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




 
                   THE FUTURE OF TERRORISM INSURANCE

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 27, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-49


                    U.S. GOVERNMENT PRINTING OFFICE
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                 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
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair         PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
EDWARD R. ROYCE, California          HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  JOSEPH CROWLEY, New York
VITO FOSSELLA, New York,             STEVE ISRAEL, New York
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
PATRICK J. TIBERI, Ohio              JIM MATHESON, Utah
J. GRESHAM BARRETT, South Carolina   STEPHEN F. LYNCH, Massachusetts
GINNY BROWN-WAITE, Florida           BRAD MILLER, North Carolina
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JIM GERLACH, Pennsylvania            NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida            MELVIN L. WATT, North Carolina
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
GEOFF DAVIS, Kentucky                DEBBIE WASSERMAN SCHULTZ, Florida
MICHAEL G. FITZPATRICK,              BARNEY FRANK, Massachusetts
    Pennsylvania
JOHN CAMPBELL, California
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 27, 2005................................................     1
Appendix:
    July 27, 2005................................................    73

                               WITNESSES
                        Wednesday, July 27, 2005

Csiszar, Ernst N., President and Chief Executive Officer, 
  Property Casualty Insurers Association of America..............    54
Harper, Edwin L., Senior Vice President, Assurant, Inc., and 
  Chairman, Group Life Coalition.................................    60
Heck, Warren, Chairman and Chief Executive Officer, Greater New 
  York Mutual Insurance Company, on Behalf of the National 
  Association of Mutual Insurance Companies......................    58
Hunter, J. Robert, Director of Insurance, Consumer Federation of 
  America........................................................    51
Maurin, James E., Chairman, Stirling Properties, on Behalf of the 
  Coalition to Insure Against Terrorism..........................    25
Mills, Howard, Superintendent, New York Insurance Department.....    15
Mirel, Lawrence H., Commissioner, Department of Insurance and 
  Securities Regulation, District of Columbia....................    18
Pritzker, Penny S., President and Chief Executive Officer, 
  Pritzker Realty Group, L.P.....................................    62
Schupp, Jason M., Vice President and Senior Assistant General 
  Counsel, Zurich Financial Services Group, on Behalf of the 
  American Insurance Association.................................    56
Sinnott, John T., Vice Chairman, Marsh and McLennan Companies, 
  Inc., on Behalf of the Council of Insurance Agents and Brokers.    23
Stiglitz, William G. III, Hyland, Block and Hyland, and 
  President-elect, Independent Insurance Agents and Brokers of 
  America........................................................    21

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    74
    Kanjorski, Hon. Paul E.......................................    76
    Ryun, Hon. Jim...............................................    78
    Sessions, Hon. Pete..........................................    79
    Csiszar, Ernst N.............................................    81
    Harper, Edwin L..............................................    89
    Heck, Warren.................................................   100
    Hunter, J. Robert............................................   108
    Maurin, James E..............................................   132
    Mills, Howard................................................   145
    Mirel, Lawrence H............................................   153
    Pritzker, Penny S............................................   157
    Schupp, Jason M..............................................   162
    Sinnott, John T..............................................   168
    Stiglitz, William G. III.....................................   218

             Additional Statements Submitted for the Record

    Association of American Railroads............................   228
    Trust for America's Health...................................   232
    National Association of Realtors.............................   244


                   THE FUTURE OF TERRORISM INSURANCE

                              ----------                              


                        Wednesday, July 27, 2005

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:00 a.m., in 
room 2128, Rayburn House Office Building, Hon. Richard Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Oxley, Shays, Sessions, 
Gillmor, Bachus, Kelly, Biggert, Fitzpatrick, Davis of 
Kentucky, Kanjorski, Frank, Maloney, Ackerman, Sherman, 
Capuano, Crowley, Israel, Miller of North Carolina, Scott, 
Bean, and Wasserman Schultz.
    Chairman Baker. I would like to call this meeting of the 
Subcommittee on Capital Markets to order.
    I am advised that Mr. Kanjorski, the Ranking Member, is on 
his way. I will go ahead and proceed with my opening statement, 
and I wish to welcome those participants here this morning.
    The meeting today occurs on the subject of terrorism 
reinsurance and the need for and appropriateness of an 
extension of the current program now in effect.
    It also occurs pursuant to receipt of a report by the 
Department of the Treasury which performed a critical oversight 
and assessment of the current program. Although many view the 
report to have been negative in context, the conclusions 
reached are valuable because of the scope of the study and the 
findings and recommendations that are included. Specifically, 
that the committee should consider modifications to the current 
program before extending any conditional backstop.
    Further, Secretary Snow in appearing before the full 
committee in response to questions which I proffered to him 
indicated that, one, he felt that there was a need for an 
extension to be created before the year end, but that such 
extension should be modified pursuant to identified concerns 
contained in the report, more specifically retention levels 
perhaps should be adjusted, trigger levels should be adjusted, 
and repayment assurances made more clear to taxpayers. Those 
are perspectives with which I find agreement.
    Today, we have the good fortune to have experts in the 
field to express from their varying perspectives the 
appropriate manner in which the extension should be considered 
or in fact whether the extension should be granted at all. My 
concerns with the findings of the Treasury report go more 
specifically to a Louisiana view as to the $500 million trigger 
level that enables a claimant to seek assistance from the 
Department of the Treasury. I am anxious to try to find an 
alternative triggering methodology that might be more 
appropriate to rural communities.
    Second, I also share the Treasury's view with regard to 
what is now a conditional repayment of taxpayer advances of 
credit which today are discretionary in the eyes of the 
Secretary and may or may not be recollected. It is my view that 
a mandatory repayment provision would be extremely helpful.
    All of us have shareholders. Those in private business have 
clearly identified shareholders. Those of us in Congress have 
constituents, and it is our job to stand between our 
constituents' checkbooks and those who make application to the 
Government for assistance, to ensure that any extension of 
taxpayer resources is not only warranted, but at the appearance 
of profitability and an ability to repay without detriment to 
the overall economy, that repayment be made on terms that are 
responsive to the identified needs.
    I do believe, however, that the Treasury has indicated a 
willingness to work with this committee and the Congress in 
general to seek a remedy perhaps over the August recess that 
could be considered in the month of September to meet the needs 
of the marketplace before the expiration of the current 
program.
    I have come to the conclusion that without a properly 
constructed reinsurance program, there will be market 
consequences that are not in everyone's best interest. 
Accordingly, I look forward to working with other members and 
those experts who appear here today to seek out those remedies.
    At this time, I would recognize Mr. Ackerman for an opening 
statement.
    Mr. Ackerman. Thank you very much, Chairman Baker.
    I would like to thank our committee Ranking Member, Mr. 
Frank, and the subcommittee Ranking Member, Mr. Kanjorski, for 
arranging the hearing today to discuss the important and 
urgently needed extension of the Terrorism Risk Insurance Act.
    I urge that we work together on legislation to extend TRIA 
and that we move this legislation both through the committee 
and the Floor of the House this year. We must act to continue 
to provide TRIA's Federal backstop.
    TRIA, as we know, was enacted in response to the events of 
9/11, an event that caused over $30 billion in insured losses, 
and was enacted to help secure our economy against the 
devastation that might come from another terrorist attack. This 
was the primary purpose behind TRIA and it is the very reason 
this law needs to be extended.
    This high-level Federal backstop not only protects private 
commercial insurance interests, but also the long-term 
interests of the Federal Government, which would be ultimately 
responsible for funding both short- and long-term costs 
associated with recovering from a terrorist attack.
    Unfortunately, TRIA will sunset on December 31st of this 
year, and with Congress very soon to adjourn for the August 
recess, that deadline is fast approaching. The full 2-year 
extension proposed by Mr. Capuano's bill, H.R. 1153, will 
prevent destabilization of the insurance industry and, in turn, 
the national economy. This Congress has no greater domestic 
obligation.
    The Treasury Secretary's recent report on TRIA makes it 
clear that private markets will develop additional terrorism 
insurance capacity over time, but that still leaves us with a 
problem that must be addressed now. Whereas Secretary Snow 
indicates that the Bush Administration opposes the extension of 
TRIA in its current form, we do understand that this program 
may not be the long-term answer to protect all of the 
stakeholders here.
    I agree that in the end we must work to find private sector 
alternatives to address the liabilities created by the 
possibility of terrorist attacks. But with no such long-term 
solution currently in place and the sunset deadline of this 
protection soon approaching, a short-term extension must be 
enacted.
    Failure to extend TRIA with the uncertainties that still 
exist in the insurance marketplace would horribly exacerbate 
the already difficult task that insurers face in trying to 
accurately and effectively manage the risk of loss resulting 
from a terrorist attack. Failure to extend TRIA now would lead 
us back to the same highly uncertain business environment we 
saw before TRIA, an environment in which firms struggled to get 
needed coverage. TRIA has provided a short-term solution to 
successfully protect policyholders from bankruptcy, keep 
insurers from insolvency, and prevent the taxpayers from paying 
the full cost of a terrorist attack.
    Failure to enact the short-term extension makes no sense 
whatsoever. We are fortunate that there have been no terrorist 
attacks on U.S. soil since 9/11. Unfortunately, we have seen 
with this month's attacks in London that we still face a very 
real threat of terrorism and this threat will not go away when 
TRIA sunsets at the end of this year.
    We must act as quickly as possible, both in committee and 
with the entire Congress to avoid the premature expiration of 
TRIA's Federal backstop. Our security and future prosperity 
demand it.
    I thank the chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Ryun?
    Mr. Ryun. Mr. Chairman, thank you, and thank you for 
convening this hearing. It is an issue that has been in front 
of the committee for some time now.
    We have had numerous hours of testimony, and I believe that 
we have done a commendable job of helping to ensure that 
terrorism insurance continues to be available during perilous 
times.
    At the same time, we must not lose sight of the goal to 
return terrorism insurance to a market-based product. If we 
fail to establish a framework that begins to wean the industry 
off the Federal assistance, we will create a dependency that is 
almost impossible to reverse. However, it would be equally 
irresponsible to allow TRIA to expire if the market cannot bear 
the product on its own.
    I do believe that the industry is not to this point and 
therefore I believe that the committee should act to extend 
TRIA in some form. I am hopeful that we will be able to include 
meaningful reforms that accomplish the goals of holding 
taxpayers harmless over time, and ensure the availability of 
this product as it returns to the market-based system.
    I want to thank the witnesses for being here today and I 
look forward to the testimony. I hope we can move quickly 
toward a responsible reform and extension of TRIA.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Baker. I thank the gentleman.
    Mr. Kanjorski?
    Mr. Kanjorski. Mr. Chairman, as you already know, I 
strongly believe that we now need to extend the Terrorism Risk 
Insurance Act. This law is critical to protecting our economic 
security. I am therefore pleased that we are meeting today on 
this important matter.
    After the terrorist attacks 4 years ago, reinsurers 
curtailed the supply of terrorism reinsurance and insurers 
began to exclude such coverage from policies. In response, we 
enacted TRIA to address these pressing problems.
    Several studies have already determined that TRIA has 
worked to increase the availability of terrorism risk insurance 
and has advanced economic development projects. The Treasury 
Department's recent report on this law also found that the 
program has helped to stabilize our insurance market.
    TRIA, however, will expire at the end of this year. Like 
many of my colleagues, I believe that we need to move 
aggressively now to extend this economic stabilization law. Our 
failure to reach quick agreement on this important issue will 
likely result in less terrorism insurance, higher prices, lower 
policy take-up, and greater economic uncertainty.
    Moreover, the recent terrorist attacks in England and Egypt 
highlight the need for us to extend TRIA despite the 
preferences of some against doing so. The occurrence of 
terrorism, after all, is currently unpredictable.
    The vast majority of experts testifying before us today, 
including regulators, insurers, brokers, and real estate 
investors, will also call upon us to act expeditiously in these 
matters in the coming months in order to prevent short-term 
market disruptions. We need to listen to their counsel.
    In debating any plan to extend TRIA, I have long held that 
we ought to work to incorporate group life insurance. 
Therefore, I am pleased that one of our witnesses will directly 
address this issue today. Group life products, after all, have 
characteristics similar to commercial property and casualty 
insurance in that there is often an aggressive concentration of 
risk within a small geographic area. As many of my colleagues 
have regularly noted, we need to insure the people inside the 
buildings, and not just the buildings themselves.
    Additionally, the Administration has proposed a number of 
reforms that it would like Congress to adopt should we decide 
to extend the program. I approach these proposals with some 
doubt and a little skepticism. After all, the original bill was 
a carefully crafted compromise that resulted from extensive 
negotiations. In particular, I am especially concerned about 
Secretary Snow's request for reasonable legal reforms. This 
proposal for legal reforms could once again stall legislative 
efforts, as it delayed consideration of the original law.
    Nevertheless, as legislators, we have the responsibility to 
give this proposal and the other reforms suggested by the 
Administration their due consideration. We also need to 
evaluate the recommendations of experts testifying before us 
today during our forthcoming deliberations.
    As I noted at our last hearing, Mr. Chairman, time is of 
the essence. We now have just 4 weeks remaining on the 
legislative calendar. As a result, we need to have our staffs 
work diligently over the August break in order for us to move 
expeditiously in September.
    In closing, this is not a Democratic or Republican issue. 
It is, as I have regularly noted, an American issue. It is a 
business issue. It is an economic security issue. I therefore 
stand ready to work with you, Mr. Chairman, and all other 
interested parties on these matters in the weeks ahead.
    Thank you.
    Chairman Baker. I thank the gentleman.
    Mr. Frank?
    Mr. Frank. Thank you, Mr. Chairman. I appreciate the 
promptness with which you and the Chairman of the Full 
Committee have given us a chance to begin working on this.
    We were encouraged when the Chairman of the Full Committee 
indicated that we will in fact be marking this up. I look 
forward to this committee doing what we have been able to do in 
a number of areas in the past, working together in a bipartisan 
way on the technical matters.
    I want to address a philosophical point here today. It is 
why I strongly support this and why I differ with some of my 
allies who have said, well, let's not be helping business in 
this regard. In the first place, the prime beneficiaries of 
this, in my judgment, are not the insurance companies. They are 
the insured. The insurance companies could walk away from this.
    The problem would then fall on those who seek to build and 
construct, particularly in our big cities. This is a very 
important issue for New York and for Chicago. This is, as I 
said, a matter of the insured. There are people who want to 
build, who want to help develop. They are the ones who have 
come to me most passionately about this.
    Second, there is the philosophical question of how does 
this society deal with the costs imposed on us by murderers who 
dislike our form of government and our way of life. Yes, I 
suppose it would be possible for the market to take care of 
this. The market would take care of it by raising the price, if 
the market works as it should, to those who would be the 
likeliest targets of terrorism. That is the way the insurance 
system works. You would in a logical way say, okay, let's try 
as best we can to figure out who are likeliest to be the 
victims of terrorism and we will charge them more for their 
insurance. That is the way insurance works.
    Now, that is often a very good idea because what it does is 
give people an incentive to make themselves less likely to be a 
cost problem. You can have people diminish the likelihood of 
fire, diminish the likelihood of automobile accidents, etc. But 
there is nothing that Americans can do in Chicago or New York 
or Boston or anywhere else, or in the rural areas about 
terrorism, because I think the chairman is quite right. When we 
do the triggering, we should be sensitive to rural areas. We do 
not know where the terrorists will strike, but we will be 
guessing.
    I do not think we ought to say to the American people, we 
are going to assess you an extra fee because terrorists may 
have targeted you. It seems to me, and this is my philosophical 
justification for TRIA, we should take the cost of terrorism, 
which may be inflicted on us, and obviously there will be a 
terrible human cost, but to the extent that it is a financial 
cost, it ought to be broadly shared. This is a case for totally 
socializing the risk and not allowing particular sectors of our 
society, particular geographic regions to be more at risk and 
to have to pay more for terrorism. That is what we are talking 
about.
    If you go to a purely market-based system of terrorism 
insurance, you are saying to the extent that you are likely to 
be targeted by the terrorists, to that extent we will charge 
you more. Our job ought to be to say to those who would murder 
and destroy because they disagree with policies of this 
country, we are going to do everything we can to make sure that 
you have no effect on us. We are going to neutralize your 
efforts. The best way to do that is to take the cost of those 
efforts and spread them as broadly as possible.
    I do not want any one segment of the American economy 
feeling, oh well, wait a minute, I better be careful about this 
policy, I will be particularly singled out. To the extent that 
we broadly distribute this risk across the board and say to 
people that we all share. Let me just be clear on the point. 
The individuals who might be building big buildings in a 
particular community, they are not the cause of the murderers 
and they ought not to bear a disproportionate share of the 
burden of dealing with it. It is the country as a whole that 
has been targeted by these people. It is the country as a whole 
that should respond.
    One way to respond is to take the risk of terrorism 
insurance, and again people cannot diminish that risk. They may 
be able to mitigate some, but they cannot diminish the risk 
that they will be victimized by terrorists because that is an 
exogenous event over which they have no control.
    So that is the philosophical justification for saying 
whether the market can or cannot do this is not to me the 
primary issue. I do not want to impose on particularly 
vulnerable people in this society a greater cost because 
murderers may have targeted them. And that is the justification 
for doing this in this public way.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Capuano, did you have a statement?
    Mr. Capuano. Mr. Chairman, first of all, thank you for the 
hearing.
    I have no real opening statement, but I actually would 
encourage all the panelists, both on the first and second 
panels. Honestly, I deal in the real world. I think pretty much 
everybody is going to be on the same line that there is some 
role for the Federal Government on some sort of backstop at 
some level. The immediate question, though, is whether we 
should extend the current TRIA law or some form thereof.
    I do not think anybody who is familiar with the legislative 
process can look me in the eye and tell me that you think we 
will come up with a permanent solution by the end of this year. 
Though that is possible, anybody who is familiar with the 
process I think knows that it is highly unlikely.
    That being the case, my biggest interest, my immediate 
interest is your opinions on the immediate future. Should we 
extend TRIA? Should we extend it with some amendments? Or 
should we just let it expire? Beyond that, the permanent fix 
will take us some time to get to. If you think otherwise, if 
you think we can do it between now and then, I would like to 
hear that as well.
    Other than that, Mr. Chairman, again I thank you for having 
this hearing and for opening up the process so that we can hear 
from people who actually know what they are talking about, 
instead of just me.
    Chairman Baker. I thank the gentleman.
    Are there Members seeking recognition?
    Mr. Crowley?
    Mr. Crowley. Thank you, Mr. Chairman. Let me thank you and 
Ranking Member Kanjorski for holding this hearing today on the 
Federal terrorism backstop.
    I especially want to highlight the work of Ranking Member 
Barney Frank on this issue in keeping it at the forefront, as 
well as my colleagues Mr. Israel, Mr. Capuano, Mr. Kanjorski, 
in conjunction with my office, in creating the legislation that 
I think has been at the forefront of moving this issue forward, 
as well as Ms. Bean from Chicago and her efforts to extend TRIA 
for an additional 2 years.
    I welcome this hearing of the subcommittee on this 
important issue and look forward to as early a markup as 
possible. It is my hope that the Capuano-Israel, et al, bill, 
H.R. 1153, will be the base for this that will include a 2-year 
extension, as well as inclusion of group life coverage. That 
bill served as a lonely leader arguing for an extension of TRIA 
and it deserves its true place as the engine that moves TRIA 
forward to the next level, as well as the recognition of all 
those who support TRIA, including a number of the witnesses 
here today, some of whom I think sometimes forget that this 
bill exists.
    As we all know, the Terrorism Risk Insurance Act passed in 
2002 allowed for the reinsurance of terrorism insurance to 
private enterprise; allowed for the financing of new 
construction projects; and provided coverage for thousands of 
businesses that would not have had insurance without it. It was 
vital and we all agree on this point. As Howard Mills--and we 
welcome you to the committee today, Mr. Mills, a former State 
assemblyman, as I was myself, in New York State, who is now 
serving as the New York State insurance commissioner--stated 
about TRIA, ``The nation's current economic strength is in 
large part due to the Federal backstop put in place by TRIA.'' 
Mr. Mills continued by saying, ``The removal of that type of 
protection could return the insurance market to the uncertainty 
experienced in the aftermath of September 11, 2001.'' As a New 
Yorker, Mr. Mills is very keenly aware of the importance of 
this legislation, which certainly had the support of our 
Administration, this Administration, after the aftermath of 
September 11th.
    The Treasury report stated that the creation of TRIA was 
meant to address any market disruptions and ensure the 
continued widespread availability and affordability of property 
and casualty insurance for terrorism risk, and to allow a 
transitional period for the private markets to stabilize, 
resume pricing of such insurance, and build capacity to absorb 
any future losses, while preserving State insurance regulation 
and consumer protections.
    The report goes on to say that TRIA has been effective in 
meetings its goals of supporting the industry during a 
transitional period and stabilizing the private insurance 
market. Later, this same Treasury report states that the 
immediate effect of the removal of TRIA subsidy is likely to be 
less terrorism insurance written by insurers, higher prices, 
and lower policyholder take-up.
    I agree with all of the above. TRIA has been a success. 
Without TRIA, our country will see serious market disruptions 
like we saw in the months after 9/11 when there was no coverage 
and no ability of insurers to assess risk. In fact, what I said 
last week when Secretary Snow was giving his testimony before 
the committee, it is a take on the old adage, if it ain't 
broke, fix it.
    But now is not the time to let TRIA die. In fact, now is 
the time to extend and strengthen it. As we learned both in the 
Treasury report and over the past few years from conversations 
with industry and business leaders, many reinsurers have still 
not yet returned to the marketplace.
    I have concerns that as we move forward with any 
legislation, that we ensure the retention trigger rates as such 
are kept at a manageable rate to lure more insurers back into 
the market. I fear that increasing retention rates while 
weakening TRIA will not lure them back in. As they operate in a 
free market, reinsurers view terrorism as an uninsurable risk 
and that simply will not change.
    We need to add group life coverage and we need to look at 
the possibility of covering nuclear, biological, chemical and 
radiation coverage and other issues. We have a lot of work 
ahead of us and not much time to accomplish it. Stating that, I 
do believe that TRIA should not be a permanent program, but 
rather a temporary program until the private insurance market 
can develop its own additional terrorism insurance capacity.
    Again, I am pleased that the Treasury Department's report 
on TRIA, as well as the leadership of Mr. Frank in continually 
charging ahead on the importance of extending TRIA and 
terrorism risk insurance, will go on. I want to applaud them 
all once again and commit to industry to all facets who are 
concerned about this that I, too, am committed to seeing TRIA 
re-passed before we leave this Congress.
    I yield back.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Israel?
    Mr. Israel. Thank you, Mr. Chairman.
    Let me echo Mr. Crowley's welcome to Superintendent Mills 
from my home State of New York.
    I look forward to hearing your comments and those of the 
other witnesses.
    I am going to be very brief, Mr. Chairman. Some have 
suggested that with the Treasury report, we are getting very 
close to building a bipartisan consensus on TRIA. I certainly 
am hopeful that is the case, but there is a sense of deja vu 
because we were very close to a bipartisan consensus with TRIA 
in the last Congress. In fact, we were minutes away from a vote 
on the suspension calendar with the TRIA bill.
    Unfortunately, the clock wound down, we were not able to 
accomplish it, and here we are again. The clock is winding down 
again. We do not get two strikes on this issue. If we do not 
act, we are profoundly disappointing our businesses and our 
residents back home, and potentially setting back the U.S. 
economy.
    So I think that we have an opportunity to build consensus 
on what I suspect will be an imperfect bill. I just want to 
close by suggesting that we have an obligation to make sure 
that in an imperfect bill we at least cover two bases. One is 
group life. It makes no sense for us to assure the continuity 
of insurance for construction, for bricks, for mortar, for 
steel, and not for the human lives inside that building. It is 
a very tough argument to make back home that we insured 
buildings, but not the people inside. So I think group life has 
to be a critical component.
    Finally, we need to ensure that whatever is passed in the 
remaining weeks that we have here in Washington does focus on a 
short-term extension and a long-term solution. I look forward 
to continuing to work with my colleagues. I want to thank Mr. 
Capuano and Mr. Kanjorski and the ranking member and Mr. 
Crowley for joining me on H.R. 1153. We continue as we always 
have at every step for the past 2 years to offer to work in a 
bipartisan, constructive fashion with our colleagues to make 
sure that we pass TRIA, put this issue behind us, and sustain 
our economy in the future.
    I thank the chairman and yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    The Chairman of the Full Committee, Mr. Oxley?
    The Chairman. Thank you, Mr. Chairman.
    And good morning to our distinguished panel of witnesses 
and welcome to the committee. We look forward to hearing your 
testimony today on the future of terrorism insurance.
    We recall today how the economy, and specifically the 
insurance marketplace, was roiled by the terrorist attacks of 
9/11. Reinsurance capital fled the marketplace, insurers began 
to exclude coverage, and large policyholders were unable to 
obtain enough insurance coverage for their construction and 
development projects.
    In coordination with the leadership of President Bush, 
Congress acted swiftly to address the problems facing the 
insurance marketplace. Those problems included a drained 
industry surplus, insufficient diversification in geographic 
risk exposure, and an inability to model potential terrorist 
losses. Within weeks of the terrorist attacks, this committee 
and the House passed legislation that in 2002 would become the 
Terrorism Risk Insurance Act or TRIA. TRIA established a 
public-private partnership with a temporary backstop to protect 
against future catastrophic terrorist attacks through December 
31st of this year.
    TRIA was designed to be a temporary fix to address very 
specific goals, and it has succeeded in that role. The 
insurance industry's surplus has dramatically increased, the 
economy has greatly improved, and commercial property insurers 
have been able to more effectively spread and model their risk 
exposures.
    However, as documented by the recent report from the 
Department of the Treasury, TRIA may actually be hindering 
market-based solutions for terrorism insurance. As a result, it 
would not be prudent to merely extend the current TRIA program. 
The threat from terrorism will likely remain with us for years 
to come, and this Nation needs a long-term solution that the 
current TRIA program simply does not and cannot provide.
    We have had the Government Accountability Office perform 
numerous studies for the committee evaluating domestic and 
foreign catastrophe programs. From their review, it is clear 
that the only long-term solution to ensuring market stability 
for catastrophic risks is by creating dedicated capital. This 
can be done by allowing long-term catastrophic reserves, 
creating an industry pool, pre-funding or post-funding losses 
through assessments and surcharges, tapping the equity markets, 
or providing a Federal subsidy.
    The last option, a Federal subsidy, is often the least 
efficient as it crowds out and distorts the private 
marketplace, reducing incentives for mitigation and appropriate 
risk pricing. For this reason, the Treasury and the White House 
have indicated their opposition to an extension of TRIA in its 
current form. I also believe that an extension of the program 
without reform would be unwise and unwarranted.
    Fortunately, the marketplace has not been without new 
thinking in the last year, and numerous parties have presented 
the committee with proposed solutions for revamping TRIA to 
reduce the Federal subsidy, increase private sector 
involvement, and create dedicated capital sources to ensure 
long-term stability in the terrorism insurance marketplace.
    This is an important due diligence responsibility for our 
committee. Whether we simply increase the TRIA numbers as the 
Treasury suggests with full taxpayer payback and more 
streamlined coverage, or create a more comprehensive solution 
with greater certainty and free-market discipline, I am 
confident we can get it done in a timely manner and in our 
committee's bipartisan tradition.
    I look forward to hearing from the witnesses on our panels 
today, and on working together on a revamped and more effective 
and efficient terrorism insurance program.
    Mr. Chairman, I yield back.
    Chairman Baker. I thank the Chairman for his participation.
    Ms. Bean?
    Ms. Bean. Thank you, Chairman Baker and Ranking Member 
Kanjorski, for holding this important hearing on TRIA.
    Thank you to our distinguished panel members for sharing 
your own valuable real-world perspective in the debate over 
terrorism risk insurance.
    In the wake of the September 11th terrorist attacks, it was 
important to put a Federal backstop in place to protect against 
large-scale terror losses. TRIA provided an important step 
forward in providing relief to insurers and third parties that 
could suffer devastating losses in the event of a terrorist 
act.
    My own suburban district is located just northwest of 
Chicago. Many of my constituents work in the city, however, and 
I have a special appreciation for how TRIA helped restore the 
confidence needed to revive our local economy after the shock 
of September 11th.
    The London bombings earlier this month illustrate that the 
threat posed by terrorism is still very real. Sadly, the London 
attacks underscore the need for Congress to act quickly to 
renew the Terrorism Risk Insurance Act before it expires at the 
end of this year. In the absence of a backdrop, I am concerned 
that the terrorism insurance market will once again become 
unstable and potentially damage our economy.
    The same rationale which compelled Congress to pass TRIA in 
the first place should again compel us to approve its 
extension. We can and should avoid further market disruption.
    I look forward to the witnesses' testimony and I yield back 
the balance of my time.
    Chairman Baker. I thank the gentlelady.
    Mr. Bachus?
    Mr. Bachus. I thank the chairman. I would like to commend 
you on your leadership on this issue and your efforts in 
renewing the Federal Government's commitment to terrorist 
insurance and the Terrorism Risk Insurance Act.
    Over the past few years, terrorist insurance has helped 
provide needed stability to our Nation's economy. It is often a 
critical component in the financing of various real estate 
development projects, including office buildings, residential 
and condominiums, and retail centers. Its continued 
availability and affordability plays an important role in the 
economic health of the commercial real estate market in our 
economy.
    For that reason, I would like unanimous consent to submit a 
statement by the National Association of Realtors.
    Chairman Baker. Without objection.
    Mr. Bachus. Thank you.
    As you know, the program is set to expire at the end of the 
year. I am concerned that America's economy will not have the 
adequate financial protection from future terrorist attacks, 
and we always have to assume that they will come, for purposes 
of this hearing. Consequently, Mr. Chairman, this program needs 
to be renewed and extended.
    In addition to the renewal of the TRIA program, we should 
consider the inclusion of group life as part of the Federal 
terrorist reinsurance program. Unlike property and casualty 
insurance and their industry, in the absence of TRIA group life 
insurers are required by State law to offer terrorist 
protection if they offer the product.
    As a result, group life insurers have had to make changes 
in their underwriting policies with potential risk of an 
exposure to a terrorist attack. For that reason, I believe that 
adding group life would help ensure the ability in the life 
insurance market and allow policyholders additional security in 
areas of high-risk concentrations. Also, it encourages the 
offering of group life insurance.
    As a proponent of the TRIA program, I have also read the 
recent Department of Treasury study on renewing terrorist risk 
insurance, the Act. It is my sincere hope to work with the 
Administration and the committee and Chairman Baker and 
Chairman Oxley on suggested changes to the program to ensure 
that TRIA renewal will not prevent the development of the 
underwriting ventures and reinsurance products in this area.
    Again, I thank you, Chairman Baker, and I look forward to 
hearing the testimonies of the witnesses here today.
    Chairman Baker. I thank the gentleman.
    Mr. Miller, did you have a statement?
    Mr. Miller of North Carolina. Just briefly, Mr. Chairman.
    I agree that TRIA should be extended. I voted for that in 
this committee in the last Congress and I have cosponsored the 
legislation this year to extend it.
    But I wanted to agree in part and disagree in part with the 
ranking Democrat, Mr. Frank's statement earlier. I am sorry he 
is not here to see me disagree with him. I just wanted to prove 
that I could do it.
    [Laughter.]
    Chairman Baker. I will tell him about it.
    [Laughter.]
    Mr. Miller of North Carolina. Okay. Thank you. I actually 
felt several people might.
    I agree entirely that there is a great deal of terrorism 
risk that is entirely beyond the power of insurers to prevent. 
There is nothing the World Trade Center could have done to 
prevent being struck by commercial airliners, but there is 
something that airlines could have done to prevent it. I 
certainly want to get at what the private sector can do to make 
us safe.
    The 9/11 Commission said that despite 9/11, the private 
sector was woefully unprepared for terrorist attack. It should 
be a cost of doing business, certainly for some critical 
infrastructure, for some businesses whose vulnerability puts 
all of us at risk, many of us at risk.
    There are real differences in vulnerability to terrorism, 
the likelihood that a business will be the target of an attack, 
that I think should not, I agree with Mr. Frank, should not be 
reflected in terrorism insurance. Obviously, the greatest 
single vulnerability is whether you are in a major population 
center; whether you are in a city or not. I do not represent a 
large city, but I want America's cities to be vibrant and I do 
not want businesses to think they have to move away from cities 
to get insurance or to get affordable insurance.
    I do not want a publisher to have to pay more terrorism 
insurance if they publish Salman Rushdie. They may be at much 
greater risk of a terrorist attack if they do. It is 
unacceptable to me that we would make that distinction. I would 
not want a Jewish community center to have to pay a higher 
terrorism risk insurance premium than would a Methodist 
community center or a nonsectarian community center. Those are 
unacceptable to me.
    But if the chemical industry can do something to prevent a 
Bhopal resulting from a terrorist attack, I want them to do it. 
If utilities, if power companies can do something, should do 
something to prevent the grid from going down because of a 
terrorist attack, I want them to do it, and I want there to be 
an economic incentive to do it.
    So whether it is this legislation and the extension of TRIA 
or in some other legislation, I do want to have a discussion 
about what we can do through market forces to encourage the 
private sector to be prepared for terrorist attack, to try to 
prevent attacks, to try to reduce our vulnerability, 
particularly when an attack on you is going to cause loss to 
others who cannot protect themselves, who can't prepare, and to 
minimize the damage so that we can recover from attacks.
    Chairman Baker. I thank the gentleman.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Chairman Baker.
    When Congress enacted TRIA, we made great strides to 
stabilize the private insurance market and to safeguard the 
economy in the face of future terrorist attacks. This temporary 
program effectively limited market disruptions and encouraged 
economic stabilization.
    In the face of TRIA's expiration, we must ask if we are 
going to try to develop a private reinsurance market for 
terrorism. Secretary Snow testified that a revamped terrorism 
insurance program must incorporate greater taxpayer protection 
and encourage private market development. Chairman Greenspan 
stated that some of the aspects of the Treasury's proposal to 
change TRIA by increasing private market participation and 
lessening taxpayers' potential liability were very sensible. I 
would like to hear the panel here today address what is 
sensible and what is not.
    Chairman Baker has raised concerns that raising the 
threshold to $500 million might make TRIA coverage unavailable 
in some areas, which could possibly include my district in 
southeastern Pennsylvania. I would also like the panel to 
address this concern.
    No matter how you look at it, the global struggle against 
violent extremism will be long. We must try to find solutions 
so that our taxpayers are not so vulnerable in the long run. In 
the end, terrorism may turn out to be an uninsurable risk, but 
until this Federal backstop is modified, the private sector 
will not have an incentive to innovate. Despite our differing 
views on reform, we can always stand together on one thing: 
protecting the American economy from the financial consequences 
of a terrorist attack.
    Chairman Baker, I commend your commitment to renew this 
vital program before it expires at the end of this year. And I 
yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    Ms. Wasserman Schultz?
    Ms. Wasserman Schultz. Thank you, Mr. Chairman.
    Chairman Baker and Ranking Member Kanjorski, I appreciate 
your convening today's hearing and for your continued 
leadership on this important issue.
    I particularly want to recognize my esteemed colleague from 
Massachusetts, Mr. Capuano, for all of his hard work on H.R. 
1153.
    Specifically, I would like to welcome Ed Harper from 
Assurant, which is a major employer in my district.
    I will not be here for your testimony because I have a 
Judiciary Committee markup simultaneous to this meeting, but I 
appreciate your being here. I look forward to your testimony 
and for all the panelists', and I want to keep my remarks short 
so we can expedite this process.
    I also want to reiterate, as my colleague from Pennsylvania 
did, that there is a need for a Federal backstop on the 
reinsurance markets. A failure of the Federal Government to 
extend TRIA will have very real consequences for our economy 
and will especially have those consequences for cities like 
Miami where the costs to private market participants will be 
simply untenable.
    The series of tragic events in London over the last few 
weeks underscore the need for the reauthorization of TRIA. The 
war on terror continues. As we heard Chairman Greenspan testify 
before this committee last Wednesday, private markets presume 
peaceful and civil societies. You cannot price or model 
catastrophic events. This is a lesson that other countries 
facing such threats, countries like the U.K., Israel, Spain and 
Italy have learned. These countries all provide the equivalent 
of a Federal backstop for their reinsurance markets.
    Like with unanticipated, unavailable insurance for 
hurricanes in my home State of Florida, the insurance industry 
cannot be expected to carry the full weight of the aftermath of 
a terrorist act. I know that many of my colleagues on both 
sides of the aisle recognize this need and I encourage us to 
move forward together and do what is best for this country.
    Thank you. I yield back the balance of my time.
    Chairman Baker. I thank the gentlelady.
    Does any Member seek recognition for an opening statement?
    If not, at this time I would like to ask unanimous consent 
that the gentleman from Texas, Mr. Sessions, be permitted to 
sit as a member and be recognized in regular order. If there is 
no objection, without objection--
    Mr. Shays. Reserving the right to object.
    Chairman Baker. Mr. Shays is recognized.
    Mr. Shays. As long as Mr. Sessions speaks with the 
eloquence that he usually speaks with.
    [Laughter.]
    Chairman Baker. You will have to be the sole judge of that.
    The gentleman from Texas is recognized.
    Mr. Sessions. Thank you, Mr. Chairman.
    You know, it is great to have friends around it, isn't it? 
Chris, thank you so much.
    Mr. Chairman, I appreciate the opportunity to be with you 
today and to hear this panel as they speak clearly about the 
needs as we go about reforming TRIA. I would like to be the 
first one to say that your leadership makes a difference, and 
the reason why we are here today is because you have been able 
to bring us along on this pathway to make sure that this debate 
and discussion takes place.
    Also, I want to thank Chairman Oxley, Mrs. Kelly, and Eric 
Cantor for their long support of this process.
    Mr. Chairman, if I could, I would like to just submit my 
remarks, rather than going through them, but I would like to 
read one page of them, and like to ask unanimous consent that 
they be included in the hearing.
    Chairman Baker. Without objection.
    Mr. Sessions. That is, with the benefit of some distance 
and greater insight into how the marketplace has responded to 
TRIA, I believe it is appropriate to revisit this program as we 
are doing today and determine how it can be improved. 
Legislation that is fiscally responsible and provides taxpayer 
protection by narrowing Federal exposure, while still providing 
certainty and stability to the marketplace is what our 
achievable goal should be. I believe it is one that can be 
reached also in a timeframe that is appropriate, considering 
the impending expiration of TRIA as we currently know it.
    Without the certainty provided by the terrorism insurance 
program, Congress runs the risk of dealing with the financial 
aftermath of the tragedy again without a plan and without 
significant involvement from the private sector. This is a bad 
policy alternative for dealing with the economic effects of 
such a tragedy, and Congress can and must do better.
    Mr. Chairman, I believe what we are doing here today gets 
us closer to the mark of not only responsibility, but making 
sure that Congress puts its mark with the private sector to 
ensure that our economy feels the strength of an ongoing need 
to make sure that Americans have confidence not only in our 
government, but also in our process and the free enterprise 
system.
    Thank you so much for allowing me to be here today.
    Chairman Baker. I thank the gentleman.
    There being no further statements from members, I have a 
request for unanimous consent that the statements of the 
Association of American Railroads and the statement of the 
Trust for America's Health be included in the hearing record. 
Without objection, so ordered.
    It is now my pleasure to turn to our distinguished panel of 
witnesses, and advise you that to the extent possible we 
request that your testimony be constrained to 5 minutes. 
However, your full statement will be incorporated into the 
official record of the hearing.
    With that, I would first like to call on Mr. Howard Mills, 
who appears here today in his capacity as superintendent of the 
New York Insurance Department.
    Welcome, sir.

