    [Senate Hearing 109-566]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-566

                      THE TERRORISM RISK INSURANCE PROGRAM

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

                                    HEARING

                                   before the

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

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                       ON

    THE IMPLEMENTATION OF THE TERRORISM RISK INSURANCE PROGRAM, FOCUSING ON
       THE ROLE OF THE FEDERAL GOVERNMENT IN ENSURING THAT INSURANCE TO
      PROTECT AGAINST LOSSES FROM ACTS OF TERRORISM REMAINS AVAILABLE TO
                                   AMERICANS

                                   __________

                                 APRIL 14, 2005

                                   __________

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

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

                                     _____

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                               WASHINGTON : 2006
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                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      RICHARD C. SHELBY, Alabama, Chairman

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

                 Kathleen L. Casey, Staff Director and Counsel

         Steven B. Harris, Democratic Staff Director and Chief Counsel

                           Mark F. Oesterle, Counsel

                   Alexander M. Sternhell, Democratic Counsel

       Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                           George E. Whittle, Editor

                                      (ii)

                                C O N T E N T S

                                  ----------

                            THURSDAY, APRIL 14, 2005

                                                                       Page

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

    Opening statements, comments, or prepared statements of:
        Senator Reed.................................................     2
        Senator Hagel................................................     3
        Senator Dodd.................................................     3
        Senator Martinez.............................................     6
        Senator Schumer..............................................     6
        Senator Sununu...............................................     8
        Senator Corzine..............................................     8
        Senator Crapo................................................     9
        Senator Bennett..............................................    10
            Prepared statement of Senator Allard.....................    36

                                   WITNESSES

    Douglas Holtz-Eakin, Director, Congressional Budget Office.......    12
        Prepared statement...........................................    36
    Howard Mills, Acting Superintendent, New York State Department of
      Insurance......................................................    13
        Prepared statement...........................................    42
    Ernst Csiszar, President, Property Casualty Insurers Association
      of America.....................................................    15
        Prepared statement...........................................    46
    J. Robert Hunter, Director of Insurance, Consumer Federation of
      America........................................................    17
        Prepared statement...........................................    51
    Brian Duperreault, Chairman, Ace Limited, On Behalf of the
      American Insurance Association.................................    18
        Prepared statement...........................................    67
    Franklin W. Nutter, President, Reinsurance Association of America    20
        Prepared statement...........................................    71
    Robert J. Lowe, Chairman of the Board and CEO, Lowe Enterprises,
      On Behalf of The Coalition To Insure Against Terrorism, The
      Real Estate Roundtable, and the United States Chamber of
      Commerce.......................................................    21
        Prepared statement...........................................    74

                                     (iii)

                      THE TERRORISM RISK INSURANCE PROGRAM

                                  ----------

                            THURSDAY, APRIL 14, 2005

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                       Washington, D.C.
        The Committee met at 10:04 a.m., in room SD-538, Dirksen
    Senate Office Building, Senator Richard C. Shelby (Chairman of
    the Committee) presiding.

            OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

        Chairman Shelby. The hearing will come to order.
        I want to thank our witnesses for appearing, especially
    since this hearing had to be rescheduled from an earlier date
    last month.
        Today, as everyone knows, we are here to discuss the
    Terrorism Risk Insurance Program, or TRIA, which was enacted in
    the aftermath of September 11. The stated purpose of this law,
    and I will quote, was to ``establish a temporary''--I am going
    to say it again--``temporary'' Federal program that provides
    for a transparent system of shared public and private
    compensation for insured losses resulting from acts of
    terrorism.
        Now, as we are gathered here 2\1/2\ years later, the
    program's scheduled termination date draws near us. I think we
    are at a point where we can determine what, if anything, more
    is required of this so-called temporary program. To make this
    determination, I think we need to look at both the past and the
    future. We need to understand where things stood in the
    insurance markets at the commencement of the program and where
    they stand today and in what direction they are headed.
        Some of you will recall I did not vote for the TRIA program
    initially since I prefer market solutions to Government
    intervention. Nevertheless, I intend to approach this debate
    with a critical but, I hope, open mind.
        Should we determine that the insurance markets are now over
    the initial shocks of 9/11, I think it would be best to
    dismantle the Federal backstop. But if we see that insurance
    markets are improving or still recovering but that they still
    lack the necessary capacity to provide coverage, I think more
    action may be required on our part. That begs the question of
    what form such action would take. If there is need for
    Government intervention in the markets, our priority must be to
    develop a program that protects taxpayers and the economy while
    helping to restore the efficient function of private markets.
        I look forward to exploring these matters with the
    witnesses today. I think we have a distinguished panel. I also
    look forward to receiving more detailed information that is, as
    you know, coming from the Department of the Treasury in the
    near future. I appreciate all of you being here today, and I
    will introduce the witnesses later.
        Senator Reed.

                     STATEMENT OF SENATOR JACK REED

        Senator Reed. Mr. Chairman, thank you very much for holding
    this hearing, and I look forward to working with you and
    Senators Sarbanes, Dodd, Bennett, Hagel, and others as we
    review the Terrorism Risk Insurance Act legislation this year
    to ensure that a Federal terrorism insurance backstop remains
    in place.
        After 9/11, we enacted a number of measures to enhance or
    stabilize the security of our citizens and our economy,
    including the Terrorism Risk Insurance Act. TRIA provided a
    high-level Federal backstop that allowed private insurance and
    reinsurance markets to return and American businesses to
    overcome the shock of September 11. TRIA seems to have
    performed exactly as we intended, but as we all know, the
    program expires at the end of the year.
        I am getting concerned that we are fast approaching a point
    where we need to take action. We cannot allow this program to
    expire without at least a short-term extension or place a
    longer-term solution on the legislative rolls--but as we
    consider whether or not to extend TRIA, we should look closer
    at the two main goals that we tried to accomplish with the law.
    First, as I just noted, we wanted to make sure that the markets
    and the economy functioned in the wake of 9/11 and in the face
    of the continuing threat of terrorism. The second important
    reason for this legislation was that many of us felt that we
    needed to have a policy in place to allow the economy to
    rebound more quickly in the unfortunate event of another
    terrorist attack here in the United States. Fortunately, and
    through the effort of many, many people, we have not seen such
    an attack, but we all understand there are ruthless and very
    clever people who are still at large planning such attacks.
        Some opponents of an extension argue that TRIA should be a
    temporary program because by ending it, private terrorism
    insurance markets would be forced to stabilize and provide
    adequate capacity to meet the demand for coverage. Even if this
    had occurred--which it has not--they would ignore the second
    goal of the act. As policyholders and insurers look to enter
    agreements for the next several years, they are facing a very
    uncertain future. It is important to remember that we still
    live under a threat of attack. As a member of the Armed
    Services Committee, every day we review information that I will
    say gives us the distinct impression, again, that we are still
    at risk.
        As you may also know, the Treasury Department is required
    to report to Congress by June 30 on issues associated with the
    act and its purposes. While I look forward to the conclusions
    of the Department's study, it will have little, if anything, to
    do with the second aim of the law, namely, having a policy in
    place in the event that there is another terrorist attack in
    America. It is this reason that most compels me to believe that
    we need to continue a Federal Terrorism Insurance Program.
        I have joined Senator Dodd and Senator Bennett to introduce
    the extension bill, S. 467, and I am an original cosponsor, and
    I look forward to working with them.
        In addition to extending TRIA to 2007, this legislation
    would establish a Presidential working group on financial
    markets to submit a report to Congress containing
    recommendations to address the long-term availability and
    affordability of terrorism risk insurance. So far the
    administration has been silent on TRIA. I believe it is
    essential that the administration lead rather than follow the
    process. I would encourage them to get actively involved in
    extending TRIA.
        Furthermore, vacancies in key administrative personnel have
    led to a vacuum in leadership and communication needed for good
    policymaking, and I urge the administration to fill those
    positions.
        I believe extending TRIA is exactly the right thing to do,
    and thank you, Mr. Chairman.
        Chairman Shelby. Senator Hagel.

                    STATEMENT OF SENATOR CHUCK HAGEL

        Senator Hagel. Mr. Chairman, thank you. I look forward to
    the witnesses' testimony this morning.
        Chairman Shelby. Senator Dodd.

                STATEMENT OF SENATOR CHRISTOPHER J. DODD

        Senator Dodd. Thank you, Mr. Chairman. I am going to take a
    minute or so, if I can.
        Chairman Shelby. Go ahead.
        Senator Dodd. I apologize for walking in a couple minutes
    late, but I have a slight passing interest in the subject
    matter.
        Let me first of all thank you, Mr. Chairman, and thank
    Senator Sarbanes as well for your efforts in holding a hearing
    this morning, and thank our witnesses in advance for their
    willingness to be here and shed some light on this subject
    matter.
        I recall that we spent quite a bit of time and effort 3
    years ago to adopt the original piece of legislation creating
    terrorism risk insurance. And while we did not agree on
    everything, I believe that we managed to create a product that
    has been very successful over the past 3 years and did what we
    thought it would do.
        I would like to, of course, welcome all of our witnesses
    here this morning and thank them for their thoughts. Most of
    the witnesses are likely aware that Senator Bennett and I as
    well as a majority of this Committee, including Senators
    Schumer, Hagel, Reed, Bunning, Bayh, Dole, Carper, Stabenow,
    and Corzine have introduced legislation to extend terrorism
    risk insurance for an additional 2 years. As a result, I would
    urge all of our witnesses who support our legislation to speak
    for as long as you would like this morning in your opening
    statements.
        [Laughter.]
        Senator Dodd. As long as it is not over 5 minutes.
        Senator Dodd. In all seriousness, I would like to thank all
    of you for your testimony today. With the expiration of TRIA in
    December of this year, your input is especially important. And
    obviously waiting until December is what many of us worry about
    because of the time that is necessary to gear up for this if we
    are going to get the job done.
        In November of 2002, the Terrorism Risk Insurance Act
    passed both the House and the Senate by overwhelming margins
    and was signed into law by President Bush, as most will recall.
    Enacting TRIA was not an easy undertaking for those of you who
    went through this. Our Nation and this Congress faced a new
    reality that terrorism could occur on American soil. The
    September 11 tragedy resulted in disbelief, devastation, and
    economic dislocation. Previously, an attack on our country
    seemed unimaginable. Few believed any significant major
    terrorist attack would occur, no less than one horrific and
    devastating event as the one that occurred on 9/11.
        As a Nation, we were forced to quickly face the tremendous
    loss of life and physical damage of that tragic event. And for
    the most part, we were able to quickly recover with the
    combined protection provided by insurance and from assistance
    from the Federal Government. However, understanding the more
    mundane long-term economic impacts of the terrorist attacks
    took us a lot longer.
        We eventually came to the realization that our current
    domestic insurance marketplace was unable or would be unable to
    sustain a second terrorist attack of that magnitude, and that
    only with the backing of the Federal Government could we
    protect our Nation from future acts of terrorism and the
    economic impacts. And while recognizing that the Federal
    Government needed to play a role to ensure economic stability,
    the exact extent and nature of that role was not easily decided
    upon. But we did persevere. We negotiated and had a very frank
    exchange of views over numerous months, as the Chairman will
    recall. In the end, even though it was a time of laborious and
    difficult process, we produced a bipartisan bill that garnered
    86 votes in this body and the strong support in the other body
    as well.
        September 11 changed everything, most visibly, of course,
    National homeland security policy. But September 11 also
    fundamentally changed the way insurers look at terrorism risks,
    which suddenly started to resemble acts of war. As a result,
    after 9/11, the insurance market for terrorism nearly
    completely dried up. Coverage was unavailable. Many financial
    transactions were unable to proceed, and construction workers
    and other hard-working Americans suddenly found themselves
    economic victims of terrorism.
        In short, we wrote TRIA for a very simple reason. Hundreds
    of thousands of American jobs and billions of dollars of
    business investment hung in the balance. TRIA was created as a
    3-year Federal program to help make sure the part of the
    commercial insurance marketplace disrupted by 9/11 could work
    again. Most Americans do not even know that TRIA provides a
    crucial economic safety net for virtually every sector of our
    economy. Transportation, real estate, utilities, construction,
    travel, tourism, and financial institutions are just a few of
    the sectors that need TRIA to protect them against economic
    devastation that could come as a result of a terrorist attack.
        Under TRIA, the Government shoulders a share of the
    financial risk of future attacks. This makes sense. These
    attacks are against us as Americans, against our democracy, our
    way of life, and even our economic institutions. But TRIA also
    required insurers to offer terrorism coverage on commercial
    policies. In addition, insurance companies would have to bear
    an escalating financial burden in future years.
        Mr. Chairman, TRIA is working, as I said at the outset.
    This public-private shared loss mechanism is making terrorism
    insurance available to all businesses at reasonable costs.
    Under TRIA, in the event of another terrorist attacks, private
    insurers will still shoulder tens of billions of dollars of
    terrorism-related risk. What TRIA does is act as a backstop to
    the private commercial property casualty insurance system. It
    gives the markets some certainty by establishing by law a limit
    to insured terrorism losses for the insurance industry and the
    Federal Government.
        Acting Assistant Secretary Greg Zerzan from the Treasury
    Department recently stated, and I quote him, ``By most
    indications, TRIA has been successful in achieving the
    fundamental goal of enhancing the availability and
    affordability of commercial property and casualty terrorism
    risk insurance, particularly for economic development
    purposes.''
        The Mortgage Bankers Association recently surveyed its 40
    largest commercial, multifamily mortgage banking firms. A
    substantial majority, Mr. Chairman, of them believe that TRIA
    has made terrorism insurance both more available and less
    expensive. But the mortgage bankers also noted that failure to
    extend TRIA could hurt the commercial real estate market. If we
    let TRIA expire, we will see, I think, the same uncertain
    environment we saw before TRIA was enacted.
        Former CEA Chairman Glenn Hubbard concluded in a recent
    economic impact study that letting TRIA expire would increase
    the overall cost to the Nation. Mr. Hubbard estimates that
    allowing TRIA to expire would result in a lower economic
    performance and greater economic disruption to the U.S. economy
    in the event of a terrorism attack. He concluded that if TRIA
    expires, even absent another attack, hundreds of thousands of
    jobs are at risk and tens of billions of dollars in economic
    development are in jeopardy. If we let TRIA expire, many
    business consumers will be unable to get the coverage they
    need. That can only hurt our economy, and I am sure and
    confident that all of the Members of this Committee share the
    goal of a growing economy.
        Senator Bennett and I and other colleagues propose a 2-year
    extension of TRIA that will help avoid destabilizing the
    insurance market and in turn the National economy. In addition
    to temporarily extending the program, the legislation mandates
    that the President's working group on financial markets develop
    recommendations to address long-term solutions to managing
    terrorism exposure. It will give Congress, insurance, business,
    and Government officials time to gather all available relevant
    data. Collecting that data without fear of market disruption I
    think would help us develop a more permanent solution for
    managing our Nation's economic exposure to catastrophic
    terrorism.
        TRIA, Mr. Chairman, has a history of bipartisan support,
    and I am extremely pleased to say that the robust support on
    both sides of this Committee panel still exists as we consider
    an extension of this program. It is my strong hope that we find
    a solution to this problem in a bipartisan fashion. Protecting
    our Nation from terrorist attacks is neither a Democratic nor
    Republican issue. It is truly and fundamentally an American
    one.
        Again, I thank you, Mr. Chairman, for letting me go on a
    little longer here in an opening statement, but having been the
    co-author of the original piece of legislation and the author
    of this one with Senator Bennett, I think it is important to
    lay out here. Again, I would like the idea of a more permanent
    bill, but I think we need to be realistic about where we are,
    and the idea of developing the data and establishing the basis
    and foundation for that I think are critically important. We
    have a chance to do it with a limited bill here, with a goal in
    mind, I would say very candidly to my colleagues here, of
    establishing a more permanent program down the road, knowing
    how valuable this is going to be, I think, in the 21st century
    for our economy.
        I thank you for listening.
        Chairman Shelby. Senator Martinez.

                    STATMENT OF SENATOR MEL MARTINEZ

        Senator Martinez. Chairman, I would look forward to
    listening to the panel discussion, and I have no opening
    statement. Thank you.
        Chairman Shelby. Senator Schumer.

                STATEMENT OF SENATOR CHARLES E. SCHUMER

        Senator Schumer. Thank you, Mr. Chairman, and I appreciate
    your calling this hearing in a timely way.
        I rise in support of this legislation. It is extremely
    important to my city. We were very involved, our whole
    government structure in New York were very involved last time
    and intend to be now. And I hope we can move this rather
    quickly. I am going to make a few points.
        First, I do hope we move it quickly. Last year, we had many
    delays, and it cost us a great deal of economic activity,
    particularly in the larger cities of the country, even though
    we knew that when you came right up to it and looked into the
    abyss, you had to do terrorism insurance. The alternatives are
    worse, much worse than they have been.
        What are the two alternatives? One is that there will be no
    terrorism insurance, that the private market will not fill the
    gap. That on itself will prevent tens of billions of dollars of
    projects and hundreds of billions of dollars of economic
    activity from occurring.
        The second is that the market will fill the gap, but only
    at such exorbitant prices and only in unique situations that
    virtually the same thing would happen: large numbers of
    projects would not go forward. So we should do it.
        Those who say, well, maybe the private market now 2 years
    after a terrorist attack will fill the gap cannot happen, will
    not happen. Why? First, even though we are a few years from the
    horrible day of 9/11, it is on people's minds all the time. Not
    just on my mind as a member of New York City, or the Members of
    this Committee's minds as Senators, or all of your minds. It is
    on the rating agencies' minds. The rating agencies have said
    that come December 31, if there is no terrorism insurance, they
    are not going to be able to give any kind of decent rating to
    any insurance offer. So things are gone.
        These guys are insurers. They look for risk. They live with
    risk. They wake up in the morning with risk and go to bed at
    night with risk. So even if we can say, well, it is a few years
    away and the markets will settle down, that is not what rating
    agencies do. That is not what insurers do. And we will be back
    where we were before.
        My first point is we have to do this. We have no choice,
    and we will do it.
        The second question is when. Well, we can wait and delay
    and do it at the last minute. But we all know that major
    building projects take long planning, and very soon if we do
    not renew this, lots of projects are going to be delayed, not
    undertaken, postponed, and, again, we will suffer a significant
    economic loss.
        You cannot call up your insurance company and say, Hey, I
    want to make sure that, you know, on December 31 you say write
    me a policy January 1. It will not happen. Right now, there are
    projects--I know; I speak to developers from all across the
    country--that are being planned, and they are not happening
    until we know what happens with terrorism insurance. So to
    wait, as we did 2 years ago until--I do not remember when it
    was, November, December--is going to cause us damage. We are
    going to do it. We should do it. Let's do it now.
        And, third, I would make a pitch that we do this
    permanently. Why are we going to come back and do this every 2
    years? Why are we going to disrupt the markets every 2 years?
    We need this.
        In Europe, an American company building in Europe, we
    provide them terrorism insurance under OPIC, right now. Why is
    it if you build a building overseas we are doing it but not
    here? Point number one.
        And point number two, we have had 3\1/2\ years since 9/11.
    Here is what Alan Greenspan said to a House committee a few
    weeks ago: ``I have yet to be convinced that the terrorism
    insurance market can be made to work.'' If it is not going to
    work 3\1/2\ years after 9/11, it is not going to work 5\1/2\
    years after 9/11.
        Let's make it permanent or at least do it for a much longer
    period of time so that people can plan, that we do not come
    back, that every 6 months out of every 2-year cycle we get a
    halt in building, in construction, in planning, and the growth
    we all love about America.
        I hope we will pass this and pass it quickly. I also hope
    we will do it for a longer period of time than the 2 years in
    the very fine bill that my colleagues from Connecticut and Utah
    have introduced.
        One other note, Mr. Chairman. I want to welcome all of our
    witnesses, a good number of New Yorkers, but particularly Mr.
    Mills, the Insurance Commissioner of New York State, and
    somebody who was my worthy opponent in the November 2004
    election. He did such a good job running against me, he is now
    seated at this table as Insurance Commissioner for New York
    State.
        Chairman Shelby. At least you are in the same room.
        [Laughter.]
        Chairman Shelby. Senator Sununu.

                  STATEMENT OF SENATOR JOHN E. SUNUNU

        Senator Sununu. Thank you, Mr. Chairman.
        I appreciate all of the witnesses being here today. For me,
    the most important question actually is not whether or not we
    pass legislation. That is an important question, and one we are
    going to have to deal with. But for me, the really important
    question is if we do decide to pass legislation, if we do, how
    do we do it? Do we do it right? Structuring this kind of a
    subsidy is important because we want to get the incentive
    structure--to the extent that we leave one behind, we want to
    get it right. This is a subsidy. This is a program that shifts
    risks from property owners to taxpayers. But for a lot of
    reasons, many people think this is important. People talked
    about the economic impacts and the environment, the investment
    environment, and the emotional everyone after September 11. So
    for a lot of reasons, we felt it was important to do at the
    time.
        As we look at renewing it, I think it is important to ask
    the questions about if we pass legislation, how do we structure
    the legislation? And there are a lot of things we need to
    discuss, we need to better understand: the structure of the
    deductibles, the Federal cost share. We are at a 90-percent
    Federal share, up to $100 billion. Is that the right number?
    Should the private sector cost burden be greater? Should the
    deductibles be structured different? CBO raises questions about
    cost-based premiums, and is there a way to create better
    incentives for adding cost-based premiums into the system? And
    in a world where, I think as a few people have pointed out,
    price regulation is often the norm, how do you create good
    incentives? How do you take advantage of the incentives that
    the marketplace can potentially provide in the insurance
    market?
        All of these things are important, and I think--I believe
    most of the Members of the Committee would recognize their
    importance in considering when we deal with this legislation,
    and I hope that the panelists will try to address these points
    as well. I am sure many on the panel are going to say from
    their perspective for good reason we think this is an important
    program and we should continue to have this program. But,
    again, more important in my mind is that you provide the
    Committee with substantive arguments for how we structure the
    program and raise concerns if you think that there are
    weaknesses in the programs that take us in the wrong direction,
    because I would hope that most of you, you know, are involved
    in industry, business and industry, and the regulation of that
    industry, competitive industries. You want industry to be
    healthy and to be competitive, and that means--I think it means
    in the long run minimizing the subsidy and allowing markets to
    do what they do well.
        Thank you, Mr. Chairman.
        Chairman Shelby. Thank you, Senator Sununu, for your
    incisive observations.
        Senator Corzine.

                  STATEMENT OF SENATOR JON S. CORZINE

        Senator Corzine. Thank you, Mr. Chairman, and I welcome the
    fact that you are holding this hearing. This is an issue that I
    think is one that needs to be addressed if we are to continue
    to see a relatively healthy economy. I think this is actually a
    very important platform for making sure that occurs. I cannot
    disagree that we need to review a lot of the variables, some of
    us might even have different philosophical views about how we
    might approach this. But I must say that given how things move,
    this extension seemed to be a good idea until we dealt with
    some of those fundamental questions and I think how much of the
    risk is borne by Government in a world where we continue to be
    told that we are at risk.
        I also want to compliment Senator Dodd for his leadership
    on this. This was not an easy product to put together in the
    first instance. I think the health of particularly the
    commercial real estate markets has benefited enormously from
    the leadership and the actions that are taken by Congress. We
    can always make things better, and we should examine that, and
    we should be looking for the long-term solution as opposed to
    interim solutions if we believe that we have a terrorism threat
    that will extend beyond some limited time frame. Otherwise, I
    think you are going to have a hard time seeing the marketplace
    fill that hole.
        I look forward to all of our panelists' comments on both
    the variables that are involved here, the need to extend this,
    and the importance.
        I have a full statement for the record.
        Chairman Shelby. Your full statement will be made part of
    the record, without objection.
        Chairman Shelby. Thank you, Senator.
        Senator Crapo.

                    STATEMENT OF SENATOR MIKE CRAPO

        Senator Crapo. Thank you very much, Mr. Chairman. I, along
    with everybody else here, appreciate your attention to this
    issue. It has been one of the most thorny issues that we have
    dealt with over the last 5 or 6 years, frankly, following the
    9/11 attacks, and even in different contexts, trying to figure
    out what to do with catastrophic insurance before 9/11.
        It seems to me that right now we are faced with--when I
    came into the hearing, I thought three options, and I heard
    another fourth option as I came into the hearing. One option is
    to simply do nothing and let the program expire at the end of
    2005, as it is under current law projected to happen. The other
    would be to temporarily extend the program with no changes or
    with minor changes. A third would be to work out some kind of a
    new program involving participation by the Federal Government
    but a creative and effective solution working with the private
    sector in trying to build a more permanent but different
    program than we have right now. And then the fourth one which I
    heard when I walked in the meeting here was to just permanently
    extend the program to be done with it now and just have the
    Federal Government continuing the current role that it has
    assumed following 9/11.
        My preference is to modify TRIA and work with the private
    sector. I have become convinced--I am one of those who believes
    we should do everything we can to move to a private sector
    solution to this and not have the Federal Government be the
    perpetual backstop. However, that is a very difficult
    proposition to accomplish in the current climate that we have,
    and I am one who has become convinced that there is a Federal
    role here and that we need to find it.
        I have had a lot of meetings with a lot of the industry
    participants over the years, and like I say, even preceding 9/
    11 as we were dealing with other catastrophic insurance issues
    that we deal with Nationwide. And these are not easy. And the
    arguments that are made about the economic implications of not
    being able to have an effective insurance program in place are
    real.
        By the same token, the suggestion that the Federal
    Government should just step in and always be the permanent
    backstop without trying to do everything we can to build an
    effective solution with the industry participants is also a
    valid argument. And where I am on this is to continue working
    with the Committee and with others who are involved in this
    issue to try to find that permanent solution that we can adopt,
    but one which I do not believe is going to necessarily be with
    such a large Federal role as we have today.
        Again, as I say, I have met with a lot of industry
    participants who have told me that we can get there if we have
    time and if we work together. And I am expecting that we will
    have good-faith efforts on the part of everybody, on the part
    of the Members of Congress, and on the part of the members of
    the industry who can work with us to find that solution that we
    have all been talking about, but which we haven't yet reached.
        And so with that, Mr. Chairman, I am going to be very
    interested in hearing the testimony of the panel today. Thank
    you.
        Chairman Shelby. Senator Bennett.

