[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
                         THE NEED TO EXTEND THE
                      TERRORISM RISK INSURANCE ACT

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

                             FIELD HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 5, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 110-8


                    U.S. GOVERNMENT PRINTING OFFICE
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           DEBORAH PRYCE, Ohio
BRAD SHERMAN, California             RICK RENZI, Arizona
GREGORY W. MEEKS, New York           RICHARD H. BAKER, Louisiana
DENNIS MOORE, Kansas                 CHRISTOPHER SHAYS, Connecticut
MICHAEL E. CAPUANO, Massachusetts    PAUL E. GILLMOR, Ohio
RUBEN HINOJOSA, Texas                MICHAEL N. CASTLE, Delaware
CAROLYN McCARTHY, New York           PETER T. KING, New York
JOE BACA, California                 FRANK D. LUCAS, Oklahoma
STEPHEN F. LYNCH, Massachusetts      DONALD A. MANZULLO, Illinois
BRAD MILLER, North Carolina          EDWARD R. ROYCE, California
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             BLACKBURN, MARSHA, Tennessee
ALBIO SIRES, New Jersey              GINNY BROWN-WAITE, Florida
PAUL W. HODES, New Hampshire         TOM FEENEY, Florida
RON KLEIN, Florida                   SCOTT GARRETT, New Jersey
TIM MAHONEY, Florida                 JIM GERLACH, Pennsylvania
ED PERLMUTTER, Colorado              JEB HENSARLING, Texas
CHRISTOPHER S. MURPHY, Connecticut   GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana                JOHN CAMPBELL, California
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 5, 2007................................................     1
Appendix:
    March 5, 2007................................................    47

                               WITNESSES
                         Monday, March 5, 2007

Bailey, Donald J., Chief Executive Officer, Willis NA............    29
Bloomberg, Hon. Michael R., Mayor of New York City...............    13
Dinallo, Eric R., Acting Superintendent, New York State Insurance 
  Department.....................................................    16
Ferguson, Roger W., Chairman, Swiss Re America Holding 
  Corporation....................................................    19
Graves, Steven K., Chief Operating Officer, Principal Real Estate 
  Investors, on behalf of the Mortgage Bankers Association.......    27
Green, Stephen L., Chief Executive Officer, SL Green Realty 
  Corporation, on behalf of the Coalition to Insure Against 
  Terrorism......................................................    23
Heck, Warren, Chairman and CEO, Greater New York Mutual Insurance 
  Company, on behalf of the National Association of Mutual 
  Insurance Companies............................................    25
Kelly, Edmund F., Chairman, President, and Chief Executive 
  Officer, Liberty Mutual Group..................................    31
Lieber, John N., Senior Vice President, World Trade Center 
  Properties, LLC................................................    21
Schumer, Hon. Charles E., a United States Senator from the State 
  of New York....................................................    10

                                APPENDIX

Prepared statements:
    Bailey, Donald J.............................................    48
    Dinallo, Eric R..............................................    61
    Ferguson, Roger W............................................    76
    Graves, Steven K.............................................    79
    Green, Stephen L.............................................    96
    Heck, Warren.................................................   105
    Kelly, Edmund F..............................................   116
    Lieber, John N...............................................   126

              Additional Material Submitted for the Record

    Statement of the Independent Insurance Agents & Brokers of 
      America, Inc...............................................   134
    Statement of the National Association of Professional 
      Insurance Agents...........................................   142
    ``Looking Beyond TRIA: A Clinical Examination of Potential 
      Terrorism Loss Sharing'', Howard Kunreuther and Erwann 
      Michel-Kerjan, The Wharton School, University of 
      Pennsylvania, dated February 2007..........................   145


