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




 
                       PROTECTING AMERICANS FROM
                      CATASTROPHIC TERRORISM RISK

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

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                AND THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 27, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-123


                    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:
    September 27, 2006...........................................     1
Appendix:
    September 27, 2006...........................................    69

                               WITNESSES
                     Wednesday, September 27, 2006

Abraham, Janice M., President and Chief Executive Officer, United 
  Educators Insurance, on behalf of the Property Casualty 
  Insurers Association of America................................    51
Ayer, Ramani, Chairman, President, and Chief Executive Officer, 
  Hartford Financial Services Group..............................    13
Case, Gregory C., President and Chief Executive Officer, Aon 
  Corporation....................................................    15
Dubois, Jacques E., Chairman and Chief Executive Officer, Swiss 
  Re America Holding Company.....................................    17
Emek, Dr. Sharon, CBS Coverage Group, Inc., on behalf of the 
  Independent Insurance Agents and Brokers of America, Inc.......    47
Harper, Edwin L., Senior Vice President, Assurant, Inc...........    53
Heck, Warren, Chairman and Chief Executive Officer, Greater New 
  York Mutual Insurance Company, on behalf of the National 
  Association of Mutual Insurance Companies......................    49
Kelly, Edmund F. (Ted), Chief Executive Officer, Liberty Mutual 
  Insurance Company..............................................    11
Knipe, Jonathan W., Senior Vice President, General Counsel and 
  Director of Business Affairs, World Trade Center Properties, 
  LLC............................................................    58
Nassetta, Christopher J., President and Chief Executive Officer, 
  Host Hotels and Resorts, Inc...................................    19
Shapiro, Ira, Chief Executive Officer, Fisher Harris Shapiro, on 
  behalf of the Real Estate Board of New York....................    55

                                APPENDIX

Prepared statements:
    Ackerman, Hon. Gary L........................................    70
    Hinojosa, Hon. Ruben.........................................    71
    Kanjorski, Hon. Paul E.......................................    72
    Lynch, Hon. Stephen..........................................    73
    Abraham, Janice M............................................    75
    Ayer, Ramani.................................................    83
    Case, Gregory C..............................................    88
    Dubois, Jacques E............................................    97
    Emek, Dr. Sharon.............................................   110
    Harper, Edwin L..............................................   119
    Heck, Warren.................................................   125
    Kelly, Edmund F. (Ted).......................................   135
    Knipe, Jonathan W............................................   145
    Nassetta, Christopher J......................................   152
    Shapiro, Ira.................................................   159

              Additional Material Submitted for the Record

    Statement of the National Association of Realtors and the 
      Institute of Real Estate Management........................   171


                       PROTECTING AMERICANS FROM
                      CATASTROPHIC TERRORISM RISK

                              ----------                              


                     Wednesday, September 27, 2006

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
              and Government Sponsored Enterprises,
                      and Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 10:04 a.m., 
in room 2128, Rayburn House Office Building, Hon. Richard H. 
Baker [chairman of the Subcommittee on Capital Markets, 
Insurance, and Government Sponsored Enterprises] presiding.
    Present: Representatives Baker, Oxley, Bachus, Kelly, Ryun, 
Biggert, Fossella, Feeney, Hensarling, Garrett, McHenry, 
Campbell, Kanjorski, Maloney, Moore of Kansas, Capuano, 
Hinojosa, Crowley, Clay, Israel, McCarthy, Baca, Lynch, Miller 
of North Carolina, Scott, and Cleaver.
    Chairman Baker. I would like to call this meeting of the 
Capital Markets Subcommittee to order. Today, we meet in a 
cooperative environment with the Committee on Oversight, 
chaired by Mrs. Kelly, who will conduct the hearing in the 
course of the second panel this morning.
    We also are reviewing the recently publicly released GAO 
report on the subject of unconventional weapons reinsurance 
coverage, and find the report to be of real value to the 
committee's consideration.
    We have two very distinguished panels of witnesses from 
whom we look forward to hearing their perspectives on current 
market condition, and I will quickly summarize what I believe 
to be the important findings of the report: one, that the 
current structure of TRIA as passed by the Congress appears to 
offer little incentive to market participants to extend NBCR 
coverage; two, that while coverage for conventional weapons 
threats appear to have expanded within the market, 
unconventional coverage has not concurrently grown at all; and 
three, the conclusion reached by the GAO, to me, most 
important, given the challenges faced by insurers in providing 
coverage for and the pricing of NBCR risks, any purely market-
driven expansion of coverage is highly unlikely in the 
foreseeable future.
    I think it makes clear that the committee's work and 
responsibility to respond to this observation is, indeed, 
important, and I am hopeful that we will hear suggestion as to 
how modifications to the existing TRIA coverage may be offered 
and some taxpayer responsible mechanism should be deployed, and 
for my own purposes, just wish to reiterate one element of a 
structure that I think important, and that is to view this 
assistance more in terms of a bridge loan as opposed to a 
grant, that at such time as it is necessary to call on the 
taxpayer to ensure market stability of the insurance industry, 
that at such time the industry returns to profitability, that 
any funds advanced be repaid to the taxpayer.
    In that fashion, we can ensure that there are favorable 
market conditions for stability in the insurance world, while 
at the same time not creating a moral hazard risk for taxpayers 
who would feel inappropriately taxed for purposes that would 
not necessarily be clear to them.
    Given those general overview statements, I welcome all of 
our witnesses to our hearing this morning, and I now turn to 
Mr. Kanjorski for any opening statement he may choose to make.
    Mr. Kanjorski. Mr. Chairman, we return this morning to a 
question that we have often discussed in the last 5 years: how 
best to protect the American economy from terrorism risk. After 
the Al Qaeda attacks of 5 years ago, reinsurers curtailed the 
supply of terrorism insurance, and insurers began to exclude 
such coverage from policies. In response, Congress belatedly 
enacted the Terrorism Risk Insurance Act to address these 
pressing problems. Last year, after encountering an unnecessary 
delay, we decided to extend this law for 2 more years.
    TRIA is critical to protecting our Nation's economic 
security. We also designed TRIA to be a temporary backstop to 
get our Nation through a period of uncertainty until the 
private sector could develop the models to price for terrorism 
reinsurance. I agreed with this decision. The reinsurance 
industry is dynamic, and we should not interrupt the 
development of new products.
    That said, however, it has become increasingly clear that 
it will take some time for the private marketplace to develop 
and offer terrorism reinsurance products, particularly for 
nuclear, biological, chemical, and radiological threats. 
Yesterday's report by the General Accountability Office 
concludes that these risks are distinctly different from those 
hazards that are predictable, measurable in dollar terms, 
random, and unlikely to result in catastrophic losses for an 
insurer. Given these challenges, the GAO found that, ``any 
purely market driven expansion of coverage,'' for these 
specialized terrorism risks is ``highly unlikely in the 
foreseeable future.''
    Late last year, when the House passed the initial bill to 
extend TRIA, we included language to provide protection against 
nuclear, biological, chemical, and radioactive terrorism 
incidents. We also included provisions to provide protection 
against domestic terrorism events and incorporated group life 
insurance as a covered line. Unfortunately, the final agreement 
adopted none of these reforms.
    We need to revisit each of these matters in the coming year 
before TRIA once again expires. We additionally need to work to 
develop a comprehensive, long-term solution to the problem of 
insuring terrorism risk, rather than continuing to address 
these issues on an ad hoc basis every 2 years and creating 
unnecessary uncertainty for the marketplace.
    To the extent possible, I continue to believe that any 
workable solution should allow for the private sector to 
underwrite the terrorism risks that it can cover. However, 
because terrorism risk is a societal problem and because the 
size of certain catastrophic terrorism risks would likely 
exceed the resources of the private sector, the Federal 
Government will likely need to play some role in this new 
system.
    Many of our witnesses today have already begun to think 
about what a long-term solution to these matters should look 
like. I look forward to hearing those ideas. I also want to 
assure them that I have an open mind on these matters.
    In closing, Mr. Chairman, I have regularly noted that the 
provision of terrorism insurance is not a Democratic or 
Republican issue. It is an American issue, a business issue, an 
economic security issue. I therefore continue to stand ready to 
work with all interested parties on these important matters.
    Chairman Baker. I thank the gentleman for his statement.
    Mrs. Kelly?
    Mrs. Kelly. Thank you, Chairman Baker, for agreeing to co-
chair this important hearing with me. I believe it is 
especially fitting that the last hearing of our subcommittees 
this Congress is going to be on the subject that is of the most 
importance to each of us.
    The September 11, 2001, terrorist attacks on our country 
devastated our economy both nationwide and in New York. 
Thousands of lives and billions of dollars in property were 
destroyed in a single morning. While our national economy has 
largely recovered, we in New York still face the physical 
reminders. Our efforts to rebuild have been hindered by the 
lack of terrorism insurance available in the immediate 
aftermath of 9/11.
    Thanks to Chairman Oxley and you, Chairman Baker, and 
others, this committee has passed and renewed terrorism 
insurance legislation. Economic development in New York and 
elsewhere is moving forward, including the construction of the 
Freedom Tower in lower Manhattan.
    Our second panel consists of representatives from the World 
Trade Center development, along with business leaders from New 
York, and I welcome their testimony.
    The GAO report that was released yesterday confirms the 
continuing terrorist threat to our country, and it demands a 
Federal backstop to our insurers so that it includes, also, 
nuclear, biological, chemical, and radiologic attacks. We do 
not charge people more money for health insurance if they are 
hit by a car or a bus, and I do not think we should charge 
America's consumers moire for coverage depending on which 
weapons our enemies use against us.
    Similarly, I think we must extend the protections of TRIA 
to group life coverage. Failure to include group life coverage 
is the economic equivalent of a neutron bomb. It protects 
employers against the loss of a building, but it leaves 
families exposed to the financial consequences of losing their 
loved ones.
    I was very pleased that the bill I cosponsored with you, 
Mr. Baker, in the House last year contained this coverage, and 
I hope that we will work together to make sure the bill we pass 
next year does the same.
    I urge all members--again, this morning, it is a busy 
morning, and I would urge all members to limit opening 
statements so that we can move on and hear from these important 
witnesses. I thank you, and I yield back the balance of my 
time.
    Chairman Baker. I want to thank the gentlelady for her 
leadership on this issue, and all members from the New York 
delegation have been very focused in trying to seek a remedy 
that is appropriate, and I do appreciate her work product.
    Ms. Maloney?
    Mrs. Maloney. Thank you very much, Mr. Chairman and Ranking 
Member, for holding this hearing, and I congratulate all of the 
witnesses today.
    In particular, I would like to welcome my constituent and 
good friend, Sharon Emek, from the Independent Insurance Agents 
and Brokers of America, who will be talking about the impact on 
small businesses and the challenge that they face in trying to 
get anti-terrorism insurance.
    As a proud representative of New York City, one of our 
financial centers and the site of Ground Zero, I am deeply 
committed not only to our national security, but an important 
part of our national security is economic security, and we 
cannot have that without a strong anti-terrorism insurance 
program with a Federal backstop.
    The Al Qaeda attacked the World Trade Center and caused a 
terrible loss to life and economic loss. We were very proud 
that our markets reopened very quickly afterwards and our 
economy moved forward, but I can tell you, of all the 
challenges that we faced in New York--and they were huge, and 
we rose to that occasion.
    The private sector, the individuals did heroic work to 
rebuild the economy. The number one challenge that we had was 
getting insurance. After 9/11, nothing moved until this 
Congress finally passed anti-terrorism insurance. That was a 
great day for New York.
    The building started going forward, but what I hear from 
individuals, what I hear from the real estate roundtables and 
the trade organizations is that our businesses cannot get 
insurance now unless there is a provision on their insurance 
plan that says that this is contingent on getting a Federal 
backstop and Federal anti-terrorism insurance.
    I have heard stories that some have had to go to Lloyd's of 
London to get insurance, and that the cost has escalated and 
hampered, but right now, what we face is that it may expire, 
and with that would end the economic development efforts that 
are taking place in New York and I would say across the 
country.
    I would like to congratulate this Congress and really the 
leadership of the two--of the ranking member and the chairman 
and my colleague from New York, Sue Kelly, in passing the TRIA 
legislation.
    We need to renew that, or some form, and it must include 
unconventional weapons--nuclear, biological, chemical, and 
radiological--because that is what the insurance agencies are 
demanding.
    The Government Accountability Office issued a report 
yesterday, and it states very clearly that, given the nature of 
these risks, we cannot expect the private sector to solve this 
problem alone, and I quote from the independent Government 
Accountability Office. ``Given the challenges faced by insurers 
in providing coverage for and pricing for nuclear, biological, 
chemical, and radiological risks, a purely market-driven 
expansion of coverage is highly unlikely in the foreseeable 
future,''.
    I encourage all of my colleagues to read this very 
excellent report, which explains this conclusion in detail.
    Given this information, it is, once again, up to use to 
renew TRIA long before it expires at the end of 2007. As the 
witnesses will explain, the alternative is absolutely 
unacceptable.
    At the same time, we must provide for a true blue ribbon 
commission, with representatives from the industry, from 
affected policyholders, from victims and government, to study 
the problem and to come up with recommendations for potential 
long-term solutions.
    I was profoundly disappointed that this provision was 
removed from our last bill, and I will work hard to get it back 
in in any renewal we have. We from New York have some 
experience dealing with terrorism and its aftermath. So, this 
issue is very, very pressing for us, and many other cities, but 
it is a very serious error to view this as a New York or urban 
problem. It is a national challenge.
    Terrorists can strike anywhere, and in fact, studies by the 
Rand Corporation and others suggest that they may be more 
likely to attack less ``hardened targets'' and other locations, 
including rural locations.
    Chairman Baker. Can the gentlelady begin to sum up?
    Mrs. Maloney. Well, I have a lot to say on this, but time 
is of the essence, so I request permission to put all of my 
comments into the record.
    Chairman Baker. Without objection.
    Mrs. Maloney. I appeal to my colleagues on both sides of 
the aisle to work together, as we have in the past, to renew 
TRIA.
    Thank you for this hearing.
    Chairman Baker. I thank the gentlelady for her continued 
effort on this important subject.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman. I want to thank 
you for holding this hearing. It is truly a very serious topic 
that we discuss today. I was one of many who voted to extend 
TRIA, but at the time, I said that I had concerns about any 
time of permanent Federal backstop, and I come into this 
hearing continuing to have an open mind but somewhat of a 
skeptical mind, as well.
    Number one, truly I believe that the best way that we can 
reduce the risk of catastrophic terrorism is to unite together 
and figure out the best way to win this war on terror, clearly 
a debate for a different committee and a different time.
    I have a skeptical mind about a permanent reinsurance 
program, because I still have a firm belief in the power of the 
marketplace, given time, that if truly these types of policies 
are demanded, somebody will provide it at the relevant cost.
    Yes, I did spend most of last evening reading over the GAO 
report, and did note their conclusion that nuclear, biological, 
chemical, and radiological risk is distinctly different.
    I have not done my--I have not studied the history of the 
industry, but I am curious about other phenomena that at one 
time in American history were distinctly different that somehow 
the industry had to learn how to deal with, be it airline 
crashes, oil spills, power outages, data losses.
    Clearly, this type of risk is different in its catastrophic 
nature, but it wasn't that many years ago that this Nation 
faced the Soviet Union, with their massive nuclear arsenal, 
with thousands of nuclear warheads pointing at us, and we all 
knew the nightmare of mutual assured destruction.
    I am somewhat curious how we as a Nation, in dealing with 
that risk, handled that catastrophe. Next, I am skeptical of 
any long-term Federal backstop, because I do not think the 
history of the Federal Government is particularly stellar in 
this area, when I look at what we have had to do recently in 
the Federal flood insurance program, which is having to be 
bailed out with billions of dollars; the Pension Benefit 
Guarantee Corporation, billions of dollars; and we all know 
about the plight of Social Security and Medicare and their 
trillions of dollars of un-funded liabilities.
    So, I continue to be very concerned, particularly about 
families who have a lot of their net worth in their homes, 
small businesses, but I also know, when it comes to very large, 
sophisticated businesses, there are other ways to reduce their 
risk, and that is not to have too much of their money in any 
one given bill.
    So, I know we have a number of serious challenges here. I 
look forward to hearing from our witnesses, and I hope that, 
indeed, we will explore all options, and particularly those 
that might limit the taxpayer exposure.
    With that, I yield back.
    Chairman Baker. I thank the gentleman.
    Mr. Moore?
    Mr. Moore of Kansas. Thank you, Mr. Chairman, for having 
this hearing. I would like to thank you and Chairwoman Kelly 
for having this hearing today. It is very important, I think.
    I would also like to welcome Greg Case, the president and 
CEO of Aon Corporation, and a Kansas native, who is testifying 
before us today on the first panel.
    The GAO released a study this week that examines the 
insurability--and we have heard about that some here this 
morning--of risks from nuclear, biological, chemical, or 
radiological weapons attacks. The GAO study concludes that the 
risk of attacks from NBCR weapons generally fail to meet most 
or all of the principles of an insurable risk.
    As we know too well, the terrorist attacks of September 11, 
2001, resulted in thousands of deaths and injuries, along with 
the destruction of the World Trade Center, and many other 
buildings and businesses in New York. Unfortunately, those 
attacks also resulted in significant economic and insurance 
losses.
    A recent study by the American Academy of Actuaries 
estimated the insured losses that could arise in four U.S. 
cities as a result of NBCR attacks. In New York alone, a large 
NBCR event could cost as much as $778 billion, with insured 
losses for commercial property at $158.3 billion and for 
workers comp at $483.7 billion.
    There are limited circumstances, I think, when the Federal 
Government needs to step in, when a private market fails to 
develop in a certain area, and flood insurance is one of those 
areas. I believe that terrorism insurance is another.
    Extending TRIA is not a partisan issue and should not be a 
partisan issue, and Democrats and Republicans ought to come 
together here to come up with a common sense workable solution 
to provide a needed element of stability and certainty to our 
economy. Terrorist attacks in our Nation don't target 
Republicans or Democrats; they target all Americans, and they 
affect all of us, wherever we live and whatever we do. I look 
forward to continuing the successful public/private partnership 
that we have forged on this issue, as Congress works to extend 
the TRIA program next year.
    Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Garrett?
    Mr. Garrett. Thank you, Mr. Chairman, and once again, I 
thank you for holding this hearing, as I join my colleagues 
here today, and I wish, as always, that this is a very 
important issue, that we would have more of our colleagues here 
to hear the discussion and testimony of this panel.
    I come here today with an open mind, to hear the sides of 
the discussion presented. The committee voted in support of the 
extension of the TRIA. We did so at the same time that Chairman 
Oxley asked GAO to report back to us, as we recently received a 
report that would look at the commonly accepted principles of 
insurability, and whether NCBR are measurable and predictable, 
some of the things that we, from a gut reaction, should be able 
to answer without a report, but now we will have that report in 
hand.
    In the near future, we are also expecting a more 
comprehensive report from the President's working group, and 
many of us are anxiously awaiting that and trying to find out 
what the inside story may be on that, in anticipation of it, 
but anticipation, considering where it has come from, I can 
somewhat predict, not the leaning, the direction in which that 
report may come to us.
    This is an issue that just continues to--I do not want to 
use the word ``haunt us'' when they go back to the district, 
but certainly is raised when we go back to the district, in the 
State of New Jersey, from both big and small industry alike, 
the concern about the availability of insurance in general for 
them.
    New Jersey, the home of the shopping centers and shopping 
malls, maybe the largest concentration in the State of New 
Jersey, and the insurability across the various spectrums of 
insurable risks and businesses--I am constantly confronted with 
the issue, from chamber of commerces and business and industry, 
when will you finally, once and for all, address this in one 
format or another.
    So, I will just conclude, Mr. Chairman, that I think 
Congress must be taking some action in this area, whether it is 
on the private sector, as Mr. Hensarling suggested, or a more 
comprehensive approach, and I thank you for the hearing today.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Crowley?
    Mr. Crowley. Thank you, Mr. Chairman. I want to welcome 
this subcommittee hearing on this terrorism risk insurance, and 
welcome the panel before us and later today.
    The timing is great, with the GAO's recent release of its 
report on the capacity of the private markets to provide NBCR 
coverage, and while we await, with baited breath, the 
President's working group report, the GAO report states, 
``Given the challenges faced by insurers in providing coverage 
for and pricing NBCR risks, any purely market-driven expansion 
on coverage is highly unlikely in the foreseeable future.''
    The reasons behind this GAO conclusion that there was no 
private sector market for NBCR are the same reasons why there 
was no private sector market for any terror insurance. The fact 
is there is no appetite for the global reinsurance market to 
fill the gap for either terror insurance or NBCR insurance.
    Without some sort of Federal backstop, and I think 
supporters of TRIA are open to adjusting the program to include 
a pool for new tax incentives for the insurers and insured or 
other avenues, there will be no terrorism insurance at all. 
Insurers will walk away. We saw this between the time of the 9/
11 attacks and when we first passed TRIA. Now it will be even 
worse.
    Currently, the Federal role plus the make available 
language ensures we have an affordable market for terror 
insurance. We do not have a make available provision for the 
NBCR now, and what do we see? We see little NBCR coverage, 
because like any terror coverage, it is too difficult to price 
it for risk.
    GAO says this, but more importantly, the fact on the 
streets show this. I hear some of my friends on the other side 
of the aisle debate this argument that the Federal backstop 
stops any innovation in the private sector from creating pools 
or other non-government-backed terror insurance. This is simply 
wrong. There is no other alternative to terror insurance 
outside of the system we have that provides a Federal backstop, 
because there is no interest in the capital markets to create 
such a private run system with no government backing, and this 
will not change if TRIA disappeared tomorrow somehow.
    Some sort of Federal role will always be needed in the 
terrorism insurance marketplace, or there will be no insurance 
for terror. The result: If we suffer another attack, the 
government will be on the hook for the entire cost, as our 
government will not walk away and not help, as Katrina, for 
example. With some sort of backstop, our government is actually 
cushioned with financial support from the private insurance and 
reinsurance market.
    The commonsense approach to both protect our Nation's 
economic well-being and the taxpayers' money is to have a 
permanent Federal backstop in the terror insurance marketplace, 
and I will just add this one final point. This is terror month 
here in the House of Representatives. This is as good a time, I 
guess, as ever to examine the only economic security measure 
against terror that we have enacted on the economic level that 
has worked over the last 5 years.
    It has worked. This is a program that has worked, a program 
that, despite the GAO report to the contrary, many of my 
colleagues on the other side of the aisle want to see ended. I 
hope that is not the case at the end of 2007, and I hope that 
this hearing today will shed some additional light as to why we 
need to see TRIA ``permanent-ized``, and I yield back the 
balance of my time.
    Chairman Baker. I thank the gentleman for his statement.
    Mr. Campbell, I know you are just arriving. Do you have a 
statement?
    Mr. Israel?
    Mr. Israel. Thank you, Mr. Chairman.
    Mr. Chairman, I think I have said everything that could be 
said on this issue in the past 2 years, and so, I am going to 
yield back my time and listen to our witnesses.
    Chairman Baker. I thank the brilliant observations of the 
leading member of your side.
    Mr. Baca, do you choose to proceed?
    Mr. Baca. I will make a statement.
    Chairman Baker. Please.
    Mr. Baca. Thank you very much, Mr. Chairman, for holding 
this important issue, and this is not a partisan issue but an 
important issue of protecting America against a terrorism 
attack. The fifth anniversary of 9/11 serves as a reminder that 
we live in different times and must guard against economic cost 
of future terrorism attack.
    The Terrorism Insurance Act, TRIA, has been an important 
safety net and has played a critical role in helping protect 
our Nation against this risk. Post-9/11, it is clear that a 
Federal backstop for terrorism insurance is essential.
    The GAO report which informed us that the private sector 
has not fully developed the capacity to provide coverage for 
terrorism risk also confirms the need for Federal involvement. 
Without a Federal reinsurance backstop, insurance will include 
the type of coverage from the policy. Tens of thousands of jobs 
will be lost, and thousands of additional bankruptcies could 
occur compared to what we saw in 9/11.
    Our constituents, small businesses, property owners, and 
communities everywhere need protection. It is critical that 
they have access to coverage that are at affordable rates, at 
affordable rates. We must reach an agreement on the best 
solution, and I hope today's hearing and the outcome of the 
report by the President's working group, PWG, on financial 
markets, will help us assess some of the details that need to 
be decided upon.
    Terrorism is directed at our entire Nation. It is directed 
at our entire Nation, and not just certain cities and towns. It 
is a national security issue that needs permanent Federal 
solutions to help guard our citizens.
    I thank the witnesses for coming to share their ideas with 
us, and I look forward to their testimony, and once again, I 
thank our chairman for hosting this important hearing today.
    Thank you.
    I yield back the balance of my time.
    Chairman Baker. I thank the gentleman.
    Mr. Hinojosa, did you have a statement?
    I thank the gentleman.
    Mr. Lynch?
    Mr. Miller?
    Mr. Miller of North Carolina. I will follow Mr. Israel's 
lead.
    Chairman Baker. Thank you very much. You are contributing 
mightily to our progress. I appreciate that.
    Mr. Scott?
    Mr. Scott. I will follow Mr. Israel's lead a little bit.
    [Laughter]
    Mr. Scott. I just want to say that I think it is very 
significant for a couple of points.
    One, that we not only just have representatives of industry 
here, but we have the CEO's, the chief executive officers of 
the insurance companies, because I think it points out that we 
definitely need a national strategy. That has to include plans 
to provide a back-up against possible massive insurance claims, 
and because terrorism is less predictable and possibly more 
severe than other catastrophes, it is necessary that the 
Federal Government ensure that insurance remains available even 
if the private market is not doing so, and while we passed TRIA 
through 2007, I think it is important that we provide a 
meaningful extension of TRIA, while creating a long-term 
market-based solution to the problem.
    A final point is that, as a sponsor of the Capuano bill, I 
also believe it is important that the people inside the 
buildings be insured, and therefore, I support the inclusion of 
group life insurance in TRIA as we move forward.
    That is it, Mr. Chairman.
    Chairman Baker. I thank the gentleman.
    Mr. Cleaver?
    Mr. Cleaver. Very, very briefly.
    I have listened--I have counted--there have been four 
different members who have said that this is not a partisan 
issue, and perhaps it is not, but it is the classic debate over 
the role of the Federal Government in this country, and it is a 
debate that did not start with--begin with TRIA, and I am 
looking forward to having that debate. It may be political, it 
may be ideological, it may be financial, but it is a debate, 
and it is not an accident that large numbers of minorities 
moved to Washington, D.C., because they wanted to get--they 
thought they were safer, the closer they got to the seat of 
government, and I have seen this argument even in the area of 
civil rights, and when you have $90 billion in New York alone 
in insurance losses, 200 billion in all, we are going to have a 
problem, and it is my hope that we will have a pure debate on 
this issue, because a lot depends on what we are able to do.
    Mr. Chairman, I spoke to a Rotary Club in my home district 
in Kansas City, Missouri, and during the question-and-answer 
period, one of the gentlemen stood up and just went ballistic, 
because he did not believe the Federal Government should be 
involved in the clean-up on the Gulf Coast, and I think there 
are people with that philosophy, not just in Kansas City but in 
this Congress, and something should be resolved, and we do not 
have a long time to do it, and so, it is my hope--thank you, 
first of all, for the hearing, and it is my hope that, before 
the gavel sounds at the conclusion, that we will have come 
closer to moving to a political, ideological, or philosophical 
position that will help the people in this country with regard 
to their insurance in the case of NBCR or another Katrina.
    Thank you.
    Chairman Baker. I thank the gentleman.
    Mr. Hinojosa, did you choose to make--
    Mr. Hinojosa. Yes. Thank you, Mr. Chairman. I am ready now.
    Mr. Chairman, while it is true that nuclear, biological, 
chemical, and radiological threats present unique risks in both 
size and scope, conventional terrorism, like that at the WTC, 
still remains a threat. I want to stress that it is absolutely 
necessary that we maintain a public/private partnership for 
these risks in order to keep this insurance coverage available.
    Additionally, I also hope that, in the future, we will 
revisit the flood insurance legislation and the impact the 100-
year flood plain mapping will have on some of the poorest 
counties in the country, including Hidalgo County, which is in 
my Congressional district, the 15th district of Texas.
    With that, Mr. Chairman, I yield back the remainder of my 
time.
    Chairman Baker. I thank the gentleman.
    Ms. Biggert, do you have an opening statement this morning?
    There being no further members for recognition, at this 
time I would turn to our distinguished panel and state our 
normal operating procedures.
    We ask that your full statement be limited to 5 minutes to 
enable members to engage in questions as much as possible. Your 
official statement will, of course, be made a part of the 
hearing record, and you will have to pull those microphones 
close in order to be heard well, and the little button on the 
bottom gets you in the game.
    So, with that, our first witness is Mr. Edmund F. Kelly, 
chief executive officer, Liberty Mutual Insurance Company.
    Welcome, sir.