                 STATEMENT OF SENATOR ROBERT F. BENNETT

        Senator Bennett. Thank you very much, Mr. Chairman. Thank
    you for holding these hearings. I know your personal position
    is somewhat different from Senator Dodd's and mine.
        Chairman Shelby. Mine is closer to Sununu's and Crapo's, I
    think.
        Senator Bennett. All right. But one common factor that we
    have here is that we have a problem, and insurance companies do
    not take risks. They analyze risks, they spread risk, they
    create a circumstance in which risk can be ameliorated. But if
    they are in a situation where they cannot analyze it and spread
    it, they do not take it. And you cannot force them to.
        The problem with TRIA is that we do not know the size of
    the risk. We cannot quantify it. We had no basis prior to 9/11
    to have any kind of a number as to what it would cost if
    someone were to hijack an airplane and fly it into a building.
    That was so foreign to protocol with respect to hijacking. In
    fact, the instructions for pilots that were hijacked prior to
    9/11 were very clear and very firm and part of their training,
    which was you do whatever the hijackers tells you to do in
    order to save the lives of your passengers. And, clearly, doing
    what the hijacker told you to do was following the book, and it
    cost the lives of the passengers and the pilots themselves,
    except in those instances where the pilots were simply killed,
    which is what I understand happened in the airplane that went
    down in Pennsylvania, when the passengers themselves took over
    the plane to the point of preventing it continuing on and
    possibly reaching reaching the Capitol.
        That is the dilemma we have here. We do not know the size
    of the risk, and in that era of uncertainty, economic activity
    does not take place. Markets can handle up and markets can
    handle down, but markets cannot handle uncertainty. And it is
    not just an insurance company problem. It is the economy's
    problem. And if we cannot build some of the major capital
    assets that we need in our economy because no one will quantify
    the risks involved in case those centers become targets of
    terrorism, the economy as a whole is paying a price. If it
    turns out to pay the price in the form of a recession, the
    Federal Government pays a price because the greatest threat to
    Federal revenue is a recession. It is not tax cuts because tax
    rates assume there is some income to be taxed. And if a
    recession comes along, it does not matter what the rate is. If
    there is no income, there is no revenue.
        I feel this is a significant economic challenge that we
    have to deal with, and we have dealt with it thus far by
    removing a degree of the uncertainty from the equation by
    virtue of having a Federal guarantee.
        So the question is: What is the appropriate level of that
    guarantee? What is the nature of the terrorist threat before
    us? Do we understand it well enough that we can quantify it
    with some kind of certainty, at which point the insurance
    companies can then step in? Because once they have some degree
    of certainty as to how big the risk is, they can figure out a
    way to spread that risk and offer the appropriate insurance.
        I think we are still in a period of sufficient uncertainty
    that the Federal Government has a role. I think the impact on
    the economy is significant that the Federal Government has to
    step up to it. I thank Senator Dodd for crafting a bill that I
    think is an excellent starting point for this, and I am happy
    to be a cosponsor of the bill. But I think it is important that
    we have these hearings and we look for additional alternatives
    and we be open to additional ideas as we go along.
        Again, Mr. Chairman, I am grateful to you for your
    attention to this, your willingness to hold these hearings, and
    to our witnesses for their willingness to come share their
    expertise with us.
        Chairman Shelby. Thank you, Senator Bennett.
        I would just note for the record that our colleague Senator
    Sarbanes is not able to be with us here today. He is attending
    a funeral in New York, and he wanted me to note that for the
    record.
        I will introduce our panel: Mr. Douglas Holtz-Eakin,
    Director of the Congressional Budget Office; Honorable Howard
    Mills, Superintendent, New York State Department of Insurance;
    Mr. Ernst Csiszar, product and Chief Executive Officer,
    Property Casualty Insurers Association of America; Mr. J.
    Robert Hunter, Director of Insurance, Consumer Federation of
    America; Mr. Brian Duperreault, Chairman, ACE Limited; Mr.
    Franklin Nutter, President, Reinsurance Association of America;
    and Mr. Robert Lowe, Chairman of the Board and CEO of Lowe
    Enterprises.
        Gentlemen, welcome to all of you. Your written statements
    will be made part of the record, and unlike what Senator Dodd
    told you, you do not have all day.
        [Laughter.]
        Chairman Shelby. Try to sum up your testimony in 5 minutes
    or less. This just gives us a chance to have a dialogue with
    you.
        We will start with you. Bring the microphone up close to
    you. This is a big room with a lot of people here.

                    STATEMENT OF DOUGLAS HOLTZ-EAKIN

                 DIRECTOR, CONGRESSIONAL BUDGET OFFICE

        Mr. Holtz-Eakin. Mr. Chairman and Members of the Committee,
    the Congressional Budget Office thanks you for the invitation
    to appear today. Over the past several years, we have produced
    several analyses for the Congress in this area, most recently
    in January. My remarks today will be a brief summary of the
    most recent report.
        The issue before the Committee and the Congress is whether
    to extend TRIA, and if extended, whether to modify it. This is
    obviously something that the Members have faced before, but one
    of the issues that now arises is whether circumstances have
    changed in a way that would lead the Congress to make a
    different decision.
        Our report highlights two dimensions along which
    circumstances appear to be somewhat different. The first and
    most important consideration is that TRIA is explicitly a
    temporary program, and a primary consideration in the current
    environment is the degree to which elevated terrorism risks
    will be a more permanent feature of the landscape. If so, the
    more durable the presence of a higher risk, the less a simple
    extension of a temporary program appears to be merited.
        Long-lasting terrorism risk does impose economic costs.
    Substantially eliminating those risks and those costs are
    largely the role of defense strategy, international affairs,
    and homeland security. Financial markets have a role in serving
    to manage whatever residual risks may remain. They do that in
    two ways. Financial markets convey important information about
    the costs of likely risks, aiding to the extent possible any
    mitigation efforts that might be possible in the economy. They
    also serve an important role in shifting the financial burden
    of those risks, when desired, through such strategies as
    diversification or direct purchase of insurance products. In
    the presence of a more durable source of risk, thinking about
    those roles of the private sector is important.
        The second difference between now and the original
    enactment is that the financial insurance markets are in much
    better shape than they were then. Equity markets have rebounded
    since NOvember 2002. In bond markets, credit risk spreads have
    narrowed considerably. And in the property and casualty
    insurance industry, net worth has risen by roughly a third, and
    underwriting profitability has returned.
        In the presence of TRIA's subsidy, prices for terrorism
    coverage have fallen and stabilized. They are down from about
    10 percent of insurance premiums to about 4 percent. It now
    costs $50 to $80 to get $1 million of insured coverage. The
    industry has developed and implemented to some extent improved
    pricing models that distinguish between more and less risky
    locations. And roughly 50 percent of firms have voluntarily
    chosen to purchase insurance as part of their strategy to
    manage risks, roughly doubling the coverage that was available
    at the time of enactment.
        Reinsurers have not been as active as some had anticipated
    over this period, but have provided some coverage of billions
    of dollars for terrorism risks from domestic sources that are
    not covered by TRIA.
        What are the lessons of this experience for decisions going
    forward? Well, the Nation might adjust more quickly to a high,
    sustained level of risk if premium reflected the higher
    expected costs. This could be done by adding cost-based
    premiums to the TRIA program, as was mentioned by Senator
    Sununu.
        Alternatively, one possibility would be to let the Federal
    reinsurance program expire and let premiums rise. Letting TRIA
    end would not increase the overall cost of terrorism. It is
    important to note that. It would change who bears the ultimate
    burden of that cost, and to the extent that mitigation of risks
    is possible, lower costs overall.
        If TRIA expired, reinsurers would most likely continue
    their previous practice of not covering losses from nuclear,
    biological, chemical, and radiological attacks. And it is
    important to note that those exclusions would probably impact
    the workers' compensation market most directly. If insurers are
    unable to diversify that catastrophic risk--and State
    regulation would make that difficult--prices for workers'
    compensation policies could rise substantially, especially in
    the near term.
        In the event that TRIA ended and there was an unexpectedly
    large terrorist attack, it is quite likely that insurance
    markets would again be disrupted and coverage would be
    unavailable for some high-risk properties. However, more
    generally, if TRIA expired, the availability and price of
    terrorism risk insurance would depend on several factors, one
    of which is the degree to which continued innovation in
    financial markets would produce new types of products, such as
    mutual insurance pools, and catastrophe bonds, or participation
    of new entities such as hedge funds in providing insurance
    capacity to the overall market.
        Availability would depend on the willingness of private
    sector reinsurers to enter and take catastrophic risks. Recent
    developments are suggestive, but not conclusive, that the
    private financial markets could shoulder more of this burden.
        The Congressional Budget Office is pleased to be here
    today. I look forward to answering your questions. Thank you.
        Chairman Shelby. Mr. Mills.

                       STATEMENT OF HOWARD MILLS

     ACTING SUPERINTENDENT, NEW YORK STATE DEPARTMENT OF INSURANCE

        Mr. Mills. Thank you, Mr. Chairman, Members of the
    Committee. I would like to note for the record that I also
    serve as the Chair of the Terrorism Insurance Implementation
    Working Group of the NAIC, and on behalf of the NAIC, I thank
    you for the opportunity to testify at this hearing.
        Today I would like to make three basic points, Senators:
        First, there is still a need for the Federal Government to
    provide appropriate financial back-up to the private insurance
    market in order to assure that segments of our Nation's economy
    do not falter due to a lack of insurance coverage for
    terrorism. The insurance marketplace is not yet ready to fully
    cover acts of terrorism on its own because of capacity issues,
    as well as extreme difficulty in developing appropriate rates.
        Second, Congress should act immediately to extend coverage
    under the Terrorism Risk Insurance Program or enact a
    comparable Federal backstop for acts of terrorism, at least
    through 2007, because the commercial insurance markets are not
    yet prepared to underwrite sufficient terrorism coverage
    without a Federal backstop. Further, a comprehensive, long-term
    plan is being developed but will not be ready in time to
    prevent market disruptions should TRIA expire.
        Third, the CBO January 2005 Paper, ``Federal Terrorism
    Reinsurance: An Update,'' contains some observations and
    opinions on how markets will react to TRIA that are not borne
    out by observations of how businesses and insurers have reacted
    to TRIA.
        TRIA has been successful. It has brought stability to a
    uncertain market for insurance coverage for acts of terrorism.
    TRIA through its make-available requirements appropriately
    focuses on the insured's decision to buy coverage rather than
    on the insurer's decision to sell it. Although the take-up rate
    for terrorism insurance coverage mandated under TRIA has not
    been widespread, coverage is currently available for those
    businesses that want to purchase it and need it the most. TRIA
    has operated exactly how the Congress intended. Those who
    needed the coverage purchased it, and those who did not
    declined, with the decision, again, always being made by the
    insured.
        The presence of the Federal backstop has provided an
    appropriate mechanism to the insurance industry, enabling
    insurers to offer coverage for acts of terrorism that otherwise
    would not have been offered in the wake of the tragic events of
    September 11.
        Now, the Congress should know that insurers have filed
    contingency endorsements or sunset provisions in many States.
    In the event that Congress does not extend the TRIA Program
    this year, insurers will reinstate terrorism coverage
    limitations that were in effect prior to TRIA's enactment for
    many policies written for coverage that extends into 2006.
    Thus, we would be in the same position that we were in just
    after 9/11 in terms of terrorism coverage.
        These filings I believe demonstrate that the insurance
    industry is not yet willing to assume the full risk of
    terrorist losses at this time. Congress should be aware that
    the private sector does not--does not--have unlimited capacity.
    NAIC data shows that 2003 was a profitable year for property
    and casualty insurers, with aggregated policyholder surplus
    increasing approximately 26 percent to $375 billion. It should
    be noted, however, that policyholder surplus decline each year
    from 1999 to 2002, and that $375 billion figure is only 4.3
    percent higher than the $360 billion in policyholder surplus
    held in 1999. Less than half of those funds--and this is very
    important. Less than half of those funds are used to support
    commercial lines of writing.
        The CBO study is flawed, with all due respect. It suggests
    that TRIA weakens incentives for the private sector, for owners
    of property, et cetera, to increase safety, to take
    preventative measures. And in New York State, and indeed all
    over the country, we see little evidence to support this
    conclusion that TRIA has resulted in owners failing to take
    appropriate steps to protect their assets from terrorist
    attacks.

        To the contrary, the evidence demonstrates that owners have
    invested heavily in security, strengthening disaster
    preparedness and response efforts in the wake of the 9/11
    terrorist attacks, notwithstanding the existence of TRIA. The
    CBO report suggests that business owners would be asked to bear
    the lost costs, but you know much better than I that history
    has shown that Congress will step in after a disaster if asked
    to do so.

        Insurance regulators strongly urge congressional action
    immediately to extend TRIA or to enact an alternative form of a
    Federal backstop system this year, immediately, in order to
    avoid market disruptions. And the market disruptions are
    inevitable if TRIA is not extended. The lack, the absence of
    the Federal backstop will cause significant and very harmful
    market disruptions.

        The NAIC stands ready to assist the Congress in any way
    possible as you grapple with this very difficult issue, and,
    finally, I would like to state on behalf of the NAIC that we
    are not urging the extension of TRIA on behalf of the industry.
    We are urging the extension of TRIA on behalf of the consumers
    of insurance and on behalf of the health of the American
    economy.

        Thank you.

        Chairman Shelby. Mr. Csiszar.

                 STATEMENT OF ERNST CSISZAR, PRESIDENT

           PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA

        Mr. Csiszar. Mr. Chairman, thank you for the opportunity
    for appearing before you this morning. I think it is important
    as we look at this to remember that I represent over 1,000
    insurance companies in this country. These companies all are
    engaged in providing economic security to its customers. It is
    important to remember that economic security does not just
    revolve around terrorism. Not only is it important to cover
    terrorism, it is also important to remember that the day after
    a potential terrorist event, that homeowner's claim, that
    automobile claim still needs to be paid. We cover churches. We
    cover football stadiums in Alabama. We cover many different
    risks.

        The problem, the fundamental problem with this is there is
    nothing more than our members would like to do than to find a
    thoroughly private, free-marketing, competition-based solution
    to this. There is nothing more that they would want. The
    problem with it is that fundamentally a terrorist event is
    uninsurable. So the only solution that we see is a combination
    of private and public partnership in which the Government plays
    its role as backstop and in which private industry plays its
    part, takes its role in at least contributing to that solution.
    But ultimately to think that there will be purely a private
    solution to the terrorist problem simply is not practical at
    this point. Let me explain why.
        First of all, the models that we currently have are
    rudimentary, even if you look at the models that have been
    seasoned and tested, let's say weather-related models or
    earthquake models. For instance, no one predicted four
    hurricanes in Florida this year, but yet the data we have on
    hurricanes extends over the last 100 years or so. With
    terrorism, we have no such data, so the best modeling cannot
    really cover all the contingencies that might occur.
        Frequency and severity are the issue. Severity to some
    extent one can get one's hands around, but the severity is so
    severe that it brings in a capacity issue. The issue then
    becomes is there enough capital really to cover an event of
    such severity as one might foresee.
        The frequency is almost entirely unpredictable. The
    irrational act of an irrational individual, impossible to
    capture from a frequency standpoint. I think that is reflected
    both in the fact that it creates capacity problems and it also
    creates a pricing problem. How do you price a product when you
    do not know what the frequency of that occurrence is and when
    you really have a difficult time predicting the size and scope,
    the severity of it?
        What is different also is the fact that, as one looks
    through the mirror to the back, September 11, and say, well,
    you know, the industry coped with a $40 billion loss in a
    fairly reasonable manner. But there was reinsurance available.
    Today there is no reinsurance available.
        I have heard about capital markets from my colleagues this
    morning, but I am afraid after 3 years the capital markets
    really have not stepped into it. And even if you look at our
    history with capital markets in terms of catastrophic bonds,
    bonds of a more general nature than terrorism-related bonds,
    that market is quite small. After 10 or 12 years' experience,
    $4 to $5 billion, the market has not been tested, and I do not
    think it can be described as really being liquid.
        The reality of it is that, as Mr. Mills has said, TRIA has
    worked and TRIA has helped to take the uncertainty of this
    uninsurable event, to some extent diminish that uncertainty.
        We at the PCI, I can tell you, we are prepared to work with
    you, and we are working. We have not been sitting on our hands.
    We have had studies from Tillinghouse. We have worked with the
    Treasury on renewals. We are prepared to do our part to try to
    find at least partially private solutions to the problem, but
    ultimately we come back to the fact that there has to be a
    backstop. We have established a number of principles, for
    instance, amongst our members. Certainly if we are to pursue a
    private solution, I would suggest that the market be allowed to
    work. Quite frankly, we now still have 19 States, for instance,
    where, regardless of the cause, fire related events have to be
    covered by mandate. We have three or four States that mandate
    terrorism coverage regardless of whether there is a Federal
    backstop. But the first principle that I would suggest for a
    private market solution is that the markets be allowed to
    operate freely, if that is the case.
        Our second principle is that we are also looking at tax-
    exempt entities for pooling, for instance. We are looking at
    reserves, possibly combined with tax breaks on reserves. We are
    looking at how capital markets, their role can be enhanced. But
    fundamentally we keep coming back to the fact that there has to
    be some back-up role that the Government has to play in all of
    this.

        Insurance is a foundation industry, and I urge you with the
    greatest sense of urgency to give consideration to the fact
    that this is about jobs, this is about economic growth, this is
    all about what our country stands for.
        Thank you very much.
        Chairman Shelby. Thank you.
        Mr. Hunter.

                     STATEMENT OF J. ROBERT HUNTER

         DIRECTOR OF INSURANCE, CONSUMER FEDERATION OF AMERICA

        Mr. Hunter. Thank you, Mr. Chairman. I would like to
    congratulate you and thank you for holding off and waiting for
    the Treasury report before we move ahead with this, because I
    think it is absolutely essential, and I appreciate your
    courage. Thank you. Because it really is too early for us to
    know exactly some of the answers to some of the questions that
    are being raised here today, and Treasury has done a
    longitudinal-type review. We can see what happened at various
    stages, and I think it is very important that you have that
    before you make a final decision.

        But there are some facts about TRIA that we can talk about.
    For one thing, the insurance industry has become financially
    flush compared to where it was when you enacted TRIA. It is no
    longer in need of a handout. On September 11, there was a loss
    of between $20 and $25 billion after taxes to the insurance
    industry, and the retained earnings for the industry that year
    fell by $28 billion. Since then, the industry has been
    unusually profitable, and the retained earnings now stand at
    $388 billion, an increase of almost $100 billion since the
    terrorist attacks.

        Remarkably, last year, with four hurricanes, the industry
    earned $39 billion. The commercial segment of the industry has
    seen retained earnings grow by $49 billion compared to what
    they had before the September 11 attacks, enough to fund two
    such terrorist events just in the profits that they have
    retained.

        While the industry has done wonderfully, taxpayers are
    shouldering a lot of the financial risk. So far the subsidy to
    the insurance industry, the actuarial value of the free
    reinsurance is $5.8 billion, and I do not think taxpayers
    should be asked to continue to shoulder that.

        Chairman Shelby. Say that figure again.

        Mr. Hunter. $5.8 billion for the program so far in
    actuarial value. I was the actuary, by the way, who had to
    calculate the reinsurance program because the Congress did
    require it. We faced the same kinds of problems with low-
    frequency, high-severity calculations. It is doable if Congress
    requires the calculation of the risk.

        CFA opposes S. 647. If it becomes law, the industry will
    continue to get an unnecessary taxpayer subsidy at a rate of
    almost $1 billion a year for an amount that could be passed
    through to policyholders if it was charged for at an average
    surcharge of less than 1 percent of premium, about seven-tenths
    of 1 percent.

        S. 647 also expands the financial risk by adding group life
    insurance. There is absolutely no evidence that group life
    insurance needs to be added, and wisely, the Treasury
    Department refused to do so. I think you should ask them why,
    and I think I know why. It is not necessary. Even the NAIC,
    usually very sympathetic to the industry, refused to grant
    licensure and exclusion for terrorism coverage because they
    could not prove that group life needed it.
        CFA opposes S. 647. Continuation of TRIA in anything like
    the current form undermines the development of private sector
    alternatives since insurers and reinsurers cannot compete with
    a zero premium policy. And as CBO also indicated, below-cost
    TRIA reinsurance undermines mitigation efforts.
        This is not to say that private sector solutions have not
    been developed to complement TRIA. Stand-alone policies are
    plentiful. More TRIA policies are sold in conjunction with a
    stand-alone policy than just TRIA alone. These policies offer
    coverage such as domestic terrorism, acts outside of America,
    et cetera, and reinsurance is plentifully blacking up these
    coverages.
        Some have said that regulation has hindered the development
    of private terrorism policies. Policies have been developed. I
    have yet to see anyone deny or any State turn down a rate
    filing.
        I attach to my testimony quotes from the recent trade press
    articles indicating that insurers are preparing to handle the
    demand for terror coverage should TRIA expire, sometimes under
    the same terms and conditions with or without TRIA.
        CFA, pending the Treasury Department's report, finds no
    compelling reason to extend TRIA beyond 2005. The dire
    predictions of what you hear might happen on January 1, 2006,
    are very reminiscent of what we heard would happen if there was
    no TRIA on January 1, 2002, and I had the same fears. But they
    did not happen.
        If TRIA, however, is extended, we would make several
    recommendations.
        First, you should ask that full actuarial rates be charged
    for the reinsurance.
        Second, the program should target only high-risk cities.
        Third, the retention levels should be raised to $50 billion
    after taxes, a level where GAO finds there may be need for such
    support, particularly if nuclear, biological, and chemical is
    covered.
        CFA looks forward to receiving the Treasury Department,
    report analyzing its implications, and sharing our perspective
    on TRIA with you in light of what we expect to be significantly
    clearer information and more information. Mr. Chairman, we
    pledge a rapid response when we have that report.
        Thank you.
        Chairman Shelby. Thank you.
        Mr. Duperreault.

                STATEMENT OF BRIAN DUPERREAULT, CHAIRMAN

      ACE LIMITED, ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION

        Mr. Duperreault. Thank you, Mr. Chairman. I want to thank
    you for holding this hearing. And I particularly want to thank
    Senators Dodd and Bennett for introducing this very important
    legislation.
        I am from the insurance industry. I run an insurance
    company. TRIA works, it worked. It was very important. But it
    does not change the fact that terrorism is uninsurable. I echo
    what Mr. Csiszar said, it is uninsurable. We cannot tell what
    the frequency or severity is. We do not how many acts are going
    to occur. We certainly cannot tell the size. As to modeling,
    modeling has improved somewhat our understanding of how big it
    could be, but frankly, as Mr. Csiszar says, these models are
    always corrected after the fact, so you cannot be certain.
        It is uninsurable by the size alone. I mean you can do
    scenarios in which a nuclear event or one of the larger weapons
    of mass destruction type events would cause losses of $250
    billion. The capital that supports the commercial business is
    about $176 billion. So it would dwarf our capital. We cannot
    handle this risk period. It is uninsurable.
        You know, even the deductible, the deductible now, roughly
    is 15 percent. It translates to something like $35 billion.
    Contrary to opinion here there is not much reinsurance market
    available for terrorism, certainly not for nuclear or
    biological, chemical, radiological. There might be 4 to 6
    billion. I think it is probably closer to 4. That would leave a
    loss of about $30 billion for support of $176 billion. It would
    severely impair insurance companies.
        So it is a significant problem for us, and the problem is
    now. You know, TRIA expires on December 31, but in fact, we
    have been issuing policies this year that extend past TRIA.
    That situation means that we are growing our exposure to a
    post-TRIA situation. We cannot let that continue. At some point
    we have to start to cut back on the capacity, and that is now,
    that is not at the end of the year. That is now when we have to
    start doing this.
        Endorsements have been issued where we can issue an
    endorsement, but we do not have a free market here to the
    extent that we have freedom to exclude these risks. Workers
    Compensation, we must cover terrorism, period. In many States
    if there is a fire following an event, regardless of the cause,
    it is covered even if you have a terrorism exclusion. So we
    have got to start reducing our exposures now.
        Chairman Shelby. How about arson? Fires would not cover it
    if there is pure arson there, would it?
        Mr. Duperreault. Fire following an event is covered in many
    States.
        Chairman Shelby. Even for arson?
        Mr. Duperreault. No, you would have to prove fraud to get
    out of it.
        I want to emphasize that the problem is now. It is not 6
    months from now or 8 months now. It is now. And actions are
    being taken in the marketplace.
        There is some mention of profit, and maybe we have made a
    windfall profit, or there is all this money. Frankly, you can
    have this risk. I do not want this risk. It is uninsurable. If
    an event happened tomorrow we would not have made any money. In
    fact, we would have a whopping loss.
        The risk reward on this thing is imprudent for us to take,
    so we do not even want to be in this business. If we could not
    be in this business, we would not. That does not mean that
    there would not be some marginal coverages being placed, but
    that is not a market. That is an occasional peripheral kind of
    play, not a real market.
        Has there been a capital market solution? The reinsurance
    market is a great indicator of capital market solutions. The
    reinsurance market did not come back. They are not restricted.
    They do not have to issue these policies, and they are not.
    There is no cat bond market, there is not any. There is not
    even any for the other businesses, let alone for our business.
    Frankly, we are the capital market. We are the indication of
    whether there will be capital market solutions to this thing,
    and frankly, none have arisen.