                         THE NEED TO EXTEND THE
                      TERRORISM RISK INSURANCE ACT

                              ----------                              


                         Monday, March 5, 2007

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
the City Council Chambers, New York City Hall, 131 Duane 
Street, New York, New York, Hon. Gary Ackerman [member of the 
subcommittee] presiding.
    Present: Representatives Ackerman, McCarthy, Velazquez, 
Bean, Sires, Perlmutter, Murphy; Pryce, King, and Garrett.
    Also present: Representatives Maloney, Crowley, Weiner, 
Israel, and Fossella.
    Mr. Ackerman. [presiding] I would like to call the 
subcommittee to order, and to welcome the members of the 
Capital Markets, Insurance, and Government Sponsored 
Enterprises Subcommittee to New York City. I would also like to 
thank our many distinguished witnesses, who will be introduced 
publicly shortly, for taking time out of their busy schedules 
to appear at our hearing on a very critical topic: ``The Need 
to Extend the Terrorism Risk Insurance Act,'' also known as 
TRIA.
    I would like to take a moment at the outset to indicate 
that the chairman of the full committee is Congressman Barney 
Frank, and that the chairman of this subcommittee is Paul 
Kanjorski, who is unable to join us this morning due to an 
unexpected conflict, which brings me to the chair. I am Gary 
Ackerman, and I represent the Fifth District of New York.
    On behalf of the subcommittee, I would like to express our 
gratitude to Chairman Kanjorski for arranging this important 
field hearing today, and for his strong support and his 
stewardship of a fair and comprehensive reauthorization of 
TRIA.
    I would also like to thank the New York City Council and 
Speaker Christine Quinn for allowing the subcommittee the use 
of their beautiful chamber this morning, and we are happy to 
have our landlady with us today, at least for this part of City 
Hall, the distinguished Madam Speaker, and we are getting used 
to saying Madam Speaker, with us; and for those of our 
colleagues who find it sometimes difficult to deal with a bunch 
of irascible New Yorkers down in Washington, imagine what it is 
like to deal with a chamber full of them.
    So if I can ask and recognize the Speaker, Madam Speaker.
    Ms. Quinn. Thank you very much, Chairman Ackerman, and we 
would like to think we set a trend here in the New York City 
Council as it relates to Madam Speakers.
    Just for the record, when you said beautiful chamber, what 
you really meant was beautiful chamber in need of a face lift 
and a clean-up job, and I know that the Mayor agrees with that 
sentiment in full. He and I will be discussing that later. If 
anyone trips over anything or feels plaster on their head, 
please feel free to mention it to the Mayor on the way out. If 
you visit his side, it is much nicer, but we are working as a 
team on this matter.
    Seriously, I want to very much thank everyone on the 
subcommittee for being here today, and to thank Chairman 
Ackerman for holding this hearing here today. We were very, 
very excited and so happy to open up the chamber to the 
Congressional subcommittee, because, obviously, the renewal of 
TRIA is central and critically important to all of us in New 
York City, and we wish it wasn't so relevant that this hearing 
happened in Lower Manhattan, but it is, and we were very 
grateful that all of you saw fit to use our chambers to have 
this hearing, which I hope sends a clear and strong message 
about the need to renew this Act in a fair and comprehensive 
way.
    So I want to thank you for reaching out to us, and to say 
that our chambers are always open to this subcommittee or any 
other Congressional subcommittee that wishes to use them. We 
are very excited about all of the opportunities that lie ahead 
for the Congress and the City of New York to strengthen our 
connection and deepen the commitment of the Federal Government 
to New York City.
    I know today's hearing, particularly with the witnesses you 
have today, Mr. Dinallo, our great Mayor, our great senior 
Senator, will help in that effort of strengthening the 
connection between Congress and the City of New York, and just 
urge everyone that we really move as quickly and thoroughly as 
we can to make sure that TRIA is renewed. It is central to our 
ability to move forward and fully complete the recovery that we 
have begun and sought so hard--worked so hard on since 
September 11th. So thank you all for being here, and again you 
are welcome to always come back, and thank you for thinking of 
using the City Council's chambers.
    Mr. Ackerman. Thank you very much, Madam Speaker. I hope 
nobody trips in the room. If anybody is concerned, maybe we can 
find somebody who might be willing to provide some insurance.
    New York City is indeed the ideal setting for the hearing 
of this subcommittee on this topic, New York City being 
originally the home of the Congress, and it was not unusual for 
Congress to have meetings and committee meetings here, because 
that was the only place we had them.
    In addition to the enormous loss of human life on September 
11th, the value of which cannot be measured, the terrorist 
attacks on that infamous day caused catastrophic economic 
losses to this City and to our Nation as a whole. The attacks 
of 9/11 resulted in $30 billion of insured losses, the largest 
catastrophic insurance loss in the history of the United 
States, larger than any tornado, blizzard, or hurricane.
    As a result, insurers and reinsurers began to worry about 
the likelihood and the cost of a future terrorist attack. 
Worrying about risk and then monetizing that risk is the key to 
the insurance industry, which itself is an essential element in 
a modern, dynamic economy. As businesses with legitimate 
concerns about their solvency, insurance and reinsurance firms 
started to withdraw from the City of New York's market.
    As the supply of terrorism insurance rapidly decreased, New 
York City developers, who were required to be insured against 
terrorism, were put in a very precarious position; they needed 
terrorism insurance to avoid defaulting on their loans, but the 
market for insurance, quite simply, didn't have enough capacity 
to meet their demand. Similar shortages began occurring 
throughout the country. In simple terms, in this case there was 
a market failure.
    It was out of this dilemma and the critical need to address 
it that the original version of TRIA was born. TRIA increased 
the availability of terrorism insurance coverage by creating a 
Federal backstop that would share the burden of losses caused 
by any future act of terrorism with the insurance industry.
    In the wake of 9/11, we had hoped that a temporary, 3-year 
program would provide enough of a shield to allow the market to 
fully recover. By late 2005, however, the Financial Services 
Committee and others in the Congress realized that TRIA had not 
resulted in as quick or as robust a recovery as was initially 
hoped. TRIA was extended for an additional 2 years, and is 
currently set to expire on December 31st of this year.
    Failure to extend TRIA would itself be a disaster. It would 
certainly result in the destabilization of the insurance 
industry and, in all likelihood, the national economy. Every 
type of large scale enterprise, and small, would be at risk, 
and the threat to our national economic health would be 
immense. Congress has no greater domestic obligation than to 
ensure the safety of the American people, and this obligation 
extends to both acts of terrorism and to foreseeable and 
preventable economic turmoil.
    It is my view, and the view of many within the financial 
services industry, that a long term extension is necessary. It 
is a cliche, but 9/11 did indeed change everything. The real 
increased potential for terrorists to commit not just a heinous 
but a catastrophic act will continue to influence the market's 
assessment of risk for years.
    In the new world in which we live, nuclear, biological, 
chemical, and radioactive or NBCR coverage must be included in 
the TRIA program. The Government Accountability Office report 
in September 2006 found that ``any purely market driven 
expansion of coverage for NBCR is highly unlikely in the 
foreseeable future.''
    A study simultaneously undertaken by the President's 
Working Group came to the same conclusion. Without a 
significant market expansion for NBCR coverage, the Federal 
Government must step in and provide coverage.
    There is a debate as to how long the reauthorization period 
should be; whether the trigger, deductible, recoupment, or co-
payment levels of existing authorization should be amended; and 
whether group life insurance provisions should be added to 
TRIA's framework. I hope that some of the witnesses who appear 
before the subcommittee today will address these specific, 
contentious areas.
    There are many different perspectives on these questions 
and many different interests and equities that are at stake. 
This subcommittee hearing is just the first step in what will 
be a long but, I hope, successful journey toward TRIA 
reauthorization.
    We hope to travel down that long road very quickly. 
Beginning our work here in New York City shows how serious the 
Financial Services Committee and the Congress are about this 
vital question to our economy. And now let's get down to 
business, as we say in New York.
    We are going to hear from the ranking member of this 
subcommittee, the very distinguished Honorable Deborah Pryce.
    Ms. Pryce. Thank you so much. I appreciate the opportunity 
to be here and the gracious way that New York City has hosted 
us since we got into town. Thank you all. What a great place to 
continue this discussion in the new Congress.
    After the brutal terrorist attacks of 9/11, America's 
economy and financial security was certainly at risk. Thousands 
of innocent people were victimized, and the financial markets 
were threatened by the largest catastrophic loss in our 
Nation's history.
    Along with the incomprehensible devastation and the loss of 
life, New York jobs and economic growth were jeopardized by a 
crippling of the insurance marketplace. The President 
immediately called on Congress to pass legislation that would 
prevent economic destabilization caused by a lack of available 
terrorism insurance, and the House Financial Services Committee 
sprang into action, produced a bipartisan solution, and 
established the framework for the current terrorism insurance 
program.
    According to reports by the Treasury Department, the 
Government Accountability Office, and others, TRIA has been a 
great success, providing American consumers with the protection 
against terrorist attacks and continued availability of 
insurance to protect our economy everywhere.
    Since its enactment, the insurance market has become 
healthier than ever. Insurers have regained lost surplus, 
diversified risks, and developed increasingly sophisticated 
terrorism loss modeling. Reinsurance availability for terrorism 
coverage has also grown, with some recent estimates of $6- to 
$8 billion available for specific reinsurance, growing by $1- 
to $2 billion per year.
    The private insurance marketplace is also able to manage an 
increasing level of exposure, and with the right combination of 
TRIA reforms such as tax reserving and regulatory reform, the 
terrorism insurance marketplace will continue to strengthen and 
expand.
    I have caucused with my Republican colleagues on the 
committee, and we are committed to extending TRIA this year. I 
co-sponsored the House TRIA extension bill last year, which 
included language creating a commission on terrorism risk 
insurance that was explicitly directed to report back to 
Congress with specific recommendations for a long term program 
with the appropriate reforms.
    Unfortunately, this commission and several other critical 
reforms in the House bill were not ultimately adopted, leading 
members on both sides of the aisle to comment that we are 
merely kicking the can down the road.
    Some of the specific reforms that were included in the 
bipartisan bill that passed overwhelmingly in the committee and 
in the House last Congress included a number of regulatory 
reforms, such as streamlining of the surplus lines market, a 
more efficient speed-to-market review of policy forums, more 
competitive freedom for sophisticated commercial consumers, and 
encouraged use by all State regulators of a nationwide single 
point filing approval system to bring better insurance products 
to consumers.
    The bill also removed the tax penalty on long term 
terrorism reserves to enable insurers to grow dedicated 
terrorism surplus that would help maintain the stability of the 
marketplace, if another event occurred.
    While the bill increased the responsibility of insurers to 
manage risk over time with slowly increasing retentions, it 
also included a reset mechanism to bring the private exposure 
back down below its current level, if terrorist losses began to 
accumulate.
    The current TRIA program has no reset mechanism and does 
not aggregate losses from multiple attacks, meaning that we are 
back to square one if the terrorists return, with insurance 
pulling out of the marketplace once again.
    Perhaps most importantly, our bill last year created a 
market for nuclear, biological, chemical, and radiological 
terrorism losses, with a separate silo, granting a more 
generous Federal backstop. I really think that is important as 
we consider this bill.
    So let's quit kicking the can and get the job done. We need 
to include appropriate reforms and make appropriate adjustments 
to the program, make it more dynamic to allow the Federal 
safety net to contract or expand over time, as the terrorist 
threat evolves.
    Once again, I want to thank my New York colleagues for 
