
the end of 2005. The only possible reason Congress might want to 
consider some form of limited taxpayer back up after TRIA expires would 
be to assist the nine cities at moderate or high risk of terror 
attacks.
    However, if Congress considers such a plan, it should:

 Target only the cities where the risk of attack is moderate or 
    high. In fact, it is highly unlikely that the five cities at 
    moderate risk of attack will need assistance, as 95 percent of all 
    potential terrorism losses will be covered by the insurance 
    industry by the end of 2005.
 Increase the deductibles that insurers must pay for losses in 
    these few cities. CFA suggests an industry-wide deductible of $50 
    billion after tax considerations--a pretax deductible of $77 
    billion--for the first year of a new program, increasing by $10 
    billion a year thereafter.
 Increase the share of losses that insurers must pay above the 
    deductible amount from 10 percent to 15 percent, increasing by 5 
    percent a year.
 Only provide taxpayer back up for truly exceptional terrorist 
    events, such as attacks with WMD, and
 Ensure that taxpayers pay no costs for backing up terrorism 
    losses. The Treasury Department should require that insurers pay 
    premiums for the coverage that taxpayers are providing that are 
    actuarially sound, if a not a little higher than estimated taxpayer 
    costs. Requiring insurers to pay rates that are slightly higher 
    than estimated will encourage private insurance mechanisms to 
    quickly compete by offering lower rates.

    I hope you will keep in mind these findings, which are based on a 
market assessment being used by the insurance industry itself, when 
considering the future of TRIA. The evidence strongly suggests that it 
is no longer necessary for taxpayers to provide free reinsurance to 
property-casualty insurers.
    Thank you. I will be happy to respond to your questions at the 
appropriate time.
























                  PREPARED STATEMENT OF JOHN J. DEGNAN
             Vice Chairman and Chief Administrative Officer
                         The Chubb Corporation
                              On behalf of
                    American Insurance Association,
                 Council of Insurance Agents & Brokers,
                   The Financial Services Roundtable,
           Independent Insurance Agents & Brokers of America,
          National Association of Mutual Insurance Companies,
         National Association of Professional Insurance Agents,
           Property Casualty Insurers Association of America,
                  Reinsurance Association of America,
                   Surety Association of America, and
    UWC--Strategic Services on Unemployment & Workers' Compensation
                              May 18, 2004
    Thank you Chairman Shelby, Ranking Member Sarbanes, and Members of 
the Committee, for your leadership on this important issue of the 
Terrorism Risk Insurance Program, a program created by the Terrorism 
Risk Insurance Act of 2002 (TRIA) and that forms a critical element of 
our Nation's economic security against the clear and present danger we 
face. My name is John Degnan and I am Vice Chairman and Chief 
Administrative Officer of The Chubb Corporation (Chubb). I appear 
before you today representing our national property-casualty insurance 
trade association, the American Insurance Association (AIA), and a 
broad coalition of property-casualty insurance trade associations. 
Together, and for the reasons I will describe, we urge you to extend 
TRIA for an additional 2 years so that the market for terrorism risk 
insurance remains stable while legislators, regulators, the insurance 
industry, and U.S. businesses assess available data (including data 
from all 3 years of the program) and develop a long-term solution to 
manage terrorism risk. Enacting an extension now is very important so 
that: (1) the insurance business cycle is not disturbed; (2) the 
financial solvency of the insurance industry and its ability to respond 
to other catastrophes is shielded from terrorist attack; and (3) U.S. 
businesses remain confident that terrorism coverage will continue to be 
available and affordable.
    The national trade associations on whose behalf I appear before you 
today represent virtually the entire property-casualty insurance 
industry, writing all lines of business in every jurisdiction in the 
United States. Their members, including Chubb, offer various types of 
insurance that provide coverage for terrorism risk pursuant to TRIA. 
TRIA has helped stabilize the private market for terrorism risk 
insurance. As the annual renewal cycle for 2005 commercial insurance 
policies begins this summer and TRIA's ``hard'' expiration date of 
year-end 2005 looms, insurers will be forced to make underwriting 
decisions without the certainty of the Federal backstop provided by 
TRIA. Moreover, where that coverage is made available for time periods 
subsequent to TRIA's expiration, the property-casualty insurance 
industry will be put at risk. For these reasons, all signs point to a 
return to the significant market instability that characterized the 
post-September 11 insurance market before the passage of TRIA. A return 
to the pre-TRIA insurance market will have a significant negative 
effect on the national economy, including employment, similar to that 
we saw prior to TRIA when billions of dollars of commercial 
transactions stalled because insurers did not have the capacity 
necessary to provide commercial property-casualty insurance that 
included coverage for terrorism losses. Accordingly, we urge Congress 
to extend TRIA now. A 2-year extension this year will help avoid 
destabilizing the insurance market, and, in turn, the national economy, 
and will enable Congress, insurers, businesses, and government 
officials to gather all available, relevant data--including market data 
from all 3 years of TRIA as insurer deductibles rise from 7 percent of 
prior year commercial premiums in 2003 to 15 percent of such premiums 
in 2005, to analyze that data without fear of market disruption, and to 
collectively develop a more permanent solution for managing our 
Nation's economic exposure to catastrophic terrorism. Congressional 
action now will avoid a premature expiration of the Federal backstop 
based on an analysis of incomplete information about TRIA's impact and 
the nature of the terrorism risk insurance market and the risk itself.
    The tragic attack of September 11, 2001 forced all Americans to 
directly confront the previously unforeseen realities associated with a 
catastrophic terrorist attack on U.S. soil aimed primarily at 
civilians. The attack resulted in the most expensive insured loss, 
natural or man-made, in U.S. history. Insurers responded to September 
11 claims in an unwavering manner, and without the benefit of a single 
dollar of Federal assistance. However, the devastating economic 
consequences of the attack, the specter of future terrorist attacks and 
the loss of available reinsurance for terrorism left insurers faced 
with the real possibility of financial devastation in the event of 
another attack of a similar magnitude. The attack also dramatically 
altered the future landscape of terrorism risk capacity and 
insurability, leaving no ready mechanisms to stabilize the market. 
Insurers and other businesses were forced to reexamine the nature of 
terrorism-related risks, as well as how such risks (which now more 
closely resemble war than any other peril) were being spread and 
managed. In a number of instances, as a matter of financial survival, 
insurers had no choice but to restrict the amount of insurance they 
made available for terrorism losses, as the risk was viewed as 
uninsurable and there was no market certainty. Congress provided 
definitional parameters of the terrorism risk and some capacity by 
enacting TRIA in November 2002, which enabled insurers to return to the 
market with some financial protection.
    TRIA sets up a public/private ``shared loss'' mechanism whereby 
insurers are required to make commercial insurance available for losses 
caused by acts of foreign terrorism against U.S. targets to the same 
extent that they provide insurance for other types of insured losses. 
For workers' compensation insurance, coverage for terrorism risk is 
mandatory, as current State laws generally do not permit insurers to 
exclude coverage for war or terrorism risk. In addition, 22 States 
currently require insurers to provide coverage for damage caused by 
fire following a terrorism event and while some of these State laws 
provide exceptions for fire following ``TRIA-type'' terrorism, TRIA's 
expiration could jeopardize those exceptions. Insurers are permitted to 
charge for the coverage they ``make available'' pursuant to TRIA, 
subject to existing State law and regulatory approval, and 
policyholders are free to reject it, except where the coverage is 
required by State law. TRIA's mandatory availability provision runs 
through 2004 and Treasury has until this September to extend the 
provision through 2005.
