[Senate Hearing 109-593]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-593

 
                    THE DEPARTMENT OF THE TREASURY'S
                    REPORT TO CONGRESS REGARDING THE
                  TERRORISM RISK INSURANCE ACT OF 2002

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

                                HEARING

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINATION OF THE DEPARTMENT OF THE TREASURY'S REPORT TO CONGRESS 
    ENTITLED: ASSESSMENT: THE TERRORISM RISK INSURANCE ACT OF 2002, 
FOCUSING ON ASSESSING THE LIKELY CAPACITY OF THE PROPERTY AND CASUALTY 
  INSURANCE INDUSTRY TO OFFER INSURANCE FOR TERRORISM RISK AFTER THE 
          TERMINATION OF THE TERRORISM RISK INSURANCE PROGRAM

                               __________

                             JULY 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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            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 Oesterle, Counsel

                    Mike Nielsen, Professional Staff

             Martin J. Gruenberg, Democratic Senior Counsel

              Stephen R. Kroll, Democratic Special Counsel

                   Sarah A. Kline, Democratic Counsel

                 Dean V. Shahinian, 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, JULY 14, 2005

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Dole.................................................     2
    Senator Dodd.................................................     4
    Senator Sarbanes.............................................    12
    Senator Hagel................................................    15
    Senator Bennett..............................................    18
    Senator Martinez.............................................    21
    Senator Johnson..............................................    21
    Senator Reed.................................................    22
    Senator Schumer..............................................    23

                               WITNESSES

John W. Snow, Secretary, U.S. Department of the Treasury.........     3
    Prepared statement...........................................    24
    Response to written question of:
        Senator Johnson..........................................    32
        Senator Schumer..........................................    32
Ben S. Bernanke, Chairman, Council of Economic Advisers..........     4
    Prepared statement...........................................    29
    Response to written question of:
        Senator Johnson..........................................    41
        Senator Schumer..........................................    41

                                 (iii)


                    THE DEPARTMENT OF THE TREASURY'S
                    REPORT TO CONGRESS REGARDING THE
                  TERRORISM RISK INSURANCE ACT OF 2002

                              ----------                              


                        THURSDAY, JULY 14, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                   Washington, D.C.
    The Committee met at 10:01 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.
    Thank you, Secretary Snow and Chairman Bernanke, for being 
here this morning. This is not the first appearance before the 
Banking Committee for either of you.
    The purpose of this hearing today is to review the 
assessment of the Terrorism Risk Insurance Act of 2002, 
recently completed by the Treasury Department, and to begin 
consideration of how we should proceed in light of these 
findings.
    From my perspective, there has never been a question as to 
the nature of the threat that terrorism presents to the United 
States. I have consistently indicated that we will face the 
challenge of terrorism into the foreseeable future.
    In this regard, I do not believe the horrific events in 
London raise any new questions about the sustained threat of 
terrorism; it was already here. Rather, the most recent tragedy 
serves to press home the critical issue that has confronted us 
since September 11, 2001: What steps do we take to best protect 
the economy in the face of the constant threat that we live 
under and perhaps will live under for awhile?
    In considering this matter, we should first draw from what 
we have learned from the program that has been in place for the 
last 3 years.
    I think the lessons of TRIA are quite clear. TRIA has 
provided limited short-term benefits. But, it has also impeded 
the development of broader solutions for the larger problems 
confronting the insurance marketplace. I believe we must look 
to ways to restructure TRIA to avoid these negative 
consequences.
    I think the Administration has made some helpful 
suggestions as to how to redesign the program to allow the 
development of a functioning marketplace. I look forward to 
hearing more on these ideas from the Secretary of the Treasury 
and the Chairman of the Council of Economic Advisers this 
morning.
    Beyond today's hearing, I look forward to working with my 
colleagues to design a targeted, short-term problem that 
permits a transition away from a taxpayer-supported system.
    In the end, I believe the best way to deal with the 
challenges we face is to encourage innovation along all fronts 
and to draw upon the great strengths of our market-based 
economy.
    Senator Dole, any opening statement?

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Chairman Shelby, Senator Sarbanes. 
Welcome, gentlemen.
    As we are all painfully aware, the events of September 11, 
2001, brought about changes in many aspects of American life. 
And just last week, we were all shaken by the terrorist attacks 
on London. Certainly, our thoughts and prayers continue to be 
with the victims and their families. The events in London 
remind us of how unexpected and vicious those attacks can be.
    Terrorist attacks, particularly large scale events such as 
those on September 11, have significant effects on the ability 
of consumers and businesses to obtain insurance. Insurance 
coverage provides security and certainty for Americans and is 
extremely important to continued economic growth and job 
creation.
    In November 2002, President Bush signed into law TRIA, to 
provide a Government backstop for excessive losses caused by 
acts of terrorism and to establish a temporary mechanism that 
the Government would use to provide assistance, should, heaven 
forbid, another large-scale terrorist attack occur in the 
United States. In my 8 years as President of the American Red 
Cross, I have seen time and time again how a good plan of 
action established in advance can make a dramatic difference 
after a disaster.
    The Government Accountability Office, GAO, has recently 
determined that the insurance industry has made little progress 
to date in providing terrorism insurance without Government 
involvement. This finding is of great concern.
    While the lack of any notable progress on this effort is 
disappointing, it is understandable, since we continue to lack 
sound methods to predict the likelihood of terrorist attacks. 
Insurance companies have developed highly sophisticated models 
that anticipate the likelihood of natural disasters, such as 
hurricanes in North Carolina. Such models suggest that there is 
a high probability that our Nation will experience a number of 
hurricanes over the next 15 years. However, acts of terrorism 
are man-made, and we have no way to foresee the possible 
frequency or size of such events. Hence, we have no way to 
price the risk involved. This uncertainty has hindered private 
market solutions to this problem.
    TRIA was created to provide temporary coverage for large-
scale insured losses and to ensure availability of terrorism 
coverage for consumers. God forbid we ever face a truly 
catastrophic nuclear or biological attack, one that has the 
potential to kill countless Americans over a very wide area, 
but we cannot ignore the possibility. Because this threat does 
exist, we should enact a long-term mechanism to protect against 
truly catastrophic losses. This should include large scale 
losses to group life insurance.
    Mr. Secretary, I have reviewed your statements to the House 
Committee on Financial Services from yesterday, and I believe 
it is clear that you and the Administration understand the 
important role a Federal backstop continues to play in our 
Nation's economic growth and development. I look forward to 
working with you in the coming months to reform and strengthen 
TRIA so that we may maintain this important Government backstop 
while also encouraging innovation and creativity in the private 
insurance market.
    This is an issue that has profound implications for the 
strength of our economy, and I stand ready, Mr. Chairman, to 
work with my colleagues as the Committee considers appropriate 
action.
    Thank you.
    Chairman Shelby. Secretary Snow, welcome again. We are 
going to put your written testimony, both of yours, in the 
record without objection. You sum up briefly. I do want to 
remind you we have four or five stacked votes, as you know.
    Secretary Snow. I know.
    Chairman Shelby. And we are not going to leave now. We hope 
we can begin your testimony and then come back afterwards.
    Secretary Snow. Chairman, I can be very brief.
    Chairman Shelby. Take your time.

                   STATEMENT OF JOHN W. SNOW

           SECRETARY, U.S. DEPARTMENT OF THE TREASURY

    Secretary Snow. Chairman Bernanke and I have agreed to 
divide our time to expedite our presentation.
    Let me elaborate on the findings of the study that you 
asked us to undertake. Of course, the study was part of the 
original TRIA, and we were asked to look into the availability 
and adequacy of the insurance market in the absence of TRIA and 
what had happened in the intervening period.
    Our findings are really fourfold: First, the industry 
capacity to provide coverage for terrorism risk has improved, 
and so has the take-up rate. Second, the study concludes that 
insurers are increasingly pricing terrorism risk insurance and 
the price of coverage with an explicit charge has decreased. I 
say this is important, because it has occurred in the face of 
rising deductibles, suggesting the capacity of the market to do 
more.
    Third, industry surplus has increased dramatically, and 
industry profitability has increased dramatically. Fourth, many 
insurers reinsure a substantial part of their retained risk 
under TRIA; but, and this is an important point, overall 
reinsurance purchases have not increased substantially. We 
think that is clearly because of the crowding out effect of 
TRIA on the reinsurance business.
    These findings from the surveys of insurers and 
policyholders point to the success of TRIA in achieving its 
short-term goals. It has effectively addressed, in our view, 
the market disruptions; ensured the continued widespread 
availability and affordability of property and casualty 
insurance; and allowed both insurers and policyholders time to 
adjust to the post-September 11 conditions.
    TRIA provisions shifted an increasing share of expected 
terrorism losses back to the private sector. We think the 
private sector should be encouraged to assume more and more of 
these responsibilities, and we think it has the capacity to do 
that. Had there been no improvement in the capacity, we would 
have observed, I think, a pullback of terrorism coverage in 
response to the shift in the deductibles which put more of the 
cost back on the business.
    The expansion of terrorism risk coverage, availability, and 
take-up, and the decline in the cost, even as the TRIA 
deductible has increased, highlight the improvements in the 
industry's ability to cover terrorism risk. If the program is 
to be continued, we have various suggestions as to how it 
should be done in a way to encourage innovation and create more 
capacity in the private sector. I will ask Chairman Bernanke to 
lay out the principles that we think should be followed.
    Chairman Shelby. Mr. Chairman.

                  STATEMENT OF BEN S. BERNANKE

             CHAIRMAN, COUNCIL OF ECONOMIC ADVISERS

    Mr. Bernanke. Thank you.
    Mr. Chairman, in 2002, with the economy being very 
uncertain and the insurance industry reeling from September 11, 
the enactment of TRIA was a sensible measure to try to provide 
some transitional aid for the industry. Today, the economy is 
much stronger and on a much better footing. Insurance companies 
have increased their surpluses. They have begun to be able to 
price and measure risk associated with terrorism, and we feel 
it is in the national interest to try to increase the share of 
terrorism risk which is borne by the private sector, both 
insurers and securities markets.
    Therefore, we do not support continuation of TRIA in its 
current form. If it is to be continued, we would like to do it 
in such a way that it will encourage increased capacity in the 
private sector. In particular, some measures that we would 
propose for consideration would be to increase the size of the 
trigger event from the current $5 million to $500 million, 
restricting TRIA to large events rather than including 
relatively small events in the backstop; second, to increase 
private sector participation by raising dollar deductibles and 
copays to increase the share of risk borne by the private 
sector.
    Third, we think that the program can be more effective if 
we eliminate certain lines of insurance which are not so 
subject to accumulation risk, for example, general liability, 
while focusing on lines such as property and casualty. And 
finally, we would like to consider some reasonable reforms to 
litigation that would make the delivery of compensation more 
efficient.
    In summary, we do not support continuation of TRIA in its 
current form. If it is to be continued, we would like to see it 
done in such a way as to encourage greater private 
participation in the market for terrorism risk insurance.
    Thank you, sir.
    Chairman Shelby. Senator Dodd, do you have any questions?

