    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

                      TREASURY'S REPORT TO CONGRESS ON THE

                      TERRORISM RISK INSURANCE ACT (TRIA)

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 13, 2005

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 109-45

                        U.S. GOVERNMENT PRINTING OFFICE
                               WASHINGTON : 2006
    29-460 PDF

    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800
    Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
    DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
    ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
    SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
    RON PAUL, Texas                      JULIA CARSON, Indiana
    PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
    JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
    STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
    CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
    VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
    GARY G. MILLER, California           STEVE ISRAEL, New York
    PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
    MARK R. KENNEDY, Minnesota           JOE BACA, California
    TOM FEENEY, Florida                  JIM MATHESON, Utah
    JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
    SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
    GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
    J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
    KATHERINE HARRIS, Florida            AL GREEN, Texas
    RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
    JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
    STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
    RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
    TOM PRICE, Georgia
    MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
        Pennsylvania
    GEOFF DAVIS, Kentucky
    PATRICK T. McHENRY, North Carolina
    JOHN CAMPBELL, California

                     Robert U. Foster, III, Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 13, 2005................................................     1
    Appendix:
        July 13, 2005................................................    43

                                   WITNESSES
                            Wednesday, July 13, 2005

    Snow, Hon. John W., Secretary of the Treasury....................     6

                                    APPENDIX

    Prepared statements:
        Oxley, Hon. Michael G........................................    44
        Crowley, Hon. Joseph.........................................    45
        Gillmor, Hon. Paul E.........................................    47
        Kanjorski, Hon. Paul E.......................................    48
        Snow, Hon. John W............................................    49

                  Additional Material Submitted for the Record

    Frank, Hon. Barney:
        Letter from the Commercial Mortgage Securities Association...    56

                      TREASURY'S REPORT TO CONGRESS ON THE
                      TERRORISM RISK INSURANCE ACT (TRIA)

                                  ----------

                            Wednesday, July 13, 2005

                      House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 2:11 p.m., in
    Room 2128, Rayburn House Office Building, Hon. Michael G. Oxley
    [chairman of the committee] presiding.
        Present: Representatives Oxley, Leach, Baker, Pryce, King,
    Royce, Kelly, Gillmor, Ryun, Shays, Fossella, Kennedy,
    Hensarling, Garrett, Barrett, Price, Davis of Kentucky,
    McHenry, Frank, Kanjorski, Waters, Maloney, Velzquez, Ackerman,
    Sherman, Meeks, Lee, Capuano, Crowley, Israel, Baca, Matheson,
    Miller of North Carolina, Scott, Davis of Alabama, Cleaver, and
    Bean.
        The Chairman. The committee will come to order. Pursuant to
    Rule 3(f)(2) of the Rules of the Committee on Financial
    Services for the 109th Congress, the Chair announces he will
    limit recognition for opening statements to the Chair and
    ranking minority member of the full committee, and the Chair
    and ranking minority member of the Subcommittee on Capital
    Markets, Insurance, and Government-sponsored Enterprises or the
    respective designees to a period not to exceed 16 minutes
    evenly divided between the majority and minority. The prepared
    statements of all members will, of course, be included in the
    record.
        The Chair is also advised that our witness today, the
    distinguished Secretary of the Treasury, needs to leave by
    4:30. The Chair now recognizes himself for an opening
    statement.
        Good afternoon, Mr. Secretary, and welcome back to the
    committee. We look forward to hearing your testimony today on
    the Treasury Department's recent report on the Terrorism Risk
    Insurance Act, or TRIA.
        This Nation suffered a series of brutal terrorist attacks
    on the morning of September 11, 2001. The massive destruction
    wrought by the enemies of America, including the total
    incineration of the World Trade Center, caused tens of billions
    of dollars in damages, and of course, killed over 3,000 people.
    No one knew how our economy would react in the immediate
    aftermath of these attacks. The uncertainty that was felt in
    the wake of that tragic day greatly impacted consumers in the
    insurance marketplace. Insurers paid out record claims in
    excess of $35 billion, but industry surpluses were drained,
    reinsurers withdrew, consumers couldn't get new policies with
    terrorism coverage, and construction projects with real jobs
    were being put on hold.
        President Bush immediately called on the Congress to pass
    terrorism insurance legislation to protect consumers and our
    economy. This committee rose to the challenge, and within 3
    months of 9/11, we developed and passed in the House the
    initial version of TRIA that eventually became law.
        TRIA established a public-private partnership with a
    temporary backstop to protect against future catastrophic
    terrorist attacks through December 31, 2005.
        Reviewing the Treasury's report on TRIA, it is clear that
    the U.S. economy has recovered quite well from the attacks of
    2001. However, TRIA has not encouraged private insurance to
    return to the U.S. market. In fact, TRIA may be hindering the
    development of innovative private sector approaches to
    providing terrorism insurance. TRIA was constructed as a
    temporary program, and a simple extension to the current
    program could actually be detrimental to the Nation's long-term
    economic health. I agree with the Treasury's assessment that we
    need a new revamped terrorism program. We need a terrorism
    program that will encourage the growth of private sector
    capacity, provide for greater taxpayer protection, and reduce
    the role of the Federal subsidy over time.
        This committee has spent the last 3 years studying
    terrorism insurance and the need for an effective long-term
    solution. We have held hearings and roundtables, ordered
    numerous GAO reports, reviewed countless studies, and met with
    key marketplace regulators, consumer groups, and industry
    representatives. We know what needs to be done and have a good
    idea how to do it. My hope is that we can overcome partisan
    rhetoric to do this in a manner that is pro-consumer, pro-
    taxpayer, and pro-national security.
        I look forward to hearing the Secretary's analysis of the
    Treasury report and on working together on a revamped terrorism
    insurance program that will meet the goals in the
    Administration's letter. I retain the balance of my time, and
    now yield to the gentleman from Massachusetts, the ranking
    member.
        Mr. Frank. Thank you, Mr. Chairman. I appreciate your
    calling this hearing and I appreciate the Secretary's diligence
    here. To me, the key point comes from the Secretary's
    testimony; and he says in that testimony--and I know the
    Administration has a somewhat mixed view on this, but this is a
    flat statement: ``While the immediate effect of the removal of
    the TRIA subsidy is likely to be less terrorism insurance and
    higher prices, we expect that, over time, the private market
    will develop additional terrorism insurance capacity.''
        I do not think it is reasonable for us to allow a situation
    in which we will see, quote, from the Secretary, ``less
    terrorism insurance and higher prices''. There are specific
    proposals for change that we are prepared to consider,
    obviously. You, Mr. Chairman, when the original proposal came
    forward, made some changes. The level of the co-payments, the
    deductible, all of those are legitimate to talk about. But I
    think it is clear from what the Secretary has said that a
    failure to go forward with this program now would be a grave
    error.
        It is also important that we move quickly. I think it is
    important to note that in the minds of many of us, the main
    beneficiaries of this are not the insurance companies but the
    insureds. The problem here, I think, frankly, is that a lot of
    insurance companies will find other things to do. But
    particularly in some of our bigger cities, particularly where
    we are talking about the construction of large buildings, the
    existence of terrorism insurance is important. I will be
    putting into the record, and I would ask unanimous consent to
    do that now, a letter from the Commercial Mortgage Securities
    Association.
        The Chairman. Without objection.
        Mr. Frank. In the letter they talk about the devastating
    effect the absence of terrorism insurance would have on them.
    And they note that a number of pension funds have bought these
    securities and would be negatively affected.
        It is also the case of what we are talking about here is
    the end users, the builders, and that is the reason why we have
    to move quickly. You cannot, if you are planning to build a
    large building, wait until the expiration date. We need people
    to be given the assurance that this program will continue. And
    it is entirely legitimate to consider whether or not there
    should be changes. But as I said, I take the Secretary's
    statement as an indication that at least for the next few
    years--we can talk about what goes on after that--we need to
    continue this program. And we need to make that decision very
    promptly so that the people who are contemplating building can
    go forward.
        And just two other policy points. The Secretary says, and I
    agree with this, that the macro economic effects are not great,
    but micro economic effects are very important. This does not
    affect the whole country equally. There are some parts of the
    country, as we recognize with our formulas, that are more
    vulnerable to terrorism than others. There are some parts of
    the country that will be asked to pay a greater price if there
    were to be no Federal terrorism insurance. And I do not want to
    see a burden put on those parts of the country which are more
    vulnerable to terrorism attacks as we anticipate than others to
    see that insurance there goes much higher for things that are
    not their fault.
        When we are talking about many of the risks against which
    we ask them to insure, we are talking about risks that we can
    ask them to control. But nobody building an office building can
    do anything about terrorism. This is legitimately a Federal
    responsibility. And since the deterrence of terrorism is a
    Federal responsibility, it makes sense to have the insurance be
    a part of it.
        Finally, I just would note that along with the other
    members on our side who have been very active in this, we have
    urged that group life be included. And to have terrorism risk
    insurance that covers buildings and not life would I think be
    the kind of committee equivalent of the old neutron bomb which
    killed people and left buildings standing. We don't want to do
    the reverse of that and compensate for buildings and ignore
    human lives. As a matter of fact, this Congress recognized the
    problem there when we passed the program which was well
    administered by Mr. Feinberg to provide some compensation to
    people. And there were ways in which we could change it. But it
    was very important, and it is particularly important for the
    economic development and health of many of our larger cities
    that we go forward with this program and that we go forward
    with it properly.
        I would reserve the balance of my time for Mr. Kanjorski.
        The Chairman. The gentleman yields back. The gentleman from
    Louisiana, Mr. Baker.
        Mr. Baker. I thank the Chairman. We are indeed in difficult
    days. As we consider the aftermath of the attacks in London, it
    is clear that the President's leadership in Iraq and pursuing
    terrorists of every stripe is indeed the right action to take
    because we know for certainty that at some point they will
    return.
        What is not clear is how we protect taxpayer interest while
    balancing the necessity to ensure our economic system functions
    without disruptive interference as a result of a physical
    assault on our property and lives. This is the difficult
    balancing act: preserving taxpayer money while not giving it
    away to businesses whose profit is based on the taking of risk
    and, at the same time, ensuring that when the surpluses are
    exhausted and the system can no longer function that the
    Federal Government steps in at that point to act as a bridge,
    not as a guarantor of profit, but to ensure the economic
    function continues without interruption.
        We cannot let the terrorists win twice. We know for certain
    they will come again unless we are successful in the near term
    in eradicating these evil-minded individuals; they are
    committed to destroy any free enterprise system they can attack
    and escape into the dark night.
        I think the report is an essential and critical overview of
    the status of the industry as it is now structured, and I have
    found much of its content to be very helpful in reaching a
    better understanding. What is required now is a creative
    solution, one which calls for balancing protection of taxpayers
    with the backstop being very far afield where industry
    resources are deployed and made the most effective utilization,
    and where I can go to my rotary club in my hometown and say to
    my taxpayers your money was not put at risk without good
    reason. And, when the industry returns to profitability, we
    will get your money back. It will require creative thinking and
    a new solution. I do not believe we now have that creative
    solution within our grasp. I am pleased that the Secretary
    would come here today and give us an explanation as to their
    findings, and I hope that today marks the beginning of a new
    effort to determine what that creative solution should look
    like, and that we can, within a timely and responsible manner,
    develop legislation for this committee to consider.
        Mr. Chairman, I look forward to continuing to work at your
    direction and with those who are interested in this important
    matter, because we cannot turn our back on the consequences of
    another unbridled assault on the American economic system and
    have the Congress stand by with its hands in its pockets. We
    have got to find a way to get this fixed. Thank you, Mr.
    Chairman. I yield back.
        The Chairman. The gentleman yields back. The gentleman from
    Pennsylvania, Mr. Kanjorski.
        Mr. Kanjorski. Thank you, Mr. Chairman. I am pleased that
    we are finally meeting this year to examine the need to extend
    the Terrorism Risk Insurance Act. This law is critical to
    protecting our economic security.
        In the wake of the 2001 terrorist attacks, reinsurers,
    unfortunately, curtailed the supply of terrorism reinsurance,
    and insurers began to exclude such coverage from policies.
    Eventually we belatedly approved the Terrorism Risk Insurance
    Act to address these pressing problems.
        Our efforts to address this predicament appeared to have
    worked. After all, the Treasury Department's recent study on
    the law found that the program has helped to stabilize our
    insurance markets. Several other studies have also determined
    that TRIA has worked to increase the availability of terrorism
    risk insurance and advance economic development projects.
        Last year, we were also able to reach an agreement in the
    Financial Services Committee to extend TRIA for 2 years and to
    modestly expand its coverage with group life insurance.
    Unfortunately, our bipartisan efforts fell short of their goal
    and that bill did not become law. Nevertheless, I continue to
    believe that we need to move aggressively now to extend this
    economic stabilization. Our failure to reach quick agreement on
    this important issue, according to Treasury's TRIA report,
    would likely result in less terrorism insurance, higher prices,
    and lower policyholder takeout.
        A recent report by the RAND Corporation also found that
    TRIA is needed, but because of its gaps it is not robust enough
    to protect against evolving threats. Another report by the
    Organization of Economic Cooperation and Development found that
    private markets are still unable to comprehensively cover the
    large losses that could result from terrorist attacks.
        Despite the Administration's preference against extending
    TRIA in its current form, last week's terrorist attacks in
    London highlight the genuine need for us to do so. Terrorism is
    unpredictable. Many others, including regulators, trade
    associations, insurance risk experts, and commercial mortgage
    investors have also called upon the Congress to act
    expeditiously in these matters in order to prevent short-term
    market disruptions. We need to heed their wise advice.
        In debating any plan to extend TRIA, we ought to work to
    incorporate group life insurance. These products, after all,
    have characteristics similar to commercial property and
    casualty insurance in that there is often an excessive
    concentration of risk within a small geographic area.
        Today, I also hope that Secretary Snow will expand upon the
    need for the reasonable legal reforms the Administration is
    requesting in any TRIA extension. I am very concerned that such
    a posture could once again stall legislative efforts as it
    delayed consideration of the original law.
        I should also point out that, to the best of my account, we
    have six legislative weeks left in this term. And since we have
    had this law in effect for almost 2-1/2 years without a
    comprehensive program better styled to meet the needs and
    suggestions of the Administration, I am leery of the fact that,
    within the next 6 weeks, such a comprehensive change could
    adequately be made.
        It would be most unfortunate, in my opinion, that we lolly
    dolly around over the next 6 weeks and then realize that we are
    not going to have an extension of TRIA and we are just going to
    allow it to lapse, to the like of some elements of our society,
    but I think detrimentally to most elements of our society. So I
    look forward, Mr. Chairman, recognizing that time is of the
    essence, to move quickly. This is not a Democratic or
    Republican issue, if I may say to the Secretary, Mr. Secretary,
    I am a Democrat and I represent a working district. My
    telephone has not been ringing off the hook on this issue. The
    people I am talking to are commercial developers, investors,
    insurance companies, and people that generally are associated
    with your side of the aisle, if I may, sir. But, I assure you
    that in my position, and I think I speak rather broadly for the
    Democratic Caucus, that we see the need to get this done.
        This, again, is not a Democratic issue and it is not a
    Republican issue. It is an American issue, it is a business
    issue, it is an economic security issue. Therefore, I look
    forward to working with you and the Administration and my
    colleagues on the other side of the aisle to get something done
    in the next six legislative weeks. Thank you.
        The Chairman. The gentleman's time has expired. The Chair
    yields the 2 minutes I had left to the gentlelady from New
    York, Ms. Kelly.
        Ms. Kelly. Thank you, Mr. Chairman.
        The recent Treasury Department report confirmed that TRIA
    lowered premiums and increased uptake rates in cities at risk
    of terror attack. However, the transmittal letter for the
    Treasury report indicated that TRIA should only be extended for
    2 years. It is an unfortunate reality that al Qaeda operatives
    and others will likely be plotting against us for many years to
    come. The recent London attacks also show that insured losses
    might not be the best indicator of changed conditions in an
    insurance market. Any change to the TRIA trigger should include
    casualty trigger so that mass casualty low property loss
    attacks cannot dry up the provision of insurance for a region
    or an industry.
        I am troubled by the Treasury Department report's assertion
    that commercial real estate is not a sector of the economy
    worthy of stimulus. According to the Department of Labor,
    construction industries will create more than 1 million new
    jobs in the next decade. According to the President, 15 billion
    in construction, which stopped after 9/11, was ultimately
    restored by TRIA. Failing to make a terrorism reinsurance
    permanently available leaves our economy, our jobs, and our
    well-being more vulnerable to the designs of the terrorists who
    hope to destroy our economic strength. I yield back.
        The Chairman. The gentlelady yields back. We now return to
    our distinguished witness and only witness today, the Secretary
    of the Treasury, John Snow. Mr. Secretary, again, welcome back
    to the committee. And please feel free to give your statement
    at any time you are comfortable.