 STATEMENT OF MR. EDMUND F. (TED) KELLY, CHAIRMAN, PRESIDENT, 
 AND CHIEF EXECUTIVE OFFICER, LIBERTY MUTUAL INSURANCE COMPANY

    Mr. Kelly. Thank you, Chairman Baker, Chairwoman Kelly, and 
Ranking Member Kanjorski, for holding this meeting, and 
distinguished members for attending. It is a privilege to be 
here to testify on what I view as one of the greatest 
challenges facing our Nation, our economy, our industry, and 
its policyholders.
    Before I begin, I do want to pay tribute to--although he is 
absent--to Chairman Mike Oxley, who is retiring this year, for 
his leadership on the extension act of last year. We owe him a 
great debt of gratitude. Now on to the subject at hand, 
protecting Americans from catastrophic financial loss from 
terrorist attack.
    In an ideal world, protection from financial loss could be 
left to the private insurance industry operating in a free 
market, but as I stated in my written testimony, the insurance 
market is not free. Regulation prohibits us from making normal 
economic and fiduciary decisions mandated in the face of 
unpredictable and potentially hundreds of billions of dollars 
of losses terrorism presents.
    Congressman Hensarling raised an interesting issue. In 
fact, during the nuclear stand-off with Russia, most insurance 
policies allowed for war exclusion. They do not allow for 
terrorism exclusion. So, the country recognized the need for a 
special exclusion in the face of the Soviet threat. Without 
exclusions, the Federal backstop is necessary, but the industry 
does not have the capital--it is not just a matter of pricing. 
The industry does not have the $7- or $800 billion of capital 
necessary to absorb the threat presented, particularly by NBCR. 
There is little capital available in the world reinsurance 
market.
    We estimate that the total reinsurance capital available 
for normal terrorism, if there is such a thing, is in the area 
of $7- or $8 billion. There is essentially none for NBCR.
    While the Terrorism Risk Insurance Act of 2002 and its 
extension of last year were very welcome, but they were just a 
stop-gap. As Chairman Oxley aptly characterized last year's 
activity, it was merely kicking the can. The short-term acts 
have created instability.
    First, they are calendar-year-based, whereas we provide 
insurance on a policy year basis. Second, the lack of a long-
term plan creates periodic economic and business uncertainty. 
Absent a Federal backstop, there would be little or no 
insurance available for terrorism.
    I know the subcommittee chairs, Chairman Baker and 
Chairwoman Kelly, understand this, and I would be remiss if I 
did not take this opportunity to acknowledge the sustained and 
effective support for the proposition by Ranking Members Frank 
and Capuano from Massachusetts.
    The GAO appears to have reached a similar conclusion, that 
given the challenges faced by the private market in providing 
coverage for terrorism risk, particularly NBCR, any purely 
private market for terrorism risk insurance is highly unlikely.
    So, how should a public/private partnership that is the 
essence of TRIA be reworked to reflect GAO's conclusions and to 
meet the needs of insurers, buyers, and sellers, and to meet 
the legitimate concerns of you in Congress? In other words, 
what might the next generation of TRIA look like?
    About a dozen large company CEO's, organized as the 
Property Casualty CEO Roundtable, which I currently chair, 
asked themselves the very same question. We at Liberty Mutual 
and The Hartford have led the industry effort to come up with 
an appropriate framework. The effort included the major 
insurance and reinsurance trades, effectively the entire U.S. 
property and casualty insurance industry.
    What we developed is not a detailed proposal but a 
framework that focuses government involvement on what private 
markets cannot do alone, while creating significant incentive 
for the private sector to do much more over time. In that way, 
it is responsive to the quite appropriate concern that TRIA or 
its successor legislation not displace or interfere with 
private markets.
    The framework envisaged a two-part structure financing both 
NBCR and non-NBCR risk. For NBCR, the Federal Government would 
assume a significant role--all or most of the risk on a 
reinsurance basis for losses which insurers cannot exclude, 
such as those on workers compensation insurance.
    For losses that would be covered but for exclusions, such 
as property insurance, NBCR risk would be assumed by the 
Federal Government on a following form basis that is subject to 
the policy terms and limits.
    For non-NBCR, a TRIA-like structure would be maintained. 
There would be insurer deductibles which would gradually 
increase--for example, one point per year for 10 years, or be 
adjusted subject to Treasury determination of available 
capacity.
    There is no one right way to do this, but the notion is 
that insurers should bear a greater share of the non-NBCR risk 
as they have capacity to do so safely.
    Consistent with this, there should be creation of a 
voluntary, federally-charted entity to facilitate development 
of new private reinsurance capacity from the issuance of pre-
event catastrophe bonds and the sale of industry loss warranty 
contracts to help fund insurer deductibles. We believe that 
such a two-part program will effectively address both the NBCR 
risk, which is totally uninsurable in the private sector, and 
the non-NCBR event. We are committed to working with this 
committee and others in our industry and in the policyholder 
community to establish an appropriate public/private 
partnership that makes terrorism risk insurance available for 
the long term.
    I do want to address Chairman Baker's repayment option. We 
have considered that, and it is far too early to decide whether 
or not to support such a thing. We have two significant 
concerns.
    One, if it is established as a liability for the industry, 
it will go on our balance sheets and will make us just as 
bankrupt as if we had to pay the cash. So, you have to take 
care of the details and be careful about the accounting issues.
    Second, even if they are taken care of, there is a 
significant problem with recovery through surcharge. 
Policyholder surcharges always end up being picked up by small 
business.
    Large business can reduce their insurance buy through 
deductibles and self-insured retentions to avoid surcharges. 
So, inevitably, anytime there is a surcharge, it is borne 
primarily by small businesses.
    So, we have to be very careful, if there is a repayment 
mechanism, not to do more damage to the business and economy of 
the country than would be done already by the act of terrorism.
    We are willing to work to come up with an acceptable 
solution. But we have concerns with that approach, Chairman 
Baker.
    Thank you for the opportunity to address you.
    [The prepared statement of Mr. Kelly can be found on page 
135 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    Our next witness is Mr. Ramani Ayer, chairman, president, 
and chief executive officer of the Hartford Financial Services 
Group.
    Welcome, sir.

   STATEMENT OF RAMANI AYER, CHAIRMAN, PRESIDENT, AND CHIEF 
    EXECUTIVE OFFICER, THE HARTFORD FINANCIAL SERVICES GROUP

    Mr. Ayer. Good morning, Chairman Baker, Chairwoman Kelly, 
Ranking Member Kanjorski, and members of the subcommittees. 
Thank you for the opportunity to appear before you today.
    My name is Ramani Ayer. I have been at The Hartford for 33 
years, and have been its chairman and CEO for the past 9 years. 
I have filed my written statement for the record. Thank you for 
convening today's hearing on this very important topic of the 
economic response to the threat of terrorism.
    The Hartford is a property casualty and life insurer. We 
provide retirement security and protection against loss for 
Americans and their businesses. The Hartford is the Nation's 
second oldest insurer. Founded in 1810, we look back with pride 
at our record of serving our policyholders throughout the 
course of American history.
    Policyholders from President Abraham Lincoln to Babe Ruth 
have relied on us to fulfill our promise to meet our 
obligations to them. We were there to cover the losses of our 
policyholders during the Great Chicago Fire and the 1906 San 
Francisco earthquake. We were also there on 9/11.
    As I consider The Hartford's 196-year history and my own 
experience in this industry, I see one peril that stands out as 
unique: the threat of a terrorist attack. Let me take a moment 
to explain why. First, terrorist acts are unpredictable. Our 
industry has no means of knowing when terrorists will attack, 
where terrorists will attack, and what kinds of weapons they 
will use. We do know from the terrorists' own pronouncements 
that their principal objective is to disrupt our way of life, 
inflict massive casualties on our population, and bring our 
economy to a standstill.
    Second, as we saw with 9/11, the damage to property, loss 
of life, and injury, and the impact on our economy, is 
potentially unprecedented and incalculable. As our leaders in 
government constantly remind us, the terrorists' ultimate goal 
is to gain access to even more deadly tools such as nuclear, 
biological, chemical, and radiological weapons. Their goal, of 
course, is to have the most severe impact. Frankly, some attack 
scenarios considered by our intelligence sources and private 
modeling firms are so devastating that they would not only 
overwhelm the entire insurance industry, they would put the 
economy into a tailspin.
    Third, terrorism is both a public and private risk. Most 
obviously, terrorist attacks are designed to hit people and 
property. Less obvious, they are also explicitly designed to 
threaten America's national security, its economy, and its 
sense of confidence. They ar an attack on the entire country 
and its vast and complex infrastructure, no matter where they 
occur and whoever is hurt or killed.
    The incredible resilience of the people of this great 
country and its economy were shown in the hours, weeks, months, 
and years following the attacks of September 11, 2001. The 
terrorists thought they could change our way of life and shut 
down our economy. They were wrong. Our country responded as 
America always has in times of crisis, with resolve, purpose, 
and strength.
    This committee passed important new laws to reflect the new 
reality. One law that has played an important part in that 
response has been the Terrorism Risk Insurance Act. The purpose 
of the law is to provide a public/private partnership to 
prevent the terrorism threat from disrupting our economy. TRIA 
has worked. Since its inception, it has been the economic 
backstop that helped America's economy to thrive in the face of 
a potential catastrophic threat.
    So, let me commend the members of this committee for 
helping advance the recovery from the attacks of 9/11 and 
defending our economy and its foundations. As I stated earlier, 
our leaders in government tell us the threat of terrorism is 
still very real. I look forward to working with the committee 
in your efforts to counter the effect of terrorism and secure 
the economic future of every American with important laws such 
as the Terrorism Risk Insurance Act.
    Thank you.
    [The prepared statement of Mr. Ayer can be found on page 83 
of the appendix.]
    Chairman Baker. Thank you, sir.
    Our next witness is Mr. Gregory C. Case, president and 
chief executive officer of Aon Corporation.
    Welcome, sir.

  STATEMENT OF GREGORY C. CASE, PRESIDENT AND CHIEF EXECUTIVE 
                    OFFICER, AON CORPORATION

    Mr. Case. Thank you. Good morning, and thank you, Chairman 
Baker, Chairwoman Kelly, and Ranking Member Kanjorski and 
members of the committee. I am very pleased to be here today to 
testify on behalf of Aon and on behalf of the Council of 
Insurance Agents and Brokers.
    What I wanted to do first is just take a bit of a step back 
and explain a little bit about Aon and why I am here. In many 
respects, I would suggest to you that Aon is in a somewhat 
unique position to comment on the very important topics of 
today.
    Aon provides risk management, risk advice. Aon is not an 
underwriter. So, we sit between companies and insurance 
companies and the capital markets. That is how we work. We do 
this across the world. We have got 47,000 colleagues around the 
world, in 500 offices and 120 countries around the world. So, 
arguably, we may be working with more companies on the topic of 
risk advice and, in accordance, terrorism than anybody else on 
the planet. That is the vantage point.
    I would also be remiss if I did not let the committee know 
that Aon takes this issue quite personally. While all of us 
commemorated the 5-year anniversary of the tragedy of 9/11, I 
will tell you that Aon also remembered 176 colleagues and 
friends who lost their lives in the twin towers. So, I want you 
to understand where Aon is coming from. We are not an 
underwriter. We are not an insurer. We do not do what my 
colleagues to the right do, Mr. Ayer and Mr. Kelly.
    We support them in what they do, but we really focus on our 
clients. That is the focal point. It is important for me to 
convey that to you, because I want you to use that as the basis 
to understand the comments I am about to make with regard to 
this critically important topic, and I am going to hit three 
issues and three issues only to start.
    First, I would suggest to you, as someone who is focused on 
companies, businesses that we serve every day, flat out, I will 
tell you that TRIA has worked, in our mind. Post-9/11, you, 
your predecessors, and the President enacted TRIA. You also 
took steps to enact the next iteration of that in 2002, and the 
next iteration in 2005, and I will suggest to you, as we look 
at this through the eyes of the firms and the companies we work 
with around the globe, that this has been crucial in sustaining 
our economic performance, and I would suggest to you the 
economic performance and health of the economy.
    TRIA, flat out, made coverage available and accessible. The 
comments made about the absence of coverage post-9/11 were 
absolutely right. In our role, we are in search of 
underwriters, in search of markets to serve our clients. Post-
9/11, the capacity did not exist. What little capacity did 
exist was priced to an extreme.
    I would suggest to you, as you look over the last few 
years, the uptake of terrorism insurance, companies out there 
in the United States who buy terrorism insurance, the uptake of 
that is 60 percent. That is an astounding number.
    In that time, over the last 3 years, as well, the cost of 
that insurance has roughly come down by around 25 percent, and 
I would remind the committee that is in the context of an 
industry in which the cost is going up over time.
    So, the pragmatic set of answers--I was not in the chamber, 
did not have to go through what all of you went through, but I 
would suggest the pragmatic set of answers and the actions you 
took to enact TRIA in the form that it was before 2005 and then 
after, and in the view of Aon, in the view of our clients, in 
the view of the companies we serve and work with, worked 
extremely well, and I commend the committee on that act. 
Without that, the outcome in terms of the impact to the economy 
would be quite devastating from our point of view. So, point 
one, TRIA has worked. It is a solution, a pragmatic solution 
that has worked.
    Second observation: From our point of view, the private 
market, currently, as things stand today, absolutely cannot 
cover terrorist risk without some kind of government 
involvement. I look forward to discussing that with the 
committee. We have heard three or four arguments over the 
course of the last year that suggest otherwise. One is the 
capital markets. The capital markets are going to come in, they 
are going to take this risk away, do not worry about it, the 
capital is going to come to pass.
    I am here to tell you, we work with the capital markets. We 
work with the primary companies, we work with the underwriters, 
and we work with the capital markets. We were a pioneer in 
issuing catastrophe bonds. We have issued as many catastrophe 
bonds as anybody on the marketplace today. The capital markets 
cannot come in and solve this issue. They will not come in and 
solve this issue. We know these capital markets. We know who 
would buy these bonds. They will not do this.
    Second, we have heard that the insurance companies will 
step up and actually take up the slack. Colleagues to my right, 
Mr. Ayer and Mr. Kelly, will be able to do this with their 
firms.
    I am to tell you, they price their products, they price 
what they do based on what is the risk, the frequency of the 
risk, the impact of the risk. It is un-achievable in this 
situation. They simply cannot come in and fill the entire void. 
As someone who represents clients, that is just the fact. That 
is just the case.
    The final point is that reinsurers will be able to come in 
and solve this issue. We work with these reinsurers every day. 
That is what we do on behalf of our clients. The reinsurers, 
even more so than the primary insurers, have to price their 
efforts and products around frequency, how often it will occur; 
severity, how big of a deal will it be?
    That is where it differs from airlines and from other 
catastrophes that have occurred over time. It is very, very 
different. The other factor I would suggest the committee look 
at is the impact of the rating agencies over the course of the 
last year.
    Rating agencies post-Katrina have even restricted the 
reinsurers even more, perhaps justifiably so, but in terms of 
the aggregate ability for them to step in, it is very, very 
difficult.
    The final point I would just make is that I would 
absolutely agree that the long-term answer has to be a 
combination of private sector solution, primarily--it should 
carry the day. The private sector solution would be the one 
that we would suggest, in the eyes of our clients, would be 
most important.
    In fact, I would tell you that Aon, a year ago, put forth a 
solution which laid out an $80 billion pool, aggregate. It 
would cover four World Trade Center events, four, and be 
covered by the industry, and there will be many other proposals 
that come forward, and we would suggest to you, again, on 
behalf of the clients we serve and the companies we serve, the 
firms we serve, one of those sets of options, which will be 
different than TRIA--it will be an evolution of TRIA.
    It will put the private sector more involved than every 
before, but will still need to involve some form of government 
support, government backing. I prefer to call it a bridge, a 
bridge to more of a private sector solution, as opposed to a 
backstop. So, my third observation is we absolutely need to 
move in that direction.
    So, I thank the committee. Thank you very much.
    [The prepared statement of Mr. Case can be found on page 88 
of the appendix.]
    Chairman Baker. Thank you for your statement, sir.
    Our next witness is Mr. Jacques Dubois, chairman and chief 
executive officer, Swiss Re America Holding Company.
    Welcome.