        We need a long-term solution. There is no question about
    it. We are prepared to work. We have ideas. We supplied those
    ideas. But I think one has to recognize that a long-term
    solution, if the problem is uninsurable, then the long-term
    solution cannot be an insurance industry solution. It has to
    involve the Government. One way or the other it has to involve
    the Government, and it is absolutely needed. If there is no
    TRIA or a longer-term solution, then we will revert to the
    situation that occurred right after 9/11, and that will be a
    market disruption that none of us want to see, and it will do
    what the terrorists wanted in the first place, and we cannot
    allow that to happen.

        Thank you.

        Chairman Shelby. Mr. Nutter.

                    STATEMENT OF FRANKLIN W. NUTTER

             PRESIDENT, REINSURANCE ASSOCIATION OF AMERICA

        Mr. Nutter. Mr. Chairman, thank you very much. The
    Reinsurance Association of America represents domestic U.S.
    entities that principally assume reinsurance. Reinsurance
    serves many roles for insurance companies, the most notable of
    which and most relevant for this hearing is catastrophe risk.
    It is largely associated with Natural catastrophes, but
    certainly the World Trade Center losses and the other losses of
    9/11 are a good example. Nearly two-thirds of the insured
    losses that occurred on 9/11 were passed through to the
    international reinsurance markets.

        We believe that TRIA has worked well to fill a vacuum in
    reinsurance capacity. We too are encouraged by and endorse the
    leadership that Senator Dodd and Senator Bennett have provided
    with regard to an extension bill with a commitment to develop a
    long-term solution. We believe it will be essential that long-
    term solution include a public as well as a private role.

        Several people have addressed the challenges associated
    with underwriting, terrorism risk, and I will not repeat that.
    It is important to understand that under the current
    legislation insurance companies have taken on greater and
    greater risk as a result of the increases in the retention
    required, the mandatory offer, the actions by some States not
    to work with the industry with regard to exclusions in policy
    forms. In addition, the industry is under increasing threat
    from independent rating organizations with regard to capital
    charges associated with the industry's exposure to terrorist
    risk.

        The reinsurance market, modest as it has been, has largely
    should work with insurance companies to assess their risk
    associated with the retention that they have under TRIA. TRIA
    has not infringed the development of a private reinsurance
    market. In fact the opposite is true. By defining the loss
    parameters of terrorism risk, it has facilitated primary
    companies and reinsurers in developing some coverage in the
    reinsurance market.
        Mr. Duperreault mentioned a figure of 4 to 6 billion
    dollars of reinsurance coverage that appears to be in place for
    U.S. terrorism risk. That is our estimate based upon a survey
    of brokers. Even if we are wrong by 50 percent, it is still 6
    to 8 billion, which would be modest compared to the needs of
    primary insurers for terrorism risk reinsurance.
        We think it is improbable that the private reinsurance
    market could ever replace the full coverage provided under the
    TRIA program.
        Let me speak briefly to catastrophe bonds and catastrophe
    reserves, both of which have been mentioned. Catastrophe bonds
    are a well-established mechanism for transferring natural
    catastrophe risk. These capital market products have been in
    the market since about 1997.
        Yet in 2004, based upon a knowledgeable industry estimate,
    only $1.14 billion of coverage for natural catastrophe risk was
    issued in cat bonds. Since 1997 only 59 transactions have taken
    place, again dealing entirely with natural catastrophe risk,
    with total limits under $9 billion. Only $4 billion of that is
    still outstanding. There is no reason to believe that the
    catastrophe bonds for terrorism will be a significant provider
    of capacity.
        With respect to catastrophe reserves, which were mentioned
    earlier, this would require a change in accounting practice to
    allow companies to set up reserves for future unknown losses
    associated with risks and coverages that they have in place.
    There are a variety of reasons why this should be considered as
    part of a long-term solution, but no one should think that
    allowing insurance companies to have catastrophe reserves will
    provide any increase in capacity for terrorism, Indeed
    catastrophe reserves may be a substitute for the risk transfer
    such as with reinsurance.
        We too look forward to working with the Committee, with the
    policyholder community, with others in the insurance community
    to find a long-term solution. We are encouraged by an extension
    that would allow that to develop and take place over the next 2
    years.
        Thank you.
        Chairman Shelby. Mr. Lowe.

           STATEMENT OF ROBERT J. LOWE, CHAIRMAN OF THE BOARD

                AND CEO, LOWE ENTERPRISES, ON BEHALF OF

               THE COALITION TO INSURE AGAINST TERRORISM

                       THE REAL ESTATE ROUNDTABLE

               AND THE UNITED STATES CHAMBER OF COMMERCE

        Mr. Lowe. Mr. Chairman, I too add my thanks for your
    holding this important hearing.
        I am the Founding Chairman of Lowe Enterprises. Our company
    is headquartered in Los Angeles, and we maintain offices
    Nationwide. Over the past 32 years, we have developed, acquired
    or managed more than $6 billion of real estate assets and we
    currently employ approximately 8,000 employees Nationwide.
        I also am the Chairman of the Real Estate Roundtable. I
    testify today on behalf of the Roundtable and the Coalition to
    Insure Against Terrorism, or CIAT. CIAT's membership includes
    over 70 trade associations and businesses from across the
    country, and includes not only real estate related firms, but
    energy, transportation, professional sports leagues, theme park
    owners, and of course, the U.S. Chamber of Commerce.
        As Chairman of the Real Estate Roundtable I have the
    privilege of working directly with the CEOs of major real
    estate ownership and financing companies throughout this
    Nation. We also count as membership the 15 major trade
    associations representing different aspects of the real estate
    industry, collectively an industry valued at about $5 trillion,
    and that employs nearly 9 million American workers, an industry
    that accounts for nearly 70 percent of all local tax revenues.
    Obviously, the real estate industry and the jobs associated
    with our industry is a cornerstone to the health of our
    economy.
        I am here to say that a Federal terrorism insurance program
    is a cornerstone to maintaining a healthy, growing real estate
    industry. Our message is simple and straightforward. The
    reasons that prompted President Bush in 2002 to urge the
    establishment of Terrorism Risk Insurance Act unfortunately
    have not changed.
        A survey we conducted during the aftermath of 9/11 showed
    an excess of $15 billion of real estate related transactions
    that were either stalled or canceled because of lack of
    terrorism insurance. Studies further show that approximately
    300,000 jobs were lost during this period due to this economic
    slowdown.
        Fortunately, in November 2002 the President and Congress
    joined together to act. Almost overnight TRIA provided capacity
    to the insurance markets, which in turn yielded economic
    confidence for transactions to resume, in particular stalled
    construction projects moved forward to the benefit of countless
    workers in the construction trades. I do not believe that the
    facts that brought about TRIA's enactment have changed.
    Obviously, the threat of terrorism in our Nation remains. A
    major even, without reasonable insurance, will once again
    significantly damage the transaction markets, result in delayed
    or canceled projects, the loss of thousands of jobs and reduced
    economic activity.
        I would like to share my personal situation. We have about
    $1 billion in current loan commitments which contain terrorism
    insurance requirements which are today supported by TRIA. This
    represents about $2 billion in project value. If TRIA is
    allowed to disappear, we most likely would be unable to
    reasonably replace the insurance perhaps at any price.
        Let me give you a specific example. We have been working
    for 6 years on a major $320 million development project to
    construct an ocean-front hospitality project in the county of
    Los Angeles. It represents a much-needed facility in Southern
    California, approximately 1,000 permanent jobs and hundreds of
    construction jobs. It will produce in excess of $8 million of
    annual local and State tax revenues. We are ready to break
    ground late this summer. Without appropriate insurance our
    lender will not fund and we will be unable to break ground.
    Additionally, we have 8,000 employees in a dozen States. Our
    insurance staff advises me our Workers Compensation coverage is
    at risk without TRIA.
        Last evening one of my associates on the Roundtable, who
    services 7,000 real estate loans, explained that their
    borrowers are having their insurance policies renewed only
    until the end of 2005. After that they will be in default.
    Another Roundtable member described how his insurance provider
    has halted all new policies until the TRIA situation is
    clarified.
        Yes, we must keep markets operating while terrorist threat
    exists. We must keep policies in place to make sure our economy
    keeps on track in the event of another terrorist attack.
        In conclusion, on behalf of the Roundtable and CIAT, I urge
    this Committee to act quickly on extending the terrorism
    insurance backstop. American businesses are now in the market
    for terrorism insurance that extends into 2006, and are
    increasingly facing difficulties. Transactions will be
    unnecessarily stalled or canceled and jobs will be lost.
    Therefore I urge you to continue the momentum started with this
    hearing, stay focused on finding a solution to this problem,
    and approve legislation providing for a Federal terrorism
    insurance backstop. Personally I support an immediate extension
    which includes the mechanism to develop a sound long-term
    program.
        Last, I add my thanks to Senator Dodd and to Senator
    Bennett, as well as the 15 other Members of this Committee for
    introducing Senate Bill 467.
        Thank you.
        Chairman Shelby. Thank you, Mr. Lowe.
        I will direct these first questions to the General
    Accounting Office, doctor, if I can, because you have done a
    lot of work in this area. The temporary TRIA program that is
    now in place does not, as I understand it, require insurance
    companies to pay premiums for the Federal reinsurance backstop
    that they receive. Is a premium free system sustainable if a
    program should go forward in the future, and what incentives or
    perhaps disincentive does a premium-free system create for
    insurance companies and insurance policyholders?
        Mr. Holtz-Eakin. Well, Senator, the TRIA program does not
    have premiums, and as a result it passes up the opportunity to
    convey to insurers and to the economy as a whole those
    locations which are placed at greater financial risk versus
    those which are a lesser financial risk. It thus passes up the
    opportunity to convey the information necessary to mitigate
    overall cost of any event.
        Chairman Shelby. Mr. Hunter, you have a view on that?
        Mr. Hunter. Yes. I think--I ran the riot reinsurance
    program, and we had to charge premiums, and it was just as
    difficult to create who is going to riot, when is it going to
    be, what is the frequency going to be, what is the severity
    going to be? And it was difficult, but we did it, and
    ultimately the taxpayers actually received about a quarter of a
    billion dollar profit when the program was finally terminated
    during the 1980's. I believe that a premium at least should be
    charged if the program is extended.
        I understand why businesses who are receiving free
    insurance would want to see it continued that way, but I do not
    think Congress should do that.
        Chairman Shelby. Doctor, I think one of the questions that
    keeps popping up that does not go away, are there practicable
    mitigation strategies that are relevant to terrorist incidents?
    Are there things that could be done to reduce losses, and are
    people implementing these strategies? And if so, what are some
    of the examples, or what steps have been taken since the
    enactment of TRIA, if there have been?
        Mr. Holtz-Eakin. I think it is important to distinguish
    between those actions which might prevent a terrorist attack
    and actions which reduce losses from an attack. It is an
    overstatement to assert that economic policy and insurance
    premiums in particular are going to be the only means to wage a
    war against terrorism. However, conditional on attacks, the
    goal is to minimize economic cost. It is always better to, (A),
    locate activity in such a way that it puts less in harm's way
    where possible; and (B), there are steps that can be taken to
    reduce losses.
        There was a recent report by the National Institute on
    Standards and Technology on the fact that in the World Trade
    Center Towers the fireproofing came off the supports. This
    suggests that steps could be taken to reduce costs such as
    amending building codes. However, nothing is a panacea.
        Chairman Shelby. Mr. Mills, what mitigation efforts have
    you seen in New York?
        Mr. Mills. Many, Senator, everything from companies
    locating data backup centers outside of the city to secure
    locations. The security efforts that the private sector has
    undertaken in the city of New York are extraordinary, and I am
    sure all of the Members of this Committee have had occasion to
    see that personally when trying to enter a high-rise in the
    city of New York. Local government of course has also invested
    heavily in security measures. Where my office is located,
    Senator, in downtown Manhattan, we have risers that come up out
    of the streets, not just the concrete barricades but the actual
    risers such as you have here in front of the Capitol to prevent
    vehicles from getting too close.
        So we are seeing the industry making significant
    investments.
        Chairman Shelby. You are reacting to it big time.
        Mr. Mills. Yes, we are.
        Chairman Shelby. Mr. Duperreault, can you or do you offer
    rate discounts for terrorism insurance coverage to clients who
    proactively take steps to reduce their loss exposure?
        Mr. Duperreault. I think it is a natural process to
    evaluate the risk and determine who is more at risk and who is
    not. The answer is yes, and if it is an area that is low risk,
    they will have a low rate, and if it is a high risk, they will
    have a higher rate.
        Chairman Shelby. Doctor, I will go back to you in a minute.
    We have heard that the insurance industry lacks the financial
    capacity to deal with a catastrophic terrorist event, such as
    9/11, or we hope not another one, but you never know. Your
    study, which is pretty comprehensive, discusses the possibility
    of obtaining greater amounts of capital directly from the
    securities or derivatives markets. Could you elaborate just for
    a moment on your concept? In other words, how much capital
    could be available? By what means could it be made available to
    backstop terrorism risk, those kind of things?
        Mr. Holtz-Eakin. I think that it is impossible to quantify,
    based on the brief experience we have under TRIA, what the
    total would be in the future. But it is clear that it would be
    a mistake to view this as exclusively an insurance industry
    issue. There are at the moment a wide variety of ways to
    address the financial risks of terrorism. Shareholders can
    diversify their holdings among many different firms. Firms can
    diversify their operations among locations. There are
    opportunities to access derivative markets, which are worldwide
    in nature and enormously deep in capacity. Those markets could
    bear losses far greater than any single terrorist event.
        Chairman Shelby. Mr. Csiszar, I will direct this to you and
    to Mr. Duperreault. First, in your testimony, Mr. Csiszar, you
    indicate that you feel that there should be Federal support--
    and the words of yours following--giving insurers and insurance
    markets more freedom to negotiate terms and conditions of
    coverage. Would you envision that an element of such freedom
    would be the ability to set risk-based prices?
        Mr. Csiszar. Yes, absolutely, that would be part of it,
    yes.
        Chairman Shelby. Could you elaborate just for a minute on
    your testimony regarding the need for freedom in the
    marketplace, which we all espouse, by providing the Committee
    with a sense of some of the differences between current market
    conditions and more free markets for which you advocate?
        Mr. Csiszar. Let me give you several examples of that.
    First of all, I think, as Mr. Duperreault mentioned, the fire
    policy is an issue in 19 States, where coverage post event is
    mandated regardless of the cause of the event. In Florida,
    California and in Georgia, for instance, you have to cover
    terrorism whether there is a backstop or not.
        Chairman Shelby. This is mandated.
        Mr. Csiszar. Mandated. Workers Compensation is mandated,
    the coverage is mandated regardless of the cost.
        Chairman Shelby. Mr. Lowe got into that.
        Mr. Csiszar. Yes. So these are some examples of where a
    market-based system simply cannot accommodate because there is
    no market-based system.
        Chairman Shelby. Mr. Duperreault, you have any comments on
    this?
        Mr. Duperreault. Yes. I think the important thing to
    recognize there is that post--without TRIA those restrictions
    remain, and that handcuffs a company's ability to deal with
    this, and therefore, you know, if a State says you cannot issue
    a Workers Comp policy unless it covers terrorism, you only have
    one choice, you do not issue the policy.
        Chairman Shelby. That is what Mr. Lowe was concerned with
    among other things.
        Mr. Duperreault. And that is very important to understand.
        Chairman Shelby. Senator Dodd.
        Senator Dodd. Again, thank you, Mr. Chairman. This is very,
    very helpful, and I want to thank all of our witnesses for
    their testimony here today. I think it has been helpful in
    making the point. I think maybe not everyone here, but I
    suspect most of us here, if there were a private sector
    solution to this problem, we would not be here. And there are
    those who I think may make the case I suppose that maybe just
    the Federal Government should do all of this. I do not buy into
    that at all, but there are those who may embrace that view.
        And I think what our witnesses are suggesting here and what
    a majority of us on this Committee are suggesting is that this
    is--you need a hybrid here to get through this, to get this
    right, and eventually at some point there may, there may in
    time become a model that would develop where the Federal
    Government would no longer need to be involved in this issue at
    all. I do not think we are there yet.
        One of the issues I wanted to raise with you, Doctor, if I
    could, is your suggestion that the catastrophic bond market
    might be a means by which this issue is--I do not know if you
    are familiar with the most recent General Accounting Office
    study that was done I think about a month ago here, but let
    me--and Mr. Chairman, I will ask unanimous consent that not all
    of this, but portions of it be included in the record. But I
    thought it was worthwhile to note--
        Chairman Shelby. Let us put it all in the record.
        Senator Dodd. It is a rather extensive study.
        Chairman Shelby. That is okay. You can refer to anything
    you want to.
        Senator Dodd. Let me just quote from it here. It says:

        Moreover the catastrophic bond market has generally been
    limited to coverage of natural disasters because the general
    consensus of insurance and financial market participants we
    contacted because they are developing catastrophic bonds to
    cover potential targets against terrorism attacks in the United
    States was not feasible at this time.

        I am quoting now from the report. It goes on to say:

        Although several modeling firms are developing terrorism
    models that are being used by insurance companies to assist in
    their pricing of terrorism exposure, most experts we contacted
    said these models were too new and untested to be used in
    conjunction with a bond covering risks in the United States.

        And last it goes on, Mr. Chairman, to say:

        Furthermore, a potential investor concerned such as risk of
    information about issue or underwriting practices or the fear a
    terrorist would attack targets covered by catastrophic bonds,
    could make the costs associated with issuing terrorism related
    securities prohibitive.