    In the event of a terrorist act, the Federal Government will assist 
the insurance industry in paying 90 percent of the resulting insured 
losses, provided: (1) the Treasury Secretary certifies that an ``act of 
terrorism'' occurred; (2) insurers have complied with TRIA's conditions 
for payment of the Federal share, including TRIA's ``make available'' 
and policyholder disclosure requirements; and (3) insurers have 
incurred losses in excess of an annual individual deductible, 
calculated as a percentage of the prior year's direct earned premium 
for covered commercial insurance lines. The insurer deductible started 
at 7 percent in 2003, is 10 percent this year, and rises to 15 percent 
in 2005. The public/private shared loss under the program is subject to 
an annual statutory limit of $100 billion, with every dollar up to that 
limit either being wholly or partially paid by property-casualty 
insurers.
    In essence, TRIA creates a Federal backstop to the private 
commercial property-casualty insurance system in the event of further 
catastrophic terrorist attacks, and provides some market certainty by 
establishing statutory caps for insured terrorism losses that apply to 
both the insurance industry and the Federal Government.
    There is no question that TRIA has helped stabilize the terrorism 
insurance marketplace. Since TRIA's enactment, affordable terrorism 
risk insurance has been more readily available to commercial 
policyholders, as insurers have passed on the benefit of the backstop 
to consumers. This market-stabilizing effect enabled billions of 
dollars of business transactions previously stalled to go forward 
without threatening the solvency of the commercial enterprises involved 
or their insurers. A recent Mortgage Bankers Association (MBA) survey 
of its 40 largest commercial/multifamily mortgage banking firms 
revealed that a substantial majority of those survey respondents 
believe that TRIA has made terrorism insurance both more available and 
less expensive. MBA also noted that failure to extend TRIA would likely 
have an adverse impact on the commercial real estate market by 
recreating the pre-TRIA environment that had led to rating agency 
downgrades of commercial mortgage-backed securities due to lack of 
adequate terrorism insurance. Statement of the Mortgage Bankers 
Association, Joint Hearing of the House Financial Services Committee's 
Subcommittee on Capital Markets, Insurance, and Government Sponsored 
Enterprises and Subcommittee on Oversight and Investigations, ``A 
Review of TRIA and its Effect on the Economy: Helping America Move 
Forward,'' at pp. 2-3 (April 28, 2004).
    TRIA also has helped insurers manage exposure to terrorism risk, 
and write or renew high-risk policyholders that might have been 
uninsurable (or only insurable on unfavorable terms) without TRIA. This 
is because TRIA provides individual insurance companies with some 
certainty as to the dollar amount of risk that they retain. Moreover, 
TRIA's thoughtful use of the insurance industry's infrastructure to 
deliver the Federal share of compensation to impacted businesses has 
allowed Treasury to establish and administer the program with minimal 
investment and ongoing expense. There is no doubt that the stability 
TRIA provides to policyholders and insurers alike has calmed a market 
struggling to come to terms with the uncertainties of 21st century 
terrorism and its ongoing challenge to our homeland security apparatus.
    While TRIA was designed to be a 3-year bridge to development of 
what was envisioned as a functional, wholly private sector terrorism 
insurance market, TRIA has not--and indeed cannot--change the 
underlying characteristics of terrorism risk in the United States. 
These characteristics weigh heavily in favor of a continued Federal 
terrorism insurance backstop.
The Commercial Property-Casualty Insurance Sector Continues to Lack
both the Necessary Capacity and Sufficient Marketplace Data to Handle
Catastrophic Terrorism Losses on its Own
    Under certain event scenarios, estimated insured losses from 
another catastrophic terrorist attack on U.S. soil could exceed $250 
billion. Tillinghast Towers Perrin, Workers' Compensation Terrorism 
Reinsurance Pool Feasibility Study, Summary of Study Findings and 
Conclusions, p. V (2004) (Terrorism experts have developed plausible 
scenarios in which the estimated total insured losses from a single 
event could exceed $250 billion.). For example, if the World Trade 
Center attack had occurred later in the day at lower floors, the losses 
could have been two to three times as severe. These levels would 
approach the entire commercial property-casualty 
industry's estimated capacity of about $150 billion; capacity needed to 
back all commercial risk. Obviously, the risk of financial ruin for the 
industry--and the concomitant impact on policyholders, the U.S. 
economy, and national security--is simply too great, absent 
continuation of a Federal backstop. Because insurers must be able to 
respond to multiple insured events, sometimes in a short time frame, 
the traditional risk spreading mechanism of reinsurance is essential. A 
significant terrorism event, the consequences of which can no longer be 
spread through reinsurance, will compromise the industry's ability to 
respond to a subsequent hurricane or other natural catastrophe.
    Moreover, private market mechanisms remain insufficient to spread 
the risk of catastrophic terrorism in a meaningful way. In its recently 
released Workers' Compensation Terrorism Reinsurance Pool Feasibility 
Study, Tillinghast Towers Perrin cited ``lack of capacity'' as the 
primary reason why a voluntary workers' compensation terrorism 
reinsurance pool would not be a viable mechanism to handle mega-
terrorism risk. This conclusion is not unique to workers' compensation 
insurance, but would apply to the ability of a pool to address 
catastrophic terrorism in other lines such as property and business 
interruption.
    TRIA's mandated study--to assess the program's effectiveness, the 
likely capacity of the private terrorism risk insurance market after 
TRIA expires, and the affordability and availability of terrorism 
coverage--is only in its initial phase and will be delivered to 
Congress by Treasury in mid-2005, just months before TRIA is to sunset. 
Even then, because the prior year's market data tends to be available 
in the first or second quarter of the subsequent year, Treasury will 
have little opportunity to analyze 2004 data before the June 30, 2005 
statutory reporting deadline. Equally important, Treasury will not be 
able to assess market data from 2005, when insurers must take into 
account deductibles that rise to 15 percent of the prior year's direct 
earned premium from TRIA-covered lines. Should Congress defer a 
decision on a TRIA extension until mid-year 2005, insurers, businesses, 
and Government officials will not have sufficient time to act on any 
recommendations and insurers will have no choice but to act now, under 
the assumption that TRIA will not be extended. Congress, other 
governmental officials, insurers, and the businesses they insure need 
time to consider all available data--the results of studies undertaken 
by Treasury and others--and to implement a thoughtful and more 
permanent solution to the terrorism problem, without the ``Sword of 
Damocles'' in the form of financial devastation, hanging over their 
heads. The stabilizing effects of TRIA must remain in place.
Because the United States Continues to be on High Alert for the
Constant and Very Real Threat of Further Attacks, Catastrophic
Terrorism Remains an Uninsurable Risk in the Traditional Insurance
Marketplace
    The Administration has repeatedly alerted Americans to the 
increased possibility of terrorist attacks. Since September 11 2001, 
the United States has been on a constant high state of alert for 
terrorist activity. In fact, New York remains on an even higher alert 
level than the rest of the Nation. In addition, both Department of 
Homeland Security Secretary Tom Ridge and National Security Adviser 
Condoleezza Rice recently warned of possible attempts at terrorist 
activity in the United States during this election campaign season. 
And, as President Bush has reminded us, we are engaged in a long-term 
war on terrorism and the situation is not expected to improve before 
TRIA's currently scheduled expiration date. War and terrorism are not 
fortuitous. Acts of terrorism, like acts of war, are premeditated, 
planned, and executed with a specific purpose by individuals (in the 
case of terrorism) and governments (in the case of war) that have no 
interest in predictability, discernable pattern, or advance warning. As 
war and terrorism are risks of the same character, both types of risk 
are uninsurable for the same reasons.
To Date, Terrorism Risk Cannot be Modeled or Predicted with any
Accuracy
    Natural catastrophe modeling does not aid the terrorism modeling 
process. Modeling for natural catastrophes is far more mature than 
terrorism modeling. Past 
natural catastrophes are predictive of the nature, frequency, and 
severity of future natural catastrophes. Most natural disasters also 
occur with at least some prior warning. Because of this element, 
insurers can track when and where natural catastrophes are likely to 
strike, the type of damage they will cause, and which areas are most 
vulnerable.