    STATEMENT OF JOHN SNOW, SECRETARY, UNITED STATES DEPARTMENT OF
                              THE TREASURY

        Secretary Snow. Thank you very much, Mr. Chairman, Ranking
    Member Frank, Mr. Kanjorski, Congresswoman Kelly, Chairman
    Baker, I appreciated your opening comments.
        The issue we face here, it seems to me, is getting the
    balance right, as risks are shared in a public-private
    partnership that was put in place by TRIA in the first place,
    and now we have an opportunity to see how it can be revamped to
    better serve its original purposes, which the Treasury
    Department report, of course, says were well achieved; that
    this was legislation well designed to advance an important
    public interest, stabilizing the insurance industry, helping
    the economy, and providing for coverage that otherwise wouldn't
    have been there. I think we probably would all agree there.
        The question now is, has the market advanced, as we think
    it has, to a further state of development and maturation where
    the private insurance industry can play a larger role? Where
    that sharing of the risks between the private sector and the
    taxpayers can be shifted a little bit more, somewhat more to, I
    think, as you were suggesting, Chairman Baker, more to the
    private sector.
        We have seen the private sector expand and play a much more
    robust role here over the last 3 years. That is the basic
    conclusion of our report; I think it is the conclusion of the
    CBO report as well. By giving the marketplace a larger role
    here, we are confident that coverage will continue to expand,
    that we will encourage innovation, and we will encourage
    creativity. We probably all would agree that the private sector
    should do what it can do, and where it can operate well, the
    Federal Government and the taxpayer responsibility can recede.
    That is basically what we are saying here. And we have laid out
    some areas in which we think the program can be revamped, and
    can be improved. Raising the trigger point is one. Another is
    raising the deductibles, raising the co-pays some, and putting
    in place a stronger litigation environment. Those are the
    essence of the reforms that we are proposing.
        In the aggregate, what they do is build on the model that
    Congress put in place back in November of 2002, a good model, a
    model that was then intended to be temporary, a model that was
    intended to let the marketplace expand and play a larger role.
    And I think that process should be very much continued with the
    action that I hope you will take here in reforming the program,
    revamping it so that we can encourage the most creative and
    cost effective means of covering terrorism insurance. We
    recognize the need for terrorism insurance; we want to see it
    provided in a way that is most creative and most cost
    effective. And with that, Mr. Chairman, I thank you very much
    for the opportunity to appear before you.
        The Chairman. Thank you, Mr. Secretary. And we will make
    your full statement part of the record, without objection.
        [The prepared statement of Secretary Snow can be found on
    page 49 of the appendix.]
        The Chairman. Let me ask you, I notice particularly in the
    report and your testimony the desire for creating a system that
    would encourage innovation in the private sector. And I suspect
    all of us, to some degree or another, share that. What did the
    Department have in mind as to what type of innovations could
    conceivably take place in the marketplace? And the reason I ask
    that is because it was my assumption all along when we were
    working on the existing legislation, TRIA, that once the market
    was stabilized and you had this backup from the Federal
    Government, that the reinsurance industry would become much
    more active and get back into the game. Your report indicates
    quite the opposite, and I have to say that I was in error on
    that assumption. Is it not the key to this entire exercise to
    somehow figure out a way that the reinsurers, who, after all,
    insure the insurers, to somehow come back into this game? Do
    you have some thoughts on that?
        Secretary Snow. Yes, I do, Mr. Chairman. And I think you
    have put your finger really on the essence of what the report
    is dealing with.
        The Government occupies the reinsurance role here,
    primarily. That is the role that Congress gave to the Treasury.
    And while there has been some expansion of reinsurance
    particularly among smaller and medium-size insurers to cover
    their co-pays and deductibles, I don't think the market has
    developed as robustly and completely and as fully as we would
    have anticipated or hoped for. And one reason I think there is
    crowding out occurring is because of the large role, the
    subsidized role really that the Federal Government plays in the
    reinsurance world. So as we raise deductibles and co-pays and
    trigger points, I think that is naturally going to lead to the
    reemergence of a larger role for the reinsurance industry.
        The Chairman. Would it be, one of the things that we are
    wrestling with is that very issue, and obviously the committee
    will want to hear from the reinsurance industry as well as the
    primary insurance industry just to see what would bring that
    about. I can understand what you are talking about in terms of
    raising the co-payment, raising the deductibles and retention
    levels to the point where you have got a band in which the
    reinsurance folks can get into. And I guess that is what we are
    going to wrestle with over the next few weeks to try to do
    this.
        I am committed to delivering a bill to the House Floor this
    year. I think it would be the height of irresponsibility on our
    part as legislators to allow the TRIA to expire. I think the
    potential for damage to the economy is large. I think the
    President deserves a great deal of credit for his leadership on
    this issue. And if not for the President raising this to the
    highest level at the time that we passed legislation, we would
    not have passed that legislation.
        This was historic in that respect. And now that we are in
    the waning months of this Act, at least from my position as
    Chairman, I just feel enormous responsibility to move the bill
    forward. And I am not going to prejudge what it looks like; we
    will have an enormous amount of input on the part of the
    committee and a great deal of interest on the part of the
    committee. But at the end of the day, at least this Chairman is
    going to deliver a bill. And we want to work with Treasury, we
    want to work with anybody in the private sector who has some
    good ideas, but at the end of the day, we are going to mark a
    bill up, and I think that to do otherwise would be a big
    mistake from a substantive standpoint clearly.
        Let me ask you about one other issue. The approach that
    Chairman Baker insisted on, which was controversial at the
    time, which was essentially to provide that the taxpayer
    essentially be reimbursed for any losses, I think, given the
    history of this Act, was a very positive step in the right
    direction. It disarmed a lot of critics that were supportive of
    the taxpayer and the like, and I think Chairman Baker deserves
    a lot of credit for being one who really stuck to his guns on
    this and ultimately was in the legislation. And I suspect that
    to get a bill again this time we are going to have to revisit--
    not revisit, but to essentially go along the same lines that we
    did before. Has the Department taken any particular position on
    that aspect of the current legislation going forward?
        Secretary Snow. Mr. Chairman, we think that the recoupment
    provisions are an important part of the framework that exists,
    and we certainly encourage the retention of those recoupment
    provisions and would look forward--let me--back to your earlier
    comment about wanting to get something done. We certainly do,
    too, and want to work with you and the committee to see that
    something happens this year in a timely way, exactly.
        The Chairman. Thank you. And I appreciate that. And I think
    the thing that the committee needs to understand is a lot of
    the criticism that went on before, and I think that the
    gentleman from Massachusetts mentioned specifically, that at
    the end of the day, this is not about the insurance companies
    or a boondoggle for the insurance companies, it is all about
    the economy and protecting against a catastrophic loss. And it
    just seems to me that, based on past experience, that
    obligation is pretty well evident.
        The Chair has exceeded its time. The gentleman from
    Massachusetts.
        Mr. Frank. Thank you, Mr. Chairman. I am very pleased and
    not surprised to hear you say that you expect that we will be
    able to have a bill. I would say, based on the functioning of
    this committee, I am confident, given our history, that we will
    be able to produce a very good bill and maybe we will even get
    it to the Floor of the House. But I don't want to get too
    optimistic about what will happen. But I do think we will get
    this consensus. And, again, we are talking here about the end
    users more than the insurance companies. And as I said, I agree
    with the Secretary that it that is not a macro-economic issue,
    but it is an important micro-economic issue for some segments
    of our economy.
        But, Mr. Secretary, I know there are some people, not
    yourself, who are just philosophically opposed to the whole
    notion of the Government being involved here except on an
    emergency basis. And they say, well, you know, after a while
    people should be able to get used to this.
        Now, I am not a great biblical scholar and I don't want to
    provoke a controversy, but I do know that the first flood of
    note happened a long time ago to Noah, and certainly floods are
    nothing new in our economy. By the logic that says we shouldn't
    extend TRIA, should we not also abolish Federal flood
    insurance?
        Secretary Snow. Well, that is not a position we are
    advancing.
        Mr. Frank. I understand that. But it does seem to me that
    the notion that we should only do it transitionally and the
    private market should be able to do it I think is rebutted to
    me by the notion of flood insurance; that there are some costs
    that are hard for a human being to avoid. Although I think we
    on this committee can take credit for a rationalization of the
    flood insurance program the Chairman and I insisted on and we
    had a good bipartisan effort and did our best to make it less
    burdensome, but it does seem to me that it is not new to say
    that there are some risks beyond human control, beyond our own
    control that should be dealt with and I appreciate that.
        I do agree we should be dealing with the questions of the
    co-pays and the deductibility. I have to say to many of us the
    important thing to do is to get this in place so that the
    economy can go forward. If we have this kind of terrorism
    attack, if we do have that kind of disaster, frankly, the level
    of the co-payment I don't think, is going to be our major
    concern. In other words, I think the most important thing to do
    is to get this enacted in a reasonable way so it does not
    become a hindrance to economic development in the big cities
    and to the other kinds of things that we are doing.
        But I do have one question, on your statement. You do state
    the Administration supports reasonable performance to make sure
    that injured plaintiffs can recover against negligent
    defendants. And I guess no Administration statement or policy
    on almost any issue would be complete without a denunciation of
    ``unscrupulous trial lawyers''. I think unscrupulous trial
    lawyers is one word in this.
        Now, I hope that is not being made a condition precedent to
    passing the legislation. For one thing, we don't have
    jurisdiction over it. And I know there are broader issues. I
    don't think we want to let the tail wag the dog. I mean,
    whatever debates people have about the tort system, I don't
    think you say that this is the way that you deal with the whole
    thing.
        So if this committee were to come forward in the bipartisan
    way we have often operated with an appropriately revised
    version of TRIA, does that mean, unless there is a considerable
    rewriting of the tort system in other committees, that this
    doesn't go forward?
        Secretary Snow. Mr. Frank, Congressman Frank, we hope that
    the committee, and the Judiciary Committee as well, could do as
    much as possible to revamp it in ways that strengthen the
    program. So we want to work with you to do as much as possible.
        Mr. Frank. And this is the obvious, but I think we ought to
    make it clear. To date, the cost to the taxpayer of this
    program has been what?
        Secretary Snow. We have not had any incidents under the
    terms of TRIA.
        Mr. Frank. So zero.
        Secretary Snow. Zero.
        Mr. Frank. And that is the point. The main goal here is to
    deal with this, to try, to the extent that we can, to
    neutralize the threat that terrorism poses to important
    segments of our economy, not to the overall economy. But I
    think that is what we ought to be clear about. And that is why,
    this is not some favor we are doing the insurance industry,
    this is an effort to prevent this threat of terrorism from
    paralyzing important segments of the economy.
        I have one last question. And I mean this quite seriously.
    A lot of this has to do with the ability of the reinsurance
    industry to step up. These have not been the best of times for
    the reinsurance industry these days. Some of them seem to me to
    be distracted by some other factors. Are they well prepared at
    this point to make major efforts? I mean, there is some turmoil
    now going on in the reinsurance industry that we read about.
        Secretary Snow. Congressman, I think that there is more
    room for them to do more. You referenced theology earlier. I
    don't view this as an issue of theology, really, I view it in I
    think the same way you and the chairman do and others. This is
    a matter of taking a good Federal Government program that has
    worked well, and looking at it and seeing if we can make it
    work better. And I think, until we give the market some more
    room to operate, we aren't going to know whether it can do
    more. That is--
        Mr. Frank. But we do go forward with the program, is your
    general--
        Secretary Snow. Yes, with the revisions we have suggested.
        Mr. Frank. Thank you.
        The Chairman. The gentleman's time has expired. The
    gentleman from Louisiana, Mr. Baker.
        Mr. Baker. I thank the Chairman. With regard to the flood
    insurance program, just for the record's accuracy, Mr.
    Secretary, isn't it true that it is a premium funded program,
    and every dollar paid out over time has been repaid from
    premium flow plus interest when a credit was extended and when
    the funds were deficient? And if we could model a reinsurance
    program that would ensure the taxpayers that every nickel would
    be paid back plus interest, this bill would probably get out of
    committee a lot quicker if we had those kind of guarantees. And
    I think, at least from my own perspective, one of the concerns
    is writing a $10 billion check to the industry when they have a
    $10 billion profit. In my slow--folks like me kind of figuring
    out that maybe the taxpayers have given insurance executives a
    little bump when they perhaps weren't entitled to it.
        Now, I have a few concerns about information in the report,
    myself. For example, it appears that there has been more
    consolidation in the reinsurance industry rather than growth,
    which leads to some concern; that the trigger levels
    recommended may be a bit high, particularly in rural or a small
    community where you would have a $500 million event where you
    could probably buy most of Louisiana for that. And, if you did,
    you would take out most of my small insurance operators, which
    I don't think is the intended consequence.
        So there has got to be the screens through which this
    triggering device sit, as distinguished from a New York City
    event which could easily exceed the triggers, versus
    communities which could be significantly dissipated and not get
    close.
        We created this remedy out of whole cloth for the patient
    we had at the time. What has now happened is the suit is
    sagging a little bit in a few places and we need to do some
    alterations. For example, I think the repayment provisions
    which the chairman was so kind to make reference to could
    easily be strengthened and give assurances to those worried
    about taxpayer position that we could absolutely guarantee