        I would like to ask--all of you addressed to some extent
    this issue--but anyone want to comment on this at all, this
    question of the catastrophic cat bond issue?
        Mr. Holtz-Eakin. If I could characterize the nature of the
    comments in the report.
        Senator Dodd. Sure.
        Mr. Holtz-Eakin. It was not the case that we were
    suggesting that there was an existing capacity in the
    catastrophic bond market that would step in and replace
    traditional sources of capacity in the insurance market. That
    was not the intention. If it was interpreted that way, we will
    write better next time. The question is, going forward, to the
    extent the Congress decides to rely more heavily on private
    capacity, what are possibilities that would be available? This
    is one of them. As many members of the panel have mentioned,
    these products and traditional products do not exist in
    isolation. One of the key issues with catastrophic bonds is
    familiarity and expertise in the modeling, and that would
    develop more quickly and more expertly if there were greater
    incentive to do so.
        Second, there is a regulatory environment that matters. Our
    understanding is that in many circumstances catastrophic bonds
    would not qualify as reinsurance. In the absence of a
    regulatory environment that supports it, it will not develop.
    And so, there are issues on all sides.
        Mr. Nutter. Senator Dodd, just to emphasize something I
    said in my testimony. Reinsurers are frequently the
    facilitators of catastrophe bonds. They use them. They work
    with clients to use them for natural catastrophes. It is a
    mature market. It has been around for a number of years yet, as
    I mentioned in testimony, it is actually very modest in
    providing capacity.
        There really is very little evidence, as you suggest and
    the GAO has said, that catastrophe bonds for terrorism are
    likely to fill the gap or provide a substitute for TRIA's
    coverage. Should they be made part of the consideration of a
    long-term solution? Absolutely.
        Senator Dodd. I think there was a suggestion--and again, I
    think you point out, doctor, and rightly so, that there are an
    awful lot of other obstacles to all of this, and the problem
    is, in the interim trying to sort all of that out while we have
    this problem lurking before us here. In the absence of doing
    anything, the exposure is significant. That is the concern I
    think. In an ideal world, I think your point--probably would
    not disagree with your point. The question is, with the limited
    amount of time we have, the potential exposure we face, the
    economic implications of not doing anything, are too risky in a
    sense for us to take. That is my view anyway. That is why we
    are talking about this.
        Let me ask you a question. One of the criticisms about this
    program, and it may have some value and I want you to respond
    to it, is that the current insurer retention levels are too low
    in the present TRIA bill, and that as a result the Federal
    Government is crowding out the reemergence of the reinsurance
    market. How do you respond to that?
        Mr. Duperreault. May I, Senator? I mentioned in my earlier
    remarks the deductible is close to the mid 30s, 35 billion is
    probably a good number given the current levels of premiums.
    That is the World Trade Center loss effectively. So we are to
    basically handle the World Trade Center loss. And if you
    compare that to our capital, as I pointed out earlier, for the
    industry at about 176 billion, that is a significant hit. The
    difference between today and that hit to us and the 9/11 hit
    was that there was a substantial amount of reinsurance
    available. There is not a substantial amount of reinsurance
    available today. So the net effect would be considerably larger
    for the industry than it would--than it was at 9/11.
        To give you an example, my company paid--incurred losses in
    excess of $2 billion on 9/11. Our net loss was about a little
    under 700 million, so we had reinsurance that covered--for
    every $3 of payments, $2 came from the reinsurers. There is
    nowhere near that capacity now. So it is not just a 9/11 loss,
    it is a supercharged one, and it is one that cannot be handled
    by our capacity at these levels of deductible.
        Senator Dodd. Let me, Mr. Mills, if I may, in the last bill
    we talked about dealing with the Workers Compensation, the life
    issues, and we asked for studies should be done on this thing.
    But in your testimony you described the unique concerns,
    obviously, that exist within the Workers Compensation and group
    life lines. With respect to Workers Compensation you related
    nearly all State laws preclude any exclusion for specific types
    of risk including terrorism risk. With respect to group life
    you raised risk concentration issues. I wonder if you will
    elaborate on this a little bit because I am sure we are going
    to be asked about this again as we come forward with this
    legislation. We have been down the road, one, of asking to be
    looked at. I do not know how the Treasury study's going to
    address this, if they are or not, but I think it is a very
    important question. Certainly we saw it in New York, the 9/11
    attack, the Workers Compensation issue, the life issues, group
    life issues loomed very, very large, and I wonder if you might
    address this?
        Mr. Mills. We do support the inclusion of group life. We
    feel that is--
        Senator Dodd. I knew you did that. I just wanted you to
    elaborate.
        Mr. Mills. We separate from NAIC a bit in that area, but
    the concentration that we see in New York buildings is
    obviously a critical issue for us, and we feel it is something
    that we would like very much to see included as this goes
    hopefully forward.
        Senator Dodd. Now put on your NAIC hat.
        Mr. Mills. NAIC does have a different opinion on that. They
    have taken a position that may not necessarily be one that has
    to be included.
        Senator Dodd. Mr. Hunter, you are chafing here at the bit.
        [Laughter.]
        Mr. Hunter. No. Well, my chafe was that I wondered who he
    was--was he speaking for New York or NAIC because I knew they
    had a different position.
        Senator Dodd. He made it clear.
        Mr. Hunter. So I was chafing over that. I do not think
    group life is necessary. I think Treasury has concluded that.
    NAIC has concluded that when they looked at whether it should
    be excluded or not. I think everyone who has made the study has
    concluded it should not be included.
        Senator Dodd. Any other comments on this?
        Mr. Nutter. Senator Dodd, if I could. This relates actually
    to your last question. The value of TRIA with respect to the
    reinsurance market is that it defines the box for these
    insurance companies. It sets the loss parameters and allows the
    reinsurer and the insurer to work out a catastrophe program
    addressing terrorism risk. Group life, as you know, is not
    included in the current program. Your bill of course proposes
    to do that.
        It seems to me including group life would have the same
    positive dynamics on the market. It is now in the reinsurance
    market in limited supply. It is very expensive, and it is
    really very limited as far as an individual insurer is
    concerned. Including group life would probably have the same
    value, if you will, in defining the box, defining the loss
    parameters and allowing reinsurers to work with the companies
    to provide a risk transfer mechanism.
        Senator Dodd. Yes?
        Mr. Csiszar. Senator Dodd, if I could add to that from our
    members' standpoint, the feeling also is that personal lines
    should be included in this. For instance if you were to take
    just the example of a dirty bomb, Chernobyl is an example, and
    it certainly has impact on all homeowners and automobile
    ownership as well, so we would ask that the consideration be
    given to personal lines as well.
        Senator Dodd. Mr. Chairman, maybe I was not clear, my staff
    tells me. Workers Comp obviously is included in the present;
    group life is not, if I did not make that clear.
        Mr. Mills. Senator, if I could just clarify one thing. The
    NAIC has actually not taken a position on the inclusion of
    group life. They do not oppose, but they have not taken a
    position.
        Senator Dodd. That is very clear.
        [Laughter.]
        Mr. Mills. Thank you, Senator.
        Chairman Shelby. Senator Bennett.
        Senator Bennett. Thank you, Mr. Chairman.
        The CBO report talks about TRIA undermining the incentives
    for mitigation. Do you insurance types agree with that? Have
    you seen a lessening, a mitigation since TRIA was enacted?
        Mr. Duperreault. No.
        Senator Bennett. I see some shaking heads. Who wants to
    speak up?
        Mr. Duperreault. I think if you look at every CEO running a
    major company in this country, you know that they are concerned
    about a terrorism risk and mitigation has taken place. They
    have taken action to protect their employees and their
    property, and it is almost insulting to talk about lack of
    mitigation. I think the motivation has been very high and many
    efforts have been taken. That does not mean that the
    terrorists' efforts, you know, their job is to work around
    those mitigation efforts, but it does not mean that mitigation
    has not been taking place.
        Mr. Lowe. On behalf of the real estate industry, which
    obviously is a great consumer of this insurance product, I can
    assure you that we are paying our premiums and we are also
    doing everything we can do to prepare our properties for the
    unknown future risks. The Roundtable specifically has
    cooperated with the Homeland Security Department to develop a
    communication network that allows the Homeland Security to
    communicate directly with thousands of buildings around the
    country and vice versa, for those buildings to communicate
    directly to Homeland Security.
        Last week we had 65 of our members participate in the
    simulation of a terrorist attack in the Northeast. One of our
    buildings in San Francisco specifically took part in those
    exercises. Our personnel--we ran about 8,000 hotel rooms around
    the country. Our personnel are trained weekly to be alert for
    problems, and very importantly, how to respond when the
    emergency occurs.
        Mr. Holtz-Eakin. Senator, if I could, on the CBO report, I
    think the important question about mitigation efforts is:
    Compared to what? Compared to a world in 2000 where terrorism
    risk was unpriced entirely? Certainly, no, we are not doing
    less than that. Compared to a world where terrorism risk was
    fully priced in the absence of free reinsurance? Incentives
    will be less than that.
        Mr. Mills. Senator, I would like to say again, reiterate
    that the evidence that we see is absolutely contrary to that
    contention. The private sector, the real estate sector in New
    York City, the Real Estate Board of New York has taken
    extraordinary steps to mitigate risk, but we are missing the
    point. The real point is, whatever extraordinary steps the
    private sector takes--and they are taking those steps--this is
    still impossible to predict and impossible to entirely prevent.
    But to contend that the private sector is not doing all that
    they can I think is clearly false.
        Mr. Csiszar. Senator, if I could add to that as well, it
    goes beyond just New York State and New York City. Our members,
    for instance, right in Iowa, well, Iowa--and one of the studies
    identified Iowa as a problem child because of the number of
    fertilizer plants in Iowa. These fertilizer plants are taking
    active steps to mitigate the terrorist threat. I think it goes
    beyond just New York City and major centers. It goes directly
    into the heartland. I wholeheartedly agree with my colleague,
    Mr. Mills here, and disagree with the report.
        Mr. Hunter. I would just comment that you have to suspend
    the laws of economics to say that free insurance will give a
    greater or equal incentive to insurance priced at full
    actuarial rates. It just makes no sense.
        Senator Bennett. The only comment I would make, Senator
    Dodd has been Chairman/Ranking Member of the Rules Committee
    while I was Chairman/Ranking Member of Legislative Branch
    Appropriations, and we did not have any insurance problems, but
    we certainly have spent a lot of taxpayers' money on mitigation
    around the Capitol. You cannot be an intelligent CEO without
    paying attention to that.
        Reference has been made to New York, San Francisco, Ohio
    and so on. I remember when there was an orange alert. I was in
    St. George, Utah, and the stores all sold out of duct tape. And
    I said, ``I really do not think the terrorists are that likely
    to strike St. George, Utah, and you probably are safe without
    taping up your windows down here.''
        Let us talk about the availability of terrorism insurance
    with respect to businesses outside of the large cities. Is this
    primarily a big city problem or does it affect the economy
    everywhere?
        Mr. Mills. Senator, if I may, Senator, one of the things
    that we hear through the NAIC in the smaller markets, you have
    to realize when you are looking at a major urban center the
    market is there, the business is there. But where the lack of
    insurance may hurt the smaller markets because the market is
    just not that large enough that a lot of the writers will not
    want to assume any risk because the profit just is not there.
    So it will indeed affect all markets, not just the large, but
    the small.
        Senator Bennett. Give me an example.
        Mr. Mills. A shopping mall. One of the things that we know
    we have to do, what the Homeland Security people are doing, is
    trying to predict how the enemy thinks. And one of the most
    dangerous acts that has been identified as--you know, we all
    know New York, LA, are likely places that they would strike.
    What if a shopping mall in a small town anywhere in the Midwest
    of the United States is bombed?
        Senator Bennett. Try Utah.
        Mr. Mills. Try Utah. That would have a devastating impact
    on the market. That would be a huge disruption. A huge fear
    would strike the market and would cause a massive disruption.
    So I believe it affects all markets large and small.
        Mr. Nutter. Senator Bennett, if I could offer a comment. I
    am sorry if I interrupted you.
        Senator Bennett. No, no.
        Mr. Nutter. It seems to me your point goes to the heart of
    the insurance industry's difficulty in underwriting this risk.
    There is an information disconnect. The industry does not know
    about potential terrorist activities, and yet terrorists can
    very well act independent of prior experience. They can also
    act based upon their assessment of mitigation efforts that
    entities are taking. So it would seem that it is a broad
    problem and reflects the problem the industry has in trying to
    price and underwrite this risk throughout the country, not just
    in the major urban areas.
        Senator Bennett. Mr. Hunter, you--
        Mr. Hunter. Yes. I just wanted to say the modeling that is
    being used to underlie rate making does imply that there are
    four cities with a very high risk, five others with a middle
    size risk, and everywhere else is low risk. And obviously that
    does not mean there cannot be an event anywhere. It could. But
    in terms of risk, the low risk cities are being priced pretty
    close to what they would be without any TRIA.
        Mr. Csiszar. Senator, I--
        Senator Bennett. Do the rest of you agree with that, that
    they are being priced as if there were no TRIA?
        Mr. Duperreault. No, I would not agree with that.
        Mr. Csiszar. And I would also say that I am told that the
    football stadium in Alabama holds 90,000 people, and that is a
    terrorist risk, and that is--
        Chairman Shelby. Then you had better insure that.
        [Laughter.]
        Chairman Shelby. First. And you have no risk there. The
    risk is a fight, is it not?
        Mr. Csiszar. Yes.
        [Laughter.]
        Chairman Shelby. It depends on who wins.
        Mr. Csiszar. That is right.
        Senator Dodd. If Auburn shows up, it is a risk.
        [Laughter.]
        Chairman Shelby. Auburn is doing quite well.
        Senator Bennett. Mr. Duperreault, you--
        Mr. Duperreault. Yes, if I could just comment a little bit
    on this question of pricing pre and post-TRIA. We do not know
    where these things are going to occur. If there is a market
    dislocation, there is going to be a market dislocation that
    affects the entire country. It is not going to be isolated to
    major cities. It will affect all cities because we do not know
    whether there is an event that was going to occur in a mall
    somewhere in Utah, or a stadium in Alabama. We do not know. So
    it will be a universal effect.
        Senator Bennett. All right. Just one quick comment, Mr.
    Chairman. Having lived through the Olympics in Salt Lake City,
    I discovered something very interesting which may or may not be
    true. We are back to the uncertainty circumstance. The Olympics
    were, as Senator Dodd discovered trying to get credentials for
    his 8-month-old daughter, pretty tight as far as security went.
    And I stood in the command center. We actually had two, the
    command center of all of the units involved with security in
    the Olympics on the ground, and then one floor up we had a
    command center of all the intelligence agencies, and it was
    highly classified, and I will not tell you how many countries
    were there, but it was not just American intelligence agencies
    that were there.
        I remember looking over this very sophisticated and
    somewhat complicated command center, and the fellow who was in
    charge of it said to me, ``Senator, this is boring. Nothing is
    going on. And in the security business boring is good.'' We
    spent an awful lot of money, Federal money, local money,
    Olympic money, et cetera, to get that boring result.
        But the interesting thing that applies here with respect to
    this question of risk is that we were told that al Qaeda avoids
    hardened sites, and one of the reasons there was no terrorism
    activity at the Olympics is that we did go to the extent we did
    for a hardened site. That is why I felt safe at the Republican
    Convention in New York City because I knew how hardened the
    site was so I figured they are not going to attack us. They
    prefer to go someplace that is not hardened where you do not
    expect it.
        Now, they want something very splashy on television. They
    want something recognizable around the world. So they might go
    to the St. Louis Arch or some other symbol that could be
    recognized if they could blow it up. But I think that becomes
    your problem. If you harden, mitigate, if you will, certain
    parts of the country, you, if you are dealing with the
    mentality of al Qaeda, you make it far less likely that there
    will be an attack there, but if they want to attack America,
    they will then come to Salt Lake City when the Olympics are not
    there and blow up the Mormon Tabernacle because that is a
    symbol that people would recognize around the world from the
    Mormon Tabernacle Choir, and when we are not holding the
    Olympics we are not very hard in Salt Lake City. So I think
    that is the problem that we face.
        Thank you for your indulgence, Mr. Chairman. I did not mean
    to overrun my time.
        Chairman Shelby. Thank you, Senator Bennett, and I also
    thank Senator Dodd, both of you, all your work on this.
        Doctor, should we move forward with a Government program?
    How can we also maximize market efficiencies? How can we--
        Mr. Holtz-Eakin. The key issue here, I think, is not to
    declare TRIA a success or failure in its incarnation. It was
    designed for a particular problem as a temporary backstop to
    restore capacity in the industry. Quite frankly, the data will
    not be there to say if this is the right design or not. You
    cannot distinguish between an economic recovery in general and
    better performance in a lot of the business investments. So
    that is problem number one, and no one at this panel will ever
    be able to have enough evidence to definitively decide whether
    this is the right solution.
        The second problem is that going forward there are these
    long standing terrorism risks that will be elevated. Compared
    to a temporary program, I think that is the key design issue,
    and in a perfect world, a private market would recognize those
    risks, price them, and have capacity to insure against them. Or
    in a perfect world, a Government backstop would have prices
    that gave good incentives, and spread the risk efficiently
    using the taxing powers of the Government.
        The real issue is looking at the downsides in both cases.
    What is the potential risk of a private sector that does not
    develop a capacity to price at least as well as possible and a
    capacity to insure the risks? And, what is the downside on the
    Government programs with poor risk management such as the
    Federal Savings and Loan Insurance Corporation?
        The goal going forward is to make sure we minimize the
    risks of bad design. For example, the savings and loans crisis
    showed the risks of bad economic incentives embedded in a
    Government insurance program. This is the kind of thing you
    want to avoid.
        Chairman Shelby. I think we all recognize that the risk of
    terrorist attacks in the future somewhere are real, and it is
    unusual, and it is not something the insurance, the private
    market has had to deal with, at least to my knowledge, in the
    past, and it is hard to put the product together. I see that.
        In the very near future, as most of you know, we will be
    receiving a report on the TRIA program from the Treasury
    Department. I believe that this document should be informative
    and helpful to our deliberations here in the Committee as we
    consider what if any steps to take next. It is my understanding
    that both the Government and the private sector, you, a lot of
    you, did a great deal of work to compile the underlying
    information that will form the basis of this study. We look
    forward to obtaining this study. Senator Dodd alluded to it
    earlier.
        And we appreciate all of you appearing here today. I think
    it has been a good hearing.
        Senator Dodd. Mr. Chairman, just very quickly, a couple of
    things. Well, I want to underscore the point that Senator
    Bennett made and others of you have made here about where these
    attacks can occur. If you understand the work, so much behind
    it, not only--
        Chairman Shelby. We hope they do not ever occur, no.
        Senator Dodd. Of course not.
        Chairman Shelby. But they may.
        Senator Dodd. If you accept obviously having symbolic, but
    also fear. I mean fear is the major, I think, emotion that
    terrorists want to promote. So I always find it troubling that
    we always go and prepare for the next event based on the last
    event, and we underestimate the creative abilities of these
    people. I have heard it said by others and I agree with it, the
    attack on 9/11 was probably the most efficient and successful,
    quote, military, if you want to call it that, attack maybe ever
    executed. When you consider how limited amount of resources
    were involved and the amount of damage done and the ripple
    effects that it caused, you would be hard-pressed, I think in
    my mind, to talk about another event you could think of that
    has had that kind of an effect.
        I think we underestimate. If we assume that just these
    large cities and big targets are the natural places, I think we
    make a tremendous mistake, tremendous mistake if we do that. I
    just wanted to make that point.
        Second, I wanted to make the point that while I am
    impressed with what the private sector is doing to harden their
    facilities and protect them against attacks, we have to go a
    long way yet. There have been studies--and I know the Chairman
    is aware of this as I am--done by reputable organizations that
    feel as though we have not done as well as we could be doing to
    provide the resources, the first responders and others to make
    us better prepared. I think that is an acknowledgement all of
    us would have to make, but we have to do a much better job in
    the coming years if we are going to close that gap.
        But also I think it is important, and I think all of you
    implied this, but I think the record needs it stated. I think I
    know the answer to this, but I think that the record should
    have it. I want to ask you, Mr. Lowe, this because of your
    extensive experience as a real estate developer.
        What impressed me at the time when we first did this bill,
    there was a very good argument made I thought by those who were
    talking about how long should this temporary program be, and
    you may have been one of them at the time, Mr. Lowe, suggested
    that a two- or three-year program really was not adequate, you
    needed more like a five- or six-year program. And I said,
    ``What do you mean by that?'' And they said, well, you need to
    understand that when you start talking about a large real
    estate development project, those are years in the execution.
    The time windows on these things are not short, and so getting
    the necessary capital, all of the work that needs to be done to
    put together a large real estate development project takes
    time.
        And I wonder if you might in light of this--and I
    appreciate what the Chairman is doing, by the way, with the
    Treasury study; I am not in any way suggesting that we should
    necessarily jump ahead of that, but our concern would be if we
    got them--
        Chairman Shelby. We jumped a little ahead of it with the
    hearing, did we not?
        Senator Dodd. Well, we did, but that is good. I think we
    set the ground work, and I appreciate the Chairman doing that.
    But if we get too late into the fall, start getting close to
    this December 31st deadline, there are a lot of people saying
    what difference does it make? If we did it on December 30, it
    is done, it will be done by the time that the legislation would
    no longer be valid, effective.
        Could you address that issue I think as someone who has had
    some experience in this thing, about the lead times necessary?
    And again, I am preaching to the choir here to many of you who
    understand this, but I think the record should reflect this.
        Mr. Lowe. Business in general, the real estate industry
    certainly specifically, need predictability in the business and
    capital markets environment. We are making long-term decision
    daily that affect our projects, our employees and our
    customers. If we cannot depend upon, now 8\1/2\ months out, 1
    year out, even 3 years out, we have trouble planning for our
    projects and our employees. That is why I concluded by
    personally recommending that your action, one, extend the
    program quickly, but do it in a way that builds in a mechanism
    that really encourages the public and private sector to get
    together and come up with a permanent long-term solution to
    this problem. It is not going to go away in 2 or 3 years.
        Senator Dodd. I understand that.
        Mr. Mills. If I may very quickly, Senator, I can tell you
    that the Real Estate Board has already reported to us already
    in anticipation of what might not happen, that multiyear
    builders risk policies are becoming increasingly unavailable.
        Mr. Duperreault. And, Senator, we are right now issuing
    endorsements that say there is no coverage past the expiration
    of TRIA on property risk where we can do it, so it is happening
    now. It is not going to happen six or 8 months from now, it is
    happening right now.
        Senator Dodd. Mr. Chairman, I thank you.
        Thank all of you very much.
        Chairman Shelby. Thank you, Senator Dodd.
        The hearing is adjourned.
        [Whereupon, at 11:55 a.m., the hearing was adjourned.]
        [Prepared statements supplied for the record follow.]
                   PREPARED STATEMENT OF SENATOR WAYNE ALLARD
                                 April 14, 2005
        I would like to thank Chairman Shelby for holding this important
    hearing. Many of us were on the Committee when we enacted the Terrorism
    Risk Insurance Act (TRIA), and I appreciate the opportunity today to
    revisit the program and review its implementation.
        I reluctantly supported the legislation passed in 2002. I believe
    in free markets, and thus am loath to inject the Federal government
    into private markets. I became convinced that September 11, 2001 was
    indeed an extraordinary event that required a temporary backstop in
    order to give the markets time to adjust. I emphasize the word
    temporary here. I came around to supporting the TRIA legislation only
    after repeated assurances from the industry that this was a one time
    request-simply buying time for the private markets to regroup.
        There is no ambiguity as to the congressional intent that the
    program should be temporary. In fact, in the conference report the
    purpose section begins, ``The purpose of this title is to establish a
    temporary Federal program that provides for a transparent system of
    shared public and private compensation for insured losses resulting
    from acts of terrorism .-.-. ''
        Now the industry is back with the same arguments. Once again, we
    are being told that the markets just need a little more time to adjust.
    I'm not sure why we should believe it this time, though. If this is to
    become a perpetual government program, like flood insurance, the
    industry should be honest about it.
        I will be following today's hearing carefully, and I will be
    interested in hearing what progress the industry has made in once again
    letting the free market take control. Again, Mr. Chairman, thank you
    for convening this hearing. I look forward to hearing more about this
    topic.
                                   ----------
                   PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN
                    Director, Federal Terrorism Reinsurance
                                 April 14, 2005
        Chairman Shelby, Senator Sarbanes, and Members of the Committee, I
    appreciate having the opportunity to discuss Federal terrorism
    reinsurance with you today.
        My statement, which draws heavily on the Congressional Budget
    Office's (CBO's) paper Federal Terrorism Reinsurance: An Update
    (January 2005), will elaborate on several points:

     By increasing the availability of terrorism insurance at
        below-market rates, the Terrorism Risk Insurance Act (TRIA) has led
        to a rise in the percentage of companies that buy terrorism
        coverage, mainly in places thought to be at high risk of terrorist
        attacks.

     In the absence of TRIA, an unexpectedly large loss from a
        terrorist attack would be likely to produce another episode of
        scarce coverage, rising prices, and uninsured assets.

     Some important changes have occurred since TRIA's enactment in
        2002, however. The most significant seems to be a growing sense
        that the threat of terrorism in the United States will continue for
        the foreseeable future. That conclusion suggests that investment
        and economic behavior needs to adjust further in response to the
        greater threat of losses from terrorist attacks. For example, with
        a continuing threat, it might be cost-effective for new structures
        to be designed,
        located, and built to better withstand such attacks. Existing
        structures might benefit from having their safety features
        retrofitted. And businesses could diversify the locations of their
        operations. The extended duration of the threat is thus relevant to
        the question of whether to extend TRIA in its current form, which
        subsidizes insurance and dampens incentives for such adjustments.

     At a minimum, the speed with which the Nation adjusts to a
        sustained high level of risk might increase if the premiums charged
        for terrorism insurance more closely reflected expected losses.
        That outcome could be facilitated by letting the TRIA program
        expire or by adding cost-based premiums to the program.

     It is easy to exaggerate the overall costs to the economy of
        reducing the Federal subsidy for terrorism insurance; in fact,
        those costs are likely to be small. One reason is that TRIA does
        not lower the total costs of terrorist attacks but rather shifts
        them from property owners to taxpayers. Indeed, total costs might
        be lower without TRIA because efforts to mitigate risk could pay
        off in smaller losses from a terrorist attack.

     Alternatives to insurance would be likely to develop more
        quickly if premiums were higher. That is, the expiration of TRIA or
        the addition of cost-based
        premiums could stimulate the development of alternatives, including
        mutual reinsurance pools and capital instruments such as
        catastrophe bonds. Another alternative to traditional insurance is
        for owners of the largest assets at risk (and their creditors) to
        protect themselves by diversifying among properties and locations.
    What TRIA Does
        The Terrorism Risk Insurance Act, enacted in November 2002, created
    a temporary Federal reinsurance program to transfer most of the risk of
    financial loss from acts of terrorism to taxpayers. At the time, the
    attacks of September 11, 2001, had made insurers less willing to
    provide terrorism coverage because of uncertainty about the risk of
    future losses. Policymakers feared that a shortage of terrorism
    insurance could expose property owners to uninsured risk, slow down
    commercial construction, and reduce economic activity. Indeed,
    anecdotal evidence suggested that some large construction projects had
    been canceled or delayed in part because of the lack of terrorism
    coverage. Many analysts expected that, in time, insurers would
    reassess the risk of terrorism, raise capital, and re-enter the market.
    TRIA was intended to fill the gap in the supply of terrorism insurance,
    at least until private insurers could recover.
        Under TRIA, companies that provide commercial property and casualty
    insurance are required to offer terrorism coverage. In return, the
    Federal Government agrees to pay 90 percent of an insurer's losses,
    above a deductible, in the event of an attack by foreign terrorists.
    Insurers would pay the deductible and the other 10 percent of losses--
    up to a total limit for the program of $100 billion. The government
    would then be required to recoup some of its costs by assessing
    surcharges on commercial insurance policies sold after the terrorist
    attack. Participating insurers pay no premiums for TRIA reinsurance,
    which increases their ability to insure against catastrophes at low
    prices. The law and the program it created are scheduled to expire at
    the end of calendar year 2005.
    Effects of TRIA on Insurance Markets
        TRIA has served its purpose of immediately expanding the supply of
    terrorism insurance. For owners of high-risk properties, the law has
    succeeded in increasing the availability and lowering the price of
    coverage for property and casualty losses from terrorism. As a result,
    TRIA has led to an increase in the percentage of companies that buy
    terrorism coverage. It has also given private insurers time to raise
    financial capital, improve their models of risk, and reenter the
    market.
        The Treasury is scheduled to deliver a report to the Congress this
    summer that should provide additional information about the effects of
    TRIA. As part of that report, the Treasury is conducting a
    comprehensive survey of insurers and policyholders about their
    experiences under the program.
    Effects on Prices of Terrorism Insurance
        TRIA has contributed to the decline in the price of terrorism
    insurance, which has fallen by half since the beginning of 2003. In the
    third quarter of 2004, the typical premium for terrorism coverage
    represented about 4 percent of the total premium for a property
    insurance policy--down from more than 10 percent in the first quarter
    of 2003, according to insurance broker Marsh Inc. That drop occurred as
    insurers' own deductibles under TRIA were rising, which would normally
    cause insurers to raise premiums. TRIA is probably not responsible for
    the entire drop in rates in 2003 because private insurers were building
    capital and learning more about pricing terrorism risks. In 2004, the
    median cost of purchasing terrorism insurance ranged from $53 to $80
    per $1 million of insured value.
    Effects on Purchases of Terrorism Insurance
        After the cost of terrorism coverage fell, the percentage of firms
    buying policies nearly doubled. A recent survey indicates that 44
    percent of large companies bought terrorism coverage in the third
    quarter of 2004, compared with just 26 percent in the third quarter of
    2003. Another survey found that 57 percent of commercial property
    owners purchased terrorism insurance in the third quarter of 2004
    versus 24 percent in early 2003. A majority of firms with terrorism
    coverage are now also buying private insurance for events not covered
    by TRIA, including acts of terrorism by domestic groups.
        Despite those increases, roughly half of all commercial properties
    still lack terrorism insurance, but that rate of coverage is not
    necessarily a sign of market failure. Factors other than price affect
    firms' decisions to buy insurance. For example, many companies that do
    not buy terrorism coverage apparently do not consider themselves to be
    potential terrorist targets. (Coverage is higher in cities thought to
    be at greatest risk--such as New York, Washington, Chicago, and San
    Francisco--despite higher premiums in those cities.) Moreover,
    properties owned by shareholders who hold diversified portfolios of
    such investments are effectively self-insured. If some firms have
    decided that the costs of terrorism coverage outweigh the benefits,
    then universal coverage may not be a desirable policy goal.
    Financial Condition of Insurers
        Insurers' capacity to provide coverage depends on their net worth
    (assets minus liabilities) and the availability of reinsurance. The
    largest component of net worth is insurers' accumulated stock of
    retained earnings. The net worth of property and casualty insurers
    dropped by nearly $30 billion in 2001 but has since recovered (see
    Table 1). In addition, underwriting losses (the difference between
    insurers' income from premiums and their expenses) have declined
    significantly. In fact, property and casualty insurers are earning
    underwriting profits for the first time in nearly 20 years--$2.8
    billion for the first nine months of 2004--despite losses from four
    hurricanes in the third quarter of 2004. The net worth of the industry
    rose to $369 billion on September 30, 2004, from $285 billion at the
    end of 2002. U.S. reinsurers have also seen a recovery in their net
    worth and net income (see Table 2). Of course, not all of that net
    worth will be available to back terrorism coverage because it will be
    needed to support other types of insurance.