 STATEMENT OF JACQUES E. DUBOIS, CHAIRMAN AND CHIEF EXECUTIVE 
           OFFICER, SWISS RE AMERICA HOLDING COMPANY

    Mr. Dubois. Good morning. My name is Jacques Dubois, and I 
am president and chief executive officer of Swiss Re America 
Holding. I am also here on behalf of the Reinsurance 
Association of America, the RAA.
    Before I begin my testimony, I want to thank Chairman 
Oxley, Chairman Baker, Chairwoman Kelly, Ranking Member 
Kanjorski, and the members of this committee for the leadership 
you have all shown on the terrorism insurance issue. Your 
leadership has been critical to the adoption and continuation 
of the successful TRIA program. The reinsurance industry 
appreciates the hard work and support you have provided on this 
important issue.
    Now, Swiss Re and the RAA strongly supported the adoption 
of the Terrorism Reinsurance Act in 2002 and its extension in 
2005. The Act has assisted in filling a vacuum in reinsurance 
capacity, and has helped bring stability to the marketplace and 
to the economy.
    TRIA has enabled insurers to provide insurance coverage to 
protect assets and to support economic activity. From our 
perspective, TRIA has performed as designed and has cost little 
to administer.
    Swiss Re and the RAA believe that the U.S. insurance and 
reinsurance industry cannot adequately underwrite and model the 
scale and frequency of potential future terrorist attacks. 
Consequently, we believe that the insurance and reinsurance 
industry cannot provide significant terrorism coverage for this 
country without TRIA's support.
    Now, this may change in the future if terrorism risk 
lessens, but absent such world conditions or improvements, 
Swiss Re does not see a time when the frequency and severity of 
terrorism risk can be significantly and successfully modeled 
and underwritten for the insurance industry to supply market 
needs by itself. Some have expressed concern that TRIA 
preempted the private reinsurance market. This is absolutely 
not the case.
    By establishing definitive loss parameters, TRIA has 
provided a defined layer for reinsurers to participate in 
sharing the retained risk that primary companies face, and 
reinsurers have been willing to put limited capital at risk to 
manage terror-related losses.
    Swiss Re is active in this limited market, but the amounts 
are small. The RAA surveyed both reinsurance brokers and 
reinsurance underwriters to estimate how much terrorism 
reinsurance capacity the market is providing, and overall, the 
RAA estimates the global reinsurance capacity available in the 
United States for 2006 at about $6- to $8 billion for TRIA 
certified stand-alone and treaty reinsurance, and it is also 
important to emphasize, as others have today, that there is 
very little reinsurance appetite for nuclear, radiological, 
biological, and chemical risks. According to the RAA survey, 
NRBC capacity is estimated to be 15 to 20 percent of the 
terrorism risk capacity I cited a moment ago, and when it is 
available, pricing for coverage including NRBC is at a 
significant premium, and coverage amounts are also strictly 
limited.
    With specific regard to workers compensation, insurers have 
been able to add terrorism peril to their reinsurance programs, 
but this coverage excludes NRBC losses. Some have suggested 
that the capital markets could assume terrorism risk. Setting 
aside the pricing problems that would also be faced by the 
capital markets, capital market participation today in 
insurance risk-taking is small. In 2006, issuance of cap bonds 
and other capital market vehicles will likely exceed $6 
billion. Swiss Re experts estimate that cap bond issuance to 
grow to approximately $10 billion by the year 2010.
    Now, this amount is dwarfed by the total value of privately 
owned commercial structures in the United States. According to 
the Bureau of Economic Analysis, these structures had an 
estimated value of $8.8 trillion at year-end 2005, or an amount 
more than 1,000 times greater than the current cap bond market.
    Certain group life insurers have petitioned for inclusion 
of group life in TRIA. Swiss Re is the largest reinsurance of 
group life writers in the world and in the United States, and 
we support their petition. Most State regulators will not allow 
group life insurers to manage their risk through terrorism 
exclusions. As a public policy matter, most State regulators 
have decided that this basic insurance, covering 167 million 
Americans, is vital. We urge you to add group life insurance to 
a permanent backstop.
    In conclusion, due to the nature of the terrorism peril, we 
believe that the private market mechanisms are insufficient to 
spread the risk of catastrophic terrorism loss. Without some 
form of Federal backstop, we would expect less coverage 
available at the policyholder level, increased prices for what 
limited amount of terrorism cover is available, and limited 
reinsurance capacity.
    I thank you for this opportunity to address you on this 
important issue.
    [The prepared statement of Mr. Dubois can be found on page 
97 of the appendix.]
    Chairman Baker. Thank you, sir, for your statement.
    Our next witness is Mr. Christopher J. Nassetta, president 
and chief executive officer, Host Hotels and Resorts, Inc.
    Welcome.

   STATEMENT OF CHRISTOPHER J. NASSETTA, PRESIDENT AND CHIEF 
        EXECUTIVE OFFICER, HOST HOTELS AND RESORTS, INC.