    repayment. What is now contained in the bill is a possibility
    of repayment should the Secretary decide to assess premiums
    that are capped in a certain way over a certain period of time.
    A lot of wheels and spinners. I helped write that, and I think
    it could be made a lot better.
        The thing that I stumbled across and I needed to get an
    explanation from you, Mr. Secretary, about that I don't know
    exactly how it fits in the overall view of the Department, but
    this is the language: Given the small size of nonresidential
    and commercial office construction, stimulating this sector
    would be neither effected or warranted. What does that mean?
    Does that mean that Treasury has reached the conclusion that
    commercial property market would remain healthy without a TRIA?
        Secretary Snow. No. What that is a reference to is that
    TRIA does not seem to be directly linked to the performance of
    that market sector. Even with TRIA, you know, the market sector
    has not come back anywhere close to the peak. And even with the
    good recovery that we have had over the last couple of years,
    the nonresidential construction industry has lagged. So in the
    presence of strong economic recovery and TRIA coverage, we have
    not seen a response there that, while it has grown some 3 or 4
    percent, it is not anywhere close to where it was before. That
    is the only point we were making.
        Mr. Baker. Well, let me follow up. If we were to proffer a
    proposal which had significant guarantee of taxpayer repayment,
    some modification of the triggering mechanisms as outlined in
    the report, maybe some creative retention system that could be
    altered from the original proposal, wouldn't we be getting
    pretty close, given the view that something needs to be done
    but the current plan is not going to be reauthorized as it is,
    it is not a responsible remedy to the problem as now
    identified? And there is great interest, I take it, from the
    Treasury in moving forward, in getting resolution on this
    before the end of the calendar year. Is that fair?
        Secretary Snow. That is absolutely true.
        Mr. Baker. Thank you, Mr. Secretary.
        Secretary Snow. And we would look forward, Mr. Chairman, to
    working with you on those ideas and reforms that you suggested.
        Mr. Baker. I yield back.
        The Chairman. The gentleman yields back. The gentleman from
    Pennsylvania, Mr. Kanjorski.
        Mr. Kanjorski. I am not sure, Mr. Secretary, what we are
    talking about. Do you see a lapse in the reinsurance business
    coming into the field? I see that the Reinsurance Association
    of America has indicated that private reinsurance market is
    currently only providing $4 to $6 billion of terrorism
    reinsurance capacity as compared to about $100 billion under
    TRIA. That is 4 to 6 percent of the field that is being covered
    by the private insurance industry. Is there a reason that you
    think that TRIA may be retarding that development?
        Secretary Snow. Well, I do, Congressman. TRIA really has
    the Federal Government occupying the reinsurance space. It has
    put the Treasury Department in the position of being a
    reinsurer and basically subsidizing the reinsurance costs. So
    that has had, I think, some impediment, some impeding effect on
    the reinsurance industry. And what we are suggesting is that as
    the Treasury Department recedes some from that area, still
    keeping the backstop but recedes some, it will create more room
    for the reinsurance industry. And it is our expectation then
    that you would see the reinsurance industry gain more coverage.
        Mr. Kanjorski. So, it is your sense that part of this
    failure of the private market to fill this vacuum or void that
    exists is that they need a stimulant in some way?
        Secretary Snow. I think that, as the Government recedes,
    you will see the private sector move in more.
        Mr. Kanjorski. But in your prepared remarks, you talk about
    that happening over years. That is not going to happen between
    the time this law expires and if we don't do something.
        Secretary Snow. No. Over the next few years, if the sorts
    of changes and reformatting that we have talked about occur, I
    think you will see, we have full expectation, you would see the
    reinsurers step up more and take over more.
        Mr. Kanjorski. In the past when we have seen vacuums and
    voids created in the private market, there have been various
    theories and methodologies used to stimulate entities filling
    that vacuum or void. Maybe I could suggest, if we want to
    stimulate the reinsurance industry in America, let us have a
    Government-sponsored enterprise take over there to be a Fannie
    Mae or Freddie Mac of reinsurance. That ought to stimulate the
    hell out of them. Don't you think?
        Secretary Snow. I am not sure I would want to recommend
    going down that road.
        Mr. Kanjorski. I don't think there is any difference. I
    mean, quite frankly, we were frustrated and waited for our
    leadership to introduce a bill. Although they did not, I think
    we finally did it in March, and it has been languishing. We
    haven't had a hearing on it. We have instead been waiting for
    your report. You know, I leave it up to the experts, Mr. Baker
    and the Chairman, to fill in the voids. If they want to up the
    caps, if they want to do some nice things, that is fine.
        Now, if they want to make this an engine for tort reform, I
    think that is dead on arrival. We had that experience under
    Secretary O'Neill for a year when the Administration decided
    they were going to use this legislation to do tort reform.
        I would just give my own impression. That is not a smart
    idea. If that happens, I don't think we will see a bill on the
    President's desk this year. And, quite frankly, I am not sure
    whose ox is going to get gored, but I don't suspect the Members
    on this side of the aisle are getting tremendous calls from
    these people that need terrorism reinsurance for business
    purposes.
        I would just like somebody to take the bull by the horns
    and let us get the job done. Can we expect you and your
    Department to have a piece of legislation up here redrafted in
    such form that can expect to have the President's support for
    it and that we can move it? Or are you waiting for this
    committee to draft legislation? Who is waiting for whom to do
    what as time ticks on?
        Secretary Snow. We are prepared to be of service in any way
    we can, Congressman.
        Mr. Kanjorski. Then next week we should look forward to a
    comprehensive reinsurance bill prepared by the Administration
    that some soul on the other side can introduce as the bill to
    move through Congress? Is that what you see? Just everybody is
    saying, ``Gee, we are all for it, we are all for it'', and time
    is going. Six legislative weeks remain. That is it.
        Secretary Snow. I accept that. I think the modifications we
    are suggesting are easily draftable. We would be happy to put a
    pencil to paper and work with the legislative staff who do the
    drafting; they would be better at it than we would. But we
    could certainly make an effort at it, and would certainly work
    with you and the Chairman and others to make sure that we do
    our part to meet this timetable.
        The Chairman. The gentleman's time has expired. The
    gentlelady from Ohio.
        Ms. Pryce. Thank you, Mr. Chairman. And, Mr. Secretary,
    welcome to the committee. And thank you so much for all the
    work that has gone into this.
        Let me ask you, Chairman Greenspan testified not long ago
    that he is not yet convinced that terrorism risk is insurable,
    and yet you folks at Treasury are calling for reduced Federal
    participation. I don't think that there is anybody in this room
    that would disagree that you are both gentlemen of incredible
    intellect and impeccable judgment, and how could you two feel
    so differently about this?
        Secretary Snow. Well, I am not sure we do, Congresswoman. I
    think we both recognize the private sector ought to be allowed
    to work wherever it has a reasonable chance of working. I think
    the Chairman would accept that characterization. And in the
    case of terrorist risks, I think we both accept the TRIA
    model--that there are risks of such a scale that aren't
    modelable--and of such size, that it is very difficult at the
    present time for the private insurance industry to properly
    assess the risks in order to be able to provide coverage. And
    that is the TRIA model. All we are saying is that within the
    TRIA model, we think you can move a little further in the
    direction of letting the marketplace work.
        Ms. Pryce. Well, let us talk about modeling for a minute.
    You know, you were very specific in saying that the industry
    does have big challenges in modeling, and the probability of
    loss from terrorism is very hard to get our arms around. Why is
    that so, and what is there to be done? Can we do more to
    encourage the scientific development of models? Should this be
    a part of our bill? Is there more that we can do to see this
    come to fruition, or is it just an incalculable impossibility
    at this point?
        Secretary Snow. You know, I think in dealing with terrorism
    generally, we are being forced to confront something we haven't
    known in this country well before, it is fairly new to us, and
    it is extraordinarily hard to predict. And since we haven't had
    a lot of experience with it, I am sympathetic to the problem
    the insurance industry has of trying to put in predictable
    models, models of predictable events. I think they are getting
    better at scalability; they are getting better at trying to
    figure out, if this happens, what is the overall impact.
        But no, I agree with your basic premise here, that the
    modeling isn't yet developed, and it is a question of how it
    will develop to the point that we can really assess these
    things the way you would assess other sorts of risks that
    insurance companies freely write policies for.
        Ms. Pryce. If we took NCBR out of it, would it be any
    easier if we made that a separate category?
        Secretary Snow. I think NCBR, given our limited experience
    with it in the United States, doesn't give us a framework for
    the sort of modeling that the insurance industry normally would
    do. I mean, we should be thankful that we don't have much NCBR
    experience. It is almost de minimis in this country. And we are
    going to continue to work through Homeland Security and others
    in intelligence to make sure it is de minimis. But the fact
    that it is de minimis is the other side of why we can't do the
    models to figure out how to lay out the risks more fully.
        Ms. Pryce. I mean, I am not expert by any means, but
    National Journal did a piece on what would happen if there were
    a nuclear attack between the White House and the Capitol
    building, and then laid out scenarios as to what damage--and
    certainly, I am certain it wasn't very scientific. But if they
    can get started, I know that there is the technology and the
    science available. And I just wonder if there isn't anything we
    as a Government can do to encourage this, to speed up the
    process. And you probably have already answered me, but if
    anything comes to mind, please let us know.
        Secretary Snow. I will.
        Ms. Pryce. Thank you very much, sir. I yield back.
        The Chairman. The gentlelady yields back. The gentlelady
    from New York, Ms. Maloney.
        Mrs. Maloney. Thank you very much, Mr. Chairman.
        And welcome, Secretary Snow. As one who represents New York
    City, I can tell you that, after 9/11, truly the most important
    action by Government that helped the people was TRIA. Business
    didn't move, development didn't move, nothing moved until we
    had the insurance in place. It is critically and tremendously
    important not only for New York, but I would say every city
    across this country and county. And I would just like to say,
    Mr. Secretary, that your report really makes me wonder whether
    the Administration is talking about the same Nation that I live
    in. Certainly your report is not talking to the people who run
    businesses in this country or the insurance industry or even
    your own terrorism experts.
        The Administration tells all of us to prepare for another
    attack, but you propose to take away our ability to be
    financially prepared. Your report advocates raising the level
    at which TRIA would kick in to a point at which an event 10
    times the size of September 11th would receive absolutely no
    TRIA coverage. There is not enough capital in the entire
    industry to cover an event of that size. In fact, the industry
    would be severely stressed by an event three times the size of
    9/11.
        If we as a country do not renew TRIA at a reasonable
    threshold level, terrorism insurance will simply not be
    available. You say, oh, go draft a bill, or we will have a bill
    up there. It is not having a bill here, it is whether or not it
    is workable, whether or not terrorism insurance will be
    available. And it will not be available at the threshold
    amounts in the report. That means that if we have another
    terrorist attack, God forbid, the taxpayer will bear the full
    brunt of the cost.
        I have been talking to people not only in New York, but
    across the country about the damage that they would suffer
    without TRIA, and I think that you should talk to them, also.
    For example, one of my constituents in New York, Lisa Cramer,
    is the CEO of FOJP Service Corporation which obtains insurance
    for several New York City hospitals and medical facilities that
    provide services, necessary services to literally millions of
    New Yorkers. She was planning to be here today, she wanted to
    talk to you directly, but due to the weather, the planes and
    transportation was cancelled. But she told me this morning
    that, after 9/11 and before TRIA was enacted, the property
    casualty insurance marketplace became an absolute nightmare for
    these hospitals and medical facilities. Their property
    insurance limits dropped from $8 billion to only $1 billion,
    and terrorism exclusions were added to all of the policies.
        Pre-TRIA, the only coverage for terrorism losses they could
    obtain was for $50 million and limits at a premium of $4.2
    million. With TRIA in effect, they secured property coverage
    with full terrorism protection at limits of $1.5 billion and a
    premium of $1.2 million. Without the renewal of TRIA, the
    maximum coverage they can secure for terrorism losses will be
    only $500 million, and the premiums will triple.
        That is unworkable. Premium increases of this nature are
    simply not affordable for these hospitals and, I would say, for
    any business. Moreover, even if the money could be found, the
    maximum available insurance limits of $500 million would not be
    sufficient to replace even one hospital in a terrorist attack.
        Mr. Secretary, my question is, what do you have to say to
    these hospitals and the people that they serve and what do you
    have to say to my constituents and other constituents across
    this country?
        I have here also today Rick Barne from your State. He is a
    vice president of Corporate Insurance Management, which is
    located in Alexandria, Virginia. He has a client that owns and
    leases about 40 buildings in northern Virginia to the Federal
    Government and large corporations. Some of these buildings are
    located at the Dulles Airport.
        Based on the scrutiny insurance companies give to these
    factors, without an extension of TRIA, it will be very
    difficult for this property owner to find affordable and
    adequate coverage. He may go out of business and his tenants
    may have to move.
        The Chairman. The gentlewoman's time has expired.
        Mrs. Maloney. May I just place in the record, if I could,
    Mr. Chairman, letters that I have gotten, even from your State,
    Ohio, and Virginia, Mississippi, Louisiana, from people who are
    bringing to our attention the absolute necessity of reenacting
    TRIA. If I could, because I think it is very, very helpful to--
        The Chairman. Without objection.
        The Chairman. The Chair now recognizes the gentleman from
    California, Mr. Royce.
        Mr. Royce. Thank you.
        Good afternoon, Secretary Snow. It is nice to have you back
    before the committee. We have talked before about antiterror
    finance policy, which is within your jurisdiction. Given some
    recent developments, I am going to take the opportunity, if I
    could, to ask you about something we have been concerned about
    for some time, and that is the massive amount of funding that
    terrorists are receiving on a global basis. We have taken some
    action in Congress, indeed in this committee, where with the