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Mr. Chairman, let me take advantage of the 
time here, if I can.
    Chairman Shelby. Sure.
    Senator Dodd. And make a quick opening statement, if I 
might, on this. And let me begin by thanking you immensely for 
doing this.
    Chairman Shelby promised those of us who have been deeply 
interested in this issue that once the Treasury report was out 
that he intended to move promptly to consider a proposal 
regarding terrorism risk insurance. We have known each other a 
long time, and his word is his bond, and once again, you have 
demonstrated that by having this hearing as quickly as you 
have.
    I appreciate the call from Secretary Snow. It was very 
generous in calling several of us here prior to the report 
coming out to give us a quick brief on what would be included 
in it. And I thank you for coming as well to be with us. Many 
of us worked very hard, as all of you know, 3 years ago, 
including the Chairman and Senator Sarbanes, to put together a 
good bill, and I think one of the reports that comes out here 
indicates, in fact, the bill that we adopted after a very 
difficult time of getting it done actually was successful in 
many ways.
    So, I would like to especially thank the Secretary for his 
work in this area. This study not only documents the success of 
TRIA, which I think is important, but it also provides some 
important suggestions, Mr. Chairman. You and I briefly talked 
about that in the corridors and on the floor of the Senate that 
we should be considering, as part of our work, to extending the 
TRIA program.
    I expect the Secretary's comments yesterday before the 
House Financial Services Committee and Congressman Oxley's 
comments as well, which I think are welcomed, and a lot of the 
events over the last number of days, particularly the tragedy 
in London, I think there is a heightened sense that this 
proposal deserves more consideration than it otherwise would 
have received--tragically; I wish that had not been the case 
obviously.
    And I do not necessarily agree with some of the suggestions 
you have made, Mr. Secretary, but as we move through the 
process here, I look forward to certainly working with you and 
your colleagues and the Committee to see if we cannot extend 
TRIA and build on the success of the program.
    Let me just, if I can, appreciate the significant work, but 
I would like to make a couple of points, if I could. First of 
all, any notion that TRIA has in some ways helped to create the 
problem is just not only misguided; but it is also dead wrong, 
in my view. Let us not forget that the root of this problem is 
the wanton acts of terrorism that were committed against our 
country. The tragic events of September 11 caused tremendous 
loss of life and severe economic damage.
    This Congress worked hard to answer those attacks in a 
variety of ways. And TRIA was a critical part of our national 
response to a national problem. Without the passage of TRIA, we 
risk significant economic dislocation, job loss, and leaving 
our Nation vulnerable to future terrorist attacks. This report 
accurately concludes that TRIA was effective at achieving its 
main goal of ensuring affordability and availability of 
terrorism insurance.
    Second, the notion contained in this report that TRIA has, 
in some way, crowded out the private reinsurance market is just 
plain wrong. I fail to see anything in this report, empirical 
or anecdotal, that supports that idea. In fact, this report 
contains no information from the reinsurance industry itself, 
but only from direct writers of insurance.
    This omission is especially troubling, I might add, because 
fundamentally, the TRIA program acts as a Federal reinsurer in 
the absence of a private reinsurance market. How can a study on 
the effectiveness of a Federal reinsurance program be complete 
without an examination of the underlying reinsurance industry? 
The truth is that direct writers of insurance, those who deal 
directly with consumers, want more private reinsurance, and 
they simply cannot get it.
    Last year, under TRIA, the total industry-wide retention 
level was around $31 billion. According to a survey conducted 
by the Reinsurance Association of America, there was 
approximately $4 billion to $6 billion of reinsurance currently 
available in the terrorism marketplace. That is a gap of 
somewhere around $25 billion, which means only a fraction of 
terrorism risk is being underwritten by reinsurers. 
Traditionally, depending on the risk tolerance of the 
individual insurer, most direct writers underwrite between 20 
to 40 percent of the policies they write, while 60 to 80 
percent is ceded to reinsurers.
    TRIA, in my view, has done nothing to crowd out 
reinsurance; in fact, the opposite is true: There is simply not 
enough reinsurance in the current marketplace, and if 
reinsurers are unwilling to write greater terrorism risk with a 
Federal backstop to cap their maximum exposure in place, the 
expiration of TRIA will only exacerbate a lack of reinsurance.
    Third, Mr. Chairman, I am concerned that this study falls 
short in its analysis of alternatives in developing the concept 
of capital market innovations. The report does little to 
describe current or potential innovations that could occur in 
the marketplace, and how the program is currently structured 
either promotes or inhibits such innovations.
    While I recognize that this is a bit difficult to quantify, 
the fact that you conclude that the TRIA program has crowded 
out innovation begs the question: What types of innovation 
should or could develop in the terrorism insurance marketplace. 
I certainly would welcome your response to the question later 
in the hearing on that particular point.
    But, Mr. Chairman, I think we need TRIA now more than ever, 
and I certainly welcome a legitimate discussion of whether 
modest changes are needed in the extension of TRIA. However, I 
believe that letting TRIA expire is not an option. We simply 
cannot afford to risk the consequences, particularly with the 
overwhelming success of the current program.
    We are at war. I do not know what more clearly needs to be 
stated. We have had 221 attacks against ourselves or allies 
since 1983. At some point or other, we need to wake up and move 
on these issues and see if we cannot establish a sound program. 
So, I would like to bring to the attention of the witnesses the 
strong bipartisan support for the extension of the terrorism 
risk insurance. Senator Bennett and I, with 32 of our Senate 
sponsors as well as a majority of the Committee, that is, 
Senators Schumer, Hagel, Reed, Bunning, Bayh, Dole, Carper, 
Stabenow, Corzine, and Johnson have introduced legislation to 
extend this Terrorism Risk Insurance Act.
    TRIA has a history of bipartisan support, and I am pleased 
to say that the robust support on both sides of the aisle still 
exists as we consider an extension of this program. It is my 
fervent hope that we will find a solution to this problem and 
do it as quickly as we possibly can, and again, Mr. Chairman, I 
thank you immensely for acting as rapidly as you have by giving 
us this opportunity.
    Chairman Shelby. We have to go to the floor. That is where 
most of our colleagues are. And we are going to be in recess, 
say, for at least 45 or 50 minutes, and we will be back. I am 
sure there will be a number of Senators wanting to question 
you. We are in recess now.
    [Recess.]
    Chairman Shelby. The hearing will come back to order.
    Mr. Secretary, Chairman Bernanke, I am very sorry. It is 
just the nature of business in the Senate, as both of you know. 
We had five votes, and they take a little while. A lot of my 
colleagues are still over there, and that might be good news 
for both of you.
    [Laughter.]
    I understand, Mr. Secretary, you have to go in just a few 
minutes, and if nobody shows up, you might go sonner than that. 
I do have a number of questions for the record, and I do 
appreciate your indulgence.
    I noted in my opening statement that the recent tragic 
events in London do not teach us any new lessons, but they do 
remind us of the threat of terrorism, because we know it here. 
We have experienced it here. The threat of terrorism has been 
an undeniable reality since September 11. But notwithstanding 
the fact that most people have long recognized this, some are 
now arguing that the events in London have changed the nature 
of the debate.
    I do not think they have changed the nature of the debate 
at all. I was in London. I was there when this was going on. It 
just reminds us of what we already know: That we are all 
vulnerable to some degree. Chairman Bernanke, this 
Administration is extremely mindful that the threat of 
terrorism could remain for some time into the future.
    Mr. Bernanke. Yes, sir.
    Chairman Shelby. It is on record.
    So in reality, the London bombings have not changed the 
Administration's perspective but rather have reinforced it. 
Would that be correct, Mr. Chairman?
    Mr. Bernanke. That is correct.
    Chairman Shelby. Is it appropriate to conclude that the 
Administration was mindful of the continuing threat of 
terrorism when it put together its recommendations with respect 
to the TRIA program, Secretary Snow?
    Secretary Snow. Yes, sir, Mr. Chairman.
    Chairman Shelby. And of course, it does not leave out the 
long-term economic interests of the country in any way, does 
it?
    Secretary Snow. Quite the contrary, Mr. Chairman. We think 
it advances the long-term economic interests.
    Chairman Shelby. Chairman Bernanke, in your testimony, you 
raised a very important point that bears repeating, ``TRIA does 
not eliminate terrorism risks but merely shifts the burden to 
the taxpayer.'' With this in mind, should we not first look to 
the dynamic capability always of the market economy before 
exposing the taxpayers to the risk. Also, if we do pass an 
extension of some type of insurance, which probably will be the 
case, should it not be narrow in scope, because otherwise, the 
markets will never develop the product?
    Mr. Bernanke. I agree, Mr. Chairman. Under the current 
rules, if there were to be a major terrorist attack, the 
taxpayer would be on the hook for up to $70 billion. That is 
money that would not be available for humanitarian assistance, 
reconstruction, or economic rebuilding. Why not enlist the 
private sector to help support the reconstruction effort? And 
the reform of TRIA would increase the capacity of the private 
sector, the insurance markets, the securities markets, to 
provide funding in the event of such a tragedy.
    Chairman Shelby. Secretary Snow, in your testimony, you 
noted, ``extending TRIA in its current form is likely to 
discourage the private market from development needed to deal 
with the risk of terrorism.''
    Secretary Snow. Absolutely.
    Chairman Shelby. Would you elaborate for just a moment on 
the market distortions caused by TRIA, in your judgment?
    Secretary Snow. There are a number of market distortions; 
basically, the fact that the Government is playing a larger 
role, occupying more space in the reinsurance business, in the 
insurance business than would be the case if we allowed the 
market to work. If we allowed the market to work, I think we 
would see a lot of adaptations and adjustments. I think we 
would see a creativity and cost-effective means of covering 
terrorist risks.
    I think we would see aaptations on the part of 
policyholders that would be beneficial in mitigating risks, and 
I think we would see credit markets adjusting as well so that 
the risks would be better distributed between the Government, 
the taxpayers, really, who always stand behind the Government 
and the private sector. The private sector can, and should do, 
more in carrying these risks.
    Chairman Shelby. Secretary Snow, you support--speaking for 
the Administration, both of you--eliminating certain lines of 
insurance from coverage under the program. Would you both 
elaborate on that a little?
    Secretary Snow. I can very briefly--yes, we do, lines like 
auto----
    Chairman Shelby. Life insurance?
    Secretary Snow. Group life? Group life, yes. The reason 
that we support the elimination of certain lines is that these 
lines do not create the cumulation, aggregation risks that are 
associated with terrorist events. We think those are lines that 
can be well-covered by the market. Of course, in response to 
the TRIA directive, we did a study on group life and concluded 
that the market was providing ample availability of group life 
insurance.
    Chairman Shelby. Okay; Chairman Bernanke, one of the 
interesting developments that has occurred since the enactment 
of TRIA has been the emergence of insurance coverage for 
domestic terrorism events, something that is not included under 
TRIA. What conclusions do you draw regarding the fact that this 
type of coverage is now available in the market notwithstanding 
the absence of a Federal program?
    Mr. Bernanke. Chairman Shelby, it is true that there is 
available insurance for domestic terrorism risk, which is not 
covered by TRIA, and that seems to indicate that the market 
does have some ability to price and evaluate that risk and to 
provide insurance for it. It may be somewhat different from the 
scale or magnitude or qualitative nature of some international 
risks. Nevertheless, it is encouraging in terms of what the 
industry has been able to do.
    Chairman Shelby. The report, Chairman Bernanke, assesses 
the likely capacity of insurers to offer terrorism insurance 
after termination of the program. You find that their modeling 
capacity and financial capacity has greatly improved. This is 
helpful, but it is only one option. Your report does not assess 
the likely response of markets outside of the insurance 
industry. These actions, I think, would be critical, because 
insurers alone will not solve the terrorism risk problem.
    Could you comment, if you have any thoughts, on where else 
in the financial markets that we can expect to see innovations 
for bearing terrorism risks? And do you believe that our 
financial markets are sufficiently broad, liquid, and 
innovative to spread this type of risk, which is important?
    Mr. Bernanke. Yes, Mr. Chairman. First, I do think the 
insurance industry has quite a bit of way to go to expand its 
capacity to deal with these risks, and beyond the insurance 
industry, in the securities markets, there are a number of 
possible ways in which these risks could be shared across 
society. For example, use of real estate investment trusts 
would allow investors to hold portfolios of a number of 
different properties that would be well-diversified by 
geography and by risk. That would allow a way of diversifying 
this risk. Commercial mortgage-backed securities would be 
another such mechanism, as would portfolio diversification on 
the part of owners of buildings that would own portions of a 
number of buildings across the country. These are all ways to 
spread the risk among a number of different owners, as are 
potential innovations such as catastrophe bonds that would 
allow the sale of part of the risks in a secondary market.
    I do believe that these markets are very deep; they are 
very liquid; they are very innovative; and given a chance, they 
will be very helpful in providing more coverage of these risks.
    Chairman Shelby. Mr. Chairman, the Treasury report also 
indicates that prices for terrorism risk insurance have not 
changed in a manner commensurate with the increase in insurers' 
risk exposure; for example, while insurer deductibles increased 
significantly, average prices only inched up, and prices in 
high risk cities fell considerably. What does this tell us 
about expected pricing if there were to be additional shifts in 
risk in the private sector?
    Mr. Bernanke. Mr. Chairman, I would be careful not to 
extrapolate too far from this data, but it does suggest that as 
more of the risk has been returned to the private sector, 
pricing and availability have not suffered. That suggests that 
the industry is building capacity and can continue to build 
capacity to meet these risks.
    Chairman Shelby. Senator Dodd.
    Senator Dodd. Thank you, Mr. Chairman. And I apologize 
again to both of you here for this interruption this morning 
with our votes. What is the play, Mr. Chairman?
    Chairman Shelby. The Secretary has to leave at 12:15, so I 
was recognizing you right now.
    Senator Dodd. Lucky guy.
    Chairman Shelby. He has been here an hour or so.
    Senator Dodd. I know. We apologize to you.
    Let me, if I can, pick up on this in the report, Mr. 
Secretary. In your report to Congress at numerous points, you 
believe that a private market will develop over time for 
terrorism insurance. My concern is I do not see anything, any 
data in the report or any basis for that conclusion.
    We have not received any testimony in this Committee, and 
the Chairman has been very gracious in listening to a lot of 
different people about this program and what should constitute 
a good program. Nor has there been any discernible activity in 
the marketplace, because certainly, there has been no guarantee 
that this 
program is going to exist in perpetuity. Given the history of 
developing the program in the first place, the reluctance to do 
much about it until this Treasury report came out. Even with 
that, concerns about whether or not we would go forward, how 
hard it was to get in the House; the argument, well, as long as 
this program is around, no market was going to develop. It 
seems to me, given the uncertainty about all of this, you would 
assume that one might begin to develop, at least, out there.
    The reinsurance market, the Reinsurance Association of 
America, and I mentioned this in my opening comments to you, 
there is only about $4 billion to $6 billion in reinsurance 
available today. They state, ``there is no evidence to support 
Treasury's suggestion that the expiration of TRIA will 
encourage the development of a private reinsurance market and 
other risk transfer mechanisms.''
    Just a few months ago, the Federal Reserve Chairman, Alan 
Greenspan, has said, and I am quoting him, that he has yet to 
be convinced the private market alone can adequately insure 
against the continuing threat of terrorism. That was in 
February 17 testimony. A recent report by Standard & Poor's 
rating services concludes that without terrorism risk 
insurance, ``property and casualty insurers will cease to offer 
this coverage or will offer it only at extremely high rates.''
    TRIA is set to expire, as you all know, on December 31. And 
I again quote him here: ``leaving insurers and ultimately 
policyholders without protection in case of another major 
terrorist attack.'' That is Standard & Poor's on February 3.
    In an April 28 report, Moody's noted that insurance brokers 
report that up to 75 percent of policies written since January 
1 have adopted a conditional endorsement that automatically 
voids terrorism coverage if TRIA is not renewed and that the 
number of conditional endorsements is expected to increase as 
the year progresses. These conditional endorsements appear to 
be, and I am quoting here, ``these conditional endorsements 
appear to be an indication that unless TRIA is renewed, premium 
spikes or a sharp reduction in the availability of coverage may 
result.'' That is Moody's conclusion.
    With all due respect, Mr. Chairman, what makes you believe 
that the market is ready? Where in the study can I find this 
information that the market is going to respond to this? And 
could you please tell us how you arrived at the conclusion that 
the private market can and will develop such a market?
    Secretary Snow. Thank you, Senator Dodd.
    The study points out that we have had increasing coverage 
and take-up rates, even as the market has been allowed to play 
a bigger role. This is because the structure of TRIA was 
designed to give the market a bigger role over time with larger 
deductibles built in, going from 7 to 15 percent. And what we 
have observed, and I think this is laid out in the study, is 
that even as the market has taken a bigger role with those 
increasing deductibles, the coverage has expanded.
    We have confidence that that trend would continue as we 
follow the reforms we have suggested of larger deductibles and 
also larger copays. So this is a case where I think the past is 
prologue.
    Senator Dodd. Would you disagree with me at all about what 
I said earlier that we talked about the $31 billion we are 
looking at here, the $4 billion to $6 billion presently out 
there, and thus, the $25 billion gap? Where is that being made 
up? I do not see any evidence of that.
    I agree with you. The idea was earlier, and believe in time 
this will happen or at least hope it does, but I do not see any 
evidence that this was emerging at all. I do not see the data 
that shows that $25 billion gap is going to be closed.
    Secretary Snow. As I say, Senator, we do have experience 
with rising deductibles and we watched the market continue to 
develop and expand, even with those rising deductibles. I think 
that is pretty indicative that the market has more capacity, 
and the basic conclusion of the study is that capacity has 
expanded significantly. The take-up on terrorist coverage was 
27 percent or so, mid-20's in 2002. It is now well over 50. The 
share of insurers who were pricing insurance back in 2002 was 
roughly 20 percent; today, it is about 55.
    Senator Dodd. Let me just make the case that TRIA has been 
working, but your numbers do not jibe here. I do not want to 
keep belaboring this point, but, I mean, I think the fact you 
made the point in this study, and I appreciate it, that TRIA 
actually is doing a good job. It did its job providing that 
product out there at reasonable prices, and that helped 
stabilize that market, and our concern--I am not for a 
permanent program at this point at all, as you and I have 
talked about here, and you do not want that either. I gathered 
in your conversation, that maybe an extension here is what we 
are talking about.
    But I do not want to belabor this point too much with you. 
I just do not see that marketplace picking up the slack. If we 
do not get this done, I do not think there is any likelihood 
that you are going to have that gap that is going to be filled 
here.
    Secretary Snow. Yes, Senator, that is where we would 
differ. We think the market has more capacity, giving it more 
room to operate and giving it more incentives to operate. 
Reducing the implicit subsidy for reinsurance that exists 
today, which is pretty sizeable, is going to create more 
opportunities for the sorts of things that Chairman Bernanke 
just talked about: Mitigation on the part of policyholders, 
risk sharing through financial instruments, and broader 
reinsurance coverage.
    Senator Dodd. I mean, what if I am right, you are wrong? 
What happens to people out here? What happens out here? What 
happens to people if we have an event, and we do not have the 
coverage? What happens?
    Secretary Snow. You are postulating the thing that we are 
asserting will not happen. Coverage has expanded and will 
continue to expand, and we will get a better sharing of these 
risks between the taxpayers and the private sector. The private 
sector, incentivized appropriately, can do more, Senator. That 
is our basic proposal: And to continue the basic model that 
TRIA put in place, which was a temporary program with rising 
deductibles, and to include rising copays, both of which 
provide more room for the market to demonstrate what it can do.
    Mr. Bernanke. Senator, may I add?
    Senator Dodd. Yes, certainly.
    Mr. Bernanke. Just on the point of reinsurance, I think 
reinsurance rates differ by type of insurance. According to the 
Treasury study, commercial multiperil insurance has a 20 
percent reinsurance rate, and workman's compensation has a 24 
percent reinsurance rate. Twenty percent of $31 billion is $6 
billion, which is about the number you cited. So it is not 
clear that reinsurance is unavailable for insurance up to the 
deductible.
    The study also notes that small companies have been able to 
utilize reinsurance at a greater rate than large companies, 
which is consistent with their greater need to diversify and 
also suggests that reinsurance is not being rationed. So, I 
think I would agree with Secretary Snow that there is quite a 
bit of capacity out there, and that once we remove the free 
reinsurance being provided by the Government that market 
reinsurance will take part of its place.
    Senator Dodd. That is pretty speculative.
    Chairman Shelby. Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Mr. Secretary and Chairman Bernanke, I do 
not have the answer, but I have a very uncomfortable feeling 
that the problem is not being sufficiently analyzed. The payout 
if something happens is enormous, so the question becomes how 
are you going to provide for that? I mean, the magnitude is 
beyond other experiences, as I understand it.
    Now, the likelihood may be small, but nevertheless, it is 
likely to be heavily concentrated. I am struck by the fact that 
the British, who are pretty good at analyzing things and 
figuring them out, they have had experience in dealing with 
terrorism over several decades. They have established a 
permanent public-private partnership for dealing with the 
question of insurance against terrorist attacks, Pool Re, an 
industry-supported reinsurance pool with a backstop by the 
Government.
    Now, the London Financial Times reported on July 8 that, 
``a large portion of the insurance claims rising from the 
explosions that ripped through London is likely to fall on Pool 
Re, the government-backed mutual reinsurer for UK terrorism 
risks.'' Now, the Israelis, who have also had, of course, long 
experience in dealing with terrorism, also have a system where 
they provide a permanent government coverage.
    I do not see these pickups coming. The Treasury report 
concludes that the immediate effect of the removal of the TRIA 
subsidy is likely to be less terrorism insurance written by 
insurers, higher prices, and lower policyholder take-up. Well, 
you may say that will be over a temporary period, and then, the 
market will step in and accomplish this. I am not quite clear 
how that is going to happen.
    The President of the Reinsurance Association of America 
recently stated, ``reinsurers continue to view terrorism as a 
risk that is uninsurable unless there are limits to protect 
against catastrophic exposure.'' And that seems to me to put 
the issue pretty well, because the exposure is huge.
    Now, if you are going to set premiums to cover the 
exposure, they are going to accumulate a lot of money that they 
may never be called upon to use, because you may never have the 
incident. On the other hand, if you have the incident, they are 
really going to get socked and socked hard, as the British are 
now demonstrating.
    It seems to me that the Government backup gets the rest of 
the market in a proper balance so that people are paying for 
some coverage, which deals with the beginnings of this thing, 
but they do not have to pay for the coverage of the 
catastrophic amounts. Otherwise, you are going to levy a 
charge. It may never be used.
    Of course, you can say that is the case in all insurance, 
but the levels are a lot more reasonable than what is occurring 
here. How do we get around that problem? How is the private 
market going to pick up this very heavy risk, catastrophic 
potentially?
    Mr. Bernanke. Senator, if I could----
    Secretary Snow. Yes, go ahead, Ben. Maybe I should, because 
I am going to have to just leave in one minute.
    Senator the world is a lot different----
    Senator Sarbanes. Well, I do not want to drive you out with 
my question.
    [Laughter.]
    Secretary Snow. No, no, unfortunately, the conditions that 
drive me out preceded your arrival.
    Chairman Greenspan has been cited. He is talking about a 
really mega-event, beyond, we would stipulate, beyond the 
capacity at the private market. TRIA contemplates that there 
are some events so large that Congress and the Administration 
would have to come back and look at it. Everyone would agree 
with that. We would all agree that there are events of some 
scale and size and risk that are large relative to the capacity 
of any individual insurance company.
    Senator Sarbanes. Now, do I take that to mean that you 
think there should be a bill, a further extension of some sort?
    Secretary Snow. I think there should be reform. I think 
that the reforms that we outlined are the right way to go. They 
would give us the ability to see the private market work 
better. They would encourage mitigation. They would encourage 
financial market developments. We would narrow the lines of 
coverage; and, we would give the market more of an opportunity.
    Earlier, I said, Senator Sarbanes, that we have watched the 
market, even in the face of higher deductibles, expand and take 
on more of the responsibility. This is a matter of getting the 
risk sharing between the private sector and the Government into 
a better posture.
    Senator Sarbanes. But I take it you are asking the Congress 
to enact legislation; is that correct?
    Secretary Snow. Well, I am really saying that we should 
reform the current TRIA system if you extend it.
    Senator Sarbanes. Do you want it extended?
    Secretary Snow. I want the reforms.
    Senator Dodd. You cannot get reforms without extending it.
    [Laughter.]
    Secretary Snow. Well, then, if you extend it, if you extend 
it, it should be reformed.
    Senator Sarbanes. What is your view of not doing anything?
    Secretary Snow. I think the system should be reformed. I 
think that is the prudential thing to do.
    Chairman Shelby. If I can, I think that what we are doing 
is the right thing, listening to the report, listening to your 
views, and we will certainly listen to your recommendations. 
But I personally believe that we do need a program here, and we 
need to have it narrow in scope, and we need to be careful in 
what we do, because if we do not, we will never develop the 
private markets.
    Senator Dodd. Mr. Chairman, can I ask, just before the 
Secretary leaves, because I am curious about this $500 million 
number here.
    Secretary Snow. Right.
    Senator Dodd. The problem is, again, going from $5 million 
to $500 million is a pretty large leap.
    Secretary Snow. Right.
    Senator Dodd. And rather than argue about the number 
itself, I would just be curious on how you arrived at that 
number.
    Secretary Snow. We arrived at that, Senator Dodd, through 
the Treasury experts consulting with industry experts, brokers, 
and industry participants. We looked at it as well, and we can 
give you the references to these people that we talked to. We 
looked at their current and existing limits on existing events, 
and we looked at the evidence of the last 3 years, as the 
market itself has evolved and developed in the face, as I say, 
of higher deductibles.
    So it is judgmental; if you are asking me is it a judgment; 
yes, it is a judgment, but I think it is a well-informed and 
thoughtful judgment.
    Senator Dodd. Well, I would be, you know, I wonder what the 
effect would be on small insurers, because it is not all just 
big companies we are talking about. It would be a pretty heavy 
hit.
    Secretary Snow. Who also tend to insure smaller scale 
events, take on smaller scale risks.
    Senator Dodd. I would be very interested in the data that 
helped you arrive at that.
    Secretary Snow. We will submit that, and I apologize very 
much Mr. Chairman, Senator Sarbanes, Senator Dodd, for the 
prior commitment, Senator Hagel, and I would be delighted--
    Chairman Shelby. Mr. Secretary, you got time for a question 
if he has one from Senator Hagel?
    Secretary Snow. I always have time for Senator Hagel.
    [Laughter.]