    Unfortunately, the same cannot be said for terrorism. Past 
terrorist attacks are not predictive of future terrorist attacks and 
the full range of possible terrorist attacks can never truly be known. 
Terrorists rely on surprise to maximize the impact of an attack, so the 
attack usually comes without warning. In fact, whether an event is a 
``terrorism'' attack might not be known until after it occurs. This 
``man-made'' threat, which is limited only by the imagination of a 
terrorist, is one that simply cannot be forecast.
    The relative infancy of terrorism modeling contributes to the 
risk's uninsurability. While modeling firms have worked diligently to 
produce terrorism risk models to predict terrorism events in the United 
States, they have not been able to model accurately for the frequency 
of terrorist attacks, because it is the terrorists who alone control 
that variable. These models instead focus only on predicting the impact 
terrorism has on its victims. Office towers can be built or retrofitted 
to withstand earthquakes in Los Angeles or hurricanes in Miami (making 
them more insurable), but few businesses would want to turn their 
offices into hardened bunkers. Even then, terrorist excel in adapting 
to overcome such loss mitigation measures.
    The possibility of nuclear, biological, chemical, or radiological 
attacks (NBCR) reinforces the conclusion that catastrophic terrorism 
risks are uninsurable. NBCR demonstrates that even the severity 
component of a terrorist attack is difficult to predict. Potential 
terrorism scenarios now routinely include discussion of NBCR events. 
The anthrax attacks perpetrated through the U.S. postal system, 
(including the U.S. Senate's own mail facility), even though limited in 
scope and severity, only serve to underscore the random quality and 
myriad potential consequences associated with such events. As a result, 
insurers remain reluctant to provide NBCR coverage for terrorism risks 
in their policies beyond that required in workers' compensation 
insurance or already ``made-available'' for other types of insured 
loss.
Unlike Other Risks of Loss, Terrorism is an Interdependent Risk
    Loss control or mitigation techniques employed by one commercial 
business may not protect that business from catastrophic loss. The 
World Trade Center is the most compelling--but not the only--example of 
the interdependent nature of terrorism risk. The World Trade Center was 
a model of security and disaster planning, yet nothing done at the 
World Trade Center could have prevented planes leaving airports with 
hijackers aboard, and nothing done at the World Trade Center could have 
prevented planes being used as weapons from flying into the towers. The 
interdependent nature of terrorism risk, with vulnerability measured by 
the weakest link in the chain, minimizes the effectiveness of even the 
best business-by-business loss control programs.
Information about Terrorism Risk is Incomplete
    Contrary to traditional evaluation of insurance risks, information 
availability and sharing about terrorism risk is asymmetric. Insurers 
and policyholders do not have access to classified information in the 
hands of the U.S. Government, and therefore cannot evaluate the risk of 
terrorism properly. This ``information vacuum'' makes risk transfer and 
management decisions about terrorism a dicey proposition.
    Because of these characteristics, terrorism risk defies normal 
underwriting and rating principles, effectively limiting the ability of 
property-casualty insurers to advance a private mechanism for that 
risk. The combination of these intrinsic characteristics of terrorism 
risk argues in favor of a Federal backstop that will provide both 
certainty and stability to the marketplace. A Federal backstop will 
also help mitigate the continuing absence of a viable reinsurance 
market. During the policy renewal period following September 11, 2001, 
reinsurers largely declined to provide capacity against the risk of 
foreign terrorism in the United States. Reinsurers continue to consider 
terrorism risk uninsurable in the traditional sense, and are not 
expected to provide the market with sufficient capacity when TRIA 
expires. Thus, the Federal Government must continue the role it has 
filled under TRIA: Supplying capacity that is unavailable in the 
private reinsurance market in order to provide the reinsurance 
protection that is critical as long as even a possibility for 
catastrophic loss exists.
    Aside from the inherent systemic issues associated with insuring 
catastrophic terrorism and the insufficient capacity reinsurers are 
able to bring to the market, there is strong consensus among commercial 
policyholders, State insurance regulators, and the insurance industry 
that continuation of a Federal backstop is essential. There also is 
strong consensus that, because of insurance and business cycles, 
extension simply cannot wait. Congress must take action in 2004 in 
order to avoid the kind of market dislocation that was so destabilizing 
prior to TRIA's initial passage. The national trade associations that I 
am testifying on behalf of today are united in support of a 2-year TRIA 
extension that will continue the pattern of certainty and stability, 
while giving all parties the time necessary to determine the best 
mechanism for managing terrorism risk and preserving national economic 
security should such an event occur in the future.
    The devastating results of the September 11 attack illustrate the 
significant threat that terrorism poses to the security of the Nation's 
fiscal health. Businesses--particularly those considered critical to 
the Nation's infrastructure--must be ever mindful of the devastating 
impact that a terrorist attack can have on their financial condition 
and prospects for survival, as well as the catastrophic ripple effect 
that cascading business failures could have on the economy. This is 
especially true of the U.S. property-casualty insurance industry. After 
September 11, the possibility of future terrorist attacks and the loss 
of available reinsurance for terrorism risk left insurers facing the 
very real possibility of financial ruin should another event of similar 
magnitude occur. TRIA helped to significantly ease that financial 
``Catch-22.''
    We urge Congress to take immediate action to extend TRIA for an 
additional 2 years for several important and inter-related reasons 
discussed below.
TRIA's ``Hard'' End Date is Inconsistent with Rolling Expiration Dates
Provided by Underlying Insurance Policies
    TRIA has a ``hard'' expiration date of December 31, 2005, after 
which date Treasury will be unable to certify any terrorist act. By 
contrast, the underlying insurance policies that rely on TRIA are 
written every day of the year, generally for a 12-month term (although 
some commercial property insurance policies covered by TRIA are 
multiyear). This sequential mismatch will create confusion for 
policyholders and uncertainty for insurers, because policies written 
before, but extending beyond, December 31, 2005 will have a coverage 
term that extends beyond the backstop. As a result, insurers will have 
no choice but to evaluate every policyholder considered for coverage 
during this period as if the backstop does not exist for at least part 
of the coverage period.
Treasury's ``Make-Available'' Decision Adds to the Uncertainty
    TRIA directs Treasury to decide by September 2004 whether to extend 
current ``make-available'' provisions to 2005, the third year of the 
program. A number of business groups have publicly urged extension of 
the ``make-available'' requirement, because the private terrorism 
insurance market is not fully stable and is likely to destabilize in 
TRIA's absence. Insurers have expressed concern about the potential 
mismatch between policies sold during 2005 and the hard sunset date. 
For example, if ``make-available'' were extended through 2005, carriers 
would be required to ``make-available'' terrorism insurance on policies 
becoming effective on December 1, 2005, even though TRIA would remain 
in effect for only one month. The ensuing confusion in terms of 
coverage, premiums charged, and exposures being assumed will 
significantly disrupt the insurance market, particularly for workers' 
compensation and commercial property insurance. Despite somewhat 
differing perspectives on the ``make-available'' requirement, 
policyholders and insurers agree that it is critical to extend the 
backstop beyond December 31, 2005. Securing the extension in 2004, 
rather than 2005, would avoid difficult implementation of the ``make-
available'' provision during the third year of the program.
    The hard end dates for ``make-available'' (December 31, 2004, 
unless extended by Treasury) and TRIA protection (December 31, 2005) do 
not coincide with State regulatory requirements or implementation 
timelines of property-casualty insurers. Post-TRIA policy forms must be 
approved by most of the States prior to their use in the market, and 
that process has already started. New forms submitted for State 
regulatory review must delineate the scope (if any) of terrorism 
coverage provided in the policy. Without a doubt, some of those policy 
forms are premised on TRIA expiring at the end of 2005. In many States, 
insureds must be notified of any unfavorable changes to the coverage 
being provided under their policies, including the terrorism coverage 
afforded because of TRIA, at least 30 (and in some cases up to 75 or 90 
days) days prior to the renewal date for their policy. This effectively 
means that insurers must start notifying insureds of the changes 
occasioned by TRIA's expiration in October 2004, because 1 year 
policies incepting in January 2005 may very well not have TRIA 
terrorism coverage for at least that part of their term that extends in 
2006.