    PATRIOT Act, under section 311 we said Treasury can impose
    special measures on a foreign jurisdiction such as a country or
    a financial institution, and in so doing then section 311 would
    essentially close any access to the U.S. financial system for
    anybody so designated.
        So I would like to know why Treasury has not imposed 311
    sanctions on Syria. In testimony this morning before the Senate
    Banking Committee, Under Secretary Stuart Levy strongly
    condemned Syria. I will just lay out his argument.
        He said as a serious national security threat and as a
    state sponsor of terrorism, Syria has been the object of
    targeted Treasury action for some time. Syria continues to
    meddle in Lebanon's affairs, allows the Iraqi insurgency to be
    partially funded and fueled from within its borders, and allows
    terrorist organizations and supporters to flourish there as
    well.
        At Treasury we are addressing this threat with a spectrum
    of targeted actions aimed at reversing this course.
        Well, as he says, you have issued a 311 against Syrian
    banks, against some senior Government officials where you have
    frozen their assets. But when it is clear that the terrorist
    financing is a systemic issue, as it is in Syria, why haven't
    we taken action against the entire jurisdiction? That is my
    question for you today. Why are we holding back on what would
    seem to be an obvious case for 311?
        Secretary Snow. Congressman, thanks for the support you
    have given us, and Congresswoman Kelly as well, over the years
    in these efforts. Syria is troublesome to us, as Under
    Secretary Levy indicated. We do have the pending 311, and the
    pendency of the 311 under the Patriot Act has produced some--
    not sufficient, we are not satisfied--but some actions. We are
    talking with them now about some other things they need to do,
    including returning substantial sums of money that belonged to
    the Iraqi people. We have had some success. They have sent back
    some and we are hopeful to get more.
        Let me assure you we are far from satisfied, but they have
    taken a number of steps, and I can detail them for you at some
    other point, if Mr. Levy didn't today send you a note on it,
    that are in the right direction. Far from all, but they are in
    the right direction.
        It is a situation we are continuing to monitor. We are not
    at all happy with a lot of their conduct, let me assure you of
    that. We have had delegations of people from Treasury over in
    Damascus and are continuing to be in close touch with them.
    Maybe that is all I should say for the record right now.
        Mr. Royce. Well, I appreciate that, Secretary Snow. I think
    it is important that regimes understand that section 311 is a
    tool that can and will be used. In this particular case, if we
    do not get some relief in terms of the funding of the
    insurgency operation there or the allowing of that to be
    conducted on Syrian soil, as well as a return of the funds, I
    think--and more transparency in the process--I think it would
    be quite appropriate. So I wanted to use this forum for an
    opportunity to have a dialogue with you on that, Secretary
    Snow.
        Secretary Snow. I appreciate your doing that. Let me assure
    you, we are working this issue hard. We are not at all happy
    with Syrian behavior. We have observed financial wrongdoings on
    their part, including terrorist financing, and we intend to use
    311 for the purposes for which you created it.
        The Chairman. The gentleman's time has expired. The
    gentlewoman from California, Ms. Waters.
        Ms. Waters. Thank you very much. I am sorry I was delayed.
    We have a markup going on in Judiciary. I am delighted
    Secretary Snow is here. I know that the presentation that he
    prepared for today had to do with the terrorism risk
    reassurance program, I believe. However, I am fascinated with
    the line of questioning and discussion of my colleague from
    California.
        While he has indicated his concerns about Syria, I suppose
    I should just share with you that some of us are just as
    concerned about Iran and just as concerned about Saudi Arabia
    and just as concerned even about Pakistan, where we have
    friends. We have just lost I think--I think the number is 20,
    Congressman Frank just indicated, as we talked about what
    happened on the border between Pakistan and Afghanistan, that
    we believe that insurgents and terrorism is emanating from all
    of these areas. Some we have, I suppose, greater relationships
    with than others and think we have friendships that will
    protect us from some of these terrorist acts.
        But while we are talking about Syria, let us talk about
    Saudi Arabia and Iran and the borders of Pakistan and
    Afghanistan.
        What are we doing to ensure that these terrorist acts are
    not emanating from these areas that is creating more of these
    problems?
        If I may, just a continuation of the discussion you were
    just having with my friend from California.
        Secretary Snow. Thank you very much, Congresswoman. We are
    very much engaged with the countries, with Saudi Arabia,
    Pakistan and others, on the whole issue of terrorist financing.
    I have traveled to those countries, talked to the leaders of
    those countries, the Finance Ministers, the Prime Ministers,
    the ruling family, about our concerns on precisely the issues
    that you have raised.
        In all of those places with whom we are engaged, we are not
    satisfied, but we are seeing progress. Saudi Arabia has put in
    much better controls over their charities. They are watching
    the money that goes through the charities. In Pakistan, they
    have put in much better rules to deal with the entities they
    call the hawallas, the money changers.
        Ms. Waters. If I may interrupt you for just a moment, do we
    know the members of the royal family who are directly involved
    in funding some of the so-called charities? Do we have that
    database put together yet? Because much of the money coming
    from there and to the madrassas are coming from members of the
    royal family. Do we know that information?
        Secretary Snow. We have some information about the sources
    of that, and have shared our knowledge, or at least our
    intimations, with the Saudi leaders; and the Saudi leaders have
    taken a number of steps against those people.
        So this is a continuing effort on our part. We have people
    located right now as part of this effort in Saudi Arabia
    working in concert with their antiterrorist groups to identify
    and go after terrorist financing. And we are going to keep that
    up. It is very important we keep that effort up. I appreciate
    your raising it. I agree with you.
        Ms. Waters. Thank you very much. I yield back.
        The Chairman. The gentlelady yields back.
        The gentlelady from New York, Mrs. Kelly.
        Mrs. Kelly. Thank you.
        Secretary Snow, one of the questions we ought to consider
    in approaching this is why should the war on terror be treated
    differently from previous more traditional wars where the
    Government reimburses for damages inflicted by the enemy? I
    think we all realize that we are in a fight to the finish
    against a dedicated enemy.
        In World War II, the Government didn't expect private
    insurance to pay the costs associated from enemy attacks on our
    soil, and I know that we all feel that defeating terrorism is
    no less important than defeating the axis powers. Surely we
    would not expect the private insurance industry to protect us
    if we thought that we would be attacked by an enemy with an
    organized military. We really need to ask ourselves what is
    different about this situation today.
        When the TRIA law was passed in 2002, we didn't know half
    of what we know now about the enemy and its resolve. We all now
    acknowledge that the war on terror will be with us for a long
    time. It is a long-term war, and I firmly believe that we need
    a long-term solution to the terrorism insurance problem that is
    going to provide our economy with the stability to keep on
    growing and protect our citizens and their businesses from
    catastrophic loss when another major terrorist event occurs.
        According to your transmittal letter, the report was based
    in part on surveys of the insurers and policyholders that were
    developed after extensive consultations with the National
    Association of Insurance Commissioners, policyholders, the
    insurance industry, and other experts in the insurance field.
        Secretary Snow, this committee has also taken testimony
    from each of these groups, and none of them support the
    conclusions of your report. Which agencies have more expertise
    on insurance? The States, who have been regulating insurance
    for more than a century, or seven employees of the Treasury
    Department who do not administer any other insurance program?
        Your transmittal letter states that the Administration only
    supports extension of TRIA if taxpayer exposure is minimized.
    Ironically, the Federal Government, including the Treasury,
    does not include any costs associated with terrorism risk in
    the budget. As a part of your commitment to lowering taxpayer
    risk from terror, will you begin submitting a reserve request
    for potential terrorism losses within your own agency to
    protect taxpayers?
        Isn't it unfair to expect American taxpayers to pay the
    costs associated with self-insuring the Treasury Department?
    That is the question.
        Secretary Snow. That is the question? Well, that is about
    six or seven by my count.
        Mrs. Kelly. That is okay. You can answer them.
        Secretary Snow. Let me try and give you a general response,
    because your question, really as I sense it, goes to the
    quality of the study. I think it is a good study. It is a study
    that was done in full cooperation and consultation with the
    insurance industry. They in fact helped shape the very
    questions that we presented to both the industry and to the
    users.
        Nobody here is talking about ending that backstop. What we
    are talking about is, as I have tried to indicate, is revamping
    the TRIA program in a way that it gives some more room for the
    private sector to operate.
        Congress has left open in the very TRIA legislation events
    above the $100 billion level as something they would return to
    surely, hopefully, in consultation with whatever Administration
    would be in place.
        So no, I don't think that is the issue. The issue is can we
    make some improvements in the program to give the private
    sector a somewhat larger role to play; and as long as the
    Government is playing such a large role in occupying the
    reinsurance space, it just stands to reason that the
    reinsurance industry will not be as vigorous as otherwise would
    be the case.
        So this is an effort just to get to the middle of the road
    and find a balanced solution here.
        Mrs. Kelly. Mr. Secretary, when you talk about letting the
    industry take more of a role, that is only going to be passed
    on to the consumers, whatever the costs are, and that is the
    taxpayers. So I again go to my question about how we are going
    to help the taxpayers afford terrorism insurance.
        Secretary Snow. Actually, Congresswoman, if our reforms are
    accepted, the policyholders would bear more of the obligation.
        Mrs. Kelly. Exactly my point, sir.
        Secretary Snow. You said taxpayers.
        Mrs. Kelly. The policyholders are taxpayers.
        Secretary Snow. They are not in their capacity as
    policyholders. They are taxpayers in their capacity as
    citizens. This is an effort, as I say, simply to modify the
    program in ways that give the private sector more room. I doubt
    you would disagree with me on the broad proposition that if the
    private sector can do it, we ought to allow them to do it.
        The Chairman. The gentlewoman's time has expired.
        The gentleman from California, Mr. Sherman.
        Mr. Sherman. Thank you. I would like to make just a couple
    of opening observations. One of those is that as terrible as a
    massive terrorist attack is, a natural disaster can have an
    equivalent economic impact, and I hope we are not only going to
    deal with the uninsurable or unreinsurable risks posed by
    terrorism, which are new and exciting, but that we also deal
    with the equivalent need for reinsurance or re-reinsurance by
    the Federal Government for massive disasters that are natural
    disasters. This has nothing to do with the fact that Northridge
    is in my district.
        Second, we should not be waiting to the last minute, which
    is what we always do. This law is going to expire December
    31st. If you had to predict the outcome, it would be we are
    going to extend TRIA the day before we leave town for the year.
        Now, if we do that, we will have the same costs. The
    gentlewoman from New York was saying, hey, maybe there is a
    burden to the taxpayer. If we extend TRIA today or do it at end
    of the year, it has the same costs, but it doesn't have the
    same benefits.
        Right now there are people thinking about huge projects,
    projects that would employ a lot of people, projects that might
    get somebody to wonder, well, will that be a terrorist target?
    Some of these projects aren't going forward because people are
    saying, well, of the many concerns we have, there is not going
    to be terrorism insurance.
        So every day that goes by that we don't extend does nothing
    to reduce the costs or disadvantages of extending TRIA, but
    diminishes the benefit. And the chief benefit is we want people
    building towers even larger than those that stood in southern
    New York, whether those be in Los Angeles, Chicago, or
    elsewhere. We want people to feel they can build something
    exciting and get insurance for it.
        Mr. Secretary, as I understand TRIA, and may be reflecting,
    the policyholder is not getting something for free. There is a
    premium that the Government charges. Is that either the case
    now or in the proposed changes that you would make?
        Secretary Snow. Congressman, TRIA does not require the
    insurance companies to pay a premium, but it does give the
    Treasury Department the authority to recoup some portion of the
    Federal payments in the event of an event; to do a subsequent
    assessment, I think it is 3 percent a year on policyholders
    thereafter.
        So there is a recoupment process. But you are correct that
    right now there is a subsidy that is being made available by
    the reinsurance, because Treasury is not charging anybody for
    it presently.
        Mr. Sherman. Now, we have seen what happened in London,
    which underscores what happened on September 11th. In light of
    the continuing and evolving threat, and given that the
    reinsurers are apparently not providing much terrorism
    reinsurance, are you concerned that the insurance market could
    become more dysfunctional than it was after September 11 if we
    fail to renew TRIA in some form?
        Secretary Snow. Congressman, we are clear on this one. With
    these reforms, you would have a better product and we support
    doing it.
        Mr. Sherman. And if we did nothing, could we, starting the
    beginning of next year, or perhaps starting after the beginning
    of next year when TRIA expired and there was some other
    terrorist action, huge or medium-size anywhere in the world,
    could the combination of TRIA being allowed to expire and even
    a new terrorist act--as if we have forgotten the old ones--
    cause the insurance markets to become even more dysfunctional
    than they were after 9/11?
        Secretary Snow. I would urge you to adopt the reforms and
    move the legislation.
        The Chairman. Does the gentleman yield back?
        Mr. Sherman. I yield back.
        The Chairman. The gentleman from Connecticut, Mr. Shays.
        Mr. Shays. Mr. Secretary, I like you. I don't agree with
    you on this position. I am not sure where your position is,
    because it is that you don't support it but you will help us
    write a bill. I guess what I am sensing from you is you are not
    advocating that we do a bill, but if we are going to do a bill
    you wanted to help us write it. Is that what you are really
    saying?
        Secretary Snow. No. Our view is that we support the
    reforms. We support revamping the program, because we think by
    revamping it we will create better coverage. We will enlist the
    private sector in ways that are more creative and cost
    effective in covering the risks, and with the reforms we are
    for the extension.
        Mr. Shays. So the bottom line is, though, that you would
    like us to write the bill and your folks will work with us?
        Secretary Snow. We will work with you, yes.