    Mr. Nassetta. Good morning, Chairman Baker, Chairwoman 
Kelly, Ranking Member Kanjorski, and members of both 
subcommittees.
    My name is Chris Nassetta, and I am president and CEO of 
Host Hotels and Resorts, the largest public owner of hotels. I 
also serve as chairman of the Real Estate Roundtable, and I am 
appearing today on behalf of the Coalition to Insure Against 
Terrorism, or CIAT. CIAT is a coalition representing a broad 
range of businesses and organizations from across key sectors 
of the U.S. economy, businesses that are the Nation's principal 
consumers of commercial property and casualty insurance.
    I would like to make three main points today: first, that 
the key market conditions that necessitated TRIA's enactment 
have not changed; second, that as proven in 14 other industrial 
nations, there is a need for a long-term public/private 
partnership, with a role for the Federal Government; and third, 
we stand ready to assist your subcommittees and Congress in 
general in developing the appropriate long-term partnership. 
There are a number of facts surrounding today's insurance 
market that have not changed since TRIA's enactment in 2002.
    First, the reinsurance market currently only provides a 
fraction of the capacity needed to protect the U.S. economy 
from catastrophic terrorism losses. Current capacity is nowhere 
near the level needed to provide protection to our economy 
without the TRIA backstop. Furthermore, even with the TRIA 
backstop, reinsurers are not meeting the capacity demand of 
primary insurers for their deductible and co-insurance layers. 
This suggests that private reinsurers simply want very little 
exposure to terrorism risk, and refutes the notion that the 
Federal backstop is crowding out the private market.
    Second, primary insurers remain largely averse to exposing 
themselves to potentially catastrophic terrorism losses without 
adequate reinsurance availability or a Federal backstop. We saw 
this last year when insurers began including--springing 
exclusions that would have voided terrorism coverage had TRIA 
lapsed. Terrorist attacks, particularly those including NBCR 
weapons, could result in catastrophic losses. As a new GAO 
report concludes, such risks are largely uninsurable because of 
their potential severity.
    Third, even though TRIA covers NBCR perils, we have not 
seen any evidence that suggests coverage is being written, 
except where mandated in workers compensation. NBCR coverage 
was not included in TRIA's make-available requirement, and 
unfortunately, the private markets have thus far failed in this 
area. I am aware of no evidence to suggest this trend will 
change, particularly if Federal involvement were to cease. The 
GAO report confirms this and plainly states any purely market-
driven expansion of coverage is highly unlikely in the 
foreseeable future.
    It is a simple, indisputable fact that markets like 
certainty. Unfortunately, there is almost nothing that can be 
considered certain about terrorism risk. It is clear to us that 
simply allowing the Federal backstop to expire will have 
significant negative economic consequences. It is imperative 
that lawmakers, insurers, policyholders, and all other 
stakeholders come together to work on a long-term solution to 
the availability problem.
    CIAT is aware of several proposals circulating for a long-
term solution, and we are studying them with great interest. 
The Real Estate Roundtable has developed a proposal that would 
create a new mutual reinsurer that would cover conventional and 
NBCR risk through a pool that would stand between primary 
insurers and the Federal Government.
    Over time, the Federal backstop would be reduced as the 
mutual reinsurer accumulates reserves, and would only be 
activated if terrorism losses exceeded a certain level. 
Meanwhile, the American Insurance Association has come up with 
a set of principles that differentiates between NBCR attacks 
and conventional terrorism, putting a TRIA-like backstop in 
place for conventional terrorism, while the Federal Government 
would assume responsibility for all NBCR attacks, with the 
ability to recoup up to 10 billion through policyholder 
assessments.
    CIAT has not endorsed any specific proposal at this time, 
but we are pleased that many include a public/private 
partnership that recognizes the Federal Government's 
responsibility to assist markets to function appropriately and 
to retain a Federal backstop for only the most catastrophic 
losses that the insurance industry and the economy simply 
cannot absorb. This is a national problem that requires a 
Federal solution.
    In the end analysis, terrorism is not aimed at a specific 
business or property owner; it is aimed at our governmental 
polices and our way of life. Government assistance to help the 
market function appropriately must continue to be part of our 
economic response to the threat of terrorism. Contrary to what 
some would like us to think, TRIA is not crowding out the 
development of private terrorism insurance markets.
    Another key element of these proposals is that they are all 
long-term solutions. Certain market conditions are simply not 
going to change as long as the threat of terrorism persists, 
and it does the market no good to have the threat of a backstop 
expiration hanging over our heads every few years. A long-term 
solution will give the market participants what they need most, 
which is certainty.
    Once again, we applaud the chairs and ranking members of 
these subcommittees for holding these very important hearings 
today, and I appreciate your time.
    Thank you.
    [The prepared statement of Mr. Nassetta can be found on 
page 152 of the appendix.]
    Chairman Baker. Thank you very much, sir.
    I will start questions with Mr. Case, just because of your 
position of observation as an interface.
    My concerns about our role in this are likened to the CEO's 
responsibility to their shareholders. They have to assure 
shareholders of safe and sound operation and, at some level, 
profitability. On my side of the desk, my shareholders are the 
taxpayers.
    I have to prove to them that when I write a check out of 
their pocket, it is for a public policy reason of necessity, 
that it is constrained in the scope of what it offers, and 
that, where possible, we recover at any opportunity that 
assistance. The industry has been prohibited from having a 
long-term build-up of reserves, even dedicated for this type of 
risk. If we were to assume that could be made possible, which 
is a very long-term solution, it would also mean that we would 
hope for no intervening adverse event in the near term.
    Should there be, however, we had proposed in earlier 
iterations a sliding scale where the smaller the event, the 
more the industry responsibility; the more catastrophic, the 
more the Federal Government role would be enhanced. Even with 
that, over time, we would have deductibles moving up, we would 
have benefits moving down, and transferring as best we can, in 
a very steady, gradual methodology, less risk from taxpayer and 
more to industry, because over that same time period, the 
dedicated reserves would be building up.
    Give me your view. I am of the opinion that something must 
be done. The debate will be what is the nature of the remedy 
that is ultimately posed. What is your view of the 
acceptability of that general structure to the clients you 
represent and the ability of the industry to work in that type 
of environment?
    Mr. Case. Chairman Baker, if you take a step back--and 
again, we are in discussions with businesses all the time about 
this--and just think about the track from 2002 to where we are 
today, and then consider the multiple proposals that are on the 
table--colleagues to my right and left--we have suggested there 
are four on the table that are coming up today that we could 
talk about.
    If you think about the track, we were at a place in 2002, 
when TRIA was enacted, in which we had an industry which had a 
limit of $15 billion that was the first initial term. We have 
raised that limit to $25 billion.
    I think, from the standpoint of what you all should and can 
and, I hope, do say, and I hope the constituents understand, 
you all put in place something, in our mind, again, with our 
company hat on, our firm hat on, that in no uncertain terms 
created a market that would otherwise have gone away.
    In our view, had TRIA not been enacted in the last bit of 
time, in its two iterations, capital investment in the United 
States would have slowed down, full stop. So, we represent and 
work with the largest construction companies in the world.
    We are privileged to work with many of the largest hotels 
in the world. It would have slowed down. So, first thing, to 
your question on speaking to constituents as a CEO, if you 
will, in terms of the track, I think the track to date, as I 
said in my opening statement, has been about as good as one 
could get. It required a pragmatic solution that is never going 
to be perfect, but in the end, it provided affordable coverage 
for a very uncertain risk.
    Going forward, specifically to your question, is there a 
solution that is longer-term, that creates more private sector 
ownership of a private/public combination? I suggest, 
absolutely.
    In fact, again, the Aon solution we proposed a year ago was 
one in which we felt so--we were so concerned about the 
situation on behalf of our--the companies we serve, we put a 
proposal on the table to get reaction, to force the 
conversation. We are not wedded to the Aon solution only. We 
are wedded to a solution, but let me describe that solution.
    Chairman Baker. If you can be brief, I want to give Mr. 
Kelly a chance to jump in here before my time expires.
    Mr. Case. I apologize. The solution is an $80 billion 
private solution, with a $40 billion initial floor-way that 
builds up over the years, and if something should happen in the 
interim, has a funding bond which the industry pays for, which 
we do not believe would actually measurably increase premiums 
in a substantial way, and so, to your question, is there a 
solution that we can collectively come up with that starts to 
change the balance, make it more private ownership, less 
public, but keep the combination, absolutely. What we need is 
we have to have the government bridge in order to make that 
happen.
    Chairman Baker. Thank you.
    Mr. Kelly, I know of your concerns about the repayment 
provision. I think at least my outside observation is the worst 
thing for the industry is uncertainty and surprise. If we are 
to do this in a very gradual, long-term program, while allowing 
internal reserves to build for this purpose, isn't that--I 
guess my role here is to tell you, I do not want to make you 
happy.
    I want to make you reasonably uncomfortable with the 
solution, because that sounds like a pretty good deal from my 
side. In the real estate business, I never wanted to see 
somebody get overjoyed; I would know I had made a big mistake. 
So, I am trying, I guess, to be cautiously generous to make 
sure solvency and economic function is maintained, but we do 
not want to fund the industry's profitability. That is not our 
job. Given those concerns, can you see how a gradual 
implementation of the structure that I have talked about could 
be made acceptable?
    Mr. Kelly. Actually, not only can I see it, Chairman Baker, 
I would applaud it. I think it is desirable that we feel 
uncomfortable. It is only if we are uncomfortable we will work 
aggressively with the capital markets to come up with 
solutions, but in the interim, we cannot expose--it would be 
Russian roulette for us to go forward without a Federal 
backstop. Although the chance of losing Russian roulette is 
only one in six, I do not expect to play it with the capital of 
the company.
    Chairman Baker. But that sliding scale where, if it is a 
smaller event, we do less; if it is a bigger event, we do 
more--that is the near-term deal on our side.
    Mr. Kelly. In the current situation, we--I can speak for 
Liberty Mutual. If there were a significant event--we would 
lose $1\1/2\ billion. $1\1/2\ billion is not insignificant. So, 
we are already under pressure, and we are willing, as I stated 
in my testimony, to work on any method that increases the 
deductible over time. It has worked very well.
    Remember, what has happened in the last 5 years--buildings 
are more secure today because of the deductibles and insurance 
that we worked actively through the distribution mechanism and 
with our policyholders to make sure they are better protected 
today than they were 5 or 6 years ago.
    So, TRIA has worked not just to provide reinsurance or 
insurance, but has also made the country safer. As we get 
better at that, working with the policyholders, as we build up 
the capital, absolutely, we stand ready, over time, to assume 
more of the risk, and I think it is very desirable. We are 
firmly committed to the private market. However, we cannot play 
Russian roulette with the existence of our company.
    Chairman Baker. Thank you, sir. My time has long expired.
    Mr. Kanjorski?
    Mr. Kanjorski. The risk, obviously, is to the equity holder 
or to the funder. Yet, we do not cover certain of the 
contingencies that could happen in a terrorist attack on the 
United States. Apparently, even with that, the mortgage holders 
and lenders of these investments go forward and offer these 
mortgages. How do you explain that?
    Mr. Kelly. Well, I mean, right now, I think--we have a 
mandatory offer. Under TRIA, we are mandated to offer terrorism 
coverage, and I think the real estate industry has made it 
clear that they see the absolute need for their mortgage 
holders. In fact, if you look at how quickly New York has 
recovered, I think both Congresswoman Maloney and Chairwoman 
Kelly alluded to how well New York has recovered, we met those 
needs because of mortgage holders where legitimate claims were 
paid.
    Mr. Kanjorski. Mr. Kelly, I am curious. Why were the 
mortgage holders happy when a great deal of their risks were 
not covered?
    Mr. Kelly. Well, I think, in any environment, there is only 
so much money that we can make available.
    Mr. Kanjorski. That is what I am trying to get to. Just how 
much of the risk should we think about covering?
    There has to be certainly the possibility of a hydrogen 
attack on New York City. It would be trillions of dollars in 
losses. So, regardless of what we write into law here, it would 
pretty much bankrupt the country.
    Mr. Kelly. I think there is a two-phase process. I think we 
all share the belief that the private sector should take on as 
much as it can right now. So, we work on that. We can envision 
$7-, $8-, $900 billion events very easily.
    So, what we would propose is, right now, set a deductible 
that the private sector can handle, not comfortably--and I 
understand what Chairman Baker says. We are uncomfortable with 
it, because it is un-priceable, but we can get some money for 
it.
    Start with a deductible, and then say, beyond that 
deductible, it is so unpredictable and potentially so large 
that no single industry or no sets of industry can absorb that 
risk. It does become a shared risk, albeit the taxpayer shares 
it, but it is so large that the private sector cannot absorb 
it.
    Mr. Kanjorski. Because we do not cover that risk at all 
right now, what portion would we have to cover--
    Mr. Kelly. We absolutely do cover it. Under workers 
compensation, we have no exclusions. I mean if an event were to 
happen--
    Mr. Kanjorski. I am talking more about other property and 
casualty lines.
    Mr. Kelly. Well, on property, in many States there are--in 
16 or so States, which represents a small number of States but 
more than half the insurance industry premium, we cannot 
exclude--we are mandated to provide the coverage. In New York, 
for example, we have to provide the coverage. I mean we cannot 
exclude it. So, the exclusions are not there, not available to 
us.
    Under a normal free market, we would exclude risks that 
would potentially bankrupt us. We cannot exclude those risks in 
most of the major States.
    Mr. Kanjorski. When do the mortgagers become happy and 
satisfied to continue the normal course of business? In other 
words, what is that risk that they are willing to accept that 
you cannot insure and you do not want to cover that risk?
    Mr. Kelly. I do not think it as much the mortgage holders 
as it is the lenders.
    Mr. Kanjorski. Lenders.
    Mr. Kelly. I think they have made it very clear.
    The mortgage issuers made it very clear that, absent a 
Federal backstop, there will be no commercial--very limited 
commercial--mortgage available, and I think this would better 
be addressed by the representative of the Real Estate 
Roundtable.
    Mr. Nassetta. I think that is right.
    I think the question you are trying to pinpoint, as I am 
hearing it, is on NBCR, for example, where we are saying there 
are exclusions, how are mortgage holders getting comfortable 
that--having something on basic conventional terrorism but 
nothing beyond that, and I think the answer is, from our 
perspective, they had minimally been comfortable with that, but 
I think that the risk in it is there only has to be one event, 
and it does not have to be a large event, that falls into those 
other categories, and I will tell you uncategorically, you will 
see the mortgage industry shut down in terms of its ability to 
lend to the real estate industry, because it will not be 
willing to take those risks. How they have concluded to date to 
take those risks--I could not tell you how the underwriting has 
been done, but I can assure you, in our opinion, that to the 
extent you have any event, that will shut down the CMBS market, 
which is obviously a large part of that market.
    Mr. Kanjorski. If it shuts down, how will you reopen it?
    Mr. Nassetta. I think you will reopen it by having that 
risk covered in some way.
    Mr. Kanjorski. So, we would have to come back here to 
Congress?
    Mr. Nassetta. You would have to come back, and so, I think 
part of our objective in being here, and having worked on this 
personally for the last 5 or 6 years, is to have an orderly 
process set up in advance to deal with these problems, rather 
than having a catastrophic shutdown in one or more parts of our 
capital markets.
    Mr. Kanjorski. Okay. Maybe I misunderstand you, but are you 
suggesting that if we do not cover nuclear, chemical, and 
biological events, and once that occurs, and since it is not 
covered, that it will shut down the market?
    Mr. Nassetta. I think that would cause a very significant 
shutdown in the lending market.
    Mr. Kanjorski. So, as TRIA exists today, it would take one 
terrorist attack, using one of those mechanisms, to cripple the 
economy?
    Mr. Nassetta. In my estimation.
    TRIA exists today. I think it is fabulous. I applaud the 
leadership in getting it done, and it does allow for capacity 
in the market that has been needed to keep the capital markets 
generally flowing, but there are some important things missing 
from TRIA.
    I think the distinction between domestic terrorism and the 
risk associated with domestic terrorism is a gap in the system, 
and NBCR is a meaningful gap, not in TRIA, but given the fact 
that it--unlike conventional terrorism, there is not a make-
available provision. It is not offered, and I think, 
absolutely, to the extent you had a meaningful event that fell 
under those categories, it would be very disruptive to the 
financial markets.
    One other comment on the question Mr. Baker asked and got a 
response to: When we think about reduction or increases, 
rather, in retention or deductibles and additional capacity 
coming into the market--and I respect, obviously, everybody to 
my right that is in the industry, that is providing this 
product, but I will tell you, from my experience, personal 
experience on the matter, with the deductibles going up after 
the extension, actually capacity has been diminishing in the 
market, and the cost has been going up.
    Now, we are not here from a consumer point of view to 
complain about costs. We will pay what it takes. We are just 
talking about capacity. But I think we have to be very careful 
to make sure whatever we are doing in weaning the Federal 
Government out of the system, which we absolutely agree with 
over time, that there is somehow created a pool of capital that 
is there to pick up the slack, because to the extent--as we are 
doing today, we just modify TRIA, and we do not create any 
mechanism for capital to accumulate.
    My own opinion is that there is risk to the capacity in the 
market. Certainly, as I say, our personal experience has been, 
in the last 2 years, capacity for what we could achieve has 
gone down, costs have gone way up.
    Mr. Ayer. Chairman Kanjorski, if I could jump in here and 
just clarify a couple of things?
    Mr. Kanjorski. Yes.
    Mr. Ayer. First of all, on the question of nuclear, 
biological, chemical, radiological, the GAO report has one or 
two errors in it. The market still does cover, first of all, 
all conventional attack modes. There is also coverage available 
today, and specific to the nuclear peril, since most property 
destruction occurs from fire following the nuclear peril. So, 
there is enormous coverage.
    Mr. Kanjorski. You therefore think that there is potential 
coverage there?
    Mr. Ayer. Fire following coverage, as Mr. Kelly was 
pointing out, is still in the contracts, and our big concern is 
the fact that absent NBCR type of backstop, we not only take 
property-oriented risk, but workers compensation, which is a 
big, big amount of coverage that the insurance industry 
provides for American workers will be one where the industry 
could get devastated.
    Mr. Kanjorski. I am going to use a term now that will 
absolutely exacerbate the other side of the aisle, but I am 
throwing it out to you, because I am listening to an industry 
that wants help.
    Mr. Ayer. Please do not get me in the middle of that.
    Mr. Kanjorski. I have always been considered extremely 
conservative about inserting government into the private 
sector. But now, as testified here rather unanimously of the 
need for government involvement and as my opening remarks 
indicated, I tend to agree with you in this time of peril, 
perhaps the next 2 or 3 decades, we are probably going to have 
that involvement.
    As a potential solution, how much thought has been given--I 
think, Mr. Kelly, you may have even referred to it in your 
testimony--to creating a government-sponsored enterprise, 
somewhat similar to Fannie Mae or Freddie Mac?
    Chairman Baker. You are right about some people's response 
to that.
    Mr. Kanjorski. I just wanted to give you prior warning.
    Mr. Kelly. I did not mean a government-sponsored entity.
    I mean legislation that would enable the private sector--
for example, the cat bond market, right now, is, in fact, based 
in the Cayman Islands, for tax reasons. It is not a U.S. 
market.
    Mr. Kanjorski. You get all the up-side, and we get all the 
down-side.
    If we form a government-sponsored enterprise, we fill a 
vacuum that the private sector has not yet filled.
    It can be structured in such a way as to create a 
reinsurance market and eventually go back to the private 
market. But if, in the meantime, no disaster occurs and there 
are some premiums that are acquired, there is a sharing of the 
benefit. I think it is only fair, if we are going to play cards 
together that the taxpayers that Mr. Baker wants to protect 
should be the recipients of some of the premiums or benefits 
from the game.
    Mr. Kelly. I do not want to get into the discussion of 
Fannie Mae and the issues involved in government-sponsored 
entities.
    I do believe that, to the extent there is no event, the 
taxpayer does participate; it gets 35 percent. We pay 
significant taxes on our profits. We are a significant 
taxpayer. So, to the extent there is no event, indeed, the 
government participates. What we want to do is create an 
environment where the economy can grow. The government is going 
to benefit from increased tax revenue.
    Mr. Kanjorski. So, your answer is you would not look at a 
government-sponsored enterprise.
    Mr. Kelly. No, we think--legislation enabling the private 
sector to form better structures. Right now, the cat bond 
market, for example, is, in fact, an offshore market for tax 
reasons.
    Mr. Kanjorski. Should it be mandatory that every company--
    Chairman Baker. That has to be the gentleman's last 
question.
    Mr. Kelly. Mandatory that every company offer terrorism--
    Mr. Kanjorski. Yes.
    Mr. Kelly. We work under a mandatory offer right now. It 
has worked. Whether or not I get into the philosophical debate 
is immaterial. It has worked, and I think we can live with the 
current mandate.
    Chairman Baker. The gentleman's time has expired.
    Chairman Oxley?
    The Chairman. Thank you, Mr. Chairman.
    Mr. Kelly, your answer on the GSE's was absolutely correct, 
and I am sorry I missed your opening statement. I hope you did 
not do any unwarranted bragging about the results of the Ryder 
Cup.
    Mr. Kelly. I restrained myself.
    The Chairman. Thank you.
    Mr. Kelly. But if you want me to start, I shall.
    The Chairman. No, I do not want to give you that chance.
    We have had quite a history of TRIA, and I was thinking the 
other day that our goal, ultimately, when we passed the 
original TRIA bill, with the strong support of the President--
we probably would not have been able to do it without his 
aggressiveness on dealing with this issue, and I remember, at 
the bill-signing ceremony, how proud I was that we had really 
come together, bipartisan, and the Administration, to pass the 
original TRIA bill, and then the second go-round was not as 
satisfying, because we had issues with the other body, to some 
extent, with the executive branch, about the extension and how 
we would--ultimately, what kind of conclusion we would come to.
    Ultimately, the goal, as Chairman Baker knows, and 
Chairwoman Kelly, and others who worked on this bill, was to 
provide a backstop but, indeed, to encourage the private sector 
to step up and deal with this issue, to get the reinsurers back 
in the game, to really gradually come back to a free market 
solution.
    It is obvious from your testimony and experience that that 
has not happened, and we still face that same problem, except 
that we now face it with a looming deadline that could be 
catastrophic, to coin a term, for our economy in going forward 
with our insurance coverage.
    As you know, both the original TRIA bill and the Baker-
Oxley-Kelly extension bill allowed insurers to set aside 
dedicated terrorism reserves, and because we were unable to 
secure the cooperation and support of the Ways and Means 
Committee, we were left with something less than a whole 
package to try to deal with that.
    So, let me just ask anybody, or all of you on the panel, is 
there any question that allowing long-term reserving for 
terrorism risk without a tax penalty would help stabilize the 
market over time? Is there any doubt about that statement?
    Mr. Ayer. Congressman Oxley, first of all, thank you for 
your leadership on the first TRIA bill and your continuing 
support. I just wanted to be sure we all recognize your 
contribution here.
    Going back to the chairman's earlier question on this whole 
issue of tax reserves, tax reserves, over time, will help the 
insurance industry deal with catastrophic losses if we are 
permitted to do so, but it is very important that we all 
recognize--and you as CEO's have to be commended, CEOs in the 
taxpayers' behalf, because you moved our retention from 7\1/2\ 
percent to 20 percent.
    Our retention went from somewhere around $400 million or so 
to $1.3 billion going into next year. So, you are shifting 
accountability to a greater and greater degree, and even in the 
layers above the industry's retention, the participation of the 
industry will increase going into 2007. So, you are doing a 
fair amount of shifting accountability to the private sector. 
My big concern is, even given all these best efforts, on NBCR-
type perils, the devastation that could result from it, absent 
a Federal backstop, will wipe out big chunks of the insurance 
industry. That is the reason why we need a public/private 
partnership. We cannot forget that.
    The Chairman. I think that is well spoken, and indeed, the 
hidden secret is that this thing has worked, and it is proof 
positive it has worked, and I think it would have worked 
better, frankly, if we had the reserving option, and hopefully, 
in the next Congress, we are kind of setting the table here, I 
think, Mr. Chairman, for what will inevitably be an effort to 
reestablish TRIA, to continue to provide for more participation 
of the private sector, for you folks to have more skin in the 
game, to be able to protect the taxpayers, which Chairman Baker 
has insisted on, correctly, but I would hope that we could take 
a step back and look at the whole picture, and clearly, the 
reserving aspect is critically important.
    I wondered if all of you could just simply give me a sense 
of how long and how we would best structure a reserving 
program, how long it would take, for example, and how you would 
see it unfold as we try to move more responsibility towards the 
private sector and less towards the government. If you were to 
write a bill or if you were to look at your own particular 
situation, how would you structure that that would make sense 
and protect our economy and really make certain that we do not 
have a real meltdown should some catastrophic event occur?
    Mr. Kelly. This is an issue--there is significant 
discussion within the industry, because it is not just with 
respect to terrorism risk, it is also the overall natural 
catastrophe risk.
    There is no debate that, for every contingency that 
confronts the country, we are much better off if there is 
savings accumulated in the private sector, and reserves are a 
form of savings, if you will, and tax-free reserving encourages 
saving.
    In most countries, in Europe, there have been 
traditionally--and up until about 20 years ago in the U.S. 
casualty industry--contingency reserves allowed on an 
accounting basis, not on a tax basis in the United States, and 
you can set up mechanisms that say how much a company could put 
into it in a given year, based on their total exposure, on the 
deductibles, and whatnot, as the deductible moves up.
    The Chairman. So, it would be a ceiling, essentially?
    Mr. Kelly. Yes, a ceiling. The problem is--as a mutual--we 
are under less pressure from shareholders to release profit 
quickly. So, as the industry is sorting it out, we have to 
balance the industry with shareholders and whatnot, the public, 
but there is a significant portion of the industry that 
believes that tax-free reserves, properly structured, are a 
very good way, over time--I have not seen a model to see when 
we would accumulate a lot, but this is still an open discussion 
in the industry.
    Mr. Ayer. If I could just clarify, Congressman Oxley, the 
eligible lines, property casualty insurance lines, premiums is 
about $150 billion or so, and so, if you are thinking in terms 
of a $100 billion event, you know, you can do the math on how 
long it is going to take from a reserving perspective to 
provision for something like that, and that is exactly why a 
public/private partnership is very helpful, because under the 
current TRIA bill, post-an event, the government does have a 
recoupment mechanism excess of the company retention.
    There is an enormous amount of genius in the way you all 
have constructed the current proposal. I would not reject it 
that easily, because there is a good balance between private 
involvement, between your capacity to recoup from policyholders 
and companies over an extended period of time once you have a 
terrorism event.
    The Chairwoman. I know Mr. Case wants to respond, but back 
to my frustrations, had we enacted that reserving as part of 
our original bill, we would be well on our way to having those 
reserves, and so, we really--we have lost 4 or 5 years here, 
dithering around, worried about jurisdiction and everything 
else that is totally irrelevant to the issue at hand.
    Mr. Case?
    Mr. Case. Congressman Oxley, I think the facts bear out 
exactly what you said, and I think your specific question was 
what you do going forward. At the risk of putting an option out 
that Aon put forward to the industry a year ago for colleagues 
to react to, I will get very specific around how one might 
think about it. First of all, do you need the build-up 
capability you have described? Absolutely.
    I think the committee has to make some decisions, and our 
broader--the broader group has to make some decisions. Is the 
government going to be involves? Yes or no? You have heard all 
of us say quite strongly it will not work otherwise.
    Then the second question is to what level? How high does it 
go? And you need some specifics. The analytics we did basically 
said, at what point will the reduction in capital--again, we 
are doing this on behalf of clients, of which some are 
insurance companies--at which point does the industry start to 
lose rating, and when the industry loses its rating, it will 
lose its ability to write, capacity goes away, and none of us 
like that picture.
    So, there is a threshold. The threshold around the 
analytics--and we are not saying it is exactly right--was 
roughly $40 billion. So, in a $40 billion first traunch, if the 
industry--we stepped up to that, and they had made a $2 billion 
contribution every year for the next 20 years, we start to 
build what you have described. Now, $40 billion--that is two 
World Trade Center events. That would be first layer.
    The second layer would be a post-event issuance of a bond. 
If something happens, a bond is issued, and the industry pays 
it back. This actually has--you captured a lot of this insight 
in the first round of TRIA, and that's another $40 billion, and 
the industry would pay that back. That basically says that the 
industry steps up to $80 billion over time, and I have thrown 
out a 20-year time-frame, again not because, Congressman, it is 
the right answer, but it gives you a perspective.
    If you said--and you are going to have make that--we are 
going to have to make that call. You are going to have to make 
that decision, at what level are you describing, I would put 
forth two $40 billion traunches, one more direct, one more 
indirect, at $80 billion.
    The item I would urge you not to get confused is we 
continue talk about NBCR and the efforts--you know, $80 
billion, while a tremendous amount of money, is wiped out in 
some of these other issues, which is why they have to be 
included, from a government standpoint, but make no mistake 
about it, you know, getting the industry, guys to my right and 
left, to step up to an $80 billion commitment, traunched over 
time, with the build-up you have described, puts us in a 
fundamentally different position, and again, back to you as a 
CEO, thinking about your constituents, there is $80 billion at 
risk before the government steps in. That is a pretty 
fundamental commitment, and again, we are not suggesting the 80 
billion is correct, or the traunch of 40, Congressman, is 
right, or the next traunch.
    What we looked at was inflection points and when the 
industry got downgraded, at which time the industry would lose 
its ability to actually be effective.
    Chairman Baker. Thank you.
    Mr. Dubois. I would like to comment that I think there are 
examples elsewhere in the world, in other countries, where 
reserves have been allowed to build up in pools or other 
vehicles, that then get used to pay for terrorism risk, should 
terrorism events happen.
    Now, none of these other pools or reserves have suffered 
losses like we did on 9/11, but nonetheless, there certainly 
are possibilities and models that can be looked at.
    You know, the industry, with, let us say, a $30 billion 
retention today, or whatever, is already in a position of 
having a lot of skin in the game, and the types of losses that 
NBCR could create are so severe that these losses--and I do not 
think there really are pools that could be created on a short-
term basis, that could come close to dealing with this. I think 
the government has to be involved, and has to be involved in a 
very substantial way.
    I think that there are also potential issues with regard to 
how you go about establishing reserves for this. There needs to 
be an actuarial determination. How do you determine how much 
reserve you should put aside for something for which the 
frequency and severity are unknowable? I think those are big 
issues that would have to be wrestled with to avoid problems 
that could be created and create issues that taxpayers would 
object to.
    The Chairman. Thank you.
    Mr. Nassetta. I guess, following on what the two gentlemen 
to my right just said, the thing we cannot lose sight of in any 
program, ultimately, that we jointly come up with is that, 
whether it is $70- or $80 billion of skin in the game, from a 
consumer point of view, one of the things--and from an economic 
point of view, looking at the country's economy, we cannot 
disregard the NBCR and the super-cat.
    A lot of the solutions that have been batted around, I 
think--and while TRIA, as I said already today, is a very 
successful program and allows for NBCR, we have to find a 
mechanism in whatever we do to allow for capacity in those 
areas.
    If we do not, obviously the markets are functioning 
reasonably well today, effectively, without it, because it is 
not being offered, but as I mentioned in response to Mr. 
Kanjorski's earlier question, all it takes is one event, and we 
are back in a mad scramble, a la Katrina, to figure out what we 
are going to do, and what I would off out is I think it will 
cost the Federal Government a lot more money trying to clean up 
the mess afterwards than it would have to have a reasoned 
program put in place up front.
    So, while we have not had to deal with it yet, certainly 
the risks that we all hear about from our President and 
everybody down the line is those are the real risks that are in 
front of us today.
    I think any program we come up with that leaves those 
super-cat kind of concept to, you know, figuring it out later 
are misguided. I think it will be very costly to the economy 
and very costly, ultimately, to the taxpayers.
    The Chairman. Mr. Chairman, I think Mr. Nassetta said it 
best. That is, does anybody here really think, if we had a 
catastrophic event, that the Federal Government would not 
respond, the way we did with Katrina or any other natural 
disaster, whether they are floods or draught or anything else?
    That is just the nature of the beast, and anything that we 
can do to alleviate that or to mitigate it seems to me exactly 
the right approach to take, and to say, you know, next year, 
the program expires and everybody goes back to their corners, 
to me, is not even close to a solution. As a matter of fact, it 
abdicates our responsibility to the taxpayers big time, and I 
thank you for your leadership, Chairwoman Kelly, others on the 
committee, who get it and who want to make this thing right, 
despite all of the political difficulties that we run into. You 
are on the right track, and I wish you the best.
    I yield back.
    Chairman Baker. Thank you, Mr. Chairman. I simply want to 
say that the general testimony here this morning has been that 
the TRIA in place has had a substantial positive effect on 
market function. It has worked, it was properly crafted, and to 
a great extent, it is the product of your work effort and 
intense focus to get this across the finish line.
    So, I wish to sincerely commend you for your hard work on 
this, and please know, going forward, whatever fortunes hold 
next year, you hanging over our shoulder up here will be a 
constant reminder we need to get this thing right.
    Ms. Maloney?
    Mrs. Maloney. Thank you, Mr. Chairman. I would add to your 
statement about TRIA working. From our experience in New York, 
we could not even build a hot dog stand until we got TRIA in 
place. All building had stopped, and the rebuilding had 
stopped, until we got the insurance program in place. I join my 
colleagues in thanking you for your thoughtful testimony.
    All of you have spent a great deal of time trying to come 
up with some long-term solutions, and that is the type of 
thinking that members of this committee tried to write into the 
TRIA extension bill.
    We tried to include a blue ribbon commission of leaders in 
the industry that would come forward with concrete ideas and 
solutions to move forward with. Unfortunately, that was not 
included in the extension of TRIA. It only provided for a 
working group, which is led by the Administration. The 
Administration has not issued their report yet from this 
working group, but from some of the signals that I have gotten 
from the Administration, I am not optimistic that they will 
come out with creative ideas that include a government 
component.
    So, my question to you is what have you done to advance 
your ideas with the Administration or, specifically, with the 
working group that is charged with coming up with a long-term 
solution, and then, secondly, what can we as a government do to 
help your industry, to support your industry while you work to 
come up with a long-term solution?
    As I said, we tried to have it in the Administration--in 
the bill that we put forward, but the working group is out 
there, they are going to be coming out with a report soon. I 
hope that you have made contact with your ideas, and I would 
like to really call first on Mr. Case and Mr. Kelly, because 
they have spoken at great length on some of their ideas and 
some of their solutions, and really open it up to all of the 
members of the panel.
    Mr. Kelly. Thank you, Congressman Maloney.
    We have met--Liberty and the industry have met several 
times with the working group. I do not think they heard 
anything that you have not heard today. We have spelled out 
clearly two things, and I will reiterate them.
    First, there is not enough capacity--I think there is 
unanimity--there is not enough capacity in the private sector 
to absorb a significant event.
    Second, the private sector stands willing to absorb more 
risk over time and is willing to work with creative mechanisms 
to allow us to do that. We have made that clear.
    Most importantly, we cannot live continually under a period 
where we are going to lose coverage every 2 or 3 years. It is 
not useful for us, it is very disruptive for our policyholders, 
and it is bad for the economy. So, we need to recognize--and we 
have made this point very clear--we cannot do it without 
government help, we will try to do more over time, and we 
cannot continue to stand the uncertainty.
    Mr. Case. Congresswoman Maloney, you asked two questions.
    One is what specifically are we doing and what you can do 
to help the industry. You know, what we have done is tried to 
put a concrete proposal on the table, again not as an answer 
but as a stocking horse, if you will, to take shots, and it has 
gotten plenty, lots of new ideas on the table, but we are going 
to continue to redouble our efforts to make sure that the 
committee understands what is out there, what the possibilities 
are.
    The most important thing I would address, though, is, in my 
mind, your second question, which is what can the industry do? 
One thought I would suggest to the committee is that if this is 
viewed as an insurance industry issue--again, Aon is not an 
insurer in the way that my colleagues to the right and my left 
are--it is a view on the issue that is--scope is way too 
narrow.
    I am not suggesting you were there in any way, in any 
event, but just for the record, this is an issue for 
businesses. It is an issue for Marriott. It is an issue for 