    Modeling Insurance Losses
        Among its other effects, TRIA has provided time for the insurance
    industry to improve its ability to predict losses from terrorism and
    thus price terrorism risk more accurately. Several competing models are
    now available that predict the risk of losses from terrorism by zip
    code or by individual location. The level of detail in those models
    allows insurers to distinguish the higher risk faced by city centers
    from the lower risk faced by outlying urban areas. Each model contains
    a list of potential terrorist targets and produces estimates of the
    severity of losses associated with different types of attacks.
        Although substantial progress has been made in modeling terrorism
    losses, the new models are not as reliable as those for natural
    catastrophes, which are based on more than 100 years of data rather
    than on two major events in the past 12 years (the September 11 attacks
    and the 1993 bombing of the World Trade Center). Terrorism models are
    hampered not only by a lack of data but also by the absence of an
    established ``theory'' of terrorist attacks. However, a generally
    accepted model of risk is not essential for providing private
    insurance. Insurance
        against natural disasters is widely available despite a variety of
    estimates from competing models of losses from such events.
        Notwithstanding concern by some actuaries that existing tools
    cannot predict losses from terrorism with the degree of accuracy
    necessary to set prices for coverage, insurers have one benchmark
    available for setting premiums. The Insurance Services Office (ISO), a
    company that provides data and analytic services to insurers, currently
    files advisory estimates of loss costs (expected annual losses over the
    long term) with insurance commissioners in each state. Once state
    commissioners approve an ISO advisory, insurance companies operating in
    that state can use the estimates as a basis for setting premiums
    without having to undertake the formal rate-filing process. In 2003,
    all 50 states approved ISO's estimates of loss costs.
    Economic Effects and the Cost of TRIA
        TRIA was explicitly designed to reduce the short-term adverse
    effects of terrorism on economic activity, at some cost to taxpayers.
    Assessing TRIA's success in offsetting the macroeconomic effects of
    terrorism is difficult because it is hard to know how the economy would
    have performed in the absence of the law. No claims have been filed
    under TRIA, but the program exposes taxpayers to substantial risks and
    costs. In addition, the TRIA program may be increasing exposure to
    losses by delaying cost-effective adjustments to a continuing risk of
    terrorism.
    Short-Term Macroeconomic Effects
        TRIA is a temporary program adopted to avoid a contraction of
    economic activity. Faced with anecdotal evidence that some major
    construction projects had been halted because of a lack of terrorism
    insurance, the Congress acted to keep such projects moving by
    increasing the availability and lowering the price of terrorism
    coverage.
        After TRIA's enactment, some recovery in retail construction
    occurred. But the law appears to have had little measurable effect on
    office construction, employment in the construction industry, or the
    volume of commercial construction loans made by large commercial banks.
    Various factors complicate that assessment, however--for example, the
    lingering effects of the 2001 recession could be masking positive
    macroeconomic effects of TRIA.
        In addition, it appears that the shock to the insurance market from
    the September 11 attacks did not spill over to the general economy.
    Surveys indicate that in the six months after September 11, banks did
    not significantly tighten their commercial lending in response to the
    shortage of terrorism insurance. Commercial lending may have been
    little affected in part because firms have alternatives other than
    insurance for spreading risk. Lenders and investors can reduce their
    risk through diversification. Real estate investment trusts, which are
    essentially mutual funds for real estate holdings, and commercial
    mortgage-backed securities (CMBs) are especially useful for that
    purpose. In fact, the extent to which interest rates on CMBs exceeded
    comparable rates was smaller in the summer of 2002 than it had been
    before September 11, 2001. That result is consistent with the idea that
    investors were requiring only a small premium for bearing terrorism
    risk, partly because CMBs are geographically diversified.
    Cost to Taxpayers
        No claims have been incurred under TRIA, but that does not mean
    that the program has no cost. Indeed, the cost--in terms of risk and
    expected losses--of having the Federal Government provide terrorism
    reinsurance is approximately the same as the cost of having the private
    sector provide it. With a Federal program, however, that cost is
    shifted from owners of commercial properties (who pay for expected
    losses and the cost of risk-bearing through premiums) to taxpayers. The
    shift in the cost of risk and uncertainty would occur even if
    surcharges on future policyholders ultimately offset all Federal cash
    outlays under TRIA.
        CBO estimates the expected value of Federal outlays from TRIA to be
    $630 million over the 2005-2015 period (assuming that the law is
    extended) and the value of governmental receipts from surcharges to be
    $320 million over that period. (Expected-value estimates reflect CBO's
    expectation of payments during the period based on the probability of
    various outcomes, from losses of zero up to very large amounts.) The
    outlay estimate does not include any charge for the risk and
    uncertainty borne by taxpayers. Thus, the budgetary estimates are less
    than the economic cost of such reinsurance.
    Long-Term Effects
        An increase in the risk of terrorism is analogous to an increase in
    the risk of natural disasters: it lowers the value of some properties
    in high-risk areas. Similarly, TRIA is equivalent to a policy of
    subsidizing property and casualty insurance in an area that appears to
    have an especially high risk of natural disasters. If the increase in
    risk is only temporary, then a Federal program to provide low-cost
    insurance might be justified as a means of avoiding an expensive and
    excessive effort to reduce losses.
        If the increase in risk is long-lived and significant, however,
    such a program could increase the cost to the economy because it could
    delay action by owners of assets to mitigate risk and reduce losses.
    Since July 2004, when the report of the 9/11 Commission was published,
    a consensus appears to have emerged that the current elevated risk of
    terrorism is likely to continue for years. With a sustained change in
    the risk of loss, spreading that risk through insurance is only part of
    an economically efficient response. Taking steps to mitigate risk--such
    as moving operations to safer areas, installing better security
    systems, hardening buildings against external attack, establishing
    disaster-recovery procedures, and setting up systems to
    protect computerized information--is also important. Firms have been
    making additional investments since September 11 to improve their
    security and avoid losses, but the incentive to do so is muted by
    subsidized terrorism insurance.\1\
    ---------------------------------------------------------------------------
        \1\ See Congressional Budget Office, Homeland Security and the
    Private Sector (December 2004).
    ---------------------------------------------------------------------------
        If the Federal Government continued to subsidize terrorism
    insurance, it could contribute to deferring the private sector's long-
    term adjustment to the increase in risk. Less adjustment would mean
    that losses from any future attacks would be greater than would
    otherwise be the case. However, the extent to which TRIA may actually
    be reducing efforts to mitigate risk is unknown.
    Policy Implications
        Three options for TRIA have been under discussion in the Congress.
    One is to allow the program to expire at the end of 2005, as scheduled
    under current law. A second is to extend the program as is. That
    approach was taken in H.R. 4772 in the 108th Congress. A third option
    is to modify TRIA. For example, H.R. 4634, which was reported by the
    House Committee on Financial Services on September 29, 2004, would have
    continued the program through 2007, raised
    individual insurers' deductibles from 15 percent this year to 20
    percent in 2007, increased the industry retention level from $15
    billion now to $20 billion in 2007, and extended reinsurance coverage
    to providers of group life insurance. CBO estimated that on an
    expected-value basis, that legislation would have increased outlays by
    $1.3 billion and receipts by $480 million over the 2005-2014 period. At
    least two terrorism insurance bills have been introduced in the 109th
    Congress--the Terrorism Risk Insurance Extension Act of 2005 (S. 467)
    and the Terrorism Insurance Backstop Extension Act of 2005 (H.R.
    1153)--but CBO has not yet estimated their cost.
    Letting TRIA Expire
        If the perception that the risk of terrorism is likely to remain
    high is correct, then it would be desirable for property owners and
    businesses to take measures to reduce their exposure to risk and lower
    the cost of any attack. They would have a stronger incentive to take
    such measures if the insurance subsidies conveyed through TRIA were
    reduced or eliminated. Letting TRIA expire, however, might expose
    property owners to onerous premiums to cover losses for which they were
    not responsible.
        Would Private Reinsurers and Investors Take Up the Slack? There are
    indications that private reinsurers would eventually fill some of the
    gap in supply left by the expiration of TRIA, but that outcome is not
    certain. Like domestic insurers, global reinsurers have increased their
    underwriting capacity since September 11, in part by adding capital.
    Global reinsurers also earned underwriting profits in 2003 for the
    first time in seven years, according to Standard & Poor's, and
    shareholders' funds (capital and shareholders' reserves) increased from
    $244.8 billion in 2002 to $338.3 billion in 2003. More recently, hedge
    funds have entered the reinsurance business. However, in 2004, the
    amount of coverage actually purchased in the private terrorism
    reinsurance market remained low--between $4 billion and $6 billion, by
    industry estimates.
        The experience of other countries provides little evidence about
    the role that private reinsurers can play. In Europe, public/private
    risk-sharing agreements on terrorism insurance are common. Typically,
    the government provides financial support for pools created by
    insurers. With a pool system, individual insurers pay the first layer
    of claims, private reinsurers cover middle layers, and a mutual
    reinsurance pool pays higher layers. Generally, the government picks up
    losses once a pool's resources are exhausted. For that reason, pure
    free-market tests of the willingness of private firms to underwrite
    terrorism coverage are difficult to find, leading to uncertainty about
    how much coverage the market would provide.
        Although capital markets are currently absorbing some terrorism
    risk, the development of global financial instruments for spreading
    that risk would probably be more rapid without TRIA's subsidized
    prices. Further, international capital markets are larger than
    insurance markets and thus have greater capacity to absorb losses.
    Daily fluctuations in the overall value of traded capital assets
    worldwide often exceed the losses incurred on September 11, 2001.
        In the absence of TRIA, catastrophe bonds--which fully or partly
    forgive the bond issuer from interest and principal payments in the
    event of specified catastrophes--might be used for terrorism losses, as
    they have been used to spread the risk of natural disasters. Two
    international catastrophe bonds have been issued that combine terrorism
    risk with other risks. However, before catastrophe bonds can play a
    major role, tax and regulatory accounting issues will have to be
    resolved.
        How Would the U.S. Economy Be Affected? The immediate economic
    effects of letting TRIA expire are likely to be small. The economy is
    stronger now than it was in 2001 and 2002 and therefore is better able
    to offset the drag from an increase in costs for terrorism insurance. A
    study sponsored by the insurance industry concluded that failing to
    extend TRIA would reduce economic growth by 0.4 percent, household net
    worth by 0.9 percent, and the number of jobs by 0.2 percent in 2008,
    even without another terrorist attack.\2\ That study predicted slower
    economic growth because of the effect that higher insurance premiums
    for property and workers' compensation insurance would have on
    businesses' operating costs. However, the study implicitly assumed that
    costs borne by taxpayers, unlike those borne by owners of commercial
    properties, do not have adverse effects on economic growth. The study
    also ignored TRIA's potential for delaying the economy's long-term
    adjustment to a higher risk of terrorism and the possibility that other
    policies could offset any economic slowdown.
    ---------------------------------------------------------------------------
        \2\ R. Glenn Hubbard and Bruce Deal, The Economic Effects of
    Federal Participation in Terrorism Risk (study prepared by Analysis
    Group, Inc., for the insurance industry, September 14, 2004).
    ---------------------------------------------------------------------------
        Letting TRIA expire would not increase the expected cost of
    terrorism to the economy but rather would change the incidence of that
    cost. Under TRIA, the cost of terrorism risk is being shared by
    taxpayers and the owners of commercial properties. If TRIA expired as
    scheduled, more of the cost would be borne by private firms and
    insurers, but the total cost would be unlikely to rise.
        How Would Insurance Markets Be Affected? One disadvantage of
    letting TRIA expire is that doing so increases the chances of a market
    disruption after an unexpectedly large loss, as has been the pattern
    for natural disasters. In particular, after a terrorist attack, the
    availability of insurance and reinsurance would drop, and premiums
    would be likely to spike. How long that effect would last is uncertain.
    But in the aftermath of catastrophic events that deplete capital, high
    prices and reduced availability of insurance can persist.
        Reinsurers would also probably continue to exclude losses related
    to nuclear, biological, and chemical attacks from their coverage. That
    exclusion would be important mainly for the workers' compensation
    market, since primary insurers for that type of policy must cover
    losses from all causes. Without Federal reinsurance, insurers might be
    unable to diversify that catastrophic risk, at least in the near term,
    so premiums for workers' compensation policies could rise
    substantially. Thus, TRIA's expiration would most likely create
    shortages in the workers' compensation market. Because of the special
    challenges posed by that market, policymakers might consider the option
    of extending TRIA only for workers' compensation policies.
        Another disadvantage of letting TRIA expire is that with higher
    prices, the prevalence of insurance coverage would probably decline.
    Thus, lawmakers might face the prospect of higher supplemental disaster
    assistance for uninsured losses in the event of a major attack. In the
    case of September 11, Federal assistance to businesses adversely
    affected by the attacks exceeded $6 billion, out of total Federal aid
    of more than $30 billion in response to the attacks.
    Modifying TRIA
        If the TRIA program was extended rather than allowed to expire, the
    government could take steps to reduce the program's adverse effects on
    risk mitigation. Charging premiums for Federal reinsurance would help
    encourage property owners to adjust to the higher level of risk. When
    TRIA was proposed, its supporters argued against premiums on the
    grounds that not charging them would have only small effects in the
    short run and would avoid the need to create a Federal entity to set
    premiums. However, if the primary goal now is to prompt the economy to
    adjust to a continuing threat of terrorism, then premiums might be set
    as close as possible to expected losses. Alternatively, to ensure that
    private insurers and reinsurers had room to compete with the
    government, policymakers could set premiums higher than expected losses
    (in other words, add ``risk loads''). In addition, periodically raising
    the deductibles and coinsurance percentages that insurers must bear
    would gradually remove the government from the market.
                                   ----------
                       PREPARED STATEMENT OF HOWARD MILLS
                       Acting Superintendent of Insurance
                Terrorism Insurance Implementation Working Group
                National Association of Insurance Commissioners
                                 April 14, 2005
    Introduction
        My name is Howard Mills. I am the Acting Superintendent of
    Insurance for the State of New York, and this year I am serving as
    chair of the Terrorism Insurance Implementation Working Group of the
    National Association of Insurance Commissioners (NAIC). We appreciate
    the opportunity to testify regarding the role of the Federal Government
    in ensuring that insurance to protect against losses from acts of
    terrorism remains available to Americans.
        Today, I want to make three basic points:

     First, there is still a need for the Federal Government to
        provide appropriate financial back-up to the private insurance
        market in order to assure that segments of our nation's economy do
        not falter due to a lack of insurance coverage for terrorism. The
        insurance marketplace is not yet ready to take on the risk of
        providing coverage for acts of terrorism on its own.

     Second, Congress should act this year to extend coverage under
        the Terrorism Risk Insurance Program (TRIP), or enact a comparable
        Federal backstop for acts of terrorism, at least through 2007,
        because the commercial insurance markets lack the capacity and
        means to underwrite sufficient terrorism coverage without a Federal
        backstop.

     Third, The CBO January 2005 Paper-Federal Terrorism
        Reinsurance: An Update-contains some opinions on how markets will
        react to the Terrorism Risk Insurance Act of 2002 (TRIA) that are
        not borne out by observations of how businesses and insurers have
        reacted to TRIA.
    TRIA Has Been A Success, But Challenges Remain
        Following enactment of TRIA, the NAIC established a Terrorism
    Insurance Implementation Working Group of state regulators that has
    worked closely with the Treasury Department to successfully implement
    TRIA's provisions, as well as to monitor the impact it has had on the
    insurance marketplace. There are many who believe the United States
    economy remains vulnerable to terrorist attack. This is evidenced by an
    increased take-up rate for terrorism coverage observed in recent
    surveys. Indeed, those who need coverage the most are able to obtain it
    because of the existence of TRIA.
        We believe the presence of the Federal backstop has provided a an
    appropriate mechanism for the insurance industry to make vital
    terrorism coverage widely available to American businesses.. By
    requiring insurers through the ``make available'' mechanism to offer
    coverage for acts of terrorism they otherwise might not have offered in
    the wake of the tragic events of September 11th, TRIA brought certainty
    to the insurance marketplace.
        The NAIC's Terrorism Insurance Implementation Working Group
    believes that TRIA has been successful in stabilizing the insurance
    market. In particular, TRIA's ``make available'' requirement has
    contributed to the overall effectiveness of the program during its
    first three years. American businesses--both large and small--have been
    offered choices they might not otherwise have had. Through the ``make
    available'' provision, TRIA has given them the opportunity to make an
    informed choice regarding the purchase of coverage for acts of
    terrorism.
        During the first week of May 2004, insurance regulators began
    receiving contingency filings from Insurance Services Office, Inc.
    (ISO), the nation's largest insurance advisory organization. In the
    event Congress does not extend the TRIA program this year, these policy
    form filings would reinstate terrorism coverage limitations that were
    in effect prior to TRIA's enactment for any policies that extend
    coverage into 2006. In addition to protecting insurers from additional
    terrorism liability, these filings demonstrate that the insurance
    industry is not yet willing to assume the full risk of terrorism losses
    at this time. If triggered by the expiration of TRIA, these limitations
    will greatly reduce terrorism coverage in the states that have approved
    the endorsements. In those states that have rejected these coverage
    limitations, insurers will have to make the difficult choice of writing
    the coverage and accepting the potentially catastrophic terrorism
    exposure or not writing it at all. This could lead to availability and
    affordability problems down the road.
    Industry Capacity Limitations
        One of the elements that Congress should consider is the capacity
    of the insurance industry to accept the risk of losses from acts of
    terrorism. Insurance capacity is generally measured by determining the
    amount of capital and surplus available to insurers to support their
    policy writings. Using that measure, NAIC data shows that 2003 was a
    profitable year for property and casualty insurers, with aggregated
    policyholder surplus increasing approximately 26 percent to $375
    billion. It should be noted however, that policyholder surplus declined
    each year from 1999 to 2002, and the $375 billion figure is only 4.3
    percent higher than the $360 billion in policyholder surplus held in
    1999. Less than half of those funds are used to support commercial
    products in all lines of insurance, including terrorism coverage.
    Moreover, the substantial losses incurred by insurers in responding to
    claims from four major hurricanes during 2004 will erode some of the
    recent surplus gains.
        As part of considering whether the insurance industry has
    sufficient capacity to underwrite the risk of terrorism losses,
    Congress should consider whether the industry is willing to put its
    capital at risk. At present, we believe the answer is no.
        In addition, insurers and the marketplace-at-large are finding it
    very difficult to accurately price coverage for acts of terrorism.
    Unknown frequency, coupled with the potential for severe losses, make
    insurers reluctant to provide coverage for acts of terrorism. Until
    insurers and their reinsurers become more comfortable that government
    efforts are adequate to protect citizens from terrorist acts, or at
    least become more predictable than they are today, they will be
    reluctant to accept complete risk transfers from American businesses
    for this exposure. In particular, businesses viewed by insurers as
    having a greater risk of terrorism losses, such as those located in
    America's financial and commercial centers, will have trouble finding
    terrorism insurance.
    Congress Should Extend the Terrorism Risk Insurance Program
        The NAIC urges immediate action by Congress on a Federal solution
    to ensure continued marketplace stability when TRIA expires at the end
    of 2005. Because some terrorism risks are largely uninsurable without a
    financial backstop, state regulators are very concerned that
    significant market disruptions will develop before TRIA's expiration.
    This is due in large part to the deadlines contained in TRIA, which do
    not match the business cycle for insurance renewals.
        The commercial insurance business cycle operates in such a way that
    insurers and their policyholders were required to make decisions as
    early as September 2004 regarding coverage that extends well into 2006.
    At present, annual policy renewals with effective dates of January 2,
    2005 or later must contemplate there will be no Federal backstop for
    any losses occurring in 2006. For this reason, state insurance
    regulators have observed widespread insistence by insurers that
    conditional policy exclusions for terrorism coverage be included in
    renewal policies. This is the same situation we encountered in the
    aftermath of September 11th, which prompted enactment of TRIA. While
    this particular dynamic is not present in the New York marketplace, the
    few states that have not allowed insurers to file coverage limitations
    fear that without TRIA, insurers will be unwilling to underwrite many
    businesses that want appropriate and reasonably priced terrorism
    insurance coverage.
        To address this situation, Congress should promptly act to extend
    TRIA for two years. Time is needed for Congress to receive and review
    the report from the Treasury on June 30, 2005, and then have roughly
    fifteen months to digest and debate the future Federal role related to
    acts of terrorism before reaching another milestone for insurers and
    American businesses.
        The NAIC stands ready to assist Congress in developing an
    appropriate method for continuing the Federal terrorism reinsurance
    backstop. The NAIC has begun to discuss a concept that would involve
    the Federal Government only for mega-catastrophes. It would encourage
    the use of the private sector to insure more moderate catastrophe risks
    using traditional methods such as reinsurance, access to financial
    market products, and risk diversification, along with changes in U.S.
    law that would allow insurers to build tax-deferred catastrophe
    reserves.
    Workers' Compensation and Group Life Insurance
        There are two major types of insurance that cause insurers special
    concern about whether they can continue to underwrite them without some
    form of assistance from the Federal Government. The first is workers'
    compensation, which is a property-casualty product that provides
    coverage for work-related injuries, illness, and death. It covers lost
    wages, provides unlimited medical benefits and, in most states,
    provides rehabilitation benefits to get injured workers back on the
    job. In the event of death on the job, worker's compensation provides
    monetary death benefits to the surviving spouse and children. It also
    provides employers with liability coverage if an employee pursues legal
    action against an employer in court. Workers' compensation is currently
    included under TRIA.
        State laws do not allow an insurer to exclude or limit worker's
    compensation coverage, except as permitted by state law. As a result,
    an insurer underwriting this risk without adequate reinsurance is
    subject to a large potential loss if there are a significant number of
    employees at a single location. The American Academy of Actuaries
    estimates that ``a modest-sized insured with 200 employees could easily
    generate a terrorism related event of $50 million. This presumes death
    of all employees and typical death benefit of $250,000 per employee.''
    \1\
    ---------------------------------------------------------------------------
        \1\ American Academy of Actuaries, P/C Extreme Events Committee May
    4, 2004 Report, P/C Terrorism Coverage: Where Do We Go Post-Terrorism
    Risk Insurance Act?, Page 14.
    ---------------------------------------------------------------------------
        The second type of coverage causing insurers special concern is
    group life insurance, which is not currently included in TRIA. Like
    workers' compensation, this insurance coverage is vulnerable to risk
    concentration problems. For example, if a business has 1,000 employees
    at a given location, the pricing employed by life insurers for group
    products probably assumes that three or four employees might die in a
    given year. If on another instance, a location with 1,000 employees is
    hit by a terror attack and all of them die, the insurer has an enormous
    financial exposure from a single occurrence.
        Unlike worker's compensation, there is no statutory requirement for
    group life that prohibits an insurer from limiting available coverage
    for acts of terrorism in some fashion. However, the employer, the
    insurer, the insurance industry in general and the American economy
    would suffer if an insurer is only able to pay a fraction of the policy
    face amount in a mass casualty situation.
        Insurance regulators are not inclined to approve exclusionary or
    limiting language in those states that have approval authority over the
    wording in group life insurance contracts. Although there is some level
    of private reinsurance available for group life coverage, it is not
    sufficient to cover catastrophic terrorism losses. While the NAIC has
    not taken a formal position on whether group life should be included in
    TRIA or another form of Federal backstop, regulators have heard these
    concerns expressed by group life insurance underwriters.
    The CBO Report
        In January 2005, the Congressional Budget Office (``CBO'') issued a
    paper entitled ``Federal Terrorism Reinsurance. An Update'' that
    concluded, in part, that TRIA's ``zero premium'' coverage could serve
    to dampen incentives for owner's of assets to engage in loss control.
    The report stated that if the ``government continued to subsidize
    terrorism insurance it would probably contribute to deferring the
    private-sector's long-term adjustment to the increase in risk,'' and
    this in turn would result in greater future losses than could otherwise
    be avoided. I wish to inform you that in New York State, and indeed,
    throughout the country, we see little evidence to support the
    conclusion that TRIA has resulted in owners failing to take appropriate
    steps to protect their assets from terrorist attacks. To the contrary,
    the evidence demonstrates that owners have invested heavily in
    strengthening disaster preparedness and response efforts in the wake of
    the 9/11 terrorist attacks notwithstanding the existence of TRIA.
        For example, since 9/11, most large commercial and many multi-
    family residential buildings in New York and elsewhere regularly
    subject entrants to security checks before permitting entry. Sensitive
    locations may even require visitors to submit to background checks
    prior to entry. Structural design has also changed substantially in
    response to the terrorist threat not the least of which is the
    ubiquitous use of barriers to thwart vehicle-borne explosive devices.
        While risk mitigation and loss control efforts are important tools
    to reduce exposure, the sad fact is that such measures can do little to
    avoid the catastrophic consequences of a successful large-scale
    terrorist attack. The country has taken such steps to improve airport
    and aircraft security and to harden many of our commercial enterprises
    and government facilities, but we still remain vulnerable to terrorist
    attack. The steps taken to mitigate losses, however, may result in
    countermeasures by terrorist that could lead to attacks on buildings or
    infrastructure that we might not have previously considered targets.
    This inescapable reality demonstrates the need for a Federal backstop
    to help in dealing with potential losses of this magnitude. Of course,
    loss control must be a part of any long-term solution in the private
    sector to manage terrorism exposures. Mitigation techniques do not,
    however, address the issue of financing the catastrophic losses should
    such losses occur. No amount of mitigation can result in foolproof
    guarantees that losses will not occur. Terrorism coverage in today's
    world is an integral part of any businesses' risk management efforts.
    Without a Federal backstop we could face market disruptions, and
    terrorism insurance will likely become less affordable or even
    unavailable to consumers. The insurance industry has not yet built the
    capacity to respond adequately to the terrorism exposure and extending
    TRIA for an additional period will allow the industry the time to
    appropriately accept increasing levels of this risk.
    Conclusion
        We strongly urge Congressional action to extend TRIA or enact an
    alternative form of Federal terrorism backstop this year in order to
    avoid market disruptions likely to occur in the absence of a Federal
    backstop program. Immediate action by Congress will help ensure the
    insurance market's continued role in supporting economic development.
    In addition, it will allow Congress adequate time to fully evaluate the
    Treasury Department's June 2005 report and recommendations.
        The NAIC stands ready to assist Congress in developing an
    appropriate method for continuing the Federal terrorism reinsurance
    backstop. The extension of TRIA will provide American businesses with
    the essential insurance coverage needed to successfully operate in
    today's uncertain global environment.
                         NAIC Resolution to Extend TRIA
                                 June 12, 2004
                                   RESOLUTION
            Whereas, the Terrorism Risk Insurance Act of 2002 (TRIA) was
            adopted by Congress to provide a temporary Federal shared loss
            program for incurred losses resulting from certain acts of
            terrorism to protect American businesses by minimizing market
            disruptions and ensuring the widespread availability and
            affordability of property and casualty insurance for terrorism
            risks;

            Whereas, the TRIA was adopted by Congress to allow a
            transitional period for private markets to stabilize, resume
            pricing of terrorism insurance, and build capacity to absorb
            any future losses, while preserving the benefits of state
            regulation and consumer protections;

            Whereas, the presence of the Federal backstop has provided a
            measure of security to the insurance industry and has enabled
            them to extend offers of coverage for acts of terrorism in the
            wake of the tragic events of September 11th;

            Whereas, insurance regulators do not believe the insurance
            marketplace is ready to take on the entire risk of providing
            coverage for acts of terrorism;

            Whereas, insurance regulators have received contingent filings
            from advisory organizations and insurers that would reinstate
            the coverage limitations that were in effect prior to TRIA's
            enactment, in the event Congress does not act this year to
            extend TRIA;

            Whereas, there are many who believe that the U.S. economy
            remains vulnerable to terrorist attack;

            Whereas, the take up rate for terrorism risk insurance has
            increased in recent months;

            Whereas, unknown frequency, coupled with the potential for
            substantial severity of a loss makes coverage for acts of
            terrorism one that insurers might choose to avoid if given the
            opportunity; and

            Whereas, insurers and their reinsurers remain uncertain that
            the efforts of the U.S. Government are sufficient to protect
            citizens from terrorist acts, or at least have become more
            predictable than they are today, and as a result they will be
            reluctant to accept complete risk transfers from American
            businesses, particularly those businesses that they view as
            having a greater risk of loss from acts of terrorism.