chairing this hearing and for planning it. There is no more 
appropriate place than Lower Manhattan to begin this 
discussion. We will continue to do our part as a committee. 
This is one of the most important issues facing our Nation. 
Thank you.
    Mr. Ackerman. I thank the distinguished ranking member. We 
will try to conduct as efficient and expeditious a hearing as 
is possible. We have two great panels, and we have a lot of 
members present.
    After discussions with the ranking member, we are going to 
limit opening statements of members of the subcommittee. We 
will try to keep this to 8 minutes on the minority side and 8 
minutes on the Democratic side, rather than just go back and 
forth, because we seem to outnumber you, if not in quality, 
certainly in quantity. But we will yield you as much time as we 
have, so that you might divide that among yourselves.
    We will ask members on our side, those who wish to make 
opening statements, to limit them to 1 minute, and encourage 
anybody who would consider passing on an opening statement to 
do that in the interest of saving time; and to call the 
attention to members of the media or the public, there are some 
members and some witnesses who have their opening statements or 
remarks in packets that are in the back of the room on your 
right, our left.
    Without objection, all opening statements will be made a 
part of the record.
    Now the first of our two distinguished panels that we will 
hear from are seated. We will begin with opening statements by 
members. You may pass, if you like. You are greatly encouraged 
to do that. I intended to repeat myself.
    First, the distinguished gentlewoman from Long Island, 
Carolyn McCarthy.
    Ms. McCarthy. Thank you, Mr. Chairman, and I will be very 
brief. I just want to remind everyone, even though we are 
having this hearing in New York, and certainly a number of us 
have been down to where the Twin Towers were, this is a Federal 
issue; because what we have learned on 9/11, as far as the 
insurance and, certainly, for the economy, not just for New 
York, but it is for all of the Nation, and that is why we on 
the Federal level need to make sure we get this done.
    With that, I yield back the balance of my time.
    Mr. Ackerman. Thank you, very much. We will next go to 
Representative Nydia Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. I am going to make 
this very easy; I ask unanimous consent for my entire opening 
statement to be entered into the record.
    Mr. Ackerman. Without objection.
    The representative from Long Island, Peter King, the former 
Chair and now ranking member of the Homeland Security Committee 
of the House and a former member of this committee.
    Mr. King. And a current member.
    Mr. Ackerman. And you have returned.
    Mr. King. Returned.
    Mr. Ackerman. We have noticed.
    Mr. King. Being in the minority does wonders for you--for 
me.
    Thank you, Mr. Chairman, and Ranking Member Pryce. It is a 
privilege to be here today. I am proud to be a member of this 
committee, because it is addressing such serious issues as 
terrorism risk insurance and its extension in a bipartisan 
manner. It is essential that we go forward.
    This is really a confluence of homeland security, national 
security, and economic stability. New York has made 
extraordinary recovery from September 11th because of the 
leadership of its officials, including, of course, Mayor 
Bloomberg, who is here today, but also because of the 
assistance it did receive from the Federal Government, and it 
is absolutely essential that assistance be continued with the 
terrorism risk insurance.
    I look forward to the hearing. I look forward, as 
Congresswoman Pryce said, to getting this resolved so we can 
resolve this once and for all. With that, I yield back the 
balance of my time.
    Mr. Ackerman. Thank you, very much. Next, the distinguished 
Representative Melissa Bean of Illinois.
    Ms. Bean. Thank you, Mr. Chairman. I will pass on an 
opening statement. I am just to honored to be here, and I look 
forward to hearing the testimony. Coming from Illinois, I just 
want to reiterate that this is important legislation for the 
entire Nation, not just New York. Thank you.
    Mr. Ackerman. A recent addition to our delegation from New 
Jersey, Representative Albio Sires.
    Mr. Sires. Thank you, Mr. Chairman. I will waive my 
comments, but I would just like to say that this is a regional, 
as well as a Federal approach. So thank you very much, Mr. 
Chairman.
    Mr. Ackerman. Thank you, very much. From Connecticut, new 
member Chris Murphy.
    Mr. Murphy. Thank you, Mr. Chairman, and thanks to the 
subcommittee and to the hospitality of the New York delegation 
for having us all here from Connecticut, only about an hour 
away. I associate myself with the remarks of Mr. Sires, that 
this is a national issue, a regional issue and, obviously, an 
issue of particular importance to the City we sit in today, and 
I thank the members for being so gracious to allow us to be 
here.
    Mr. Ackerman. The distinguished representative from New 
Jersey, Scott Garrett.
    Mr. Garrett. Thank you, Mr. Chairman, and I thank the 
ranking member as well. I join Albio as a member from the other 
side of the river where we live in the shadows of the Twin 
Towers, and a number of our constituents worked and died and 
suffered through the tragedies here.
    The point that we are discussing today, TRIA obviously was 
a necessary element at the time, and it has worked. It was not 
at the time intended to be a permanent fix, but it did 
stabilize the market. It has been successful, and the 
President's Working Group, after our re-fix to TRIA, has found 
that, despite what some people thought at the time, scaling 
back some of the indicators, as the ranking member indicated, 
has to continue to work. Insurers have got into the market, and 
I think our job here is to see what we can do to potentially 
scale down the market--scale down the program even further, so 
that there is still a successful program.
    Thank you. I yield back.
    Mr. Ackerman. Thank you. Now the distinguished additional 
member from New York, someone who has worked long and hard on 
this issue, Carolyn Maloney.
    Ms. Maloney. Thank you, Mr. Chairman. Some of the members 
of the committee began our day by touring the site at Ground 
Zero, and we are making progress, but the engineers made clear 
that we need at least 15 years of extension in order to get the 
financing in place to continue the building of the Freedom 
Tower and all the other aspects, the pools and so forth, at 
Ground Zero.
    I want to thank all of my colleagues for supporting New 
York during our time of need with $20 billion, but I have to 
say that an important part of our national security, our 
homeland security, is our economic security; and there is no 
more urgent link in our economic security than putting TRIA in 
place.
    We are much better off as a Nation having a plan in place, 
in case, God forbid, we are attacked again, so that we can 
quickly respond. Many people come up to me, and they think that 
TRIA is for insurers, and I want to make clear to the audience, 
my colleagues and the residents of New York and across this 
country that the purpose of TRIA is not to protect insurers.
    The purpose is to make sure that our economy, our national 
economy, can respond in an orderly fashion in the event that we 
have a tragic occurrence.
    So I want to thank Chairman Barney Frank, Representative 
Paul Kanjorski, Ranking Member Pryce, and Representative Gary 
Ackerman from the committee for coming to New York to see 
firsthand, to hear from our Mayor, our Governor's 
representative, the Superintendent of Insurance, Mr. Dinallo, 
our Senator who fights on this. We thank all of you for being 
here, and thank you, Mr. Mayor, for hosting us so beautifully 
last night. Thank you.
    Mr. Ackerman. The distinguished representative from New 
York, representing Staten Island and Brooklyn, Vito Fossella.
    Mr. Fossella. I have nothing to add.
    Mr. Ackerman. You have set the record.
    All members of the subcommittee having had the opportunity 
to make opening statements, we will turn now to three other 
Members of the Congress who--oh, I'm sorry. They put you out of 
order here. The distinguished gentleman from Colorado, the 
person coming the longest distance to be with us today, Ed 
Perlmutter.
    Mr. Perlmutter. Thanks, and Mr. Chairman, I know you 
skipped me, because we now have the Democratic National 
Convention in Denver, and that is why you wanted to overlook 
me. It is not here in New York. But I do want to say thank you 
for the hospitality we have been shown on this trip so far.
    I have two questions I would like either committee members 
or the panelists to answer. How much does this cost the Federal 
Government? If the actuaries can't estimate how much this is 
going to cost insurance companies, how much are we looking at 
as a backstop? The second question is: in 2005 why wasn't this 
extended for a greater period?
    So if someone could answer that for me, I would appreciate 
it. Thank you.
    Mr. Ackerman. Thank you very much, and I greatly appreciate 
your adding method to my madness in overlooking you.
    Now the members of the subcommittee having had the 
opportunity and having done that in so expeditious a fashion, 
we will afford a moment--a minute each to three other Members 
of Congress who have blessed us with their presence today. 
First, Joe Crowley, from Queens and the Bronx.
    Mr. Crowley. Thank you, Mr. Chairman. It's great to be able 
to--
    Mr. Ackerman. Former member of the committee.
    Mr. Crowley. That is right. Thank you. And some have 
suggested that I have gone to greener pastures. I don't 
necessarily think that is the case, but I appreciate serving on 
the Ways and Means Committee.
    Senator, good to see you, Commissioner and Mayor. Thank you 
for participating in the hearing today.
    As an original co-sponsor of the TRIA legislation in the 
House and an original conferee--they never met, although my 
colleague, Mr. Israel--I think it is incredibly important that 
we are holding this hearing today and that we are taking this 
show on the road. I think this is indicative of the new 
Congress as well. I don't think we would have been here in the 
last--we weren't here in the last Congress and, had there not 
been a change, I don't think we would have been here in this 
Congress either. So thank you, Mr. Chairman.
    Mr. Ackerman. Thank you, very much. The distinguished 
representative of Brooklyn-Queens, with other desires, the 
distinguished gentleman, our colleague, Anthony Weiner.
    Mr. Weiner. Thank you, Mr. Chairman, and I appreciate the 
committee and the subcommittee meeting here today. You know, 
the extension of terrorism insurance is not an abstract 
economic issue. If TRIA is not extended, if terrorism insurance 
is not extended, banks will cease to provide loans, Ground Zero 
construction will end, and frankly, what is likely to happen is 
the single greatest engine for economic growth not only here in 
New York but around the country, the growth of the real estate 
community, will grind to a halt.
    As uncomfortable as some of us are advocating on behalf of 
the insurance industry, and mindful as we are that many 
insurers have acted in a way that has been borderline 
irresponsible in the way that they have resisted their 
commitments to rebuild parts of Ground Zero, it is absolutely 
essential that we not only extend terrorism insurance, but make 
this not a year-by-year contest on how much fear we can put 
into the market that Congress won't act.
    It is an obligation, I think, on the part of the Nation as 
part of its responsibilities for accepting a Federal role in 
the attacks of September 11th, is to permanently extend 
terrorism insurance, and I appreciate my colleagues being here 
to make that point.
    Mr. Ackerman. Thank you, very much. Finally, the 
distinguished representative from Nassau and Suffolk Counties, 
a former member of this committee where he worked very hard on 
this legislation, and abandoned us for the Appropriations 
Committee, Steve Israel.
    Mr. Israel. Thank you, Mr. Chairman. I did have to leave 
the Financial Services Committee to get on Appropriations. My 
heart is still very much with this issue and with the 
committee. My wallet is with the Appropriations Committee, 
however, and I do very much appreciate your including me in 
this hearing. I was one of the original sponsors of TRIA in the 
last Congress and was named to the conference that never met, 
and I look forward to continuing to work with you and our 
colleagues on this committee, Mr. Chairman.
    Mr. Ackerman. Thank you. This committee has now set a 
record for the period of time in which members made opening 
statements, and it is greatly appreciated, not just by the 
Chair but by the audience and the witnesses as well, I am sure.
    Now to our first panel. The first witness is the 
distinguished senior Senator from the State of New York, 
Charles E. Schumer, most recently a New York Times best selling 
author of the book, ``Positively American.'' I don't know that 
copies of the book are in the folders in the back, but if you 
have one, the Senator will be happy to autograph it before you 
leave the chamber.
    A former member of this committee when he served in the 
House, Senator Schumer has moved on to bigger and maybe better 
things, as he currently serves on the Senate Committee on 
Banking, Housing, and Urban Affairs where he is the chairman of 
the Subcommittee on Housing, Transportation, and Community 
Development, the jurisdiction of which is, appropriately, urban 
development.
     We appreciate the Senator's appearance here with us this 
morning, and hope he will be able to share both New York's and 
the Senate Banking Committee's perspective on the need for 
terrorism risk insurance.
    Senator.