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. Mr. Secretary, thank you.
    Senator Sarbanes. That is the right answer.
    [Laughter.]
    Senator Hagel. He experienced some Cornhusker hospitality 
last week, and I understand they treated you well out there and 
that you were a big hit.
    Secretary Snow. Thank you, Senator.
    Senator Hagel. But you did not bring any linebackers or 
quarterbacks with you, I heard.
    I am sorry I am late here, Mr. Secretary, but I understand 
in referencing the Treasury report, which came out, what, a 
week or 2 weeks ago, that Treasury report noted the lack of 
reinsurance coverage on group life and for group life 
companies, and it is my understanding, I watched a little bit 
of this on television here before I came, that you had 
responded to the Chairman saying that you, Treasury, do not 
recommend that we include covering group life in TRIA, and I do 
not know whether that has been covered.
    Chairman Shelby. Go ahead.
    Senator Hagel. And I apologize for taking you back through 
that, but if you could explain that essentially; what do we do 
here if we cannot find that reinsurance element, and what is 
your suggestion if we do not cover it under TRIA?
    Secretary Snow. Senator, under the original TRIA, Treasury 
was asked to do a study and determine what course of action was 
prudent with respect to group life. We were asked to look at 
two criteria: One was the availability of general insurance for 
group life, and two was reinsurance. We found, and we said that 
we should not cover group life unless it was a conjunction, it 
met both tests.
    We found that there was general availability of group life, 
but that there was not general availability of reinsurance; 
and, since the test was the twofold test, we did not include 
group life. Then, going to the broader issue of the 
recommendation, we do not think group life presents the 
accumulation risk that terrorist risk insurance was intended to 
cover, so we do not recommend covering it. We think the 
marketplace can work well in that area if we move the 
Government out and thereby reduce the implicit subsidy and 
encourage a larger role for reinsurance. That is our basic 
view. I know you do not agree with it.
    Senator Hagel. I do not, but more to the point, we are 
going to have to address it and deal with the realities here of 
the market, and I am inclined, as I am sure some of my 
colleagues and others, to find a resolution and have to and 
work with you on this as well and, as you know, Senator Dodd 
and others have led the effort here, and I will continue to 
work with them, and I know you have to go, so thank you for 
allowing me a question. I appreciate it.
    Secretary Snow. Thank you.
    We have given you our study, and we have given you the 
recommendations that we think follow from the study, and we 
look forward to working with the Committee and the Congress as 
you continue to consider this important issue.
    Senator Sarbanes. Mr. Chairman, as Secretary Snow departs, 
let me note Senator Schumer was not able to be with us, because 
he has some amendments on the floor that he is dealing with. He 
is obviously keenly interested in this subject, and he has a 
series of questions he wants to submit for the record.
    Chairman Shelby. Without objection, they will be made part 
of the record.
    Senator Sarbanes. I want to bring that to the Secretary's 
attention, because I know some of them are directed to the 
Treasury.
    Secretary Snow. Exactly, Senator Sarbanes, and Senator 
Schumer and I have talked about that, and I fully contemplate 
further conversations with him as I do with Senator Dodd, 
Senator Hagel, the Chairman, and you.
    Thank you very much.
    Chairman Shelby. Thank you, Mr. Secretary.
    Senator Sarbanes. Mr. Bernanke, could I ask you a couple of 
questions before you go?
    Mr. Bernanke. Yes.
    Senator Sarbanes. Nice to see you here, and congratulations 
on your confirmation.
    Mr. Bernanke. Thank you, sir.
    Senator Sarbanes. Is this the first time you have appeared 
as Chairman of the CEA.
    Mr. Bernanke. It is.
    Senator Sarbanes. Good.
    Chairman Shelby. But not the first time he has been before 
us, been with us.
    Senator Sarbanes. No.
    You noted in your testimony that the 60 percent of the 
policies included terrorism coverage in 2002 and conclude from 
that that it was generally available. I am interested in, first 
of all, whether you know the 60 percent of policies included 
coverage that was comparable in terms of limits and exclusions.
    Mr. Bernanke. No, sir, I am quoting the number from the 
Treasury study, and I merely made the point that insurance 
coverage did not dry up entirely. I do believe that TRIA was 
useful and did enhance the insurance market.
    Senator Sarbanes. Do you know the geographic location and 
risk profiles of the properties covered, the 60 percent by 
those policies?
    Mr. Bernanke. I do not. The Treasury study does, however, 
suggest that premiums between cities, large cities and other 
cities and premiums between so-called ``high risk properties'' 
and ``less risk properties'' did not diverge unduly over this 
period, suggesting some capacity to cover even higher risk 
areas.
    Senator Sarbanes. They may have taken the path of not 
providing the coverage rather than escalating the premiums, 
which they made the kind of judgment about the risk.
    I guess the point I am trying to get at, and I am not 
suggesting a counteranswer, because I just do not know; I mean, 
it is not meant to draw a conclusion, but if the policies were 
in relatively low risk areas in effect, it would be difficult 
to draw the conclusion that terrorism insurance was generally 
available, would it not?
    Mr. Bernanke. Again, I would differentiate between 2002 and 
then the subsequent years. In 2002, there was a good bit of 
insurance being written, but I am not claiming it was the 
optimal amount or the desired amount. TRIA did help to 
strengthen the market. I think TRIA was a good bill.
    As we looked over the next few years, though, we saw that 
generally, availability and pricing improved, and I believe the 
Treasury study showed that that was both the case in high risk 
as well as less high risk areas, despite the fact that the 
exposure to the private industry essentially doubled as 
deductibles went from 7 percent to 15 percent. So, I take that 
as evidence that the industry, over time has been building 
capacity, ability to price these risks, and ability to insure 
these risks.
    Senator Sarbanes. Why do you think the British and the 
Israelis do it the way they do?
    Mr. Bernanke. Senator Sarbanes, different countries use 
different methods. The OECD report suggests that only 5 of 
their 30 members have similar approaches. I would think that in 
the case of the London bombings, as tragic as they were, that 
preliminary estimates of the damages are on the order of 1 to 2 
percent of a major hurricane, and therefore, it seems to me 
something that could have been handled strictly in a private 
market, and the British have decided to provide this backup; 
that is the approach they have chosen.
    Senator Sarbanes. So you do not see the catastrophic size 
as way out of bounds; is that correct?
    Mr. Bernanke. Senator, your point that you actually raised 
earlier, I think, is right on point, which is that I believe 
the insurance markets can handle substantial risks but not 
unlimited risks, and in particular, TRIA as currently written 
is capped at $100 billion, and presumably, a shock above $100 
billion would require the Congress to reconsider the entire 
situation and make priorities about where its available funding 
would go.
    What we are talking about here is creating more exposure to 
the private sector below this $100 billion risk. That number is 
a very high number, but it is not radically different from 
risks that are borne in other kinds of contexts.
    Senator Sarbanes. Do you think we need to pass legislation 
on this issue?
    Mr. Bernanke. On TRIA? I would like to see substantial, 
increased exposure to the private sector of terrorism risks. I 
would be happy with any legislation that accomplished that 
objective.
    Senator Sarbanes. Let me pursue the question for a minute, 
because sometimes, the easiest thing in the Congress is no 
action, you know? What is your view of a scenario in which the 
Congress failed to take action on this issue and the program 
simply expired?
    Mr. Bernanke. I think an expiration would probably require 
some transition period before it was finally expired to give 
the markets ability to adjust. I think the more likely 
outcome----
    Senator Sarbanes. That means you think we need legislation.
    Mr. Bernanke. I am comfortable with legislation that 
increases the exposure of the private sector to these risks.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Hagel, do you have any questions 
for the Chairman?
    Senator Hagel. No questions.
    Chairman Shelby. Mr. Chairman, we appreciate first your 
indulgence in waiting, and we will continue to work with you on 
this issue that we think is very important.
    I think it would be unacceptable for us to not do anything, 
and we are going to try to come with a bill, a meaningful bill, 
a responsible bill and hope that with time that the private 
market will assume more and more of the risks.
    Senator Sarbanes. Is the Council of Economic Advisers still 
banished, exiled, or still outside the Executive Office 
Building?
    Mr. Bernanke. I have a personal office that is in the 
Executive Office Building, which is very useful, and we use 
that to----
    Senator Sarbanes. But you are separated from all your 
staff.
    Mr. Bernanke. But my staff, unfortunately, are a block 
away. We make the best of that.
    Senator Sarbanes. Are they scheduled to come back in? Is it 
because refurbishing is going on?
    Mr. Bernanke. It is entirely because of refurbishing and 
reconstruction, and I do not think that is about to be 
completed. I think there is still some time.
    Senator Sarbanes. We are trying to be helpful to you on 
that issue.
    Mr. Bernanke. Senator, I would be happy to accept any help 
you are willing to offer on that front.
    Chairman Shelby. Mr. Chairman, how is the transition going 
from the Federal Reserve, a Member of Board of Governors, as 
you were, very active, to the Chairman of the President's 
Council of Economic Advisers?
    Mr. Bernanke. The new job is very exciting and gives me a 
wide range of opportunities to look at different issues like 
this one, and I want to thank you again for your speedy 
confirmation.
    Chairman Shelby. Senator Bennett, you are just in time.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Yes; thank you, Mr. Chairman. I apologize 
for being late. The votes disrupted all of our mornings. But I 
am still grateful for the opportunity.
    I will not go into any particular details. I am sure they 
have been discussed at great length, and I will read the record 
with great interest. But let me just get your reaction to one 
thought that has occurred to me, and I have discussed it with 
Secretary Snow privately.
    If we do not have a formal TRIA program, and there is 
another September 11, that is, a major disaster that is in the 
$40 billion category, remembering what happened after September 
11 around here, the Congress went to great lengths to assure 
everybody that they would be made whole. The speed with which 
the $40 billion for New York and Virginia went through here was 
really astonishing.
    I believe that same thing would happen, I say, if there 
were an event, somebody flew an airplane or found a rogue 
cruise missile or whatever disaster you might think of in San 
Francisco to the TransAmerica Building, the California Senators 
would be here saying you have to help us, and every one of us 
would say yes, we will help you.
    I remember one Senator saying at the Senators' meeting we 
had after September 11 consider me the third Senator from New 
York. I will fight as hard as you do for these appropriations.
    Senator Sarbanes. I hope they got it down and recorded it.
    [Laughter.]
    Senator Bennett. Well, yes.
    Now, my concern is, for those who say, well, let us not 
have the Federal Government involved in this; this is something 
the market should do because we do not want to put the 
taxpayers on the hook, that experience says to me the taxpayers 
are going to be on the hook, emotionally if not financially, 
but emotion will turn to finance really quick, as it did after 
September 11.
    Now, I am not begrudging the $40 billion, but I can tell 
you that the emotion around here was so strong that if somebody 
had said $50 billion, no, it has to be $60 billion, there would 
not have been very many who would have stood up and said, well, 
I am going to look at the pocketbook rather than the problem in 
New York, and $60 billion is too much. I do not know whether 
$40 billion was the right number or not, but $40 billion is 
what we did.
    All right; I am rambling, but let me get to the point. I 
think, paradoxically, that extension of this program with a 
specific number in it that will cause the industry itself to 
come in and backfill, if you will, up to that number actually 
would be better for the taxpayers than if there were no formal 
action, because then, we could say, well, the legislation is in 
place; there is a taxpayer involvement; but there is a $30 
billion, a $40 billion, or a $50 billion, if you will, 
deductible from the taxpayers, that the market has now, in an 
orderly fashion, filled in.
    If we do not put that deductible in place, the market will 
not fill in anything, and the taxpayers will be on the hook for 
the whole amount. React to that observation. Am I right or 
wrong? I mean, I think am right on the emotion, but am I right 
on what the market might do?
    Mr. Bernanke. Senator, I think I broadly agree with you. I 
think what we want to do is get the private sector more 
involved to provide more insurance and other types of 
mechanisms for sharing risk and compensating losses so that 
should an attack happen, the private sector will provide 
substantial funding for reconstruction and for compensation, 
leaving the Government without these huge obligations through 
TRIA but with the money available to do whatever is necessary 
on a prioritized basis for humanitarian assistance, for 
reconstruction, and for getting the economy back on its feet.
    So, I think the purpose of TRIA is not to say we are 
throwing the country to the wolves; the point is to get both 
the private sector's insurance capacity and the Government's 
reserve for emergencies of all kinds--both of those things--
available should an attack occur.
    I believe I agree with the philosophy you are saying, and I 
think a big part of that, again, is to stop suppressing the 
private market and allow the private market to come back in to 
this process in a much bigger way than it is now.
    Senator Bennett. So if we set a Federal number at a 
reasonably high level, then, the private market says okay, we 
can fill up to that number. If we leave the high level off, the 
private market says we do not know quite where to go, and the 
taxpayers, I think, in the event of a real disaster would end 
up paying more than they would if we extend TRIA in a logical 
fashion.
    Mr. Bernanke. We have a $100 billion limit now on TRIA. 
Above that level, the Congress is going to simply reconsider 
the entire situation. We have a number of mechanisms already 
for dealing with emergencies such as FEMA, for example.
    Senator Bennett. Right.
    Mr. Bernanke. So what I would suggest is not that we try to 
preprogram how we respond to a shock of that size, but rather 
that we simply--by putting more of the cost onto the private 
sector--leave more capacity for the Government to respond ex 
post, after the fact, in the most effective way, given the 
circumstances.
    Senator Bennett. Okay; well, I am for extension of TRIA. I 
appreciate the Administration's indicating their support for 
extension, and we will argue over the details.
    Thank you.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. I have nothing further.
    Chairman Shelby. Mr. Chairman, we appreciate your 
appearance here, and again, we apologize for the delay.
    Mr. Bernanke. Not a problem, sir.
    Chairman Shelby. We will see you again. Thank you, sir.
    The hearing is adjourned.
    [Whereupon, at 12:41 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record:]