        Mr. Shays. Fair enough. Let me ask you, it would strike me
    that a general principle would be that we would ultimately want
    to wean the insurance industry from Government guarantees, but
    that we would have them over a fairly long period of time build
    up reserves but still make policies fairly affordable.
        Is that the logic to this program? In other words, I spent
    8 years focusing on terrorism, and what I see is that attacks
    are more likely in the future, and more devastating, and the
    consequence of chemical, biological, even nuclear attacks, is
    not out of the question. So it is not like in the future there
    be less attacks, it is more likely there will be more attacks
    as I see it.
        So is the point to just have them start to build up
    reserves over time?
        Secretary Snow. That would be a piece of it. But another
    piece of it is to give the industry, which is quite innovative
    and capable, and the marketplace generally--
        Mr. Shays. I don't know how to interpret innovative. It
    seems kind of basic.
        Secretary Snow. The modeling, getting a better assessment
    of things through the modeling, seeing if financial facilities
    develop securitization and other things that offer some
    opportunity here. I am not saying they will be there, but if we
    don't create room for them, we will never know.
        Mr. Shays. Let me ask you, though, if you own an insurance
    comapny or you are managing one, running it, you are the CEO,
    without some guarantee from the Federal Government, aren't you
    playing Russian roulette with your company, because you may
    find that there is such a potential for devastation that you
    basically--your company goes under because of your unlimited
    liability?
        Secretary Snow. Congressman, insurance companies will not
    put more than X amount of their surplus in jeopardy. I agree
    with you. That is the way the insurance industry operates. What
    that means is if more than X would be put in jeopardy by
    writing a set of policies, for terrorism risk insurance or
    whatever, they won't write it.
        Mr. Shays. If policies are not written, do you think
    mortgages take place and banks are willing to--
        Mr. Snow. Remember, the TRIA structure stays in place. The
    Government under the reforms that we are talking about, the
    revamping, the backstop is still there. We are talking about
    way below the backstop trying to get more reinsurance being
    provided through the private market. So the backstop structure
    is still there.
        Mr. Shays. It just strikes me you are basically asking the
    industry to put up all their reserves.
        Secretary Snow. No, we would not. That would not be
    prudential. Far from that. In fact, the very point of study--
    and your question is taking me right to the heart of the
    study--is that the insurance industry has developed
    substantially more reserves now, but there are limits on the
    amount of reserves that a well-run, prudentially run insurance
    company will make available, and that is how the insurance
    industry must function and should function.
        Mr. Shays. Let me just say, my last question is what
    happens if TRIA expires January 1st without a replacement bill?
    That is my question. And my point to you would just be that I
    know you well enough to know--and your Department--that you
    will be working with this committee, and hopefully that will
    not take place. But I will ask you, what would happen if it
    did?
        Secretary Snow. I think the best thing is to follow the
    course that you are suggesting and I am suggesting, and I think
    the Chairman is suggesting, and that is to adopt the
    suggestions and move forward with the legislation.
        Mr. Shays. Thank you, Mr. Secretary.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from New York, Mr. Meeks.
        Mr. Meeks. Thank you, Mr. Chairman.
        Mr. Secretary, I am a little bit confused. Let me just pick
    up from what was just stated. You say adopt. I have the
    confidence, as Mr. Frank indicated earlier, and Chairman Oxley,
    that we will come up with a strong bipartisan bill that is
    coming out of this committee.
        Now, you seem to say that you want us to come up with a
    piece of legislation that you have written, adopt it, and make
    it law. What if this committee comes up with some
    recommendation as to how it feels the TRIA law should be, and
    then it comes to the Administration? Will you then say we must
    then have a bill so we can have it signed by January 1, that we
    don't have the expiration of TRIA? Or will you say no, it has
    to be as we want it, as we have proposed it?
        Secretary Snow. Well, I would hope there would be a good
    dialogue. There has been a good dialogue on a lot of other
    issues with this committee on both sides, and I would hope we
    continue to have a good dialogue, good set of understandings.
        Let me assure you, Congressman, we know that you write the
    legislation, not us. And I have been asked to testify to offer
    our views on what a good outcome might be, and that is all I am
    doing, is giving you our sense of what a good outcome might be.
    But I fully understand that you are going to write the
    legislation and factor our recommendations in as you think they
    merit attention.
        Mr. Meeks. Now, in your recommendations and your testimony,
    one of the things I am trying to decipher--in questions to Ms.
    Kelly, for example--are you concerned at all about what the
    cost of terrorism insurance, the bottom-line cost for the
    policyholder is? You said they are not--she said they are
    citizens. You said it differently. But the cost that it would
    come--that the policyholder would have to get terrorism
    insurance, are you concerned about that at all?
        Secretary Snow. Absolutely. Cost and availability are the
    two things we looked at in the study. So they are both very
    important. Because if there isn't availability, there won't be
    the take-up rates that ought to occur, and if the price is too
    high, there wouldn't be the take-up rates. So availability and
    price are the two determinants of coverage.
        Mr. Meeks. You keep referring to studies you have had, but
    what I have been able to decipher, the studies and individuals
    I talked to, if we go in the direction the Administration would
    like us to go to, the cost would become prohibitive for many
    individuals, affecting--and I think this is what Mr. Sherman
    was talking about--in a lot of the markets, a lot of the
    economic development projects we currently have going on.
        We talk often that we can't let terrorists and terrorism
    win. One of the reasons why they attacked New York--and a lot
    of other major cities are focused on this--they want to go
    after us financially and our economy.
        When they talk about TRIA, we are really talking about a
    program where we should be coming together as a Nation, as
    opposed to ending it and saying, as I believe was stated, that
    the continuation of the program in its current form is likely
    to hinder the further development of the insurance market by
    crowding out innovation and capacity building.
        I don't see how that is so. I think even while we are
    working here, innovation and the markets and everyone is
    working together so that we will not allow the terrorists to
    win. We are in Iraq now, spending a whole lot of taxpayer
    dollars, when a lot of taxpayers did not want to be there in
    the beginning.
        Secretary Snow. Well, look, I agree with you on the basic
    premise as I hear it, and that is we have got to protect the
    homeland. That is the first line of defense here.
        I talked to Secretary Chertoff this morning on that very
    score. Of course, we put a lot more money into homeland
    security, and developed this comprehensive national strategy
    for homeland security. That is the first line of defense, good
    strong, homeland security initiatives, investigating terrorist
    activity, good intelligence on terrorist activity, bringing the
    whole government together to focus on it and the global
    community as well.
        Mr. Meeks. So you would agree with me--
        Mr. Snow. I agree the first line of defense is strong
    homeland security.
        Mr. Meeks. You agree it should be the priority of the
    Administration to make sure that we work and that you work
    closely with this committee to make sure that we do not allow
    TRIA to expire prior to January 1st.
        Secretary Snow. I think we ought to work to reform it in
    the way that I have suggested, because by doing that we are
    going to have a better TRIA. We are going to have a set of
    policies in place that encourage a more creative and cost-
    effective means of covering terrorist risks.
        The Chairman. The gentleman's time has expired.
        The gentleman from Texas, Mr. Hensarling.
        Mr. Hensarling. Thank you, Mr. Chairman. Thank you, Mr.
    Secretary.
        I don't know if I can do it justice, but President Reagan
    once said something along the lines of one of the closest
    things to eternal life on Earth is a Federal program. I, for
    one, on behalf of the taxpayers, hope I am not witnessing that
    today with TRIA. Having said that, we know all the obvious
    implications of 9/11, the tragic loss of life, the incredible
    blow to the economy, that we have done, frankly, a very good
    job under this Administration of recovering from.
        I believe that TRIA played a role in that recovery. I just
    don't want to see the taxpayers on the hook forever.
        In your written testimony you state that TRIA has been
    effective in meeting its goals of supporting the industry
    during a transitional period. So to me that is really the key
    question: What is going to constitute this transitional period?
    I, for one, don't believe that 3 years is quite enough. I don't
    know if 6 years is too much. It is kind of like Goldilocks and
    the various porridges.
        So what does the Administration believe is an ample
    transitional period?
        Secretary Snow. Well, Congressman, I share the sentiments
    you have expressed there. I think a couple of years' extension
    would help us understand better the situation. Over the weekend
    I read this recent OECD study on terrorism insurance and
    threats of terrorism in Europe, and it is a very thoughtful
    study. What they basically recommended was maximizing the role
    of the private sector, using the Government as a backstop, and
    continuing to evaluate it and not, in effect, making it a
    permanent program.
        So it seems to me a couple of years, if we had it for a
    couple more years, we would be in a position to evaluate and
    have a better sense of where to go from there. But it was not
    intended, as you know, to be a permanent program. It was
    established as a temporary program.
        Mr. Hensarling. In your written testimony you also allude
    to the progress the industry has made since the enactment of
    TRIA and its capacity to write terrorism insurance. You didn't
    really elaborate upon that in your oral testimony. Can you
    elaborate a little bit more on what improvements we have seen
    in the market?
        Secretary Snow. Yes. One, we have seen the surpluses in the
    industry have gone up quite dramatically. Of course, it is the
    surpluses that determine how much insurance they will write.
    Underwriting profits, which were negative in 2001 and 2002,
    turned positive in 2004. The capital base of these industries
    has gone up a lot because back in 2001, then 2002, the equity
    markets took a big hit. Now the equity markets are much, much
    stronger. Economic growth for the economy has been much, much
    better. Unemployment rates have come down.
        Then when you look at the industry statistics or metrics
    themselves, the take-up terrorism rate, which was in the mid-
    twenties in 2002, is now over 50; 54 percent as I recall.
        The share of insurers who were pricing insurance, making it
    available with prices, has more than doubled over that period
    from some roughly 20 percent to the mid-fifties.
        Policyholder costs, that is as a share of premiums, has
    gone up from about 1.2 percent to 1.7 percent, something on
    that score. But the policyholder cost in the high-risk cities
    has come down, which is interesting.
        So overall we see a better insurance picture than we saw
    back then.
        Mr. Hensarling. I see in your testimony there has been some
    question about the Administration position on the extension. I
    see where you state that you are hoping the extension of the
    program would recognize the temporary nature of the program,
    the rapid expansion of the private market development and the
    need to significantly reduce taxpayer exposure. In the seconds
    that I have remaining, I could not agree more, Mr. Secretary.
        I yield back the balance of my time.
        The Chairman. The gentleman yields back. The gentlewoman
    from New York, Ms. Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Welcome, Mr. Secretary. Mr. Secretary, studies show that
    small businesses, even those located in high-risk cities, are
    taking up terrorism insurance at lower rates. The Treasury
    report supports this notion that as firm size increases, firms
    are more likely to have terrorism insurance. Often small
    businesses cite the high cost of policies as the reason for not
    purchasing it.
        If small businesses are unable to afford coverage, they may
    move to lower-risk areas, leaving many downtown urban centers
    devoid of the economic vibrancy that they are known for.
        On page 7 of your report, Treasury states: ``Overall our
    assessment is that the immediate effect of the removal of the
    TRIA subsidy is likely to be less terrorism insurance written
    by insurers, higher prices, and lower policyholder take-up.''
        Clearly, letting TRIA expire will not help small businesses
    secure the insurance they need. If small businesses are unable
    to secure terrorism insurance, particularly those located in
    high-risk cities like New York, what effect might this have on
    economic development in downtown urban areas?
        Secretary Snow. Congresswoman, thanks for that good
    question. Small business, of course, is at the center of our
    economy. We need to make sure small businesses continue to
    thrive. What we are saying is that with the reforms, with the
    reforms, we think that there would be more creative and lower-
    cost insurance available, because the reinsurance industry,
    which is being crowded out now by the Government program, would
    come into play.
        A lot of small businesses, according to the study, even
    though it has been available under TRIA, have not taken the
    terrorism insurance, making a judgment I guess that they aren't
    at great risk; others do. That is a normal sort of market set
    of choices.
        Ms. Velazquez. Well, I have a lot of small businesses in
    New York City, especially in my district. They border Chinatown
    and they border the area of the World Trade Center. I have met
    with them. We do a lot of hearings or meetings with them. And
    that is not what they are telling us. They are telling us that
    is it is the cost that is making it impossible for them to get
    their insurance that they need.
        Secretary Snow. You are saying the cost with TRIA today?
        Ms. Velazquez. Yes.
        Secretary Snow. I think we can probably do better as we go
    forward with the modifications that we are suggesting.
        Ms. Velazquez. Sir, what will you do, or the Federal
    Government, to increase the affordability of terrorism
    insurance for small businesses?
        Secretary Snow. Oh, I would let the market work more.
        Ms. Velazquez. It is not working now, even with TRIA.
        Secretary Snow. That is the very point I am making. There
    would be more room for the market to work if we had the
    Government recede some and let the reinsurers and the insurance
    business play a bigger role here, if we in effect cut back on
    the Government role.
        Ms. Velazquez. I also want to follow up on Mr. Frank's
    question on flood insurance. The Federal Government has
    frequently interceded in insurance markets, offering the
    Federal Crop Insurance Program and the National Flood Insurance
    Program, providing deposit insurance and implementing the
    Price-Anderson Act, which then insures against nuclear
    accidents. These are just a few instances.
        Given the Administration's opposition to TRIA, does the
    Administration plan to oppose other Federal insurance programs?
    Explain to me why the justification for these programs are
    different than for that of TRIA.
        Secretary Snow. Well, Congresswoman, as I have been careful
    to try to explain, with these reforms that we are suggesting we
    will make the program stronger, and then want to urge you to