        Now, Therefore, Be It Resolved, That:

            State insurance regulators urge Members of Congress to adopt a
            short-term extension of TRIA to avoid market uncertainty this
            fall. The short-term extension would provide sufficient time
            for the next Congress to consider longer-term solutions to the
            terrorism insurance risk and the nation's economic security. An
            extension of two years would provide Congress with the time it
            needs to evaluate the study and report required of Treasury on
            the effectiveness of TRIA and the insurance industry's capacity
            to provide terrorism insurance. It will also provide sufficient
            time to review and evaluate information provided by others.

        Be It Further Resolved, That:

            The NAIC urges Members of Congress to encourage the Secretary
            of the Treasury to extend the ``make available'' requirement
            into Year 3. This will avoid any market disruptions that would
            occur in the absence of the mandated coverage offer. Such
            action will ensure the insurance market's continued role
            supporting economic development.
                                   ----------
                      PREPARED STATEMENT OF ERNST CSISZAR
                     President, Property Casualty Insurers
                             Association of America
                                 April 14, 2005
    Introduction
        My name is Ernie Csiszar and I am President of the Property
    Casualty Insurers Association of America. PCI is a trade association
    representing over 1,000 property/casualty insurers that write almost 40
    percent of all the insurance policies in the United States. PCI was
    founded on the philosophy that consumers are best served by free, fair,
    and well-regulated insurance markets in which a wide variety of
    financially healthy companies compete for business on the basis of
    price, product innovation and quality, and customer service.
        I would like to commend the members of this Committee for
    recognizing that terrorism insurance is a national, economic, and
    homeland security issue, for your commitment to seeking a long-term
    solution to this problem, and for understanding the critical role of
    the federal government in solving this problem. I am here today to give
    you our views of this issue. I am also here to commit to you that PCI
    will work with this Committee to explore all aspects of this problem
    and all possible solutions in order find a program that will protect
    our nation's economic security and our policyholders.
    The Importance of a Federal Role in Terrorism Insurance
        Our members believe in the power of free markets and support
    competition-driven solutions to public policy problems. We think
    consumers are best served, wherever possible, by markets that are free,
    fair, and well regulated. That being said, there are some instances--
    terrorism insurance clearly being one of them--where there is clearly a
    need for federal involvement.
        This fundamental point has been underscored recently when Federal
    Reserve Board Chairman Alan Greenspan said in his testimony before the
    House Financial Services Committee, ``There are instances in which
    markets do not or cannot work, and....I have not been persuaded that a
    private market for terrorism insurance works terribly well.''
        We all know that the threat of a terrorist attack on our nation and
    our economy is still very real. CIA Director Porter Goss recently
    testified that an attack on our nation is ``only a matter of time'' and
    that our enemies continue searching for ways to make future attacks
    much more devastating than September 11, including the use of nuclear,
    biological, chemical, or radiological weapons.
        We believe our nation must fight terrorism on all fronts, using
    military action, homeland security measures, and programs that protect
    our economic security. We believe that a public/private partnership,
    harnessing the power and security of the Federal government with the
    innovation and agility of private markets, is the best way to protect
    our economy.
    The Impact of TRIA
        I would like to offer several comments on the Terrorism Risk
    Insurance Act of 2002. TRIA was adopted in November 2002, more than a
    year after the September 11 attacks. It was debated significantly in
    the House and the Senate and emerged from long and thoughtful
    consideration of the issues involved, observation of the response of
    private markets to terrorism risk, and evaluation of alternative
    approaches. Ultimately, TRIA was not done in haste and reflects the
    well-considered wisdom of the Congress and the Administration. We
    believe it was a tremendous achievement by the 107th Congress.
        TRIA provides essential support and confidence to private insurance
    markets. The program has created a degree of certainty about the
    maximum losses that any individual company or the entire insurance
    industry could suffer and, in doing so, has helped foster what market
    there is for terrorism insurance. According to the latest statistics,
    roughly 44 percent of all business insurance consumers buy terrorism
    coverage. Some have feared that TRIA would ``crowd out'' the
    development of a meaningful private market for terrorism reinsurance.
    On the contrary, we believe it gave the support needed to allow such a
    market to begin to develop. Without TRIA, we don't believe we would
    have seen the limited development that has occurred.
        Our members write insurance policies for individuals and businesses
    in every state and virtually every community in our nation. Their
    commercial insurance policyholders--real estate developers, builders,
    manufacturers, retail stores, malls, apartment complexes, churches,
    mosques and synagogues, schools, and universities--have benefited
    enormously from TRIA. They know the threat of a terrorist attack is
    real and many have made a deliberate and considered decision to protect
    themselves from the economic risks of future attacks.
        As you know, TRIA will expire at the end of this year. Given the
    many benefits it has provided, I am here to tell you that all of us--
    Members of Congress, insurers, and policyholders--must act now to
    develop a long-term solution to the problem of insuring terrorism risk.
        We commend Senators Bennett and Dodd and their cosponsors for
    introducing S. 467 to extend TRIA for another two years. They have
    recognized the very serious nature of this problem and are working to
    solve it in a constructive way. We favor the modifications they have
    suggested--including a ``soft'' landing to allow policies written in
    the second year to naturally expire, including group life insurance
    under the program, and keeping individual company retentions level.
        At the same time, we also believe that a short-term extension of
    TRIA can and should be seen as the basis for developing a long-term
    solution to the terrorism insurance problem. I commit to you today the
    resources of PCI to work with members of Congress and the business
    community to develop an effective, market-driven system that
    establishes a long-term, public/private partnership to address the
    issue of terrorism insurance once and for all.
    The Unique Challenge of Underwriting Terrorism Insurance
        Our members are in the business of assessing, pricing, and
    underwriting risk. They work closely with their policyholders to reduce
    their exposure to all types of loss, including terrorism. Insurers have
    always risen to the challenge of underwriting and paying for
    catastrophic losses. Our industry paid nearly $35 billion in claims
    from the September 11 attacks, not to mention the enormous payments we
    have continued to make, as always, from ``normal'' natural disasters
    such as hurricanes and earthquakes.
        When we tell you that terrorism risk is different from other
    catastrophes, we do so for several reasons. The differences arise
    mostly from differences in severity and predictability. The size of the
    potential losses from a terrorist attack dwarfs the financial resources
    of the insurance industry. The cost of the September 11 attacks was by
    far the largest insured loss in history. The amount of insurance
    industry capital devoted to insuring the lines of business most likely
    to be affected by terrorist attacks (commercial property, workers
    compensation, etc.) amounts today to approximately $148 billion or 40
    percent of the total capital of the industry. Since September 11,
    insurers and catastrophe modeling experts have modeled many potential
    terrorist attack scenarios--these experiments convince us that there
    are many attacks, especially those involving the use of nuclear,
    biological, chemical, or radiological weapons, that are well beyond the
    financial capacity of our industry to withstand. CIA Director Goss'
    recent testimony underscored our concerns.
        Second, this risk is impossible for insurers to assess and price
    based on our current knowledge. Weather-related catastrophes are much
    more predictable. We have years of experience with sophisticated models
    that tell us not only where these losses are likely to occur, but on
    average how large they might be and how often they might happen. We
    know none of this about terrorism. Without a distribution of either the
    ultimate cost or the probability of loss, we don't have a method to
    develop the appropriate charge for the coverage nor do we know what
    losses to expect.
        These problems are the reasons that a vibrant, substantial, and
    healthy private market for terrorism reinsurance has not emerged since
    September 11. We are concerned that there appears to be a belief in
    some quarters that allowing TRIA to expire with nothing in its place
    will automatically spur the development of a significant private market
    that can handle all terrorism risk. We see no reason to expect that
    will happen.
    Limits on the Private Sector Role
        I have spoken above of our support for the greater use of private
    sector responses to this risk. At the same time, it is critical that
    policymakers also recognize the limits of the private sector response
    and why a federal role is essential. As already noted, insurers face
    significant problems underwriting this risk because of the enormous
    potential losses and because we don't know size or frequency
    distributions for the risk.
        In addition, private markets require that buyers and sellers are
    able to determine for themselves whether a product will be offered and
    under what terms and conditions. If there is to be a greater private
    role in solving the terrorism insurance problem, there must also be
    federal support for giving insurers and insurance markets more freedom
    to negotiate these terms and conditions. Let me offer some examples of
    the problems we face:

     In 19 states, insurers writing commercial property insurance
        are still required to cover losses from a ``fire following'' a
        terrorist attack, due to restrictions in 1940s-era laws enacted for
        a very different world. This is true even if insurers and
        policyholders would prefer to alter coverage.

     State regulators in three key states (New New York, Florida
        and Georgia) continue to refuse to allow insurers to exclude or
        limit coverage for terrorist attacks after the expiration of TRIA
        this year. This refusal continues even if the insurer and the
        policyholder both might want the flexibility of a free market.

     TRIA itself provides state oversight and control of the rates
        insurers can charge for terrorism coverage, with the result that
        insurers cannot truly experiment with the appropriate price for
        this coverage and, if they try, must fear potential future
        requirements that they return supposedly ``excessive'' rates.

     No state allows an insurer writing workers compensation to
        exclude or limit coverage for losses caused by terrorism. The only
        way workers compensation insurers can avoid this risk is to stop
        writing certain insureds--i.e., to walk away from policies they
        think may pose excessive risk. However, even when they do so, they
        face exposure in many states to losses from those same policies
        through mandatory residual market pools and guaranty funds.

        We understand the desire for consumer protection behind many of
    these requirements, however, we must emphasize that it is inconsistent
    to urge a more robust private sector response without giving the
    private sector the tools it must have to build that response.
    Guiding Principles for a Long Term Solution to the Terrorism
    Insurance Problem
        As you consider how to proceed, we believe there are several
    important principles to keep in mind when evaluating long term
    solutions to the terrorism insurance problem:

     Terrorism is the most significant risk facing our nation's
        economic security today. It is critical that it be addressed. It
        requires uniform protection and a nation-wide response (not state
        by state). The fight against terrorism is a long-term battle and we
        should now build on the steps initially taken by Congress to
        provide a long-term solution.

     The insurance industry does not have the financial capacity to
        bear the total risk of terrorism losses due to the nature of the
        exposure and the scale of the risk. Addressing this risk to our
        nation's economic security requires a partnership between the
        private sector (and its infrastructure) and the Federal government.
        This partnership must protect the public, the nation's economy and
        insurers' ability to meet their many obligations to their
        policyholders.

     A long-term solution should minimize cross-subsidies by line
        of insurance and by insurer, maximize incentives for sound economic
        underwriting and pricing, and cover exposures most seriously
        threatened by terrorism. There should be an equitable distribution
        of costs based on geographical location and risk of loss, which
        includes potential losses to life, property and agriculture, and
        critical economic infrastructure.

     The program should cover losses from both domestic and foreign
        terrorism events.

     The program should be consumer friendly and implementation
        costs kept reasonable by following standard industry business
        practices.
    Components of an Alternative Solution
        I want to emphasize the need for us to develop a long-term solution
    to the terrorism insurance problem. PCI believes that all reasonable
    ideas should be considered and, to that end, I'd like to offer several
    thoughts on such a design. Such ideas might include:

     Federal support for giving insurers and insurance markets more
        freedom to negotiate terms and conditions of coverage. This point
        has been discussed above and I would only add that if solutions are
        going to be based on free market principles, then the market must
        be allowed to work freely.

     Treating the unique exposures resulting from use of nuclear,
        biological, chemical and radiological weapons differently that
        those involving other terrorist tactics. These risks have never
        been part of the insurance industry's assumed risk profile--there
        has never been a true, private market for this insurance and there
        is no reason to believe one will arise now in the face of the
        threats we face. Such attacks pose the risk of damage and losses
        far beyond the financial capacity of the insurance industry to
        sustain and may require a different approach to solve.

     There is also a need to recognize and, in the longer term, to
        deal with the exposure faced by homeowners and their insurers due
        to the risks of a devastating attack using nuclear, biological,
        chemical, or radiological weapons.

     We understand that some want to see individual company and/or
        industry-wide retention levels increase so that private insurers
        accept more of the responsibility for paying terrorism insurance
        losses. We have significant concerns about this and want to make
        clear that any such change must be coupled with a program that
        allows insurers to reduce their own individual retention levels.
        Moreover, such increases would have to be gradual so that each
        insurer can manage the increase in its own exposures. A sudden,
        ill-planned transition could have a catastrophic impact on
        America's economy. Finally increasing the exposure of private
        markets must be coupled with more freedom to underwrite and a way
        to allow insurers to collectively access wider capital markets
        supported by the federal government.

     Enabling the industry to form a tax-exempt entity or entities
        to provide reinsurance or to allow companies to reduce their
        individual company retention level to some manageable level. The
        tax-exempt entity might also be allowed to issue post-event bonds
        or to use some other financing mechanism to pay for losses and
        allow the use of longer time horizons to absorb those losses.

     Allowing the accumulation of funds through the establishment
        of individual company tax-deferred reserves.

     Ensuring that market-based solutions are built on the concept
        of risk-based pricing. Cross-subsidies by line of insurance and by
        insurer should be minimized, and sound underwriting and pricing
        should be rewarded.

     Allowing group life insurers to gain access to the public/
        private partnership, given their very serious exposure to
        catastrophic losses from terrorism, and ending the arbitrary split
        now in TRIA between foreign and domestic terrorism losses.

        Right now these are just ideas, not fully developed solutions. PCI
    has been reviewing the merits and consequences--including unintended
    ones--of each and the association is committed to working with you to
    explore these options and to create a solid, long-term public/private
    partnership to address this critical problem.
    Conclusion
        Our members again commend you and your colleagues for addressing
    this issue and for offering ideas for a solution. We believe terrorism
    is the most significant threat today to America's economic security and
    we applaud your efforts to address this very serious problem.
        We believe TRIA represents the considered will of the Congress and
    has worked well at very low cost to the government. It has been a
    success and has promoted the ongoing development of private markets for
    terrorism coverage.
        Finally, we want you to know that our members are committed to
    addressing this issue. We have been working closely and diligently with
    them, and will continue to do so, to identify and explore potential
    solutions to this problem. We look forward to continuing to work with
    you and your colleagues to find a solution.

                         STATEMENT OF BRIAN DUPERREAULT
                             Chairman, ACE Limited
                On Behalf of the American Insurance Association
                                 April 14, 2005
        Chairman Shelby, Ranking Member Sarbanes, and members of the
    committee, my name is Brian Duperreault. I am Chairman of ACE Limited
    (ACE). I appear before you today representing ACE and our national
    property-casualty insurance trade association, the American Insurance
    Association (AIA).
        I would like to first thank the committee for its leadership on the
    important issues related to terrorism insurance. The Terrorism Risk
    Insurance Program--created by the Terrorism Risk Insurance Act of 2002
    (TRIA)--is part of our nation's critical infrastructure, strengthening
    and securing our economy against the clear and present danger we face
    from terrorists bent on destroying our way of life. I would also like
    to particularly thank Senators Bennett and Dodd for recently
    reintroducing legislation to temporarily extend TRIA. Clearly the bill
    recognizes the critical importance of TRIA in stabilizing the market
    for terrorism risk insurance by making terrorism insurance broadly
    available to all businesses by requiring insurers to make terrorism
    coverage available in the policies they issue. A temporary extension
    will help prevent market dislocation and provides an opportunity for
    the industry to continue analyzing options for a long-term solution.
    Specifically, the Dodd-Bennett bill establishes a mechanism to consider
    long-term public/private solutions for managing terrorism risk. We
    continue to devote considerable time, energy and effort to work through
    ideas that could serve as long-term solutions, and we remain fully
    committed to working with Congress and the Administration to craft a
    workable long-term solution that all stakeholders can support. We
    endorse the Dodd-Bennett bill, especially as it contains a mechanism
    that will ensure development of a long-term public/private partnership,
    a goal that we all share and that we will all continue to work toward.
        On behalf of ACE and all of AIA's member insurers, I would like to
    urge you to continue providing a federal terrorism risk insurance
    mechanism to protect the United States from the potential economic
    devastation that can come from catastrophic terrorist attacks.
        The ACE group of property-casualty insurance companies conducts
    business throughout the United States and in more than 50 other
    countries. We employ more than 4,000 employees here in the U.S., and
    trace our long, proud history in this country back to 1792, with the
    establishment of the Insurance Company of North America, the first
    investor-owned American insurance company. ACE is among the largest
    property and workers' compensation insurers for businesses and
    municipalities of all sizes. Our customers include a broad array of
    organizations that rely on a stable market for terrorism insurance.
    These customers include many financial institutions, energy companies,
    hotel chains and professional sports leagues.
        Congress enacted TRIA to ensure that our nation could prepare for,
    and recover from, financial devastation caused by catastrophic
    terrorism attacks. The public/private ``shared loss'' program
    established by TRIA also helps prevent terrorists from accomplishing
    one of their key objectives--undermining America's economic security.
    TRIA has helped stabilize the private market for terrorism risk
    insurance, and has made terrorism insurance broadly available to all
    businesses that want and need this vital coverage. However, TRIA
    provides only a temporary backstop; it expires at the end of this year.
    Unfortunately, our nation's exposure to the terrorism threat will not
    expire at the end of this year. Every day, new information about this
    continuing threat is revealed.
        For example, two weeks ago, the Final Report of the Bipartisan
    Commission on the Intelligence Capabilities of the U.S. Regarding
    Weapons of Mass Destruction, concluded, ``We still know disturbingly
    little about the weapons programs and even less about the intentions of
    our most dangerous adversaries.''
        On February 16, Federal Bureau of Investigation (FBI) Director
    Mueller and Central Intelligence Agency (CIA) Director Goss testified
    before the Senate Select Committee on Intelligence at a hearing on
    ``Current and Projected National Security Threats to the United
    States.'' The FBI and the CIA emphasized their concerns about the
    threats of nuclear, biological, chemical, and radiological (NBCR)
    attacks, with Director Goss specifically stating that ``[i]t may be
    only a matter of time before al Qaeda or another group attempts to use
    chemical, biological, radiological and nuclear weapons.'' Director
    Mueller echoed this prediction, saying that he was ``very concerned
    with the growing body of sensitive reporting that continues to show al
    Qaeda's clear intention to obtain and ultimately use some form of
    chemical, biological, radiological, nuclear or high-energy explosives
    material in its attacks against America.'' Certainly, the threat of
    terrorism will not diminish before December 31, 2005, when TRIA is
    currently scheduled to expire. What Congress does now to address these
    catastrophic threats, including NBCR, will serve as an economic legacy
    for future generations.
        We urge you and your colleagues to continue to focus on the
    fundamental importance of a federal backstop. As TRIA's end date nears,
    insurers are making decisions now whether or not to write terrorism
    insurance without the certainty of a federal backstop. There are those
    who suggest that TRIA should be allowed to expire and that the ``free
    market'' should respond to fill the need for terrorism insurance.
    However, property-casualty insurers do not operate in a free market
    environment. In the existing state regulatory structure, insurers:

     cannot exclude or limit terrorism coverage in certain
        commercial lines such as workers' compensation insurance or
        statutory ``fire-following'' coverage for property insurance
        policies in many states; and,

     cannot exclude terrorism coverage in certain states whereby a
        government backstop is absent.