               PREPARED STATEMENT OF SENATOR MEL MARTINEZ

    Thank you, Mr. Chairman, for holding this important hearing. You 
and your staff have conducted a very comprehensive examination of this 
issue. I also commend the work of the Treasury Department in preparing 
its report for the Congress. I am going to keep my opening remarks 
brief so that we can hear from our witnesses.
    As we have observed in recent years, Federal and State governments 
have a responsibility to respond to catastrophic events. Whatever the 
type of assistance provided, the goal is the same--to return to 
normalcy and protect ourselves going 
forward by learning from what happened. On Monday, I spent the day in 
Florida traveling to several emergency operation centers across the 
panhandle visiting with constituents impacted by Hurricane Dennis. In 
Florida, we never know what the next hurricane could bring, but 
Floridians do everything they can to get back to life as usual as 
quickly as possible and to learn from the hurricane for future storms. 
To assist Floridians, Governor Bush declared a state of emergency for 
the counties hardest hit to initiate relief efforts.
    On a much larger scale, Congress responded to the terrorist attacks 
on September 11 by passing a temporary program to help the private 
property and casualty insurance companies rebound after the 
unprecedented premiums they paid out in the last months of 2001. As 
Secretary of HUD, I participated in the efforts to assist lower 
Manhattan and its businesses recover and rebuild. What happened that 
day was unimaginable and after the immediate outpour of Government 
assistance, the Congress had to develop a way to protect the insurance 
industry against future events.
    Over the last 3 years, the majority of property-casualty insurance 
policyholders took up terrorism insurance--because TRIA made it 
available and affordable--and the insurance industry has now reached a 
point where its surplus has returned to pre-September 11 levels--making 
them financially strong enough and better able to bear unexpected 
losses.
    The Treasury report made clear that while TRIA has been effective 
in fulfilling what it was originally intended to do, the future 
existence of a TRIA program discourages the private markets from 
developing a long-term solution.
    We exist in a world that will always have risk. Hurricanes, stock 
market investments and potential terrorist attacks all carry risk. It 
is our responsibility to determine how we hedge against those risks and 
who bears the financial risk that would accompany another terrorist 
attack.
    I understand that terrorism poses a unique risk potential. We must 
find a way to allow the marketplace to develop while at the same time 
be mindful of the potential for catastrophic losses of such magnitude 
that may require Government intervention.
    Thank you. I look forward to the testimony.

                               ----------

               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Chairman Shelby, Ranking Member Sarbanes, thank you for holding 
this important hearing today on terrorism risk insurance.
    It has been almost 4 years since the September 11 attacks that 
prompted the passage of the Terrorism Risk Insurance Act. And while we 
have been fortunate here in the United States that no events have 
triggered the use of this Federal backstop, the bombings in London last 
week, the Madrid train bombing last year, and the nightclub bombing in 
Bali in 2002, each serve as painful reminders of the reality of the 
ongoing war on terror, and the fact that attacks can happen anywhere at 
anytime.
    Prior to September 11, the risk of terrorism was not a factor when 
insurers wrote policies. However, in the post September 11 environment, 
the availability of affordable insurance for terrorism risks has become 
a necessity.
    The war on terror involves protecting our homeland and protecting 
our citizens. Recent polls show that Americans believe that more 
attacks on the United States are very likely. In light of the current 
environment, it would be both unrealistic and premature to conclude 
that a Federal backstop is no longer necessary. Moreover, with less 
than 6 months before its expiration, it is irresponsible for the 
Administration to determine that extending TRIA is not warranted absent 
significant changes, and to suggest that it is appropriate to shift the 
burden of insuring against the risk of terrorist attacks solely to the 
private insurance market.
    At this juncture, I believe we continue to need a program like what 
we have established with TRIA. This week, I joined with Senators Dodd 
and Bennett, and nine other Members of this Committee in cosponsoring 
S. 467 which extends the program, and would enable the Presidential 
Working Group on Financial Markets to make long-term recommendations 
for Congress to consider.
    S. 467 would also direct Treasury to include group life products in 
the program. As I have reiterated over the past several years, it is 
critical that we create conditions that permit the private insurance 
markets to continue to offer group life insurance coverage to employees 
at high risk of attack. Moreover, the lack of affordable reinsurance 
for group life products calls into question the Administration's 
position that TRIA is crowding out innovation that would otherwise 
enable the industry to offer insurance for terrorism risk without a 
governmental backstop. Reinsurance has essentially evaporated for the 
group life sector, which Treasury specifically chose not to include in 
the terrorism risk insurance program, and thus was not hindered in its 
pursuit of market innovations. We should be working to create a 
marketplace where reinsurance can reemerge for group life products, 
rather than jeopardize the TRIA-facilitated appearance of reinsurance 
for products, like workers compensation, which are comparable to group 
life.
    That said, I certainly appreciate that innovations within the 
insurance industry may be part of the long-term solution, and we 
certainly should facilitate that as we go forward. I think the time has 
come for Congress to review the current regulatory landscape of the 
insurance industry to ensure that it does not unnecessarily restrict 
innovation, and I am pleased that Senator Dodd's legislation is 
consistent with that objective--extending TRIA for a period of time 
sufficient for Congress to begin looking at modernizing the regulatory 
scheme for insurance while it also reviews longer term solutions to the 
challenge of insuring against acts of terror.
    Because of the random and unpredictable nature of terrorism, I am 
not yet convinced that the private sector can adequately or accurately 
assess terrorism risk in the absence of a Federal backstop. Estimating 
the likelihood of attacks or the extent of loss is difficult, if not 
impossible. Now is not the time for the Administration or Congress to 
leave the private insurers to go it alone.
    I look forward to hearing from today's witnesses.

                               ----------

                PREPARED STATEMENT OF SENATOR JACK REED

    Terrorism Risk Insurance is one of the most important economic and 
national security issues we face. Terrorism is still a very real threat 
in this country. The bombings last week in London serve as a reminder 
that enemies remain who are committed to threatening our security and 
our way of life. September 11 was not only an attack on the American 
people, but it was also an attempt to undermine our economy. Terrorist 
will undoubtedly try again.
    We live with the threat of terrorism for the foreseeable future and 
Congress has a critical role in insuring that our economy is protected 
from the potential dislocations from a terrorist attack.
    I am proud to be a sponsor of the Dodd-Bennett bill because I 
believe that we must extend the Terrorism Risk Insurance Act and 
protect our economy from the threat of terrorism.
    Everyone agrees that the TRIA program has worked. TRIA helped 
stabilize the insurance markets after September 11 and has strengthened 
them since then. The question facing us today is how to proceed for the 
future and what form the TRIA program should take going forward. I 
think there are several facts that are critical to this debate. 
Terrorism is a major and continuing threat that we cannot ignore.
    Protecting our national security is first and foremost the 
responsibility of the Federal Government. Other nations have looked at 
this problem and have chosen to provide a government backstop program. 
Unlike some other types of insurance coverage, regardless of how 
prudent a policyholder is or how much he acts to protect against a 
terrorist attack, the policy holders ability to protect themselves is 
limited.
    While we all prefer to allow markets to function without Government 
intervention when possible, this is a classic market failure. Unlike 
the actuarial data for floods, earthquakes, hurricanes, and life 
expectancy, no one can quantify the likelihood of a terrorist attack 
because it is less predictable and there is no historical data to allow 
for an accurate assessment. If we cannot predict the likelihood and 
policyholders have a minimal role in protecting themselves, how can we 
create a market to insure against it? And perhaps most importantly, we 
cannot risk the potential economic dislocation of getting this wrong.
    At a recent testimony, Chairman Greenspan said that there are 
certain instances in which markets do not work and there is no 
compelling evidence that the market can be made to work.
    In a June 2005 Special Comment, Moody's stated ``Almost 
universally, private market reinsurance is not being utilized to cover 
terrorism risk below companies' TRIA deductibles. Consistent with our 
2003 survey, Moody's would still characterize the proportion of 
terrorism risk being shifted from primary insurers to private markets 
as low.''
    I believe there are some modifications that can and should be made 
to this program within the framework of the original program. However, 
we should not throw out the baby with the bath water. I am no more 
convinced that the private markets are any better equipped today to 
effectively insure against terrorism without a Federal backstop than 
they were after September 11.
    We should reauthorize TRIA and examine the appropriate Federal role 
for the future. We have an obligation to the American people to protect 
our economy. I believe there probably will need to be a continuing 
Federal role because the markets will not be able to adequately insure 
against the risks of terrorism in a fair or affordable manner.
    Mr. Chairman, I want to raise one more note of caution. We should 
reauthorize TRIA in a bipartisan and expeditious fashion without 
extraneous and controversial issues. As we learned in 2002, tort reform 
provisions will only impede the legislative process and threaten the 
extension of this important program. I have supported a number of legal 
reform measures, but we should keep this legislation clean and not 
weigh it down with unnecessary and contentious tort reform provisions.
    I look forward to hearing the testimony of the witness.

                               ----------

            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER

    Do you know that under the Treasury new trigger proposal many of 
our world's most recent terror attacks would not be covered? London 
would not be covered. Madrid would not be covered. I take issue with 
the fact that you only collected data until February 2005 several weeks 
short of the end of the first business quarter.
    The bottom line is that I am absolutely open to a serious 
consideration of minor tweaks to improve the TRIA program. But, I am 
not willing to accept any drastic changes that are based on incomplete 
data, information driven by ideologues, or information that simply 
lacks empirical evidence. I mean you said it yourself, the program has 
been effective, it has been a success.
    Mr. Chairman, as we move forward I want us to remember why this 
program was established in the first place. It was established to 
create a public/private partnership between business and Government 
that would provide a safety net to allow us to bounce back from a 
terrorist attack with little market disruption and minimal impact on 
our overall economy. That need has not changed. We know what happens 
when there is no terrorism insurance, because it happened in 2002. In 
that year, the President himself said that the lack of terrorism 
insurance cost our economy tens of billions of dollars and 300,000 
construction jobs.
    We, in government, have a responsibility to get this done to 
protect our Nation's businesses and workers.
    We have a responsibility to find a long-term solution because 
terrorism is a long-term problem.
    Until our Government can declare that we are no longer at risk of a 
terror attack, no longer in need of the Department of Homeland 
Security--we will continue to be in need of TRIA.
    But most of all we have a responsibility to create policies to 
protect our policyholders--they are our businesses and property owners. 
We should not be in the business of placing the financial burden of 
fighting the war on terrorism on our private citizens.
    If you look at the history of war in this country that has never 
been the case.

 During World War II we provided a program called the War Risk 
    Insurance program that provided insurance for property damage here 
    in the United States caused by German or Japanese attacks.
 During the Vietnam War we provided an insurance program to 
    cover commercial airplanes that flew into and out of Vietnam.
 And, today we have a first dollar loss insurance program for 
    the airline industry to cover losses caused by terrorism in the 
    United States, which is expected to be reauthorized at the end of 
    August.

    London showed us that the reauthorization of TRIA should be one of 
this country's highest priorities.
    Yesterday, during the House Financial Services Hearing, Secretary 
Snow seemed even more supportive of moving a TRIA in the coming weeks. 
Maybe in light of the recent attacks we all see there is a greater need 
for the reauthorization of TRIA sooner than later.
    So Mr. Chairman one of the things I would like to take away from 
this hearing today is a commitment and a timeline to get this done in 
the next few weeks. Every day this does not happen--our businesses, 
workers and economy are at risk.
    Thank you.
                               ----------

                   PREPARED STATEMENT OF JOHN W. SNOW

               Secretary, U.S. Department of the Treasury
                             July 14, 2005

    Thank you, Chairman Shelby, Ranking Member Sarbanes, and other 
Members of the Committee. I appreciate the opportunity to discuss the 
Treasury Department report on the Terrorism Risk Insurance Act (TRIA).
    As you know, President Bush signed TRIA into law in November 2002 
to help safeguard America's economy following the terrorist attacks of 
September 11, 2001. The September 11 losses led the insurance industry 
to reduce its exposure to future losses largely by excluding coverage 
of terrorism risk in many policies. The pullbacks in terrorism coverage 
and the quotations of rapidly increasing premiums raised concerns that 
this period of adjustment to the reality of global terrorism risk in 
the insurance market could have a negative effect on the economy.
    In response, TRIA was passed. It was meant to address any market 
disruptions and ensure the continued widespread availability and 
affordability of property and casualty insurance for terrorism risk, 
and to allow a transitional period for the private markets to 
stabilize, resume pricing of such insurance, and build capacity to 
absorb any future losses, while preserving State insurance regulation 
and consumer protections.
    TRIA required the Treasury Department to assess the effectiveness 
of the Terrorism Risk Insurance Program. It also required Treasury to 
assess the likely capacity of the property and casualty insurance 
industry to offer insurance for terrorism risk after termination of the 
Program.
    The report finds that TRIA has been effective in meeting its goals 
of supporting the industry during a transitional period and stabilizing 
the private insurance market. Consistent with TRIA's design to 
encourage the development of the private market, the Administration 
opposes extension of the program in its current form. Extending TRIA in 
its current form is likely to discourage the private market development 
needed to deal with the risk of terrorism. The Administration has 
outlined principles that any extension should recognize and we look 
forward to discussions with the Congress on them. Before I review the 
main findings of the report, however, I would like to discuss the 
approach that the Treasury Department took in the course of evaluating 
TRIA.