    move forward and adopt them and keep the program in place with
    these reforms.
        Ms. Velazquez. Thank you.
        The Chairman. The gentleman from North Carolina, Mr.
    McHenry.
        Mr. McHenry. Thank you, Mr. Chairman.
        Mr. Secretary, is it your goal for the Federal Government
    to be out of the insurance business, out of this entirely, and
    if so, what is your sort of game plan for that?
        Secretary Snow. Go back to the original TRIA. It was
    intended to be a temporary program to serve an important need
    for a period of time. The evidence, as indicated in our report,
    is pretty clear that TRIA has been helpful. We have seen the
    surpluses rise, we have seen coverage rise, we have seen take-
    up rates rise. That is all positive.
        Now we are at the point of asking ourselves can we improve
    the program? Not eliminate it, but improve it. Because it is
    really important that we get--you weren't in when Chairman
    Baker talked about this, but get this balance right--maybe you
    were--between the sharing of the risks.
        Mr. McHenry. I was.
        Secretary Snow. The risks between taxpayers and private
    industry should be balanced. It is our view that giving private
    industry more room to operate, they can share more of the
    risks, reduce the risks on taxpayers, and actually it is our
    view they will probably get a better product over time. We want
    to keep that process going.
        Mr. McHenry. What is your time frame?
        Secretary Snow. Well, as I said, a couple of years'
    extension would seem to me to be reasonable.
        Mr. McHenry. Why not a simple extension of what we have
    now?
        Secretary Snow. Because I think we shortchange the
    taxpayers with a simple extension. We shortchange taxpayers and
    we also, frankly, shortchange the capacity of the insurance
    industry to perform at a higher level.
        Mr. McHenry. Okay. Now, in terms of in the past, certain
    States have said that you must make available--well, certain
    States, it is said that you have to make available the
    backstop. Let me rephrase this.
        Under the current TRIA program, there is a requirement that
    companies make available coverage, coupled with a Federal
    backstop, to help make coverage more affordable. What would the
    new program do in those terms?
        Secretary Snow. It would, as we are proposing it, those
    components would remain the same.
        Mr. McHenry. The exact same as we have?
        Secretary Snow. We would cut back some lines, we would
    reduce coverage on some lines, but change deductibles and
    copays. But that sort of model, framework, template, would stay
    in place.
        Mr. McHenry. Have you thought about the ramifications with
    insurance packages, where you have Workman's Comp, you have
    commercial property insurance, but when you are eliminating
    lines like automotive and general liability, that increases the
    costs in the marketplace by not having that Federal backstop.
        Have you considered the ramifications for how that
    transition is going to occur, the effects it is going to have
    on the market?
        Secretary Snow. Yes, that is the subject of the study. We
    concluded that those additional lines that you mentioned aren't
    subject to the sort of aggregation risks, like auto insurance,
    that are really not the appropriate subject for TRIA, and that
    is why we called for cutting back coverage on those lines. But
    we don't think other than that it would have a far-reaching
    effect.
        Mr. McHenry. And this is my final thought or final
    question. With what just happened with the terrorist attacks in
    London, there is a lot of concern about the soft targets, not
    just on infrastructure being targeted, but on the soft targets.
    How is this new program going to encourage take-up rates when
    it comes to especially soft targets, that sector?
        Secretary Snow. Well, I have talked to the people in
    London. Our condolences go out to them, and concern. They have
    handled it well.
        A London-size event, as devastating as it is, is not large
    relevant to the capacity of the industry to handle it.
        Mr. McHenry. But in terms of increasing the take-up rates
    when we are talking about soft targets, just generally
    speaking, aside from the events that occurred in London--
        Mr. Snow. You mean like subways? This is a subject I
    mentioned earlier, a discussion I had this morning with
    Secretary Chertoff. It is clear the terrorists are looking for
    soft targets. They are looking for the things that they think
    aren't sufficiently protected or that are hard to protect, like
    subways. And our response has to be to toughen up our security
    processes on those targets. I think that is the better way to
    get at this; it is the only way ultimately to really get at it.
    That is partly intelligence gathering, it is partly
    surveillance, it is partly more security at the facilities. It
    is a whole range of things.
        The Chairman. The gentleman's time has expired. The
    gentlelady from California, Ms. Lee.
        Ms. Lee. Thank you, Mr. Secretary, for being here today. I
    apologize for being late due to another conflicting meeting. I
    am trying to review your testimony very quickly. A couple of
    questions I have with regard to your testimony which I am not
    sure have been answered in this.
        First of all, clearly we all agree, I think, that the risk
    of terrorism is very real and we must ensure that coverage is
    available. However, I wanted to get some specific dollar
    amounts in terms of just what the taxpayer subsidies have been
    since TRIA has been in effect. I am not sure if your testimony
    gives us that dollar amount.
        What have the American taxpayers provided?
        Secretary Snow. Well, to date, fortunately there have been
    no incidents that are coverable under TRIA, so the direct
    outlays have been, as Ranking Member Frank said, zero; the
    direct outlays. But, of course, there is a potential cost that
    is there, which constitutes, in effect, a subsidy to the
    industry.
        Ms. Lee. What, though, in terms of the reinsurance, what
    are your projections though?
        Secretary Snow. I don't think we have quantified that to
    any satisfactory degree, to be honest with you.
        Ms. Lee. Just in terms of evaluating legislation, I would
    like to know what we are looking at, what your estimates are. I
    think taxpayers deserve to know that, should they have to do
    this, what they would be required to pay.
        Secretary Snow. Well, we can give you the math on that.
    That is pretty straightforward as laid out in the statutory
    framework itself. The Government is on the hook for a sizable
    amount of money over the deductibles and copays that would take
    you to the $100 billion cap. So there is a portion that would
    be retained by the industry and there is a portion that the
    Government would pay, and then there is a recoupment. I will
    send you an example that lays that out. That we know.
        What we don't know is the year-in/year-out hidden subsidy
    that the program costs. Not to any high degree.
        Ms. Lee. That will be very helpful. Some would suggest
    looking at the riot reinsurance program of the 1970's. I am not
    sure if you have had a chance to look at this. Some would say
    this is an example of how we should modify TRIA as we begin to
    reauthorize it.
        Secretary Snow. Thank you. I don't know that we have done
    that, but I will ask the staff to take a look at it.
        Ms. Lee. Thank you very much, Mr. Secretary. Thank you, Mr.
    Chairman.
        The Chairman. The gentleman from Staten Island.
        Mr. Fossella. How is that for a dramatic introduction?
        Thank you, Mr. Chairman. And thank you, Mr. Secretary, for
    coming.
        Let me just state for the record, as has been said, that
    TRIA has worked. It has been effective in stabilizing and
    allowing our economy to move forward. There are many people, I
    know, especially in New York City where I am from, of all
    shapes and sizes, all political views and ideologies, from
    ``the government has no role'' to ``the government should do
    everything in life,'' who all agree, I think, that TRIA has
    served its purpose. I do think it has to be renewed in some
    way.
        You mentioned the fact that the take-up rate has almost
    doubled in the last couple of years, and I can appreciate your
    desire to try to stimulate more private sector involvement and
    minimize the exposure of the Federal Government. But how can
    you determine that take-up rate will at least continue at the
    current rate, at a minimum remain at the status quo, and not be
    adversely affected if the Government does pull out or change
    the formula or implement some of the reforms as you have
    suggested?
        Secretary Snow. Congressman, that issue is dealt with in
    the study. The market has developed well and it is our sense
    that as we give the reinsurance market, which hasn't developed
    as well, more room to operate--in other words, reduce the
    subsidy some--that the private market would play a bigger role.
        It seems to me it is hard to argue with the fact that the
    subsidy crowds out some of the reinsurance that otherwise would
    be there. So it is the conclusion of the Treasury experts who
    ran the study that we would have a larger role for the private
    sector if we reduced the subsidy somewhat. We are not
    eliminating it, of course; we are just giving the private
    sector a somewhat larger role. But we are not eliminating it in
    any way in our proposal, the backstop or the fundamental
    structure of TRIA.
        Mr. Fossella. Along the same lines, earlier you said there
    were impediments, or at least you indicated if you implement
    some of the reforms, the policy rate premiums would come down.
    Just for the record, what are those impediments that are in
    place that prevent the policy rates from coming down right now?
        Secretary Snow. Well, I am not sure the rates will come
    down if we go forward, because the rates today, of course,
    reflect the subsidy, and we are proposing to narrow the
    subsidy. But we don't think there would be any material effect
    on coverage and rates. And over time, I think as we allow the
    private sector to play a bigger role here, including the
    financial sector, that we would expect to see innovations that
    would result in better products and better pricing and better
    coverage for the marketplace.
        It is our trust in the markets, fundamentally.
        Mr. Fossella. I appreciate that as well.
        Before I yield back, I think it was said earlier, let us
    not get ourselves in a position of putting all of us at too
    much risk, and God forbid another attack occurs a year from now
    or 2 years from now and we indicate that maybe we moved too
    fast in implementing some of the reforms. I believe in the
    market myself, but I see at some point in time it is
    appropriate for the Federal Government to step in and Congress
    to step in to provide that stability to the marketplace that is
    essential.
        I yield back. Thank you, Mr. Chairman.
        The Chairman. The gentleman yields back.
        Mr. Capuano. Thank you, Mr. Chairman.
        Mr. Secretary, I actually agree with I think virtually
    every general policy statement you have made today. I totally
    agree that, if possible, in a perfect world the Government
    should have no role in private insurance, and I think that is
    what I have heard today, and that is a great thing.
        But, however, like many things I find in Congress, it is
    really not about the general policy goals that we have
    problems, it is about how we get from A to B. And I guess, just
    for general ideas, do you agree, do you believe that, God
    forbid--and I guess all of today is based on the premise that
    we may some day have another accident. If we all agree that we
    would never have another accident, we wouldn't be here today.
    So, God forbid, we have another event, a horrendous event in
    America. Do you agree that the United States Congress and the
    current Administration, probably every future Administration,
    is likely to be able or be desirous of considering Federal
    Government involvement either through reinsurance after an
    event just like we did after 9/11? Do you think that is a
    positive and a likely occurrence?
        Secretary Snow. Congressman, I think we have to continue to
    be focused on the issues of terrorism and use every means in
    our disposal to deal with it. It starts with the protection;
    the back end of it is in case a terrorist event that we don't
    want to see happen does happen. And all we are saying here is
    that, as you consider extension of TRIA, we suggest adding
    these reforms.
        Mr. Capuano. I understand. I don't want to get into word
    games with you because that is not what I want to do today. I
    happen to think that it was the right thing for this Congress
    and this Government to be involved in the aftermath of 9/11,
    and I would argue that any time we had another terrorist event
    we should be considering that. Not that we always want to do
    it, but that it is a likely thing. I think the American people
    think that it is a likely thing. I think that businesses think
    it is a likely thing and the average person thinks it is a
    likely thing. And my expectation is that, since President Bush
    was so upfront after 9/11 in support of Government action, I
    would assume that he would be similarly situated in, God
    forbid, another situation.
        For me, based on that belief and on the presumption that
    that is your belief and the Administration's belief, we are
    really not talking about anything here other than how do we get
    there. And TRIA, we all agree, was temporary. And you have
    discussed, you mentioned shortchanging taxpayers. But the only
    way we shortchange taxpayers is if there is an event. If there
    is no event, nobody gets shortchanged; nothing changes.
        So, for me, between now and the time we actually come to a
    conclusion, we have to concern ourselves with two parts. I
    mean, I agree with you and the reason I want to echo the
    statements made earlier, the chairman's comments earlier about
    having a bill out, I agree. I look forward to working with him
    on it. And I think there is a good chance that we will do it.
    However, if there isn't, I also think we have to be honest
    about it. And if--the worst-case scenario is nothing. Under the
    situation of nothing, there is no backstop for anybody.
        The second worst-case scenario, I think I agree with you on
    many situations, is a simple extension of TRIA. However, I
    also, with some of the things I have heard today, make me
    concerned about whether we can actually get to an extension or
    a modified extension of TRIA. Number one is the things that Mr.
    Kanjorski mentioned; namely, the games that might be played
    that have nothing to do with insurance on so-called tort reform
    and other things. But I also want to comment very specifically
    on your proposal on the $500 million.
        Now, I fully admit that when we did triggers, as far as I
    was concerned most of the numbers were just guesses. They
    weren't based on anything. Was your $500 million based on
    anything, or was it just a more educated, updated guess?
        Secretary Snow. Well, this isn't science, of course. There
    is no logarithm you can turn to to get the answer to that
    question. But it is more than a hunch or a guess. We look at
    the $500 million as a threshold that is high enough that it
    will reduce unnecessary Government intrusion into the
    marketplace and create the opportunity for more private
    solutions while maintaining broad coverage. And in doing this,
    arriving at this number, we had lots of consultations,
    Congressman, with members of the industry. This reflects those
    conversations and consultations with them and looking at their
    own retention rates--and I won't go into all the details--their
    own statements of what they think the market can bear.
        Mr. Capuano. Mr. Secretary, again, I have no specific
    argument with the $500 million number because, again, to me it
    is just at the moment something pulled out of the air and I
    would like to hear more about it. But the reason I ask is
    because now and the time we have to renew this bill we have to
    come up with a real number. If it is $500 million, so be it.
    But for the sake of discussion, I don't think anybody here
    would argue that the London incident was an act of terrorism. I
    don't think anybody would argue that the Madrid train bombing
    was an act of terrorism, that Oklahoma City was an act of
    terrorism, and that Pan Am 103 was an act of terrorism. None of
    those would exceed $500 million. None of them. Not even all