STATEMENT OF THE HONORABLE CHARLES E. SCHUMER, A UNITED STATES 
               SENATOR FROM THE STATE OF NEW YORK

    Senator Schumer. Well, thank you, Mr. Chairman. It is great 
to be here. It is great to see you running this show with such 
precision and alacrity. It is a record. I did serve 18 years on 
the committee. In fact, had I stayed in the House, I would be 
chairman of the full committee right now, something that I am 
sure many of my--
    Mr. Ackerman. We appreciate the fact that you are in the 
Senate.
    Senator Schumer. Yes, exactly. I was going to say, 
something that my colleagues here would have very mixed 
opinions about, as you just showed, but you really ran it well.
    I am also glad to be here in the City Council Chambers, and 
hope we can avoid any terrorism of the falling plaster that 
might occur as well. But I thank you all for being here, and I 
want to thank particularly my colleagues from New York for 
being here, for demonstrating what an important hearing this 
is; because let me just say that this issue was a quiet issue, 
but it is an issue that is extremely important to New York.
    It is one of the top three or four issues that will face us 
in this session of Congress in terms of its effect on New York. 
It is of critical importance not only to New York, but as 
Congresswoman Bean brought out, and others, it affects the 
whole country. It affects any large target, whether it is in 
New York or outside of New York, and it is really vital to us.
    So let's get straight to the point. Congress must act 
quickly to extend TRIA. It should extend it permanently, and if 
permanency is not possible, we should extend it for at least 15 
years. That is how important this legislation is for us.
    We still live in the shadow of 9/11, and it is quite 
natural for insurance companies, who calculate risk, to look at 
the worst possible things that could happen and then measure 
how much insurance they will provide and at what price.
    If you think that this is not a danger, as some of my 
colleagues in Washington sometimes think, look at what just 
happened with the hurricane. Not only are many insurance 
companies pulling out of Florida unless they get some kind of 
permanent Federal back-up, but as I am sure Congresswoman 
McCarthy and Congressman Israel can testify, they are pulling 
out of Long Island, in the remote eventuality that a Level 3, 
4, or 5 hurricane would hit Long Island.
    Well, if insurance companies won't write insurance for 
hurricanes, imagine their view of, God forbid, a terrible 
terrorist attack which would create much more loss of life, and 
much more property damage.
    So it is almost without doubt that, if we did not have 
terrorism insurance, one of two things would happen. Either 
insurance companies would not write insurance here at all in 
New York and in other large cities, and perhaps for other large 
enterprises like a Disney World or a Rose Bowl, and 
construction here in our City and in the country for large 
projects would come to a grinding halt.
    The insurance business is not supposed to be an 
eleemosynary business. That is how the free enterprise system 
works, and yet we have to look at the consequences of them 
looking at their bottom line. Their bottom line would affect 
our American bottom line, and that is that tens of billions of 
dollars of projects, hundreds of billions of dollars of 
economic activity would be gone if we didn't have terrorism 
insurance.
    Maybe one day the fear of terrorism will be gone. That day 
is not today, and it is not 2 years from now or 5 years from 
now. Just last week we debated on the Floor of the Senate the 
ability to scan cargo ships so that, God forbid, a nuclear 
device wouldn't be placed in one of those ships and exploded in 
one of our large cities.
    If the Congress is debating that issue as a real 
possibility and debating hundreds of millions of dollars that 
should be spent on it, how can we say that terrorism is not a 
worry; and given what we have seen the insurance companies do 
even when a hurricane occurs, how can we say that they will 
continue to write insurance here.
    Even if they were to write insurance, it would be at such a 
high price and on such a limited basis that economic activity 
would slow down dramatically, and millions, not tens of 
thousands, not hundreds of thousands, but millions of people 
would suffer.
    So I think there is very little doubt that we must extend 
terrorism insurance. We had trouble extending it in the last 
few years, because there were ideologues, basically, who said--
they didn't look at the facts, and they said we don't want the 
government doing anything. The very same ideologues, when it 
comes to some kind of insurance for something in their 
communities, are often for it. But now we have a new Senate, 
and I can tell you, Mr. Chairman, in reference to your request, 
that the Senate Banking Committee is going to look very 
favorably on a long extension of terrorism insurance, if not 
permanency, and I know that the House under your leadership, 
Congressman Kanjorski, Chairman Frank is looking at the same 
thing. I have talked to all of them about it.
    So let me make three points that we ought to be aware of as 
we do it. First, as I said, the extension should be permanent 
and, if we can't get permanency, a minimum of 15 years. Why? If 
you do it a year at a time, every year at this time projects 
slow down. Someone planning to build something will say, well, 
there won't be terrorism insurance after December, so I better 
not build it.
    As we see some of our leaders in the real estate industry 
here in New York, they can tell you, the closer we get to the 
expiration date, the fewer new projects are planned, the fewer 
move forward, and to go through this fear pattern every year at 
great detriment to our economy makes no sense, when at the end 
of the day we extend it. So let's just bite the bullet and do 
it once and for all.
    Second, we should provide the availability of nuclear, 
biological, chemical, and radiological coverage. I don't know 
why one is different than the other. These kinds of 
catastrophes, which could befall New York or any other large 
project, large agglomeration of people, will frighten away 
insurers just like an explosion would or any other kind of 
terrorism, and to not include them makes no sense whatsoever--
makes no sense.
    I don't know why we make a division. An insurer doesn't 
look at how you are killed or how the property is destroyed. 
They just look at how much, and these are the kinds of things 
that could frighten insurers away.
    Third, we must ensure that there is sufficient insurance 
capacity for densely developed areas perceived as high risk. 
Without doing so, we could still be at risk of market 
disruptions because of a shortage of insurance under the 
program, and we have missed the whole reason why the program 
was created.
    According to one insurance company, Aon, even with the 
current TRIA extension in place, there is currently less than 
$750 million worth of coverage in the entire Lower Manhattan 
market. This is troubling as we work to rebuild the World Trade 
Center and the rest of Lower Manhattan. In fact, the lack of 
this provision in our terrorism insurance law could greatly 
slow down the redevelopment of Ground Zero and the re-
burgeoning as is happening of Lower Manhattan.
    Finally, we should move quickly. Fourth, we should not wait 
until December 1st or December 15th to do this, because there 
is a December 31st deadline. Let's get it done now. Let's let 
people go ahead, plan their projects, insure their projects, 
and then move forward and employ people and build these 
projects.
    So in sum: first, permanency or at least 15 years; second, 
inclusion of nuclear, biological, chemical, and radiological 
coverage; third, sufficient capacity for densely developed 
areas that are high risk; and fourth, let's do it quickly.
    Thank you, Mr. Chairman. I very much appreciate the 
committee coming to New York, which is the number one place 
affected by the lack or the halting nature of terrorism 
insurance, and look forward to working with your committee to 
get something done and get something done right, once and for 
all, on terrorism insurance.
    Mr. Ackerman. Thank you, Senator, and thank you for your 
statement.
    We will next turn to the gentleman in the middle of the 
panel, as he is in the center of everything that is good about 
New York, Mayor Michael R. Bloomberg.
    The 108th Mayor of the City of New York, Mayor Bloomberg 
brings a unique perspective to our hearing this morning. Aside 
from his role as Chief Executive of New York City, Mayor 
Bloomberg's well documented background in the financial 
services industry makes him a most knowledgeable witness.
    In 1982, well before his election as Mayor of the City, 
Mayor Bloomberg's financial information company, Bloomberg LP, 
revolutionized the way that Wall Street does business.
    The subcommittee very much looks forward to hearing Mayor 
Bloomberg's extensive expertise in this area, and we are 
extremely fortunate that he is here with us this morning. We 
thank him for taking time to appear with us, for hosting us at 
dinner at the mansion last night, and for setting a national 
standard for how to get along without partisanship in 
governance. Thank you, Mr. Mayor. We are happy to hear from 
you.