Treasury Approach to TRIA Evaluation
    Treasury contracted with an outside survey research firm to conduct 
two independent, nationally representative surveys. One survey sampled 
insurers in the commercial property and casualty line, which is 
eligible for the Federal reinsurance provided under the program. The 
other survey sampled policyholders, businesses, and other organizations 
that purchased commercial property and casualty insurance in TRIA-
eligible lines. Respondents were asked to provide information on an 
annual basis from 2002 (prior to passage of TRIA), to the first 2 
months of 2005. The data therefore give a unique, comprehensive 
overview of the availability and affordability of terrorism risk 
insurance coverage in the private market.
    From insurers, the surveys collected information on the amount of 
terrorism coverage written, the cost of terrorism coverage, terms and 
conditions on terrorism coverage, and the purchase of reinsurance. From 
policyholders, we collected information on take-up and cost of 
terrorism coverage, the characteristics of firms and other 
organizations that purchase terrorism coverage, special terms and 
conditions associated with that coverage, reasons why the mandatory 
coverage offer was declined, and loss-mitigation efforts.
    To safeguard the confidentiality of the business information 
requested in these surveys, Treasury took great care to ensure that the 
data were assembled at arm's length from the Government. All 
identifying information was removed or masked prior to analysis by 
Treasury staff and officials.
    I have been insistent throughout this process, consistent with 
Congress' direction to us in TRIA, that we draw upon as many sources of 
information and input as possible. Treasury has in fact consulted with 
a broad range of experts representing the insurance industry, the 
National Association of Insurance Commissioners (NAIC), policyholders, 
and taxpayer groups in developing the survey instruments. Preliminary 
survey instruments were reviewed by insurance industry representatives, 
NAIC representatives and others experts, including the American 
Insurance Association (AIA), and the Alliance of American Insurers 
(AAI) after consultation with its members. Members of the Coalition to 
Insure Against Terrorism (CIAT) also met with Treasury staff to review 
the policyholder survey.
    We are very pleased with the extensive collaborative process that 
Treasury undertook to conduct this assessment, and believe that it 
reflects fully the extensive input of the industry and other groups. 
The completed survey results, and information derived from these other 
sources forms the basis of the report to Congress.

Structure of TRIA
    TRIA established a temporary Federal program of shared public and 
private compensation for insured commercial property and casualty 
losses resulting from foreign acts of terrorism. TRIA represents a form 
of publicly provided and subsidized terrorism risk reinsurance, which 
essentially transfers risks associated with terrorism losses from the 
private to the public sector (taxpayers).
    Under TRIA, companies that provide commercial property and casualty 
insurance are required to offer (make available) terrorism coverage on 
the same terms and conditions as offered in their non-TRIA coverage. To 
be eligible for TRIA reinsurance, an act of terrorism must be certified 
by the Secretary of the Treasury, with the concurrence of the Secretary 
of State and the Attorney General, and must have resulted in aggregate 
property and casualty losses of $5 million or more. TRIA defines an act 
of terrorism as (1) a violent act or act that is dangerous to human 
life, property, or infrastructure, that (2) has resulted in damage 
within the United States or outside of the United States in the case of 
an air carrier or vessel (as defined by TRIA) or on the premises of a 
U.S. mission, and (3) has been committed by an individual or 
individuals acting on behalf of any foreign person or interest, (4) as 
part of an effort to coerce the U.S. civilian population or influence 
the policy or affect the conduct of the U.S. Government by coercion.
    The Federal Government would have to cover 90 percent of insured 
losses beyond an insurer deductible, up to $100 billion per year. In 
the first full program year (2003) the deductible was 7 percent of 2002 
premiums, in 2004 the deductible was 10 percent of 2003 premiums, and 
in 2005 the deductible is 15 percent of 2004 premiums. The purpose of 
the graduated deductible amounts was to encourage development of 
private market capacity over time. Insurers are also liable for 10 
percent of losses above the deductible threshold.
    In the event that the Federal Government provides compensation for 
insured losses for an act of terrorism under the program, TRIA requires 
recoupment of at least a portion of the Federal compensation through 
policyholder premium surcharges. Recoupment is mandatory in cases where 
the aggregate industry insured terrorism losses (deductibles and 
copays) are below a specified aggregate retention amount. The annual 
aggregate retention amount was $10 billion for 2003, $12.5 billion for 
2004, and is $15 billion for 2005. The Government is required to 
collect the difference between these recoupment amounts and the 
aggregate industry insured terrorism losses through an industry-wide 
surcharge, not to exceed 3 percent of the premium paid on a policy. If 
the aggregate industry insured terrorism losses exceed the aggregate 
retention amount, the Federal Government may require recoupment at the 
discretion of the Secretary of the Treasury, but the statute does not 
require recoupment.
    To encourage the development of private market capacity over time, 
provisions in TRIA have gradually shifted more of the risk to the 
private sector.

Impact of TRIA on Insurance Markets
    The Treasury Department report finds that the program provided 
support in a transitional period, during which the capacity of the 
insurance industry to write terrorism risk insurance has improved.
    I will elaborate on four main findings in the report:

 Industry capacity to provide coverage for terrorism risk has 
    improved, as has take-up of such coverage.
 Insurers are increasingly pricing terrorism risk insurance, 
    and the price of coverage with an explicit charge has decreased.
 Industry surplus has improved.
 Many insurers reinsure a substantial portion of their retained 
    risk under TRIA, but overall reinsurance purchases have not 
    increased substantially.

Availability and Take-up of Terrorism Coverage
    Results from both the survey of insurers and the survey of 
policyholders show that the availability and the take-up (purchase) of 
terrorism insurance increased while TRIA has been in effect.
    Insurers now provide terrorism coverage on a greater share of 
commercial property and casualty insurance policies than in 2002 (the 
year before TRIA). While 60 percent of policies written in 2002 
included terrorism insurance coverage, fully two-thirds of such 
policies included such coverage in 2004. Terrorism insurance was also 
more widely available in the market, as the share of insurers providing 
any terrorism coverage rose from 73 percent to 91 percent over the 
period.
    Policyholders as well are now more likely to purchase terrorism 
risk insurance than in 2002. The data show a doubling in the take-up 
rate of terrorism risk coverage: From 27 percent of policyholders in 
2002 to 54 percent of policyholders by 2004. The finding that just 
under half of policyholders do not take-up such coverage does not 
necessarily reflect a problem in the market. The decision to purchase 
terrorism insurance reflects a tradeoff between the benefits and cost 
of the coverage. Firms that perceive a low risk of terrorism attacks or 
that have some form of self insurance (for example, through diversified 
portfolios) may simply not place a high value on terrorism insurance. 
It is useful to note that TRIA did not mandate the purchase of 
terrorism insurance, but rather that such coverage be made available.

Pricing and Cost
    Both insurer and policyholder surveys show that insurers 
increasingly began pricing terrorism risk insurance during the time 
TRIA was in effect. More than 75 percent of insurers providing coverage 
for terrorism risk in 2002 did not charge for it, but only 40 percent 
in 2004 provided coverage for free. These numbers are very similar to 
those reported by policyholders.
    The average cost of terrorism insurance (measured as the share of 
total premiums paid for terrorism coverage) generally rose during this 
period. Overall, insurers reported costs ranging from 0.9 percent of 
premiums in 2002 to 1.8 percent by 2004. Among insurers who charged for 
terrorism insurance, the share of premiums charged for terrorism 
coverage first declined from 3.7 to 2.4 percent of premiums between 
2002 and 2003, but then increased to 3.1 percent of premiums by 2004.
    The average costs reported by policyholders increased from 1.2 
percent of premium in 2002 to 1.6 percent in 2003, and further to 1.7 
percent of premium by 2004. Among policyholders who reported paying for 
terrorism coverage, cost declined steadily over the period: From 4.0 
percent of premium in 2002 to 2.8 percent in 2003 and further to 2.7 
percent of premium in 2004.
    Policyholders located in high-risk cities faced overall declining 
costs for terrorism risk coverage that varied from 2.8 percent of 
premiums in 2002, 3 percent in 2003 and 1.9 percent in 2004.

Industry Surplus and Reinsurance
    Industry surplus, a key source of insurer capacity, has returned to 
pre-September 11 levels. Insurers are financially stronger and more 
able to bear unexpected losses than they were prior to the enactment of 
TRIA. Reinsurance, another important component of an insurer's capacity 
to absorb losses, has not increased substantially, however. Seventy 
percent of insurers reported purchasing reinsurance for terrorism risk 
in 2003, but only 65 percent in 2004 reported purchasing reinsurance in 
2004. Preliminary data from the first months of 2005 are encouraging 
and suggest a rebound to 75 percent. Smaller and medium-sized insurers 
generally reported greater use of reinsurance for terrorism risk 
exposure (TRIA deductibles and copayments) between 2003 and 2005. 
During this same period, however, larger insurers reported less use of 
reinsurance for terrorism risk exposure.

Summary
    The findings from the surveys of insurers and policyholders point 
to the success of TRIA in achieving its short-term goals. TRIA 
effectively ``addressed market disruptions and ensur[ed] the continued 
widespread availability and affordability of property and casualty 
insurance for terrorism risk.'' While we do not ascribe a direct causal 
effect to TRIA, we note that insurer financial strength has improved 
substantially over this period. More generally, TRIA allowed both 
insurers and policyholders time to adjust to the post-September 11 view 
of terrorism risk.
    TRIA provisions shifted an increasing share of expected terrorism 
losses back to the private sector, as the deductible was increased from 
7 percent of premiums in 2002 to 15 percent of premiums in 2004. Had 
there been no improvement in capacity, we should observe a pullback of 
terrorism coverage in response to this shift in cost. The expansion of 
terrorism risk coverage availability and take-up, and the decline in 
cost even as the TRIA deductible has increased therefore highlights the 
improvement in the industry's ability to cover terrorism risk

Industry Capacity to Cover Terrorism Risk After TRIA
    Congress also directed Treasury to assess the likely capacity of 
the property and casualty insurance industry to offer insurance for 
terrorism risk after expiration of the program. TRIA provided a Federal 
backstop for terrorism losses that effectively subsidized terrorism 
risk insurance. It is reasonable to expect that the removal of the 
subsidy will result in adjustments in coverage and pricing. In the 
Treasury report, we present a framework to evaluate the impact of a 
TRIA sunset in more detail, and provide evidence from our surveys and 
from insurance industry statistics, data, and discussions with industry 
and other experts. Two important determinants of insurers' ability to 
effectively write coverage for terrorism in the near-term are the 
ability to model terrorism risk and the industry's financial capacity--
including both surplus and access to reinsurance--to cover terrorism 
losses.

Modeling Terrorism Losses
    To provide and price insurance efficiently, insurers should be able 
to quantify their exposure to losses from terrorism risk. The primary 
tool available for quantifying loss exposure is modeling terrorism 
risk. Our assessment of developments in risk modeling over the past few 
years is positive, but we note that challenges do remain.
    Modeling terrorism risk has two critical components: The ability to 
identify and quantify the severity of an event in terms of insurers' 
losses, and the probability of the loss occurring. Our study concludes 
that insurers' ability to identify and quantify the severity of an 
event in terms of insurers' losses has improved greatly. In particular, 
insurers are much better able to assess their exposures or 
accumulations of risk for a given terrorist event on an overall and 
individual customer basis. The industry--particularly the primary 
insurance industry--has made great progress in tracking aggregate 
exposure by location to estimate exposure to losses from physical 
damage and considerable progress in tracking aggregates of employees 
down to the level of individual locations to estimate exposure to 
workers' compensation losses. Modelers have created and implemented 
sophisticated probabilistic loss estimates that are said to take 
account of terrorists' shifting goals and strategies. Insurers writing 
coverage for high risk exposures are able to use multiple methods of 
assessing terrorism risk. This is important because it allows insurers 
to more effectively underwrite coverage. We acknowledge that the 
industry faces some difficulty in assessing the probability of the loss 
from terrorism. The uncertainty surrounding their predictions reduces 
the usefulness of these models.

Financial Capacity
    An insurer's capacity to write coverage is limited to the maximum 
coverage it could provide, while retaining its ability to meet current 
and future obligations to its base of policyholders. An important 
determinant of insurers' capacity to cover terrorism losses is 
financial strength, which incorporates both balance sheet strength and 
operating performance. The financial health of the insurance industry, 
especially surplus, has improved greatly in the past 3 years. Among 
insurer groups providing coverage in TRIA-eligible property and 
casualty lines, surplus was higher in the third quarter of 2004 than it 
was in the third quarters of 2001, 2002, and 2003. Between the 3rd 
quarter of 2001 and the 3rd quarter of 2004, surplus increased from 
$256 billion to $341 billion. Measures of the industry's capacity to 
cover terrorism risk, including the ratio of net premiums to surplus, 
the return on surplus, and the capital adequacy ratio (accounts for 
underwriting, investment and credit risk) have all improved since the 
losses following the September 11 attacks.
    By purchasing reinsurance, insurers can write additional coverage 
without increasing their financial holdings. Our survey results show 
that reinsurance is available, and purchased, for a sizable portion of 
the retained risk under TRIA. Seventy percent of insurers purchased 
reinsurance for TRIA-eligible risks in 2003. The results also indicate, 
however, that over the time period covered by our study, purchases of 
reinsurance have not increased substantially.

Insurance Market Outcomes
    The expiration of TRIA will change the business environment in 
which insurers operate and will therefore change their behavior. 
Insurers will likely consider factors such as the possibility of 
insolvency from terrorism losses given the levels of surplus available 
and the effect on credit ratings. Experience with natural catastrophe 
risk underwriting and assignment of agency ratings suggests that in 
order to avoid ratings downgrades, insurers may significantly alter 
their approach to terrorism risk insurance after TRIA's expiration. 
Among the changes insurers may institute are increasing the use of 
private reinsurance, building surplus by tapping into capital markets, 
and raising premiums or placing exclusions on some policies.
    Our surveys included direct responses on the availability of 
coverage after the expiration of TRIA. Responding to questions about 
policies written in early 2005 that continue into 2006, nearly 50 
percent of insurers reported that they are not writing coverage for 
terrorism risks in 2006 (after the scheduled expiration of TRIA) that 
is similar to the coverage they write under TRIA. One-quarter of 
policyholders with terrorism risk coverage indicated that their 
coverage excludes terrorism coverage after the expiration of TRIA.
    TRIA's expiration will conclude the transitional assistance first 
provided to the 
insurance markets in the uncertain economic environment of 2002. While 
the immediate effect of the removal of the TRIA subsidy is likely to be 
less terrorism insurance and, higher prices, we expect that over time 
the private market will develop additional terrorism insurance 
capacity. We anticipate that the initial response of premiums in the 
market will spur the buildup of surplus as insurers tap into capital 
markets; and the development of additional private reinsurance and 
other risk shifting mechanisms.