    State cancellation/nonrenewal requirements add more complexity. 
Insurers that cancel or nonrenew certain policyholders because of 
concern about post-TRIA exposure levels will have to comply with a 
myriad of State cancellation and nonrenewal notification requirements, 
generally ranging from 30 days to 90 days. Carriers that are unable or 
unwilling to offer the capacity for workers' compensation and/or 
commercial property insurance (that, by law, must include at least some 
insurance for terrorism) to insureds that have significant terrorism 
exposures will have no choice but to cancel or nonrenew these policies, 
causing additional market disruption. Policyholders who receive such 
notices will need to seek out other insurers from whom they can obtain 
needed coverage.
Once Policy Forms are Approved, System Changes must be Implemented
    New policy forms (along with any required policyholder notices) 
will need to be loaded into insurance company systems, a process that 
often takes several months, because many States typically require 
State-specific policy language (resulting in multiple versions of the 
same form) and have State-specific notice requirements. These changes 
must be in place before any policies using the new forms can be 
underwritten consistent with State regulatory requirements.
    Implementation of new policy forms will affect the full range of 
commercial policyholders. For large commercial policyholders, the 
underwriting process will take several months. Many of the large 
commercial policyholders that benefit most from TRIA have relatively 
complex insurance arrangements that generally require 2 to 3 months of 
negotiation prior to being finalized. As a result, the first policies 
that are likely to be affected by TRIA's ``hard'' sunset (that is, 
those that are up for renewal subsequent to January 1, 2005) will be 
negotiated in the late summer or early fall of 2004. In addition, 
ongoing uncertainties surrounding TRIA's hard sunset date may more 
immediately and adversely impact small to mid-size commercial insurance 
policyholders. These businesses comprise the majority of the commercial 
lines marketplace. They rely on TRIA perhaps to a greater extent than 
many of their larger counterparts, because their operating margins are 
thinner, and they have less leverage in the marketplace.
Insurance, the Underpinning of the U.S. Infrastructure, needs a TRIA
Extension until a Long-Term Solution is in Place
    Commercial insurance spreads risk for all critical U.S. 
infrastructures. If the solvency of the insurance industry were 
compromised, the ramifications for the U.S. economy and national 
security would be catastrophic. Indeed, the importance of property-
casualty insurance to the physical and economic infrastructure of the 
United States cannot be overemphasized. Insurance helps immunize the 
U.S. economy from the adverse effects of the risks inherent in economic 
growth and development. Insurance also provides the funding necessary 
to rebuild physical and 
economic infrastructure in the event of catastrophic losses to persons 
or property, whether caused by hurricane, earthquake, fire, defective 
products, or other calamity. Examples of the necessity of insurance to 
the Nation's critical infrastructure abound in every significant 
economic sector, including:
Construction
    Construction projects cannot go forward unless property-casualty 
insurance is in place to protect against loss arising out of 
construction activities. Without insurance in place, contractors 
engaged in building projects will not build (because surety bonds are 
not available); permits will not be issued (because most statutes 
require ``builder's risk'' and contractor's liability insurance); 
necessary financing cannot be obtained (because lenders typically 
require insurance as a condition to lending money) and work cannot 
commence (because workers' compensation insurance is a statutory 
workplace requirement).
Commercial Lending
    Businesses cannot obtain financing for property acquisitions or new 
business initiatives, because property-casualty insurance is an 
essential prerequisite for mortgage and other commercial lending 
activities.
Real Estate Development and Commercial Leasing Activities
    These activities account for nearly one-quarter of U.S. Gross 
Domestic Product. The inability of tenants to obtain property-casualty 
insurance to protect owners of office buildings and other commercial 
properties frustrates these activities and causes significant economic 
dislocation, particularly in urban areas, as demonstrated by the 
dramatic slowdown in the New York City real estate market after 
September 11.
Employment
    Businesses cannot employ workers without providing them workers' 
compensation insurance.
Transportation, Shipping and Transit
    Motor vehicles (including trucks, buses and cars) cannot be 
operated on public roads without property-casualty insurance because 
proof of financial responsibility (in the form of insurance) is a 
statutory prerequisite.
Business Recovery
    In the event a business sustains a property loss to its production 
facility (for example, in the form of a fire), property-casualty 
insurance provides that business with the money necessary to: (1) 
rebuild the property lost by the fire; (2) preserve its income stream 
while the property is being repaired and its operations are being 
restored; and (3) meet its payroll obligations to its employees. 
Without such insurance, employees could very well lose their jobs if 
the business cannot recover from the property and income losses 
sustained from the fire.
Research and Development
    The development of pharmaceuticals, software, and other new 
products, requires companies to put business assets at risk and expose 
themselves to new liabilities. Property-casualty insurance allows 
businesses to protect against first party losses to new product 
prototypes, shields against new legal liabilities created by 
introducing new products into the stream of commerce, and to otherwise 
``hedge'' against the risks inherent in innovation and invention.
Global Commerce
    Property-casualty insurance plays a critical role in global 
commerce. The international partners of U.S. businesses and the legal 
requirements of other countries make the continued availability and 
affordability of property-casualty insurance essential to preserving 
this Nation's place in global markets.

    Terrorism risk is exactly the kind of problem that threatens to 
compromise U.S. critical infrastructure. The potential for catastrophic 
terrorism loss, especially without the benefit of a Federal backstop, 
exacerbates the solvency challenges faced by insurers. As noted earlier 
and based on figures provided by the Insurance Information Institute in 
its III Fact Book for 2004, currently the U.S. property-casualty 
insurance industry has approximately $300 billion in surplus. Roughly 
half that figure represents monies set aside to cover homeowners and 
automobile insurance losses, leaving approximately $150 billion to 
support all types of commercial insurance losses, including (but not 
limited to) losses from terrorism. If an event of greater magnitude 
than the September 11 attack were to occur, the ramifications for the 
insurance industry, the U.S. economy, and U.S. national security could 
be dire. Moreover, if the U.S. property-casualty insurance industry 
were to become insolvent, the economic reverberations would be felt 
throughout the world.
    In short, without a robust and financially sound property-casualty 
insurance industry, none of the other aforementioned critical 
infrastructure industries--which look to their insurers in the event of 
a loss to make them ``whole'' again--would be able to recover 
economically from a major terrorist attack, or for that matter, from 
any other type of catastrophe. One terrorist attack may very well be 
enough to render the insurance industry unable to absorb a subsequent 
catastrophic loss of any kind.
Conclusion
    TRIA's public-private partnership is working to stabilize the 
commercial insurance markets that underpin our entrepreneurial, free-
market economy. However, because war and terrorism are societal risks, 
they remain uninsurable. The aim of a terrorist is not to hurt the 
insured, but rather to attack the United States. To ask the insurance 
industry to absorb loss resulting from an attack against our Nation 
(one directed at the United States to alter its behavior) places the 
U.S. economy and our national security at great risk. Without a risk-
spreading mechanism, the right attack could very well bring the 
insurance industry to its knees and significantly destabilize our 
economic infrastructure, achieving a primary aim of the terrorist. We 
simply cannot afford to let TRIA expire and leave this important matter 
to chance. A 2-year extension is critical.
    TRIA must be extended in a manner that: (1) avoids the types of 
market dislocations it was designed to address; (2) protects our 
ability to both recover economically from a terrorism loss and respond 
to other catastrophic events that take place thereafter; and (3) allows 
insurers, businesses, and government officials to develop a more 
permanent solution to the terrorism insurance problem. Because of the 
regulatory and operational lags that are inherent in the insurance 
system, Congress must act in 2004, even though the law itself does not 
expire until year-end 2005.