 STATEMENT OF HOWARD MILLS, SUPERINTENDENT, NEW YORK INSURANCE 
                           DEPARTMENT

    Mr. Mills. Thank you, Chairman Baker, Mr. Kanjorski, all 
the members of the committee.
    It is clear to me from hearing the many opening comments 
today that all of the members of the committee seem to have a 
very keen appreciation for my critical point.
    My critical point, if I could leave you with one message, 
Members of Congress, is that we cannot have any gap. On January 
1, 2006, something must be in place, a Federal backstop, or we 
will indeed immediately return to the post-September 11th 
period in the insurance industry and it will have devastating 
impacts on our national economy.
    I would be pleased to see an extension of TRIA. The NAIC 
has advocated for an extension of TRIA with the inclusion of 
group life. I think that is very important. But I have been 
listening very carefully to the Administration, to the Members 
of Congress. I do not expect that there is a lot of desire to 
just go ahead with a straight extension. So I am here to try 
and offer some thoughts on how we could go about approaching it 
in a different way.
    Before I share some of those thoughts, let me make a couple 
of points that are critical to what an extension of TRIA or any 
new program would have. The first thing I would like to say--
and I heard it in some of the opening comments here this 
morning--there is a tendency, and I with all due respect think 
that it is incorrect and misguided, to still regard this as a 
large city issue. This is something that we have to really 
think about. I personally believe that it would be far more 
devastating if the next, and we all hope of course that there 
will not be a next, but the experts tell us that there will be 
a next attack.
    I think it would be far more devastating to the insurance 
industry, to the economy, to the national psyche if that next 
attack were not at the Sears Tower in Chicago, not at the 
Empire State Building in New York City, but in a small shopping 
mall in Iowa or in Louisiana that none of us had ever heard of. 
That would immediately necessitate that any building project 
anywhere in this country where people gather would have to have 
terrorism insurance. Immediately that would occur.
    It simply must be there. Our national economy will be 
devastated if that were to occur. We know that we are dealing 
with a savage, but a very cunning enemy. They have a history of 
going after soft targets, not hard. And many of our best minds 
were focused on trying to predict and prevent the next attack 
have that very same concern, that it will be an unforeseen 
attack in an unlikely location designed for maximum economic 
damage, which of course is one of the major objectives of our 
enemy.
    That brings me to another point that I would like to make. 
I do think that the industry can do more, should do more, but 
those who say that the existence of TRIA over the last 2 years 
has completely depressed industry response, that also is not 
correct. The industry has done a great deal. You need only look 
at the security measures taken on by the private sector in 
large cities primarily, you know, expected targets.
    Local governments are bearing a heavy burden and the 
American taxpayer is already bearing a heavy burden. That is 
something else that is not often said enough. There is a lot of 
concern for the cost to the taxpayers. I would point out that 
TRIA so far has not cost the taxpayers a dime, not a dime has 
been spent on TRIA.
    But the American taxpayers are already paying. They are 
paying when their local governments have to take up security, 
enhance security measures, so we are all already paying a cost. 
It is a question of how that cost will be borne and what will 
be the most effective use of those monies to protect our 
national economy.
    One of the great problems that the industry has even if 
TRIA goes away and if there is not a backstop, insurance rates 
are set based on modeling. To price a product, they have to 
model. They have to try to predict the likelihood of payment of 
claims. You simply cannot model a terrorist attack. By its 
definition, a terrorist attack is meant to be unexpected. It is 
meant to be a surprise. You cannot model it. Therefore, you 
cannot price it.
    And finally, to those who are questioning whether we should 
even allow TRIA to just expire and go away with no Federal 
backstop, and ``let the free market respond,'' I would urge the 
Congress to consider this. There will be a free market 
response, but the likely, indeed the probable free market 
response will be to not write the insurance at all. That will 
have devastating impacts on our economy.
    TRIA has worked very, very well. I think that the major 
point that I would like to make here is that TRIA, the Congress 
was wise, the Administration was wise in its make-available 
clause. It put the onus on the insureds, not the insurers. It 
is the option of the insureds to look for it. It has to be made 
available by the insurers, and I would hope that any solution 
going forward will keep that in mind. I agree with those who 
said here today, and I am here as the superintendent of 
insurance, not advocating for the industry. I am here 
advocating for the consumers of insurance, for your 
constituents, for the American economy.
    Right now, the Congress should be aware that even with this 
question of whether TRIA will be extended or not, great harm is 
already being done. Again, I urge you, there must be a Federal 
backstop in place in some form on January 1, 2006, and I would 
also urge you to move as quickly as possible because the mere 
confusion about what is going on is already doing economic 
damage. You are seeing exclusions being written into policies 
right now and those exclusions will kick in with any policies 
going into 2006. If there is not a Federal backstop in place, 
those exclusions will kick in and we will indeed be right where 
we were on September 11, 2001, before TRIA was enacted that 
year, where the economy had such terrible damage.
    Congress should be very aware of the fact, you know, it all 
comes down to an issue of capacity, and there is not unlimited 
capacity. Capacity has enhanced since TRIA was enacted, that is 
true, but the capacity is not unlimited. You should be aware 
that less than half, less than half of all the capacity out 
there right now in the insurance industry, less than half of 
that is dedicated to commercial lines.
    Also, the hurricanes in Florida have reduced our capacity 
by $20 billion, and we are in hurricane season again. We have 
already had the earliest force four tropical storm in the 
hurricane season on record, so we just cannot count on the 
capacity being there. It is not yet there and the fact that all 
of the policies being written are already containing these 
exclusions in the event that a Federal backstop goes away, 
shows that the industry is not yet ready to write and that they 
will indeed, because of capacity issues, in many cases opt not 
to write if the Federal backstop is not extended. There are 
just some catastrophes that the private sector is not able to 
deal with. It is absolutely critical that this backstop 
continue.
    Now, where do we go? I have been listening very carefully. 
I do believe that there is a sincere effort to come up with a 
long-term solution. I believe that a long-term solution is 
preferable. Hopefully, the Congress can enact a long-term 
solution so it is in place by January 1, 2006. If it is not, if 
for political reasons or other reasons it just is not able, I 
urge you to do some sort of a temporary extension as a bridge 
to get you to the point that a long-term solution can be put 
into place. Again, the economic impacts of any gap, any gap at 
all on January 1, 2006, would be devastating. We are already 
feeling the impacts.
    Where would I like to see a long-term solution go? I do 
believe that we need more private involvement and we need to 
come up with a mechanism that would over time do two things: 
build capacity and reduce the Federal Government's involvement. 
Some type of a mechanism, some other entity created where 
capacity was built, which was optional, which those insurers 
that opted to go into the program would then pay an assessment 
to build capacity. It would be absolutely necessary that if 
they opted in, they had to cover all types of terrorism.
    Chairman Baker. Could you begin to conclude, sir?
    Mr. Mills. Okay. Chairman, I have many other points I want 
to make which maybe we can get on, but let me make one final 
point please, if I may.
    The urgency of having this in place is critical. I happen 
to be a very, very big believer in tort reform. I am very 
concerned when I hear some of these talks about linking TRIA or 
another backstop to other issues. I urge you not to do that. I 
believe that this is, after the men and women in the United 
States military, TRIA is, or a Federal backstop, an improved 
Federal backstop is the most critical weapon in our arsenal to 
fight the war on terror. They want to destroy our economy. TRIA 
has kept our economy strong and the lack of a Federal backstop 
will have a devastating impact on our national economy.
    I thank you, Mr. Chairman.
    [The prepared statement of Mr. Mills can be found on page 
145 of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    Our next witness is Mr. Larry Mirel, who testifies here 
today in his capacity as commissioner of insurance and 
securities regulation for the District of Columbia.