 STATEMENT OF THE HONORABLE MICHAEL R. BLOOMBERG, MAYOR OF NEW 
                           YORK CITY

    Mr. Bloomberg. Chairman Ackerman, Ranking Member Pryce, and 
distinguished members of the committee, good morning. It is my 
pleasure to be here with Senator Schumer and Superintendent 
Dinallo, and thank you for inviting me to testify.
    Congressman Ackerman, let me first do some housekeeping 
here. Number one, for the record, the ceiling at this end of 
City Hall is no worse than the ceiling at the other end of City 
Hall, and it is functional and safe.
    Number two, Senator Schumer's book and my book are both 
available on Amazon. We are not giving free copies away in the 
back. At least, I am not giving any free copies of mine away.
    Third, your opening statement where you promised an equal 
amount of time to both parties--I must warn you, it smacks of 
true bipartisanship, and if I were you, I would be very 
careful. You will win a lot of points with me on that, but 
whether from anybody else, I don't know.
    Anyway, as Mayor let me also welcome all of you to New 
York. During your brief visit here, I think you will discover a 
city that really is facing its future with confidence. If you 
remember the days after 9/11, there were a lot of people who 
predicted the worst for New York. They were convinced that 
businesses were about to flee, our economy would tank and never 
recover, and crime would once again return to our streets.
    Instead, I think it is fair to say exactly the opposite has 
happened. Over the past 5 years, we have made the safest big 
city in the Nation even safer, and we have brought our economy 
back stronger than ever, and certainly stronger than anybody 
had expected. Last year, unemployment in our city hit an all-
time low, and now we are in the midst of one of the biggest 
construction booms since the end of World War II.
    Protecting New York against terrorism has been a critical 
part of keeping the City strong, safe, and attractive to 
businesses. The NYPD has built an intelligence and 
counterterrorism operation that monitors and responds to 
threats worldwide as they arise, and I think it is fair to say 
also, they are recognized as models for local law enforcement 
around the Nation.
    We are determined to prevent another attack, and we are 
sparing no expense. For instance, in this year's executive 
budget, I have proposed an initial investment of $15 million in 
the Lower Manhattan Security Initiative, which will help 
safeguard our bridges, tunnels, and other infrastructure 
downtown.
    But should the worst happen, we must also be fully prepared 
to minimize the impact on our 8.2 million citizens, as well as 
on the millions of commuters and tourists who come here every 
day, principally from outside of New York City and New York 
State and from the great States of New Jersey and Connecticut.
    This preparation includes not only strengthening rescue and 
recovery operations, but also taking preventive steps to 
stabilize the City's economy in the event of an attack. The 
Federal Government's leadership in enhancing the availability 
of commercial insurance has been, and must remain, a crucial 
part of this strategy.
    After 9/11, Congress did a great service to our Nation by 
quickly passing the Terrorism Risk Insurance Act, or TRIA, 
which requires insurers to provide coverage against terrorism 
but caps their total liability, with the Department of Treasury 
responsible for claims exceeding that ceiling.
    This legislation, which was temporarily extended in 2005, 
is set to expire once again at the end of this year, and with 
no foreseeable end to the terrorist threats against our Nation, 
it is imperative that Congress not only renew TRIA but ensures 
that it is in place indefinitely.
    It is up to the Federal Government to continue bearing this 
responsibility for the simple reason that commercial insurers 
neither have the ability nor the capacity to provide the full 
level of desired terrorism coverage.
    The numerous factors at play, including the weapons, the 
methods, the targets and the timing of our enemies, are just 
far too difficult to predict, and if insurers can't estimate 
the risk, they simply can't price their product. That means 
that either they won't sell insurance to many businesses in New 
York or they will sell it, but only at prohibitively high 
prices.
    Some might say that TRIA is a subsidy to successful 
developers and insurers, but that is not true. This is about 
government correcting a serious market failure caused by the 
threat of terrorism.
    Without a doubt, the Federal Government's terrorism 
insurance program has been a critical part of New York City's 
revival and is giving businesses the confidence to move forward 
with exciting new projects. At the Atlantic Yards in downtown 
Brooklyn, for instance, we are moving ahead on a dynamic 
commercial and residential development featuring the future 
home of the Brooklyn Nets, designed by Frank Gehry.
    In Long Island City in Queens, we are sowing the seeds of a 
major new central business district which will complement 
Midtown and Lower Manhattan. On Manhattan's Far West Side, we 
are extending the subway line and transforming an old 
industrial zone into a vibrant new neighborhood, and here in 
Manhattan, new office towers and cultural centers are rising, 
as well as almost $10 billion worth of mass transit projects.
    In total, these projects and developments will create 
hundreds of thousands of new jobs and up to 46 million square 
feet of new commercial space, as well as producing more than 
$10 billion in additional property tax revenue for New York 
City each year. Their importance to our economy can't be 
overstated, but without terrorism risk insurance, none of them 
would ever get off the ground, and if projects like this are 
put in jeopardy, so will the future of our City, the global 
financial leader of America.
    The demand for terrorism insurance is clear, and the demand 
is urgent. Although the current program does not expire until 
December 31st, the insurance industry writes and renews its 
commercial properties policies many months in advance, meaning 
we need to reauthorize this vital legislation now, and I have 
come here today to pledge to do whatever it takes to get that 
done.
    Before closing, I want to raise two additional issues that 
must be addressed before the Terrorism Risk Insurance Act is 
renewed. First, this Federal program needs to eliminate its 
distinction between international and domestic terrorism.
    Currently, TRIA only covers an act of terrorism that is 
committed on behalf of a foreign person or interest. However, 
this distinction could be a very difficult one to discern if a 
domestic group contains at least one member from another 
country or maintains even minimal contact with other terrorism 
groups around the world.
    For instance, an attack like the one committed by homegrown 
extremists on London's mass transit system in 2005, if 
duplicated here, would not be covered by TRIA, and that just 
makes no sense whatsoever. As long as TRIA excludes acts of 
domestic terrorism, every business and commercial enterprise 
continues to be at risk of suffering catastrophic financial 
losses.
    We are in this world together. The world, by Tom Friedman's 
definition, is flat. There is no unit of any part of government 
or society that doesn't act internationally in this day and 
age. We just could not make that distinction between domestic 
and foreign terrorism.
    My second concern is the lack of insurance coverage for 
what would be some of the most frightening weapons of mass 
destruction. TRIA currently protects consumers against events 
involving conventional explosives and the use of airplanes to 
cause widespread damage, but there is no protection against a 
potentially more destructive chemical, biological, 
radiological, or nuclear attack.
    By definition, commercial insurance is designed to provide 
peace of mind, so it is important that any Federal terrorism 
insurance program is a comprehensive one that addresses all 
major threats.
    We must not only be prepared for yesterday's attacks. The 
9/11 Commission has statedthat the failure of preventing 9/11 
was a failure of imagination. We need to be prepared for every 
possible attack, and not just the ones that have already 
happened.
    I appreciate the chance to be with you here today. 
Hopefully, this hearing will move us closer to ensuring the 
long-term and affordable solution that our economy needs to 
continue this growth.
    Let me add one other thing. I talk about New York, because 
I am the Mayor of New York City, but this is an issue for the 
country. This is an issue for the big cities that are likely to 
be attacked across this country, whether it is Chicago or 
Hartford, whether it is L.A. or Atlanta, whether it is Miami or 
Dallas.
    You can go around this country. There are big cities 
everyplace. Some of them are more at risk from international 
terrorism because they represent to overseas people what 
America stands for. They are our symbols. Our skylines matter 
to them.
    Some of them are targets for domestic problems, domestic 
terrorism, because that is where the domestic terrorists live 
and may find things that they don't like and that they want to 
protest against. This is something not just for New York; this 
is something for America.
    Thank you for your time.
    Mr. Ackerman. Thank you very much, Mr. Mayor.
    We will next hear from acting superintendent Eric R. 
Dinallo, who has been nominated by Governor Elliott Spitzer to 
be the 39th superintendent of the New York State Insurance 
Department. Pending the New York State Senate's confirmation, 
he serves as the Department's acting superintendent.
    Acting Superintendent Dinallo has previously served as the 
general counsel for Willis Group Holdings, the third largest 
insurance broker in the world, and managing director and global 
head of regulatory affairs for Morgan Stanley.
    We are pleased to have him with us this morning and look 
forward to hearing his testimony.