    Thank you for this opportunity to explain the importance of a 2-
year TRIA extension.
                               ----------
               PREPARED STATEMENT OF CHRISTOPHER NASSETTA
                 President and Chief Executive Officer
                       Host Marriott Corporation
                              on behalf of
               The Coalition to Insure Against Terrorism
                              May 18, 2004
    Chairman Shelby, Ranking Member Sarbanes and Senators, good 
morning, my name is Christopher Nassetta. I am CEO of Host Marriott, 
which owns or has interests in over 230 hotels in 34 States and the 
District of Columbia, and is a publicly traded real estate investment 
trust. I am appearing today on behalf of the Coalition to Insure 
Against Terrorism (CIAT).\1\
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    \1\ I am also a board member of The Real Estate Roundtable (The 
Roundtable) and a member of the executive committee and treasurer of 
the National Association of Real Estate Investment Trusts (NAREIT). 
Both The Roundtable and NAREIT are CIAT members.
---------------------------------------------------------------------------
CIAT Representing Consumers of Commercial Insurance
    CIAT is a broad coalition of insurance consumers that was formed in 
the months following September 11 to ensure that American businesses 
could obtain comprehensive and affordable terrorism insurance. As part 
of its effort, CIAT joined with the Administration and those in 
Congress who recognized that only the Federal Government could provide 
the framework to make this coverage available to all those who required 
it. The diverse CIAT membership covers virtually every sector of the 
private economy as well as public sector buyers of insurance. For 
example, the U.S. Chamber of Commerce, the National Association of 
Manufacturers, and the National Retail Federation are members. So are, 
to name a few sectors, transportation interests (for example, the 
Association of American Railroads, the General Aviation Manufacturers 
Association, and the Taxicab, Limousine, and Paratransit Association), 
utilities (for example, American Gas Association, American Public Power 
Association, Edison Electric Institute, and National Rural Electric 
Cooperative Association), finance (for example, American Bankers 
Association, America's Community Bankers, Mortgage Bankers Association 
of America), real estate (American Resort Development Association, 
National Association of REALTORS', Building Owners and 
Manufacturers International, International Council of Shopping Centers, 
and National Association of Industrial and Office Properties) and 
sports (for example, the Baseball Commissioner, NCAA, NBA, NFL, and 
NHL). A full list of CIAT's member trade associations as well as other 
members accompanies my written testimony.
    Collectively, the business and governmental organizations 
represented by the CIAT membership are the principal consumers of 
commercial property and casualty insurance in America, and therefore it 
is accurate to say that the voice we provide today is the true consumer 
voice with respect to the subject of today's hearing.
After September 11, TRIA Became Indispensable
    My own company Host Marriott does not come to this subject 
untouched by terrorism. We and our employees were deeply and personally 
affected by the terror attacks of September 11. Although we were not 
specifically targeted by the terrorists, we did not escape the terrible 
consequences of their acts. Host Marriott lost our 820-room Marriott 
World Trade Center Hotel which was completely destroyed, and our 
Marriott New York Financial Center Hotel was heavily damaged. Much more 
importantly, we suffered the loss of two hotel employees and eleven 
hotel guests were unaccounted for.
    After first addressing the human issues, we needed to reassure 
markets that our properties were fully insured, and I spent many hours 
on the phone with shareholders and analysts. In each instance, they 
wanted to know whether our policies fully covered terrorist attacks. 
Fortunately, our property and casualty policies then in effect did 
cover losses resulting from acts of terrorism. After the horrific 
attacks, the insurance market changed dramatically. Terrorism risk was 
excluded from renewal offers on most of our policies, and the only 
coverage we could find was either ``stand-alone'' policies or ``buy-
back'' endorsements, and such policies left us with considerably less 
protection than we had before September 11.
    All of CIAT's members were united in their support for the 
enactment of the Terrorism Risk Insurance Act of 2002. All remain 
equally determined to see the TRIA program continue for the 
intermediate term because the conditions that made it necessary still 
are with us. The threat of foreign terrorist acts in the United States 
has not diminished; if anything, it may have increased since TRIA was 
enacted. At the same time, the insurance market has not recovered, at 
least not with respect to this peril. While some limited reinsurance 
capacity has returned, nothing near what is needed to sustain the 
economy is foreseeable under current conditions.
    In today's world, CIAT believes TRIA or something like it has 
become indispensable. That is because our economy and businesses are at 
risk for unique man-made catastrophic events of unknown dimension and 
frequency which the insurance industry is unprepared, understandably, 
to handle on its own. Our national leaders tell us repeatedly that 
terrorism will be a threat to us for the foreseeable future. At the 
same time, our Nation is undertaking significant efforts both to 
prevent and to prepare for terrorism. We believe that TRIA is an 
important component of this national effort, as TRIA both helps the 
economy move forward in the face of terrorism and helps us prepare 
economically should there be another catastrophic event. Without TRIA 
we believe the wheels of commerce, including the active development of 
new businesses and the jobs they bring with them, will be slowed 
jeopardizing our Nation's economic security.
    On behalf of CIAT's members, let me thank this Committee and the 
entire Senate for enacting this successful law. But I would be remiss 
if I did not specifically acknowledge that the President provided 
critical personal leadership in getting the program enacted. President 
Bush recognized the importance of this effort, not just from the 
perspective of an insurance market unable to underwrite accurately and 
assume the whole risk, but because he knew our economy needed to be 
secure then and in the future. We thank you and him for these efforts. 
They succeeded well.
Importance of Immediate Extension of ``Make-Available''
    Before I explain how TRIA has succeeded, I would like to address a 
pressing and related matter. The members of CIAT are increasingly 
anxious about the looming prospect that our ability to obtain 
comprehensive and cost-effective terrorism coverage will be diminished 
substantially in 2005 unless the Secretary of the Treasury moves 
affirmatively to extend the so-called ``make-available'' provision in 
TRIA. The Act provides that he is to make this determination by 
September 1, 2004. If the ``make-available'' provision is allowed to 
expire this year, American businesses face the alarming prospect that 
terrorism insurance policies again will become scarce, if not 
unavailable altogether--a full year earlier than TRIA's termination 
date. Further, it is likely that financial markets will react 
negatively in the final quarter of 2004 to the prospect that insurance 
may not be available.
    Absent an extension, primary insurers would no longer be mandated 
to make terrorism insurance available on the same terms and conditions 
as other insurance. Although we had hoped initially, like all who were 
involved in the passage of TRIA, that a significant private market for 
terrorism reinsurance would emerge in a post-September 11 TRIA 
environment, this has not happened. Consequently, we are seriously 
concerned that with the absence of a ``mandate'' in 2005 under TRIA and 
with the paucity of private market reinsurance available, primary 
insurers will not offer, or ``make-available,'' significant, 
comprehensive terrorism insurance for the 2005 marketplace. In fact, we 
know from the example of the continuing exclusion of biological, 
chemical, radiological, and nuclear risks how markets will react if 
there is no mandate (and continuation of backstop).
    Accordingly, I respectfully urge Members of this Committee and 
indeed all of the Senate to recommend to the Secretary of the Treasury 
that he extend the vital ``make-available'' provision of TRIA this 
year. A bipartisan effort already is underway in the House in calling 
on Treasury Secretary Snow to extend the ``make-available'' provision 
of TRIA for the third year of the Program. These House Members have 
urged the Secretary to take that action as soon as possible rather than 
leave it for the September 1 deadline. This will ensure that the 
insurance industry will be prepared in 2005 to provide American 
businesses with one of the crucial tools necessary to help protect the 
American economy and American jobs from the ugly and harmful specter of 
terrorism.