        And, in virtually all of the states, there is no ``free market''
    because of a complex system of government price and product controls
    that artificially suppress terrorism insurance rates and deny product
    choices to consumers.
        Under these regulatory conditions, failure to provide a federal
    backstop is tantamount to conscripting insurers to cover terrorism risk
    when they cannot adequately price for this potentially ruinous exposure
    and, if provided a truly free market, may prefer to avoid entirely. The
    insurance industry simply does not have the capacity to be the nation's
    insurer of all terrorism risks. Unfortunately, insurers are faced with
    a conundrum--take on this uninsurable risk at pricing suppressed by the
    states--or stop writing insurance altogether. This is not a free
    market; it is a forced market, and it is one important reason why the
    federal government should continue to play a role in managing this
    exposure.
        The insurance industry can play a vital role in a post-attack
    recovery. Indeed, we are proud of our ability to put thousands of
    ``boots on the ground'' immediately after the tragedy of September 11.
    We stand ready to provide those claim evaluation and processing
    services again. The insurance industry also offers a wide-ranging
    network of contacts with U.S. businesses that can be used to
    communicate with our policyholders to further assist in post-event
    reconstruction. However, insurers simply can't afford to gamble our
    solvency on the bet that there will never again be a major terrorist
    attack on the United States.
        The ``all or nothing'' proposition facing the industry benefits
    neither insurance customers nor the economy. As Standard & Poor's
    recently noted, ``[m]any policyholders are now inking deals for
    property-casualty coverage that exclude terrorism coverage after TRIA
    expires. . . .[F]or every day that such coverage is in effect between
    January 1, 2006, and the day their policies end, they will be without
    terrorism coverage if TRIA is not extended.'' This will, in turn, have
    a severe, negative effect on the national economy, including job loss,
    stalled commercial transactions and delayed construction projects.
    Market stability provided by a federal backstop will be replaced by the
    market uncertainty that characterized the post-September 11, pre-TRIA
    economy. Accordingly, we urge Congress to act as soon as possible to
    provide a continuing federal backstop and to consider long-term
    solutions for managing our nation's economic exposure to catastrophic
    terrorism.
        The United States is in a critical phase of the global war on
    terrorism. This war involves urgent national security issues coupled
    with a long-term commitment from the government, industry and public to
    reduce and, hopefully, eliminate threats and risks associated with
    terrorist activity. As a key component of national economic security,
    the challenges facing the private terrorism insurance market are
    similarly critical and stretch well beyond TRIA's expiration.
        While I do not use the term ``war'' lightly, we are certainly
    engaged in a war, and terrorism and war share certain features that
    make it extremely difficult, if not impossible, for private markets to
    bear their risk. War and terrorism are not fortuitous. Acts of
    terrorism, like acts of war, are premeditated, planned and executed
    with a specific purpose by individuals (in the case of terrorism) and
    governments (in the case of war) that actively seek to defy
    predictability, discernable pattern or advance warning. In addition,
    war, like today's brand of catastrophic terrorism, is waged against
    America, not against particular businesses.
        In this context, we also urge you to further consider several
    underlying characteristics of terrorism risk in the United States that
    make catastrophic terrorism uninsurable as you debate the best way to
    secure our economy against terrorists in the years to come.
        First, while the private sector has made significant progress in
    terms of accumulation management of terrorism risk, we continue to lack
    both the necessary capacity and sufficient marketplace data to handle
    catastrophic terrorism losses on our own. Under certain plausible event
    scenarios, estimated insured losses from future catastrophic terrorist
    attacks on U.S. soil could exceed $250 billion.\1\ These levels greatly
    surpass the entire commercial property-casualty industry's estimated
    capacity of about $176 billion. Importantly, this capacity is not just
    dedicated to terrorist attacks; it is needed to back all commercial
    risk in order to cover claims from such things as natural disasters or
    workplace incidents unrelated to terrorism. In 2004 alone, hurricanes
    took approximately $25 billion of industry capital for losses.
    ---------------------------------------------------------------------------
        \1\ Tillinghast Towers Perrin, Workers' Compensation Terrorism
    Reinsurance Pool Feasibility Study, Summary of Study Findings and
    Conclusions, p. V (2004) (``Terrorism experts have developed plausible
    scenarios in which the estimated total insured losses from a single
    event could exceed $250 billion.'').
    ---------------------------------------------------------------------------
        While other commercial risks can be spread through reinsurance,
    reinsurers have no significant appetite for terrorism risk. Reinsurance
    plays a critical role in the financial management of catastrophic
    losses by limiting primary insurer liability on specific risks,
    increasing insurer capacity and stabilizing insurers' financial
    results. As a result of this lack of appetite to reinsure terrorism
    risk, current terrorism reinsurance capacity, according to the
    Reinsurance Association of America, is limited to between $4 billion
    and $6 billion. Only a small amount of this limited reinsurance
    capacity is available for NBCR terrorism risk. Because of this
    withdrawal of the largely unregulated global reinsurance network from
    the terrorism risk--a sign of the ``free market's'' negative evaluation
    of the terrorism risk--U.S. insurers have few external partners with
    which to spread this catastrophic risk.
        Moreover, private market mechanisms remain insufficient to spread
    the risk of catastrophic terrorism in a meaningful way. In a 2004
    Workers' Compensation Terrorism Reinsurance Pool Feasibility Study,
    Tillinghast Towers Perrin cited ``lack of capacity'' as the primary
    reason why a voluntary workers' compensation terrorism reinsurance pool
    would not be a viable mechanism to handle mega-terrorism risk. This
    conclusion is not surprising because pooling does not introduce new
    capacity for the terrorism risk--it merely moves it around for marginal
    increased efficiency. This conclusion is not unique to workers'
    compensation insurance, but would apply to the ability of a pool to
    address catastrophic terrorism in other lines of business, such as
    property insurance, including business interruption coverage.
        The same conclusion holds true for other capital market tools. For
    example, some academics have discussed catastrophe bonds as a source of
    new capital for terrorism risk. To date, however, there have been only
    two bonds underwritten, and those included terrorism as a small
    component of risk among a number of traditional natural catastrophe
    exposures; in fact, one was only to cover the risk of event
    cancellation. Despite the confidence of a few theorists who feel that
    catastrophe bonds represent promising, untapped sources of profit-
    seeking capital that could be used for terrorism risk, the reality is
    that debt and securities markets remain unconvinced and reluctant to
    provide such capital instruments. Put simply, investors are simply
    unwilling to gamble capital on an unforeseeable, unique event such as a
    catastrophic terrorist attack when there are other attractive, much
    less risky, investment alternatives.
        Second, the threat of catastrophic terrorism remains real and
    unabated. The Bush Administration has repeatedly alerted Americans to
    the increased possibility of terrorist attacks. Since September 11,
    2001, the United States has been on a constant, elevated state of alert
    for terrorist activity. Recently, as noted above, top intelligence and
    law enforcement officials from the Administration have reported that
    terrorists are regrouping and planning possible new attacks against the
    United States.
        Third, private sector information about terrorism risk is
    incomplete. Contrary to traditional evaluation of insurance risks,
    information availability and sharing about terrorism risk is
    asymmetric. Insurers and policyholders do not have--nor should they
    have--access to classified generalized or specific threat information
    in the hands of the U.S. government. Therefore, insurers cannot
    properly evaluate the many complex risks associated with terrorism.
    This ``information vacuum'' makes all risk transfer and management
    decisions about terrorism a dicey proposition.
        The relative infancy of terrorism modeling also contributes to the
    risk's uninsurability. While modeling firms have worked diligently to
    produce terrorism risk models to predict terrorism events in the United
    States, they have not been able to model accurately for the frequency
    of terrorist attacks, the terrorists alone control that variable. These
    models instead focus only on predicting the impact terrorism has on its
    victims. Office towers can be built or retrofitted to withstand
    earthquakes in Los Angeles or hurricanes in Miami (making them more
    insurable), but few businesses would want to turn their offices into
    hardened bunkers. Even then, terrorist excel in adapting to overcome
    such loss mitigation measures, or turn their attention to ``softer''
    targets.
        Unfortunately, natural catastrophe modeling--which is a much more
    mature science--does not aid the terrorism modeling process. Past
    natural catastrophes are predictive of the nature, frequency and
    severity of future natural catastrophes. Most natural disasters also
    occur with at least some prior warning. Because of this element,
    insurers can track when and where natural catastrophes are likely to
    strike, the type of damage they will cause, and which areas are most
    vulnerable, and can exercise loss control measures to protect against
    catastrophic loss.
        In contrast, past terror attacks are not predictive of future
    terror attacks, and the full range of possible methods of attacks can
    never truly be known. Terrorists rely on surprise to maximize the
    impact of an attack, so the attack usually comes without warning. In
    fact, whether an event is a ``terrorism'' attack might not be known
    until after it occurs. This ``man-made'' threat, which is limited only
    by the imagination of a terrorist, is one that simply cannot be
    forecast. In addition, terror attacks can be opportunistic or carefully
    planned for years--or both, which can change the outcome of the attack
    and the resulting losses.
        Fourth, while insurers strongly support risk mitigation efforts and
    are working with policyholders on terrorism risk analysis, mitigation
    alone cannot remove the terrorist threat or significantly reduce losses
    from certain types of terrorist attacks, such as those involving NBCR
    weapons.
        Also, unlike other risks, terrorism is a wholly interdependent risk
    that defies traditional loss control methods. Loss control or
    mitigation techniques employed by one commercial business may not be
    sufficient to protect that enterprise from catastrophic loss. The World
    Trade Center is the most compelling-but not the only--example of the
    interdependent nature of terrorism risk. The World Trade Center was a
    model of security and disaster planning after the 1993 truck bombing,
    yet nothing done at the World Trade Center could have prevented planes
    leaving airports in other cities with hijackers aboard, and nothing
    done at the World Trade Center could have prevented planes being used
    as weapons from flying into the towers, and destroying them along with
    neighboring buildings. The interdependent nature of terrorism risk,
    with vulnerability measured by the weakest link in the chain, minimizes
    the effectiveness of even the best business-by-business loss control
    programs.
        Finally, the challenges facing insurers with respect to
    catastrophic ``conventional'' terrorism risk are greatly magnified by
    the potential for NBCR terrorism. NBCR terrorism demonstrates that even
    the severity component of a terrorist attack is difficult to predict.
    Potential terrorism scenarios now routinely include discussion of NBCR
    events. Recent intelligence reports by the Administration have centered
    on the possibility of a so-called ``dirty'' bomb or a suitcase nuclear
    explosive; weapons capable of producing precisely the type of
    catastrophic terrorism that is difficult to quantify and whose
    emergence threatens the solvency of the property-casualty insurance
    industry. The anthrax attacks perpetrated through the U.S. postal
    system, (including the U.S. Senate's own mail facility), even though
    limited in scope and severity, only serve to underscore the random
    quality and myriad potential consequences associated with such events.
    As a result, insurers remain reluctant to provide NBCR coverage for
    terrorism risks in their policies beyond that required by state law.
        Key federal officials have also acknowledged the difficulty of
    private markets addressing the risks associated with terrorism. Just
    weeks ago, Federal Reserve Chairman Alan Greenspan told the House
    Financial Services Committee that, ``there are regrettable instances in
    which markets do not work, cannot work.'' Chairman Greenspan added:
    ``You cannot have a voluntary market system and the creation of
    markets, especially insurance markets, in a society subject to
    unanticipated violence .-.-. And while I think you can get some
    semblance of terrorism insurance [without government involvement], I
    have not been persuaded that this market works terribly well.''
        Having established the characteristics of catastrophic terrorism
    that render it uninsurable, AIA and its members also understand that
    TRIA was designed as a temporary stabilizing mechanism, and that a
    long-term shared responsibility program must be developed, enacted, and
    implemented. The Dodd-Bennett bill paves the way to such a program by
    tying a short-term extension to mandatory study of a long-term public/
    private solution, utilizing the Presidential Working Group on Financial
    Markets to facilitate that discussion.
        We also have been working diligently with the rest of the industry
    and the policyholder community to identify potential long-term options
    for shared responsibility in managing catastrophic terrorism risk.
    While our progress has been slowed during the implementation phase of
    TRIA and by impediments to the free market that are a product of our
    state insurance regulatory structure, the structural elements of a
    long-term program can be gleaned from our experience in a post-
    September 11th world. That experience has shown us that catastrophic
    terrorism poses the greatest threat to the insurance industry and the
    economy at large, led by the dynamic uncertainty of NBCR events.
        To be workable, we believe any long-term public-private partnership
    to manage terrorism risk must recognize the need for public--rather
    than private market--responsibility for NBCR risks. In addition, we
    believe there should continue to be a risk-sharing mechanism for
    catastrophic terrorist attacks using conventional weapons that go
    beyond available industry capacity. Both of these conceptual elements
    of a long-range program would be aided by a true ``free market''
    environment for terrorism risk insurance--an environment that fosters
    more opportunities for insurers to provide coverage and more options
    for policyholders to obtain coverage. While a free market environment
    for terrorism risk insurance may not change the underlying
    characteristics of catastrophic terrorism that make it uninsurable, it
    will supply the flexibility that the current regulatory structure
    lacks.
        ACE and AIA stand ready to work with Congress and other interested
    stakeholders to translate these long-term concepts into legislation,
    but our commitment should not prevent this committee from moving
    legislation as quickly as possible in order to avoid the expiration of
    a federal backstop. The committee's important work today on the future
    of terrorism risk insurance will ensure that terrorists fail in their
    mission to undermine this nation's economic security.
                                   ----------
                    PREPARED STATEMENT OF FRANKLIN W. NUTTER
                 President, Reinsurance Association of America
                                 April 14, 2005
        Good morning Chairman Shelby, Ranking Member Sarbanes, and members
    of the Committee. My name is Frank Nutter and I am President of the
    Reinsurance Association of America. Incorporated in 1969, the RAA is a
    national trade association based here in Washington, D.C. We are the
    sole organization representing the U.S. property and casualty
    reinsurance industry. Our membership consists of U.S. domestic
    reinsurers and reinsurance brokers.
        Reinsurance is commonly referred to as the insurance of insurance
    companies. Reinsurance plays a critical role in maintaining the
    financial health of the insurance marketplace and ensuring the
    availability of property and casualty insurance for U.S. citizens.
    Reinsurance can be used by insurers for several reasons. One of the
    most common purposes is to transfer losses from catastrophic events
    such as hurricanes, earthquakes, and in the case of September 11, acts
    of terrorism. To that end, reinsurers have financially responded to
    virtually every major U.S. catastrophe over the past century. For
    natural disasters typically one-fourth to one-third of the insured
    losses are passed on to reinsurers and in the events of September 11,
    2001, two-thirds of the losses were absorbed by the reinsurance
    industry.
        As the Committee has called this hearing to discuss ``the Oversight
    of the Terrorism Risk Insurance Act (TRIA),'' I am here to share with
    you the reinsurance industry's perspective on TRIA. The RAA strongly
    supported the adoption of TRIA in 2002. We believe the program is
    working well to fill a vacuum in reinsurance capacity, keep premiums
    paid by consumers at affordable levels, provide insurance coverage to
    support economic activity, and to minimize disaster assistance should
    there be other terrorist acts in the U.S. We support the recent
    introduction of a TRIA extension bill by some Members of this
    Committee. The RAA believes that an extension is appropriate and will
    provide the industry and Congress a window of time to consider long-
    term solutions for managing catastrophic terrorism risk.
        My comments are intended to provide the Committee with: (1) a
    better understanding of the significant challenges the reinsurance
    industry is facing in providing private terrorism reinsurance capacity,
    and (2) why the reinsurance industry strongly believes that a public/
    private partnership is necessary on a going forward basis to help
    stabilize the commercial insurance markets that underpin our free-
    market economy.
    Creation of TRIA
        As you are very well aware, TRIA was enacted in response to the
    tragic attacks of September 11, 2001. In the history of our nation, no
    hurricane, earthquake or other catastrophic event so fundamentally
    changed the American landscape and the insurance industry.
        These attacks forced all Americans to confront the previously
    unforeseen realities associated with a catastrophic terrorist attack on
    U.S. soil. Although the insurance and reinsurance industry responded in
    an unwavering manner to the catastrophic losses associated with
    September 11, the events shook the financial foundation of the industry
    and forever changed the way it views this risk. The simple fact is
    that, on its own, the U.S. insurance and reinsurance industry does not
    have adequate capital to assume the potentially unlimited exposure to
    loss arising from insuring against catastrophic terrorist attacks. The
    industry cannot predict the number, the scale or the frequency of
    future terrorist attacks that we may face as our nation continues to
    execute the ``war on terror.''
        TRIA was created to provide a federal backstop, which was essential
    to allow the primary insurance industry to provide terrorism coverage
    to our nations' businesses. The RAA believes that TRIA has principally
    fulfilled its purpose of allowing primary insurers to provide terrorism
    insurance coverage that is widely available and affordable to U.S.
    commercial policyholders in both urban and rural areas. By limiting
    insurers' exposure to catastrophic terrorism losses, TRIA has improved
    the market for such coverage and has had a stabilizing influence on the
    economy.
    Reinsurance Challenges to Underwriting Terrorism Risk
        Over the last several years, reinsurers have worked hard to develop
    a better understanding of terrorism risk. Reinsurance companies have
    created task forces, consulted military and intelligence experts, hired
    specialty risk modeling firms, invested in research and development,
    and developed new underwriting standards all with the intention of
    trying to determine if a private market could develop to absorb this
    risk. Despite these efforts, a key struggle in the development of a
    private market is that terrorism risk is not conventional. It has
    characteristics unlike any other peril or insured risk:

    1. The number one plan of terrorists is to inflict maximum damage.
        These are not random or fortuitous acts.

    2. Terrorists learn from their attacks and thus will attempt to defeat
        loss reduction methods used by policyholders, insurers and
        reinsurers.

    3. The potential size of loss is enormous, with total destruction of
        multiple insured properties likely.

    4. The potential size is compounded by the aggregation of losses
        arising from multiple clients and from multiple insurance products
        covering the occurrence. This is difficult to predict and thus
        difficult to measure.

    5. The frequency of loss is unpredictable, with little historical track
        record to project future loss experience.

    6. Risk of loss is inter-dependent. Individual policyholders can take
        all appropriate risk management actions, but still be rendered
        vulnerable by actions of others outside their control.

    7. Unlike natural disaster risk, reinsurers achieve virtually no spread
        of risk with terrorism coverage. Hurricanes in Japan and Florida
        are not correlated. Premiums can be collected and risk assumed
        knowing that one loss will not lead to another. Writing terrorism
        coverage in Europe and North America may well lead to closely
        related loss events, thus minimizing any benefit of risk spreading
        around the world.

    8. Terrorism events can lead to major disruptions in the financial
        markets. At a time when reinsurers will be liquidating assets to
        pay claims, the asset values themselves will be declining due to
        the likely downturn in the markets. This is not the case with
        natural disasters.

    9. The U.S. government warns us that we are in a war on terrorism,
        which may increase the risk of loss.

    10. Nuclear, biological, chemical and radiological weapons can create
        large losses of property and life. These extreme loss scenarios
        would cause losses that outstrip insurer financial resources and
        are uninsurable.