 STATEMENT OF ERIC R. DINALLO, ACTING SUPERINTENDENT, NEW YORK 
                   STATE INSURANCE DEPARTMENT

    Mr. Dinallo. Thank you, Chairman Ackerman, Representative 
Pryce, and members of the committee. Thank you for inviting me 
to testify here today, and for the opportunity to share some of 
my thoughts with you on this important topic.
    I am the acting superintendent for New York State, and 
having only been in the office for 5 or 6 weeks, the ``acting'' 
is pretty well applied right now. So if I can't answer all of 
your questions, I apologize, but I can guarantee you that the 
staff of the Department--which is a fantastic staff, with an 
incredible depth of knowledge--is there to help you and to 
answer any of the questions that you may have, if I am unable 
to do so today.
    A lot of the discussion that we have heard so far has made 
a convincing case that the threat of terrorism is still real, 
that although it is a threat to the entire country, it is 
especially an issue here in New York, and that here in New 
York, TRIA's renewal is essential, but that is also true for 
the entire country. We need the national, long-term solution of 
TRIA.
    I am here to make two main points and end with some of the 
specific recommendations that you have asked to hear about. My 
first point is that TRIA fixes the blind pricing problem. I 
will explain what I mean by that in a minute, but I think it 
has been successful, because it fixes what I call the blind 
pricing problem.
    The role of insurance is to permit us to share or pool our 
risks. The industry has developed very sophisticated models to 
do this, but they rely on maximal information and data. The 
problem with terrorism, of course, is that it is very 
unpredictable and has extreme costs associated with it. 
Insurers set prices by looking at experience, and predicting 
future size and frequency, but they lack such information for 
terrorist attacks.
    Normally, insurers use curves of possible losses. The mean 
or average tells them how much to charge to cover possible 
losses and still make a fair rate of return. Terrorism has a 
very, very long tail, in statistical speak, with a small number 
of events that have huge possible costs. Without the backstop 
of TRIA, we are asking underwriters to do what is commonly 
thought to be the most difficult for them; that is, to price 
blindly.
    So the amount they would have to charge to cover all 
conceivable outcomes becomes prohibitively expensive, and this 
is across the board in asset management, all forms of 
underwriting, all forms of insurance. People will tell you that 
the far end of the curve, which I hope to show you in a second, 
is what drives the bell shape and, in fact, has a tremendous 
impact on the average pricing for all consumers. So it is not 
just a subsidy for the industry, as some people have affirmed, 
but it is also something that has a positive impact on a 
pricing breakdown and fixes what is, I believe, a market 
failure.
    If I could stand up, I could just show you this chart, if 
that is okay, if I have the permission to stand.
    Mr. Ackerman. Without objection.
    Mr. Dinallo. I don't want to alarm anybody.
    I am just going to sketch a quick and simple bell shape 
curve where you have the number of events on the y axis, and 
that is zero events, and that is up to potentially infinite 
events.
    Then here you have the dollar value of those events, from 
zero to some amount, but in general underwriters and asset 
managers can begin to price this, and the price of insurance is 
going to be based on the average of having to cover the 
underside of the bell shaped curve, and the dollars go this 
way, and the number of events go that way.
    Asbestos, for instance--if you changed the time at the 
bottom, you would have it go out like this. But here is what it 
appears for terrorism, and I want to show you on this chart how 
TRIA affects the curve in a very positive way.
    Here, you've got the likelihood of the loss on this axis, 
and you've got the average policy loss under here, and it goes 
up on the x axis. By engaging a TRIA, you have permitted the 
underwriters to take away all of this as a pricing problem, and 
now they don't have to price this in the blind manner that I 
talked about before.
    This, although it is a very small amount visually, is 
extremely expensive, and the NBCR events that we have heard 
talked about, some people think, could go as high as three-
quarters of a trillion dollars. That is way out here. That 
dramatically changes the average on this curve.
    Current TRIA is set here at $27 billion. The World Trade 
Center attack, depending on how you calculate it, is $30- $40 
billion, and it is appropriately placed in this quadrant, and 
the storms of 2005 would be $70 billion, about here.
    When you put TRIA in place, you bring the mean, the 
expected average loss without TRIA, from here back to here, 
because now the underwriters can take this out, and they have 
certainty in the pricing across here. That results not only in 
the help to society that we have talked about but in a better 
rate of return for the underwriters, because they can do it 
more accurately, but now they can actually offer the insurance 
at a fair price to the consumers, because the average is 
brought down to a point that is affordable and can be priced.
    My second point is that TRIA is a form of a subsidy, but it 
does not encourage what is commonly called a moral hazard or a 
moral hazard conduct or uneconomic behavior.
    People do have a healthy skepticism about subsidies, but 
fear the government assistance will encourage bad behavior, and 
that is what economists often call a moral hazard. That is not 
what is going on here.
    I think that people living in dense cities, and New York 
City being the center of the financial services for the world, 
are good things that ought to be encouraged. TRIA, therefore, 
is not rewarding or encouraging any kind of a negative 
behavior, the very issue you would often have with a government 
subsidy, but it is simply permitting us to properly insure 
those who are living and engaging in work in a manner we choose 
to protect and appropriately reward.
    Those two points, the blind pricing problem, and that TRIA 
does not create a moral hazard, lead me to believe that TRIA is 
not some unacceptable subsidy to the private sector. TRIA 
permits rational pricing and the fixing of a market failure. 
TRIA does not replace the private sector. It makes private 
sector involvement possible.
    Okay. In conclusion, I would say that there are five 
specific recommendations for TRIA; three, we have already 
covered. We shouldn't be renewing it every 2 years. It is too 
disruptive to the industry and the CEO's I have talked to and 
the real estate industry. We need a long-term solution, not a 
permanent solution.
    Obviously, I agree that domestic terrorism should be 
covered. I don't really see the reason for the disjunction. We 
should cover NBCR.
    The fourth point is that worker's compensation is now 
covered appropriately by TRIA because of concentration issues 
in the workplace, and we should continue the workman's 
compensation coverage, but also with similar logic extend it to 
group life insurance, where I think the same reasoning applies.
    Finally, Congress should consider permitting tax deferred 
reserves by underwriters, because that is a way to increase the 
amount industry can handle by itself. Otherwise, underwriters 
often surplus out dividends or otherwise the amounts that are 
collected at the end of each year, and I would think that 
permitting tax deferred reserving would encourage industry to 
develop a dedicated pool of capital for terrorism exposure.
    Thank you, very much.
    [The prepared statement of Mr. Dinallo can be found on page 
61 of the appendix.]
    Mr. Ackerman. Thank you, very much.
    Unless anybody has a compelling question to ask of anybody 
on this panel, the Chair would ask that you submit those 
questions in writing so that we could get to the very 
distinguished second panel. Does anybody have the need to ask a 
question of the Mayor or the Commissioner--the Superintendent?
    Seeing none, let me thank the distinguished panel for an 
excellent, comprehensive presentation to us.
    The Chair would ask the unanimous consent of the committee 
to submit for the record at the end of the testimony and the 
question period statements from the Independent Insurance 
Agents and Brokers, the National Association of Professional 
Insurance Agencies, and a paper from the Wharton Risk Center, 
as well as a paper from the Risk Insurance Management Society, 
and an article from Swiss Re. Seeing no objection.
    Our second panel this morning consists of industry experts 
as well as individuals representing firms that will be directly 
affected by the scope and period of extension of TRIA.
    We will hear from all of the witnesses, and then we will 
open it up to questions. Let me call the attention of this 
panel to the fact that, when you hear the high pitched note, it 
is not my Uncle Max's hearing aid battery, but the indication 
that your 5 minutes has expired. Your entire statements, 
without objection, will be placed in the record, and we ask you 
to summarize within a 5-minute time frame.
    Mr. Ackerman. First, we will hear from Dr. Roger W. 
Ferguson, who is the chair of Swiss Re America Holding 
Corporation and a former Vice Chairman of the Board of 
Governors of the Federal Reserve System. Dr. Ferguson is one of 
the foremost experts in the terrorism risk insurance field, and 
we are indeed very fortunate to have him with us this morning. 
We look forward to his testimony and thank him for appearing 
before the subcommittee at this field hearing.
    Dr. Ferguson.