How TRIA Helped The Market
    Prior to September 11, coverage for acts of terrorism was routinely 
included in all property and liability insurance policies. As I said, 
after those horrific attacks, terrorism risk was generally excluded 
from the renewal offers on all of these policies, and the only coverage 
that could be found was either ``stand-alone'' policies or ``buy-back'' 
endorsements, and even taking up what coverage was offered on those 
terms left us and others with substantially less protection of our 
assets and operations than had been the case before September 11. Even 
when some coverage was available, it was not as broad or secure as 
before and the costs were dramatically higher. Moreover, there was no 
consistency or apparent rationality to the prices on various layers and 
programs of coverage.
    With respect to Host Marriott's own program, our property insurance 
costs nearly tripled in the policy year following September 11, even 
though on a property portfolio insured for $8.6 billion for other 
(nonterrorism) perils, we had stand-alone terrorism insurance for only 
about 3\1/2\ percent of that portfolio value, and that now excluded 
biological, chemical, and radiological risks.
    I have no doubt that virtually all other commercial buyers in the 
market had the same experience as Host Marriott. The consequence of 
this was not just decreased coverage protection and increased cost for 
us and other buyers. In many cases, it also meant that we in the 
business community could not, for example, provide lenders and other 
business partners with evidence of insurance consistent with loan 
documentation requirements. This led to a slow-down of development 
activities, job losses, and other consequences throughout the post-
September 11 economy.
    After TRIA was enacted the market very quickly normalized, for the 
most part. The combination of the Federal reinsurance backstop and the 
law's requirement that all participating property and casualty insurers 
``make-available'' terrorism insurance in every commercial policy, led 
to restoration in available limits in most cases and, importantly, a 
return to something like a rational or consistent pricing of this 
coverage in the market in the 18 months since TRIA came into effect. To 
be sure, the process has been gradual as insurers, brokers, and buyers 
have adjusted to the Act's requirements and considered the evolving 
prices and other terms. The most recent information from Marsh, Inc., 
the world's largest insurance brokerage firm, shows that the take-up 
rate for terrorism coverage continues to rise as this adjustment 
process continues. For example, a recent Marsh study of 2,400 U.S. 
businesses found that, from the second quarter to the fourth quarter of 
2003, the percentage of businesses purchasing terrorism coverage rose 
another 5.4 percent, from 27.3 percent to 32.7 percent. I believe that 
if you looked specifically at major businesses or at publicly traded 
companies with boards and managements subject to Sarbanes-Oxley 
responsibilities, you would find even higher rates of purchase.
    In assessing the success of TRIA, Congress should keep in mind that 
it is early in the TRIA experience. Consider the comparative experience 
for other government-backed insurance programs dealing with specific-
perils. Two examples are instructive. First, the California Earthquake 
Authority, which is a publicly managed entity established by the 
California Legislature to ensure that earthquake coverage is offered to 
all residential policyholders, reports that just 14-17 percent of 
eligible California homeowners have earthquake insurance.\2\ Second, 
according to a recent GAO report, the Federal Emergency Management 
Agency, a unit of the Homeland Security Department, estimates that one-
half to two-thirds of property owners in eligible flood-prone areas do 
not have flood insurance coverage under the National Flood Insurance 
Program (NFIP), even though NFIP coverage is mandated for all FHA or 
GSE-backed loans for homes in special flood hazard areas.\3\ This 
participation rate for the NFIP, which has been in operation since 
1968, would be roughly comparable to the recent take-up rate reported 
by Marsh for the new TRIA-backed commercial terrorism insurance. 
Moreover, the NFIP flood insurance is not evenly distributed across the 
country. As of March 2001, Florida accounted for roughly 41 percent of 
total NFIP policies in effect nationwide.
---------------------------------------------------------------------------
    \2\ Summary Report to the CEA Governing Board: Stakeholder Comments 
at Roundtable Summit Meetings, June 6, 2003, p. 5. Available: 
www.earthquakeauthority.com/pdfs/FinalRndtbl Rept6-19-03.pdf.
    \3\ U.S. General Accounting Office, Flood Insurance: Challenges 
Facing the National Flood Insurance Program, GAO-03-606T (Washington, 
DC: April 1, 2003). GAO did not attribute the low NFIP participation 
rate to a lack of need for Federal flood insurance, but rather lack of 
awareness or information on the part of policyholders and complexity of 
the NFIP. Similarly the early participation rates under TRIA, in part, 
may reflect the newness of the program and inexperience or 
informational deficiencies for both insurers and customers. The 
increases in participation rates during 2003 reported by Marsh suggest 
this may be the case rather than lack of ultimate demand for the 
coverage.
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Biological, Chemical, Radiological, and Nuclear Risks
    TRIA has certainly led to a general availability of terrorism 
coverage and has produced relative stability in pricing for that 
coverage. Unfortunately, it cannot be considered a complete success, 
from the perspective of CIAT's broad membership, because of the 
continued exclusion by insurers of biological, chemical, radiological, 
and nuclear (or B/C/R/N) risks from the terrorism insurance being 
offered.
    In the early months of TRIA, there was some confusion among various 
parties and even some commentators about whether the TRIA backstop was 
available for these B/C/R/N risks, whether as WMD's or otherwise. CIAT 
itself sought and obtained from the TRIA Office an unequivocal 
affirmation that B/C/R/N terrorism is an insurable risk which will be 
eligible for indemnification under TRIA.\4\
---------------------------------------------------------------------------
    \4\ See Terrorism Risk Insurance Program Interpretive Letter, dated 
March 24, 2004, available on the Department of Treasury's website at: 
www.treas.gov/offices/domestic-finance/financial-institution/terrorism-
insurance/pdf/redactedci.pdf.
---------------------------------------------------------------------------
    While this may clear up some misunderstanding that existed on the 
margins in the market, it is equally clear that most major insurers 
understand that the indemnification is available for these perils but 
that they, at least for now, have no plans to offer coverage of B/C/R/N 
perils because of the deductibles they retain and because of the lack 
of non-Federal reinsurance. State regulators have, since TRIA was 
enacted, approved specific exclusion clauses which allow exclusion of 
most B/C/R/N risks from most commercial lines property and casualty 
policies. The main exception is workers' compensation where the 
coverage is defined by statute and is not allowed to exclude these 
perils.
    We point this out not to criticize the insurers, or the State 
regulators, but to illustrate the still tenuous nature of the market 
and of the insurance industry's limited capacity or willingness to 
accept terrorism exposure. We believe this observation only reinforces 
the conclusion that the private insurance and reinsurance market is not 
yet ready, nor will it be by 2006, to offer terrorism insurance to the 
U.S. economy without some continued indemnification from the Government 
under TRIA. The experience also illustrates that whether coverage is 
available is largely a function of the interplay of the continued 
Federal backstop and the mandatory offer or coverage requirements of 
both State and Federal law.
Critical Importance of 2-Year Extension of Overall Program in 2004
    We are staring the calendar in the face. TRIA is currently subject 
to a scheduled ``hard'' expiration on December 31, 2005. It is a 
``hard'' expiration in the sense that no terrorist event after that 
date will be federally indemnified even under a policy which is still 
in effect on that date and which otherwise covers terrorism. The 
insurance industry has already proposed to State regulators, through 
the collective body, Insurance Services Office (ISO), to begin using 
policy forms beginning January 1, 2005 that would exclude or cut off 
terrorism coverage on January 1, 2006 on policies that run past that 
date. (While the calendar year is common in insurance programs, the 
majority of commercial policies have renewal dates other than January 
1.) Worse, our fear is that in many cases insurers may withdraw from 
particular lines or particular customers rather than bother with 
negotiating over these ``sleeping'' exclusions that have been proposed 
to regulators. Thus, commercial insurance buyers face potentially 
severe dislocations and availability problems not in 2006 but as soon 
as negotiations for 2005 insurance programs commence; that is to say, 
later this year, if the overall TRIA program is not renewed before 
then.\5\
---------------------------------------------------------------------------
    \5\ TRIA calls for a comprehensive study and report by the Treasury 
Department to Congress in June 2005. Unfortunately, it is now clear 
that date will be too late for Congressional action, if serious market 
dislocations are to be avoided. We believe that Treasury study may 
provide valuable guidance for any eventual long-term solution but 
should not deter Congress from providing the 2-year extension in the 
meantime.