  STATEMENT OF LAWRENCE H. MIREL, COMMISSIONER, DEPARTMENT OF 
   INSURANCE AND SECURITIES REGULATION, DISTRICT OF COLUMBIA

    Mr. Mirel. Good morning, Chairman Baker, Mr. Kanjorski, and 
Mr. Sessions and members of the subcommittee.
    As the insurance commissioner for the District of Columbia, 
I carry out the laws that were mostly enacted by this Congress, 
and in many ways I am Congress' State insurance regulator. I am 
here today on behalf of my department, the District of Columbia 
Department of Insurance, Securities and Banking, and I am not 
speaking on behalf of the NAIC, the National Association of 
Insurance Commissioners.
    I want to agree with Superintendent Mills, first, that the 
issue really is one of capacity. Will there be enough money 
available to cover losses due to future terrorist attacks, no 
matter how large they may be? Will people who pay premiums to 
protect themselves from financial disaster due to a terrorist 
attack be able to collect on the promises of reimbursement for 
which they paid?
    We do not want to see a situation where a large-scale 
terrorist attack exhausts the reserves set up to pay for those 
losses, leaving people without financial relief at the very 
time they need it the most.
    Under TRIA, the deal that was made was that in exchange for 
insurance companies offering terrorism coverage, the Federal 
Government steps in under certain circumstances to provide a 
backstop. TRIA has worked well and it is an important law, but 
there are two shortcomings, in my view, with the approach taken 
by TRIA.
    First, the legislation does nothing to promote growth in 
the capacity of the private insurance market. On the contrary, 
the very fact that the Government is willing to step in when 
losses exceed a stipulated amount discourages the growth of 
private capacity above that amount.
    Second, the risk that the Federal Government will have to 
make good on its pledge to act as the insurer of last resort is 
too high. $15 billion in terrorism losses may seem like a high 
industry retention level, but when compared to the $40 billion 
caused by the destruction of the World Trade Center, it is 
clear that the Federal Government would become involved very 
early under TRIA in a major terrorism event.
    To deal with both of those problems, in my view, a long-
term solution should make the Federal Government a far more 
remote guarantor. There needs to be a Federal guarantee. In the 
end, as Mr. Mills has said, and others, terrorism risk is 
unpredictable. There needs to be a Federal guarantee, but it 
should be far more remote than it is currently.
    The way to deal with that, in my view, is to use the 
legislative authority of the Congress to create the 
establishment of a terrorism risk pool that would be funded and 
run by the industry; that would act as a cushion between what 
the industry can cover in the ordinary course of its activities 
and the point at which the Federal Government needs to step in 
as guarantor.
    In my view, the sensible approach would be for Government 
to use its authority to create such a pool, which would take 
some time to be filled up, but as it fills up, the terrorism 
guarantee provided by the Federal Government could retreat. 
Basically, what I am talking about is a TRIA-like arrangement, 
but funded by private money, not by the Federal Government.
    I also want to deal with a point that was made earlier 
about the unfairness of putting the risk of terrorism attack on 
those people who happen to be in the way of the particular goal 
of the terrorists. I always use the example of Joe's shoe store 
down here on 15th Street near the White House. The terrorists 
are not after Joe. They are after America, and Joe should not 
have to pay 3 times as much as anyone else for insurance 
coverage.
    The creation of a risk pool would allow the subsidizing of 
the risk by every American. I think that is only fair. Not only 
do we not know when the next terrorism attack will take place, 
but we do not know where it will take place. Everybody is at 
risk. The terrorists are after America. They are not after 
Joe's shoe store.
    The terrorism risk pool could be funded by a very small 
increased charge on policies that are covered by the pool. That 
small charge would very quickly mount up to a great deal of 
money that would be used as a backstop before the Federal 
backstop is reached.
    Currently, what happens is that insurers, not knowing what 
the risk will be, not being able to properly model it, charge a 
high rate. They would rather err on the side of being too high 
than too low. At the end of the year if there has been no 
terrorist attack, that money goes to the company's bottom line. 
The following year, it has the same issue, and so it charges 
the same high rate.
    Instead, if this money were put into a terrorism risk pool, 
and kept aside for the purpose of backstopping terrorism risk, 
it could serve a very important role as a cushion between what 
the private industry can provide in the ordinary course and 
what the Federal Government ultimately will have to do.
    Thank you, Mr. Chairman, for holding this hearing. I do 
think that it is very important that something happen before 
the end of the year. I agree with Superintendent Mills that we 
should not have a gap. Something has to be done. I think also 
that a long-term solution is in the air and could be done. I 
hope it could be done by the end of this year, but if not, then 
something must be done. There cannot be a gap.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Mirel can be found on page 
153 of the appendix.]
    Chairman Baker. I thank you for your testimony.
    For the appropriate introduction of our next witness, I now 
turn to Mr. Geoff Davis.
    Mr. Davis of Kentucky. Thank you, Mr. Chairman.
    It is a privilege to be here this morning serving on the 
Terrorism Subcommittee on Armed Services, the House Task Force 
on Terrorism and Unconventional Warfare, and also on the 
Financial Services Committee and Chairman Baker's Subcommittee 
on Capital Markets.
    Before introducing Mr. Stiglitz, I would like to comment on 
the importance of this hearing today simply from the 
perspective of this not being a war on terror. This is a war 
that Islamic extremism has imposed on this country, not simply 
by poor people from remote areas, but highly educated middle 
class and upper middle class people who are orchestrating this 
effort, and understand very clearly that to win the 
psychological war, to reduce the will of the American people to 
unutterably defeat them, they need to be able to strike a blow 
to our economy and our confidence in our governmental 
structures.
    That is one reason I am very grateful to the chairman for 
holding this hearing and being a champion on reauthorization 
and reformation of this very critical piece of insurance 
legislation, because one of the great blows, as a student of 
the Middle East, one of the great blows throughout the 
extremist Islamic community was the fact that our markets were 
open for business again within days after the 9/11 attacks. I 
think we have to take the steps necessary to show the world our 
confidence. Indeed, the world is watching this hearing today.
    This morning, it is my privilege to introduce Mr. William 
Stiglitz, the third president-elect for the Independent 
Insurance Agents and Brokers of America, from Louisville and 
the great Commonwealth of Kentucky. Mr. Stiglitz was elected to 
the executive committee of the IIABA in October of 2000; was 
inaugurated as president-elect in 2004 at the IIABA's 
convention in Orlando, and will become the association's 
president this year.
    Mr. Stiglitz is an account executive with Hyland, Block and 
Hyland, Incorporated in Louisville, Kentucky. A past president 
and State national director for the Independent Insurance 
Agents of Kentucky, Mr. Stiglitz is on the State's board of 
directors and government affairs committee. Nationally, he 
served as planning liaison to the executive committee and as a 
member of the dues taskforce. He also is past president of the 
Louisville Board of Independent Insurance Agents.
    Mr. Stiglitz graduated from Centre College in Danville, 
Kentucky, and served in the United States Army in Vietnam.
    For that, we thank you for your service.
    Mr. Stiglitz, we are pleased to have you here this morning 
at the Subcommittee on Capital Markets, and we look forward to 
your testimony.
    Chairman Baker. Please proceed, Mr. Stiglitz. Welcome.

   STATEMENT OF WILLIAM G. STIGLITZ, III, HYLAND, BLOCK AND 
 HYLAND, AND PRESIDENT-ELECT, INDEPENDENT INSURANCE AGENTS AND 
                       BROKERS OF AMERICA

    Mr. Stiglitz. Thank you, Congressman Davis, for that 
generous introduction.
    Good morning, Subcommittee Chairman Baker and Ranking 
Member Kanjorski and members of the subcommittee. My name is 
Bill Stiglitz, and I am pleased to be here today on behalf of 
the Independent Insurance Agents and Brokers of America, IIABA, 
to present our association's perspective on the future of 
terrorism insurance.
    I am an account executive with Hyland, Block and Hyland, an 
independent agency based in Louisville, Kentucky. I also serve 
as president-elect of IIABA.
    Today, independent agents and brokers sell nearly 80 
percent of all commercial lines policies in the country. 
Members of the Big I, as we are known, write the coverage for 
America's businesses and serve as the intermediary between 
consumers and insurance companies, thereby seeing the insurance 
market from both perspectives.
    From this unique vantage point, we urge Congress to 
continue some form of a Federal terrorism insurance backstop 
beyond the year-end expiration of TRIA. I would like to 
compliment Chairman Oxley, Subcommittee Chairman Baker, and 
Ranking Members Frank and Kanjorski for holding this hearing 
and moving expeditiously to consider the recent report issued 
by the Department of the Treasury.
    The Big I and our 300,000 members are especially encouraged 
that members of this committee and Secretary Snow reaffirmed 
support for a continued Federal role in terrorism insurance. 
The challenge now before Congress is how to follow up the 
success of the Terrorism Risk Insurance Act, or TRIA, to ensure 
that consumer have continued access to terrorism insurance.
    After 9/11, it was quickly apparent that insurers could not 
handle the risk of further large-scale terrorist events without 
a Federal backstop. As insurers reacted to uncertainty in the 
market with exclusion clauses and outright cancellations of 
coverage, agents and brokers were left in the difficult 
position of not being able to meet clients' needs for coverage.
    In the market, we began to see economic activity, 
especially significant new construction projects, impacted by 
the inability of owners to satisfy demands of current or 
prospective lenders to demonstrate adequate insurance coverage. 
Fortunately, through the leadership of the Administration and 
many in Congress, TRIA was enacted before the worst effects of 
this availability and affordability crisis further injured our 
national economy.
    As an agent from Louisville, Kentucky, serving many smaller 
communities, one of the points that I would like to stress to 
the committee today is that the need for a terrorism insurance 
backstop is not confined solely to large urban areas. In 
Louisville, my clients in the downtown area and icon buildings, 
and those clients with heavy involvement with the public have 
purchased this coverage. This is not unlike other stories that 
I have heard from other agents who have seen coverage purchased 
across the country, from small towns in Mississippi to small 
and large businesses in New York City.
    The bottom line, this is not a big city or a big State 
problem. It is a business consumer problem throughout the 
country. This is truly a national issue. Our ultimate goal is 
to ensure that our customers have access to affordable 
insurance, which enables them in turn to serve their customers, 
whether they are hotels and convenience stores like the 
witnesses here today, or other businesses that drive our 
economy.
    At the end of last month, the Treasury Department released 
its report on the TRIA program. We agree with the report's 
conclusion that TRIA has worked well and generally as intended. 
In our experience, prices have come down, capacity has grown, 
and demand is up in many geographic areas. Overall, the 
Treasury Department's findings support the need for an 
appropriate Federal role to encourage a workable insurance 
mechanism in the event of cataclysmic terrorism losses.
    The report is also consistent with the Big I position that 
the Federal Government's role in the insurance market be 
limited, while State insurance regulation is preserved. In 
fact, most folks in the private sector will tell you that they 
prefer the private market to handle this risk. In an ideal 
world, it would, but that is not practical at this time.
    However, to the extent that the private sector is able to 
handle this risk and Federal Government involvement is phased 
out, we believe that all stakeholders and the market will 
ultimately benefit. Going forward, the litmus test for Big I is 
that any solution must work for the consumers with whom our 
members serve. Put simply, the ultimate test for IIABA support 
of any proposal will be whether the program works for the 
marketplace.
    Right now, both Congress and stakeholders are at somewhat 
of a crossroads with two basic choices: either reauthorize the 
TRIA program temporarily with some modifications suggested by 
the Treasury Department; or enact a long-term private industry 
pooling mechanism which phases out the Federal role over time. 
Both options have some attraction.
    Short-term extension legislation may have fewer political 
complications, although it may be difficult to find the right 
balance of increased deductibles and triggers for the 
marketplace. On the other hand, developing a private sector-
funded layer of coverage would help reduce Federal involvement 
in the marketplace and create a long-term market-based solution 
for a problem which we have every reason to believe will be 
with us for years to come.
    The Big I is committed to working with this committee on 
parallel tracks to develop both options so the Congress is in 
the best possible position to move forward with the solution 
that is most viable.
    I thank you very much for the opportunity to testify today.
    [The prepared statement of Mr. Stiglitz can be found on 
page 218 of the appendix.]
    Chairman Baker. Thank you for your statement, sir.
    Our next witness is Mr. John Sinnott, testifying in his 
capacity as vice chairman of Marsh and McLennan Companies.
    Welcome, sir.

STATEMENT OF JOHN T. SINNOTT, VICE CHAIRMAN, MARSH AND MCLENNAN 
 COMPANIES, INC., ON BEHALF OF THE COUNCIL OF INSURANCE AGENTS 
                          AND BROKERS

    Mr. Sinnott. Thank you, Mr. Chairman, and thank you, 
members of the subcommittee, for allowing us here today.
    I am here also in my capacity representing the Council of 
Insurance Agents and Brokers, in addition to my own firm. We 
prepared a statement. I will not read it, but I will try to 
give you some highlights.
    Compared to the chaotic situation that existed 3 1/2 years 
ago when I last appeared before this committee, I will describe 
the situation today as far more reasonable, certainly up to 
this point.
    We have attached a good number of statistics to our 
statement. It is in a document such as this, and I would 
encourage you and your staff to take a look at it, because it 
slices and dices take-up rates. It does it by industry. It does 
it by region. It shows the trend as to what has happened from 
before TRIA, but more importantly what has happened since TRIA.
    I think it demonstrates that substantially due to the 
actions of this committee during that time, the situation is 
much better, and that without TRIA we would be in the same 
chaotic situation that we were back in 2002.
    Just a brief resume, prior to 9/11, terrorism was ho-hum. 
It was just included. There were no issues there. From 9/11 
until November of 2002, there was chaos. That does not mean 
that there wasn't some terrorism availability, but I can tell 
you most of our commercial clients had Swiss cheese when it 
came to their property placements, because they are multi-
carrier and there were exclusions in some cases. The exclusions 
differed.
    In other cases on workers comp, with high aggregations, in 
one case we actually were prepared to have a very large 
financial institution's workers comp insured by the New York 
State Insurance Fund, which Superintendent Mills would agree 
that is not the intent of that market of last resort.
    The shake-out after TRIA was put through, yes, there was 
some difficulty while the markets figured out how to respond. 
But from about November 2003 until let's say June of 2005, we 
saw a steady increase in the take-up rate and in the level of 
confidence that the market had in dealing with this. Today, of 
course, pending your decisions and the decisions of Congress, 
there is a bit of uncertainty that is building in.
    So what are we looking at? Do nothing on December 31st and 
many consumers will be significantly disadvantaged. I am 
talking about the consumers. I am not talking about the 
insurance companies. But the insurance companies will reduce 
availability to our clients. That is a given. That absolutely 
will happen. High-risk property, workers comp aggregations and 
the whole issue of nuclear, biological, chemical and 
radioactive coverage deficiencies.
    Please remember, in our report we show the take-up rates. 
We believe now that even on property the take-up rate is up to 
60 percent. It was 25 percent in 2003. It is 80 percent on 
general liability, and of course it is 100 percent on workers 
comp because workers comp is statutory and there is no option 
for a market to exclude anything in that regard. So doing 
nothing, I think as everyone has stated, would be disastrous.
    An extension, modified extension, we believe that an 
extension with some modification will continue to serve our 
clients. Now, the two areas that I have noted, that we have 
noted have been discussed is particularly the industry trigger 
point, moving it up to $500 million. Frankly, I will not speak 
for the large insurance companies, but I suspect that at the 
very big insurance companies that is not an issue because in 
many cases their own individual retention is as large if not 
greater than $500 million.
    What you have to look at carefully is the availability 
among the smaller insurance companies to whom an event, if it 
occurs, might disproportionately involve smaller or middle-size 
insurance companies and the amount that they retain, it might 
be within the $500 million point, so they do not have any 
protection, and that could risk their balance sheets, or make 
them withdraw coverage from the clients that they are providing 
today.
    The second thing that we noted was that, okay, can you 
reduce some of the areas, some of the risk areas. The one that 
seems to be sort of tossed about is auto. The only thing I 
would suggest that the committee look a very seriously there is 
the impact on the trucking industry. Our country, our economy 
is dependent upon that. I think some investigation should be 
done as to the impact with those carriers who ensure general 
liability, auto liability on truckers to make sure that they 
would continue to maintain coverage for terrorism for those 
particular categories of users.
    Finally, the pooling approach, that might not be the proper 
term, we have made some suggestions in our written statement. I 
will not belabor it, but one of the considerations one might 
look at is whether or not the pool should be voluntary with 
carriers, as against be mandatory.
    Perhaps some of the large carriers might opt out. I do not 
know that. We do not know that, but I think something that is 
voluntary should at least be looked at. Having said that, if 
you opt out, you are out because there cannot be any adverse 
selection that underwriters go through.
    So in summary, our clients' interests would be served if 
crafted properly by either a modified extension, a pooling 
arrangement which would still have a backstop behind it, but 
their interests would be severely damaged if nothing was done 
by the end of the year.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Sinnott can be found on page 
168 of the appendix.]
    Chairman Baker. I thank you for your statement.
    It is my pleasure to welcome our next witness, Mr. James 
Maurin, appearing today in his capacity as chairman of Stirling 
Properties and as a member of the International Council of 
Shopping Centers' board of trustees, and more particularly an 
old college friend.
    Welcome, Jimmy.

STATEMENT OF JAMES E. MAURIN, CHAIRMAN, STIRLING PROPERTIES, ON 
      BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM

    Mr. Maurin. Thank you, Congressman, and thank you, Ranking 
Member Kanjorski, for conducting today's hearing on the future 
of terrorism insurance.
    I also want to thank Chairman Oxley for his commitment to 
bring legislation regarding this issue to the Floor of the 
House of Representatives in an expedited manner.
    My name is James E. Maurin, and I am the immediate past 
chairman of the 56,000 members who make up the International 
Council of Shopping Centers. I am the founder and principal of 
one of the Gulf South's largest commercial real estate 
companies, Louisiana-based Stirling Properties.
    I am appearing on behalf of the Coalition to Insure Against 
Terrorism, or CIAT, which includes the United States Chamber of 
Commerce and 75 other major trade and business organizations 
that rely on the current Federal program for access to 
terrorism insurance for the future of our businesses.
    The members of CIAT have strongly and consistently 
supported and encouraged every effort to continue a terrorism 
insurance program that would provide effective coverage for one 
overriding reason: the private insurance markets are not yet 
able to take over the job on their own.
    We know this because as policyholders, the consumers of 
insurance, when the current program expires, so does our 
coverage. As policyholders, our members have already been 
subject to a variety of pop-up exclusions and sunset clauses 
and other restrictions which the insurance industry has begun 
to impose on renewals of policies that run beyond December 31, 
2005.
    Furthermore, I need to emphasize the extreme importance of 
having a new terrorism insurance backstop in place as far ahead 
of the current scheduled expiration as possible. The 
uncertainty surrounding the future of Federal terrorism 
insurance is impacting business today and growth for years to 
come.
    My message to you today is simple. American businesses need 
to be able to effectively manage risk to function on a long-
term basis. Regrettably, terrorism is an unknown risk, akin to 
wartime risks that cannot be borne alone by the business 
community in the face of the continued threat of terrorism. 
Terrorism insurance is a requirement in most commercial real 
estate loan documents. Investors will not absorb the risk if 
insurance companies are not able to provide terrorism 
insurance. This is true for properties in small towns and large 
cities alike.
    Should terrorism insurance not be available, thousands of 
outstanding existing loans will likely be in technical default 
and under the covenants of the loan documents, the loan 
servicer will be forced to seek remedies such as force placing 
coverage no matter what the price is, or some other legal 
action against property owners.
    While commercial banks remain the industry's principal 
source of construction financing, commercial mortgage-backed 
securities, the CMBS market, are the source for much of real 
estate's longer term debt. CMBS are bonds backed by individual 
commercial mortgages that are typically owned by commercial 
banks, insurance companies and savings institutions.
    More than $444 billion of loans are pooled in CMBS, 
representing almost one-fifth of all commercial real estate 
mortgages. These securities are rated by rating agencies such 
as Moody's and Fitch, who have already voiced concerns 
regarding the potential effects of the expiration of TRIA. When 
CMBSs are downgraded, as they were prior to the enactment of 
TRIA in 2002, they generally decline in value and restrict 
access to capital.
    Pension funds also play an important role in capital 
formation for commercial real estate. As of January 2005, $166 
billion in assets have been invested by defined pension plans 
in commercial real estate.
    Pension funds with substantial commercial real estate 
investment include California Public Employees and Teachers, 
Florida State Board, New York State Employees and Teachers, 
Ohio State Teachers, and my own home State of Louisiana's 
Teachers Fund. Should terrorism insurance expire, billions of 
pension dollars belonging to workers across this country would 
be exposed to undue liability.
    The esteemed members of this panel can appreciate the 
significant role that retail real estate plays in our economy, 
and the considerable concern of having our businesses put at 
risk. Relating back to the shopping center industry, during the 
first two quarters of this year, the shopping center industry 
expanded by 102,000 new jobs, accounting for 9.4 percent of job 
growth. This may help to illustrate why terrorism insurance is 
not merely an insurance issue, but a widespread economic issue 
with far-reaching implications on financial markets and our 
Nation's economy.
    The risk of further catastrophic terror attacks appears to 
be as acute as ever. The recent attacks on our closest ally, 
Great Britain, remind us all of what may happen here. While the 
highest levels of government tell us that the threat of 
terrorism and the war on terror in the United States continues, 
not surprisingly the insurance and reinsurance markets lack the 
ability to handle this problem alone.
    We have recognized that Congress, the Administration, and 
stakeholders are now effectively faced with pursuing two 
options: implementing a short extension of the TRIA program; or 
developing a more permanent solution utilizing a form of a 
mutual reinsurance facility, or pool, as discussed earlier, 
with government bonding.
    The short extension legislation should be relatively simple 
to negotiate, and therefore may provide greater assurance of 
being completed on time, which is our paramount concern. On the 
other hand, developing an intermediate private sector layer of 
coverage would move us toward a long-term, market-based 
solution for a problem that we have every reason to believe 
will be with us for years to come.
    In creating a successor program under either model, the 
policyholders of CIAT request that the committee keep in mind 
the following principles: First, the program should include the 
make-available requirement for insurers to ensure that property 
owners and businesses will be able to secure sufficient 
terrorism coverage to adequately protect their assets and their 
employees.
    Second, new programs must be designed with the goal of 
minimizing exclusions or gaps, which would undercut the intent 
of the program. As previously mentioned, this should include 
coverage for nuclear, chemical, biological, and radiological 
acts, as well as acts of domestic terrorism.
    Mr. Chairman, CIAT is committed to working with your 
subcommittee and other stakeholders during the next month on 
parallel tracks to develop both options, if need be, so that we 
are in the best possible position after Labor Day to enact the 
solution which proves the most viable.
    To close, I am not in the insurance business. I am in the 
commercial and residential real estate business. I cannot write 
my own insurance and I cannot decide what levels of risk or 
capacity my insurers can undertake and still be responsible to 
the fiduciary interests to which they are subject. I am the 
end-user and a policyholder. I am being squeezed by both sides 
in this debate regarding the future of Federal terrorism 
insurance.
    On the one hand, insurers do not want to take on this 
seemingly open-ended risk, and on the other hand my investors 
cannot absorb that liability of being exposed. You will have a 
situation where the cost of capital goes up and the value of 
assets diminishes. At the end of the day, my colleagues and I 
in business need to be able to buy terrorism insurance so we 
can continue to help grow the economies of every community in 
this country.
    Chairman Baker, Ranking Member Kanjorski, CIAT thanks you 
for holding this hearing and for giving us the opportunity to 
testify. We look forward to working with you and the rest of 
the subcommittee on this important subject in the coming weeks.
    Thank you.
    [The prepared statement of Mr. Maurin can be found on page 
132 of the appendix.]
    Chairman Baker. I thank the gentleman for his statement.
    I would like to start with just a general observation about 
our procedural circumstance.
    It is very clear, to me at least and I think to Chairman 
Oxley, that a mere extension of the current programmatic 
guarantees will not be acceptable to the Administration without 
modification. The mere process to pass an extension will 
require the Congress to act over some number of days.
    In the intervening August recess, we have the opportunity, 
I think, to significantly evaluate alternative approaches, 
perhaps something short of a pooling mechanism which may be 
more complicated and require more time to implement, but 
something that would achieve the following goals. One is to 
ensure market stability by the Federal backstop continuation, 
but at the same time to reduce the potential exposure of 
taxpayers to payments which may not necessarily be warranted.
    I would refer, I have not had the occasion to review Mr. 
Sinnott's dicing of the numbers, but I believe there are others 
on the panel who indicated that with the market enactment of 
TRIA, meaning the actual operative effect, that stability 
returned to the marketplace, companies generally showed levels 
of profitability they had not previously enjoyed because we had 
the good fortune of pricing the risk and we have had no event 
on which to make claims.
    The result is an industry which has, because of these 
perverse circumstances, found itself in the better financial 
condition that everyone hopes for, but at the same time my 
view, from my shareholders' perspective, we cannot continue to 
underwrite this indeterminate risk at these levels while the 
industry enjoys significant levels of profitability. As 
Chairman Greenspan would say, there is need for equities to be 
rebalanced.
    In that case, I think to upwardly adjust retention levels, 
for example, immediately may not be warranted, but there 
certainly is a need to upwardly adjust retention levels for not 
only the balancing of equities, but I think to incent the 
industry to move toward the voluntary pooling or other 
alternatives that bright people may develop.
    Secondly, there needs to be not a permissible, but a 
mandatory repayment of liquidity advanced by the Federal 
Government when the industry returns to profitability. The 
current structure in the TRIA Act is a conditional repayment 
which the secretary may assess. That needs to move over into 
the ``shall'' category with certain circumstances on limiting 
premium run-ups and adverse economic conditions for the 
industry should it not be warranted in a particular timeframe.
    And then finally, the triggering mechanism. I am putting 
this out maybe for response and comment. As opposed to a hard 
$500 million trigger, I have noted that in much of Louisiana, 
you could pretty much take everything out there and you would 
not get close to $500 million, but it would be a pretty 
significant event to us.
    If we were to take some measure of commercial property 
concentration and look at it in some geographic area, whether a 
census tract or something larger, starting with the 9/11 event, 
valuing the buildings prior to the attack and having them 
establish as a percentage of value of commercial property in a 
designated area.
    Let's just assume it is 1 percent. Then the triggering 
device for any other area of the country might be that the 
attack results in losses exceeding 1 percent of commercial 
value in that designated area. This is not that complicated a 
deal, but it takes a little time to get all the data together.
    So it is a relative trigger. In other words, our loss in 
Baton Rouge would not have to hit $500 million, but it would 
have to hit the same percentage loss that New York had or 
exceed it. That percentage could go up each year, so we would 
have a moving window: increasing retentions, increasing 
triggerings, and a guaranteed repayment to taxpayers.
    That, to me, says: Industry, get it together and find a 
cheaper way to do this because I do not think, at least 
speaking for this Member of Congress, that we can out-think the 
entire insurance industry and keep you guys from being 
profitable almost notwithstanding what happens.
    I also know that you cannot calculate the risk of an 
unknown, unpredicted terrorist event and the consequences of 
that would be unacceptable if we do not have some balanced 
backstop in place.
    Mr. Sinnott, would you like to start?
    Mr. Sinnott. Yes, thank you.
    The idea that I had not heard before of trying to 
geographically set a trigger, if that is what I understand you 
are saying, my quick reaction is that the only problem with 
that is that that would then require the underwriters, the 
insurers also to only write in certain geographic areas. My 
example is New York City, Washington, the major cities. It is 
not just the big carriers that underwrite insurance there. They 
also want the opportunity to make available insurance for the 
smaller customers that reside in that area.
    If they still underwrote in that area which had the high 
trigger point, they could be in dire straits if they ended up 
having an unusually large share in that high-risk area.
    Chairman Baker. But give me alternatives. If today we have 
a $500 million trigger and the little guy is in that area where 
it is $455 million, he is in duck soup now.
    Mr. Sinnott. Absolutely.
    Chairman Baker. So if we at least get it down to some 
census tract level, the idea here is that you cannot have all 
big guys living only in certain neighborhoods. You are going to 
have mixed properties, I understand that.
    Mr. Sinnott. Right.
    Chairman Baker. What else can you do?
    Mr. Sinnott. I mean, the only other way to do it is to try 
to look at a trigger that is somewhere in between the $500 
million.
    Chairman Baker. That sounds like an answer I would give.
    [Laughter.]
    Mr. Sinnott. I do not know. I would have to give some 
thought as to whether there is any way that you can balance the 
two, the geography on the one hand with the, call it the 
balance sheet sides of the companies that are offering 
protection or risk transfer in that area. It is something 
worthwhile working on.
    Chairman Baker. Does anyone else have any comment or 
adverse comment about increasing retentions, increasing the 
triggers over time, absolute guarantee of a taxpayer repayment? 
These are the things that I think would be responsive to the 
Administration's concerns.
    Mr. Mirel?
    Mr. Mirel. Mr. Chairman, I think that these kinds of issues 
can be left to the industry to deal with under rules set by the 
Congress. I think there ought to be a pool. If Congress were to 
establish the pool and tell the industry to figure out when and 
how to pay out of that pool, I think you would find that the 
industry would do a good job at that.
    Chairman Baker. Do you think there is sufficient time for 
the Congress?
    Let me tell you our timeline. If we were to return and have 
the good fortune and agreement on some proposal by the middle 
of September and get it out of the House, the Senate still 
would have to respond to it, practically speaking, in early 
October. The industry would be uncertain as to the necessity to 
do this until Thanksgiving.
    Does that really leave time to develop that type of 
response in light of the time constraint?
    Mr. Mirel. Again, I would say--and then I will let 
Superintendent Mills chime in--I would say that the fewer 
decisions that have to be made by the Federal Government, the 
better. If you set the general rules and let the industry 
figure out how it is going to meet those requirements, I think 
that it is possible to do things pretty quickly on an industry 
basis.
    Chairman Baker. Thank you.
    Mr. Mills?
    Mr. Mills. Mr. Chairman, I think that the industry could 
respond very quickly if the Congress were to come up with 
another idea along the same track. I absolutely agree with the 
mandatory repayment, but if some new entity, a public-private 
partnership were to be created which was voluntary, the 
industry that wanted to offer the coverage could participate 
it, pay an assessment to build capacity.
    Again, getting back to one of the critical points I think 
you heard all of the witnesses say is we need to build 
capacity. Capacity would be built. Initially, there would be a 
heavy Federal involvement, but as capacity is built, the 
Federal involvement would decrease. There would be an automatic 
repayment mechanism in there. It is completely voluntary. It 
could be a self-executing, self-directing entity with a board. 
I think the industry would respond very, very quickly.
    We are convinced and everyone that I have talked to is 
convinced that the industry can handle this very, very well. 
They just need to know where their risk is. Right now, they 
don't. They need to have a ceiling. They need to have a 
trigger. They need to know what their deductible is. If they 
know what the deductible is and they know that the Federal 
Government is there as a backstop and one that will decrease 
over time as capacity is built, I am confident that the 
industry would move very, very quickly and would have this up 
and running.
    Chairman Baker. My time has long expired.
    Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Gentlemen, we have to get some more details. I presume 
today is not the day to do it. Does anyone on the panel right 
now believe that we should not cover or include group life 
insurance in an extension or any permanent plan that we might 
have?
    So, therefore, I presume that you think that we should 
consider including group life insurance. Thank you, because 
that is one of the issues we have not discussed.
    Everything that Mr. Baker has said, pretty much I agree 
with him. I think the required repayment is a good idea. I 
think the real issue that we have here is to try to come up 
with a limit, somewhere between $5 million and $500 million. 
Five million dollars may or may not be too low; $500 million is 
too high. At $500 million, there has only been one terrorist 
attack in the history of mankind that exceeded that limit, and 
that means we would not be covering, we would not be bumping up 
against it for the London attack that just happened, or Madrid 
or Bali.
    I am not convinced at all, and again that is all part of 
the discussions we have to have. That is why I do not think we 
can do this in the timeframe that we have. Maybe I am wrong. 
Maybe Congress will somehow do something that they never done 
in the history of America and actually act quickly, but hope 
springs eternal, I guess. But I do not see how we can come up 
with a number.
    What is the number that we want? I understand full well 
that the industry wants a number, and you are right, that is 
exactly what we need to do. But are we willing to say that 
America will step up if the next attack is in Oklahoma City, 
which based on history is no longer out of the realm of 
possibility. Or Bali--our own Bali could be Disney World. It 
could happen tomorrow. I do not see how you can set it on 
geographic precedent, but again I would like to hear if the 
industry feels that way.
    I also would like to ask, is there anyone here who thinks 
that the insurance coverage wouldn't be impacted by another 
attack on American soil? If, God forbid, tomorrow in 
Washington, D.C., the subway gets attacked, what happens then? 
Whether we have a plan or not, my expectation is that anything 
we do, we are talking about permanence here. I do not believe 
we can do this permanently. I do not think this country or this 
world is ready to do it permanently. I do not think your 
actuaries are ready to do it permanently, which is why I think 
an extension is necessary.
    I guess I would like to ask whether you think we can do it 
permanently, or whether you think that, God forbid, the next 
attack, and many of the experts say it is not a matter of if, 
it is a matter of when, will it not shake this very aspect of 
the economy once again? Whoever wants to start is fine by me.
    Mr. Stiglitz. Well, as an independent agent, I think you 
are going to have to put a number somewhere. We have to start 
with a number. That is the way insurance works. We cannot model 
terrorism. So you are going to have to say, we will either pick 
$100 million or pick $75 million or whatever, and then let the 
marketplace work from there. I agree with the commissioner. I 
believe that the industry will respond very quickly if we just 
know where we are going. We do not know where we are going 
right now.
    The thing that worries me about a geographical deductible, 
things like that, would be the effect on regional companies. 
Independent agents for the most part represent regional 
companies in all their States, and some of them are very, very 
small. Any type of really high threshold limit or anything like 
that, any kind of deductible percentage based upon values, I 
think that would probably affect them. It would probably cause 
them to withdraw from this market immediately.
    I think if you just give us a number and let the industry 
work on it, I believe we could come up with something quickly.
    Mr. Mills. Congressman, if I may also, with regard to your 
concern that you do not think it could be a permanent program, 
I respectfully submit that France, Germany, and the U.K. all 
have permanent programs based on the pool idea that 
Commissioner Mirel talks of.
    The FDIC is a permanent program. I have often said and some 
folks have criticized my analogy, but I think it fits. The FDIC 
is a permanent program to instill confidence in the American 
banking system, backed up by the Federal Government. We are 
advocating the same thing for the insurance industry in 
response to a terrorist attack.
    Mr. Sinnott. To your point, certainly if there is a major 
event within the next few years, it is going to again create 
significant disruption in the mechanism. If we have some sort 
of a backstop there, it will be ameliorated to a great degree. 
The problem with moving up the thresholds so significantly is 
that if you just extend and do that, you have created an 
enormous gap that the whole industry cannot respond to.
    So the difficulty here is, yes, if you move things up, you 
have no choice but to try to create some intermediate 
mechanism, and that is this pooling. The question is how and 
how quickly it can be done.
    But I do not see how you could move thresholds up without 
creating an intermediate mechanism, something that involves the 
insurance company takes its piece; there is an intermediate 
level that can work out the difference between the major 
insurance companies and their ability to retain risk; and the 
smaller insurance companies and their ability to retain risk.
    But then ultimately, particularly during the early years, 
until it is decided that that pooling or funding is adequate, 
there is going to have to be a backstop there. If you get an 
event early on in any risk enterprise that can swallow up the 
funds that you put in initially, yes, that can happen. But the 
longer you go and the more you build that up, the more you 
remove the government from involvement.
    Chairman Baker. The gentleman's time has expired.
    Mr. Maurin. Mr. Chairman, I have one quick comment, if I 
could. And again, I cannot really address the issues here. I am 
representing the policyholders, CIAT, and the associations of 
people who actually need this insurance every day.
    I would caution that in the tinkering of the formula as far 
as triggers and copays or whatever, that we do not err on the 
side of making it not work and the insurance industry cannot 
provide me what I need.
    Prior to 9/11, and my company has been in business for 30 
years, I got terrorism insurance for free. I mean, I literally 
got it as part of the overall package. I have been told by my 
insurance agents that it was included. Today as we speak, even 
with TRIA, my insurance costs have risen dramatically on our 
commercial properties. So don't think that with TRIA I am back 
to pre-9/11 costs. My costs of doing business have risen 
dramatically.
    If we tinker with this and my costs go up 10 times again, 
you have maybe fixed the problem from your perspective, and 
maybe the insurance companies will write it, but they will 
write it at such a cost that doesn't make it affordable. I 
would say in negotiating and working with them, come to 
something that they can look at and say reasonably that they 
can provide terrorism insurance to policyholders at a cost that 
we can afford.
    Chairman Baker. I thank the gentleman. His time has 
expired.
    Mr. Bachus?
    Mr. Bachus. I thank the chairman.
    My first question, Mr. Sinnott, I noticed that you dealt 
with 9/11 on a very personal basis and that you were the CEO of 
Marsh and you lost 295 employees.
    Mr. Sinnott. Correct.
    Mr. Bachus. I would like to thank you. I noticed in your 
bio you were honored by the New York City police and fire 
widows and children's benefit fund for your contributions. I 
would like to say thank you for that.
    Mr. Sinnott. Thank you for saying that.
    Mr. Bachus. Being such a personal issue, what some people 
have said about 9/11 is that we are dealing with a big city 
skyscraper-type of issue, urban, New York issue. Yet your 
testimony indicates that TRIA has a much broader impact.
    Mr. Sinnott. Right.
    Mr. Bachus. Would you like to give us your thoughts on 
that? What your biggest worries are?
    Mr. Sinnott. As this shows with the statistics that we have 
gleaned from the placements that we have made for our clients, 
it is not correct to say that it is only in the urban areas 
where there is a take-up on terrorism. We give the regional 
percentages and there is a take-up rate, granted, lower perhaps 
in the middle of the country than elsewhere, but still a take-
up rate. Now, that is a function as well of a different pricing 
structure that the insurance companies are not costing-out the 
risk the same way as they are in New York, where it is a real 
issue.
    So I do not think that TRIA is something that responded 
only to what happened in New York and Washington, D.C. It 
responded universally. As I said earlier, our statistics show a 
marked difference between how the market would respond, and as 
with my colleague here, I am speaking on behalf of the 
consumers, not the insurance companies. But if we do not have 
availability in the market, my clients are in trouble.
    So I think your point is well taken. It is much more 
universal than just speaking about New York or Washington.
    Mr. Bachus. I appreciate that fact that you pointed out it 
is not just a New York problem.
    Mr. Sinnott. Yes.
    Mr. Bachus. I thought your testimony was very good.
    Mr. Sinnott. Yes, right. The other thing--well, maybe that 
is enough.
    Mr. Bachus. I might ask Mr. Stiglitz, the Independent 
Insurance Agents, you represent small communities in States all 
over the United States, where you serve consumers as 
independent insurance agents. How are those towns going to cope 
without extending TRIA? Are they going to be affected by the 
lack of terrorist insurance affordability and availability?
    Mr. Stiglitz. I certainly think so. I think it is going to 
be basically this. When our agents go out to sell the renewal, 
right now there is an exclusion pretty much across the board 
that starts 12/31/05.
    And when you get into a rural area, and particularly when 
you are talking about utilities that may serve that area, a 
rural electric co-op, perhaps a water system, even industrial 
parks that are somewhat isolated, but can certainly be an easy 
target. That would include chemical plants, any type of 
manufacturing facilities.
    For the most part, those folks are now, as Mr. Sinnott has 
said, are now taking up this coverage. They did not initially. 
There was a lot of laughter when you threw down the quote for 
the terrorism. But it is not a laughing matter anymore. 
Certainly, they are buying it and we encourage our clients to 
buy it. Without it, I think a lot of these people, especially 
the utilities, are going to be in trouble.
    Mr. Bachus. So you do not see it as a big city issue.
    Mr. Stiglitz. Not by any means. No, sir.
    Mr. Bachus. Okay. That is what I am hearing.
    What about the desirability of a backstop as opposed to 
what we did on 9/11 when we tried to deal with it on an ad-hoc 
basis? Actually, there was terrorist insurance afforded at that 
time, and I think the point has been made that it would not be 
this time. It is now excluded.
    But isn't it better to have a long-term solution in place 
for terrorist insurance, rather than dealing with the aftermath 
of another attack on an ad-hoc basis? I will ask any of you to 
comment on that.
    Mr. Mills. I certainly think so, Congressman. I think a 
long-term solution is definitely preferable. I certainly do not 
think that the Administration or the Congress are interested in 
making TRIA permanent. I think the key is a long-term solution 
with no expiration date, but with a declining Federal 
involvement and a building of private capital capacity. That I 
think is the key.
    Mr. Bachus. I think the desirability of a backstop, but 
then the desirability of minimizing the Federal role over time 
would be the way we ought to approach this.
    Thank you.
    Chairman Baker. I thank the gentleman, who yields back his 
time.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Mills, under TRIA, the insurance industry is still 
subject to form approval and right approval by State 
regulators. Has the insurance industry been seeking any 
differentiation rights based upon risk or upon mitigation 
efforts, and what has been the response of State regulators?
    Mr. Mills. We have not seen much of a request for 
differences in rates. There has been some discussion that the 
industry has come to us for. It certainly will increase 
dramatically if a backstop goes away, of looking again at 
exclusions, which the New York department has historically not 
allowed.
    I think that with the continuation of the backstop in 
whatever form it is, that the rates will stabilize and the 
industry will be well equipped to go ahead without that type of 
fluctuation and uncertainty.
    Mr. Miller of North Carolina. But what I am getting at, is 
there a difference in premiums based upon level of 
preparedness? For instance, in homeowners insurance, if you 
have a smoke detector you get a break.
    Mr. Mills. We certainly could see more of that. I think 
that we could see more of that. I think that we could see more 
of that.
    We do see some differences, but certainly I have seen many 
instances of the private sector making significant investments. 
I used the example in my presentation earlier about 
enhancements to security.
    I certainly do think that looking at the investments that 
the private sector makes and looking at reductions in rates 
such as a homeowner does when they put in a security system is 
something that the industry should look to much more closer. 
There is room for greater allowances for that.
    Mr. Miller of North Carolina. Okay.
    Mr. Sinnott, what is the insurance industry doing along 
those lines? Does the insurance industry try to differentiate 
rates?
    Mr. Sinnott. First of all, in the commercial side of the 
industry, there is great flexibility as against homeowners 
where the rates are more filed and fixed. So I think there is 
sufficient flexibility I think within the system to allow for 
this type of risk, the rates to be properly cared for.
    As far as the issue of security, you can just go into any, 
using a large city, I will just use office buildings. You can 
go into any office building, I do not care whether it is 
Chicago or New York or San Antonio or wherever. There is 
security there that we never saw prior to 9/11.
    I think the same thing is true, I am not an engineer, so 
maybe there is a lot more than can be done, but by the same 
token I think that manufacturing plants and other installations 
clearly put a higher priority on security, not just loss 
prevention like more sprinklers and things like that. I mean 
security.
    So I think that it is not perfect. I am sure there is more 
that can be done, but I do not think that corporate America has 
not recognized that security is a key aspect, along with the 
government doing whatever it can to secure our borders, but 
that people are going to get through and the corporations 
better make sure that they have done their part. I think in our 
view, security is a significant item with corporate.
    Mr. Miller of North Carolina. Okay. Anyone else wish to be 
heard?
    Okay. Thank you, Mr. Chairman.
    Chairman Baker. The gentleman yields back his time.
    Mr. Shays?
    Mr. Shays. Thank you, Mr. Chairman.
    The challenge all of us have is we all agree. We are all 
saying the same thing. It was kind of exciting to have the 
Secretary of the Treasury come here because his transmittal 
letter said postpone it, and his written statement, written by 
OMB, and his public discourse was, you know, I will work with 
you guys; let's get the job done. So it is a little bit of a 
conflict.
    I think sometimes what we should do is we should ask 
someone from OMB who approves these statements to testify, so 
that they have to justify really what is outrageous. I think it 
is outrageous that we are not dealing with this issue. But I 
think Mr. Robert Hunter, the director of insurance, Consumer 
Federation of America, is probably the only one disagreeing. I 
would just make the point, I would like to have some folks who 
disagree so I could hear their arguments and hopefully pick it 
apart.
    I do not really have much to ask you all. I think I will 
just make a statement. I think we should have passed it a while 
ago. I think it does not pass the smell test for me to think 
that we are going to ask insurance companies to insure for 
something they cannot insure for. If there was a catastrophic 
event, we would be jumping to help out because we are not going 
to let everybody go under.
    So it just seems to me that it makes more sense to deal 
with it up front. I am sorry I do not have a question, but I 
just happen to think that we need to get on with this in 
Congress. Maybe my only suggestion would be--we have Sarbanes-
Oxley--and maybe we just need a Baker-something and put your 
name on it, Mr. Chairman, and pass it and we can hear your name 
talked about for the next 10 years.
    [Laughter.]
    I would be happy to yield my time to Ms. Kelly because I 
understand she has two people up here from her district, so she 
may need more than 5 minutes. So I will give her the remainder 
of my time.
    Mrs. Kelly. I appreciate that very much.
    This is the first time in my entire career in Congress I 
have faced a panel with two constituents on it. So, Mr. Mills 
and Mr. Sinnott, I am delighted, as a New Yorker, to have two 
New Yorkers on this panel. I am delighted also to have read 
your testimony and to be able to ask you some questions.
    I stood looking at the ruins of 9/11 at the Trade Towers, 
thinking, while the smoke was rising, something needs to be 
done with regard to the way the insurance is going to handle 
this. That is why I worked so hard to help to write and pass 
the original TRIA bill. I am convinced because the Chairman of 
the Federal Reserve has stated on more than one occasion--Mr. 
Alan Greenspan--that we must have some kind of a mechanism 
because the industry simply cannot handle it at some levels.
    So I am delighted to have you both here. We New Yorkers 
know very well firsthand what the net effect is on the markets 
and on our economy when there is a terrorist act. One of the 
reasons I believe that the economy of the world has been 
remarkably stable in light of the London bombings has been 
because everyone knows that England has dealt with this problem 
and they have something in place, so there was no real jolt to 
our economy when those bombings occurred in London.
    We need to make sure that if that happens again, and my 
friend Porter Goss at the CIA says it is not if, it is when--we 
need to have something in place so that the Federal Government 
does not have to step in and be the insurer of first resort, 
but also so that the smaller insurance agencies who cover this 
do not have to go out of business, and we do not have them in 
the market again.
    That being said, for the remainder of Mr. Shays's time--
and, Mr. Shays, I thank you very much for giving me this time.
    Commissioner Mills, I wanted to say to you that the 
Treasury report that came out, you probably read it, they made 
a remark in that report that the importance of commercial real 
estate did not need any, that commercial real estate did not 
need to be covered essentially by any kind of terrorism report.
    I would like you to talk to the panel about the importance 
of the commercial real estate industry to the economies of New 
York, Washington, D.C, and the United States as a whole.
    Mr. Maurin, I would like you to join in.
    Mr. Mills. Well, Congresswoman, I certainly could not 
disagree with that statement more. The commercial real estate 
industry is critical to our home State in New York. It drives 
the economy, but it is not just a New York thing. As I have 
said, it drives the whole national economy.
    The commercial real estate market, whether it is in New 
York or anywhere--and again I go back to my earlier point. You 
know, if a terrorist attack, God forbid, were to happen in some 
small town in Iowa tomorrow or Louisiana, you would need right 
away to have terrorism coverage for all building projects. 
Right now--and this point was made by several on this panel--it 
is not a question of we need to have the backstop on January 1, 
2006. We all, I think, know that we do. We need to have it 
yesterday.
    You are already seeing multi-year builders risk policies in 
New York City not being written, period. You can't get it. 
Major, major construction projects that employ many, many 
thousands of people all over this country will stop. Lending 
from financial institutions will dry up. The commercial real 
estate market, all sectors of our economy are highly 
susceptible to it, none more so than commercial real estate.
    Mrs. Kelly. Thank you.
    Mr. Maurin. I would agree with Mr. Mills. I would remind 
everyone, and there are some younger faces here than Richard 
and I, but the Tax Reform Act of 1986 was passed by Congress 
for the sole reason of dealing with abusive tax shelters. It 
devastated the commercial real estate market.
    Congress did not, in fact no one anticipated that it would 
have the effect that it did, but it devastated it, and it was 
primarily because of the capital markets. The values of real 
estate dropped. The ratios and various things for banks and 
lenders got out of whack. We went through a period of years of 
foreclosure and the RTC and whatever.
    This issue, if not handled carefully, has the same 
potential impact upon the commercial real estate industry. The 
capital markets, the life insurance companies, the pension 
funds, the CMBS market, they are not willing to accept this 
risk. They want the insurance markets to do that. I, as an 
investor or as a developer, I am not willing to accept this 
risk. I simply can't.
    And if we do not come up with a solution that keeps the 
capital market stable, I do not care whether that shopping 