  STATEMENT OF ROGER W. FERGUSON, CHAIRMAN, SWISS RE AMERICA 
                      HOLDING CORPORATION

    Mr. Ferguson. Thank you very much, and I wish to thank 
Chairman Kanjorski and also Chairman Frank for holding this 
hearing on the need to extend the Terrorism Risk Insurance 
Extension Act, which I think of as a very important and 
successful public-private partnership.
    As you indicated, my name is Roger Ferguson. I had a period 
of time in public service, and now I am the chairman of Swiss 
Re America Holding located here in Manhattan as well as 
Washington, D.C.
    TRIA may be analyzed from many different perspectives. As 
an economist, I would like to share a few thoughts about why 
this public-private partnership is critical to an important 
segment of the U.S. economy.
    My argument has three parts. First, terrorism does not have 
the usual characteristics of an insurable risk. Second, 
industry capacity is insufficient to handle the losses that 
would arise from a major terrorist event. And third, the 
government has already created an implicit backstop. From those 
three points, I conclude it is better public policy to have an 
explicit Federal backstop for the terrorism insurance market.
    Competitive private markets generally lead to the most 
productive allocation of resources. Nonetheless, markets 
sometimes fail to function efficiently, creating a waste of 
resources and a loss of economic value. Terrorism insurance and 
reinsurance are businesses prone to market failure, because 
terrorism risk is largely uninsurable for three reasons:
    First, terrorism risk cannot be measured satisfactorily, 
because terrorist events are willful acts undertaken by parties 
who wish to confound those who study them.
    Second, terrorists' coordinated large scale attacks can 
cause loss occurrences to be correlated over time and across 
business lines.
    Third, and finally, due to adverse selection, terrorism 
insurance may become unaffordable in the major urban areas 
where the need for coverage is greatest.
    After 9/11 highlighted these dimensions of terrorism risk, 
its unpredictability, its high correlation of loss occurrence, 
and the large scale of potential losses, insurers withdrew from 
the market. In a clear case of market failure, real estate 
projects, particularly those in target areas such as New York, 
were delayed or canceled, because insurance could not be 
secured. This economic domino effect ultimately resulted in the 
loss of jobs.
    Aside from the fact that a terrorist event does not have 
the usual characteristics of insurability, the potential scale 
of the risk makes it difficult for the private sector to manage 
on its own. Although the U.S. property/casualty sector has an 
aggregate surplus of more than $400 billion and writes nearly 
$500 billion in annual premiums, it lacks the resources to 
cover large scale terrorist events. Only a small fraction of 
industry premiums and surplus is available to cover terrorism 
losses, because this money must also be available to repay 
policyholders for losses due to other insured risks such as 
workers' compensation, product liability, fires, and 
earthquakes.
    Many observers believe that the government would be forced 
to provide aid to individuals, insurers, and other businesses 
who suffer devastating losses from a terrorist event, even if 
they had not purchased insurance. Thus, even without an 
explicit terrorism risk backstop, the government provides an 
implicit backstop. Confusion and uncertainty about whether the 
government would step in is clearly not constructive.
    An explicit government terrorism risk backstop offers 
numerous advantages. First, it reduces ambiguity about pre- and 
post-event and enhances the transparency by making it clear who 
will pay how much for what, should an event occur. Second, a 
broader societal sharing of terrorism risks makes lower premium 
rates possible. Third, by reducing uncertainty, a backstop 
reduces the risk of financial market disruption in the wake of 
an attack.
    A viable terrorism insurance market with adequate capacity 
reduces the level of uncertainty before and after a terrorist 
attack occurs.
    In closing, insurers, Swiss Re among them, generally agree 
that TRIA has done a good job of stabilizing the terrorism 
insurance market. There are, however, several elements that 
undercut the law's benefits.
    First is the distinction between certified acts of 
terrorism, which TRIA covers, and non-certified acts, which it 
does not. This distinction creates areas of ambiguity.
    Second is the law's impermanence. Uncertainty regarding 
whether the backstop will be renewed every 2 years taxes the 
energies of lawmakers and insurers.
    A final point of note is the exclusion of group life from 
TRIA's covered lines. Group life business, like worker's 
compensation, contains a significant concentration of risk. 
Moreover, group life insurers are not free to manage their risk 
through terrorism exclusions. Most State regulators do not 
allow it. A very large scale attack can cause a massive number 
of mortality claims that threatens the stability of even the 
leading group life insurers. In view of this, group life should 
be part of an effective Federal backstop. Group life insurers 
have asked that a separate recoupment mechanism be created for 
group life insurance. This seems to me both logical and 
reasonable.
    To help meet the threat of terrorism--that the threat of 
terrorism poses in a proactive, economically efficient manner, 
we ask this subcommittee to craft a permanent public-private 
response that builds on the strengths of the insurance industry 
and also the obvious strengths of the government.
    Thank you for the opportunity to express our views on this 
very important matter.
    [The prepared statement of Mr. Ferguson can be found on 
page 76 of the appendix.]
    Mr. Ackerman. Thank you very much, Dr. Ferguson.
    Next we will hear from John L. Lieber, who is the senior 
vice president at Silverstein Properties where his primary 
responsibility is oversight of the rebuilding of the World 
Trade Center. We also note that Mr. Silverstein himself has 
joined us here today. We appreciate that.
    Mr. Lieber is also testifying this morning on behalf of the 
Real Estate Board of New York, and we look forward to his 
testimony now.

STATEMENT OF JOHN N. LIEBER, SENIOR VICE PRESIDENT, WORLD TRADE 
                     CENTER PROPERTIES, LLC

    Mr. Lieber. Thank you, Chairman Ackerman, Ranking Member 
Pryce, and distinguished members. As Congressman Ackerman said, 
I am here representing not only the Silverstein organization 
but also the Real Estate Board of New York, which is the 
premier trade organization of owners and developers in this 
great City, and you will hear from one of our leading members, 
Mr. Green, in his capacity as a leader of CIAT in a moment.
    As you know, Larry Silverstein leased the commercial office 
portion of the World Trade Center just 6 weeks before 9/11, and 
since then, and after many years of debate and public dialogue, 
which has been very productive, all parties, the State and City 
of New York, the State of New Jersey, and the Port Authority 
have come together on a plan and are fully united on what will 
be rebuilt at the World Trade Center when, where, and by whom.
    That means that the whole site is going to be rebuilt by 
2012, and you saw the beginnings of that work when you visited 
the World Trade Center site today.
    Over the past few years since the enactment of TRIA, the 
private insurance market has rebounded, to a degree. However, 
in some areas--and I have to emphasize this point--especially 
densely developed areas perceived as high risk, like Lower 
Manhattan, there is, even with TRIA in place, simply 
insufficient insurance capacity, both terrorism insurance and 
other insurances that have a terrorism component, such as 
builder's risk insurance.
    This is the situation that we are facing in Lower Manhattan 
and also, to a degree, in Midtown as well, and those two 
business districts comprise 450 million square feet of office 
space.
    As other speakers have said, the most important action that 
Congress can take to assure the availability of terrorism 
insurance for areas like New York City is to extend TRIA 
permanently. A long term program is just necessitated by the 
realities of how buildings are developed, financed, and 
insured. Lenders are looking at timelines well beyond a 2-year 
type extension. They need to know that the insurance is going 
to be there for the full life of the loan, and that is really a 
major factor that we have to deal with, and permanency would 
address them.
    There is another point that I think I have to emphasize 
which is slightly different than what you may have heard from 
others, the need for additional capacity to areas like New York 
City, these densely developed areas. All over the City, real 
estate owners and developers are struggling to obtain and 
maintain sufficient terrorism insurance.
    I spoke to a major owner of Lower Manhattan--a Lower 
Manhattan portfolio worth approximately $10 billion who has 
such trouble obtaining insurance that they have only a billion 
dollars of coverage. Another owner can only get $1 billion of 
insurance, of terrorism insurance, which is less than a third 
of the total value of their several buildings in the 
Rockefeller Center area; and our project, the World Trade 
Center rebuilding, really brings this problem into relief.
    The total cost of the project, as you may have been told, 
is roughly $13- to $15 billion, but as Senator Schumer pointed 
out, according to leading insurance brokers, there is only $750 
million of capacity, of terrorism insurance capacity, available 
in Lower Manhattan. So there is a very serious disconnect.
    We strongly believe that a TRIA extension ought to address 
the capacity problem of densely developed urban areas branded 
as high risk, for example, Lower Manhattan, Times Square, and 
the Grand Central, and so on.
    Today you heard from Senator Schumer, Mayor Bloomberg, 
Superintendent Dinallo, and others about a variety of different 
fixes that we all believe in, the NBCR issue, eliminating the 
foreign versus domestic distinction. Those are all urgently 
needed to increase capacity. But I should emphasize that, even 
if these important corrections are made, there will still be 
questions about whether there will be sufficient capacity in 
high risk areas.
    So we suggest that you give consideration, not wedded to 
any particular mechanism, that consideration ought to be given 
to some actions to alter the risk-reward equation so that 
insurers will be incentivized to come into these types of 
areas.
    There is one other step that Congress can take in the TRIA 
extension in order to free up terrorism insurance capacity. We 
urge that the TRIA extension clarify the scope of coverage by 
making it clear that the TRIA backstop supports all 
consequences of a terrorist attack, including a fire or a 
collapse following an attack, as well as the damages from the 
initial impact or explosion.
    Unfortunately, the scope of TRIA coverage is currently 
perceived as somewhat unclear and, therefore, terrorism risk, 
as perceived by the insurers, is bleeding into builder's risk 
and property insurances and causing a shortage of capacity for 
those insurances, again especially in areas like Lower 
Manhattan.
    Finally in conclusion, the TRIA program is essential to 
give us any chance of obtaining the terrorism insurance which 
lenders and investors require. It has been a success and should 
be made permanent. However, we do need absolutely to deal with 
the issue of capacity for downtown.
    It would be a great disappointment to everyone here and 
everyone involved with the TRIA program if the redevelopment of 
the World Trade Center were seriously hindered by an inability 
to obtain terrorism insurance, and we need the leadership and 
creativity of this community--this committee and this community 
to assure that a new TRIA bill addresses that particular issue.
    Thank you.
    [The prepared statement of Mr. Lieber can be found on page 
126 of the appendix.]
    Mr. Ackerman. Thank you very much, Mr. Lieber.
    Steven L. Green is the chairman of the Board of Directors 
and the chief executive officer of SL Green Realty Corp., the 
largest commercial office landlord in the City of New York. SL 
Green owns approximately 24.5 million square feet of office 
space in New York City.
    The committee looks forward to hearing Mr. Green's 
testimony about the impact that TRIA reauthorization and how 
that authorization is packaged will have on commercial 
properties in New York and other large cities.