businesses around the world.
    Our concern, which is the reason we put forward a solution, 
is, if it ever gets construed as an insurance company set of 
issues and an insurance company backstop, if you will, in our 
view, that undermines what you all have actually put in place, 
and undermines the ability to actually talk about this issue in 
a way that can be very productive. So, I would ask your help to 
make sure that, when the solutions come forward, they are from 
a broad-base sector--financial services, which include the 
banks; the insurance companies, their constituents and 
companies out there trying to make investments and build. All 
these constituents are incredibly impacted by this.
    I can make an argument that banks are as impacted as 
insurance companies. Banks will eventually be--if they are 
building buildings and they finance them, they eventually are 
going to be the construction owners, and they are eventually 
going to be insurance companies, if anything happens, and the 
banks do not want to do that. So, please help us make sure the 
constituent group is broad enough.
    Mrs. Maloney. Any other comments?
    Mr. Ayer. We belong, Congresswoman Maloney, to--we belong--
the AIA, ACLI, as well as the CEO Roundtable that Mr. Kelly 
referred to, and in all cases, we have actually worked and 
reached out to the working group to advance ideas and kick 
around different alternatives, and I believe that the industry 
eagerly awaits the analysis and is hopeful that, fundamentally, 
we will continue to have a public/private partnership here for 
the risk of terrorism.
    Mr. Dubois. We have been involved in this discussion for 5 
years now, as many of us here in this room, and we are today 
reinsuring terrorism risk, to some extent. We are the largest 
reinsurer worldwide, and we collect premiums from around the 
world to cover exposures here and in the U.K. and in Spain, 
etc.
    The appetite, for the industry, however, as I said earlier, 
for reinsuring terrorism risk, is still limited. That may 
change over time, but it would require the reinsurers and 
society at large to consider terrorism risk to be a lessening 
risk. We do not yet see that.
    We in the RAA have been working on alternative solutions, 
as well, just as Mr. Kelly and Mr. Ayer and Mr. Case have been 
suggesting for themselves, and I think that there is an 
opportunity for all of us to get together to work on these 
solutions. Pools are one possibility. Reserving is another 
possibility. They all have problems attached to them, but I 
think that there may be ways that, collectively, we can do it.
    You know, cat bonds are suggested as an alternative. Yes, 
but cat bonds face the same pricing problem that we face. I do 
not know why the capital markets would look at the pricing any 
differently. After all, the capital markets supply capital to 
us.
    So, consequently, I think that it is a potential long-term 
solution, but it is nothing immediate, but I can assure you 
that we, Swiss Re, are more than happy and willing to work with 
any working group or any of the insurers, reinsurers, and 
brokers, etcetera, to come up with alternative solutions that 
can be meaningful on as short a term period as possible.
    Mrs. Maloney. Thank you.
    Mr. Nassetta. I think most of it has been said. On behalf 
of CIAT and the roundtable and personally, we have been 
spending a lot of time with the members of the President's 
working group and, I think, have had a good dialogue, as others 
have, about the various options. We are not, at CIAT, promoting 
one versus another. We think there are a lot of alternatives 
that would make sense.
    What we are promoting is, really, making sure all the 
interested parties are in the same room and have an incentive 
to find a way to make this work that is balanced, that is 
balanced in terms of the policyholder versus the insurers, the 
reinsurers, and ultimately the taxpayer. So, from the 
standpoint of your question, what can you do, short of, of 
course, passing legislation, which would be terrific, it would 
be to continue to put the pressure on all of us and all the 
other interested parties on this issue to really sit down and 
force the parties to figure out a balanced public/private 
partnership equation that ultimately makes everybody reasonably 
uncomfortable, as Chairman Baker said, which I think was a very 
good way of putting it, and so, I think there is a good start.
    I think there is a lot further to go, obviously, and we are 
going to be running out of time. People are renewing policies. 
From a consumer point of view, this is an issue that is 
accelerating very rapidly as people go out to renew their 
policies, and so, very timely that we are having the hearing 
today, and again, all of us very much appreciate it.
    Chairman Baker. The gentlelady's time has expired.
    Our co-chair, Mrs. Kelly.
    Mrs. Kelly. Thank you. The House bill we drafted last year 
had a specific program for the NBCR coverage, and the GAO has 
said that that is the greatest terror risk to our country, but 
there is no private market that has really developed on that. 
Is there any doubt that we need to have a specific NBCR 
protection written into this law? Do any of you have any 
question about that? I am just going to ask you to give me a 
quick yes or no.
    Mr. Kelly. I think, given the significant difference in 
NBCR from, if you will, conventional terror--I mean it is 
somewhat sad that we now talk about conventional and non-
conventional terrorist acts, I mean the world has changed so 
much.
    There is such a significant difference in terms of 
predictability, in terms of the long-term emergence of damage 
from--whether it be biochemical or nuclear--that it is so 
significantly different, we believe it is highly desirable to 
treat the two separately. They can be coordinated, but they 
need to be treated separately.
    Mr. Ayer. There is no doubt in my mind that we need a 
Federal partnership on NBCR. I would also say, on conventional 
acts, we are always concerned, as you saw in the case of the 
London terrorism incident, of what we in our industry refer to 
as swarm attacks. So, you could have conventional attacks occur 
in several cities at the same time, which collectively could be 
a serious size loss that the industry would have difficulty 
responding to.
    That is the reason why your increasing retention has been a 
nice device, a good device to construct the right balance 
between how much the industry ought to bear versus how much the 
government ought to step in as a backstop.
    Mrs. Kelly. One of the things I think that is problematic 
for the general public is that they have not seen the movements 
within the industry that have enabled it to cover, so far, the 
World Trade Tower disaster and Hurricane Katrina, and with the 
terrorist attack on the towers, followed by Katrina, it has had 
an economic effect on the whole country, but people have not 
thought about what has gone on within the industry itself, and 
I would like to ask what it took, if you are willing to share, 
what it took within your industry to be able to cover the 
disaster of Katrina and the hit of the terrorist in New York.
    Mr. Kelly. We assume great fiduciary responsibility for the 
capital of our companies, so we try our best to manage risk, 
and it is a truism in the insurance industry, the best accident 
or best claim is one that never happens. I think if you go 
around the cities and malls of America, you will see that they 
are significantly safer, whether it be devices as concrete 
pylons, metal pylons, to keep trucks away from the front of the 
building--we, separately, and a competitive marketplace, have 
worked with each of our policyholders to reduce the terrorism 
risk.
    The average consumer does not see that. They see a planter 
in front of a building, and they think we are beautifying the 
building. No. We are working with the policyholder to make sure 
nobody can drive a truck bomb up beside that building.
    I think what is not obvious--obviously, what is obvious in 
New York, Chairwoman Kelly, is that things recovered, but what 
is not obvious is that around the country, we, working with the 
policyholders, have made this country safer against terrorism. 
We are glad it is not noticed. We are proud of what we have 
done, and each of us do it in our own way, but it is a safer 
country for that reason.
    Mrs. Kelly. I want to go back to this question again and 
ask about manipulations within the industry itself. Have you 
had to help each other because of the amount of coverage and 
exposure that one person in the industry has had versus another 
person?
    Mr. Kelly. The TRIA has allowed the free market to work in 
the following sense--and I speak for how we approach it. We can 
tell you in New York, within a hundred yards, within a quarter 
of a mile, how much exposure we have. Once it gets more than we 
have an appetite for, we back out.
    TRIA allows other people who are willing to step in, to 
pick up the exposure. We cannot do it in collusion, but when 
we, as a company, decide not to bid, there is always enough 
people in there bidding for the risks we do not want. So, TRIA, 
by creating a certainty as to the absolute amount of loss, no 
runaway losses, has allowed the free market to work very, very 
well. We can make normal economic decisions, and there is 
enough capacity left underneath the TRIA deductible to meet the 
needs. So, it is a remarkably effective construct.
    Mr. Ayer. From a consumer point of view, I agree with all 
that, and I think it is actually a fairly simple approach, when 
you think about it.
    As it has been for a hundred years or more in the insurance 
industry, the tradeoff has been limited, as described by Mr. 
Kelly, meaning limiting exposure in certain areas.
    It has been through exclusions, like excluding NBCR and 
other things, so that not taking certain risks at all--and it 
has been through rates, which is to say that our rates from a 
consumer point of view--and again, I am not saying it in a 
negative sense, it is because of these things that have 
happened--the rates are multiples.
    So, it is through limiting risk, excluding risk, and 
getting greater payments to cover what risk remains. It is a 
simple equation of a profit-making business.
    Mrs. Kelly. Mr. Case, I see you looking as though you would 
like to answer that question.
    Mr. Case. Congresswoman Kelly, it is interesting--I agree 
the markets have worked in a wonderful way. There is $15- to 
$25 billion at risk as that has evolved over time. Mr. Nassetta 
is right, though. Rates have gone up. Post-9/11, rates went up 
quite substantially, as they needed to do.
    If you talk to constituents, look at the balance sheets of 
the insurance industry, because one question you should be 
asked is why would you be thinking about this when it looks 
like the industry is so strong right now? That will be a 
question you will be asked.
    I think a reasonable response is that the balance sheets of 
the entire industry, the overall capital, were at a much weaker 
position, having coming through a decade of softer prices in 
2001. The $20 billion event, which was the World Trade Center, 
was devastating in that context, plus we had a market crash 
afterwards, equally devastating.
    Understand, last summer was a 60-plus-billion-dollar event 
that my colleagues' balance sheets absorbed, and they actually 
came out of it quite well. In fact, they are prepared and they 
are well equipped to kind of continue to meet the needs of 
consumers and of businesses, and it is because of all the 
preventions that happened, that Mr. Kelly talked about, and 
everything that went on, all those are good, but the market was 
forced to react. Prices did go up over time, and the mechanisms 
did work.
    Mrs. Kelly. Thank you.
    Yes, Mr. Ayer.
    Mr. Ayer. Just a quick additional thought here. TRIA cost 
us close to a billion dollars--not TRIA--the World Trade Center 
cost us close to a billion dollars, and the devastating 
hurricanes of last year cost us close to a billion dollars. 
When we had the WTC event, we did have reinsurance. Today, our 
retention inside of TRIA is entirely borne by The Hartford.
    On the other hand, we have close to a billion-and-a-half of 
reinsurance available on natural disasters, and so, today, we 
scour the world markets, including capital markets, to seek 
reinsurance support. So, that is the distinction.
    So, what changes inside The Hartford? We not only are a 
writer of property, casualty, and workers' compensation 
insurance; we also provide group life, and we are one of the 
largest lenders to commercial real estate through commercial 
mortgage-backed securities.
    So, what we have to do is really take a second look at how 
our aggregations stack up inside of cities, including New York 
City, how much lending are we doing, how much group life are we 
writing, how much comp and property insurance are we affording, 
and that is the change in our lives post-TRIA.
    Mrs. Kelly. I have one more question, and that is, the 
White House-controlled PWG report last year was not--did not 
contain what the House bill contained. The House bill--we had 
an independent commission looking at the future of terrorism 
insurance that would have had experts from both sides. Would 
you support the establishment of an independent TRIA commission 
that represented government, policyholders, and the industry?
    Mr. Kelly. I hate to say yes, but--yes, I think that would 
be a very desirable way to make sure there is an open hearing 
and a broader constituency.
    My concern is that were we to advocate such a commission, 
it would provide an excuse to give us another temporary 
extension, and one message I do want to leave--I have said it 
several times, and I will say it again, and I think Mr. 
Nassetta alluded to it several times, too. This idea that, 
every 2 or 3 years, we are in limbo is not a good thing.
    So, if a commission delayed a permanent solution--it would 
be not a desirable thing at all. On the other hand, any 
mechanism that gets the best and widest thinking would be 
highly desirable.
    Mrs. Kelly. Thank you, Mr. Kelly.
    Chairman Baker. I thank the gentlelady.
    Mr. Case. As long as the industry is defined broadly 
enough--and I apologize for repeating, but if the industry is 
the insurance world, it has, in my view, hindered the ability 
to actually push this forward. If the industry is represented 
by the capital providers, banks, etcetera, and is there with 
insurance companies, with reinsurers, and it is broad-based, 
you are going to get a much richer view of what the 
possibilities are.
    Chairman Baker. I thank the gentleman.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I would like to make a statement and then ask a question of 
Mr. Gregory Case.
    Some folks suggest that TRIA is crowding out private market 
solutions. Has the amount of reinsurance available for this 
risk increased since we renewed TRIA, and is it enough?
    Mr. Case. To the question of is it crowding out private 
solutions, within the construct that was set up by TRIA, in 
terms of the aggregates that are there for the broader market 
that the industry absorbs, I think, as Mr. Kelly was pointing 
out, there has been a tremendous amount of innovation to try to 
operate within that context. To take on additional risks that 
are both unpredictable and unquantifiable, basically, if I may 
offer, kind of finite capital against infinite risk, there have 
not been a lot of solutions that show up sort of in that genre, 
as Mr. Dubois described, which is why, within the context of 
the next iteration, should there be one, of how we think about, 
you know, a set of solutions, the innovation in the capital 
markets and the innovation in the industry, the innovation on 
the reinsurance side is--you know, in my view, is not going to 
be constrained at all with regard to whether the government--if 
the government is involved. In fact, quite the reverse, what 
the government backing would do is to provide a stable playing 
field upon which the participants could actually put some 
things forward and potentially price product to be effective.
    Mr. Hinojosa. Mr. Chairman, based on what I have read and 
heard, I think it remains extremely important that we, the 
Federal Government, continue to collaborate with the private 
sector and, in some form, on this issue.
    I want to thank you, Chairman Baker, for holding this 
hearing, and I want to work with you and Ranking Member 
Kanjorski and with other members of our subcommittee to keep 
this terrorism coverage available. I yield back the balance of 
my time.
    Chairman Baker. I thank the gentleman.
    Mr. Garrett?
    Mr. Garrett. Thank you, Mr. Chairman. Just a couple of 
quick questions.
    Mr. Case, you had made an indication before that, after 9/
11, because of the situation at that time, a deadening of the 
economy, and but for us taking some sort of action on TRIA, you 
would have probably seen a deadening of the economy and new 
construction and the like, what have you. You also indicated 
that you have constituents or clients around the world, as 
well. Could you or other members just very briefly tell us what 
is going on in the rest of the world, to the best of your 
knowledge, in this area, whether they have a TRIA backstop in 
the other countries, or do we see a flattening of their 
economies?
    Mr. Case. First of all, in terms of sort of what happened 
in the United States, it is, in fact, exactly what happened for 
a period of time, until things became more stabilized. We have 
seen other constituents around the world asking the same sets 
of questions. The capital is global. The capital is fungible.
    They are seeking and they are trying to understand, when 
you think about the events that have happened in the U.K., the 
incident that happened in Madrid, a whole set of issues are 
being raised. This is not just a U.S.--
    Mr. Garrett. But did the other countries adopt this?
    Mr. Dubois. Maybe I could address that for a moment. There 
are a number of countries around the world that have terrorism 
risk protection programs in place. One of the oldest is the one 
in the Republic of South Africa, and it has been there for 
decades. Potentially older is the program in Spain, which dates 
back to the early Franco days, in the civil war. The U.K. has a 
program that can be considered a model for us. France, Germany, 
and other countries, the Netherlands, set up programs after 9/
11. Australia has, as well. So, there are plenty of models out 
there that we can look to for example.
    They all have what some might consider failings, but 
nonetheless, you know, they are in place. Other than Spain and 
Israel and South Africa, there is only one that really has 
responded to terrorist acts, and that would be the U.K. 
program. It was set up in 1993 in response to IRA attacks in 
London and elsewhere in England. The funding was provided 
through a mechanism where policyholders paid insurers, who paid 
into a pool, and that pool accumulated the funds.
    It also purchased a reinsurance line from the U.K. 
government, which served as the ultimate reinsurer for that 
pool. It has responded on three or four occasions out of the 
funds that have collected in the pool and is, today, expanding 
its coverage. It is not shrinking it. It is expanding what it 
covers. So, it is actually going in the opposite direction. 
Instead of reducing its involvement, it is actually going the 
other way.
    As I understand it, that company, although more limited in 
size, in terms of the funds involved and its coverage, it 
employs about nine people. So, it is not exactly an enormous 
bureaucracy. It has, frankly, been quite effective.
    Mr. Garrett. I guess my next question was going to be--as 
far as whether what we have done has sort of frozen out either 
innovation or any enlargements into the system because--
obviously, industry knowing that we are here, you are not going 
to be expanding into this market.
    Mr. Dubois. Well, from a reinsurer perspective, I can say 
that we have changed our view on terrorism risk over the last 
number of years.
    As some of you know--we can talk, certainly, about large 
numbers--we suffered losses of $3.3 billion on 9/11, and we 
immediately, within a week's time--my colleague from 
Switzerland and I visited the White House and indicated that we 
would not be renewing our treaties with reinsurance--with 
terrorism being protected under our treaties. Since that time, 
we have been changing our view, and we do now provide 
reinsurance protection for terrorism risk, as I testified 
earlier.
    Mr. Garrett. So, had the original TRIA been in place prior 
to 9/11, the impact upon the industry, the government, in that 
situation, would have actually had to have stepped in to a 
significant degree. First of all, is that correct, and 
secondly, if it is correct--
    Mr. Dubois. I think it would depend on what you mean. What 
were the deductibles in place, you know, in a pre-9/11 TRIA 
package?
    Mr. Garrett. The original TRIA that we passed.
    Mr. Dubois. Then the government would have picked up, 
probably, some of the tab, yes.
    Mr. Garrett. Thank you.
    Mr. Kelly. If you recall, the very low level of industry 
deductible early in TRIA was because we were recovering from 9/
11. We did not have the capital at that time.
    One can always speculate as to what might have happened, 
but had it been--my belief is that, had TRIA been enacted 
earlier, the deductibles would be more like the levels we have 
right now, in which case there would have been very little 
Federal Government involvement. The early 7\1/2\ percent was 
only so low because the capital has been significantly damaged 
by 9/11.
    Mr. Garrett. But the industry was able to absorb--
    Mr. Kelly. Yes, we were able to absorb it, but we could not 
absorb the high deductible, 7\1/2\ percent, post-event.
    So, the 7\1/2\ percent initially was recognizing that we 
had been damaged significantly.
    Mr. Nassetta. I think Chairman Oxley made the comment 
before, which is worth noting again, which is to say some of 
these other programs, as Mr. Dubois describes around the world, 
have been very successful, including the U.K. program, where 
they are building pools.
    To the extent that approach had been taken, which is an 
approach that a number of parties, including the Roundtable, 
have put forth, 5 or 6 years ago, you would have, today, 
substantial pools of capital that would be available.
    So, it is something that--it is not the only solution, but 
is a solution that we should be, as a group, considering. In 
the end analysis, some kind of pooling system--we can debate 
what mechanism, and whether it is reserves, tax-free reserves, 
etcetera--some mechanism to build up a capital base of some 
kind or another is absolutely necessary here in order to 
ultimately have the Federal Government be able to lessen its 
role over time, and again, debatable what exact form that will 
take, but the concepts that have been used around the world, 
which vary a great degree, have largely, in my opinion, been 
successful, because they have build up independent pools of 
capital to deal with this risk, and ultimately taken their 
Federal Government exposure down over time.
    Mr. Garrett. In each one of those cases, is there always a 
government backstop at the other side of those pools?
    Mr. Nassetta. There has been in each one that I am aware 
of, yes.
    Mr. Kelly. There is not enough capital in the private 
sector to absorb the hundred, three, four, five hundred billion 
dollar loss that could easily occur. There is a level at which 
there is not enough--there is no mechanism that will create 
enough private capital. What is desirable is to create an 
environment with a mechanism to move that government step-in 
point higher and higher over time, but there will always be a 
need, ultimately, for a Federal Government backstop.
    Mr. Ayer. One misunderstood point, Congressman Garrett, is 
the fact that, today, there is private capital. It is the 
insurance industry, and you know, in stepping up our retention 
from 7\1/2\ percent to 20 percent, what you have done is 
brought the insurance in as private capital, but unlike natural 
disaster risks that take us--for example, we are in the market 
on natural catastrophes where we have reinsurance from cat 
bonds protecting us.
    With respect to TRIA, we cannot get or secure protection 
from capital markets or from reinsurance markets, and that is 
the distinction.
    Chairman Baker. The gentleman's time has expired.
    Ms. McCarthy?
    Ms. McCarthy. Thank you, Mr. Chairman. I want to thank 
everybody for the testimony. It really has been fascinating.
    I am one of those who do believe that the Federal 
Government should be involved in backing up for the terrorist 
insurance, and actually even for catastrophe insurance, what we 
have seen in the last couple of years that has happened here in 
the United States.
    From listening to your testimony, probably most of you were 
talking, especially, from 9/11 and Katrina. It has opened up 
our eyes to what we all are exposed to, but one of the things I 
have not heard--one part, I heard that the insurance have 
actually gone down about 25 percent, I believe, Mr. Case, you 
had mentioned, that it was being stabilized?
    Mr. Case. What I mentioned was in the context of the 
effectiveness of TRIA, that the terrorism rates had come down 
roughly 25 percent. That is, within the context of insurance 
rates, dramatically increasing over that period of time.
    Ms. McCarthy. Okay. Because my concern is really--no one 
has talked about small businesses. We know that, from 9/11, in 
the building, certainly there were large corporations, and 
certainly they were extremely hurt, but there was also small 
businesses that were in the building and in the surrounding 
areas.
    My concern would be a lot of those businesses have not cone 
back, because they were not prepared for, certainly, that kind 
of a disaster, and I think one of the problems that we are 
going to see in the future, whether it is a Katrina-like issue 
or another terrorist attack, if it does happen here in the 
United States, that small businesses are still going to end up 
losing, and I think that is something that needs to be adjusted 
somehow.
    You had mentioned that your costs have gone up quite a bit. 
Is there anything that we can do to incorporate--to make sure 
that small businesses are covered--with the rates?
    Mr. Ayer. If I could pick up on this, The Hartford is one 
of the largest small business insurers in the country. We have 
770,000 small businesses that we insure today, and a ton of 
them were our insureds in the 9/11 incident, and a ton of them 
have come back, and absent reinsurance availability, that would 
be a challenge, but a lot of them do buy the terrorism 
insurance currently in their contracts, because it is automatic 
on workers compensation, and it is also available on property 
insurance, because it is a mandatory offer today.
    Ms. McCarthy. I am wondering today, with what we are 
dealing with, possibly, for the future--I know here--actually, 
on one of my other committees, we had--for small businesses to 
be able to buy health care, to pool together. When I talk about 
small business, I am talking about the little guy that has got 
a little shop, probably does not have any insurance whatsoever, 
or if it is, it is minimal, because we talked about fire, but 
if we had a biological attack, which we are hearing about 
constantly, there would be no fire.
    Obviously, some other attacks, yes, there would be 
explosions and then fires. That would be covered. How do we, as 
the government, work with you to try and cover those particular 
different areas?
    Mr. Kelly. First of all, the small business market is very 
competitive. There is lots of property and casualty capacity 
available to small business. Now, whether or not they want to 
pay for it or not, that is a decision.
    They have to pay the rent, and there is the form of doing 
business. It is a competitive market. We compete against my 
colleagues at The Hartford.
    It is a very active--and I think, later, you will hear from 
the independent agents--it is a very active market, but to the 
extent they are exposed to things such as nuclear or 
biological, you know, it is the same for an aggregation of 
small businesses as for a big business. Our capital is at risk.
    So, if TRIA provides the appropriate backstop, then we can 
provide the coverage. It is no different. The mechanism will be 
no different than it is for the larger risks.
    Ms. McCarthy. Let me ask you a question, because it just 
popped into my mind. You know the insurance business better 
than I do, but with a large corporation--say they are an 
accounting firm. You know, they have records, they have 
paperwork, but downstairs there is a restaurant which would be 
considered a small business.
    They might not be prepared for the loss of, number one, 
closing the restaurant down for weeks, months, certainly the 
loss of income, food, and everything else. So, your insurance 
would cover something like that?
    Mr. Kelly. Business interruption insurance is probably the 
most significant part of their coverage. They would get 
significant business interruption payment that is based on 
their revenue and profits. Mr. Ayer alluded to how well his 
policyholders recovered, the same as ours. That is a huge part 
of the business, business interruption insurance. It is readily 
available, it is freely available, and if someone decides not 
to buy it, I mean--it is a cost of doing business, but it is 
there. It is there.
    Mr. Nassetta. I think, again, from a consumer point of 
view, whether large or small--and a lot of our businesses 
certainly are large, but there are small businesses involved--I 
think it gets back to the underlying issues that I have talked 
about, others have talked about here, and that is we cannot--in 
thinking about terrorism insurance, you cannot exclude certain 
aspects of it like NBCR and feel like we have accomplished the 
objective.
    Again, while TRIA has been very, very successful and does, 
in fact, cover it, there needs to be a plan put in place to 
stimulate more capacity for those types of things, for small 
business, big business, medium-size businesses. Otherwise, to 
the extent that we have an occurrence of that sort, it is going 
to devastate all businesses in whatever particular zone of the 
country that it occurs.
    So, I think the small business will ultimately benefit from 
whatever we are doing in the same exact way that any medium or 
larger business would.
    Chairman Baker. The gentlelady's time has expired.
    Ms. McCarthy. Thank you, Mr. Chairman.
    Chairman Baker. I thank the gentlelady.
    Mr. Miller?
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Kelly, you have at least mentioned, for the first time 
in any of the hearings on TRIA, a concern that I have had about 
what is the insurance industry doing to push the private sector 
to be prepared for terrorism attacks, to be--what is the 
insurance industry doing for preparedness. I am glad to see 
that that--that you have addressed that, or you mentioned it, 
at least.
    The 9/11 Commission report said that the private sector was 
almost wholly unprepared. All of the witnesses said that, 
despite the clear risk, the private sector was almost wholly 
unprepared, 85 percent of the likely targets were in the 
private sector, and that there was, in fact, no widely 
understood set of standards for care, for preparedness that was 
being embraced, that was embraced by the private sector, and 
actually, when the 9/11 Commission did their follow-up report 
card just a year ago, private sector preparedness still got a 
grade of minimal progress and said that the insurance and 
credit rating industries were just beginning to incorporate 
national preparedness standards into their underwriting and 
risk assessment criteria, and that there needed to be a great 
deal more of that done.
    Are you requiring your insureds to submit to preparedness, 
terrorism preparedness audits? Are you telling them of 
standards? Are there clearly understood standards for 
preparedness?
    Are you telling them about that? Are you able to require 
that they meet those standards?
    Mr. Kelly. Yes. I think it is always easy to look at 9/11 
and say we should have been prepared. As a country, we should 
have been prepared. We were not. We were not prepared.
    I understand it is easy to say, in retrospect, we should 
have been. No one could have anticipated it. So, that 
criticism, let us put aside, but I do think the report is 
absolutely incorrect.
    Each of us in our own way--we cannot compare underwriting 
rules. The Hartford has theirs; we have ours.
    It is an essential part, before we will assume a risk. Have 
they protected the building? Have they taken care if something 
goes wrong? And we have worked with various groups to develop 
our underwriting standards.
    Our competitors have similar standards, and it is a central 
part--people who do not meet the standards cannot get 
insurance.
    Mr. Nassetta. As a consumer, I would have to agree with 
that, from what we are seeing.
    It is certainly a very active dialogue that occurs as we 
are placing our insurance--as an industry, we are placing 
insurance. It starts with a fundamental belief that there are 
some things that you can protect against and some you cannot. 
We cannot protect against a plane flying into our building, as 
an example, and we had that happen at our company. We owned the 
World Trade Center. Marriott--we lost a number of guests, a lot 
of employees, and ultimately, an 820-room hotel that was taken 
out.
    There is nothing, ultimately--the Federal Government can 
help protect us against that; we cannot. Having said that, as 
an industry, not only is it being driven through the discussion 
we are having with lenders and insurers, but it is being driven 
by our own interest in protecting ourselves because of what I 
am describing, which is a lot of these risks and perils that we 
have, we do not have coverage for.
    I mean the fact of the matter is, when it gets down to 
NBCR--I have talked about it 5 times. I will not say it again. 
We really think we have very little coverage. So, we have to 
protect ourselves right now as best we can. There are some 
things we can do, some we cannot. The real estate industry has 
gotten together with the Federal Government and created a real 
estate information sharing analysis center, real estate ISAC, 
that we have invested a lot of capital into, that is working 
very well.
    Individual companies are doing a great deal to harden 
targets as best they can. I know we are spending millions and 
millions of dollars, our company, additionally, a year, on 
security and protection against NBCR and other forms of 
terrorism that we think we can protect against. So, I disagree 
with the report in the sense of what I see day to day and what 
we are doing in our business, what I see in the industry, 
overall, and I think, you know, there is a kind of self-help 
component to what is happening, not just the influence of 
lenders and insurers but a self-help in the sense that it is 
the only protection we may have on some of these events right 
now.
    Mr. Miller of North Carolina. One of the other findings of 
the 9/11 Commission was the civil liability system should be 
part of the market inducement to preparedness, that if the 
company has what should be a known risk and fails to take the 
actions to prepare for that risk and causes harm to others, 
under the civil justice system, they should have liability for 
that.
    Mr. Kelly, do you agree with that finding of the 9/11 
Commission?
    Mr. Kelly. That is an area I think is beyond where I have 
expertise.
    Mr. Miller of North Carolina. Does anyone on the panel wish 
to claim expertise and address that?
    Mr. Nassetta. I have no expertise, but I have to say I 
would not be in favor of it.
    I think what it will lead to is a massive amount of 
litigation in which you are going to turn--what will ultimately 
happen is the victims of terrorism will be victimized again 
with a debate, with a thousand lawyers trying to determine 
whether the locks on our doors of our HVAC system were adequate 
enough to keep somebody out of putting a chemical agent in 
there that harmed our guests. I can only imagine the anarchy 
that would follow.
    So, I personally, speaking on my own behalf, think it is a 
very, very difficult thing to do.
    Mr. Miller of North Carolina. Actually, I think the 9/11 
Commission was not talking about statutory liability but simply 
common law liability; the existing law of negligence would hold 
that once--in 9/11, nobody thinks the World Trade Center should 
have understood that they were going to be hit by a plane 
filled with jet fuel.
    No business in America can now say who would have thought--
who would ever have thought we could be the victim of a terror 
attack, particularly the chemical industry, particularly all 
the industries that we know are likely victims.
    If there is a clear set of standards of what they should 
do, they did not do it, and others suffered as a result, you do 
not believe that they should be held--
    Mr. Nassetta. The clear standards are the rule of law and 
people that are not abiding by the rule of law or set-out 
rules, I think there is a different set of issues involved. 
That is not how I understood the--
    Mr. Kelly. Let us hypothesize a situation. There are 
certain glass standards you can put in a hotel. I will posit 
that as a situation. Well, unless you mandated a specific 
manufacturer and said, unless you buy that manufacturer's 
glass, then there is significant liability. Well, the bar will 
begin saying, well, you bought that glass, but that does not 
quite meet the standard in the following way--or it was not 
installed properly because in the upper right-hand corner, on 
the 22nd floor, you find a millimeter--it opens and so on. The 
plaintiff bar is remarkably creative in using liability laws to 
significantly increase the cost of doing business in this 
country, and to create a new liability, with all the 
interpretation of clear standards, and use legislation to 
encourage litigation, which this would do--it would not just 
allow it, it would encourage litigation--would be a deleterious 
effect on the broad economy.
    Mr. Ayer. It would be a tragedy, Mr. Miller, if you used 
this legislation to spawn or support the idea--
    Mr. Miller of North Carolina. Actually, I was just asking 
if you agreed with the 9/11 Commission.
    Mr. Ayer. I just believe that litigation is not the best 
way--
    Mr. Miller of North Carolina. I think the answer is no.
    Mr. Ayer. Litigation is not the best way to enforce 
accountability, in my view.
    Mr. Case. The one item I would also just highlight is to 
what purpose?
    What I thought was interesting when you asked the question, 
is there preparedness and is there efforts around preparedness, 
you actually heard as emotional a response as you have heard 
today, and it was from the insurance world, who talked about--
you know, they actually spend real time with companies, with 
firms, not just asking but requiring, and the penalty for not 
complying is much, much higher rates or no coverage, and then 
you heard a client describe the fact that they believe most of 
their terrorism risks right now are uncovered. They are self-
insured, and what is insured--again, they have tremendous 
economic incentive to try to get the best possible situation 
they can.
    So, I would just ask--I would concur with the other panel 
members but would ask to what end? Are we trying to improve the 
situation, because we have got tremendous incentives to try to 
do that now.
    Chairman Baker. Can you make this your last one, Mr. 
Miller?
    Mr. Miller of North Carolina. I can.
    I also understand that, for the vast majority of insureds, 
who are not required to have a form of insurance--workers comp 
insurance, one obvious example; the other is the requirements 
of the lenders, mortgage lenders--that the vast majority of 
insureds, commercial insureds, decline terrorism insurance.
    They do not pay the additional premium. They simply bear 
the risk. Given the fact that some are obviously vulnerable, 
their vulnerability affects others. Their failure to take 
precautions affects others.
    Do you believe that, for some businesses that are obvious 
terrorism risks, that insurance should be optional or required?
    Mr. Kelly. I think mandatory coverages inevitably lead to 
regulatory abuse, and I think to mandate coverages would be a 
bad thing.
    Let the person's risk appetite determine what they are 
willing to pay in the marketplace, and it is not--you should 
not be surprised that the take-up--it is increasingly 
dramatically, I think, as Mr. Case pointed out--take-up is low.
    Think of a California earthquake. A State program available 
to individuals on their homes, people living on the faults do 
not buy it. Very small take-up of earthquake insurance by 
individuals in California. Is that a rational act? No. But 
should the government mandate rationality? I think that would 
be unfortunate.
    Chairman Baker. I think government and rational are 
mutually exclusive.
    That was the gentleman's last question, I believe, and I 
just wanted to clarify, Mr. Kelly, with regard to pricing 
freedom, the NAIC has taken the position with regard to this 
issue that there are no pricing constraints. The GAO report 
seems to indicate that there is considerable friction between 
insurers and varying State regulation. I believe it extremely 
important to have pricing freedom for this product in order to 
have availability.
    From your role, and particularly given the extent to which 
you are engaged in workers comp, do you find, from your 
perspective, there is State regulatory intervention in your 
pricing models?
    Mr. Kelly. Significant. In our own State of Massachusetts, 
pretty much the rate is mandated.
    I think very interesting in the GAO report is the situation 
in California.
    The industry is in a peculiar Catch-22 situation. 
California regulation says that before a rate can be approved, 
it must be actuarially based. Because of the nature of the 
terrorism risk, they say your rates are not actuarially based, 
so we will not let you charge anything. Essentially, I mean it 
is a Catch-22. I mean it is not an actuarial system.
    So, in many, many, many States, there is significant price 
control of workers comp. We do not operate in anything remotely 
like a free market.
    Mr. Ayer. Congressman Baker, I would like to add--I think 
it's a very well-framed question.
    I believe, today, that price and forms are not areas where 
the industry has much freedom.
    As a matter of fact, I believe that the NAIC is not right 
in suggesting that there is enormous freedom in both rates and 
forms today.
    Chairman Baker. I thank you. I want to express appreciation 
on behalf of the committee to each of you. This has been a very 
informative hearing, very good information provided from 
various perspectives, and it will be of substantive help to us 
as we move forward in this resolution.
    Mr. Kelly. Thank you for inviting us to testify.
    Chairman Baker. I appreciate your time, and this panel is 
dismissed, and Mrs. Kelly will assume the chair.
    Mrs. Kelly. [presiding] Thank you very much for joining us 
today.
    This second panel begins with Dr. Sharon Emek, a partner of 
CBS Coverage Group, Incorporated. She appears today on behalf 
of the Independent Insurance Agents and Brokers of America. She 
has testified numerous times before the New York State Assembly 
on terrorism insurance, insurance market conditions, and broker 
compensation. Most recently, she testified before the National 
Association of Insurance Commissioners on developing a 
permanent terrorism insurance solution.
    We welcome you, Ms. Emek, and let us start with you.