center is in Baton Rouge, Louisiana, or that office building is 
in New York City, it does not matter, it is going to be in 
trouble, whether it is an existing property that would be in 
default of its mortgage because the mortgage requires terrorism 
insurance, or whether there will ever be another property built 
in that market or whatever.
    So this could have significant impact if not handled 
carefully, and I might add quickly in the sense that hopefully 
we can have action here in September or October. As we get 
closer to December, quite frankly, we will begin to see some 
disruption, in my opinion, before the end of the year.
    Chairman Baker. The gentlelady has expired the gentleman's 
time.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Mills, I want to carry on your supposition that we may 
suffer in the United States the same type of terrorism as we 
have experienced in Europe in the last year or so. That is, 
attacks on shopping centers or subways or something like that, 
which is less catastrophic in terms of damage to real estate or 
property and more in the nature of loss of life, etc.
    It seems our problem here is that we have some support in 
the Congress not to take any action because they want the 
ideal, and we are now down to the last 5 months of time. I 
guess we are going to be called upon to write the ideal statute 
in order to get it passed, whereas I am a supporter of a 2-year 
extension.
    But rather than trying to spend our time now and hold up 
the marketplace and put it in jeopardy, I think we are in a 
perfect position to lay out a plan of attack over the next 2 
years to look at things like what happens on the shopping 
center attack and what happens for the people's compensation 
programs that we may need to put into place. But that is no 
reason why, in my estimation, we should hold back from moving 
ahead with what has stabilized the market.
    I think a delay for the purposes of perfection would be a 
great error. And quite frankly, I am very much worried about 
it.
    As you know in the last terrorism risk insurance bill, 
there was the effort to make that a vehicle to carry tort 
reform, which everybody has their own ideology and method of 
arriving at their ideology, but I do not think we have time for 
that. I agree with the panel that discussed the idea. We have 
to move now. We have to stabilize the market as early as 
possible. Even yesterday was too late.
    We have a little window of opportunity here now, at the end 
of September, to get this done. I do not see any great 
contribution that could be made to reorganize or re-think a 
perfect plan. If we try to do that, we are going to only 
exacerbate the opposition in various quarters, both in this 
city and around the country, that will cause further delay.
    So, I guess I generally want to ask the panel, do you feel 
that we could, speaking for the Congress, just put a timetable 
together that within 6 months from January to have everyone--
the Treasury, the White House, the Congress, and the insurance 
industry--submit their ideas as to what we could do to change 
this, how we could restructure it, and what other facets and 
potential damages should be covered?
    But in the meantime, we cannot put that in place merely as 
just a study, but a study with tracking. In 6 months, issues 
will come in; a year from now, a final bill will be put 
together. We could use the next 6 months to have hearings on 
that study to reconstruct the program beyond the 2-year period 
that we are looking at now, as opposed to trying to compress 
that all together in the next 1 1/2 months and get some 
comprehensive magic bill that I am quite worried is not really 
going to cover everything.
    For instance, one example that I am worried about is our 
inability to realize the impact of changing the proportional 
size standard that the chairman is talking about. I appreciate 
what he is trying to accomplish, but what impact will it have 
on various size companies and coverage, and what areas of the 
economy are going to be weakened because of that.
    Because maybe we could end up not covering a large portion 
of the regional or small insurance companies across the 
country, by simply not understanding that in Iowa maybe AIG 
does not cover or write a lot of insurance. Maybe it is the 
Iowa mutual that does it, and they may be excluded if we start 
putting triggering mechanisms without an in-depth, fully 
thought-out analysis of what is necessary.
    So, I would like the panel to give me an idea. Do you 
believe we should just move ahead? We have a bill pending after 
all. We have, in H.R. 1153, added on group life insurance, and 
we could add on to that bill a detailed reporting and study 
process to move beyond the two years. Such a provision would 
help us be prepared a year from now to really move serious 
legislation to make the changes we probably should have been 
thinking about a year-and-a-half ago.
    Mr. Mills. I think, Congressman, again the primary message 
from everyone on this panel is no gap. And whether that comes 
in the form of the Congress does work on a long-term permanent 
solution and has that in place by January 1, 2006, great. If it 
is a temporary bridge of an extension of TRIA with 
modifications to get you to that point, great.
    As long as the Federal backstop is in place on January 1st, 
however the Congress can do that, I certainly feel that the 
industry will work with the Congress. I certainly will in any 
way I can be helpful to get that long-term solution in place, 
but just make sure, please, that it is bridged.
    Mr. Kanjorski. Does anybody else want to add to that?
    Mr. Sinnott. I am certainly not competent to figure out how 
soon Congress can get things done. I think it is clear to say 
that we are looking at what we feel is the needed result, and 
we are looking at December 31st. If Congress feels that both 
can be accomplished within this timeframe, both the backstop, 
if you will, as well as this interim piece, I think we would 
all be fine with that. So it is really a question of what 
Congress feels can be done in this timeframe.
    Mr. Kanjorski. If you recall, it took us 13 months to put 
the first act into place as a result of the tort reform debate. 
And an extension is so tempting a bill, particularly as we get 
closer to the end here, for some people who want to craft 
something like that to add it on. I am not sure we can control 
it even on this committee. I imagine there will still be a 
referral to the Judiciary Committee and they just may have 
other thoughts on it.
    So your argument sort of agrees with me. Let's get it done.
    Mr. Sinnott. I think what I am saying is that question 
really, I hate to say this, but I have to bounce it back 
personally to the Congress as to what they feel. If you are 
saying, and I think we have all said that the worst-case 
scenario is that nothing happens on December 31st.
    Now, the best-case scenario would clearly be if there can 
be two solutions: a continuing backup with this interim piece. 
That, I think, would be probably preferable. If that cannot be 
done, we need something beyond December 31st and we need 
something that does not drive certain of the providers of risk 
saying the retention is so big, I can't deal with it. I do not 
know how to answer otherwise.
    Mr. Maurin. I think from the perspective of the coalition, 
the CIAT coalition, it would be that you go to work now in the 
short term and see what tweaks can be done to the current 
system, but do two important things.
    Number one, let's pass an extension for at least 2 years. 
Let's not do a 6-month extension or a 1-year extension. We get 
ourselves into the same box that we are in right now.
    Second, if you err in the tweaks that you do to the current 
system, please err on the side of that it is not going to cause 
a disruption in the program. That would be our request.
    Mr. Stiglitz. Independent agents would certainly like to 
see really three things happen. We want to see the program 
strengthened. We want to see it modernized. And we do want to 
absolutely maximize private market participation. If you can do 
that by the end of the year, we are all for it.
    Mr. Kanjorski. And what if we can't?
    Mr. Stiglitz. I think we would probably accept an 
extension, but there has to be some absolute rules as to what 
is going to go on, who is going to study it, let's get it into 
place, and move on from there.
    Chairman Baker. The gentleman yields back.
    Ms. Biggert?
    Mrs. Biggert. Thank you, Mr. Chairman.
    I have just a couple of questions.
    What sort of transition time is needed for companies to 
produce and distribute new forms or system changes that are 
needed to accommodate any sort of TRIA modification? And how 
long would you need, based on past experience, to get up and 
running with those?
    Mr. Sinnott. Do you want me to try that? Obviously, if you 
excluded certain risks like auto, which as I said you should 
look at the trucking industry if you do that, if you are 
thinking about that, yes, the carriers will have to put some 
exclusions.
    But I do not frankly see anything that we have discussed 
today creating a big problem in timing from the process. I do 
not know whether anyone, the commissioner sees it.
    Mr. Mirel. That really is a question for the industry. It 
depends entirely on how complex the changes are. If they are 
not overly complex, they can do it pretty quickly.
    Mrs. Biggert. Okay. Thank you.
    Then, Mr. Sinnott, with the low trigger and the substantial 
deductibles, does the current TRIA program distort the 
marketplace and create a competitive advantage for high-risk 
captives versus large diversified companies?
    Mr. Sinnott. Clearly, yes. Captives, as you point out, are 
covered and one could say that the threshold point there is one 
that they can deal with. On the other hand, clearly if you 
moved it up very high, they would not be able to deal with 
that. Pricing has been a function of, yes, of degree of risk.
    Mrs. Biggert. If there was a hit, wouldn't the captive 
almost always get Federal reimbursement, while an insurer like 
Zurich on the second panel would rarely be backstopped? Is this 
a market distortion that we should avoid?
    Mr. Sinnott. Well, the captive is a capitalized insurance 
company as well. It just has its own risks that it deals with.
    Mrs. Biggert. It is separate, yes, management, I should 
say.
    Mr. Sinnott. You are talking about captives?
    Mrs. Biggert. Yes.
    Mr. Sinnott. Yes. So it follows the same formula as the 
smaller insurance companies that have certain thresholds that 
they have to meet.
    Mrs. Biggert. Would you say that that would distort the 
market, that it would be a bad thing?
    Mr. Sinnott. No, I frankly do not think that that is a 
major issue that we are looking at here as far as the whole 
issue of availability. I think captives have been a mechanism. 
One of the things we talked about 3 1/2 years ago, if the 
backstop is going to be there, you have to sort of follow the 
way the insurance market operates. Captives have been there for 
a long time, and captives have been recognized as a viable 
vehicle for corporations, for companies to use.
    So I do not think that in anything that we are doing in the 
backstop should deviate from what has been traditional 
insurance practice in that regard. Otherwise, you get the 
government involved in a lot of complexities and trying to 
figure out something that I think has been fairly well managed 
by the industry and by the regulators.
    Mrs. Biggert. Okay. Then just one last question for Mr. 
Stiglitz.
    As the insurers' deductibles in TRIA continue to increase, 
is there a risk that a series of attacks over multiple years 
would decrease the industry surplus so that insurers would no 
longer be able to handle the higher levels? Would it be wise to 
have some sort of a re-set mechanism in exchange for the higher 
deductibles to bring the deductibles back down after a series 
of major events?
    Mr. Stiglitz. Yes. We would certainly support that. That 
seems to be reasonable. I would think certainly any type of 
smaller insurance company is almost going to have to have a re-
set in place if we get into a situation like that.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Chairman Baker. I thank the gentlelady for yielding back 
her time.
    Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Welcome. This is a very important panel. You guys are on 
the front lines. You are the industry out there, representing 
the agents, putting this together, having to cover it.
    In going forward, we had Secretary Snow in last time. We 
are getting mixed signals from this Administration whether they 
want to go forward with it and under what terms. Last week when 
he was in, he mentioned that, Mr. Snow did, that perhaps they 
could go forward, but with certain conditions that, one, they 
do away with general liability; that they would increase the 
premiums; they would raise the trigger to $5 million; they 
would do away with auto; and would not allow group life.
    Is that something you all could accept?
    Mr. Sinnott. I think I have already said that, number one, 
think carefully about moving up the threshold points to such a 
point that it reduces significantly availability. Availability, 
when you move up threshold points, involves small companies. I 
also said general liability, no. I think that that is something 
that should be re-thought if they are thinking of excluding 
that. There you get into nuclear, chemical, biological, and 
radioactive risks that can be truly catastrophic.
    I have just thrown out the issue of studies should be made 
as to auto, which appears benign, but maybe the trucking 
industry issue should be looked at.
    Mr. Scott. Let me ask another question, and if each of you 
could answer this. Do you think that the risk of litigation 
exposes taxpayers to excessive costs in backstopping terrorism 
risk? If so, what do you recommend Congress could do to 
separate excessive lawsuits from legitimate claims?
    Mr. Mirel. Congressman, you are asking a very serious and 
important question that I think is not going to be possible to 
answer in connection with this particular legislation. I do 
think it is very important to ask it, but I do not think it can 
be answered and also have Congress do something between now and 
the end of the year.
    Mr. Scott. Let me ask you this, then, particularly in view 
of what is happening around the world. Under the current law of 
TRIA, there is a distinction between domestic and foreign 
terrorism. Should that be eliminated?
    Mr. Mirel. Let me try to tackle that, and it deals with an 
earlier question you asked, Congressman. My view is that the 
trick here is to deal with places where the capacity is not 
sufficient to handle the exposure. I think if we focus not on 
the kind of insurance, but rather on the risk of catastrophe, 
we do much better. Is there a risk of catastrophe with group 
life? If there is, then it ought to be part of this program. If 
there is not, then it shouldn't be.
    The same with any kind of other insurance. I think that can 
be handled on a market basis. That is, who would be in a pool 
and who would not be in a pool. The ones who are concerned 
about the capacity to cover losses would want to be in the 
pool; and the ones who think they can handle it on their own 
would not. Again, it can be left to the market, but I think 
that the issue is a capacity issue, not a particular line of 
insurance issue.
    Mr. Mills. If I could tie one thing to that, Congressman, 
if I may. I certainly agree with what Commissioner Mirel said 
in terms of approaching it from the point of view of capacity, 
but I would caution that that question of domestic or foreign, 
there is some question whether the attacks that occurred in 
London 2 weeks ago, if they had occurred in the United States 
in a similar fashion, if it would be covered under TRIA because 
the bombers were British citizens. If there were American 
citizens in a radical cell here today who detonated a bomb in 
the Metro system in D.C., or anywhere else, it may not come 
under TRIA as it exists today.
    Mr. Scott. Let me ask another question, if I may. I have a 
couple more before my time is up.
    I mentioned a worldview here. Is terrorism reinsurance a 
unique product for the United States? Has there been a time 
before 9/11, for example, where there has been a reinsurance 
crisis? Is there any comparison to the experience of other 
countries, Great Britain for example? In other words, what is 
the state of things regarding terrorist insurance from other 
parts of the world?
    Mr. Mirel. Congressman, the proposal that I talked about 
earlier about creating a risk pool, that is not a new idea. 
Great Britain has one. Spain has one. I believe France and 
Germany have them at this point. I think it is not very 
different than what the State of Florida created in the way of 
a catastrophe risk pool for hurricanes in that State.
    This is not a new concept. It is just a concept that has 
not been embraced yet in this country.
    Mr. Scott. Okay. Thank you.
    Mr. Stiglitz. Congressman, let me reinforce that. He is 
absolutely correct about Florida. There was a reinsurance 
crisis there about 5 or 6 years, I believe it was, after they 
had a series of hurricanes. They responded by putting their 
pool together. It has worked. There is a lot of money in it. It 
has responded very well, certainly during the last four that 
they had last year. We have already had two this year. That 
pooling mechanism does work. So there are precedents for what 
we are talking about.
    Mr. Scott. Does the existence of TRIA in your opinion, 
since we have had it, has an indirect impact on indirectly 
lowering rates? Or does it cause additional costs to be passed 
on to the consumer?
    Chairman Baker. That will have to be the gentleman's last 
question, as his time has expired.
    Please respond.
    Mr. Stiglitz. Actually, the rates are coming down. 
Initially, they were higher. There wasn't near the take-up 
level, as Mr. Sinnott has mentioned. Now, the rates are coming 
down because there has not been an incident. They understand 
it. They have modeling. They have all kinds of stuff that 
enters into it. So we are seeing the rate come down.
    At the same time that we had this problem, we also had what 
they call a hard insurance market. Pricing increased rather 
dramatically, which I think Mr. Maurin probably refers to as he 
got hit by the hard market, not just the TRIA-related calls. So 
now that market is softening again. We go through cycles every 
3 or 4 years in the insurance business and now we are starting 
back down again. It is just typical of our industry.
    So I do not think there is a direct correlation between 
TRIA rates and the general insurance rates at all.
    Mr. Sinnott. Just to add one comment, and that is that when 
looking at terrorist rates, I do not think it is so much that 
all rates came down. The difference was that in the early 
stages, the rates that were being offered were of such a level 
that they were declined by the clients. As TRIA took hold, I 
think the underwriters began to reduce the rates in that area, 
so those insureds that in 2003 might have decided not to take-
up property as an example, in 2004 because the rates seemed 
more reasonable, took it up. And that is why we saw our 
percentage double in a period of probably 18 months on take-up 
on property.
    Mr. Scott. Thank you, gentleman. You have been very 
helpful.
    Chairman Baker. The gentleman's time has expired.
    Ms. Kelly?
    Mrs. Kelly. Thank you.
    I am very interested, Commissioner Mills, in the question 
of whether or not if TRIA were allowed to expire, what impact 
the higher premiums that would most certainly occur would have 
on terror insurance with regard to the take-up of terror 
insurance and the pass-on costs to consumers or tenants in New 
York. Would you like to answer that for me?
    Mr. Mills. One of the things that we have always felt is 
that if TRIA goes away, that the take-up rates may be impacted 
because the terror insurance may not be available. I mean, I 
really think that the very likely scenario would be that most 
of this coverage simply would not be available, and so 
obviously the take-up rates become insignificant.
    Mrs. Kelly. Anybody else want to jump in on that? I am 
interested in what could happen in terms of the pass-on costs 
to tenants in buildings.
    Mr. Sinnott. I think that there would be some increase in 
cost because there is a limited market for stand-alone 
terrorism, and that those rates, just as they did right after 
9/11 for stand-alone, jumped up. But I agree with the 
Superintendent, I mean, I am saying yes there would be some 
cost impact, but the biggest problem for our clients would be 
lack of availability.
    Mr. Stiglitz. Ms. Kelly, I might also add that the thing 
that really worries me is that if this goes away, I think 
probably the largest exposure, which we really have not 
addressed, is workers compensation. If statutorily our clients 
are required or companies rather are required to offer this, 
workers comp, I can't help but think that that will increase 
without the backstop in place.
    Mrs. Kelly. Well, that takes me to my next question, which 
is the fact that I think London showed that mass casualty 
attacks may not cause mass insurer loss, but we also have 
gotten information that it is possible that you could have 
10,000 casualties and they are saying that that could fit under 
a $500 million cap.
    So my question is, is it realistic to say that a 
catastrophic event would not drive capacity out of the market 
in that area and essentially out of the industry?
    Mr. Mirel. Let me just say, Congresswoman, that my 
understanding is that the largest amount of money paid out as a 
result of the attack on the World Trade Center was actually 
workers comp payments. Maybe Superintendent Mills can say.
    It is a real problem. We have it here in Washington, D.C., 
where very large businesses can no longer get coverage in that 
area, even under TRIA, and have had to go into our own risk 
pool, the city's risk pool. Organizations like The Washington 
Post, AARP, Kennedy Center, these kinds of institutions are 
having trouble finding coverage even under TRIA for workers 
comp. That would be much, much worse if TRIA were not extended.
    Mrs. Kelly. I understand. I needed to testify on a bill 
that I have before Congress, which is why I was late. I 
understand before I got here you had some discussion about the 
Treasury report and the $5 million. I am interested in what you 
think the trigger amount really ought to be, what the effect of 
a major catastrophic event, or multiple minor catastrophic 
events would be, and where you think that trigger really should 
be set in order to make sure that the reaction of the industry 
is not catastrophic in and of itself.
    Mr. Mills. There was a great degree of discussion on the 
size of the trigger. There was no real resolution. Myself in 
New York, we have said that we have no problem with 
significantly raising the trigger event. The chairman made a 
very good point that frankly I had not considered, because I 
was looking at largely the New York market. Mr. Sinnott also 
made a very good point that there are a lot of other small 
carriers even in New York and in all markets.
    So I think the trigger is really one of the major questions 
that the Congress will have to resolve, and it will not be an 
easy question to resolve, but certainly I think that it is safe 
to say it can be increased significantly from what it currently 
is.
    Mrs. Kelly. Anybody else want to address that?
    Mr. Maurin. On that issue, I think the trade that could 
better this coverage would be if in raising the trigger to be 
able to move it up from $5 million, which is relatively low, 
that we could include chemical, biological which is now 
excluded, and also include this domestic-foreign issue, which 
was talked about earlier.
    We are going to determine whether a claim is paid on a 
terrorist act depending upon where your passport is. As we saw 
in London and as we have even seen in America, we have had even 
some Americans that have joined Al Qaida. Okay?
    So I do not think the test should be where your passport is 
from. The test should be whether it was purely a terrorist act 
on this country, focusing on a specific property or a specific 
event. That should be the trigger for TRIA taking place.
    Mrs. Kelly. Thank you very much.
    I yield back.
    Chairman Baker. I thank the gentlelady.
    Ms. Maloney?
    Mrs. Maloney. Thank you, Mr. Chairman.
    The timely renewal of TRIA is a critical issue for the city 
I represent, New York, where the painful memory of September 
11th has been renewed by the tragic events in London this 
month.
    I would like to thank you very sincerely and deeply, 
Chairman Baker and Ranking Member Kanjorski, on behalf of my 
constituents for advancing the renewal of TRIA. I cannot think 
of anything that is more important to their lives and the 
ability for New York City to go forward.
    I welcome Superintendent Howard Mills and Mr. Sinnott. I 
was in your crisis offices on September 12th. You had grief 
counselors there, assistance for victims' families, and you had 
offices set up to continue business. On behalf of many of my 
constituents who benefited from these efforts and your efforts 
for the city, I express their appreciation.
    I can tell you from a very personal point of view in the 
painful days after September 11th, this great Congress came 
together like I have never seen it to help New York City and to 
help the Nation. But of all the efforts, by far the most 
important was passing TRIA. The city was not moving, and we are 
a resilient, great city, but no one could build. No one could 
plan. No one could do anything until TRIA was put in place. As 
their testimony states, if we are not able to renew and move 
forward, we face a tremendous challenge.
    Mr. Mirel, you spoke beautifully that this is not an attack 
against a particular shoe store, but it is an attack against 
America and it is a responsibility of all Americans to come in 
and be part of the solution. Many people are citing the 
reaction of London and support for the pool system. The AIA PCI 
came out in support of this approach.
    I would like to ask Mr. Sinnott, if Congress were to move 
toward a pool system, how long do you think the industry would 
need as a transition period to get up and running?
    Mr. Sinnott. I do not think I could specifically give it to 
you in 1 year, 3 years, 5 years. My belief is that it would 
take several years without an incident, frankly, to build up a 
sufficient amount of funds in the pool that one could say that 
the backstop that would still be there behind it is no longer 
necessary. It might be that you just keep pushing it up and up 
and up and up, and that the amount of backstop that is 
reasonably deemed to be there is extremely remote that it would 
ever be called in.
    There are other things like war that are not covered by 
insurance. I think the fact that the market has responded and 
Congress has responded, and not just saying, well, war is war 
and it is excluded and we will figure it out after it happens, 
which is what would happen if we had a war event. The Federal 
Government would have to step in.
    Now, this with TRIA and I think with what we are talking 
about today, we are talking about a more organized and thinking 
ahead of the event as to building something so that there isn't 
what happened after 9/11 or what happened would not happen if 
we had actually something that is defined as in the old sense a 
war event.
    Mrs. Maloney. So if you were stating, in other words, you 
would need a certain amount of time to build a reinsurance pool 
similar to London's. So in other words, we would possibly need 
a 2-year extension of TRIA or something like it in more or less 
its current form before the industry is ready to have a pool 
that could really be the backstop. Is that what you are saying?
    Mr. Sinnott. I am sure there are others who might have a 
slightly different view, but I think that a backstop to a 
diminishing degree will be required because, as they would say 
in workers comp, there could be theoretically a $90 billion 
event. Now, it is going to take a long time. You are not going 
to build up that sort of a fund in 2 years. The whole 
commercial industry premium-wise I think is roughly $200 
billion. So it will take time, but I think if you start out, 
you are going to gradually remove the government, push any sort 
of backstop security out.
    Mrs. Maloney. The chairman came forward with a very 
thoughtful proposal, and I thank him for his attention to this 
critical issue before our country. His idea of a geographic 
slide, a percentage point. You countered that the smaller 
companies would not be able to compete. How could we adjust 
that? Could we put in a provision that smaller companies could 
come together and possibly band together to provide insurance 
jointly so that they could meet the trigger?
    I also thought that Mr. Miller came forward with a good 
idea. I think that industries that help themselves and protect 
themselves, and some of our companies now even take photographs 
before you can enter the building, hire private guards, have 
put in metal detectors, have gone to great lengths to increase 
security on their premises.
    Shouldn't that effort to invest in security from the 
private sector be taken into account in any type of formula in 
order to reward the creativity of the private sector and also 
the financial and creative effort that they are taking in 
localities and in particular businesses to help themselves?
    Just in New York, there is a wide disparity between 
different office buildings when you walk into them, to the 
degree that they have taken steps to really protect their own 
employees and their clients as they come there.
    I see that my time is up. I think the testimony today has 
been really extraordinary. You have given us a good foundation 
to go forward.
    I cannot mention more passionately how important this is to 
the city of New York. If we do not have TRIA, building will 
stop. Nothing will happen. And when the economy is bad in New 
York, the economy is bad throughout the country. I have always 
noticed that.
    So I would argue that all of our cities have a stake in it, 
and we have to remember the terrorists were en route to San 
Francisco, Los Angeles, and our Capitol and the Pentagon on 
that day.
    Anyway, in any event I thank you, Mr. Chairman, on behalf 
of my constituents. You have obviously put a great deal of work 
on it, and you will be a big part of making this happen. I hope 
it happens soon because we need it. Thank you.
    Chairman Baker. I thank the gentlelady for her kind 
comments.
    Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    You gentlemen are in the business of determining whether an 
insurance company has adequate reserves to deal with the 
particular risk that they have assumed. You do that for both 
insurance companies, presumably also for reinsurance companies.
    If there was a company called the United States Government, 
and it assumed the risks of TRIA, and you may want to respond 
for the record or respond orally now, how big a reserve would 
your State require them to have?
    Mr. Mirel. The Federal Government has one thing, 
Congressman, that insurance companies--
    Mr. Sherman. I am not saying the Federal Government. I 
realize if you add in the U.S. Treasury, the ability to print 
money and the ability to tax America, you would say it is a 
fiscally sound company with or without reserves. What I am 
saying is, if you were going to have reserves for that 
particular risk, how big would they be?
    Mr. Mirel. That is exactly the problem, Congressman. Nobody 
knows. I have seen the kind of modeling that has been done by 
the various--
    Mr. Sherman. Can you give us the range?
    Mr. Mirel. Can you tell me what the next terrorist attack 
will be and how much--
    Mr. Sherman. No, but I can't tell you when the next 
hurricane is, and you are doing that for insurance companies 
all the time.
    Mr. Mirel. Because if you go back over 100 years or 200 
years, you can predict where the hurricanes will come.
    Mr. Sherman. Well, let's say this, you cannot predict the 
next earthquake. Trust me. I represent Northridge.
    [Laughter.]
    Mr. Mirel. Okay.
    Mr. Sherman. So you have companies that sell earthquake 
insurance. There will be an earthquake sometime in California. 
It could be in the Mojave Desert. It could be in downtown Los 
Angeles. Predicting the economic effect of an earthquake is 
rather difficult. Any of you want to venture, since you do 
something just as difficult all the time, help us with this 
difficult issue as to trying to value what the reserve would 
be, what the risk would be.
    Mr. Sinnott. I will make one comment. When you are talking 
about an earthquake or hurricane or other catastrophes, there 
are limits of liability that the carriers are able to put on 
the policy. On earthquakes in California on commercial 
properties, nowadays you cannot get $1 billion of coverage. So 
the limits that an individual insurance company has I think 
allows--
    Mr. Sherman. So if somebody built something the size of the 
World Trade Towers in Los Angeles, they could not get insurance 
for the full value.
    Mr. Sinnott. Right.
    Mr. Sherman. Or even half the value, yet people are 
willing, well may or may not be willing to build huge projects 
in Los Angeles without such insurance.
    Mr. Sinnott. That is the way the commercial insurance 
market works, except for workers comp, where it is unlimited 
liability.
    Mr. Sherman. One of the other questioners talked about the 
differentiation between international terrorism and domestic 
terrorism. I would hate to think that the outcome would depend 
upon which terrorist had a green card, which terrorist did not. 
Do you see any reason to differentiate between ``domestic'' 
terrorism and ``international'' terrorism?
    Mr. Mirel. I do not see any reason, Congressman.
    Mr. Sherman. I agree. Now, let's go on from there. Why do 
we differentiate between an earthquake and terrorism, since 
both can cause the same amount of damage?
    Mr. Mirel. Congressman, as we pointed out earlier, Florida 
has in fact developed a very good catastrophe fund for 
hurricanes. Except for the fact that it is probably more 
difficult to predict man-made events than natural events, I see 
no difference.
    Mr. Sherman. What you are saying is that, well, in New York 
you may not be able to get terrorism insurance for your 
building. In Los Angeles, you cannot get earthquake insurance 
for your huge project. I would think that the Federal 
Government would be just as interested in making sure that 
projects go forward and are not stopped by risk of earthquake 
as by risk of hurricane as by risk of terrorism.
    Mr. Mills. Congressman, if I may, you are failing to take 
into account the most insidious weapon of all that we are 
dealing with, and that is the power of the human mind. I mean, 
human beings, terrorists will change tactics. They can come up 
with new plans to deliberately try. You cannot predict an 
earthquake, but an earthquake cannot proactively try to 
confound you.
    Mr. Sherman. Mr. Mills, neither you nor I know whether 
during this century the greatest catastrophe and the greatest 
insurance events will be an earthquake or a terrorist action or 
a hurricane. You cannot predict it. I cannot predict it. Yes, 
terrorists can do new and terrible and unpredictable things, 
but earthquakes can do new and unpredictable things, and of 
course the tsunami in the Indian Ocean. We never had tsunamis 
in that ocean. We did not have a warning system in that ocean.
    So whether God or man creates the greatest catastrophes is 
something that only time will tell. I would think that we would 
want the same kind of system to make sure that you can get 
earthquake coverage in California, hurricane coverage in the 
Gulf, other catastrophe insurance. We should have a system 
where huge projects can go forward everywhere in this country 
regardless of which is the greatest risk.
    It is interesting. I represent a city, perhaps the only 
city where the earthquake and the terrorism risk have both been 
illustrated just in the last 10 or 15 years.
    Moving on, you folks deal with insurance companies, but I 
hope you also, and I expect you also deal with policyholders. 
Have you learned anything in your conversations with commercial 
policyholders about the price and availability of terrorism 
insurance? I think you have probably answered this question in 
different guises through the hearing, but I just got here.
    Chairman Baker. That will be the gentleman's last question, 
as his time has expired.
    But please respond.
    Mr. Sinnott. Yes, we have provided information on what the 
pricing is. We happen to have in this case statistics that show 
it by industry, by region. So yes, that is there, and there are 
differences.
    Mr. Sherman. Mr. Chairman, I look forward to having the 
Federal Government play the minimum possible role in order to 
make sure that some kind of adequate insurance is available for 
all the risks that otherwise hold up major projects.
    I yield back.
    Chairman Baker. I thank the gentleman for his statement.
    I want to thank each of you for your participation and just 
make the observation on behalf of the Administration that the 
Treasury report, although we may find reasons to differ with 
the conclusions reached, was a very thorough examination, broad 
in scope, carefully prepared, and provides I think a great deal 
of information for this committee to consider.
    I would request to each of your respective interests in the 
matter that over the course of the August recess you make 
available to the committee any perspectives you have that would 
lead the committee to reach conclusions different from those 
presented in the report.
    Some have suggested that the committee needs merely to 
renew the TRIA and engage in a study. I would suggest that the 
Treasury work is a pretty good piece of critical analysis, and 
I think the appropriate timeline is over the course of the next 
4 or 5 weeks for industry representatives to give us the 
appropriate take, remedies, whether it is a regional trigger, 
whether it is gradual increase in retentions. We need 
assistance, and the reason for the hearing today is to bring 
that clearly to your attention.
    I am appreciative of your time and your effort. Thank you 
very much.
    As appropriate, we will get started with our second panel 
when folks are settled in.
    We will just stand in recess for about 5 minutes.
    [Recess]
    Chairman Baker. I wish to call the subcommittee back to 
order and welcome our distinguished panel of witnesses who have 
already spent a considerable portion of their day here. For 
that, I am appreciative.
    As you heard in the first panel, we would request that you 
attempt to keep your statement to 5 minutes. Your entire 
official statement will be made part of our record. We 
appreciate your participation here today.
    Our first witness is Mr. Robert Hunter, no stranger to the 
committee, who again is testifying in his capacity as director 
of insurance for the Consumer Federation of America.
    Welcome, Mr. Hunter.