Macroeconomic Effects
    We do not believe that the elimination of the Federal terrorism 
risk reinsurance subsidy is likely to have a discernable macroeconomic 
effect. In late 2001 and 2002, there was concern that there could be 
macroeconomic effects associated with the transition between a world in 
which terrorism coverage was provided for a negligible price and one 
where terrorism risk was considered a nonnegligible risk. The economic 
climate during the discussion of TRIA and its enactment was highly 
uncertain. Industrial production had peaked in mid-2000, and by 
September 2001 had already fallen more than 5 percent. The terrorist 
attacks of September 11 created macroeconomic uncertainties that most 
analysts believed would translate into a further sharp downturn in 
economic activity that would last at least two additional quarters. 
Nonresidential building activity tumbled about 33 percent at an annual 
rate in the fourth quarter of 2001, and continued to experience 
declines well in excess of 15 percent in the subsequent three quarters. 
It was difficult at the time to assess whether the substantial declines 
in nonresidential building were due to the chilling effect of terrorist 
activity, terrorism insurance issues or the result of a cumulative 
unwinding of activity more typical of a recession and even the excesses 
of the late 1990's.
    Helped by tax cuts and monetary stimulus, the economy has since 
improved substantially. GDP growth rose from just 2.3 percent in 2002 
to 3.9 percent in 2004 (fourth quarter over fourth quarter). The 
unemployment rate, which was 6 percent in December 2002, fell to 5.1 
percent in May 2005. However, despite the rising economy and the 
enactment of TRIA, nonresidential building has rebounded only slightly. 
Nonresidential building is currently 4.2 percent higher than the trough 
reached in the first quarter of 2003, but remains substantially below 
the previous peak. From our current perspective it appears that neither 
the potential lack of terror risk insurance nor a general economic 
downturn were responsible for weakness in nonresidential building 
activity.

Overall Assessment and Policy Recommendations
    The risk of terrorism changed fundamentally and permanently after 
the events of September 11, 2001. In the words of the President:

        Our country is safer than it was on September 11, 2001, yet, we 
        are still not safe. . . . We are a Nation in danger. We are 
        doing everything we can in our power to confront the danger. We 
        are making good progress in protecting our people and bringing 
        our enemies to account. But one thing is for certain: We will 
        keep our focus and we will keep our resolve and we will do our 
        duty to best secure our country.

    It is our view that continuation of the program in its current form 
is likely to hinder the further development of the insurance market by 
crowding out innovation and capacity building. Consistent with TRIA's 
original purpose as a temporary program scheduled to end on December 
31, 2005, and the need to encourage further development of the private 
market, the Administration cannot support a straight extension of TRIA.
    Any reform of TRIA should be consistent with several principles. It 
is the Administration's view that extension of the program should 
recognize the temporary 
nature of the program, the rapid expansion of private market 
development (particularly for insurers and reinsurers to grow 
capacity), and the need to significantly 
reduce taxpayer exposure. The Administration would accept an extension 
only if it includes a significant increase to $500 million of the event 
size that triggers coverage, increases the dollar deductibles and 
percentage copayments, and eliminates from the program certain lines of 
insurance, such as commercial auto, general liability, and other 
smaller lines, that are far less subject to aggregation risks and 
should be left to the private market.
    It is also important to keep in mind that the program would cover 
damages awarded in litigation against policyholders following a 
terrorist attack. Current litigation rules would allow unscrupulous 
trial lawyers to profit from a terrorist attack and would expose the 
American taxpayer to excessive and inappropriate costs. The 
Administration supports reasonable reforms to ensure that injured 
plaintiffs can recover against negligent defendants, but that no person 
is able to exploit the litigation system.
    The events of the past week in London have been an unwelcome 
reminder that the risk of terrorism is real and that the war on 
terrorism is one that will be waged over a long period of time on many 
fronts. Some believe the fact that terrorism risk is real suggests the 
need for a permanent and obtrusive Federal role in the market for 
terrorism risk insurance. I agree that the risk of terrorism is likely 
to remain a part of our lives for some time to come, but that is 
precisely why the Federal Government needs to encourage the development 
of the most creative and cost effective means of covering terrorism 
risks. The Administration looks forward to working with the Congress to 
achieve this end.

                               ----------

                 PREPARED STATEMENT OF BEN S. BERNANKE
                 Chairman, Council of Economic Advisers
                             July 14, 2005

    Thank you, Chairman Shelby, Ranking Member Sarbanes, and Members of 
the Committee, for this opportunity to discuss the Treasury 
Department's report on the Terrorism Risk Insurance Act of 2002 (TRIA).

The Economic Climate in 2001 and 2002 was Uncertain
    The terrorist attacks of September 11, 2001, which devastated 
thousands of lives and wreaked billions of dollars in losses, also came 
at a time of considerable macroeconomic uncertainty. By that time, our 
economy had already slid into recession. Payroll employment peaked in 
March 2001 and declined through the remainder of 2001 and 2002. 
Industrial production stalled in the second half of 2000 and had 
already fallen by more than 5 percent by September 2001. At the time of 
the attacks, stock prices had been falling for a year and a half. The 
terrorist attacks heightened concerns about the near-term strength of a 
number of sectors of the economy, including aviation, travel and 
tourism, the financial industry, and nonresidential construction. 
Nearly one million jobs were lost in the first 90 days after September 
11.
    As of late 2001, the prospect that terrorism risk insurance might 
be unavailable raised particular concerns. Prior to September 11, 
insurers underwriting property and casualty policies generally treated 
terrorism as a negligible risk. The industry had not developed models 
of the likelihood or severity of potential terrorist events and 
consequently did not have the capacity to price those risks. Moreover, 
the large payouts associated with September 11 and low returns to 
insurers' portfolios reduced the financial capacity of the insurance 
industry. Some observers pointed out that, if terrorism risk insurance 
were unavailable or prohibitively expensive, the capitalized value of 
existing commercial structures might decline, possibly creating 
significant financial problems for lenders and building owners. The 
willingness of builders to undertake new commercial construction, or 
their ability to obtain financing for that construction, might also be 
reduced, putting construction jobs and economic growth in jeopardy. 
These concerns contributed to the prevailing climate of uncertainty 
about the economy in 2002.
    In retrospect, survey results in the Treasury's report suggest that 
the market for terrorism risk insurance did not dry up in 2002, to the 
extent feared. The insurer survey indicates that more than 70 percent 
of insurers writing in commercial property and casualty (P&C) lines 
wrote terrorism risk insurance in 2002, and that 60 percent of 
commercial P&C policies written in 2002 carried terrorism cover. The 
policyholder survey offers a somewhat different picture, but likewise 
indicates that terrorism risk insurance was available in 2002. 
Nevertheless, given the considerable uncertainties of the time, it was 
prudent for Congress to enact TRIA and for the President to sign it 
into law in November 2002. TRIA provided a temporary Federal backstop 
in terrorism risk insurance and allowed the insurance industry a 
transition period to adjust to post-September 11 realities.
Insurers Have Increased Their Capacity to Deal with Terrorism Risk
    The tragic events in London last week underscore the ongoing risks 
posed by terrorism. In the period immediately after September 11, the 
ability of the insurance industry to handle terrorism risks was in 
considerable doubt. However, the evidence presented in the Treasury 
report suggests that, in the nearly 4 years since the attacks, private 
insurers have developed increased capacity to deal with such risks.
    Insurer capital, known as policyholder surplus, has rebounded and 
now exceeds pre-September 11 levels. This surplus approached $341 
billion in the third quarter of 2004, a 33 percent increase over the 
third quarter of 2001. The industry booked this increase of $85 billion 
over 3 years despite absorbing heavy hurricane losses last fall.
    The industry has developed new analytical tools, including 
sophisticated models of loss exposure that allow insurers to limit and 
manage their accumulation risk from a terrorist attack. Better 
measurement of accumulation risk facilitates the spreading of the risk 
of loss from a terrorist attack across a broader set of insurers. The 
industry has also made progress in modeling the likelihood of terrorist 
attacks, although this is an area where considerable challenges remain.
    The insurance industry's capacity to bear terrorism risk is not 
unlimited, of course. Some have raised concerns about the industry's 
ability to handle what might be termed a mega-event, resulting in 
insured losses of more than $100 billion. However, it is important to 
keep in mind that TRIA, as currently structured, provides reinsurance 
only up to $100 billion and does not specify how losses above $100 
billion would be handled. TRIA states only that Congress would 
determine the source and procedure by which any payments in excess of 
$100 billion would be made. Likewise, should TRIA be allowed to expire 
and a mega-event were to occur, presumably Congress and the 
administration would evaluate the overall situation and determine how 
to respond to such losses.

TRIA's Effect on Pricing and Availability: Evidence from the
Treasury Study
    We cannot observe the counterfactual of what would have happened to 
the pricing and availability of terrorism risk insurance had TRIA not 
been enacted. But the Treasury study's survey results allow a 
comparison of pricing and availability immediately before and after 
TRIA's enactment, as well as changes to pricing and availability in the 
second year of TRIA's operation, as higher deductibles were phased in 
and the Federal provision of reinsurance was scaled back.
    The survey results indicate that, after the passage of TRIA, the 
proportion of P&C policies carrying terrorism cover at a nonzero 
premium increased. This pattern tended to raise average premiums for 
terrorism risk insurance after the introduction of TRIA. On the other 
hand, policies that had nonzero premiums in 2002 exhibited a pattern of 
declining cost share for terrorism risk insurance (as a proportion of 
total P&C premiums) between 2002 and 2003. The net effect was a slight 
increase in the cost share of terrorism risk insurance across all 
policies after the introduction of TRIA, contrary to some expectations.
    Between 2003 and 2004, TRIA's insurer deductible for Federal 
reinsurance increased from 7 to 10 percent of direct earned P&C 
premiums, shifting some exposure to terrorism losses from the Federal 
Government back to insurers. Yet, despite this increased exposure, the 
cost share of terrorism risk insurance across all policies rose only 
slightly, from 1.6 percent of P&C premiums in 2003 to 1.7 percent in 
2004. It would be inappropriate to read too much into these results 
about the likely effects of allowing TRIA to expire. However, at least 
for the period during which TRIA has been in force, the surveys do not 
support the view that the cost share of terrorism risk insurance is 
highly sensitive to changes in the industry's risk exposure.
    Regarding the availability of insurance, the insurer survey 
indicates that the proportion of commercial P&C policies carrying 
terrorism risk insurance grew by 7 
percentage points between 2002 and 2003, and the policyholder survey 
found that takeup rates for P&C policyholders rose during that period 
as well. These results suggest that TRIA improved the availability of 
insurance during 2003. However, the proportion of commercial P&C 
policies carrying terrorism risk insurance remained stable through 
2004, while take-up rates increased, despite the fact that TRIA's 
increasing deductible raised insurers' exposure to terrorism risks. 
Again, it is important not to extrapolate these results too far. 
However, at least after 2003, availability of insurance does not appear 
to have been closely linked to the industry's overall exposure to 
terrorism risk.
    These insurer and policyholder survey results are consistent with 
the view that TRIA succeeded in providing a transition period for 
insurers. The data also appear consistent with the view that insurers 
have been able to cope with increased exposure to terrorism risks as 
the Federal provision of reinsurance has diminished.

The Economy Has Strengthened
    The economy is more robust now than when TRIA was enacted. GDP 
growth has increased from 2.3 percent in 2002 to 3.9 percent in 2004 
(fourth quarter over fourth quarter). The unemployment rate, which was 
6.0 percent in December 2002, has fallen to 5.0 percent as of June 
2005. Overall construction jobs (residential and nonresidential) are at 
a record high 7.2 million. Financial markets are also functioning well 
now, with more credit available at lower long-term rates. The economic 
uncertainties that partly motivated TRIA's adoption have receded and 
the economy is fundamentally stronger and more robust.

Conclusions
    TRIA has succeeded in its limited role of providing a transition 
period for the insurance industry to adjust to the new realities after 
September 11, through a temporary Federal backstop. Continuation of the 
program in its current form is likely to hinder the further development 
of the insurance market by crowding out innovation and capacity 
building.
    Consistent with its original purpose as a temporary program 
scheduled to end on December 31, 2005, and the need to encourage 
further development of the private market, the Administration opposes 
extension of TRIA in its current form.
    Any extension of the program should recognize several key 
principles: The temporary nature of the program, the need to rapidly 
expand the development of private markets and capacity, as well as the 
need to substantially reduce taxpayer 
exposure. The last point bears emphasizing: TRIA does not eliminate 
terrorism risk but merely shifts the burden to taxpayers. It should be 
noted that, should a large terrorism event occur, the Treasury would 
face many competing priorities, and the responsibility to provide large 
insurance payments under TRIA could put a heavy strain on the 
Government's finances.
    If TRIA is to be retained, it should be reformed in such a way as 
to increase the role of private insurers and significantly diminish the 
public responsibility for terrorism risks. The Administration would 
accept an extension only if it includes a significant increase to $500 
million of the event size that triggers coverage, increases the dollar 
deductibles and percentage copayments, and eliminates certain lines of 
insurance from the program, such as commercial auto, general liability, 
and other lines that are much less subject to accumulation risks. The 
Administration also supports reasonable reforms to ensure that injured 
plaintiffs can recover against 
negligent defendants, but that also guarantee that no person is able to 
exploit the litigation system, exposing the American taxpayer to 
excessive and inappropriate costs. We look forward to discussing this 
very important issue further with Congress.
       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                       FROM JOHN W. SNOW

Q.1. According to Secretary Snow's testimony, one of the 
recommendations the Treasury report makes is to eliminate from 
TRlA certain lines of insurance that are far less subject to 
``aggregation risks'' and should be left to the private market. 
Based on this, how does Treasury define the term ``aggregation 
risk''? Furthermore, which lines of insurance does Treasury 
deem to be qualified under the definition?

A.1. In general, aggregation or accumulation risk refers to the 
concentration of an insurance company's portfolio of risks, 
comprised of relatively small exposures on an individual basis, 
but which represents an enormous exposure when taken as a 
whole. This is because each individual exposure is located or 
``aggregated'' in such a way that all are exposed to the risk 
of a single terrorist attack or simultaneous set of attacks. 
Two examples of geographic aggregation that would result in a 
high concentration of risk are providing workers' compensation 
insurance to the majority of employers in a skyscraper, or 
insuring several buildings in the same urban block. It appears 
that lines of insurance that are not subject to accumulation 
risk could be handled by the private sector without the 
assistance of the Government backstop provided by TRlA. Thus, 
one of the key features we suggested for any temporary 
extension of the TRIA program is the elimination from the 
program of lines of insurance that are far less subject to 
accumulation risk, such as commercial automobile and general 
liability.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 
                       FROM JOHN W. SNOW

Q.1. When the ``TRlA'' law was passed in 2002, we did not know 
half of what we know now about the enemy and its resolve. We 
all acknowledge that the war on terror will be with us for a 
very long time.
    So if it is a long-term war and this is what the 
Administration and the intelligence community tells us often, 
why don't we need a long-term solution to the terrorism 
insurance problem? A long-term solution that will provide our 
economy with the stability to keep growing and protect our 
citizens and their businesses from catastrophic loss when 
another major terrorist event occurs.
    Do you agree that the insurance industry took a long time 
to come back from the combined effects of terrorism and natural 
disasters?
    If so, why do you think they can now handle these disasters 
on their own? Furthermore, do you believe it is responsible to 
speculate when our economy will take huge hits from any future 
attacks?