 STATEMENT OF SHARON EMEK, CBS COVERAGE GROUP, INC., ON BEHALF 
  OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA, 
                              INC.

    Dr. Emek. Thank you. Good morning, Chairman Baker, 
Chairwoman Kelly, Ranking Members Kanjorski and Gutierrez, and 
members of the subcommittee. My name is Sharon Emek, and I am 
pleased to be here today on behalf of the Independent Insurance 
Agents and Brokers of America to present our association's 
perspective on terrorism insurance. I am currently a managing 
director and partner at CBS Coverage Group in New York, and 
also chair of the board for the Independent Insurance Agents 
and Brokers of New York.
    I would like to begin by complimenting the committee and 
Congress for passing TRIA in 2002 and its extension in 2005. 
The Federal backstop created by these laws have worked well. It 
has ensured that terrorism insurance is available and more 
affordable. It has allowed businesses to continue operating and 
growing and preserve jobs, at virtually no cost to the Federal 
Government.
    However, as we all know, TRIA is scheduled to expire at the 
end of 2007. There is still no reason to believe that the 
threat of terrorism is on the decline, or that the private 
insurance alone can adequately provide coverage.
    As such, the Big I encourages Congress to develop a long-
term solution that encourages the private sector to take on 
additional risk. Based on our members' experience in the 
market, we would like to stress that this is not just a big 
city or a big business problem; it is truly a national issue. 
Policyholders across the country insist on having the coverage. 
We have seen terrorism coverage purchased everywhere, from 
small towns in Mississippi to small and large businesses in New 
York City.
    Similarly, this issue impacts all businesses, large and 
small. The fabric of this country and our economy are built on 
small businesses. Without a long-term solution, we anticipate 
that coverage would be very expensive and unaffordable to 
smaller businesses. It would be years before there would be 
sufficient take-up to make it affordable for small businesses, 
if ever. These businesses would be at risk, with no option, and 
I personally have seen what can happen after a terrorist 
attack.
    I work and live in New York City, and I lived through the 
horrific event at the World Trade Center. After 9/11, a number 
of my friends had to close their businesses because they did 
not have sufficient business interruption coverage, even with 
terrorism being covered on their policies at the time, because 
no one could have anticipated the length of time it would take 
to get back into business after a terrorist attack.
    Imagine how many more businesses would go out of business 
without business interruption coverage at all, because they 
could not purchase affordable terrorism insurance. Without the 
ability to purchase affordable terrorism insurance, businesses 
will have no business interruption protection, and in the event 
of a terrorist act, many more businesses will go out of 
business.
    You have heard plenty of testimony from experts on why 
terrorism insurance is uninsurable in the free market alone, as 
it does not have the appropriate characteristics and creates 
adverse selection. So, I would like to tell you about the 
businesses I insure, and what they think and worry about every 
day, and I insure small to mid-size businesses all across the 
country, not just in New York.
    At most of my client renewal meetings this year, my clients 
ask, first thing, about a permanent terrorism insurance 
solution. They say will it still be available? Will it be 
affordable for me? What would happen to me if a terrorist 
attack happened in my surrounding area? How would I get back 
into business?
    We agents have to deal with these questions and help our 
clients figure out how to best protect themselves in the case 
of a terrorist event. Without the availability of affordable 
terrorism insurance, we would not be able to help them.
    Imagine a terrorist act happening in a few industrial 
complexes around the country, some of which I insure, at the 
time, and a ripple effect it would have across the country on 
the businesses in their supply chain. If they cannot get back 
into business because they were not able to purchase affordable 
terrorism insurance, it will have a dire economic effect on all 
the businesses they support, not just perhaps their 
distributors and the retailers that they might supply, but 
their accountants, consultants, attorneys, the coffee vendors, 
the office supply vendors--all of them would have economic 
impact because these businesses would not be able to get back 
into business without the ability to purchase affordable 
terrorism insurance.
    I can tell you from firsthand experience that the ripple 
effect of 9/11 in the city was enormous. All of the retail 
shops in downtown New York were closed for months. Many never 
were able to get back into business, even with having terrorism 
coverage at the time.
    Imagine how many more would have gone out of business 
without it, but it was not just the retail stores. One of my 
clients was a dentist, just blocks away from the World Trade 
Center, and his practice was built on servicing those 
professionals who worked in the World Trade Center. At 55 years 
of age, he was out of business, because there were no more 
customers available.
    What I want to reiterate is that we need to look at this 
problem from the bottom up and not just from the top down. 
Millions of small businesses across the country can be affected 
without affordable terrorism insurance. The Big I is encouraged 
by the report released by the Government Accountability Office 
yesterday. We believe its findings highlight the need for a 
limited but continued Federal role in terrorism insurance.
    Coverage would be very limited and less affordable without 
a Federal role to encourage the private market, especially as 
it relates to NBCR attacks.
    The requirement that insurance companies make available 
coverage has been very important to the policyholders that our 
members serve, because it encouraged greater uptake, resulting 
in increased capacity and lower premiums.
    The Big I supports the continuation of make-available 
requirements in any future public/private partnership, and 
consider extending the make-available provision to NBCR 
attacks, providing that this risk is separated and given 
special treatment.
    Any program should focus on increasing uptake rates to 
spread the risk and build capacity while protecting taxpayers 
from ad hoc post-disaster funding.
    In conclusion, the Big I applauds Congress for not ending 
TRIA abruptly last year and for having the foresight to 
continue the program while working on a viable long-term 
solution.
    Most importantly, we thank this committee and Congress for 
its continued leadership on these issues. Your efforts are 
crucial for finding long-term solutions of the economic and 
physical risk associated with terrorism.
    Thank you.
    [The prepared statement of Dr. Emek can be found on page 
110 of the appendix.]
    Mrs. Kelly. Thank you, Ms. Emek.
    Mr. Heck, I am going to call on you, but I am going to ask 
if you could curtail your opening remarks. We have your full 
testimony, it will be made part of the record, but we are just 
being called to the Floor for some votes, and if we could have 
your testimony before we go to the Floor, it would be very 
convenient for Chairman Baker and myself.