  STATEMENT OF ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Hunter. Thank you, Mr. Chairman, members of the 
committee.
    Three years ago, Congress was debating creation of a 
temporary program to give insurance companies time to adjust to 
the new world we were faced with after the September 11th 
attacks. As Congress debated this, the property casualty 
insurance market was reeling from a hard market that had seen 
capital decline and commercial insurance prices skyrocket. The 
hard market began early in 2001 and the attacks exacerbated the 
problem.
    Congress wisely sought a temporary program. Some members 
warned that a program of free reinsurance, as was about to be 
adopted, would be difficult to terminate as insurers and others 
who would receive a Federal subsidy would naturally like to 
keep the tap into the Federal Treasury. Whether Congress did it 
knowingly or not, the choice of a 3-year temporary program 
turned out to be perfect for those who would seek to end 
taxpayer subsidies for terrorism insurance today. Now is the 
ideal time to end TRIA or sharply cut it back.
    Why? The reason is the hard market of falling insurer 
capital and skyrocketing policyholder rates has ended. We are 
now in a soft market of skyrocketing capital and sharply 
declining commercial property casualty insurance rates. It is 
impossible to justify terrorism insurance subsidies when 
insurance profits are skyrocketing, property casualty insurance 
rates are sinking, and beleaguered taxpayers face mounting 
deficits.
    In the first quarter of 2005, the industry had a 92 percent 
combined ratio, one of the lowest such ratios in decades, 
meaning mammoth profits lie ahead. The first quarter of 2005 
had underwriting profit of almost $7 billion and with 
investment income, retained earnings jumped $10 billion. 
Retained earnings of the insurers were $323 billion before the 
terrorist attacks of September 11th, but now are $403 billion, 
$80 billion higher than they were before the attacks.
    The commercial lines segment of the industry had a surplus 
of $171 billion at year end 2004, a growth in surplus of almost 
$50 billion before the attacks. The new capital just in the 
commercial property casualty insurance area would be enough to 
pay for losses from an attack more than twice the size of the 
World Trade Center.
    This excess of capital has, happily for commercial 
policyholders, led to a price war, with rates dropping by 5 
percent for small commercial accounts and over 10 percent for 
medium and large accounts for the 12 months ended June 30, 
2005. Since Treasury has shown that average percentage of 
overall premiums paid out by commercial policyholders for 
terrorism insurance were under 2 percent in 2004, it means if 
terrorism rates doubled as a result of TRIA termination or 
cutback, overall insurance premiums paid by businesses of all 
sizes would still decline.
    More remarkably, for larger commercial accounts, terrorism 
prices could more than quintuple with no overall premium 
increases being felt. It is a perfect time to end the program 
or cut it back. Claims by insurers and large real estate 
interests that an end to TRIA would put the economy at risk, 
threaten jobs, stall commerce and delay construction are not 
credible as Treasury and CBO have indicated.
    Our review of the terrorism reinsurance gap in 2002, 
detailed at great length in my testimony, shows that the Nation 
adjusted to the terrorism insurance shortage and the private 
market found ways to provide most of the needed coverage in 
2002. Now, this was in the midst of a hard market with surplus 
falling and insurance prices soaring. Imagine how well it could 
cope in 2006 with the industry enjoying record reserves and 
profits and rates dropping.
    What should Congress do? We think Congress should let TRIA 
expire, maximizing the private sector response and maximizing 
mitigation incentives. However, if TRIA is extended, we think 
that you should adopt the Treasury Department's recommendations 
in the main to significantly pare back the program. This would 
include elimination of lines of insurance such as general 
liability and commercial auto, with relatively low terrorism 
risk. Group life insurance should definitely not be added to 
TRIA since life insurers have never provided any meaningful 
evidence that it is necessary. CFA also agrees with the 
Treasury Department's recommendation that the trigger should be 
increased.
    I heard your comments, Mr. Chairman, about rural areas. I 
think there may be ways to adjust it. I have just started 
thinking about it. I think that you might have a trigger that 
varies by size of insurance company, rather than territorially. 
That might be a better way to handle what you are looking for. 
But I would like to think some more and get back to you on 
that.
    We do think that the deductible should be raised, we 
believe, to $75 billion before taxes, which is $50 billion 
after taxes, which would mean that the industry would never be 
in a worse position than they were before the first attack. 
Copayments should also rise as the Treasury Department 
proposed.
    Beyond the Treasury Department's recommendations, we 
recommend charging a premium for whatever coverage is available 
to insurers. CBO favors this. Even insurers have agreed there 
is no legitimate argument against charging a premium, so that 
taxpayers can be kept whole. Developing and administering a 
premium payment requires a very small staff. I know. I was the 
sole actuary who did it for the riot reinsurance program in HUD 
under President Ford. Any extension of TRIA must be declared 
temporary and extended only for the purpose of giving the 
private sector a bit more time to prepare.
    Now, there is an area, nuclear, chemical, biological. If 
you do expand it to that, I think the industry cannot handle it 
without a Federal backup. You do need to think about that.
    Finally, the third choice would be a longer term pool 
backed by the Federal Government. A pool could be set up with 
no Federal involvement if TRIA expired or didn't, even, for 
that matter, and we think over time some States like New York 
and California might want to have an interstate compact-type 
pool. A simple solution might be for Congress to authorize a 
pool that way. It is unlikely that a complex risk pooling bill 
could possibly be done by January 1 of next year, much less 
have it up and running.
    Further, we are concerned it might significantly increase 
the risk of a permanent Federal presence in terrorism and 
therefore unnecessarily increasing taxpayer exposure. We worry 
that complex Federal-State issues that deserve a separate 
discussion might be swept into such a bill. However, we do list 
in my written testimony a series of things that we think you 
need to be concerned about in how you put together a pool, 
including cherry-picking the kinds of regulation necessary to 
protect against a cartel-type structure that would be legally 
mandated, and making sure coverage is limited to high-risk 
lines.
    I would be happy to answer questions at the appropriate 
time.
    [The prepared statement of Mr. Hunter can be found on page 
108 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Before proceeding to the next witness, because of 
scheduling conflicts, Ms. Bean would like to make remarks at 
this time.
    Ms. Bean?
    Ms. Bean. Thank you, Mr. Chairman, and thank you also for 
allowing us to have such extensive testimony on the important 
subject of terrorism risk insurance.
    Thank you to our second panel for participating.
    I did also appreciate the opportunity to personally welcome 
two Illinois constituents, Jason Schupp and Penny Pritzker, who 
have traveled from my home State of Illinois and bring some 
Chicagoland perspective to the debate over reauthorization of 
terrorism risk insurance.
    Ms. Pritzker is the founder and chairman of Classic 
Residence by Hyatt, which provides luxury senior living 
communities nationally. She serves as president and CEO of 
Pritzker Realty Group, headquartered in Chicago, and is 
treasurer and on the board of directors of the Real Estate 
Roundtable. Her numerous chairmanships and board positions at 
private and philanthropic institutions, as well as her 
distinguished economic credentials really enable her to provide 
a broad management perspective.
    But it is her industry-relevant experience in the real 
estate business that makes her testimony so valuable today. 
Pritzker Realty's diverse asset portfolio includes developed 
industrial parks, apartments, offices, land, and airport 
parking complexes. Such development projects are critical to 
America's continued economic growth, and so her testimony to 
the impact of TRIA on such development is important today.
    Jason Schupp is from Inverness and is an 8th District 
constituent whom I am honored to be working for every day. He 
is vice president and serves as chief legal counsel to the 
underwriting committee for Zurich American Insurance, the 
third-largest commercial insurer in America. He has been 
directly involved with developing internal policy addressing 
exposure to terrorism. His testimony is valuable as well.
    I am honored to have you both here today from my home State 
and I look forward to hearing your testimony, although I may be 
pulled out for a couple of meetings.
    Thank you so much.
    Chairman Baker. I thank the gentlelady.
    It is my pleasure to next call on Mr. Ernie Csiszar, who 
also is no stranger to the committee, who appears here today as 
president and chief executive officer of the Property Casualty 
Insurance Association of America.
    Welcome, sir.