A.1. As reflected in its statutory purposes, TRIA was intended 
to be a temporary, short-term Federal program to address market 
disruptions following the September 11 terrorist attacks; to 
ensure the continued availability and affordability of 
terrorism risk insurance; and, to allow a transitional period 
for the private insurance markets to stabilize, resume pricing 
of such insurance, and build capacity to absorb any future 
losses. The Treasury study found positive signs of private 
market development since the September 11 attacks. Even as the 
TRIA deductible has risen over time (increasing the private 
market's participation), terrorism risk insurance take-up has 
continued to increase, insurers have written coverage on a 
similar or greater number of policies, and pricing has fallen 
where insurers have charged for the coverage.
    In the Treasury report, we conclude that the TRIA has been 
effective in achieving its objectives. Insurers are much better 
able to assess their exposures and are increasingly pricing 
terrorism risk insurance. Insurer surplus, a major source of 
insurer capacity to write coverage, has improved from pre-
September 11 levels. The insurance industry's recovery from 
September 11 and its resiliency show that the private market 
functions well over time and returns stronger and capable of 
handling catastrophes--both natural and man-made.
    The risk of terrorism is likely to remain a part of our 
lives for some time to come, and that is precisely why the 
Federal Government needs to encourage the development of the 
most creative and cost effective means of covering terrorism 
risks. Over the long-term, the most efficient, lowest cost, and 
most innovative methods of providing terrorism risk insurance 
will come from the private sector. It is time for the Federal 
Government to step back and allow more opportunities for 
private sector development. I have faith in the power of 
markets to provide the resources and flexibility needed in a 
way that will be more efficient and lower cost than any 
permanent government provision of insurance.

Q.2. Mr. Secretary and Mr. Chairman, during World War II we 
provided a program called the War Risk Insurance program that 
provided insurance for property damage here in the United 
States caused by German or Japanese attacks. During the Vietnam 
War we provided an insurance program to cover commercial 
airplanes that flew into and out of Vietnam. And, today we have 
a first dollar loss insurance program for the airline industry 
to cover losses caused by terrorism in the United States.
    My question is two-fold.
    First, is there a difference between war and terrorism? 
What is it? Why does the Administration seem to be saying that 
the private insurance market can provide insurance against 
terrorism but not against war? If we are in a ``War against 
Terror'' why do not we provide the same type of economic 
protections that we have historically provided when we are at 
war.
    Second, what is the Administration's position on the first 
dolIar loss program for airlines? And, what is the difference 
between such a program for airlines and a reinsurance program 
for buildings and people that those airlines fly into? Clearly 
the reinsurance program is less costly than a first dolIar loss 
program.
    During your review did you study any mechanisms like this 
to deal with the economic risks posed by this ongoing war on 
terrorism?

A.2. As passed by Congress, TRIA does not provide a backstop 
the insurance industry for losses caused by acts of war, except 
in the case of workers' compensation insurance.
    The insurance industry itself treats war risk and terrorism 
risk differently. War risk has been subject to long-standing 
exclusions for losses caused by war, warlike action by a 
military force, insurrection or similar unrest, while terrorism 
risk had not been excluded prior to September 11. Terrorism 
risk was insurable despite decades of international terrorist 
attacks, and remained insurable even after the 1993 bombing of 
the World Trade Center and the 1995 bombing of the Alfred P. 
Murrah Federal building in Oklahoma City. What the insurance 
industry was not prepared for was a catastrophic terrorist 
attack of the magnitude of September 11. Yet our report showed 
an expansion of terrorism risk availability and purchase, even 
as the deductible increased, which highlights the improvements 
in the industry's ability to cover terrorism. Even without the 
TRIA backstop, insurers are providing coverage for terrorist 
acts that would not be eligible for TRIA program coverage. Our 
report showed that about 40 percent of insurers reported 
writing polices covering noncertified terrorism risk. The 
private market itself is the best indicator as to why the two 
risks are treated differently.
    TRIA required Treasury to assess the effectiveness of TRIA 
and the likely capacity of the property and casualty insurance 
industry to offer insurance for terrorism risk after 
termination of the program. The Treasury report finds, in 
accordance with its purpose, the program provided support in a 
post-September 11 transitional period, during which the 
capacity of the insurance industry to write terrorism risk 
insurance has improved. It is our view that continuation of the 
program in its current form is likely to hinder the further 
development of the terrorism insurance market by crowding out 
innovation and capacity building. Our report did not evaluate 
the extent of private market provision of war risk insurance.
    In connection with its work in this area, Treasury 
evaluated other past and present Federal insurance programs, 
such as the terrorism coverage provided through the Federal 
Aviation Administration's war risk insurance program. Though 
structured differently, the provision of terrorism coverage 
through the FAA program is temporary (currently expiring at the 
end of this year). The FAA program is not inconsistent with our 
overall view that in the long-term the most efficient, lowest 
cost, and most innovative methods of providing terrorism risk 
insurance--even for air carriers--will come from the private 
sector. As Transportation Secretary Norman Mineta reported to 
Congress in March 2003, war and terrorism risk insurance is 
generally available from private insurers for U.S. airlines and 
other segments of the aviation industry, though at 
significantly higher costs than prior to the September 11 
attacks.
    The Administration will continue to monitor the improvement 
in the cost of available private war and terrorism coverage and 
the likely economic effect upon air carriers and other parts of 
the aviation industry before making any decisions concerning 
the continuation of terrorism coverage through that program.

Q.3. Mr. Secretary, one of the things that concerned me the 
most about the Treasury report is that there is virtually no 
focus on the policy consequences for policyholders.
    To me the most important people in this debate are the 
consumers of terrorism insurance. They are largely responsible 
for growing the U.S. economy. They do so by running businesses, 
owning property, employing workers.
    Businesses are even committed to doing so in my hometown of 
New York City--even though it is a high-risk area that has 
proven to be a most desirable target to terrorists.
    Yet, Treasury seems to want to throw these people back on 
the mercy of a purely private marketplace that, before TRIA was 
enacted, wouldn't write terrorism insurance to any of them. The 
Treasury report seems to be putting their faith in a private 
market specifically the reinsurance industry--that shows no 
sign of being able to fill the coverage gap as this 
Administration decides to pull away.
    It seems that you express this belief, based on no 
empirical data. You say with a great deal of confidence that 
the reinsurers will come back even though this conclusion is 
inconsistent with a statement by the Reinsurance Association of 
America that ``the expiration of TRIA is no likely to stimulate 
much additional capacity.''
    Are you both aware of the fact that reinsurers continue to 
view terrorism as a risk that is uninsurable. And, that there 
is only $4 to $6 billion of reinsurance in the current market, 
well short of the aggregate industry retention level.
    What evidence does Treasury rely upon to conclude that 
private reinsurance would be more available if the retention 
level is raised, especially if the reinsurance market has not 
come back under the current TRIA level?
    Are you willing to bet that the economy will not be 
negatively affected with the changes you are proposing?

A.3. One of the statutory purposes of TRIA is to protect 
policyholders by addressing market disruptions and ensuring the 
continued widespread availability and affordability of 
insurance for 
terrorism risk while preserving State insurance regulation and 
consumer protections. In evaluating the TRIA program, Treasury 
paid particular attention to the impact on policyholders. We 
found that the purchasing (or ``take-up'') of terrorism risk 
insurance increased significantly among policyholders between 
2002 and 2004. We found the cost of terrorism risk insurance, 
as reported by policyholders, declined over the period, both 
nationally and for policyholders located in high-risk cities. 
We were pleased to find that 
insurers resumed pricing terrorism risk insurance, even for 
policyholders located in high-risk cities, as insurers built 
capacity to absorb any future losses.
    As we note in the Treasury report, these changes correlated 
with TRIA but were not necessarily a result of TRIA. Other 
factors, such as the general insurance underwriting cycle 
likely had some effect on these insurance market outcomes 
during this period.
    In the Treasury report, we concluded that TRIA was 
effective for the purposes it was designed to achieve. But this 
does not imply continuation of the program, even for 
policyholders in high-risk cities. As has been demonstrated 
before with natural catastrophes, once insurers have rebuilt 
capacity and come to understand a new risk, private markets 
resume coverage. The sunset of TRlA should encourage further 
development of the private markets.
    It is reasonable to expect that the removal of the subsidy 
provided by the program will result in adjustments in coverage 
and pricing. We expect that innovators in the private markets, 
spurred by the likely initial response of increased premiums, 
will continue to develop additional terrorism risk insurance 
capacity.
    As noted in the Treasury report, we found a modest net 
increase in use of reinsurance over the period, particularly 
among smaller and medium-sized insurers, as insurer retentions 
increased. We would not expect to see evidence that private 
reinsurers were providing coverage for insurers' TRIA-eligible 
losses during the time that TRIA is in effect. By providing, in 
effect, subsidized reinsurance, TRIA has crowded out private 
reinsurance markets.

Q.4. How did Treasury determine the amount of the recommended 
trigger?
    In your June 30 letter to Congress, you state that the 
Administration would accept an extension of TRIA only if it 
includes an increase of the event size that triggers coverage 
from $5 million to $500 million. This is a big increase--how 
did you arrive at the $500 million number? As you may know, 
many terror attacks would not be covered under this new 
trigger.

 The London Bombing would more than likely not be 
    covered.
 The Madrid Bombings would not be covered.
 The bombing of Pan Am flight 103 would not be covered.

    The Rand study showed that most terrorist are willing to do 
smaller attacks like the bombings I just spoke of. They are not 
usually as dramatic as September 11.
    Is the proposed $500 million trigger appropriate in these 
cases, especially when the goal should be to build a public-
private partnership?

A.4. It is our view that any reform of TRIA should be 
consistent with several principles, including the rapid 
expansion of private market development, and the need to 
significantly reduce taxpayer exposure. Raising the minimum 
event trigger is recommended because the private market now has 
the capacity to provide coverage for losses in this range. If 
Congress docs not act to remove the Federal Government from 
intruding into this range, we will further hinder the 
development of the private markets.
    The conclusion with regard to the size of the minimum event 
trigger reflects our consultations with the insurance industry 
and our own research into recent market conditions. We 
considered the levels of coverage generally available for 
individual exposures. Individual exposures are important 
because they are a ``limiting case.'' If individual exposures 
can be covered to this amount, then any event of this size can 
be covered.

Reinsurance Available at this Level

    Private reinsurance capacity for this relatively low level 
of loss is readily available. As Treasury reported, survey data 
indicates that in 2004 some 70 percent of insurers writing 
property coverage purchased reinsurance for a portion of their 
TRIA deductibles and copayments.\1\ Today, it is reported \2\ 
that about $300 million of commercial reinsurance capacity is 
available for individual insurer 
programs, including chemical, biological, radiological, or 
nuclear (CBRN), on an aggregate basis, and up to $600 million, 
excluding CBRN, on an occurrence basis, and more than $1 
billion is available for a single reinsurance program in which 
the terrorism exposure is limited in a single State. The market 
for stand-alone reinsurance coverage has become cheaper as more 
capacity and 
competition has entered.
---------------------------------------------------------------------------
    \1\ U.S. Department of the Treasury, ``Assessment: The Terrorism 
Risk Insurance Act of 2002,'' Report to Congress, June 30, 2005, pages 
111-112.
    \2\ The information reported in this paragraph is drawn from the 
following sources; Benfield Group Limited, ``Outrageous Fortune: 
Reinsurance Market and Renewals Review,'' Benfield Industry Analysis 
and Research, January 2005, pages 38-39. Marsh, ``Marketwatch: 
Terrorism Insurance 2005,'' Marsh Research Report, 2005, pages 24-25.
---------------------------------------------------------------------------

Many Insurers Unaffected

    Terrorism risk insurance coverage from insurers with 
deductibles above $500 million today--the 13 largest insurers 
representing about half the market in TRIA-eligible lines--is 
likely to be unchanged by the increase in size of the minimum 
event because they are providing this level of terrorism risk 
insurance today without TRIA compensation.\3\
---------------------------------------------------------------------------
    \3\ Although the increased event minimum means that fewer losses 
will count toward their TRIA deductible, this would affect these large 
insurers only in the case where they experience significant losses from 
several such attacks during the year, or moderate losses from each of a 
great number of attacks.
---------------------------------------------------------------------------

Other Insurers Already Providing this Level of Coverage

Without Backstop

    We expect that any primary coverage gaps in terrorism risk 
insurance could be provided by the stand-alone markets, which 
are typically used to cover gaps in all-risk coverage for 
example, noncertified acts of terrorism such as terrorism 
attacks on policyholders' locations abroad that do not 
otherwise fit within TRIA's definition of ``act of terrorism.'' 
The stand-alone terrorism risk insurance markets routinely 
offer property terrorism insurance for international terrorism 
risk that is not eligible for TRIA compensation. Overall 
capacity has been relatively stable since January 2004. Most 
recent Treasury consultations with brokers show the maximum 
coverage amounts available for any risk in the stand-alone 
market for individual exposures is over $1 billion.

Q.5. Mr. Secretary, the Treasury report spends a lot of time 
comparing the availability of terrorism insurance in the pre-
September 11 world with the one that has existed for the first 
2 years that TRIA has been in effect. That strikes me as a 
false and misleading comparison.
    Terrorism insurance was pretty much offered for free pre-
September 11, so of course everyone had it. Everyone who wants 
terrorism insurance now has it because the Federal program 
requires insurers to make it available.
    But the reason why TRIA became law was because we 
experienced, post-September 11, a whole year (2002) when--
according to the President--terrorism insurance increasingly 
was impossible to get, $15 billion in construction projects 
were cancelled or idled and 300,000 jobs were lost.
    So, isn't the real point that terrorism insurance would not 
be widely available without the Federal program? And isn't that 
one big reason why we need it?

A.5. The data in the Treasury report, in fact, cover 2002 
through 2005, and therefore reflect adjustments in the market 
following September 11. The data for the report was collected 
in three annual series or ``waves'' of surveys: The first 
covered the policy years 2002 and 2003; the second wave covered 
2004 and the third survey wave covered the first two month of 
2005. The survey data reflect adjustments in the market to the 
September 11 attacks. All conclusions in the report refer to 
the data from these three waves of surveys.
    Survey data from 2002--which captured what was happening in 
the marketplace prior to the enactment of TRIA--indicates about 
73 percent of commercial property and casualty insurers 
provided some terrorism coverage in TRIA-eligible commercial 
property and casualty lines, not including workers' 
compensation (terrorism is not permitted to be excluded by 
State law so 100 percent of workers' compensation insurers 
provide coverage). The policyholder survey indicated that 
roughly 27 percent of policyholders reported some terrorism 
coverage. The average cost of terrorism coverage reported by 
policyholders was about 1 percent of the premium for the entire 
policy.
    In its study, Treasury found that the availability and 
affordability of terrorism risk insurance has increased during 
the time that TRIA has been in place. It is our view that, we 
have reached the point at which it is now time for the Federal 
Government to allow further private market development in this 
area.

Q.6. As you both know, many reports have been conducted on the 
need for terrorism insurance. The Rand Corporation issued a 
report expressing the urgent need to continue TRIA. The 
Organization for Economic Cooperation and Development (OECD)--a 
UN-specialized agency--recently made its own report on 
terrorism insurance stating ``private markets are not yet able 
to fully cover the extremely large losses that could result 
from terrorist acts in the future.''
    It also states that ``despite improvements in market 
conditions, the losses associated with very large scale 
terrorist attacks may, under current conditions, remain beyond 
the capability of the private insurance and reinsurance 
industry to price and to absorb alone. The future evolution of 
the terrorism threat, and the ensuing capacity and willingness 
of the private market to cover resulting losses, is 
uncertain.''
    Most of the OECD's 30 member countries--except the United 
States--currently have some type of long-term Federal terrorism 
risk insurance program.
    Do you have a response to the OECD report's conclusions?
    Why does the Treasury Department think that private markets 
in the United States are better prepared than other nations to 
handle this incalculable risk, particularly when some of the 
some of the other member countries like the United Kingdom and 
Spain have more experience dealing with this terror attacks?