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. I will cut out most of what I was going to say, 
but there are a few items that I think I should cover.
    My experience tells me that, without a Federal program, we 
would find ourselves in the same position we were in at 9/11, 
with insurers excluding terrorism, unless they were required, 
as they are in New York, to provide it. Insurers forced to 
write such coverage in New York would either leave New York or 
they would increase their rates.
    Now, my company is a medium-size company. It is the fourth-
largest writer of commercial multi-peril in New York State, and 
we are one of the major writers of commercial insurance in New 
York City. We talked about the capital markets, so I will not 
say anything about that, but I would like to say that the 
insurance industry has been working to devise a long-term 
program for Congressional consideration that would maximize 
private sector participation without threatening the economy 
and the industry.
    One way might be to create a federally-charted entity that 
will establish a reinsurers market below the deductibles. With 
voluntary insurer participation, this ``middle layer'' of 
potential risk-bearing capacity would provide the kind of 
private market test that some in the Congress believe is 
needed. Another critical consideration is the size of the 
trigger, and this is very important. We heard a lot of very 
large insurance companies discuss this today.
    We should consider the small and medium-size companies, and 
for medium-size and small companies, the event trigger is 
critical. Too high a trigger would drive them from the market, 
because reinsurance costs would be too expensive, making 
primary coverage unaffordable.
    A trigger in excess of $50 million would severely limit my 
company's ability to offer as much coverage as it does now. I 
think a $50 million trigger would likely assure the continued 
involvement of these insurers in the sale of terrorism 
insurance.
    Absent their involvement, I believe there would not be 
enough capacity and interest to stabilize the economy after 
another event.
    One of the very important things to consider is that there 
are 2,100 property and casualty insurance companies that 
operate in the United States. If you look at the amount of 
premium that they write and the surplus that they have, there 
are only approximately 40 companies that have $1 billion or 
more of written premium and about 60 companies that have $1 
billion or more of surplus.
    In order to make terrorism available and affordable, it is 
essential that all companies participate, so that the risk can 
be spread. You need the smaller companies, too, and many small 
companies, like my company, operate in New York, and write a 
significant part of that market. There is much more detailed 
information, as you had indicated, in my written testimony, as 
well as a description of NAMIC's views regarding a long-term 
terrorism risk insurance proposal.
    Thank you once again for the opportunity to testify on this 
issue. NAMIC appreciates your continuing leadership. We stand 
ready to assist you in any way possible in developing an 
effective long-term terrorism insurance plan.
    [The prepared statement of Mr. Heck can be found on page 
125 of the appendix.]
    Mrs. Kelly. Thank you.
    Mr. Heck is chairman and chief executive officer of the 
Greater New York Mutual Insurance Company, and he testified 
today on behalf of the National Association of Mutual Insurance 
Companies. Mr. Heck, you have been with us before. You have 
testified before. We are always happy to have you here again.
    We have been called, as I said, for a vote. There are three 
votes. I would imagine that we will probably have to figure, I 
would think, at least--to give it some time, because I do not 
know what is going to happen between the votes, I would say we 
will recess for approximately 20 to 25 minutes, and see you all 
back--I am sorry for the break, but this is the way it is 
today.
    Thank you.
    [Recess]
    Mrs. Kelly. [presiding] Thank you very much, all of you, 
for your indulgence on our going off to vote.
    We will hear now from Janice M. Abraham, who serves as the 
president and chief executive officer of United Educators 
Insurance, having occupied that position since 1998. She 
testifies today on behalf of the Property Casualty Insurers 
Association of America. Ms. Abraham has over 14 years of 
experience in serving the higher education community through 
her work as chief financial officer/treasurer of Whitman 
College, various senior positions at Cornell, and the National 
Association of College and University Business Officers.
    We welcome you and we look forward to your testimony.

 STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, UNITED EDUCATORS INSURANCE, ON BEHALF OF THE PROPERTY 
            CASUALTY INSURERS ASSOCIATION OF AMERICA

    Ms. Abraham. Thank you very much, and I appreciate the 
opportunity to talk to you today, Chairwoman Kelly, and Ranking 
Member Kanjorski. Thank you very much.
    I am Janice Abraham, and I am president and CEO of United 
Educators. We are an insurance company owned by over 1,200 
schools, colleges, and universities throughout the United 
States, and we are very interested in the continuation of the 
partnership that exists in providing liability insurance, 
property insurance, and workers compensation insurance for 
terrorist events in this country.
    On first blush, it might be unlikely to think about 
educational institutions as targets, but the experts have 
identified educational institutions, colleges, and schools as 
potential soft targets, and there are really four reasons that 
we are focused on that.
    The first is colleges and universities. Our schools are 
symbols of what is great about this country. They are the envy 
of the entire world. They are icons of America. It is not at 
all unusual to walk down the street of a foreign capital and 
see a t-shirt for Sarah Lawrence, for Dickenson, for any of the 
institutions, University of Michigan, Cornell University, St. 
John's, on somebody walking down the street. They are known, 
they are respected, and they are envied around the world.
    Our campuses, our schools are open. They are open for 
debate, for controversy, and they are open physically. We 
cannot and we do not want to lock down our campuses. There are 
some areas that are restricted, obviously, but for the most 
part, we encourage visitors. We encourage individuals to come 
to our campuses, to engage in the arts, to engage in the 
discussion and the gatherings that happen, and so, we cannot 
lock down nor do we want to make a hardened target for our 
colleges and universities.
    We are also magnets for mass gatherings, whether or not it 
is 110,000 people at the football stadium at the University of 
Michigan; the presidential debates, which are often held on our 
college campuses; or a commencement, where you will have 
thousands of individuals, plus illustrious speakers, gathered 
for an important ceremony. Thousands and thousands of people 
come to our campus every day for nationally televised events, 
and it is an important symbol of what we do.
    Finally, some of the most important research, often done 
under Federal grants and contracts, is done in the laboratories 
of schools and colleges and universities. Research on ebola, on 
anthrax, and on botulism is done in our labs, and we take great 
care to keep those laboratories safe; however, it is not 
unthinkable that there would be a break-in and dangerous 
substances would be stolen and used as part of a weapon in a 
terrorist event.
    So, it is--we are targets, potentially soft targets for a 
potential terrorist event.
    Our first line of defense as an insurance company which is 
owned by the educational institutions is to do risk management, 
and we do extensive work on crisis planning, on safety, on 
security, but if that were all it took, we would not be here 
today. We would not be talking about this issue.
    Rather, we need--we are dependent on having a three-way 
partnership to provide terrorism insurance. We offer very high 
limits of liability insurance to our educational institutions, 
and if the Federal Government is not part of the three-way 
partnership, we will not be able to offer this coverage to our 
members.
    We will either exclude it or we will sub-limit it 
significantly and leave our educational institutions with a 
significant uninsured position, and the three-way partnership 
is this:
    First, our schools and colleges commit a lot of resources 
in crisis planning, keeping the athletic stadium safe, and they 
have significant financial investments in this.
    Second, as an insurance company, we have a significant 
investment in the risk management that we offer our educational 
institutions, and we have a significant financial exposure to 
the loss. That is what we do. We are not looking to step away 
from that, but we are a small company, and we are dependent on 
our reinsurers.
    I just came back late last night from meeting with five of 
our domestic reinsurers, and they told me that they are not 
able to provide unlimited terrorism insurance for us, for 
United Educators without the role of the Federal Government. 
They cannot predict what the frequency, the severity, when it 
would happen, how it would happen, and they are not able to 
provide that protection to us, and so, without--as a small 
company, without the reinsurance support, we will not provide 
it.
    So, we need the Federal Government to be a backstop, not a 
bail-out but a partner in a long-term solution, some of the 
solutions that were talked about earlier this morning, to make 
sure that educational institutions continue to meet their 
mission.
    In conclusion, we do not know when the next event will be. 
We do not know where it will be. Will it be at a college? Will 
it be at a shopping mall? Will it be at a Federal Government 
building? We do not know that.
    We do not know what method the terrorists will use, but 
what we do know is that United Educators, small insurance 
companies, our educational institutions, and our reinsurers 
want to be part of that solution, but we cannot do it without 
the role of the Federal Government.
    Thank you very much for the opportunity to speak to you 
today. I would be happy to answer questions later on.
    [The prepared statement of Ms. Abraham can be found on page 
75 of the appendix.]
    Mrs. Kelly. Thank you, Ms. Abraham.
    We turn now to Mr. Edwin Harper. Dr. Harper is a senior 
vice president with Assurant. Prior to joining the Assurant 
Group in 1998, Dr. Harper held a number of senior management 
positions in the private sector. He also served as an assistant 
to President Richard Nixon for policy planning and budgeting. 
During the Reagan Administration, he was Deputy Director of the 
Office of Management and Budget, and Chief of Policy 
Development.
    We welcome you and look forward to your testimony, Mr. 
Harper.

STATEMENT OF EDWIN L. HARPER, SENIOR VICE PRESIDENT, ASSURANT, 
                              INC.

    Mr. Harper. Thank you very much, Chairwoman Kelly, and 
Ranking Member Kanjorski. My name is Ed Harper, and I am here 
today representing the ACLA, Assurant Inc., and as chairman of 
the Group Life Coalition, and I will summarize my written 
testimony by making a couple of points and then telling a 
story.
    In 2001, I walked through the smell of quenched fire and 
ashes to my office at One Chase Manhattan Plaza, and from my 
office, I looked down into the hole which was the site of the 
World Trade Center, where more than 2,000 people lost their 
lives. Most of those lives were covered by group life 
insurance. So, we at Assurant know about terrorism attacks and 
group life from close-up.
    My message here today, to this committee, is do it again, 
and do not let go. This committee got the TRIA extension right 
by including group life in last year's bill, and as we heard 
from the earlier panel, TRIA has done a lot of excellent things 
and has made a huge difference, but TRIA has a big gap, as it 
was finally enacted.
    It provided for the buildings, the brick and mortar, but 
not for the people who work in those buildings. The workers got 
left behind when the bill was finally signed.
    The National Association of Insurance Commissioners has 
publicly stated its support for group life's inclusion in TRIA. 
Howard Mills, New York's superintendent of insurance, 
vigorously restated his support for this position in a hearing 
at the NAIC's quarterly meeting 2 weeks ago in St. Louis, and 
group life is important, because it is the only insurance that 
most of the working men and women of America have.
    At the end of 2004, there were 165 million certificate 
holders of group policies. It is interesting. I am told, 
historically, that New York State wanted to isolate itself from 
potential insurance company failures in other less rigorously 
regulated States, since the subsidiaries who operate in the 
single State of New York, the amount of surplus and assets 
available to pay claims is limited to the amount of company 
operating in New York but protected by potential failures 
elsewhere.
    The normal solvency regulation says you have surplus 
proportionate to the amount of risk the company has. Some group 
life actuaries would suggest that normal is to expect four 
deaths per 1,000 lives covered each year, with the average 
claim cost of just over $46,000.
    Thus, the normal loss would expect to be about $184,000 per 
thousand employees covered per year. However, in terrorism 
risk, there is no normal.
    Let me illustrate the dynamics of the situation with a 
story about two companies: one, the ABC Financial Services 
Company; the other, the XYZ Insurance Company. The story is 
fiction, but as they say in movie previews, it is based on a 
true story.
    What is true is there was an ABC Company that was decimated 
in 9/11, and the XYZ Insurance Company's financials represent 
those of a not atypical mid-sized group life insurer.
    In our story, ABC Financial Services, a successful company 
with about 700 employees operating from the heights of a prime 
building on Wall Street decide to get group life for its 
employees it pays well, about $250,000 a year, so they got 
group life coverage of one times their salary, then an 
accidental policy covers another one times their salary. So, 
the average employee there could expect a half-a-million 
dollars of death claim if they died.
    ABC's risk manager checked out the XYZ Insurance Company 
and found that XYZ was operating profitably in New York, with a 
$50 million surplus. In further checking, he found that, on 9/
11, XYZ had catastrophic reinsurance which covered the entire 
amount of claims, without a deductible, but today, the best 
catastrophic reinsurance they could get is $60 million of 
reinsurance after paying a $20 million deductible. It should 
still not be a problem, right?
    This risk manager was a tough analyst, and he looked into 
New York State's regulatory regime, and he realized they were 
good, solid regulators. Well, the risk manager felt good. He 
had bought group life cheap as a part of his employee benefit 
package. He had bought from a company that was profitable, had 
a nice surplus, and from a company under a strong regulatory 
regime, and XYZ surplus was far in excess of the claims one 
would normally expect.
    What could go wrong? Now, we start the movie based on a 
true story. ABC is devastated by a terrorist attack, with 658 
of the 700 employees killed in the terrorist attack. The claims 
are $329 million. XYZ's reinsurance pays $60 million of that 
amount, leaving claims of 269 million to be paid from assets 
and surplus, but XYZ's surplus in New York, available to pay 
claims, is only $50 million.
    Thus, if XYZ's New York operation were bankrupted to pay 
claims, there would still be 438 employees who would have to 
rely on public guarantee funds to be paid their justly due 
claims, and claimants in XYZ's other lines of insurance would 
find that they were not getting paid because the company was 
bankrupt, it was gone. Well, that is a short, gruesome movie 
with needless suffering.
    If XYZ had been able to purchase the same level of 
catastrophic reinsurance it had before 9/11, there would not be 
a problem, no need for public sector involvement, but the 
catastrophic reinsurance available since that time has not been 
on the terms or in the amounts available for it. There is a 
lack of capacity.
    Interesting, revitalizing the private sector market for 
catastrophic reinsurance for group life could be as simple as 
including it in TRIA this time.
    The June 30, 2005, Treasury study assessing the 
effectiveness of TRIA demonstrated that reinsurance markets for 
a covered line, such as workers comp, was revitalized by its 
inclusion in TRIA. You might look at page 113, among other 
pages, for that point. The data suggests that the reinsurance 
market for group life would be similarly revitalized by the 
inclusion of group life in TRIA.
    This committee understands the problem. In its prior 
action, refining TRIA and extending it, it included group life. 
This time it must include group life again and insist that the 
others in the legislative process not leave group life and the 
American workers behind.
    Thank you very much.
    [The prepared statement of Mr. Harper can be found on page 
119 of the appendix.]
    Mrs. Kelly. Thank you very much, Dr. Harper.
    Next we hear from Ira Shapiro, who serves as the chief 
executive officer of Fisher, Harris, Shapiro Company, an 
outsourced risk management company. He appears today on behalf 
of the Real Estate Board of New York. Mr. Shapiro was principal 
of the JLS Group, one of the Nation's larger mid-sized boutique 
brokerage firms, for 30 years. He was also a senior executive 
of the Kay Group, Incorporated, and in 1995, he founded Ira 
Shapiro Consulting Services, Incorporated. In 1998, Mr. Shapiro 
combined with colleagues to form Fisher, Harris, Shapiro.
    Mr. Shapiro, we look forward to your testimony.

   STATEMENT OF IRA SHAPIRO, CHIEF EXECUTIVE OFFICER, FISHER 
 HARRIS SHAPIRO, ON BEHALF OF THE REAL ESTATE BOARD OF NEW YORK

    Mr. Shapiro. Thank you very much. I appreciate the 
opportunity to be here and testify on behalf of this subject 
matter. I am the CEO of Fisher, Harris, Shapiro. We are a 
outsource risk management consulting firm. We do not sell 
insurance. Most of our clients are in the real estate business. 
We serve over 30 real estate portfolios and large construction 
projects, most of which are New York City-based or located in 
New York City area.
    My clients represent about $45 billion of total insured 
value, 900 million square feet of commercial space, and 71,000 
residential units. As a result of that, we are well versed of 
what is going on in the marketplace.
    While New York City and other urban centers face serious 
concentration of risk issues, the problem is a national scope. 
As an example, mortgages: Mortgages were discussed earlier 
today, but mortgages are securitized, and these securities are 
held by pension funds, mutual funds, and individuals.
    Without TRIA, these commercial mortgage-backed securities 
are in danger of underlying the mortgages and being in default. 
This could impact millions of Americans, as one example.
    What I would like to talk about is the present state of the 
insurance marketplace. New York City, in particular, and I am 
sure, other major cities, are having more and more problems in 
getting their insurance portfolios completed. It is happening 
almost--and I am not being dramatic--almost on a daily basis, 
insurance is disappearing.
    Just yesterday, we got a call from one of our portfolios 
that the broker was trying to put it together. He had 
anticipated buying $175 million, which was promised to him by 
the insurance company, in one of their layers which was 
scheduled to be put in place on October 26th. They called him 
yesterday and they said you put the insurance in force today or 
we are going to take the capacity away from you, and this is 
without the portfolio having been completed. So, this is 
something we had to do. There was no option.
    The reason that--2006 has been probably the most difficult 
year that I have seen in the insurance business, and I have 
been in the business for over 40 years and in my consulting 
firm for over 12 years--and the question is why is 2006 such a 
difficult terrorism issue when TRIA is still in effect, and 
this has come about because of TRIA. TRIA obviously has been a 
basically very important matter to the industry. Had it not 
been for TRIA, we would be having a catastrophe as far as 
trying to get insurance.
    The government has tried, in the extension of TRIA, to 
remove itself as much as possible from small exposures and 
tried to get the insurance industry to take on higher risks. 
The extension of TRIA was a godsend to buyers of insurance, 
because TRIA now had to be mandated by the insurance companies.
    On the other hand, the insurance companies were being--with 
the extension of TRIA--were being exposed to greater self-
insured retentions. We had a $5 million criteria before TRIA 
would respond to an event. With the extension of TRIA, it is 
now $50 million. So, insurance companies, on any risk that 
becomes less than $50 million, has no TRIA back-up.
    There have been actuarial studies made by the American 
Academy of Actuaries and Risk Management Solutions wherein they 
took a study of 10 possible terrorism attacks and came to the 
conclusion that 9 of those 10 attacks would not pierce the $50 
million layer, and the insurance companies look at that and say 
we are not going to have protection. I am not here to support 
the insurance companies. I am here to tell you how it impacts 
on the buyers of insurance.
    The situation, also, the insurance companies are more 
exposed because of the fact that the--and this has been 
discussed in the morning, that the percentages that the 
insurance companies have to assume has gone from 7\1/2\ percent 
up to as much as 20 percent next year, and in addition, to the 
extent that the--that an event would pierce the 50 million and 
pierce the retention that they have, the insurance companies 
now have to co-share with the government 15 percent of whatever 
it goes above that.
    The impact that that has had on the insurance--on the 
buyers of insurance is that insurance companies are not putting 
out the kind of limits that they were putting out prior to--in 
the year or two prior to that. They are concerned that--putting 
up big limits. They are insurance companies that were putting 
up $100 million and $200 million of exposure, are now putting 
up $25 million and $50 million.
    Many insurance companies have come to the conclusion that 
they cannot afford to provide terrorism insurance. Since you 
cannot write property insurance without having terrorism 
insurance, a lot of these companies have stopped writing 
altogether.
    We have some very large portfolios. We have large 
construction projects going on. We have a very large 
construction project that was in progress, that is in progress, 
and the builders risk--there are very few insurance companies 
that are providing builders risk insurance for Manhattan 
construction--large construction projects.
    When we took this project to the insurance marketplace 
through one of the major brokers, the insurance companies 
turned around and said we will not provide you any insurance 
unless you agree in advance not to buy terrorism coverage. So, 
we had to go out and buy it without terrorism coverage in order 
to get them to buy all-risk coverage, and then we had to go to 
the stand-alone terrorism market at enormous prices and with 
tremendous deficiencies in coverage.
    Mrs. Kelly. Mr. Shapiro, I would appreciate it if you could 
please sum up. The red light is on, and if you could sum up, it 
would be appreciated.
    Mr. Shapiro. A couple of things I just wanted to mention. 
The insurance industry is now being managed by the rating 
agencies.
    There are insurance companies that are willing to put up a 
lot of capacity. The rating agencies are threatening these 
insurance companies and saying to them that we will reduce your 
ratings if you continue to write terrorism. So, we have had 
insurance companies that have basically pulled back from the 
marketplace because they had to, not because they wanted to.
    Mrs. Kelly. You understand, Mr. Shapiro, your full 
testimony is a part of the record. We have all read that.
    Mr. Shapiro. Okay.
    Mrs. Kelly. So, let me explain for Mr. Knipe, in case you 
have not testified before us before, the box sitting in front 
of you has three lights in it. One is green, the middle one is 
yellow, and when it is read, it means the time is up. You each 
have 5 minutes for your testimony. Mr. Shapiro, if you have not 
finished, please do.
    Mr. Shapiro. Just one final paragraph.
    Clearly, a long-term payment permanent solution is needed. 
A workable solution will require government involvement. Let me 
just say one thing off the paper. I think the government wants 
to move back from the exposure, and I think the best way to do 
that is the pooling arrangement. It puts the pooling 
arrangement between the government and the insurance companies, 
which I think would be the ultimate situation.
    Mrs. Kelly. Thank you.
    Mr. Shapiro. Thank you.
    [The prepared statement of Mr. Shapiro can be found on page 
159 of the appenidx.]
    Mrs. Kelly. We hear next from Jonathan Knipe, a senior vice 
president, general counsel, and director of business affairs at 
World Trade Center Properties, LLC. He is responsible for 
managing the legal and business aspects of the Silverstein 
organization's to rebuild the World Trade Center site. Prior to 
joining Silverstein Properties, Mr. Knipe was the general 
counsel for Fisher Brothers, a New York City-based real estate 
development and finance company. Mr. Knipe, we appreciate your 
being here. You have heard about the lights. So, we look 
forward to your testimony.
    Thank you.