 STATEMENT OF ERNST N. CSISZAR, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA

    Mr. Csiszar. And who is also a new resident of the State of 
Illinois. I just moved there.
    [Laughter.]
    Thank you, Mr. Chairman, and members of the committee. It 
is a pleasure to be able to testify before you today.
    I represent the Property and Casualty Insurance 
Association. We have over 1,000 insurance companies as members. 
We represent some very small companies with no more than a few 
million dollars' worth of premiums. And we represent some very 
large companies with several billion dollars' worth of 
premiums. So we have a wide cross-section of members.
    As a result, I think I can fairly say that we have had a 
committee together that has worked very closely with members of 
your staff. We are fully committed to finding as much of a role 
for the private sector in solving this terrorism risk problem 
as we possibly can. We have worked well with your staff toward 
that end and we will continue to do so.
    We have made some progress. Nonetheless, let me begin by 
stating some very simple facts. You have heard some of these 
before. What we are talking about here is essentially 
uninsurable. We do not know where it is going to occur. We do 
not know when it is going to occur. We do not know how often it 
is going to occur. And we do not know how much it is going to 
cost when it does occur. It is an uninsurable event for all 
practical and theoretical purposes.
    That very fact immediately brings in the question of how do 
you price this product and secondly, how do you reserve for 
this product? Since reserving is an issue, as a former 
regulator, for instance, I can tell you very clearly that 
immediately the lights go on when it comes to solvency. What 
kind of solvency problems are you really creating if you even 
underwrite this type of product, never mind about whether you 
are able to price it correctly or not?
    The last point I would like to make as a fact is very 
simply this, and we all know this. You have a bill before 
Congress now, the SMART Act. We are asked to provide market 
solutions, but we are not operating in a free market. As you 
know, there are rate restrictions. There are policy form 
restrictions that prevent any kind of creativity, oftentimes, 
from finding solutions to these problems. So we are not 
operating in a free market. If that is what we are looking for, 
then one of the issues we need to address is what kind of free 
market solutions are there in fact that can be part of the 
solution for terrorism.
    While there is no perfect solution, I will say that the 
only answer in these cases will be a public-private partnership 
that essentially addresses the problem. What we have worked on 
essentially has several different prongs. If the private 
markets are to participate in a significant manner, first of 
all the private markets need greater freedom to respond. That 
means greater freedom to rate. That means repeal or a scale-
back of some antiquated fire policy provisions, for instance. 
That also means preventing States from unilaterally mandating 
that terrorism coverage must be provided. So that is prong 
number one.
    Prong number two is also let's pursue the capital markets 
and see whether we can find capital market solutions to this. 
The argument has always been that these kinds of financial 
instruments--a catastrophe bond, which are quite common these 
days, in fact--are not unusual transactions, that they may not 
be liquid; that the markets might not be receptive.
    We think there are ways to provide liquidity in this 
instance. For instance, providing puts to the Treasury as a 
purchaser of last resort could very simply solve that problem, 
and there may be other ways in which we can address it. So one 
component of a solution may well be participation by the 
capital markets.
    We also very much agree with what you have heard earlier 
today that some type of a pool will be necessary in which 
companies can participate. Let's not forget that while it is 
true, again I heard some questions before as to how long an 
accumulation might take before it is meaningful in such a pool, 
let's not forget that such a pool might also be able to pre-
fundable by way of borrowings, for instance, by way of issuing 
bonds, by way of revenue creation in fact to repay. These 
things I think there are details that can be worked out.
    We also think as a fourth component of the solution that 
one needs to look at buildup of tax-deferred catastrophe 
reserves for terrorism.
    Last but not least, we have heard it before, domestic acts 
are no different from foreign acts. I would also suggest that 
personal property is really no different from commercial 
property, particularly homeowners. Now, I know we have not 
talked specifically about homeowners, but I would suggest it 
deserves further study as to what kind of coverages, what kind 
of inclusion one might bring to the homeowners policy.
    Let me make a few comments in finishing on just some of the 
proposals that we have heard. I am quite unclear as to 
precisely what the Treasury expects at this point or what kinds 
of changes because the signals have been mixed, quite frankly. 
I welcome the Treasury report. I agree with you, it was quite 
comprehensive and I can assure you we will respond to that 
report. But at the same time, I do not want to be critical 
because I think it is hard to anticipate exactly what is 
suggested in that report. But let me make a couple of comments.
    On the issue of the $500 million, there is no question that 
as I speak, for instance, for some of our smaller and mid-size 
insurers, that would put them out of business. I can think of 
an insurer we have, for instance, who covers churches and 
synagogues and mosques and so on. One mega-church on a Monday 
morning with a single bomber would do the job. It would only be 
that company exposed to it. So a retention that high, I may 
agree that $5 million is too low, but I think $500 million is 
way too high, and we have to find some compromise in between.
    As regards retentions, I would also agree there is room for 
discussion on increasing retention levels. What I would suggest 
is that we do not approach it as dramatically as suggested by 
the Treasury, from 15 to 20 to 25. Maybe it is more reasonable 
to think of 15 to 16 to 17 and so on, a much more gradual 
approach on those retention levels. But these are details that 
can be worked out.
    Quite frankly, I think a good deal of progress has been 
made on these issues and I would hope that this committee can 
use this as an opportunity to continue to pursue those and to 
put them in place really by year-end. I think it can be done. I 
think the industry understands the need to do this. The worst 
of all possible things that can happen here is that we leave 
ourselves open with nothing at the end of the year. But I would 
suggest, let's use it as an opportunity. Let's implement a 
longer-term program than the current one that is in place.
    Thank you.
    [The prepared statement of Mr. Csiszar can be found on page 
81 of the appendix.]
    Chairman Baker. Thank you very much, sir. I appreciate your 
testimony.
    Mr. Schupp, as you have been previously introduced by Ms. 
Bean, please proceed at your leisure, sir. Welcome.

    STATEMENT OF JASON M. SCHUPP, VICE PRESIDENT AND SENIOR 
ASSISTANT GENERAL COUNSEL, ZURICH FINANCIAL SERVICES GROUP, ON 
          BEHALF OF THE AMERICAN INSURANCE ASSOCIATION

    Mr. Schupp. Thank you.
    Chairman Baker and members of the subcommittee, thank you 
for the opportunity to speak on behalf of Zurich and the 
American Insurance Association about what is actually happening 
in the terrorism insurance marketplace.
    I am vice president and senior assistant general counsel 
for Zurich, the third-largest commercial insurer in America. I 
have been intricately involved in all aspects of our U.S. 
terrorism underwriting strategy since September 11th. Based on 
those experiences, I assure you that the private sector has 
made great strides in understanding the terrorism exposure. 
However, there are inherent limitations to what the private 
sector can do.
    Since 9/11, we have learned some fundamental principles 
about terrorism and about the private marketplace's ability to 
deal with this risk. The first is that terrorism presents a far 
larger financial risk than private capital markets can handle. 
For example, insurance rating agencies recently suggested that 
no more than 10 percent of insurer capital should be exposed to 
terrorism risks. That amounts to a capital commitment of about 
$19 billion for the commercial property casualty lines covered 
by TRIA.
    Yet under this year's TRIA retention levels, total industry 
exposure is $37.7 billion, about double the capital exposure 
that rating agencies look for. This is an obvious concern for 
insurers, but should alarm anyone relying on the property 
casualty sector to respond to another terrorist attack on U.S. 
soil.
    Some academics and others suggest that TRIA has crowded out 
private market reinsurers or other capital market mechanisms 
that would commit capital to the terrorism exposure. Over time 
and on the right terms, it is possible to coax a bit more 
limited, short-term capacity from private reinsurers and other 
capital markets. However, there is plenty of space today for 
these private market solutions to expand and they have not.
    The second principle we have learned is that terrorism 
exposures are not all alike, nor should they be treated alike. 
For example, it has become clear that NBCR attacks have such 
unique characteristics that our capability to respond is 
particularly limited. In addition to thinking differently about 
the type of attack, we have learned that certain classes of 
business such as workers compensation and commercial property 
pose more difficult underwriting and risk accumulation 
challenges due to the nature of the risk and the regulatory 
regime governing those lines.
    This hearing asks: What is the future of terrorism 
insurance? The American Insurance Association, including 
Zurich, believes strongly that a continued Federal role is 
necessary, and we congratulate this committee for the 
extraordinary bipartisan leadership demonstrated in developing 
and expressing this common understanding.
    There are several ways the subcommittee could proceed. One 
would be to scale back the existing program, as Treasury has 
proposed. The viability of that approach depends on the numbers 
and whether there is room to further respond to the risk 
characteristics of the various lines. Or a structural 
alternative to TRIA such as a pool or a pay-to-play reinsurance 
system could be developed. Either approach needs to encourage 
higher take-up rates.
    Whatever path is chosen, our fundamental concern is that 
any mechanism must be workable for all stakeholders in the 
marketplace. We will judge these various proposals based on our 
real-world, on-the-ground experience and expertise.
    I would like a minute to quickly address some of the 
suggested program changes. We appreciate the expectation that 
the private sector insurer should shoulder more of the 
financial burden associated with terrorism, but increasing 
individual insurance company retention levels will not create 
more reinsurance capacity. It will simply make it more 
difficult for insurers, particularly large diversified 
insurers, to manage the massive unfunded and unreinsured 
portions of their deductibles.
    For similar reasons we have serious concerns about 
increasing insurers' quota share if a loss exceeds the per-
company deductible. Moreover, the existing quota share is 
consistent with those in many private reinsurance contracts and 
provides ample incentive for companies to efficiently manage 
claims to minimize Federal involvement.
    The recent Treasury report suggests removing commercial 
auto and general liability from the program. While commercial 
automobile is likely to pose a less major terrorism 
accumulation challenge, general liability is a very real 
significant exposure. A full impact analysis should be 
undertaken before acting in this area.
    A final policy area that must be addressed is insurance 
market reform. State rate and form laws limit insurers' ability 
to manage the terrorism exposure. The still all-too-real risk 
of catastrophic terrorism attacks on U.S. soil means that we 
need an effective insurance mechanism in place beyond December 
31, 2005. Such a mechanism must be built to reflect marketplace 
reality, not hopes or theories.
    On behalf of Zurich and the American Insurance Association, 
let me say that we stand ready, willing, and able to work with 
you to ensure timely enactment of a workable national terrorism 
insurance mechanism.
    Thank you.
    [The prepared statement of Mr. Schupp can be found on page 
162 of the appendix.]
    Chairman Baker. I thank you, sir.
    Our next witness is Mr. Warren Heck, testifying as the 
chairman and chief executive officer of the Greater New York 
Mutual Insurance Company.
    Welcome, sir.

STATEMENT OF WARREN HECK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
  GREATER NEW YORK MUTUAL INSURANCE COMPANY, ON BEHALF OF THE 
       NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Heck. Thank you.
    Chairman Baker and members of the committee, my name is 
Warren Heck. I am chairman, as you indicated, and chief 
executive officer of Greater New York Mutual Insurance Company 
and its wholly owned stock subsidiaries, the Insurance Company 
of Greater New York and Strathmore Insurance Company. I am also 
the chief underwriting officer of the companies and manage 
their underwriting activities.
    I am here today to testify on behalf of the National 
Association of Mutual Insurance Companies. Let me start by 
thanking Chairmen Oxley and Baker and this committee for 
adopting TRIA in 2002. NAMIC and I are convinced that it played 
a major role in preventing an economic catastrophe in helping 
get the country back on its feet economically after 9/11.
    We also thank you for your efforts today to reform TRIA and 
to renew the Federal reinsurance backstop for terrorism before 
it expires at the end of this year. We agree with Federal 
Reserve Board Chairman Alan Greenspan's observation before this 
committee that there is ``no way that the private insurance 
market can handle terrorism-related risk by itself because of 
the very substantial potential scope of damage.'' We support 
his endorsement of government-backed reinsurance for terrorism.
    Greater New York Mutual Insurance Company is the fourth-
largest writer of commercial multi-peril business in New York 
State. Much of that business is in New York City. As CEO and 
chief underwriting officer of our companies, I have first-hand 
knowledge and understanding of the needs of our policyholders 
and brokers, particularly with respect to the terrorism 
exposure.
    As a result of the terrorist attack on 9/11 and prior to 
the passage of TRIA in late 2002, most primary insurance 
carriers operating in New York City began to non-renew their 
large commercial property and workers compensation business or 
to reduce or limit coverage to under $20 million on the 
property side. With the passage of TRIA, the fear that a worst-
case terrorist event could render our company insolvent was 
reduced, which made it possible for our company to keep its 
market open to a degree that would not have been otherwise 
possible.
    While we believe that TRIA has been instrumental in 
creating some market stability, we also agree with Treasury 
that some reform is needed. We think the Treasury Department's 
recommendations for changes in TRIA are a reasonable starting 
point for short-term reforms. We agree with Treasury's 
assessment 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.''
    Treasury outlined several key areas of reform, particularly 
higher deductibles and higher event triggers. The private 
sector has shown that it can operate with a 15 percent 
deductible. Raising that deductible would provide a further 
test of private sector capacity. Similarly, an increase in the 
event trigger is within the realm of reality. However, raising 
the event trigger much higher would be problematic, 
particularly for medium and small insurance companies.
    In establishing new deductible levels and a higher event 
trigger, one must recognize that if they are set too high, the 
program will unfairly discriminate against the medium and small 
companies in favor of large companies that can afford a much 
larger hit.
    As far as a long-term solution goes, I think it is more 
likely that the creation of a private-public partnership 
similar to the system that exists in Great Britain with the 
Pool Reinsurance Company, Ltd., can be a substantial part of 
that solution.
    A new RAND Center for Terrorist Risk Management study 
recommended two other possibilities: first, requiring that 
terrorism insurance cover acts by domestic groups as well as 
foreign terrorists, a wise admonition in light of the London 
attacks; and second, requiring that insurance cover attacks 
involving chemical, biological, radiological or nuclear 
weapons, perhaps through a direct government insurance program.
    Now would also be a good time for the Federal Government to 
examine tax and accounting policies that NAMIC believes are 
major impediments to increasing the capacity of insurers and 
reinsurers to provide terrorism coverage. For example, insurers 
should be permitted to deduct reserves set up for terrorism 
losses. The present prohibition against this creates a 
disincentive for the private sector to invest in the insurance 
industry.
    The flow of private sector capital to this industry is also 
inhibited by outdated State regulatory policies that often 
require regulatory approval of the price insurers charge.
    Thank you once again for the opportunity to testify on this 
issue of vital importance to NAMIC member companies and the 
U.S. economy. Your continuing leadership on this issue 
represents the best in public policymaking and NAMIC stands 
ready to assist you in any way in developing the best possible 
terrorism insurance legislation.
    Thank you.
    [The prepared statement of Mr. Heck can be found on page 
100 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Our next witness is Mr. Ed Harper, who appears here today 
as the senior vice president of public affairs and governmental 
relations for Assurant, Inc.
    Welcome, sir.

STATEMENT OF ED HARPER, SENIOR VICE PRESIDENT, ASSURANT, INC., 
               AND CHAIRMAN, GROUP LIFE COALITION

    Mr. Harper. Good afternoon, Mr. Chairman.
    The Group Life Coalition appreciates your leadership and 
our being given the opportunity to present some ideas to the 
committee on defending the American economy against terrorist 
attacks. I am Ed Harper, as you said, senior vice president of 
Assurant, which is a leading provider of insurance products and 
services, including health and employee benefits.
    I am here today in my capacity as chairman of the Group 
Life Coalition. The coalition is composed of insurance 
companies which provide the protection of group life insurance, 
both as a stand-alone product and as a part of an employee 
benefits package. I particularly want to thank you, Mr. Oxley 
and Mr. Frank and Mr. Kanjorski for their commitment to get 
something done this year and for their interest in and support 
of group life.
    I am here for two reasons. I join with my industry 
colleagues and Federal Reserve Chairman Alan Greenspan in 
sharing the belief that the private insurance market cannot 
fully handle the risk posed by terrorist attacks. Secondly, I 
hope to persuade the committee to create a successor program to 
TRIA that protects the people as well as the buildings. That is 
a program which includes group life insurance going forward.
    What is group life? Group life is the financial lifeline 
for the widowed families of breadwinners for over 160 million 
Americans. In many cases, group life is the only life insurance 
most policyholders have to provide protection to their 
families. It truly is a financial security blanket for the 
average family. Our prime purpose here today must be to make 
sure that consumers' claims are paid promptly under the worst 
of circumstances.
    Unfortunately in a post-9/11 environment, this financial 
protection is threatened by two aspects of group life 
insurance. One is a concentration of risk from covered 
employees working in the same building, coupled with an absence 
of the mechanism that had previously been used to spread such 
risk, catastrophe reinsurance. Moreover, State insurance laws 
do not allow for any group life exclusion from acts of 
terrorism from conventional weapons nor unconventional nuclear, 
chemical, biological and radiological attacks. But for group 
life, if someone dies, group life pays regardless of the source 
of the attack.
    The group life market is highly competitive, where 
employers buy policies from the lowest bidder, usually as a 
part of a package sold by an employee benefits insurer. 
Policies are lost to competitors for pennies on the dollar. 
Faced with the reality of extremely limited or no catastrophe 
reinsurance protections, group life insurers are faced with few 
options to address concentration risks in an age of terrorist 
attacks.
    None of the options are attractive. They can raise prices 
to cover a risk they cannot calculate, thereby cutting 
themselves out of the market. They can exist the employee 
benefits market or they can continue to offer coverage without 
the catastrophe reinsurance mechanism to mitigate such risks. 
None of these options are truly viable solutions for a group 
life insurance company, nor do they properly address the 
problems posed by catastrophic terrorist attacks.
    What should the Congress do? The committee has asked for 
our views on a successor to TRIA. We believe the following four 
principles should be considered. Number one, the program ought 
to match the term of the solution to the term of the threat. 
Historically in times of war, particularly World War II, the 
Federal Government has made legislation permanent or set to 
expire at the war's end. Just recently we have seen the House 
of Representatives make key provisions of the USA Patriot Act 
permanent in recognition of the long-term danger of terrorism. 
Unfortunately, the risk of terrorism and our Nation's struggle 
with the specter of terrorist attacks is not likely to end 
soon.
    Second, we need to have a shared burden with a balance. Any 
long-term solution should first demand that carriers assume a 
significant deductible to assure everyone that underwriting 
procedures are appropriate. Second, it should facilitate the 
private market-enhancing mechanism supporting pools that have 
been mentioned here this morning, and finally require that the 
industry pay to play by repaying over time any funds advanced 
by the Federal Government in the wake of catastrophic terrorist 
events.
    The program's mechanisms and formulas should: (A) achieve 
increased capacity where the industry is paying just consumer 
claims; (B) have an appropriate level of shared burden with the 
Federal Government; (C) avoid a program where only big 
companies in big cities could access the program; and finally 
(D) provide an orderly transition. The creation of something 
beyond a quick-fix solution may be achievable yet this year, 
but the implementation will take time to get right.
    We support an extension of TRIA with appropriate reforms to 
the extent necessary, but only as a transition to a more 
comprehensive approach. As the new program is ready to be 
engaged in begin functioning, the old TRIA model should be 
sunset. Protect the people inside the buildings, too. This is 
where I would end: any program must include group life as a 
covered line of insurance to make sure that the financial 
security of the average American families in those buildings is 
covered as well.
    On behalf of the Group Life Coalition, we thank you and 
your colleagues for holding this hearing on this important 
subject, and we look forward to working with you.
    Thank you.
    [The prepared statement of Mr. Harper can be found on page 
89 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Ms. Pritzker, pursuant to Ms. Bean's welcome, please 
proceed at your leisure.

 STATEMENT OF PENNY S. PRITZKER, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, PRITZKER REALTY GROUP, L.P.