    together would they exceed $500 million.
        Now, and the reason I point this out is because, again, a
    number pulled out of the air is very good, and if it
    statistically backed up, fine. And $500 million is not some
    number. But I would argue that the question that really should
    arise is what is it that we really think is a threshold number,
    a trigger number for the type of event that we want to get. And
    I personally, at least sitting here without any further
    additional information, would argue that any of the items we
    just--that I just mentioned and probably many more would
    certainly rise to the occasion of me as a Member of Congress
    wanting to consider whether we should take action and therefore
    should be below a trigger that we might put into TRIA. Again, I
    understand.
        The Chairman. The gentleman's time has expired.
        Mr. Capuano. But I would just point that out as a point of
    information as we go through the discussion.
        Secretary Snow. While I acknowledge this is not a
    scientifically verifiable number, it is a number that reflects
    the best thinking of the Treasury experts who arrived at it,
    and with which I concurred after consultations though,
    Congressman, with a lot of people in the industry and looking
    at their own retention rates. And I think it is a reasonable
    number and we can debate it, we can discuss it.
        The Chairman. The gentleman's time has expired. The Chair
    would indicate that the Secretary does have to leave in 25
    minutes, so we will try to move through the questioning as
    quickly as possible.
        The gentleman from New York.
        Mr. Crowley. Thank you, Mr. Chairman. I will try to be as
    quick as possible.
        Let me thank Mr. Capuano, Mr. Israel, Mr. Frank, and Mr.
    Kanjorski for helping to move at least on this side of the
    aisle some of the issues. And I just want to clarify for the
    record, the phone has been ringing off the hook in my office
    and I am from New York City and it is representative of both
    sides of the aisle, so to speak. And I do recognize the
    interest here that this is not a red or a blue issue, this is a
    red, white, and blue issue and one that needs to be addressed.
        It just harkens me back to an old adage of, albeit a nuance
    to it, of: If it ain't broke, fix it. That is kind of what I am
    getting from you, Mr. Secretary. On one hand you are saying
    what is taking place with TRIA was something that was good and
    it is a good thing that happened, yet we have to fix it. And I
    am not so sure that I just sort of come at it from that avenue.
    I look at it from the point that it has been effective, it has
    worked, it has been able to enable tenants with cities like
    mine in New York to continue to operate--and I am talking about
    corporate America--to continue to operate and therefore
    employing a lot of my constituencies, therefore employing a lot
    of the taxpayers that work in those industries and ancillary
    industries.
        The whole discussion before about the exposures of
    taxpayers or shortchanging taxpayers, when I point out that
    zero taxpayer dollars have actually been used from the, God
    forbid, an account after a terrorist attack, I mean, the whole
    thing here is about we hope that this never happens again,
    albeit we see what happened in London. We know that they have
    their intentions on doing something again, and unfortunately, I
    don't think we can wait. I don't think the terrorists are going
    to say, well, let us let them figure out how to deal with the
    long-term exposure with the threat of terrorism. They are not
    going to give us that luxury. Therefore, we have had this last
    2-year period, and what we are looking for is an extension so
    that the industry itself can come to some conclusion in
    conjunction with Treasury, in conjunction with the committee in
    both Houses to come up with an overall final solution to the
    problem.
        I will just ask quickly, what is your time limit? What do
    you perceive as being the time line that is necessary? I know
    you mentioned a couple of years. But specifically what do you
    see laid out in that period? And group life. Again, I think
    what Mr. Frank talked about before, we are going to cover
    property but not lives themselves. We know that the Victims
    Compensation Board did an admirable job. Is that how we are
    going to move forward in the future if, God forbid, there was
    another terrorist attack?
        And before you answer that, Mr. Chairman, I would like to
    yield the balance of my time to the young lady from Chicago,
    Ms. Bean.
        Ms. Bean. Thank you, Congressman Crowley. Thank you, Mr.
    Chairman. Thank you, Mr. Treasury Secretary, for being here
    today. I just wanted to follow up on a point expressed by my
    colleagues Maloney and Capuano regarding the increase to $500
    million as the trigger. I don't think you got an opportunity to
    necessarily respond to Congressman Maloney earlier. And
    certainly Congressman Capuano talked about several other
    incidents that would not have been covered. At $32 million,
    even 9/11 wouldn't be covered. How can you say to areas like
    New York or Chicago--I represent a suburban district of Chicago
    - that you are really providing a viable backstop?
        Secretary Snow. You heard me describe how the $500 million
    came about, consultations with industry representatives,
    looking at current retention levels that they are able to put
    in place. The recognition that we have had over this last 3
    years, much higher take-up rates have been observed. Even as
    the program's deductibles have gone up as required in the
    statute--you recall the framework or the statute is every year
    the deductible goes up. Even in the face of that we have seen
    these sorts of numbers I recited earlier indicating that
    coverage in take-up rates have broadened. So what we are seeing
    here is the insurance industry maturing, developing, probably
    doing better modeling, better assessments, and putting itself
    because of its stronger financial position in a better position
    to offer the very coverage that we want to see them offer.
        Ms. Bean. Thank you very much. I yield back the balance of
    my time.
        The Chairman. The gentlelady yields back. The gentleman
    from New York, Mr. Israel.
        Mr. Israel. Thank you, Mr. Chairman. Mr. Secretary, thank
    you for your patience. Mr. Secretary, one of the things that we
    do very well around here is to snatch defeat from the jaws of
    victory. We had a victory on TRIA in the last Congress. There
    has been a lot of talk today about working out some
    differences, reaching consensus, developing a bipartisan
    approach with the Administration. Been there, done that. It
    happened in the last Congress. We were on the suspension
    calendar. We were a couple minutes away from a vote on a
    product of consensus from this committee, and then it got
    pulled at the last minute. Mr. Capuano, Mr. Kanjorski and I
    have introduced a bill that is very similar to the bipartisan
    product of consensus that was approved in this committee in the
    last Congress, and I really am hopeful that we can work
    together with the Administration and get something done that
    makes sense in this Congress.
        Let me just ask you a question about process, the process
    by which you formulated the report. My district is about 50
    miles from Ground Zero, and I hear regularly from the real
    estate community, from the insurance community, from the
    financial services community that they are exceedingly nervous
    about what will happen not if TRIA is not extended, but what is
    happening right now, what the trends are right now. Exclusion
    clauses are already being written into insurance contracts.
    Premiums are already becoming unaffordable for proposed
    developments next year and the years after. Instability has
    already set in against the uncertainty of a Federal role. It
    seems to me that the reality that I am hearing from the
    marketplace in my congressional district and near my
    congressional district doesn't necessarily square with the data
    that is reflected in your report.
        One of the questions I have with respect to that data and
    that process is, at what point did you stop taking economic
    data from the various experts? In other words, and
    specifically, was second quarter data included and reflected in
    the report that was submitted to Congress?
        Secretary Snow. The data I am advised ran through February
    of 2005. So it might not reflect some of these sentiments that
    I assume reflect uncertainty about the future of the program.
    Congressman, if you are suggesting that uncertainty is the
    enemy of well functioning markets, I agree with you. Business
    people need to have a sense of certainty in order to make
    market decisions. So, you know, I have said it over and over
    again, I hope we can move forward with these reforms to the
    program that we started with the opening comment by the
    Chairman on.
        Mr. Israel. Just so I make sure I am clear. Any submissions
    of data from various experts after February that may have
    reflected a growing uncertainty or more up-to-date trends were
    not able to be included--
        Secretary Snow. We did not--
        Mr. Israel. Fair enough.
        One final point if I may, Mr. Chairman. You know, we have
    heard a lot of talk about taxpayer liability and the cost of
    TRIA to the taxpayer. Mr. Secretary, I appreciate your candor
    and honesty as a matter of common sense that there has been no
    cost to the taxpayer of TRIA. There has been some talk about
    how the Federal Government doesn't have an answer to every
    program; there is not a Federal program that can help every
    problem. I agree with that entirely.
        I would say that in addition to national flood insurance,
    you know, we have a wonderful crop subsidy program. It is
    costing the Department of Treasury $19 billion this year to
    subsidize the agricultural industry not to grow crops. Now, I
    don't know how you can defend subsidies from the Federal
    Government in order to keep crop prices high but say there is
    no role for the Federal Treasury to play in not helping to
    create a backstop for insurance to keep premiums and consumer
    costs low.
        Thank you, Mr. Chairman. I yield back the balance of my
    time.
        Mr. Crowley. Would the gentleman yield for just a moment?
        Mr. Israel. I yield to the gentleman.
        Mr. Crowley. Mr. Chairman, if I could just ask, I am also
    hearing from industry about the timing of this; that if
    policies are not issued--or the sense that there is going to be
    a TRIA next year, that policies be issued in October of this
    year and not in December of this year. Is that something that
    the Secretary is aware of as well in terms of the timing of
    getting legislation passed?
        Secretary Snow. I am aware, having gone through the
    exercise here a year ago, that timeliness with respect to where
    this is going to go is very important to the industry, yes.
        The Chairman. The gentleman's time has expired. The
    gentleman from Kentucky.
        Mr. Davis of Kentucky. Thank you, Mr. Chairman.
        Mr. Secretary, I would like to follow on your remarks just
    now on the comments of a sense of certainty, which is one
    aspect I think that is important to cover. Certainly in the
    September 11th attacks, one of the clearly articulated but I
    think culturally misunderstood aspects of the attacks were a
    goal to disrupt our economy, damage the financial markets as
    well as making a profound visual statement and inflicting pain
    on our Nation. TRIA concerns me very much in the sense of not
    opening a window of additional vulnerability, knowing that
    there is a backstop of some kind of place to instill confidence
    in the markets.
        I have a couple of questions along these lines. Are lenders
    now requiring that developers have terrorism coverage on new
    properties like large shopping malls and office buildings?
        Secretary Snow. Do they take an interest in whether they
    have them or not?
        Mr. Davis of Kentucky. I know many do take an interest. But
    as a--
        Secretary Snow. Yes.
        Mr. Davis of Kentucky. Basis of requirement for lending.
        Secretary Snow. In some cases, yes.
        Mr. Davis of Kentucky. If that is the case, and I guess my
    question would be is if TRIA is not extended in some proactive
    form, what would be the consequences for these lenders and
    developers in what might be targeted or in--that is a bad
    choice of words--in, say, high-value structures?
        Secretary Snow. It would very much depend on the
    performance of the industry and the absence of TRIA, of course,
    and how much capacity it would have. What we are calling for is
    of course reforming the system, revamping it, making it more
    effective, and allowing the private sector to play a bigger
    role, and I think if we do what we are suggesting that we would
    see the private sector respond and we would get higher take-up
    rates even as the deductibles in the retentions go up.
        Mr. Davis of Kentucky. Do you feel, just as a final point,
    that were TRIA not extended do you think that lenders may
    determine that the risks are too great, that they would call
    loans early if insurers are unable to extend coverage?
        Secretary Snow. Congressman, I have not had a chance to
    assess that issue as such. It would be hard for me to be
    getting inside the minds of the lenders to give you an informed
    answer on that.
        Mr. Davis of Kentucky. Perhaps if one of your staff has a
    chance, I would be very appreciative if they might share a
    perspective on that question.
        Secretary Snow. Good. Thank you.
        Mr. Davis of Kentucky. I yield back, Mr. Chairman.
        The Chairman. The gentleman yields back. The gentleman from
    North Carolina.
        Mr. Frank. Mr. Secretary, we have three more members--if
    you could promise us an additional 5 minutes, we have some of
    our most conscientious members who have been here throughout
    this. So I would ask for 5 minutes indulgence.
        Secretary Snow. Thank you.
        The Chairman. I thank the Secretary. The gentleman from
    North Carolina.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman.
        Secretary Snow, I support the extension of TRIA. I
    cosponsored the legislation in the last Congress and voted for
    it in this committee, and I have cosponsored the legislation in
    this Congress. But I have a concern about TRIA that no one
    really has expressed today, and that is the effect that it has
    on the market encouragement for private sector preparedness. It
    appears to me that heavily subsidized reinsurance tends to
    undermine, to weaken the private sector encouragement for
    preparedness. And obviously some, a great deal of what we have
    to do to prepare for terrorist attacks is on the Government
    side. It is intelligence, it is law enforcement, but also some
    of it, a lot of it has to be on the private sector side as
    well.
        The 9/11 Commission report said that 85 percent of our
    critical infrastructure was in the private sector. It said that
    witness after witness told us that, despite 9/11, the private
    sector remains largely unprepared for a terrorist attack and
    concluded that private sector preparedness is not a luxury, it
    is a cost of doing business in the post-9/11 world. It is
    ignored at a tremendous potential cost of lives, money, and
    national security.
        Mr. Secretary, I was intrigued to read an article in the
    Boston Globe earlier this year, February 22, that said that the
    Department of Homeland Security was looking at using insurance
    or encouraging insurers to push private sector preparedness,
    and said the basic idea would be to have the Government or each
    industry develop a minimum set of security best practices, and
    then insurers would audit companies for compliance with those
    standards with the power to reduce premiums for those who
    comply.
        That seems to be contrary, to be inconsistent with TRIA as
    it is now written, but it also is not anything that is included
    in the Department's, your Department's recommendations. What
    has become of those recommendations? Do you know, Mr.
    Secretary?
        I was pleased to hear that you were speaking to Secretary
    Chertoff this morning. I hope you all talk all the time.
        Secretary Snow. Congressman, my testimony and the report I
    think both stress that one reason for the reforms or revamping
    changes that we are suggesting is to give the private sector
    more incentive to do mitigation. I think there would be
    mitigation, I think there would be adaptations that we don't
    see today because TRIA is there with the reinsurance. So
    absolutely I think the incentives for mitigation behaviors