STATEMENT OF JONATHAN W. KNIPE, SENIOR VICE PRESIDENT, GENERAL 
 COUNSEL AND DIRECTOR OF BUSINESS AFFAIRS, WORLD TRADE CENTER 
                        PROPERTIES, LLC

    Mr. Knipe. I think I have all of the lights figured out. 
Thank you, Chairwoman Kelly, and Ranking Member Kanjorski. We 
really appreciate you allowing us to participate today.
    I would also like to thank the other distinguished members 
from New York, in addition to Chairwoman Kelly, for your 
continued hard work and support over the last several years, as 
we have dealt with the various terrorism insurance concerns, 
particularly Congressman Crowley, Congressman Fossella, 
Congresswoman Maloney, Congresswoman McCarthy, Congressman 
Israel, and of course, again, Chairwoman Kelly.
    As the lights are getting away from me in thanking 
everybody, as most of you know, our companies leased the 
commercial office portions of the World Trade Center site from 
the Port Authority of New York and New Jersey just 6 weeks 
prior to September 11, 2001. Since that terrible day, our 
entire effort has been focused on rebuilding what was lost.
    Last Thursday, as most of you know, marked an extremely 
gratifying and long overdue milestone for those of us involved 
in the redevelopment of the World Trade Center. The business 
deal between Silverstein Properties and the Port Authority was 
formally agreed upon and approved. This means that the entire 
World Trade Center site, with four exceptional skyscrapers, 
designed by four of the most talented and renowned architects 
in the world, should be entirely rebuilt by 2012.
    These office towers will be a magnificent addition to the 
rebirth of lower Manhattan, creating vibrant retail and office 
space, and joining the Santiago Calatrava-designed PATH 
transportation hub and our own Seven World Trade Center, the 
David Childs-designed building that our company completed and 
moved into at the beginning of this year, to make lower 
Manhattan, once again, one of the more exceptional destinations 
in the world.
    The new skyline that will be created will be worthy of a 
new 21st century downtown, restoring New York City's historic 
birthplace. That and the World Trade Center memorial will honor 
the memory of the heroes of the attacks of 9/11.
    Now that Silverstein Properties and our partners at the 
port authority have designed these great buildings and resolved 
our business issues and received the full support of the City 
of New York, the State of New York, and the State of New 
Jersey, we need to face our other remaining challenges. Along 
those lines, the timing of this testimony is ideal, because we 
face no greater obstacles to our redevelopment efforts than our 
insurance concerns.
    Our first insurance concern does not have anything to do 
with TRIA. It is our current litigation against several of the 
large insurance companies that insured the Twin Towers that 
were destroyed on 9/11 and are refusing to pay what they owe.
    Our second big obstacle is the reason for this hearing 
today, and that is the current lack of terrorism insurance 
capacity in the lower Manhattan market. We are scheduled to 
begin construction on the three office buildings to be owned by 
our companies January 1, 2008.
    As you all know, the extension of TRIA expires one day 
prior to this, on December 31, 2007. I am not an insurance 
expert, like my colleagues to my right, nor are most real 
estate developers. However, we have instructed our consultants 
and brokers to scour the markets and determine how we can 
secure adequate terrorism insurance for our buildings.
    The most recent information we have been given, as you all 
know and as you learned even more about today, paints a very 
bleak picture. Even with the current TRIA extension in place, 
if we had to go out and buy a builder's risk policy today, we 
are told that there is less than $500 million worth of coverage 
available in the entire lower Manhattan market.
    Our consultants have also informed us that they see no 
viable alternative beyond the traditional private marketplace, 
and that without some sort of permanent, workable, governmental 
backstop in place, there will essentially be zero terrorism 
insurance capacity in downtown New York City at the end of 
2007, when we commence construction of our buildings.
    As you can imagine, this reality is staggering to us. Even 
more shocking to us was that our professionals told us that 
there is currently no identifiable insurance, reinsurance, or 
capital market solution that could finance the potential losses 
in the absence of a national framework.
    We cannot finance office buildings that cost billions of 
dollars without adequate terrorism insurance coverage. While a 
substantial portion of the $8 billion needed to rebuild the 
World Trade Center comes from insurance proceeds, we will also 
need to obtain billions of dollars worth of financing in the 
form of liberty bonds.
    To obtain this financing, our lenders will require 
terrorism insurance. It would not currently be possible, even 
with the current TRIA extension in place, to adequately insure 
even one of the four office towers on the World Trade Center 
site, and this does not take into consideration the other 
construction going on in downtown Manhattan, like the Goldman 
Sachs buildings and the other major construction projects.
    Without a permanent workable solution and despite all of 
the collective hard work, the redevelopment of the World Trade 
Center site will come to a grinding halt without a permanent 
workable solution with a government backstop.
    Thank you again for allowing us to participate today, and 
we welcome any questions you may have.
    [The prepared statement of Mr. Knipe can be found on page 
145 of the appendix.]
    Mrs. Kelly. Thank you, Mr. Knipe.
    Mr. Knipe, you have testified that TRIA has been essential 
in moving forward on the Freedom Tower project. Would it be 
fair to say that if we do not make TRIA permanent in some form, 
the terrorists will not only have destroyed the World Trade 
Center, but also prevented it from being rebuilt, with the help 
of Congress?
    Mr. Knipe. Absolutely. Without adequate terrorism coverage, 
which does not exist, from everything that we have been told by 
all the best people in the business, the new towers will not be 
built.
    Mrs. Kelly. I also will be submitting testimony, Mr. Knipe, 
on behalf of the New York labor union members who are working 
on your project, who also support the renewal of TRIA.
    I would like you to explain, if you would, to the 
committee, the importance of TRIA to the union members, the men 
and women who help build our country.
    Mr. Knipe. In New York City, over the course of the next 5 
or 6 years--I think I have my statistics correct--there will be 
over $15 billion inserted directly into the economy, as well as 
over 8,000 jobs, as these four skyscrapers are built. So, 8,000 
jobs is a whole lot of union employees and whole lot of people 
who are looking to make a living. So, certainly, it would have 
a great effect on that.
    Mrs. Kelly. Thank you. I ask unanimous consent for 
testimony of the National Association of Realtors and National 
Construction Alliance be admitted to the record.
    So moved.
    Mr. Heck, you note the specific difficulties small mutual 
companies have in the terrorism risk environment.
    I would like you to elaborate, if you would, on the 
challenges of raising risk capital in a terrorism risk market 
with a mutual structure.
    Mr. Heck. Well, it is very difficult for a mutual company 
to raise capital. All of the capital that my company has, which 
is about $300 million, was earned out of operations, and so, we 
purchase reinsurance, which is another way of increasing your 
capital.
    Unfortunately, as you have heard all day, there is not 
enough reinsurance available for terrorism. We still buy quite 
a bit of it, and we are fortunate enough to be able to buy it, 
but it is extremely expensive.
    As the retentions go up and as the triggers are increased, 
it requires more reinsurance coverage, and we cannot afford to 
pay for the coverage, because we cannot charge enough for our 
policies. So, it is a very serious problem.
    Without having TRIA to cover the industry, it would be 
difficult for us to continue to do what we have been doing in 
the last 5 years.
    Mrs. Kelly. Mr. Shapiro, when you were speaking, I was 
mindful of the fact that a real estate entity arrived in my 
office with a picture, a graph, if you will, of what it took 
for them to put together the amount of terrorism risk insurance 
that they needed to carry prior to 9/11, and then they showed 
me the picture of what it took to even get one-half of that 
after 9/11, and I was interested in the fact that, no matter 
what they did, they still could not come back up to the 
coverage they had had prior to 9/11.
    I would assume that you would agree with me that, if TRIA 
had been in place when they first started looking, after 9/11--
they were looking immediately before we had enacted TRIA--I 
would imagine they would have been able to get better coverage.
    Would you agree with that?
    Mr. Shapiro. Yes. Before 9/11, terrorism was not even 
considered a peril. It was an all-risk policy with no terrorism 
exclusion, and nobody ever gave any thought to the fact that 
terrorism was going to happen. Terrorism came into place after 
9/11, before TRIA, when insurance companies started to exclude 
terrorism.
    Before 9/11, you could put together, with a half-a-dozen 
companies, or even more, a billion dollars worth of coverage to 
cover an entire project. To do it after 9/11, it did not get--
it did not become a problem right away after 9/11.
    The policies that had been written before 9/11 had 12 
months, 11 months, 10 months to go. So, those companies were 
okay. Towards the end of 2002, it was not too far before TRIA 
came into place. Then you had reinsurance treaties; 70 percent 
of them expire at the end of 12/31, but there was still 30 
percent of those reinsurance companies going through to the end 
of April or the end of July. So, after 9/11, it was not as bad 
as everybody thought it was.
    2002 was a bad year, because--when basically all the 
treaties were gone. You cannot get a billion dollars from 
anybody anymore. Now, the most--and if I had to go back a year 
or a year-and-a-half, you could get $200 million from an 
insurance company.
    Now, we are seeing $25 million, $15 million, $50 million. 
That is about it, and when you get these big projects which 
have a billion dollars or $1.2 billion, in one case, for my 
client, it is almost impossible to find enough insurance 
companies to fill that up. Many insurance companies have 
dropped out completely. They just cannot afford the retentions, 
so they are just not participating.
    Mrs. Kelly. Thank you.
    Ms. Abraham. Mrs. Kelly, if I could add to and build on Mr. 
Heck's comment very briefly, we are similar in structure to a 
mutual insurance company. We are a reciprocal. So, all of our 
policies are held--all of our capital are held in the name of 
our insureds, our educational institutions, and since 2001, we 
have gone back to them and asked them to contribute capital.
    They have--so that we could provide the breadth of coverage 
that we do. We have gone back to our members, our 
policyholders, and raised additional capital, but without the 
Federal backstop in providing TRIA, we would not be able to go 
forward.
    So, they are will to contribute, they are willing to make 
investments in risk management and in capital, but we need 
them--we need you to be part of the solution.
    Thank you.
    Mrs. Kelly. Thank you.
    I was going to ask you, Ms. Abraham, about how your members 
are responding to the challenge of continuing overseas research 
that I know that they do, and also, the outreach and admittance 
of foreign students in this kind of an environment must also 
affect your ability with regard to insurance.
    Ms. Abraham. It absolutely has, Chairwoman Kelly. As you 
know, we are great importers of students. Students from all 
over the world come and study with our educational 
institutions.
    After September 11, 2001, there was a blip in the number of 
students who come over, particularly in the graduate research 
programs. So, much of the research has slowed down. It is 
beginning to pick up.
    The institutions have made additional risk management 
steps, background checks, working with the Federal Government 
on USA Patriot Act, and they are doing significant additional 
work, unfunded mandates, if you will, in order to reach--try to 
create a secure campus, still have the research, still have the 
exchange of ideas, but it has added an additional challenge to 
them in order to meet the open campus, the ongoing research, 
and continue to attract students from all over the world in 
order to study here.
    In addition, our students are going overseas. That is good. 
That makes better global citizens, but it has added an 
additional burden for terrorism here, and we do provide 
terrorism coverage, internationally or domestically.
    So, that is a coverage that we feel has to be provided, 
going forward.
    Mrs. Kelly. Thank you.
    I have finished with my questions, and I have an 
appointment in my office. So, I am turning the chair over to my 
colleague from New York, Mr. Fossella.
    Mr. Fossella. [presiding] Good afternoon. This will be 
fast.
    Thank you all for your testimony.
    I think the inherent irony in all of it--and it has been 
stated in a couple of different ways, but it bears repeating--
inasmuch as that the site will not commence construction till 
January 2008, the one project that will definitely not be 
covered under TRIA is the basis of why we are here, the 
rebuilding of the World Trade Center site, and I find that 
utterly ironic, as we deal with this issue, that the one 
guarantee we will have under the current law is that the trade 
center site will not be redeveloped, which brings me to Mr. 
Knipe's point, in part, raised regarding the litigation and 
insurance proceeds.
    I understand much of the rebuilding is going to be done 
through insurance proceeds. Can you give us--describe the 
current status of those proceedings, and what is the minimum 
required of insurance that has been paid?
    Mr. Knipe. First of all, Congressman Fossella, thank you 
for being here today, and on behalf of Silverstein Properties, 
we want to thank you for your years and years of hard work, not 
only on our behalf, but on the entire lower Manhattan 
community's behalf, to help with the rebuilding of downtown, 
and I also wanted to touch upon one of the things you said 
before I get into the new insurance--the other insurance issue, 
which is the Freedom Tower, which is now controlled by the Port 
Authority, actually construction has commenced on the Freedom 
Tower, and it will be up to grade level by the end of next 
year.
    So, it is just the three towers that will be owned by 
Silverstein Properties that we are not starting to build until 
January 1, 2008, after the appropriate excavation work has been 
done. As far as the state of the current litigation, thank you 
for asking about that, as well.
    As you know, juries have decided that this was a two-event 
attack, and that several of the major insurers have to pay for 
the two events. Unfortunately, several of the major insurers, 
particularly Aleons, Royal, Swiss Re, Gulf, Wasaw, and Zurich, 
have not even paid for the one event coverage, and we are just 
in a horrible litigation that drags on and on, and they are 
dead wrong.
    We now have, you know, unanimous support, letters being 
written by the day from every level of government to these 
insurance companies to get them to pay what they owe, and you 
know, this money is desperately needed to rebuild downtown.
    Mr. Fossella. To what extent will that impact the framework 
that has been established among the Port Authority, the City of 
New York and the State of New York and your company?
    Mr. Knipe. Well, they are arguing everything they can get 
their hands onto, the insurance companies. We really--it has 
just become clear that they are looking to be an impediment to 
construction.
    One of the theories that they came up with that would 
enable them not to pay what they owe is that this conceptual 
framework agreement, which transfers ownership of the Freedom 
Tower and Tower 5 to the Port Authority, is contradictory to an 
anti-assignment provision within the insurance policies.
    In fact, the Port Authority is a named insured on those 
policies, and there is just no question, as a matter of law, 
that they do not have a leg to stand on with this fight. If 
they do not agree to pay up--and again, there are several 
insurers--I mean I want to make clear, the vast majority of the 
insurers have agreed to honor their commitment and pay what 
they owe, but there are still several insurers--Aleons, 
Travelers, Royal, and Swiss Re--that owe a total of $1.12 
billion in insurance money. Again, the buildings just will not 
be built without that money. It would completely thwart the 
conceptual framework, and there would be no deal, in effect, 
and no buildings, if they do not pay what they owe.
    Mr. Fossella. To clarify what I talked about before, about 
the irony, is we first met to discuss TRIA to redevelop the 
Trade Center site in its entirety, and the buildings that your 
company is discharged with the responsibility of building could 
be left out in the cold.
    Is that true?
    Mr. Knipe. Yes, absolutely.
    Mr. Fossella. Finally--I know it has sort of been dealt 
with in different ways, but in the long term--and any of the 
panelists could comment, if they so choose. If not, we will end 
the hearing.
    What are the key factors that will determine the amount of 
private market insurer and reinsurer capacity available for 
terrorism risk insurance coverage in the long term? Anybody 
want to offer that opinion?
    Ms. Abraham. Thank you very much.
    I think the first issue is we need to recognize that there 
is a three-part partnership. The first is the business--in my 
case, the educational institution--the second is the insurance 
companies, and the third is the government.
    The second is the stability, that we need to have a long-
term plan to know that whatever happens will need to be phased 
in.
    It is not something, whether it is a pool, which is a 
concept that needs additional research, but something that we 
know we are working towards.
    A 2-year solution, a 3-year solution will not help us, but 
all parties that I have talked to in the insurance and the 
business world are interested in taking significant risk and 
phasing out over a very long period of time the government's 
role.
    What we need is a long-term solution rather than these 
quick 2 years, so that we can plan for it, and a pooling 
arrangement, particularly, will take many years in order to 
provide the adequate support that we need.
    We heard this morning the European countries have been 
working at this, and South Africa, for a very long period of 
time.
    We are anxious to get engaged in that and start that 
funding sooner rather than later.
    Mr. Shapiro. To add to that, I believe that the pooling 
arrangement satisfies both the needs of the buyers, the 
insurance companies, and the government. The government is 
trying to remove itself from the smaller exposures.
    The insurance companies are troubled with--they cannot 
afford to take those exposures, and the pooling would sit right 
in the middle of that, so that the insurance companies can come 
back into the marketplace and take some risk, get the pooling 
in between that and the government, and would actually remove 
the government further away from exposures, and that will take 
over a period of time, but it will work. It is the only way it 
is going to work.
    Mr. Heck. I would like to also say that NAMIC, working with 
the CEO Roundtable, does have a plan, and it involves a public 
and private arrangement bewteen the Federal Government and the 
insurance carriers. There is a middle layer, which is really a 
reinsurance layer, to help the smaller companies that need to 
buy down their deductible.
    We talked about cap bonds. If that could develop, it would 
be very important to providing capacity. We talked about tax-
free reserves. When you think of how large an undertaking it 
is, to cover the catastrophic loss. Potential from terrorism 
risk, you need to employ all means at your disposal to increase 
capacity, and it is going to take time to build that capacity.
    It is not something that can be done in just a few years. 
It would probably take 10 to 20 years, but if we can all agree 
on some type of a solution, we can begin to implement it. As 
time goes on, the government would have less and less exposure, 
and the private sector would take up more of the exposure. It 
is not something that can be done overnight.
    Mr. Harper. If I could add, a member of the committee this 
morning brought up a concept which I think is important and 
fundamental to understanding where we should be going with a 
solution, and that was--he referred to the war on terrorism 
which we have to win.
    I think it is not inappropriate to think of the risk we are 
looking at as a war risk, and as there were several programs 
during World War II and prior wars that--where Congress enacted 
legislation for the duration of the war. Maybe we should look 
at terrorism risk insurance as something that would be enacted 
for the duration against terrorism, because war is ultimately 
and fundamentally a governmental responsibility, and it can be 
so devastating to the economy and to the civilization of our 
country that there is no limit to how much could be involved, 
and therefore, if the government can do anything to define the 
risk that the private sector is taking and, in effect, it is 
asking the private sector to take on behalf of the government, 
I think that would do a lot to bring back reinsurance and to 
revitalize the capacities for the private sector to take care 
of the Nation's needs.
    Dr. Emek. I would like to add that the Independent 
Insurance Agents and Brokers of America--we believe that we 
need to explore ways to strengthen the program and maximize, 
you know, the private market participation, whether it is from 
a risk-sharing mechanism, capital reserve accounts or, you 
know, tax-free reserves, cap bonds, but it has to be a long-
term solution.
    It is so disruptive to the marketplace when, every 2 years 
or 3 years, we have to worry about terrorism insurance.
    What happens--it drives capacity out of the marketplace, 
and if you take a look at New York, where you cannot exclude 
terrorism, without TRIA being reauthorized in some way, or some 
mechanism over the long term, carriers will not be able to 
write in downtown Manhattan or in Manhattan or the surrounding 
area, and you will find that small businesses, large businesses 
just will not be able to pay the price for the cost of 
insurance.
    Without capacity, even property insurance goes up. So, what 
happens if nobody is writing, or very few companies are writing 
in downtown, there is less competition; less competition, 
prices go up, and then it is a burden to the businesses in the 
city, or anywhere in the country that will face the same 
problem.
    Mr. Fossella. Along those lines, with respect to price and 
the rising premiums, how is that ultimately passed on to the 
tenants in the forms of, you know, the higher premiums or 
rents?
    What is the impact or has been the impact over the last 
several years?
    Can anybody comment on that?
    Mr. Heck. I could say something about that. I think the 
fact that TRIA was passed in 2002 went a long way to help the 
consumers in the business community. Without it, prices would 
have been much, much higher, and I believe that if there is no 
government backstop after 2007, there will be a shortage of 
insurance availablity, and that will push prices up.
    Dr. Emek. I would concur with that. I have a client who 
owns a number of industrial buildings, and they are in New 
Jersey, they are not in New York, and they face that same 
problem.
    When premiums went up because of the terrorism issue, they 
had to pass on that cost to their tenants. So, their tenants' 
rents up, and TRIA will help stabilize that, by continuing 
TRIA. Without some form of extension of this, premiums will 
definitely go up, and that will definitely impact what tenants 
will have to pay.
    Mr. Shapiro. I can add to that, that nationally, insurance 
prices have gone down in the last year, with the exception of 
property insurance in the major cities. In the major cities, 
property insurance is going up, and primarily because a lot of 
insurance companies are dropping out or providing low capacity, 
and it is causing price increases.
    Mr. Fossella. Is there a way to quantify this? You say it 
is going to go up or it has gone up or will continue to go up. 
Is there any way to put like a dollar per square foot--
    Dr. Emek. Well, I could give you--not necessarily a dollar 
per square foot, but an example, just in a small business.
    Because of the higher retention for the carriers, a number 
of the small, you know, and regionals are really not writing 
very much in the city, and so, now you have smaller businesses 
who have had to buy insurance from larger carriers, and they 
are paying more, but in terms of just terrorism, I have seen a 
small business who paid maybe $500 for their office policy for 
terrorism insurance this year paying $2,500.
    Now, for a small business, that has dramatic impact on 
their bottom line and just because there is a higher 
retention--so, imagine the effect that then has on all 
businesses in the city.
    So, I cannot quantify it per square foot, but I could tell 
you that it does impact, and it does not just impact on the 
cost of their rent, but it is impacting their own particular 
insurance premiums.
    Mr. Knipe. Let me also try to address that from our unique 
perspective, and I am glad you asked it, Congressman.
    We are not even looking at price.
    Obviously, it has to be something that enables us to build 
our buildings and have tenants that can afford their rent.
    In our particular situation, which, albeit, is unique, as a 
main consumer of insurance at the World Trade Center site, the 
capacity is just not there, at any price, and that is the 
bottom line.
    It is not that the private sector is coming after us and 
charging us a premium.
    It just not available.
    Mr. Fossella. How does that translate--you know, everything 
is fungible, right, and if a prospective tenant has to incur an 
additional cost with respect to--because terrorism risk 
insurance is--or the premiums have gone up, does that put 
places like New York City at a competitive disadvantage with 
other areas because of an increase in rents, or is that a 
specious argument?
    Mr. Shapiro. I think New York City is New York City, and 
there a lot of companies that are not going to move out just 
because the pricing is going up. The real estate owners can 
afford the price increases, as was said here.
    It is getting the capacity and getting the right terms and 
conditions that are the problem, but those costs on commercial 
buildings are being passed through to tenants, and some of 
those increases are very substantial.
    So, it is not hurting the real estate companies as much as 
it is the tenants.
    Mr. Fossella. Is there any way we can get that number? 
People throw around numbers--substantial, a lot, large. It's 
pretty subjective.
    Is there a way to say that, in this particular building, we 
have seen rents go up by a dollar-fifty a square foot because 
of this, or is that possible or no?
    Mr. Shapiro. Rents are definitely going up, and the real 
estate board in New York will do everything possible to try to 
keep that under control.
    The situation is such that one of the major insurance 
companies who writes the primary layers on these programs has 
basically come out and said that we are going to give 10 to 20 
percent increases on our policies. That is not going to say 
that every one is going to be 10 to 20 percent, but that is 
what they are trying to put out there. It is a big increase.
    Mr. Fossella. Okay. The hearing is adjourned.
    Thank you very much.
    [Whereupon, at 2:26 p.m., the hearing was adjourned.]


                            A P P E N D I X

                           September 27, 2006


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