    Ms. Pritzker. Thank you very much for the opportunity to be 
here today. My name is Penny Pritzker. I will not repeat the 
introduction, the very lovely introduction given by Congressman 
Bean. However, I do want to say that I am also here as 
treasurer and a member of the board of directors of the Real 
Estate Roundtable.
    I want to begin by thanking you, Chairman Baker and Ranking 
Member Kanjorski, for conducting today's hearing on the future 
of terrorism insurance.
    I am pleased that Chairman Oxley and so many members of 
this committee support the continuation of Federal terrorism 
insurance programs.
    I also want to specifically note my appreciation for the 
focus and attention given to the issue by Representatives 
Kelly, Frank, Israel, Crowley, Capuano, and Bean.
    I am honored to offer my perspective today as you craft 
legislation in the area.
    Immediately following 9/11, Congress was called upon to 
develop many new public policies to reflect the changed world. 
This committee, led by Chairman Oxley, quickly grasped the 
enormous potential economic problems that could develop if the 
government did not step into the terrorism insurance 
marketplace. You led the Congress in developing the legislative 
solution that became known as TRIA. Thank you for your hard 
work in this area then, and thank you for recognizing the need 
to focus intently on the issue once again.
    Like many of you, I had hoped that the government's role in 
terrorism insurance could be ended. I am in a highly 
competitive market-based business. Like the real estate 
business that I am in, I was hopeful that the private insurance 
markets could fully handle the issue of terrorism insurance as 
it had prior to 9/11. But let me be clear: Unfortunately, that 
does not seem to be the case.
    From my perspective, the reasons that caused this committee 
to work daily to enact the Terrorism Risk Insurance Act have 
not significantly changed. Because of this reality, I strongly 
believe that our economy continues to need a Federal terrorism 
insurance backstop. We need it to be in place well before TRIA 
sunsets at the end of the year. So I favor reauthorization for 
several years while a commission considers a longer-term 
solution. The issues here are complex and the implications are 
very broad for our economy.
    Obviously, as recent events in London and around the world 
indicate, the threat of terrorism continues to be strong. Where 
terrorists might strike and how they might attempt to do so 
continues to be an evolving picture. Not only does the 
terrorist threat continue, but the potential economic costs of 
terrorist attack are almost limitless. You correctly saw the 
problem in 2002. You enacted TRIA. I believe it has been a 
tremendous success.
    A survey conducted during the post-9/11, pre-TRIA time 
period showed that more than $15 billion of real estate-related 
transactions had either been stalled or cancelled because of 
lack of terrorism insurance. Studies further showed that 
approximately 300,000 jobs were lost during this period. Almost 
overnight, TRIA provided the capacity to insurance markets, 
which in turn yielded the economic confidence for transactions 
to resume.
    I am personally familiar with stalled construction projects 
that moved forward immediately to the benefit of countless 
workers in the construction trade, including our newly 
completed and constructed Hyatt Center, a 1.5 million square 
foot office building that created over 2,500 jobs that we 
started just post-9/11 after the implementation of TRIA. 
Without TRIA, we would not have been able to finance and build 
our new building. Without the continuation of TRIA, we will not 
be able to refinance our building.
    Having noted the benefits of TRIA, I am also aware that few 
laws are perfect. You are the ones who must review the 
technical way in which the Federal backstop functions and make 
any revisions that you see fit. I personally do not share the 
optimism expressed in the Treasury report concerning the 
ability of private insurers to effectively model terrorism 
risk. However, if reforms to the program along the lines 
suggested by Treasury Secretary Snow can be crafted to increase 
the role of the private market in this area that still makes 
sure that terrorism insurance is widely available to the 
economy, then they should be done.
    I also understand this committee might be interested in 
crafting a longer-term solution to the terrorism insurance 
problem. I certainly would not discourage this committee and 
Congress from exploring a more permanent way to ensure that 
terrorism insurance is available in our country. There are 
several models that may be instructive in this area, including 
the pool approach used in the United Kingdom and the pooling 
approach for catastrophic risk taken by Florida. I urge you to 
proceed cautiously when looking at TRIA reforms or at a longer-
term solution.
    In general, I urge that you make sure that whatever the 
approach, you do not unintentionally penalize the policyholding 
community. The economy does not need a situation where 
terrorism insurance is once again only available in limited 
supply and then only at extremely exorbitant prices. The 
resulting illiquidity would not be a functioning marketplace.
    During your deliberations, I respectfully offer a few 
points for you to consider. First, one of the most important 
aspects of TRIA was the so-called make-available provision. It 
ensured that terrorism coverage was offered to businesses. I 
strongly urge that this provision be included in whatever 
Federal backstop program this committee recommends.
    Second, the distinction under current law between domestic 
and foreign terrorism should be eliminated. In today's world 
having to determine whether a terror strike is at the direction 
of a foreign entity is obviously very difficult and seems 
somewhat meaningless. Even today, little is known about the 
origins of the anthrax attacks of a couple of years ago.
    Third, nuclear, biological, chemical, and radiological 
exposures are truly limitless. It seems that they should be 
somehow treated differently than other forms of terrorism risk, 
if for no other reason than to provide an even greater 
incentive for insurers to offer this type of coverage. As you 
know, TRIA currently backstops these events if in fact a 
primary insurer will write the coverage. I see no evidence that 
such coverage is being written today. A strong incentive is 
needed to ensure that this very real risk is covered.
    Finally, I would urge you to act in this area quickly. 
According to the Moody's report, 50 percent to 75 percent of 
all property and casualty insurance policies written since 
January 1st have adopted conditional endorsements. Conditional 
endorsements will automatically void terrorism coverage if a 
Federal terrorism insurance backstop is not in place by January 
1, 2006.
    Also, new projects will face increasing difficulties 
because in many cases terrorism insurance coverage will not 
extend into next year and therefore the financing will not be 
available to go forward. The sooner Congress acts on this 
issue, the less dysfunction will occur in the marketplace.
    I would also urge caution in two additional areas. First, 
there is great discussion about what lines of business are to 
be included and excluded from backstop coverage. For example, 
general liability is an important line of business coverage by 
itself. It also gives support to our officers and directors 
insurance. I urge you to carefully review the justifications to 
exclude it from the future backstop coverage. Obviously, if the 
decision is to move forward on a pooling approach to address 
this problem, which will bring with it a pay-to-play aspect, 
then I would strongly urge all existing lines be covered in the 
successor program.
    Second, the issue of tort reform is one that is very 
important, but one that could overwhelm the prospects for this 
important legislation if not carefully crafted. First, through 
regulation, the Treasury Department already has established 
strong litigation safeguards against runaway verdicts and 
excessive settlements. These regulations, of course, expire 
with TRIA. I think reauthorizing these regulations would 
address the concerns of unwise lawsuits arising in this area.
    Just to summarize here, rational litigation management 
rules are needed in this area, but the debate should not serve 
as a hurdle to achieving the most important goal here, and this 
is a workable terrorism insurance program.
    In conclusion, the real estate industry is one of the most 
competitive market-oriented industries in America. We want 
markets to operate freely, but sometimes they can't. As Alan 
Greenspan testified last week to this committee, ``So long as 
we have terrorism that has the capability of a very substantial 
scope of damage, there is no way you can expect the private 
insurance system to handle it.''
    Given this situation, I am pleased that a bipartisan group 
of members of this committee support the continuation of 
Federal terrorism insurance programs. Without a backstop, the 
terrorism insurance market is very likely to once again become 
highly unstable with potentially very harmful effects on the 
economy. TRIA was successful. Perhaps it can be made more 
market-oriented without causing market disruption and perhaps a 
long-term solution is within grasp.
    The most important action, however, is to act by putting a 
program in place long before the year ends.
    Thank you for the opportunity to comment today.
    [The prepared statement of Ms. Pritzker can be found on 
page 157 of the appendix.]
    Chairman Baker. Thank you, Ms. Pritzker.
    I would like to start with the observation about the 
nationalization of insurance risk. I disagree with the view 
that the United States taxpayer should be the first line of 
response in these circumstances. The industry assesses risk and 
collects a premium against that risk and tries as best is 
practicable to be profitable in judging future risk and making 
profits for shareholders in that business. So as between 
nationalizing on the one hand, and throwing it all on the 
industry, there is a balance to be reached here.
    What I think the Treasury report underscores in its view of 
the current TRIA program is that those equities are not 
properly balanced today, and that we can move more in the 
private market direction without adverse economic consequences. 
To that end, we have the month of August plus a week or so 
before we would come back, even if the decision were made just 
to extend TRIA as others have suggested, it would not happen 
this week anyway. So since we have the gift of 5 weeks, let's 
focus on Treasury, focus on what can we do to move in the 
direction they would like us to move, and I will acknowledge 
that the $500 million trigger, for example, is a problem.
    In suggesting remedies, I talked about some regional type 
of measure taking the percent of commercial value lost as 
opposed to the commercial property in that regional area as a 
triggering device. Mr. Hunter suggested it might be more 
appropriate to have some other trigger that relates to the size 
of the business entity, which is subject to the claims for 
payment.
    The only hesitancy I have about that, and maybe the two can 
be done in tandem, is that when you move to looking at the 
individual business enterprise, whether we by inadvertent 
action are creating additional moral hazard by causing that 
company to not worry about concentration of risk in a 
particular community, whether they have properly gauged the 
risk, whether the business enterprise, for example, has 
security on the file. As Ms. Maloney rightfully pointed out, we 
ought to incent professional conduct and people who have 
security devices in place ought to have lower premium than 
people who just say, we are open for business. So some blend on 
the triggering side, coupling that with some graduated increase 
in retentions.
    I agree with you, Mr. Csiszar, that we may not want to go 
at 5 percent a clip, but maybe nothing the first year, to give 
us time to graduate to a more sophisticated increase, maybe two 
points the following year or something thereafter to be 
negotiated, but certainly an increase in retention. Absolute 
language of taxpayer repayment under whatever conditions we 
choose to construct that the secretary of the Treasury would 
have to administer, and then whatever language the lawyers tell 
us is necessary to incent the creation of voluntary pools over 
some time.
    My idea is that we still should be in the temporary 
business. We ought to be providing a transition to where there 
is sufficient pooling voluntarily, and if you are not in it, 
you have no claim. I think that really incents people to think 
these things through, whether it is regionally, by State. It 
does not matter to me. I think the larger the area, the more 
you minimize potential risk of catastrophic loss.
    Could anybody respond to why this would not make some sense 
over the next 5 or 6 weeks to try to get something like that 
agreed to? Mr. Csiszar, I will throw it to you first.
    Mr. Csiszar. I would certainly commit our organization to 
work with you on that. I think all of those points have merit. 
For instance, your suggestion that there be some regional. I 
can see some problems with that, where you are writing a church 
in New York City now, but you might not be able to write it in 
New York City, and you are a small company based in Wisconsin.
    But I think we need to look at all the options. Nothing 
should be taken from the table at this point. And there may be 
some combination formula that we can come up with, or we may 
find that we can agree on an absolute ceiling, for that matter. 
Let's not eliminate that possibility as well.
    So on all of the points, I think they are worth pursuing. I 
know 4 weeks, 5 weeks does not sound like much, but under the 
pressure cooker, we know how much time we have between now and 
December 31st, and the worst thing that can happen is that we 
have nothing in place. So I think that puts pressure on us as 
an industry to work with you and to come up with a solution. So 
I would be fully committed to that.
    Chairman Baker. Mr. Hunter, how would you jump in?
    Mr. Hunter. CFA would be happy to work with you. I am 
sitting here thinking about ways to address your rural issue 
and I am coming up with ideas, but they are half-baked at this 
point. But if you get the retention to a high enough level, 
maybe you do not need a trigger. Maybe the retention takes care 
of it for the small company because that is varied by size. Who 
knows? But we need to start thinking about those kinds of 
approaches.
    Chairman Baker. Thank you.
    Mr. Schupp, did you want to comment?
    Mr. Schupp. Certainly. Thank you.
    You are absolutely right, Chairman. This is not 2002 
anymore. We have learned over the last 3 years quite a bit 
about the terrorism exposure. We have the Treasury study and 
assessment to look at and learn from. We have even the 
documents that are attached to the gentleman from Marsh's 
testimony that provides some good analysis of the terrorism 
exposure by line, by geographic region.
    Over this time period, I would suggest to you that this is 
learning that is taking place certainly within my company, 
within the AIA, and I have confidence within other companies 
over many months and years that we have now been in the 
terrorism insurance business. We can bring these learnings 
together in the short period of time, come up with a program 
that is more responsive to the unique characteristics of the 
terrorism risk as that plays out geographically and across the 
various lines.
    Chairman Baker. Thank you.
    Mr. Heck?
    Mr. Heck. Yes, I believe that realistically the trigger can 
be raised. However, as Ernie Csiszar mentioned, insurance 
companies range in size from a few million dollars in capital 
to many billions of dollars. So one size does not fit all 
companies.
    I do think the important thing is the deductible and not 
the trigger, because if the deductible is high, that determines 
how much the company is going to assume and the government not 
pay. So I think more focus should be put on the individual 
company retention, rather than on the trigger. Although as I 
said, I think it can be higher than it is.
    Chairman Baker. There may be some combination of the two.
    Mr. Heck. Possibly, yes.
    Chairman Baker. Mr. Harper and Ms. Pritzker, would you care 
to comment?
    Mr. Harper. Yes, sir. We are delighted and look forward to 
the opportunity to work with you and your staff on dealing with 
these five issues. Of course, the interesting point will be in 
the details, the incentive, for example, to participate in 
voluntary pools. In the State guarantee funds, the incentive is 
a kind of a mandatory incentive, and likewise with the Florida 
catastrophe funds that we were talking about, it is not 
entirely a voluntary fund.
    So we will look forward to it, and I guess we would lean 
somewhat toward the view that some of these will have to be 
mandatory and they will have to be fairly strong incentives to 
make people play in the game. But we are absolutely delighted 
to have the opportunity to work with you in this, and we look 
forward to it.
    Chairman Baker. Well, unfortunately we are not really in a 
free market anymore when you have must-carry provisions and 
workers comp is mandated, there went free market. If we want to 
really go free market, that is a dangerous thing in this 
environment where you may or may not be able to get it and you 
do not know what the price will be. So somewhere modifying what 
we now have, that I am not altogether comfortable with, I think 
we can improve on it and make modestly better.
    Ms. Pritzker?
    Ms. Pritzker. As you said, decreasing the degree of 
taxpayer potential liability is fine. I think the things to 
keep in mind are that ultimately the results lead to broad 
capacity and reasonable pricing for the insured so that you do 
not have a dramatic impact on the economy.
    Chairman Baker. The only point that I am making is that 
when you force the market to price the risk, the people who pay 
the premium are the people who are exposed to the risk. When we 
have a system that does not achieve that goal, the taxpayers 
pay it. Mr. Kanjorski and I were talking a moment ago, if there 
were no program extension and there was an act in January, this 
Congress would write checks, as we do for earthquakes or any 
other disastrous consequence, without the type of controls or 
accountability that either one of us would like to see.
    So I do not want to see taxpayers generally called on in 
Wyoming to continually fork out money for risks that they have 
no relationship to. But you cannot force all of New York to pay 
for all of New York losses because there is not an insurance 
capacity to manage it, so it is a balancing act. And that 
requires a regimen of barriers to access to the taxpayer that 
makes all reasonable effort to recoup whatever is on the table. 
And then we come to the taxpayer and say we will give you a 
bridge loan, but when you are healthy we are going to get that, 
too.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I feel much more comfortable that I know when I return on 
September 6th you all will have a bill worked out that we can 
vote on.
    There is one other issue that I am interested in, and one 
of your last statements brought it to mind. We have a tendency 
to think that because the first terrorism strike was in New 
York, there is some greater burden on New York City. We are 
ignoring the fact of what may be the cause of terrorism. At 
least some enlightened people in our society would argue that 
it has some bearing on national policy of this country and 
other countries.
    As a result, if there is some part of the mixture that is 
responsible to the national policy, then the national expense 
has to be well-shared. It cannot be looked at as a municipal or 
regional problem jus because the target is nice. I mean, maybe 
some people like to hit the Washington Monument, but that is 
not because of something that people in Washington, D.C., did 
or are responsible for. We have to look at it that we are a 
target in particular cities, I think, because of policies 
either we pursue or policies of other nations, but not by 
having a regional or municipal identification point.
    I was interested, Ms. Pritzker, in your testimony when you 
talked about the $15 billion of delay of investment as a result 
of the hiatus after September 11th of not having terrorism 
insurance in place. I have heard that figure used many times.
    I am wondering, has anybody done any studies? What would be 
the effect if we did not pass, at the very minimum, an 
extension of TRIA? What kind of a jolt to the economy would 
occur, say, within the first 6 months or a year?
    Ms. Pritzker. I don't know the precise economic studies, 
because I do not know if those figures have ever been 
calculated.
    What I would say is that obviously the exclusions that I 
spoke about would come into effect immediately. Your financing 
markets would be severely affected, which would affect your 
commercial mortgage-backed securities markets and therefore all 
the buyers and owners and all the economics and impact on the 
economy of that, as well as frankly your financial institution 
because they are not going to lend money to those of us who 
create buildings if we cannot provide terrorism insurance to 
them.
    They do not want to take, nor are they pricing in to the 
risk of those mortgages, the risk of a terrorist attack on the 
asset they are lending against. Unfortunately, I cannot give 
you a dollar figure.
    Mr. Kanjorski. Do you think it would be as great as the $15 
billion figure?
    Ms. Pritzker. I actually think it would be greater because 
you are dealing with a much more robust economy than we were 
dealing with around 2001. There is a lot more construction 
going on right now. I think that construction would be severely 
impacted, so I think the number would probably be much larger.
    Mr. Kanjorski. Would there be a tendency for the lenders to 
protect their own assets and treat much of this commercial 
mortgage market as being in technical default because of the 
failure of terrorism insurance? Would there be a lot of calls?
    Ms. Pritzker. Absolutely. Today, I will give you an 
example. For us, we are refinancing a very large building right 
now. We are just in the term sheet phase, and we spent almost 2 
weeks and about a page of a term sheet, not documents, 
discussing what would happen if there was no terrorist 
insurance or if TRIA is renewed in such a fashion that costs 
become astronomically high. The marketplace is already 
anticipating the various potential outcomes. They are very 
harsh on the people like us who are borrowing money who are 
insureds.
    Mr. Kanjorski. Something the chairman mentioned, too, is 
that we could gear this off-risk. Isn't this a problem? I ask 
this sort of generally to the panel. We have no experience with 
risk insurance. I do not really understand how you all write a 
premium for risk when we do not have a formula to work off of. 
I am sort of struck with the idea that we are convincing 
ourselves that there is an intelligent private market to deal 
with risk that isn't identifiable presently. How do you look at 
that?
    Mr. Harper. Mr. Kanjorski, you are exactly right. There is 
no way to calculate the risk properly. We do not have the 
frequency or severity of experience to be able to calculate and 
extrapolate. The Treasury report, interestingly, said well, the 
models are improving. Well, the models are improving, but they 
also noted that the three major models gave radically different 
projections of what would happen in a particular situation.
    So here are the best models in the world, examined by, we 
will stipulate the best analysts in the country and coming up 
with radically different conclusions. So how are we supposed to 
come up with a single rate that is intelligent, whether it is 
for group life or for buildings, either one?
    Mr. Kanjorski. And isn't it the normal experience of the 
insurance industry to be conservative, and therefore anticipate 
the worst potential?
    Mr. Harper. Absolutely. In the group life business, this is 
a little business. It is not exciting, but we know that out of 
every 1,000 employees, approximately three of them will die in 
a year. So we go to a company and say, here it is. We know what 
their salaries are. You know what they are. So we will sell it 
to you at a minimum price that basically is the claim plus a 
minor administrative charge and we hope to make a few dollars 
on the deal.
    Well, to go from that where the risk is three in 1,000, to 
1,000 in 1,000 in a terrorist attack, I mean, how do you figure 
out what is the right premium for that? There is no way to 
calculate it.
    Mr. Hunter. Mr. Kanjorski, the models, I am an actuary. I 
have looked a the models. We had to develop models for riot 
reinsurance in the wake of that to price it. In the wake of 
Hurricane Andrew, models had to be developed because up until 
then the insurance companies thought they could just rely on 
some recent history. That turned out to be inaccurate.
    The models do go through a learning curve, but these curves 
are relatively fast. They have learned a lot. If you study the 
models that are in place, not only did they learn a lot. Every 
insurance company is buying them for small fortunes. They 
believe in these models.
    These models are very valuable and you can predict, not 
with precision because this is not a precise kind of thing. It 
is man-made threats, but you can predict with a great degree of 
comfort at maximum probable losses and annual expected losses, 
and you will have to improve them over time, but it is doable 
and it is being done.
    Mr. Kanjorski. How would you account for the fact that we 
do not have a very strong reinsurance industry out there?
    Mr. Hunter. Because the reinsurance industry cannot compete 
with a zero TRIA rate. It is not going to come in and compete 
with that.
    Mr. Kanjorski. So your proposition is that what the 
Congress did last time and what we may intend on doing in the 
future is actually counterproductive.
    Mr. Hunter. Absolutely. I agree with Treasury's finding 
that it has pushed out innovation in the private sector. But 
they are pricing. You do pay more in New York than you do in 
rural Louisiana. The pricing is variable by using the models by 
both geography and type of risk.
    Mr. Kanjorski. If you make the argument, though, that we 
are pushing the private sector out of the market by having 
government involvement, then you are really saying let it go. I 
hear the rest of this panel saying that solution is a 
catastrophe.
    Mr. Hunter. I am saying you can at least go as far as what 
Treasury has proposed and significantly increase the private 
sector involvement. I said earlier I do agree that nuclear, 
biological, chemical, there is no way that the private sector 
can handle risks of that magnitude, but the conventional type 
terrorism risks can be mostly and I think all handled by the 
private sector.
    Mr. Csiszar. Mr. Chairman, if I can jump in for a moment 
here. I am a former regulator and I am also a former CEO of a 
company. I can tell you that the terrorist models that we are 
using are primitive by comparison to the models we are using on 
earthquakes and weather-related incidents, for instance.
    Secondly, the data available, models are as good as the 
data: junk in, junk out. So it is only as good as the data and 
there is very little data available that you can use 
objectively. A lot of what we are doing here on terrorism 
really is guesswork. Unless you know, unless you have the 
comfort, yes, you have the comfort of that model, perhaps, but 
unless you also know that there are caps to how much you are 
going to pay; unless you know that there is a formal program in 
place which limits your exposure, you are not going to write 
the stuff. I do not care what your model does.
    An earthquake is an earthquake, by the way, but two planes 
hitting a tall building and a nuclear attack are very different 
from each other. So it is a little bit more complex, I think, 
than Mr. Hunter is portraying here.
    Mr. Kanjorski. Does anybody else want to comment?
    Mr. Heck. I would like to say something about that also. We 
have done a lot of modeling for terrorism. What you arrive at 
are many alternative attacks. There are hundreds of attacks. 
They go from 2,000- to 25,000-pound truck bombs to radiological 
types of attacks. And when you try to decide what your exposure 
is, you have to just arbitrarily pick something. Typically what 
we pick is the smallest exposure because the others are just 
unmanageable. There is no way to deal with them.
    So modeling is so primitive at this point, and so uncertain 
that it is of really very, very limited value. I think there is 
a lot of work being done on the models. It is true that the 
data has to be very accurate. When a lot of these models are 
done, the data isn't accurate so you have to go into it and try 
to improve it. But it is very, very difficult to determine 
exposure from the models, but it is all that we have. We have 
nothing else. We have no experience.
    Mr. Schupp. Congressman, that is absolutely right. Models 
are used today primarily for capital allocation purposes. How 
much capital is an insurance company willing to lose based on 
an assumed scenario does not take into account probability, how 
often will that assumed event occur, and does not do a 
particularly good job of looking at or helping an insurance 
company manage scenarios that differ from that assumed 
scenario, such as two truck bomb events instead of one.
    So we can tell you, and we feel we have a fair degree of 
confidence in telling you that if a five-ton truck bomb were 
detonated at a certain location in Manhattan what the resulting 
workers compensation and property losses would be. That can be 
used to determine how much capital to risk on the exposure.
    Converting that into a rate, which is what is the 
probability, how often should we anticipate suffering that type 
of a loss, is not something that the models can help us with 
today. Unlike hurricanes where we can accumulate tens of 
decades, a hundred years worth of data and make predictions, 
terrorism is a very dynamic exposure. It is driven by a lot of 
factors that change rapidly over time.
    Thank you.
    Chairman Baker. If no one else, Ms. Bean?
    Ms. Bean. Thank you, Mr. Chairman.
    I did want to just follow up on Congressman Kanjorski's 
question to Ms. Pritzker regarding what if we did not extend 
TRIA. I know he was looking to quantify that in terms of 
dollars and it was hard to do that.
    But could you give us some insight into as a percentage of 
projects in your industry that you develop and others like you 
develop, what could be in jeopardy, both future projects that 
haven't even started and those that are already in the works 
that may have financing now that could become in jeopardy.
    Ms. Pritzker. Let me try and just frame the picture. The 
real estate industry employs about 9 million people in this 
country, and about 70 cents of every State and local tax dollar 
comes from real estate. So I will try and give you a whole 
picture. We think it is at least 10 percent of gross domestic 
product comes from real estate. Obviously, construction jobs 
are very high-paying jobs.
    So pick a percentage of that that you think is going to be 
hurt. I would say you would have to think about what kind of 
attack it is and how large the impact could be. But frankly 
from my standpoint, if I cannot get terrorism insurance on a 
project, it means I cannot finance it. If I cannot finance it, 
I can't afford to build it. And if I am in construction and I 
lose that coverage because of the exclusions that have been 
created in policies, I may have to stop construction whether I 
like it or not, whether I want to or not, I may not be able to 
continue funding because the banks will say we are no longer 
going to fund unless you can give us some kind of coverage.
    Ms. Bean. Let me ask it a little differently. Given that 
there are projects that are happening right now and that are 
being financed, and there is some uncertainty obviously as to 
whether this is going to be extended further, what percentage 
of projects do you think are already going away just because of 
that uncertainty?
    Ms. Pritzker. I can't answer that question. It is too 
difficult a question to answer. I think what is happening is 
that if you thought about it in terms of years, for example, 
since the beginning of this year there has been the creation of 
these exclusions, which means the marketplace is anticipating 
the notion that if there isn't an extension or some new kind of 
a bill, that they are going to take action or lack of action in 
terms of offering that insurance.
    So you could say okay, projects that began this year will 
be through the end of the year and then they are going to face 
the issue. Projects that I am considering today, if I can get 
insurance, I will begin the process because I have confidence 
that I think we are going to enact something. The question will 
then be, I am taking the risk of what is the cost of getting 
that insurance post-January.
    But the closer we get to January or the end of the year, 
the harder it is going to be for a person to get insurance and 
therefore the harder it is going to be to begin a new project. 
So I think that you are starting to see the marketplace, they 
are assuming right now that something is going to happen to 
continue the backstop, I believe. If that view changes, I think 
that is when you will begin to see projects stopping.
    Ms. Bean. Thank you.
    Chairman Baker. The gentlelady yields back her time.
    I just want to express my appreciation to you. It has been 
a long hearing. Your perspectives have been helpful to the 
committee's work.
    And I renew my request I made of the earlier panel. Over 
the course of the next several weeks, your observations and 
recommendations are very important in helping us come to 
formulate some response when the committee returns in 
September.
    We look forward to working with you.
    Our meeting stands adjourned. Thank you.
    [Whereupon, at 1:50 p.m., the subcommittee was adjourned.]


                            A P P E N D I X


                             July 27, 2005


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