[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
31-552 WASHINGTON : 2007
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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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