[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.*
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    \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.
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    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.
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    \2\ See Associated Press wire story, ``Three Men Are Indicted In 
Financial-Building Plot,'' (April 12, 2005).
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    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.
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    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).
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    \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.
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    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.
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    \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.
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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.
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    \6\ CATASTROPHE RISK: U.S. and European Approaches to Insure 
Natural Catastrophe and Terrorism Risk, GAO-05-199 (February 2005).
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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.
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    \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.
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    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\
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    \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.
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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.
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    \11\ ``CMBS CREDIT UPDATE'' (March 1, 2005), RBS Greenwich Capital 
CMBS Strategy.
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    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.