A.6. The OECD Report does not conflict with Treasury's report 
on TRIA. We see a number of areas of agreement between the two 
reports--for example we agree with their conclusion that 
terrorism risk modeling faces some challenges and that 
financial markets so far have not been a source of capacity. We 
certainly agree with their conclusion that countries should 
rely on private sector solutions as far as possible and avoid 
crowding out private sector initiative.
    We evaluated the permanent state-run programs in other 
countries, such as in the United Kingdom and Spain, but we 
believe that in the long-term the most efficient, lowest cost, 
and most innovative methods of providing terrorism risk 
insurance will come from the private sector. The power of the 
markets will provide the resources and flexibility needed in a 
way that will be most efficient.
    While there may be some short-term adjustments to a reduced 
government role, it is our view that over the long-term the 
industry will continue to build capacity and that the private 
market can and will work. Treasury's Report pointed to a number 
of positive developments: The increased pricing of terrorism 
risk insurance; greater availability of reinsurance; and 
improving market conditions even as insurer retentions under 
TRIA have increased through the life of the program.

Q.7. Mr. Secretary, I want to ask you about your report's 
findings on how policyholders have been taking terrorism 
insurance--the so-called ``take-up rates'' issue. The report 
says that take-up rates only improved ``somewhat'' from 2002-
2005 (Executive Summary), or that rates have been ``increasing 
steadily.'' However, the report's hard statistics show that 27 
percent of surveyed policyholders reported taking terrorism in 
2002, increasing to 39 percent in 2003, and finally increasing 
to 54 percent in 2004.
    A doubling of the take-up rate in just 2 years' time is a 
phenomenal rate of growth that shows how successful the TRIA 
program has been for policyholders. Why does the Treasury 
report downplay this great success?

A.7. Treasury was pleased to find that policyholders have been 
able to obtain larger amounts of coverage for their risks 
during the period. The Treasury report highlights this in the 
Executive Summary, which states, ``Between 2002 and 2003, after 
the enactment of TRIA, take-up of terrorism risk insurance 
increased from 27 
percent of policyholders to 39.5 percent. In 2004 54 percent of 
policyholders reported having terrorism risk insurance 
coverage.'' Further, in my prepared written testimony I 
reiterated that, ``data show a doubling in the take-up rate of 
terrorism risk coverage: From 27 percent of policyholders in 
2002 to 54 percent of policyholders by 2004.''
    The rise in take-up rates should not be attributed solely 
to TRIA. If market development factors were not at work, one 
might expect that the increase in insurer retention would have 
a negative effect on take-up rates but that is not what we 
observed. The increase in take-up rate occurred as the TRIA 
deductible increased from 7 percent in 2003 to 10 percent in 
2004, to 15 percent by 2005. The key market development that 
might drive take-up of such insurance is the increasing 
awareness and understanding of terrorism risks.

Q.8. Doesn't sound national security include a strategy for 
economic security?
    Your report concludes that, if we allow TRIA to expire, 
there will be a significant shortage of terrorism coverage and 
coverage that is available will be more expensive. All issues 
of price aside, is not it a national security issue if our 
commercial buildings and public spaces such as stadiums are 
left uninsured? In other words, does not having a safety net in 
place help to deter terrorists who are out to ``hit us where it 
hurts'' economically in this case?

A.8. Our fundamental position is that TRIA should not be 
extended in its current form. TRIA was expressly intended to be 
temporary. What we have said is that the existing TRIA program, 
unless reformed, will hinder further development of the private 
market. This is why the Administration opposes a straight 
extension of the program in its current form.
    Extending TRIA in its current form is likely to discourage 
the private market development needed to deal with the risk of 
terrorism. The most efficient, lowest cost, and most innovative 
methods of providing terrorism risk insurance will come from 
the 
private sector. Encouraging our private markets is the best way 
to make the country more economically secure.

Q.9. Treasury's report expresses confidence that private 
insurers now can take care of all the needs of policyholders. 
How is this true in the case of chemical, nuclear, biological, 
or radiological (CBRN) terrorism--including detonation of a 
``dirty bomb''? The market does not even cover this under the 
TRIA regime. What makes you think that CBRN will be covered by 
the private marketplace when it is not even covered with TRIA 
in place?

A.9. As Treasury has stated throughout the temporary Program, 
TRIA does cover certified terrorist acts involving chemical, 
biological, radiological, or nuclear (CBRN) weapons if the 
coverage is provided in the primary or excess property and 
casualty insurance 
policy issued by the insurer. To that extent, the CBRN coverage 
decision has been left to the market.
    As reflected in the Treasury report, we found that CBRN 
risk has been covered to some degree. The insurer survey found 
that, on average, 35 percent of insurers reported including 
CBRN risks in some of their policies in 2003 and 2004 (and all 
of their workers' compensation policies as State law requires 
it be covered.) There has been a distinct shift in the size of 
insurers writing the coverage, however; while the number of 
smal1er insurers providing this coverage declined, the number 
of larger insurers providing it increased. From 2003 to 2004, 
there was an increase of 12 percent in the number of insurers 
with assets of $1 to $10 bil1ion who reported writing some 
coverage, and about 17 percent in the number of insurers with 
assets of over $10 billion who wrote some coverage, compared 
with a decrease of roughly 6 percent in the number of insurers 
with assets of under $1 billion who wrote some coverage.
    Yet, though the coverage was available, our study revealed 
that only a very small percentage of policyholders purchased 
CBRN terrorism risk coverage--less than 3 percent, other than 
workers' compensation policies (that are not permitted to have 
exclusions.)
    Ofthe 97 percent of policyholders that did not purchase 
CBRN coverage, our study revealed that they did not do so 
mostly because they believed that they were not at risk. 
Another reason was that some (15 percent) felt that the 
premiums were too high. Only about 5 to 8 percent of the 
nonpurchasers reported that they could not find adequate CBRN 
terrorism coverage.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR JOHNSON 
                      FROM BEN S. BERNANKE

Q.1. According to Secretary Snow's testimony, one of the 
recommendations the Treasury report makes is to eliminate from 
TRIA certain lines of insurance that are far less subject to 
``aggregation risks'' and should be left to the private market. 
Based on this, how does Treasury define the term ``aggregation 
risk?'' Furthermore, which lines of insurance does Treasury 
deem to be qualified under the definition?

A.1. In general, aggregation or accumulation risk refers to the 
concentration of an insurance company's portfolio of risks, 
comprised of relatively small exposures on an individual basis, 
but which represents an enormous exposure when taken as a 
whole. This is because each individual exposure is located or 
``aggregated'' in such a way that all are exposed to the risk 
of a single terrorist attack or simultaneous set of attacks. 
Two examples of geographic aggregation that would result in a 
high concentration of risk are providing workers' compensation 
insurance to the majority of employers in a skyscraper, or 
insuring several buildings in the same urban block. It appears 
that lines of insurance that are not subject to accumulation 
risk could be handled by the private sector without the 
assistance of the Government backstop provided by TRIA. Thus, 
one of the key features we suggested for any temporary 
extension of the TRIA program is the elimination from the 
program of lines of insurance that are far less subject to 
accumulation risk, such as commercial automobile and general 
liability.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 
                      FROM BEN S. BERNANKE

Q.1. When the ``TRIA'' law was passed in 2002, we did not know 
half of what we know now about the enemy and its resolve. We 
all acknowledge that the war on terror will be with us for a 
very long time.
    So if it is a long-term war and this is what the 
Administration and the intelligence community tells us often, 
why do not we need a long-term solution to the terrorism 
insurance problem? A long-term solution that will provide our 
economy with the stability to keep growing and protect our 
citizens and their businesses from catastrophic loss when 
another major terrorist event occurs.
    Do you agree that the insurance industry took a long time 
to come back from the combined effects of terrorism and natural 
disasters?
    If so, why do you think they can now handle these disasters 
on their own? Furthermore, do you believe it is responsible to 
speculate when our economy will take huge hits from any future 
attacks?

A.1. As reflected in its statutory purposes, TRIA was intended 
to be a temporary, short-term Federal program to address market 
disruptions following the September 11 terrorist attacks; to 
ensure the continued availability and affordability of 
terrorism risk insurance; and, to allow a transitional period 
for the private insurance markets to stabilize, resume pricing 
of such insurance, and build capacity to absorb any future 
losses. The Treasury study found positive signs of private 
market development since the September 11 attacks. Even as the 
TRIA deductible has risen over time (increasing the private 
market's participation), terrorism risk insurance take-up has 
continued to increase, insurers have written coverage on a 
similar or greater number of policies, and pricing has fallen 
where insurers have charged for the coverage.
    In the Treasury report, we conclude that TRIA has been 
effective in achieving its objectives. Insurers are much better 
able to 
assess their exposures and are increasingly pricing terrorism 
risk insurance. Insurer surplus, a major source of insurer 
capacity to write coverage, has improved from pre-September 11 
levels. The insurance industry's recovery from September 11 and 
its resiliency show that the private market functions well over 
time and returns stronger and capable of handling 
catastrophes--both natural and man-made.
    The risk of terrorism is likely to remain a part of our 
lives for some time to come, and that is precisely why the 
Federal Government needs to encourage the development of the 
most creative and cost effective means of covering terrorism 
risks. Over the long-term, the most efficient, lowest cost, and 
most innovative methods of providing terrorism risk insurance 
will come from the private sector. It is time for the Federal 
Government to step back and allow more opportunities for 
private sector development. I have faith in the power of 
markets to provide the resources and flexibility needed in a 
way that will be more efficient and lower cost than any 
permanent government provision of insurance.

Q.2. Mr. Secretary and Mr. Chairman, during World War II we 
provided a program called the War Risk Insurance program that 
provided insurance for property damage here in the United 
States caused by German or Japanese attacks. During the Vietnam 
War we provided an insurance program to cover commercial 
airplanes that flew into and out of Vietnam. And, today we have 
a first dollar loss insurance program for the airline industry 
to cover losses caused by terrorism in the United States.
    My question is two-fold.
    First, is there a difference between war and terrorism? 
What is it? Why does the Administration seem to be saying that 
the private insurance market can provide insurance against 
terrorism but not against war? If we are in a ``War against 
Terror'' why do not we provide the same type of economic 
protections that we have historically provided when we are at 
war.
    Second, what is the Administration's position on the first 
dollar loss program for airlines? And, what is the difference 
between such a program for airlines and a reinsurance program 
for buildings and people that those airlines fly into? Clearly 
the reinsurance program is less costly than a first dollar loss 
program.
    During your review did you study any mechanisms like this 
to deal with the economic risks posed by this ongoing war on 
terrorism?

A.2. As passed by Congress, TRIA does not provide a backstop to 
the insurance industry for losses caused by acts of war, except 
in the case of workers' compensation insurance.
    The insurance industry itself treats war risk and terrorism 
risk differently. War risk has been subject to long-standing 
exclusions for losses caused by war, warlike action by a 
military force, insurrection, or similar unrest, while 
terrorism risk had not been excluded prior to September 11. 
Terrorism risk was insurable 
despite decades of international terrorist attacks, and 
remained insurable even after the 1993 bombing of the World 
Trade Center and the 1995 bombing of the Alfred P. Murrah 
Federal building in Oklahoma City. What the insurance industry 
was not prepared for was a catastrophic terrorist attack of the 
magnitude of September 11. Yet Treasury's report showed an 
expansion of terrorism risk availability and purchase, even as 
the deductible increased, which highlights the improvements in 
the industry's ability to cover terrorism. Even without the 
TRIA backstop, insurers are providing coverage for terrorist 
acts that would not be eligible for TRIA program coverage. 
Treasury's report showed that about 40 percent of insurers 
reported writing polices covering noncertified terrorism risk. 
The private market itself is the best indicator as to why the 
two risks are treated differently.
    TRIA required Treasury to assess the effectiveness of TRIA 
and the likely capacity of the property and casualty insurance 
industry to offer insurance for terrorism risk after 
termination of the program. The Treasury report finds that, in 
accordance with its 
purpose, the program provided support in a post-September 11 
transitional period, during which the capacity of the insurance 
industry to write terrorism risk insurance has improved. It is 
our view that continuation of the program in its current form 
is likely to hinder the further development of the terrorism 
insurance market by crowding out innovation and capacity 
building. Our report did not evaluate the extent of private 
market provision of war risk insurance.
    In connection with its work in this area, Treasury 
evaluated other past and present Federal insurance programs, 
such as the terrorism coverage provided through the Federal 
Aviation Administration's war risk insurance program. Though 
structured differently, the provision of terrorism coverage 
through the FAA 
program is temporary (currently expiring at the end of this 
year). The FAA program is not inconsistent with our overall 
view that in the long-term the most efficient, lowest cost, and 
most innovative methods of providing terrorism risk insurance--
even for air carriers--will come from the private sector. As 
Transportation Secretary Norman Mineta reported to Congress in 
March 2003, war and terrorism risk insurance is generally 
available from private insurers for U.S. airlines and other 
segments of the aviation industry, though at significantly 
higher costs than prior to the September 11 attacks.
    The Administration will continue to monitor the improvement 
in the cost of available private war and terrorism coverage and 
the likely economic effect upon air carriers and other parts of 
the aviation industry before making any decisions concerning 
the continuation of terrorism coverage through that program.

Q.3. As you both know, many reports have been conducted on the 
need for terrorism insurance. The Rand Corporation issued a 
report expressing the urgent need to continue TRIA. The 
Organization for Economic Cooperation and Development (OECD)--a 
UN-specialized agency--recently made its own report on 
terrorism insurance stating that ``private markets are not yet 
able to fully cover the extremely large losses that could 
result from terrorist acts in the future.''
    It also states that ``Despite improvements in market 
conditions, the losses associated with very large scale 
terrorist attacks may, under current conditions, remain beyond 
the capability of the private insurance and reinsurance 
industry to price and to absorb alone. The future evolution of 
the terrorism threat, and the ensuing capacity and willingness 
of the private market to cover resulting losses, is 
uncertain.''
    Most of the GECD's 30 member countries--except the United 
States--currently have some type of long-term Federal terrorism 
risk insurance program.
    Do you have a response to the GECD report's conclusions?
    Why does the Treasury Department think that private markets 
in the United States are better prepared than other nations to 
handle this incalculable risk, particularly when some of the 
some of the other member countries like the United Kingdom and 
Spain have more experience dealing with this terror attacks?

A.3. The GECD Report does not conflict with Treasury's Report 
on TRIA. We see a number of areas of agreement between the two 
reports--for example we agree with their conclusion that 
terrorism risk modeling faces some challenges and that 
financial markets so far have not been a source of capacity. We 
certainly agree with their conclusion that countries should 
rely on private sector solutions as far as possible and avoid 
crowding out private sector initiative.
    The Administration evaluated the permanent state-run 
programs in other countries, such as in the United Kingdom and 
Spain, but we believe that in the long-term the most efficient, 
lowest cost, and most innovative methods of providing terrorism 
risk insurance will come from the private sector. The power of 
the markets will provide the resources and flexibility needed 
in a way that will be most efficient.
    While there may be some short-term adjustments to a reduced 
government role, it is our view that over the long-term the 
industry will continue to build capacity and that the private 
market can and will work. Treasury's report pointed to a number 
of positive developments: The increased pricing of terrorism 
risk insurance; greater availability of reinsurance; and 
improving market conditions even as insurer retentions under 
TRIA have increased through the life of the program.

Q.4. Mr. Chairman, do you believe that terrorist attacks are 
attacks on our Government in most instances? That when they 
attack the World Trade Center, they are attacking a symbol of 
America and not the securities firms or other businesses that 
inhabit those buildings?

A.4. Terrorist attacks are attacks on our Government, our 
businesses, and our citizens. However, terrorist goals do not 
factor into the economic justification of TRIA. The economic 
justification for Government to subsidize terrorism risk 
insurance should be motivated by the existence of a positive 
public benefit that is not taken into account by private 
parties. In the case of terrorism risk insurance, there was a 
case to be made after September 11 that heightened fears 
triggered a temporary disruption of terrorism insurance 
services. However, the recent increase in terrorism insurance 
take-up rates suggests that this motivation for TRIA no longer 
exists, at least not to the degree it did in the period 
immediately following the attacks. Moreover, as long as the 
private market is willing to provide terrorism insurance, the 
accurate pricing of such insurance by private counterparties 
will help businesses react efficiently to this very real risk.