---------------------------------------------------------------------------
    Thus, we believe that Congress should enact that extension now, 
this year, to ensure that everyone who needs coverage can buy it. Only 
this will avoid gaps in availability during the 2004-2005 insurance 
renewal season. Any uncertainty during the coming year could impair 
economic activity--especially new commercial construction--and job 
growth, as clearly occurred between September 11 and November 2002 when 
TRIA was enacted.
A Federal Role Remains Necessary
    From CIAT's perspective, TRIA has been not only a great success, 
but also an economic necessity in helping to manage each industry's--
and our Nation's--economic risks from terrorism. Looking forward, we 
see no evidence that private insurance markets will be able to provide 
adequate terrorism insurance.
    Some claim to know what U.S. cities or buildings are at risk and 
what areas are not at risk. Neither I nor other CIAT members pretend to 
have that kind of knowledge. The knowledge we do have is that the 
terrorist mind is dynamic. Its targets and methods of attack evolve 
with the conditions. As potential targets harden, other softer targets 
or geographical areas come into focus. Given this reality it seems 
shortsighted indeed to try to microdesign a program today for specific 
risks that we know will evolve in the future. To suggest that terrorism 
insurance is relevant to only nine U.S. urban areas is ludicrous. Host 
Marriott has hotels in 34 States and the District of Columbia, and the 
CIAT coalition has national membership active in all 50 States 
including rural organizations, such as the rural electric cooperatives, 
that are vitally concerned with the availability of this insurance 
coverage. What we need, and need urgently, is a continuation of TRIA, 
to help us be prepared for whatever might come.
    Clearly, terrorism is a risk that arises from persons or groups who 
have declared war on the United States--making U.S. economic interests 
at home and abroad the new battleground. Recent attacks in Jakarta, 
Istanbul, and Spain have demonstrated that terrorists remain intent 
upon waging this war. As Secretary of Homeland Security Tom Ridge said 
recently in a speech at the Port of Portland (Oregon):

        [T]he terrorists in part targeted the free and democratic 
        elections in Spain--again striking at the elements of our 
        society that they hate the most. As we enter a season dominated 
        by these symbols--the Olympics, political conventions, and our 
        own presidential election--we must remain on heightened alert 
        so that these very foundations of our freedom do not become 
        targets for the enemy.

    However, unlike hurricanes, earthquakes, and floods, we do not know 
how another attack will manifest itself--we do not know where, when, or 
how catastrophic an attack will be--all we know is that another attack 
is likely coming. Despite early attempts by modeling firms to produce 
terrorism risk models that can accurately predict terrorism events in 
the United States, they are unable to model accurately for the 
frequency or severity of such attacks, absent more reliable data. 
Unfortunately, even as we make every effort to eliminate the threat of 
terror, the terrorists themselves may substantially influence those 
variables.
    The private sector has not been idle in the meantime. For example, 
serious work has been done exploring alternatives to TRIA, such as the 
possibility of a privately funded terrorism reinsurance pool for the 
workers' compensation insurance market. This is a line of coverage 
crucial to every employer. The preliminary conclusions, however, 
suggest that even this may be beyond the capability of the private 
economy without some Government assistance. At a minimum, more time is 
needed to develop solutions, and only an extension of TRIA will provide 
that time.
    Whether or not private markets are able to meaningfully price in 
the future the risks associated with this war, we need to think about 
what condition insurance markets will be in after another such attack. 
Insurance is a critical element in the business of this Nation. As we 
spend billions creating the Department of Homeland Security, we need to 
consider also the experience and example of other nations, such as the 
UK, France, Germany, Israel, Austria, South Africa, and Spain--and 
recognize that this is not solely a ``market'' issue--clearly, this is 
a matter of managing the Nation's economic risk and preparing our 
Nation's economy for war of this nature. Each of these countries, and 
others, have established ongoing government-aided terrorism insurance 
(or reinsurance) programs. Attached is an addendum briefly describing 
each of these foreign programs.
    It would be ironic if Congress declined to give the domestic 
economy the security of knowing next year that the Government will 
continue to support terrorism insurance risk. That is because Congress 
has provided long-term insurance protection for U.S. investors against 
terrorism and other forms of ``political violence'' when U.S. business 
invests overseas. The Overseas Private Investment Corporation (OPIC), a 
Federal Government agency, has been providing this protection to U.S. 
investors for their overseas projects since 1971.\6\ It certainly seems 
consistent to us that the U.S. Government, while it continues to 
provide multiyear insurance coverage for acts of terrorism overseas, 
should also at the very least provide a short-term extension of 
reinsurance coverage for terrorist events on our own soil. TRIA should 
be extended at least through the current authorization of the OPIC 
program, that is 2007. As President Bush has repeatedly reminded us, 
the war on terrorism is a long-term endeavor, with little expectation 
that the situation will improve with any certainty before TRIA's 
currently scheduled expiration date.
---------------------------------------------------------------------------
    \6\ OPIC is currently authorized through 2007--two years after TRIA 
is currently set to expire--but has project commitments, including 
insurance coverage, for up to 20 years into the future.
---------------------------------------------------------------------------
    Terrorist attacks are not attacks on individual companies or 
buildings but rather on our national policies and the way of life in 
America. When considered in this way, it is only natural that a 
national policy of shared risk be established--and be maintained--until 
the threat is removed. A major reason that terrorists attack us is to 
disrupt our economy. Having mechanisms, such as TRIA, in place that 
allow our economy to continue in the face of threats and to recover 
from actual attacks, enhances our economic security. This is no time to 
retreat from what we resolved to do after September 11. As a country we 
must maintain the efforts which will secure our economy. TRIA is an 
important part of that national resolve. For these reasons, CIAT urges 
you to act quickly to extend TRIA for 2 additional years.
Conclusion
    TRIA has been a success, and we commend the Chairman and Ranking 
Member for holding this very important hearing today. We remain 
concerned, however, that an adequate private reinsurance market for 
terrorism has not emerged in the 18 months since TRIA's enactment, and 
for this reason as well as the other reasons stated above, action this 
year is imperative in two respects: (1) the Treasury Secretary should 
extend the ``make-available'' provision as soon as possible; and (2) 
TRIA should not be allowed to sunset in 2005; rather, Congress should 
provide a seamless, 2-year extension of TRIA, which contains the 
``make-available'' requirement, before adjournment this year.
    Neither we in the private sector nor Congress should sit idle 
during the time after TRIA is extended. This 2-year extension will give 
policymakers, insurance markets and their regulators, and we customers 
the extra time needed to revise or modify the program or to develop a 
wholly new and more permanent solution to this critical need of the 
economy. Thank you, Mr. Chairman. I would be happy to respond to the 
Committee's questions.






                PREPARED STATEMENT OF JACQUES E. DUBOIS
               Chairman and CEO, Swiss Re America Holding
                              May 18, 2004
    Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. My name is Jacques Dubois and I am Chairman and CEO 
of Swiss Re America Holding Corporation. We have filed written 
testimony for the record. Thank you for your leadership on this urgent 
matter and for giving us this opportunity to comment regarding the 
Terrorism Risk Insurance Act.
    First, a few words about Swiss Re. Founded in Zurich, Switzerland 
in 1863, Swiss Re has insured risks in the United States since 1880. 
Today, Swiss Re has global revenues of approximately $28 billion and 
total assets of $130 billion. Swiss Re is the world's second largest 
reinsurer and the world's largest life and health reinsurer and is also 
North America's largest reinsurer. Our company insures risks globally, 
operating from 70 offices in 30 countries. We employ 2,300 people in 
the United States and 9,000 worldwide. We are also members of the 
Reinsurance Association of America and the American Council of Life 
Insurers.