    would be much stronger in the sort of environment we are
    suggesting be created.
        Mr. Miller of North Carolina. Was the only thing that you
    proposed to do to kind of ratchet back the extent of
    reinsurance, or are there other specific--as this article seems
    to suggest, that the Homeland Security Department is
    considering other specific measures to encourage--
        Secretary Snow. The Homeland Security Department, of
    course, is dealing with a lot of that in their consultations
    with individual industries. My old industry, the
    transportation, railroads and ocean shipper companies and barge
    lines and truck lines, which is my business, they are working
    with them to do just that.
        Mr. Miller of North Carolina. Right. I am happy for that.
    But what are they doing other than encouraging it? I want them
    to encourage, but are they--
        Secretary Snow. Well, there are consultations. They are
    pointing out risks.
        Mr. Miller of North Carolina. Great.
        Secretary Snow. They are pointing out--
        Mr. Miller of North Carolina. There is not any regulatory
    requirement?
        Secretary Snow. Not that I am aware of. But in my days, I
    remember Tom Ridge calling me and saying, ``John, you have got
    to worry about this and worry about that.''
        Mr. Miller of North Carolina. And is there any effort that
    is going to come from this Administration to try to encourage
    the insurance industry to differentiate in premiums based upon
    the level of preparedness?
        Secretary Snow. Well, the insurance industry itself has a
    huge incentive to do that if we let the marketplace play a
    bigger role. Because that is what insurance does. I mean, if
    you have got a brick house, your fire insurance policy is lower
    than if you have got a tinder wood house.
        Mr. Miller of North Carolina. Your testimony today with
    respect to the liability system--and I read that the way that
    Mr. Frank did, that the phrase ``allow unscrupulous trial
    lawyers to profit from a terrorist attack'' basically means you
    are going to ratchet back the civil liability system. I am sure
    as both the holder of a law degree and a Ph.D. In economics,
    you are aware of the wealth of economic theory mostly by
    conservative economists like Milton Friedman and Richard Posner
    that the civil liability system is a market mechanism to push
    preparedness. Are we not, if we protect ill-prepared, slothful
    private sector entities from the liability for the losses that
    come from their lack of preparedness, that we are going to
    undermine the market encouragement for preparedness?
        The Chairman. The gentleman's time has expired. The
    Secretary may respond.
        Secretary Snow. That is not our intention.
        The Chairman. The gentleman from Georgia, Mr. Scott.
        Mr. Scott. Thank you very much. Thank you, Mr. Secretary.
    It is good to have you here. I represent the Atlanta, Georgia,
    metro area which is of course like so many other major cities
    in this country, but certainly its uniqueness being the center
    for headquarters for the Centers for Disease Control, the
    world's busiest airport, we have got real brand name companies
    like CNN and Coca Cola companies which terrorists--have been
    known to be on terrorists' targets. So we are very much
    concerned about this issue with TRIA.
        I think the issue that concerns me is the phase of your
    testimony dealing with opening up the private markets, the
    markets would be more attainable in saving the taxpayers money
    and so forth. But I think our primary concern here is to
    understand the nature of our situation in this war on terror,
    homeland security being a Homeland Security, national security
    issue. So there is a primary responsibility for the Federal
    Government to make sure that our safety and security is at
    stake.
        For the very nature of your moves and the tools that you
    are advocating in the reforms concern me. While you are saying
    we will, I think your conclusion is that we will move ahead
    with TRIA, but when you mention that you want to increase
    deductibles, you want to increase copayments, you want to do
    away with liability, you want to kick the auto insurance out,
    you don't want to include group insurance, and then you want to
    raise the trigger from $25 million to $500 million, that is
    like shooting holes in a ship and then putting it on out to
    sea. I mean, there is enough there to sink it before you even
    move.
        In good times, when you use those figures, and the
    insurance company, insurance industries use those tools,
    deductibility, the copayments, but based upon some level of
    certainty, the two major issues we are faced with, with this
    new entity we are faced with in terror is the mass, the huge
    uncertainty, number one, of the events, and, number two, the
    hugeness of the cost. We are talking about billions of dollars.
    So I am concerned that, with your tools that you are using in
    terms of encouraging the free market to come in place, given
    the nature of our problem. I don't believe, I don't agree with
    you and maybe you can share this with me, that our insurance
    industry has the capacity to even deal with a problem of this
    magnitude. And so I am concerned that we move with caution as
    we revamp TRIA and that your remedies might be too drastic and
    could have a negative impact.
        Secretary Snow. Congressman, thank you for those
    observations. The insurance industry of course, as you know,
    writes policies based on the surplus that they have relative to
    the size of the risk that they are undertaking. Our study was
    careful to look at that critical set of relationships and
    concluded, as you know from the study, that insurance provision
    beyond some level was beyond the capacity of the individual
    private insurer. So we are agreeing with you.
        What we are proposing here is take TRIA, use that
    framework, but revamp it some. And I don't think we are
    revamping it in a way that does damage to the ability--in fact,
    quite the contrary, we are revamping it in a way that
    encourages the ability of the marketplace to bear more of the
    risks. And as the implicit subsidy--there is no payout of any
    subsidy, but as the implicit subsidy gets reduced, it is going
    to expand the role for the private sector. And I think that
    even as the copays go up and the deductibles go up, we will see
    the take-up rates continue to rise because that is precisely
    what we have observed in the last 2 years as under TRIA those
    deductible levels have gone up.
        But as I said earlier in response to questions with
    Congressman Frank, I agree with you, this isn't theology, this
    is a matter of trying to find a reasonable set of answers to
    how these risks should be shared between private sector and
    taxpayers.
        Mr. Scott. Why wouldn't we adjust it and revamp it going
    forward based upon the most obvious need that is coming to us?
    For example, we know now that one of the--
        The Chairman. The gentleman's time has expired. You may
    finish up your question.
        Mr. Scott. If I could finish my point, is that this war on
    terror, the types of attacks are changing as we speak. The one
    thing that we learned about London is evolving is that these
    were not folks coming in or foreigners, they were citizens who
    were living there, they were young people who committed this.
    Loss of life is paramount in terms of infrastructure. Given
    that new phenomenon, why wouldn't we want to include group life
    insurance, for example? Why wouldn't we want to include them?
        Secretary Snow. Well, this again is a matter that Mr. Frank
    has raised with me. You will recall, the original TRIA statute
    passed in November of 2002, directed Treasury to look at group
    life and consider whether it should be included, to do a study
    and conclude. And you gave us two criteria. Basically, the two
    criteria were availability of insurance and availability of
    reinsurance. We found that there was an insufficient
    availability of reinsurance, but we found that insurance itself
    was generally and widely available. So we didn't meet the
    statutory test and therefore we did not feel that group life
    should be included. And we are at that same position.
        The Chairman. The gentleman's time has expired. The
    gentleman from Alabama, the cleanup hitter for today's
    activities.
        Mr. Davis of Alabama. Thank you, Mr. Chairman. To be as
    respectful, Mr. Secretary, of your time as possible, I am going
    to ask you three questions and then ask you to respond to them
    and try to move as quickly as we can so you can go home or go
    to your next meeting.
        The first question I suppose relates to the whole premise
    behind the report from Treasury. The whole premise is that the
    market is slowly engaging in a series of correctives over the
    last several years and that you are confident that these
    correctives will continue without an extension of TRIA in its
    current form. My first question would be a fairly basic one.
    How much of the market's readjustment is itself linked to an
    expectation that TRIA will be renewed in its current form? That
    would seem to be a reasonable possibility to me. And a lot of
    the readjustment that is occurring is against a backdrop of
    Congress doing something that you seem to oppose is question
    one.
        Question number two, this is a very real concern that I
    have about the event limit being raised to $500 million. There
    is every reason to think, unfortunately, that the strategy of
    al Qaeda or whatever passes for al Qaeda now will be to shift
    toward suicide attacks on soft targets, and that al Qaeda may
    very well have in its capacity, in its mindset an ability to
    start doing the kind of pinprick suicide attacks that are
    common in the Middle East, that were last week in London, and
    that these kinds of things could be done 4 or 5 times a year if
    we are unlucky. If we were to raise the event coverage to $500
    million, given that a London scale attack, even though New York
    or Washington would fall way short of that, and any single
    limited suicide type bombing would fall well short of that,
    what about the possibility that we would enter this very
    uncertain environment if we raise the level to $500 million
    where there could be repeated attacks in the United States,
    none of them anywhere near the Government's backdrop but yet
    rising uncertainty in the market because of this new rhythm of
    attacks? That strikes me as a very real worry.
        And finally, Mr. Secretary, the third point. If I
    understand your position correctly, you are not one of the
    theologists on this issue who believe that the Government just
    shouldn't be involved as a backstop. You reject that premise.
    You are for an extension provided event coverage is expanded. I
    am concerned given that stance about some of the language in
    the report that has been issued. One of the sentences in your
    report states, ``We do not believe that the elimination of the
    Federal terrorism risk reinsurance subsidy is likely to have a
    discernible macroeconomic impact or effect.''
        There are other sentences to the effect that expiration of
    TRIA will still lead to a continued instance of the market
    developing additional terrorism insurance capacity.
        I am concerned, and I think you might want to be concerned,
    too, about some people taking some of the broad conclusions in
    this report and using it as an argument against any TRIA
    extension. The majority leader, frankly, in a talk that he gave
    several months ago questioned whether or not the Government
    should inject itself into the market in this manner and
    suggested that you could not have any extension of TRIA without
    doing real violence to the market.
        So given the fact that you favor an extension of TRIA, are
    you not concerned that some of the language in this report
    could very well be used by someone like Mr. DeLay who doesn't
    agree with your opinion? Those are my three questions.
        Secretary Snow. I will leave it to Mr. DeLay to figure out
    how to use our report, and I will sit down with him and tell
    him what we think it says.
        On your question about--and I think it is a good question,
    it is an important question about continuing series of small-
    scale attacks. I am just back from Europe, and that is a very
    real concern that is very much on the mind of European
    authorities. Under our proposal, the backstop would stay in
    place because it is an aggregate loss of $500 million. So it
    would cover a series of small attacks--five attacks at $100
    million would aggregate to the trigger, if all were related.
        Mr. Davis of Alabama. But September 11th with 3,000 dead,
    and there was about $32 million. You would still be way short
    if you had a series of pinpricks.
        Secretary Snow. Billion you mean? That was $33 billion.
        Mr. Davis of Alabama. Right.
        Secretary Snow. So it would be way over the number here.
        You know, the $500 million, we can debate the $500 million.
    As I have said over and over, this is a best judgment.
    Sometimes all you can do is render a best judgment because
    there is nothing else to return to.
        Mr. Davis of Alabama. What about the first question? I
    don't want you to miss the first question.
        Secretary Snow. The first question, which had to do with
    has the take-up rates been influenced by the fact that there is
    an expectation of TRIA being, as I got it right, being
    extended. Maybe to some extent, yeah. I think there is a sense
    in the marketplace that TRIA will be extended. I think that is
    something that we would acknowledge. And to save time, I think
    there is a case to be made, a good case for the sorts of
    changes that I have called for.
        The Chairman. The gentleman's time has expired.
        Mr. Frank. Mr. Secretary, briefly, and I really appreciate
    your time, just two points. One, when we talk about what
    happens if we do or don't and whether or not--but this is one
    case where I think we need to do a dynamic model and not just a
    static one. That is, again, my conversations have been to a
    great extent with some of the end users. And it is not just a
    case of, well, if a given amount of construction goes forward,
    will there or won't there be insurance. What I am concerned
    about is that the volume will go down, that the insurers will
    be out of it.
        Secondly, I just want to make a philosophical point that is
    kind of important. And it is a philosophical point that
    justifies I think a continuing Government role. With regard to
    insurance--Mr. Miller's question raised this--we do want to put
    some substantial part of the burden on the insured so that the
    insured can take steps to avoid the problem. It is an incentive
    to do better. Terrorism for us today is a largely external
    threat against the United States based on people who dislike
    us, who hate us, who unfairly want to victimize us. To the
    extent that we put the entire burden of insuring against
    terrorism ultimately on those who would be the victims of it, I
    think that is philosophically not justified. This is not a case
    where people are victims because of their own misdeeds. This is
    a case where a certain number of Americans because of where
    they are and what they do may be bearing the brunt of attacks
    based on anti-Americanism in general. To that extent I think
    there is a philosophical justification for socializing the risk
    and to some extent through taxpayers; that is, people in the
    big cities, people who are particularly likely to be targets I
    think are entitled to some burden sharing because that is where
    it comes from.
        The Chairman. The Chair wishes to thank the Secretary once
    again for his valuable time and sharing it with us. It was a
    most helpful hearing, and the Chair wants to continue to work
    with the Secretary and his very able folks at Treasury to craft
    an answer to this situation.
        The committee is adjourned.
        [Whereupon, at 4:40 p.m., the committee was adjourned.]

                                A P P E N D I X

                                 July 13, 2005

    [GRAPHIC] [TIFF OMITTED] T9460.001

    [GRAPHIC] [TIFF OMITTED] T9460.002

    [GRAPHIC] [TIFF OMITTED] T9460.003

    [GRAPHIC] [TIFF OMITTED] T9460.004

    [GRAPHIC] [TIFF OMITTED] T9460.005

    [GRAPHIC] [TIFF OMITTED] T9460.006

    [GRAPHIC] [TIFF OMITTED] T9460.007

    [GRAPHIC] [TIFF OMITTED] T9460.008

    [GRAPHIC] [TIFF OMITTED] T9460.009

    [GRAPHIC] [TIFF OMITTED] T9460.010

    [GRAPHIC] [TIFF OMITTED] T9460.011

    [GRAPHIC] [TIFF OMITTED] T9460.012

    [GRAPHIC] [TIFF OMITTED] T9460.013

    [GRAPHIC] [TIFF OMITTED] T9460.014