        Reinsurance company underwriters must consider all of these factors
    and more when deciding whether to take on this risk. The result has
    been a development of a very limited private market for terrorism.
    Reinsurers' Role Under TRIA
        TRIA provides a large amount of reinsurance-like protection for
    primary commercial insurance exposures. For 2005, 90 percent of the
    commercial terror loss for primary insurance companies is covered up to
    an industry total of $100 billion, subject to individual company
    retention of 15 percent of 2004 direct earned premium on commercial
    lines. These individual company retentions and the 10 percent co-pay
    for losses above the retention require commercial insurance companies
    to absorb significant losses before TRIA funding is available. The
    primary industry is under increasing financial risk and exposure to
    acts of terrorism because of: (1) the significant retentions under
    TRIA, (2) the mandatory offer of coverage required of insurers under
    the program, (3) state regulatory action or refusal to act on rates and
    exclusions, and (4) the scrutiny of independent rating agencies. In
    certain instances under TRIA, some insurance companies have to absorb
    losses greater than the losses they sustained during the World Trade
    Center attacks before the federal funding is provided. This is
    precisely where the private reinsurance industry role fits under TRIA.
        Primary insurers are actively seeking private reinsurance to help
    reduce the large un-reinsured gap in terror exposure they face from the
    retention and loss-sharing provisions under TRIA. Reinsurers are being
    asked to ``buy down the primary company retentions.''
        Some have expressed the concern that TRIA has infringed on the
    private reinsurance market. This is absolutely not the case. In fact,
    the opposite is true. By establishing definitive loss parameters, TRIA
    has provided a defined layer for reinsurers to participate in sharing
    the retained risk of loss that primary companies face under the federal
    terrorism program.
    Reinsurance Terrorism Capacity
        Working with their client primary companies to manage their
    substantial retained exposure under TRIA, reinsurers have been willing
    to put limited capital at risk to manage terror-related losses.
    Reinsurers typically seek to manage the risk by offering terror
    coverage in a stand-alone contract rather than within a traditional all
    peril catastrophe treaty contract, especially for insurers writing a
    national portfolio. Some regional carriers, with exposures limited to
    rural or suburban areas far from target risk cities and business
    centers, have secured terrorism coverage within their standard
    reinsurance programs, usually with some limitations as to the nature of
    the subject risk or size of subject event.
        With regard to workers' compensation, some insurers have been able
    to add the terrorism peril to their reinsurance programs, but this
    coverage typically excludes nuclear, biological, chemical, and
    radiological (NBCR) losses. It is important to point out that there is
    very little reinsurance appetite for NBCR risks. When it is available,
    pricing for coverage including NBCR is at a significant premium and
    coverage amounts are restricted. This presents a major problem for
    primary insurers since states do not allow them to exclude this peril.
        The RAA surveyed both reinsurance brokers and reinsurance
    underwriters to estimate how much terrorism reinsurance capacity the
    private reinsurance marketplace is providing. The survey suggests
    terrorism capacity for a reinsurance program may range from $300
    million up to $600 million on an occurrence basis for property and
    workers' compensation. This coverage includes TRIA ``covered acts'' as
    well as domestic terrorism and personal lines exposure. Overall, our
    estimates are that the global reinsurance capacity available in the
    United States for 2005 is about $4-6 billion for stand-alone and treaty
    reinsurance. Some experts predict that given favorable loss experience
    this supply could increase to $6-8 billion in private reinsurance
    coverage within several years. This projected growth is still very
    modest and will not fill the capacity needs of the primary industry,
    with or without TRIA.
        We understand some in Congress are disappointed that the private
    reinsurance market has not provided more capacity. Most market
    participants believe, as we do, that reinsurers may never be able to
    provide enough capacity to replace TRIA.
        Although much progress has been made trying to model terrorism loss
    scenarios, forecasts of the frequency and the magnitude of terrorism
    losses are extremely problematic. Reinsurers are only able to provide
    limited capacity for terrorism because the potential losses would
    otherwise place these companies at risk of insolvency. To that end, it
    is important to point out that the global reinsurance industry does not
    have the capital necessary to absorb losses of up to $100 billion which
    are contemplated by TRIA. Reinsurers' capital is necessary to support
    all outstanding underwriting commitments reinsurers face, including
    natural disasters, terrorism, workers' compensation and other casualty
    coverages.
    Capital Markets Limited Impact Under TRIA
        We know some Members of Congress and the Congressional Budget
    Office have suggested the possibility of the capital markets assuming
    terrorism risk. Catastrophe bonds are a known mechanism for using
    financial markets to absorb and spread natural hazards risk. Indeed,
    reinsurance companies are one of the most frequent users and
    facilitators of catastrophe bonds. Yet, hurricane and other natural
    disaster ``cat'' bonds are currently in limited use. According to a
    Marsh McLennan Corporation (MMC) Securities Corp. 2005 report, total
    cat bond issuance in 2004 was only $1.14 billion, a decline from 2003.
    The report notes that since 1997, when cat bonds first were issued, the
    total number of transactions has only been 59 with total issuance
    limits of $8.66 billion of which only $4.04 billion is outstanding.
    This is a very small amount in comparison to the industry's catastrophe
    exposure. Although many in the industry had hoped the cat bond market
    would provide significant additional capacity for natural disasters, it
    simply has not. Factors such as cost, complexity, regulatory and
    accounting issues, high risks, lack of analytical capacity and
    liquidity concerns are often cited as reasons the catastrophe bond
    market has not developed further.
        Acts of terrorism present much greater underwriting and pricing
    challenges to the insurance and reinsurance industry and of course to
    those issuing and investing in catastrophe bonds. There is no reason to
    believe terrorism bonds are likely to be a significant provider of
    terrorism coverage in the foreseeable future. The capital markets face
    the same problems as insurers: inability to assess frequency of attack,
    a lack of predictive experience, correlation of loss to other exposures
    such as a stock market decline, and potentially devastating financial
    loss.
        Likewise, some have suggested allowing tax-free catastrophe
    reserves might be a solution to increase the industry capacity for
    terrorism risk, but, as GAO reported, this proposal is controversial.
    The GAO notes that Treasury officials are concerned that not only would
    such a proposal lower federal tax receipts, but there would be no
    assurance that the increase in capital would result in the allocation
    of more capacity toward terrorism risk or other catastrophe risk. GAO
    also notes that it would be difficult to determine the appropriate size
    for such reserve because the modeling used to determine terrorism risk
    is not sufficiently reliable. Furthermore, both proponents and
    opponents of catastrophe reserves alike agree that insurers might
    substitute the reserves for other types of capacity such as
    reinsurance. So in effect there would not be an increase in capacity.
    Private/Public Partnership Necessary to Address Terrorism Risk
        Mr. Chairman, even without a federal backstop, the reinsurance
    industry remains committed to working with primary insurers to cover
    terrorism exposure. Our companies will continue to explore private
    market solutions to terrorism risk. Due to the nature of this peril,
    however, we believe that private market mechanisms are insufficient at
    this time to spread the risk of catastrophic terrorism loss in a
    meaningful way. Without a federal backstop we would expect less
    coverage available at the policyholder level, rising prices for
    terrorism cover and more limited private reinsurance capacity.
        The RAA continues to work with task forces from both our
    reinsurance companies and the primary industry national trade
    associations to determine what the most effective and less intrusive
    federal role would entail beyond TRIA. Key to these ongoing discussions
    is the participation and consensus from the policyholder community. No
    single solution has emerged but we welcome the opportunity to work with
    the Congress and all private sector stakeholders to craft a public/
    private partnership to address this most important national issue.
                                   ----------
                      PREPARED STATEMENT OF ROBERT J. LOWE
             On Behalf of The Coalition To Insure Against Terrorism
                         And The Real Estate Roundtable
                   And The United States Chamber of Commerce
                                 April 14, 2005
        Good morning, Chairman Shelby, Ranking Member Sarbanes and members
    of the Committee. My name is Robert J. Lowe. I am Chairman of the Board
    and Chief Executive Officer of Lowe Enterprises. I am also the current
    Chairman of The Real Estate Roundtable.\1\ I am appearing today on
    behalf of the Coalition to Insure Against Terrorism, or CIAT, which
    includes The Roundtable, the United States Chamber of Commerce, and 73
    other major trade and professional associations and businesses,
    representing the nation's major consumers of commercial insurance
    lines. A list of the 75 CIAT member organizations accompanies this
    statement.*
    ---------------------------------------------------------------------------
        \1\ The Real Estate Roundtable and its members lead an industry
    that generates more than one-third, or $2.9 trillion, of America's
    gross domestic product, employs more than 9 million people, represents
    capital investment of over $4.6 trillion, and produces 70 percent of
    the taxes raised by local governments for essential public services.
    Our members are chief executives from the nation's leading private and
    publicly-held income-producing real property owners, managers and
    investors, the key executives of the major financial services companies
    involved in financing, securitizing or investing in income-producing
    properties, as well as the elected heads of America's 15 leading real
    estate trade associations.
        * Held in Committee files.
    ---------------------------------------------------------------------------
        Over the past 32 years, Lowe Enterprises, which I founded, has
    developed, acquired or managed more than $6 billion of real estate
    assets nationwide. Our privately owned firm currently employs over
    7,000 people, with a management team of approximately 250 men and
    women.
        The members of CIAT were pleased to work with all the members of
    this Committee to help develop and enact the Terrorism Risk Insurance
    Act of 2002 (TRIA). We thank the members of this Committee for their
    continuing leadership in addressing this national problem.
        Today we urge the Committee to act promptly to provide continuity
    to the terrorism insurance market for next year. Most immediately, that
    means the Committee should take up and approve S. 467, which would
    extend TRIA for two additional years beyond the current scheduled
    expiration on December 31, 2005 and set up a presidential commission to
    report back to Congress and the Administration on a more permanent
    solution to the long-term need for terrorism insurance protection. CIAT
    also supports developing the new more permanent structure this year, if
    possible; but in order even to keep that option open, we believe this
    Committee must move forward on S.467 now. The American economy is
    already being adversely affected by the anticipated year-end expiration
    of TRIA. If we want to avoid a repeat of the near-paralysis of major
    construction and interruption of other business activity which we
    experienced in 2001-2002 before TRIA was in place, then Congress needs
    to act well in advance of year-end.
        CIAT remains committed to working with you, Chairman Shelby,
    Senator Sarbanes, the entire Committee, the rest of Congress and the
    Administration to find a longer term solution to the terrorism
    insurance problem so that the terrorism insurance needs of the
    country's businesses can continue to be met. We wish to express CIAT's
    special thanks to Senator Bennett and Senator Dodd for their
    introduction of S.467.
        As consumers of commercial property and casualty insurance,
    policyholders are pleased with the success of TRIA and the terrorism
    insurance program it instituted. With virtually no cost to the
    taxpayer, the terrorism insurance program has worked as intended. It
    put the economy back on track after 9/11 and restarted the stalled
    construction industry putting some 300,000 people back to work. Since
    then it has allowed businesses across America to continue operating and
    growing, saving countless jobs in the process. Although there are still
    some gaps in coverage, TRIA has made terrorism insurance broadly
    available to all businesses that want and need this vital coverage.
        The terrorism insurance program has achieved two major national
    goals envisioned by bipartisan leaders in Congress--including many on
    this Committee--and shared by the Administration. The terrorism
    insurance program has helped enormously to keep the economy going in
    the face of terrorist threats. The terrorism insurance program also
    serves as an important tool to minimize the severe economic disruption
    that almost certainly will occur from a future terrorist attack.
        As you know, the terrorism insurance program created by TRIA was
    intended to be a temporary measure to ``backstop'' the market until the
    private insurance markets could fully assess and price the risk.
    Unfortunately, the situation the Nation is in today does not make that
    possible. Our most senior government officials tell us that the threat
    of terrorism remains undiminished. Our Nation has had a great deal of
    success at dealing with and deterring terrorist threats over the past
    three years. Paradoxically, that success makes it impossible for the
    government, the insurance industry, or insurance policyholders like
    CIAT members to determine where, when, or with what frequency future
    terrorist attacks might occur. As a result, the private insurance and
    reinsurance markets are no more able to assess risk or price terrorism
    insurance policies than they were able to do prior to TRIA's passage.
    What that means for policyholders like the members of CIAT is highly
    troubling. Our Nation's businesses, large and small alike, will not be
    able to get adequate terrorism insurance in a purely private
    marketplace if the TRIA program ends. That was our experience in 2002,
    when there was no program and the reinsurance industry was not writing
    policies. And that will surely be our experience if a terrorism
    insurance program is not permitted to continue beyond this year, at
    least for a limited time.
        The risk of further catastrophic terror attacks appears to be as
    acute as before. Just weeks ago CIA Director Porter Goss told the
    Senate Intelligence Committee that al-Qaeda is intent on finding ways
    to circumvent U.S. security enhancements to attack the homeland. He
    said, ``the terrorist threat to the U.S. in the homeland and abroad
    endures . . . [i]t may be only a matter of time before al-Qaeda or
    other groups attempt to use chemical, biological, radiological or
    nuclear weapons.'' In the same hearing, FBI Director Robert Mueller
    expressed concern about the risk posed by radicalized Muslim converts
    inside the United States and said that he worries about a ``sleeper
    operative'' who may have been in place for years, awaiting orders to
    launch an attack: ``I remain very concerned about what we are not
    seeing,'' he said.
        Just this week indictments against three men were unsealed which
    show they are charged with plotting to blow up major financial center
    buildings in New York, New Jersey, and Washington, D.C. Both the United
    States and the U.K. intend to prosecute these individuals.\2\ These new
    indictments illustrate the continuing threat which our nation faces.
    ---------------------------------------------------------------------------
        \2\ See Associated Press wire story, ``Three Men Are Indicted In
    Financial-Building Plot,'' (April 12, 2005).
    ---------------------------------------------------------------------------
        While the highest levels of government tell us that the threat of
    terrorism in the United States continues, not surprisingly the
    insurance and reinsurance markets have not reestablished an ability to
    handle this problem alone. Federal Reserve Chairman Alan Greenspan, in
    one of his recent appearances before the House Financial Services
    Committee, said he has yet to be convinced the private market alone can
    adequately insure against the continuing threat of terrorism. Chairman
    Greenspan said, ``[t]here are regrettable instances in which markets do
    not work, cannot work,'' and added ``I have yet to be convinced'' that
    the terrorism insurance market can be made to work. Even with the
    terrorism insurance program in place, the most severe risks cited by
    the CIA Director Goss--chemical, biological, radiological and nuclear
    attacks--are almost wholly uninsured today, aside from workers'
    compensation.
        The business continuity issue becomes more urgent with each passing
    month this year. Commercial insurance policies covering businesses of
    all sizes and types will extend past the December 31, 2005, sunset date
    of the terrorism insurance program. Insurance regulators in most states
    already have approved conditional terrorism exclusions for these
    policies which will be triggered when TRIA expires. As explained in
    detail below, with each passing week, commercial policyholders and the
    capital markets concerned with asset values are seeing and more renewal
    policies which provide for a ``sunset'' of terrorism coverage at year's
    end if TRIA is not renewed. Thus we already have an answer to the
    central question--we know that the market will not be adequate next
    year without some Federal backstop.
        All these factors--the likelihood of future terrorist attacks; our
    success in thwarting more attacks to date; the impossibility of
    assessing where, when, and how terrorist attacks may occur; and the
    severe consequences for the economy without the continued availability
    of coverage--combine to make it imperative for Congress to act promptly
    to provide for the availability of terrorism insurance beyond this
    year.
        The bill introduced recently by Senators Bennett, Dodd and other
    members of this Committee, S. 467, sets an appropriate course by
    extending the current TRIA program for a short period of time while
    also setting up a commission to work on a long-term solution. We look
    forward to working with Members of Congress to develop, adopt and enact
    legislation that makes certain that the nation's citizens and
    businesses are able to secure truly comprehensive coverage against
    terrorism after 2005, and that we as a nation have a reasoned and
    supportable policy in place to enable the economy to recover, should
    another terrorist attack occur in the U.S.
    Five Reasons Why America Needs A Terrorism Insurance Backstop
    The Unique Nature of the Risk
        Terrorism is a man-made risk--intentional, organized and adaptive.
    It is unlike any of the other, usually natural or fortuitous, risks
    that the insurance industry typically underwrites. Terrorism is much
    more akin to war risk, both in its man-made characteristics
    (intentional, organized, and adaptive) and its potential for massive,
    unpredictable destruction. Experience has shown that war risk insurance
    is not (and will not be) readily available on most ordinary commercial
    property and casualty insurance policies; most such policies carry war-
    risk exclusions and have done so for decades. \3\ Thus, there is little
    reason to believe that insurers, or their reinsurers, will develop any
    time soon the ability, much less an appetite, to write terrorism
    insurance on a wide scale without some government role.
    ---------------------------------------------------------------------------
        \3\ ``War Risk Exclusion Legal History Outlined,'' Massmann, Susan,
    National Underwriter (Property & Casualty-Risk & Benefits Management
    Edition), September 24, 2001.
    ---------------------------------------------------------------------------
        While war-risk exclusions on most policies have been tolerable to
    insurance buyers (and their lenders) because the advent of, or at least
    the proximity to, military operations is relatively uncommon and
    generally avoidable,\4\ exclusion of terrorism risk from commercial
    policies today would be a significant deterrent to economic activity
    because of uncertainty and unavoidability of the risk. This is what we
    saw in the months between the September 11 attacks and the
    establishment of the TRIA program. Lack of coverage in those months
    significantly impaired economic activity and chilled financial markets
    and lending sources for large-scale development, until TRIA created the
    ability for insurers to fill the gap (or most of it).
    ---------------------------------------------------------------------------
        \4\ Where the lack of private war-risk coverage has been
    commercially significant, e.g., for ocean shipping or commercial
    aircraft that must either traverse or come near war-risk zones, the
    U.S. government has traditionally provided a standby war-risk insurance
    program which is triggered when commercial markets withdraw or
    dramatically raise prices. See, Merchant Marine Act of 1936, 46 U.S.C.
    Sec 1202, et seq.; FAA Aviation War Risk Insurance Program authorized
    at 49 U.S.C. Sec. 44302, et seq. Moreover, when the threat of war
    damage to the general U.S. economy has become pronounced, the U.S.
    government has also intervened to keep economic activity moving. During
    World War II, for example, Congress created the War Damages Corporation
    which, with the participation of private insurers, provided a universal
    war risk add-on to virtually all property insurance policies, both
    commercial and personal lines, during WWII. See discussion of War
    Damages Corporation on page 7, infra.
    ---------------------------------------------------------------------------
        There is another reason the current terrorism risk is so difficult
    for private markets to handle without some government role. Insurers
    have few data points (e.g., the attacks on September 11) by which to
    attempt to model the risk. With other potentially large catastrophic
    risks such as hurricanes and other natural phenomena, there is
    significant historical data on past events which can be used to model
    the frequency, severity, and locations (or paths) of future events.
    This modeling in turn can be overlaid with historical loss data and
    with policyholder location or density information to calculate each
    insurer's maximum probable loss for certain statistically probable
    events. With terrorism, however, there is a deficiency of data about
    potential attacks.
        This deficiency of data is exacerbated by an important additional
    fact. The Federal government is the most informed source of information
    about terrorism risks; presumably assessing such risks are a primary
    focus of our national intelligence organizations. That is, the Federal
    government may well be in possession of such intelligence or other
    information regarding likelihood or nature of future terrorists acts,
    but it is unlikely that the government would share such information
    with the insurance and reinsurance industry as well as their customers.
        Given the unique nature of the risk, the paucity of useful data to
    model future events and the controls in place on relevant information
    concerning terrorism, it is entirely understandable that the insurance
    and reinsurance industries have not yet developed an ability to
    underwrite intelligently on their own the complete amount of terrorism
    insurance necessary for the U.S. businesses to operate effectively and
    the U.S. economy to achieve its full potential.
    The State of the Insurance Market
        In the debate over a terrorism insurance mechanism three years ago,
    there was much concern expressed about government intervention in a
    ``free market'' of insurance. Free market principles are a laudable
    starting point for most economic policy discussions. The insurance
    industry, however, is a sector which the courts and legislatures have
    long recognized as ``affected with the public interest'' and therefore
    subjected to heavy government regulation. Indeed, it is one of the most
    pervasively regulated of all industries. Both entry into and exit from
    the industry is strictly controlled by government licensing and
    regulation. While there seems to be real competition for some of the
    easy-to-write lines of insurance, both the form of product and often
    the price in most lines of property and casualty insurance are subject
    to state-by-state regulation (and sometimes Federal creation). The
    latitude of insurer actions in many aspects of their business is to a
    large degree a function of state solvency regulation. It is also an
    industry where various government actions (both state and federal)
    require or encourage the pooling of certain risks, and where, in many
    cases such as workers' compensation insurance, the insurable risk is
    itself created and defined by government mandate. So, to assume that
    there is a market otherwise unaffected by government action or that
    unfettered market forces will somehow be prepared to respond to the
    threat of terrorism in the absence of a federal backstop seems to
    ignore the reality of that industry.
        The state-by-state nature of insurance regulation and therefore
    market conditions means that, in the absence of Federal backstop,
    availability of coverage and industry response to a catastrophic event
    may be quite variable from jurisdiction to jurisdiction. In the event
    of a multiple-jurisdiction attack following TRIA's expiration, the
    regulatory patchwork could result in businesses in one location with
    effective coverage and those in another location without coverage or
    with coverage from an insolvent carrier.
        This is not to say that there is no role for private capital or
    entrepreneurial spirit in this line of the insurance business. TRIA
    proved that the presence of some form of Federal backstop enables the
    private sector to respond in various ways to their customers' needs (if
    far from completely in the case of nuclear, biological, chemical and
    radiological risk). All of the responsible studies and reports produced
    since TRIA was put in place show that the private insurance and
    reinsurance sector do not have the capacity to underwrite this risk
    without the Federal backstop. Reinsurers this year have available
    terror-related capacity of only $4 to $6 billion dollars.\5\ To provide
    some context, the World Trade Center attack resulted in insurance
    payments exceeding $32 billion. Moreover TRIA does not appear to have
    ``crowded out'' the development of private capacity. To the contrary,
    all data show that private reinsurance capacity has not even been able
    to cover the primary industry's collective deductibles and retention
    layers which the TRIA backstop leaves to the private sector. Any
    thought that reinsurers will commit additional resources now to
    terrorism coverage in the absence of a backstop defies logic. More
    time, and perhaps a re-thinking of the division of risk between the
    Federal backstop and the private sector, is needed in order to better
    develop private capacity for terrorism coverage.
    ---------------------------------------------------------------------------
        \5\ R. Glenn Hubbard and Bruce Deal, The Economic Effects of
    Federal Participation in Terrorism Risk (prepared by Analysis Group
    Inc., September 14, 2004), p. 40, available at www.iii.org/media/
    lateststud/TRIA. See also Congressional Budget Office, Federal
    Terrorism Reinsurance: An Update (Congressional Budget Office, January
    2005), p. 17.
    ---------------------------------------------------------------------------
    The Proper Role of Government
        When terrorists target symbols of a nation's economic, political
    and military power, they are attacking the nation as a whole, not just
    the symbol itself. We need to recognize that the terrorism risk is
    different from other types of insurance for other reasons. By its
    definition, terrorism is an effort to effect changes in government
    policy and public attitudes. Terrorists target places and properties on
    American soil in an effort to change U.S. government policy and our
    behavior as a society. While we may not be able to truly understand the
    motivation of such actors, whether it is our way of life or our
    government policy which they attack, it does seem that the risk has
    little to do with the particular policyholders who need protection. How
    is a business owner in Baltimore or an insurer in Birmingham expected
    to cope with that threat without some role by the government? We look
    to the Federal government to protect us from this threat militarily;
    why not, in some limited way, economically?
        Other leading nations on the forefront of the war against terrorism
    have found it necessary to adopt national programs to help manage this
    economic risk. Most involve a mix of both government and private sector
    roles. These include government programs in at least the following
    countries: the United Kingdom, Germany, France, Spain, South Africa,
    Austria, and Israel. Recently the Government Accountability Office
    released a report entitled, ``CATASTROPHE RISK: U.S. and European
    Approaches to Insure Natural Catastrophe and Terrorism Risk,'' \6\
    which gives a detailed description of the governmental guarantees
    provided for terrorism coverage in the first four European countries
    mentioned above. In every one of these cases, the program extends
    beyond the current expiration of TRIA.
    ---------------------------------------------------------------------------
        \6\ CATASTROPHE RISK: U.S. and European Approaches to Insure
    Natural Catastrophe and Terrorism Risk, GAO-05-199 (February 2005).
    ---------------------------------------------------------------------------
    A Matter of Fairness
        The Federal terrorism insurance backstop does not exist in a
    vacuum. TRIA was part of a comprehensive set of policies which comprise
    the war on terrorism which President Bush rightly declared after the
    September 11 attacks on our country. These in turn fit with already
    existing policies, some of which found heightened purpose in the post-
    9/11 world. The PATRIOT Act is one example of the new set of actions
    launched after 9/11. Like TRIA, much of the PATRIOT Act was originally
    authorized for three years, and the Administration is now calling for
    renewal of those provisions because the war on terrorism is far from
    complete. Just as the PATRIOT Act will be re-examined this year in
    light of three years' experience, we do not insist that an automatic
    extension of TRIA is the only appropriate response to the continuing
    insurance market failure. However, some Federal insurance backstop
    mechanism is surely a necessary component of this continuing war to
    protect America's economy from these enemies.
        An example of a pre-existing government policy which has found new
    importance in the post-9/11 world is the Overseas Private Investment
    Corporation (OPIC). Founded in 1971, and recently reauthorized through
    2007 by Congress, OPIC provides insurance against political risks--
    including terrorism--for U.S. businesses' overseas operations.
    Currently, OPIC provides insurance and financing to U.S. investors for
    projects in approximately 150 developing countries and emerging
    markets. Among the most recent projects insured by OPIC are the
    construction financing of $250 million for a natural gas pipeline in
    Israel and a $300 million development of Egypt's natural gas industry.
    To take another example, OPIC recently issued long-term government-
    backed political risk coverage (including for terrorism and other
    ``political violence'') for a commercial facility in Uzbekistan. It
    would be a sad and hard-to-explain irony if TRIA were to expire this
    year and no Federal terrorism insurance role was in place within the
    U.S. next year, but OPIC continued to provide next year Federally-
    backed terrorism insurance for U.S. businesses and facilities abroad.
    Such a development would mean that American businesses and facilities
    just down the street from the Capitol, as well as anywhere else in the
    Nation, could be left without sufficient and adequate terrorism
    insurance, but that, thanks in part to the Federal government, U.S.
    businesses doing business outside the U.S., ranging from operations in
    Afghanistan to Zimbabwe, would have all the terrorism insurance
    coverage that they require.
        OPIC is an example of a long-standing program which serves
    continuing U.S. foreign policy objectives. To be sure, there are some
    domestic Federal insurance programs which deal with long-standing
    marketplace failures, most notably Federal flood insurance and some
    forms of crop insurance.\7\ However, there are also examples of Federal
    insurance programs which were authorized to deal with immediate and
    acute problems at the time, which were then de-commissioned when the
    emergency subsided. These include the Federal crime insurance \8\ and
    Federal riot reinsurance programs \9\ which were established in
    response to the insurability problems arising out of the urban
    disturbances in the late 1960s. Both of these programs were
    administered by the Federal Insurance Administration, an office within
    FEMA, but were allowed to expire by the 1980s.
    ---------------------------------------------------------------------------
        \7\ The National Flood Insurance Program was created in 1968 (42
    U.S.C. '' 4001-4129) and reauthorized as recently as 2003 (Pub. Law
    108-3, Jan. 13, 2003). The Federal Crop Insurance Corporation was
    created in 1938 (Pub. Law 75-430, Feb. 16, 1938) and is currently
    overseen by the Risk Management Agency under USDA.
        \8\ The Federal Crime Insurance Program was established by the
    Housing and Urban Development Act of 1970 (Pub. Law 91-609, Dec. 31,
    1970) to provide limited burglary and robbery coverage to property
    owners unable to buy private insurance coverage on property located in
    ``blighted or deteriorating areas.'' The FCIP was abolished in
    September 1996.
        \9\ The Federal Riot Reinsurance Program was established by the
    Urban Property Protection Reinsurance Act of 1968 (12 U.S.C. Sec. 174-
    9bbbb-21). This provided federal riot reinsurance to insurance
    companies which participated in State-administered residual market or
    ``FAIR Plans.'' The riot reinsurance program was terminated in 1983
    with funds on hand of over $100 million.
    ---------------------------------------------------------------------------
        The precedent which perhaps most closely parallels the current case
    of terrorism risk is the War Damages Corporation (``WDC'') which was
    authorized by Congress within days after the December 1941 attack on
    Pearl Harbor. This government-owned corporation provided direct war
    risk coverage to both personal and business property owners throughout
    the United States and its overseas possessions for the duration of
    World War II. Approximately 8,700,000 polices were issued for property
    values totaling $117 billion. WDC collected premiums of approximately
    $221 million, returning most of this to the U.S. Treasury as profit.
        WDC conducted its business with remarkable efficiency by
    authorizing private insurers to attach the war risk rider to existing
    multi-peril insurance policies, and working with representatives of the
    industry to develop policy forms and pricing guidelines within a matter
    of months after its authorization; the first policies were issued
    effective July 1, 1942. The WDC premium insurance program was
    terminated in March 1946 and WDC assets were liquidated before June 30,
    1949, although its capital stock was not returned to the United States
    Treasury until the 1950s. Net income of approximately $211 million had
    been remitted to the Treasury by 1947-48, even after payment of all
    claims (mostly arising in the Philippines or from the 1944 explosion of
    the destroyer USS Turner in New York harbor) and after sharing
    commissions and profit-incentive payments with private insurance
    industry which had acted as its agents.\10\
    ---------------------------------------------------------------------------
        \10\ See, e.g., ``A Documented Account of the Establishment and
    Activities of War Damages Corporation,'' (1950) in the Records of the
    War Damages Corporation held at the National Archives.
    ---------------------------------------------------------------------------
    Sunset Clauses In Insurance Policies Are Already Hurting Our
    Homeland's Economic Security
        The threat of terrorism will be with us for the foreseeable future;
    in the words of President Bush, delivered on February 14, 2005, ``We
    must not allow the passage of time or the illusion of safety to weaken
    our resolve in this new war.''
        If TRIA is allowed to expire, and is not replaced with another form
    of Federal backstop, the nation will be more exposed economically than
    was the case after September 11. There will be a scarcity of terrorism
    insurance and what is available will be at an exorbitant price. There
    is no doubt that without a Federal backstop, fewer businesses will have
    such terrorism coverage than today with TRIA in place or before 9/11.
    In fact, the evidence is already in front of us. Most major insurers
    already appear to be imposing ``sunset'' clauses in their policies
    being renewed this year. Appendix 1 to this testimony is a selection of
    the sunset clauses from many of the largest insurers in the U.S. and
    globally. All of these documents come from renewal quotation packages
    actually received by policyholders or their brokers in recent weeks.
    These sunset clauses make it clear that there will be no terrorism
    coverage under the policy after 12/31/2005 unless Congress renews TRIA.
    In some cases, there is no promise to provide the coverage even if
    Congress acts--presumably the policyholder and insurer will have to
    take some action in these cases to restore the coverage if TRIA is
    renewed between now and year-end. With each passing week, more and more
    of these ``sunset'' disruptions are being built into the nation's
    business insurance picture, and more economic effects are being felt.
    The extent of the problem is illustrated by Appendix 2, a chart showing
    the actual results of an April renewal program of $1 billion of
    property insurance for a major real estate company with assets
    throughout the U.S., which shows substantial holes in its terrorism
    coverage after December 31 of this year.
        Multi-year construction and financial markets which depend on
    commercial mortgage-backed securities are being affected adversely by
    the year-end sunset of terrorism coverage. Appendix 3 is a chart
    showing a limited sampling by the Real Estate Board of New York of
    construction project in just two areas of the country-metropolitan New
    York City and South Florida. In all eighteen projects sampled, the
    builders' risk insurance either was subject to a sunset clause, renewal
    was overdue/delayed, or the policyholder was required to secure
    dramatically more expensive stand-alone terrorism cover from a limited
    market to satisfy lender requirements.
        Aon is the world's second largest insurance brokerage firm. Aon has
    been actively tracking the terrorism insurance market and, in
    particular, TRIA coverage with the potential expiration of TRIA on
    December 31. We understand that an update to Aon's 2004 Terrorism
    Mitigation & Risk Transfer Overview will be published later this month
    based upon first quarter 2005 performance. Aon estimates that 80% to
    90% of the available TRIA property insurance capacity will resort to
    the use of Absolute TRIA exclusions or low sub-limits for top tier
    metropolitan areas/target risks effective January 1, 2006. In short,
    insurance market behavior during the first quarter 2005 indicates that
    there will be a substantial shortfall in terrorism capacity both for
    existing properties and for new projects. At the same time, Aon
    confirms that lenders are requiring terrorism coverage for the full
    loan values or for a stipulated amount within loan covenants--whether
    or not TRIA is reauthorized. We will be pleased to provide the
    Committee with copies of the Aon report when published.
        The important commercial mortgage-backed securities (CMBS)
    marketplace ($432 billion outstanding) is also at risk of credit
    downgrades. As one prominent publication \11\ put it, ``the possibility
    [of TRIA non-renewal] re-ignites the threat of downgrade for certain
    CMBS transactions and has the more macro and ominous potential of
    reducing property valuations and the attractiveness of commercial real
    estate as an investment vehicle. Without TRIA and with little
    confidence that reinsurers and primary property and casualty insurers
    will offer affordable terrorism coverage without a Federal backstop,
    it's highly probable that at least two of the major rating agencies
    will place certain CMBS transactions on watch for possible downgrade.''
    The extension of TRIA would serve to remove a significant credit risk
    from the CMBS marketplace. Moreover, it would help the market avoid the
    ratings volatility experienced from late-2001 through 2002 as it
    related to terrorism insurance.
    ---------------------------------------------------------------------------
        \11\ ``CMBS CREDIT UPDATE'' (March 1, 2005), RBS Greenwich Capital
    CMBS Strategy.
    ---------------------------------------------------------------------------
        This sunset problem not only dampens economic activity now and for
    as long as the non-renewal persists, but, in the event of another
    attack, there will be substantially less insurance coverage in place--
    and therefore fewer and less insurance industry payments than were
    available for the 9/11 losses. This means, most likely, that--in the
    absence of a program like TRIA--the government's costs, one way or the
    other, following a new event similar in size to 9/11, would actually be
    greater than after September 11th. Continuation of some form of Federal
    backstop which maximizes the involvement of the private insurance and
    reinsurance industry is in fact the policy which is best able to
    encourage economic activity in the near term while minimizing the
    government's own exposure in the event of another catastrophic event.
        Planning the day before for the day after an attack should be
    viewed as equally important to efforts to protect ourselves against
    such an attack.
    Conclusion
        CIAT is unanimous in its belief that the Federal government must
    continue to provide a reinsurance backstop beyond 2005 if we are to
    avoid major disruptions to the economy. Indeed, these disruptions are
    already beginning to occur as major insurers cut off coverage at year-
    end in absence of a clear signal from Congress. We urge this Committee
    to act promptly to approve the Bennett and Dodd bill, S.467, which
    already has as co-sponsors a majority of this Committee. Committee
    approval will advance the process towards a longer term solution. Only
    a seamless continuation of the Federal backstop in some form in the
    meantime will avoid the more severe economic impacts, some of which
    already are emerging with the widespread use of sunset clauses in
    current renewal policies. Chairman Shelby, Ranking Member Sarbanes,
    CIAT thanks you for holding this hearing and for giving us the
    opportunity to testify. We look forward to working with you and the
    rest of the Committee on this important subject in the coming weeks.