    More to the point of today's hearing, Swiss Re has responded to 
virtually every major U.S. catastrophe over the last 100 years. In 
fact, for Swiss Re, prior to September 11, our largest single loss 
relative to capital was the San Francisco earthquake in 1906. Swiss Re 
plays an important role in the U.S. insurance industry and is active in 
discussions regarding terrorism risk and terrorism losses. Our 
September 11 claims totalled $3.3 billion and we were the largest 
insurer of the World Trade Center.
    Although reinsurance is not subject to TRIA, Swiss Re has a keen 
interest in the law for two reasons:

 First, U.S. terrorism risk stems, in large measure, from 
    terrorists' efforts to influence government policy. Terrorist 
    attacks seek to undermine U.S. institutions and culture. Prior to 
    September 11, terrorism had not been perceived as a significant 
    risk. But September 11 demonstrated the enormous potential for loss 
    caused by terrorist attacks. We feel very strongly that Government 
    must play a partnership role with the insurance industry in coping 
    with these losses. Insurers, reinsurers, property owners, business 
    owners, employees, and government and its institutions--all of us 
    are at risk for terrorism.
 Second, in short, TRIA has worked. TRIA has provided 
    protection to insurers that limits losses in the event of an 
    additional terror attack. This has allowed insurers to perform 
    their traditional roles in bearing risks against losses from perils 
    that the industry can effectively price and underwrite such as 
    hurricanes, floods, fire, auto accidents, and other events.

    As a reinsurer, we are not required to provide terrorism 
reinsurance coverage. And, for the most part, we do not now provide 
terrorism reinsurance because we cannot quantify the frequency or 
severity of possible events. There are a few exceptions:

 We provide partial protection for clients in containing their 
    TRIA retention exposure.
 We provide modest catastrophe cover for our group life 
    clients.

    In both cases, what we provide is a fraction of what our customers 
need and want and what we had provided prior to September 11.
    What these two exceptions have in common is that we can quantify 
our maximum exposure. To accept risk without fully understanding our 
exposure would be irresponsible to our shareowners and to our 
customers.
    The impossibility of predicting frequency and severity of terrorism 
attacks is the primary reason why the reinsurance market has been 
cautious in offering terrorism risk protection. Although much work has 
been done on models to assess terrorism risk, forecasts of the 
frequency, and the magnitude of terrorism losses are extremely 
problematic. Statistical data is simply unavailable to begin to 
quantify this risk. And we must accept the fact that it may never be 
possible to capture, in a model, the intentions of human minds that 
strive to inflict maximum devastation and human suffering.
    Nevertheless, a limited reinsurance market for terrorism risk has 
developed. Insurers can buy some terrorism coverage for their TRIA 
retention. They must, however, retain a substantial amount of the risk. 
Covers are usually subject to limits per event as well as an annual 
aggregate limit. Further, most contracts have exclusions for events 
involving nuclear, radiological, biological, or chemical weapons. But, 
in total, the coverage available is insufficient even to cover TRIA's 
deductibles.
    Swiss Re's position is that the insurance and reinsurance market is 
not currently prepared to absorb terrorism risk regardless of our 
limited improvements in our ability to assess risk. The attack on the 
WTC caused insured losses estimated at up to $40 billion including $21 
billion in property and business interruption lines alone. Total 
insured and uninsured losses have been estimated at about $100 
billion. Loss estimates from September 11 exceed the largest losses 
from natural catastrophes the industry has ever suffered: Hurricane 
Andrew 1992: $21 billion; Earthquake Northridge 1994: $17 billion; 
Winter storms in Europe 1999/2000: $9 billion.
    Potential losses from a terrorism attack conceivably could be much 
larger than total insured losses of September 11 or the largest 
conceivable natural catastrophe loss. Swiss Re is currently co-
sponsoring with nine other organizations a study by RAND Corporation 
aimed at assessing terrorism risk and loss potentials. Study results 
will be released over the next 2 years. In addition, Swiss Re assisted 
in 
another study by RMS, a leading risk modeling organization, which also 
analyzed terrorism scenarios. This study found that insured losses of 
$80 billion are possible for worker's compensation and life insurance 
lines of business. Further, LOMA, a research and education association 
for the life insurance and financial service industry, has also 
released a study on terrorist events such as a smallpox attack that 
could result in deaths in excess of 30 million. Just as with September 
11, these losses have not been factored into insurance prices and 
cannot be absorbed within the industry's capacity.
    This issue is extraordinarily complex. We know that if a major 
terrorism event were to occur, it would likely hit several insurance 
lines of business simultaneously, as illustrated by the WTC event. The 
September 11 tragedy caused insured losses in individual life, group 
life, aviation, property, business interruption, workers' compensation, 
and accidental death. In the light of these uncertainties, our cautious 
approach toward terrorism risk is dictated by our responsibility to our 
shareholders, clients and employees.
    We urge you to pass a 2-year extension of TRIA. The extension will 
allow TRIA to continue to provide protection to the insurance and 
reinsurance industry as well as to provide additional time to assess 
terrorism risk.
    Certain group life writers have petitioned for inclusion of group 
life insurance in TRIA. We support their petition. Adding group life to 
TRIA will provide group life insurers the protection they need to 
insure the lives of people in the workplace. Group life insurers are 
not free to manage their risk through terrorism exclusions. State 
regulators will not allow it. As a public policy matter, State 
regulators have decided that this basic insurance now covering 158 
million Americans is vital. The regulators are right. Group life should 
be included in TRIA. In fact, Swiss Re believes that individual life 
insurance should also be included but we await the conclusions of the 
RAND Corporation and U.S. Treasury studies.
    In closing, Congress should extend TRIA for an additional 2-year 
period. Swiss Re is committed to working with the Federal Government to 
develop solutions that involve all stakeholders. In the weeks and 
months following September 11, Swiss Re met with Members of Congress 
and the U.S. Treasury to discuss possible approaches to this challenge. 
We recommended that the Federal Government consider adopting the UK's 
working solution, Pool Re. Pool Re and other solutions should again be 
considered. We believe that a public-private partnership between the 
Federal Government, industry and insured parties is the best way to 
deal with the risks involved. We believe Government has an ongoing role 
and responsibility due to the relationship between Government policy 
and the motivations and actions of terrorists.
      RESPONSE TO A WRITTEN QUESTION OF SENATOR SANTORUM 
                     FROM J. ROBERT HUNTER

Q.1. What is the rationale for excluding group life carriers 
from TRIA coverage? It is my understanding that State insurance 
commissioners do not allow group life carriers to exclude 
terrorism act coverage from these policies even though these 
outstanding contracts expose companies to billions of dollars 
in losses. If TRIA is to be extended, should serious 
consideration be given to including group life carriers in the 
program?

A.1. The rationale for excluding group life insurance coverage 
from TRIA is the same as the rationale the NAIC used in 
deciding to not allow exclusions for terrorism insurance; the 
industry does not need backup or exclusions.
    The group life situation vis-a-vis terrorism risk is a 
classic example of a problem that the private sector can solve 
by itself without Government help. Here is why: A group life 
carrier might have an extreme exposure in a city, say 
Manhattan. Other insurers might have extreme exposures in other 
places, like Chicago, Los Angeles, Miami, Philadelphia, and so 
on. These insurers are free to pool these exposures with each 
other in a way to spread this risk across the industry and all 
over the country.
    The NAIC wisely denied the request for terror exclusions 
from group life policies because the industry had not done due 
diligence to determine how to pool these risks to spread the 
risk and make exclusions unnecessary. The NAIC saw that a 
private sector solution was feasible and should be undertaken.
    For the same reason, Congress should not step in to this 
situation, which can be easily dealt with privately.