  STATEMENT OF STEPHEN L. GREEN, CHIEF EXECUTIVE OFFICER, SL 
GREEN REALTY CORPORATION, ON BEHALF OF THE COALITION TO INSURE 
                       AGAINST TERRORISM

    Mr. Green. Good morning. Thank you, Chairman Ackerman, 
Ranking Member Pryce, and members of the subcommittee for 
holding this hearing in New York City and for allowing me to 
testify today.
    My name is Stephen Green, and my background you have gone 
over. So there is no point in repeating it, but I am also here 
as vice chairman of the Real Estate Board of New York. I am 
testifying today on behalf of the Coalition to Insure Against 
Terrorism, CIAT as it is referred to, which represents a broad 
range of businesses and organizations from across the United 
States, business that are the Nation's principal consumers of 
commercial property and probably casualty insurance.
    Sometimes the subject of today's hearing is characterized 
as an insurance industry issue. I respectfully suggest that it 
is not. It is really an issue of national economic security. It 
is an issue of jobs, and it is an issue of protecting the 
investment of pensioners, shareholders, bond holders, and 
individuals from across the Nation, protecting them from the 
potential economic devastation caused by a foreign enemy 
dedicated to the destructions of our economy, our property, and 
our institutions.
    As everybody has come here and stated, I also believe that 
it is a responsibility of the Federal Government to protect 
both its citizens and their property from foreign enemies. 
There is certainly strong precedent for this in the form of the 
War Insurance Corporation which was established by Congress 
some 6 days after Pearl Harbor.
    The War Insurance Corporation provided property owners in 
the United States with insurance protection against loss or 
damage resulting from enemy attack. Both fixed and movable 
property was insured.
    Since 9/11, this committee and our Congress, Republican or 
Democrat, we recognize, have worked hard to find solutions to 
the economic risks associated with terrorism. The terrorism 
insurance law you enacted certainly has been very welcome. I 
should say it is vital to our industry, but the current law, 
TRIA, set to expire in just 7 months, is creating an 
uncertainty in the market, and I assure you from my own 
experience that until either that law is extended or a 
permanent law is voted on, the insurance companies are not 
eager to provide us the insurance on a certain--with a level of 
certainty.
    Holding this hearing today in the shadow of Ground Zero 
recognizes the fact that--the essential facts that you 
understand what happened in 2002, and you want to continue the 
TRIA, the concept of TRIA. Terrorism continues to be an 
unpredictable threat today here in New York with obvious 
mammoth losses. Insurers continue to say terrorism risk is 
uninsurable due to lack of underwriting criteria and history.
    Our economy continues to need terrorism insurance in order 
to function, and our economy needs the mechanism the program 
provides to enable us to recover quickly and efficiently after 
a terrorist attack. I support market solutions to problems 
where possible, but the market in this case has failed due to 
lack of capacity and ample consideration, and it shows no sign 
of reviving itself.
    We need Congress to act as soon as possible, but we urge 
you to not simply extend the current law for a few years. We 
think that whatever is done must be put in place for many years 
to come. It should be made permanent. Obviously, what has gone 
on in the past 3 or 4 years, it seems quite evident that 
terrorism will be here for years to come, and our need for TRIA 
will be here for years to come.
    In addition, we respectfully suggest that the current 
terrorism insurance laws need to be modernized in a number of 
ways. While TRIA has been largely successful, there are huge 
and significant availability problems. For example, there are 
major markets today, particularly in high urban areas with 
fire-following laws, such as New York, where the combination of 
aggregation of risk, high retention rates for the insurers, and 
rating agency pressure on insurance companies are causing 
significant capacity problem for conventional terrorism 
coverage.
    In other words, some markets today, businesses, still 
cannot buy levels of terrorism insurance that are mandated by 
their mortgages. Moreover, the government today and the 
Government Accountability Office has identified weapons of mass 
destruction, what is known as NBCR. It is not available in the 
market today, notwithstanding the fact that TRIA backstops such 
insurance.
    Did I hear that buzzer? Okay, then I was told to say: In 
summation. In summation, firstly, I can't read the rest of my 
remarks in summary. Most of it, you have heard.
    NBCR is vital, because the $100 billion cap that you have 
put on it today is not adequate, and insurance companies don't 
feel it is adequate, and we cannot get NBCR. I would 
respectfully urge this committee to take that and make that as 
part of--create legislation that will require that kind of 
insurance like normal terrorism insurance.
    I thank you, and I look forward to your questions.
    [The prepared statement of Mr. Green can be found on page 
96 of the appendix.]
    Mr. Ackerman. Thank you very much, Mr. Green. Let me assure 
you that your entire written testimony as presented will be in 
our record and will be read by everybody as well.
    Warren Heck is the president and chief executive officer of 
Greater New York Mutual Insurance Company, a leading provider 
of commercial, multi-peril, and worker's compensation products 
in the northeast and Mid-Atlantic States. We are glad to have 
you and look forward to hearing from you.

 STATEMENT OF WARREN HECK, CHAIRMAN AND CEO, GREATER NEW YORK 
MUTUAL INSURANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION 
                 OF MUTUAL INSURANCE COMPANIES

    Mr. Heck. Thank you, Chairman Ackerman, Ranking Member 
Pryce, and members of the subcommittee. As you indicated, I am 
chairman and chief executive officer of Greater New York Mutual 
Insurance Company, a medium-sized insurer which is the fourth 
largest writer of commercial multi-peril insurance in New York 
State and one of the largest writers of commercial multi-peril 
insurance in New York City.
    While I am here today to discuss the experience of my own 
company, my perspective has also been shaped by my service as 
the chairman of NAMIC's TRIA Task Force. I have no doubt that 
TRIA and TRIEA played a major role in preventing an economic 
catastrophe in helping to get New York City and the country 
back on its feet economically after 9/11.
    I am deeply concerned that, if Congress does not adopt a 
long-term, private-public terrorism risk insurance program, 
many of our citizens who need terrorism coverage to operate 
their businesses across our Nation will either be unable to get 
insurance or unable to afford the coverage that is available.
    The experience in New York City following the 9/11 tragedy 
demonstrates why Congress must extend TRIEA. Immediately after 
the terrorist attack, most primary insurance carriers began to 
non-renew their large commercial property and worker's 
compensation business or reduce their limits of coverage to 
levels below what was needed by the business community. The 
result was very harmful to the New York economy, leading to the 
postponement of many construction projects and significant 
increases in pricing of commercial multi-peril insurance.
    The few remaining insurers increased their prices because 
of the significant terrorism exposure, and many cut back when 
concentrations of values and employees became too large. TRIA 
reduced the fear that a worst case terrorist event could render 
my company insolvent. Without the passage of TRIA and TRIEA, 
our company could not have provided adequate levels of coverage 
for many of the existing policyholders in New York City and 
retained the insurance capacity needed to write new business.
    5\1/2\ years after 9/11, with no other terrorist attack on 
U.S. soil, terrorism reinsurance availability remains limited, 
and the prices are extremely high. Without the government 
backstop, I believe the primary insurance market would have 
dried up in large urban centers, particularly in New York City.
    These and other problems flow from a simple and inescapable 
fact, and you heard it from other witnesses, that terrorism is 
a classic uninsurable risk. In order for the private market to 
function efficiently, it needs the availability, and I won't go 
into that anymore. I think you have heard it enough.
    Though terrorism modeling can help individual insurers 
reduce their exposure by quantifying their risk, it cannot 
protect an entire industry and the economy against damages that 
could run into hundreds of billions of dollars. Only the 
Federal Government can do that.
    My experience tells me that without a Federal program, we 
would again find ourselves in the immediate post-9/11 
situation, with insurers excluding terrorism unless required to 
offer it by the States. Insurers forced to write such coverage 
would have no choice but to either charge very high rates or 
decline to write the business, thereby inhibiting economic 
growth.
    Further, there is no evidence or reason to believe that the 
capital markets will replace the missing insurance capacity or 
that TRIEA has crowded out private market capacity. The capital 
markets take their cue from the reinsurance markets.
    Key players have indicated that the potential market for 
terrorism bonds is $1- to $2 billion at best over the next 5 
years, and there is no appetite whatsoever for developing a 
bond market for NBCR events.
    Since the Federal Government has historically assumed the 
large responsibility for large natural catastrophes, it seems 
fair to conclude that the government would step in and help 
people harmed by a future terrorist event. Thus, the importance 
of a long-term, private-public terrorism insurance plan to the 
Federal Government is that it would reduce its exposure and 
provide for an orderly processing of claims.
    The insurance industry has been working to devise such a 
long-term program for Congressional consideration that would 
maximize private sector participation without threatening the 
economic viability of the industry.
    A critical consideration for my company and small and 
medium sized insurers that NAMIC represents is the event 
trigger. Too high a trigger would drive them from the market, 
because reinsurance costs would be too expensive, making 
primary coverage unaffordable. I think a $50 million trigger 
would be likely to assure the continued involvement of these 
insurers in the state of terrorism insurance.
    It is important to recognize that these insurers provide 
competition for larger insurers, and thereby lowering prices 
for policyholders, and really creating a competitive market.
    NAMIC also supports the creation of a federally chartered 
entity that would establish a reinsurance market to help 
companies manage their risks retained. With voluntary insurer 
participation, this middle layer of potential risk bearing 
capacity would provide the kind of private market test that 
some in Congress believe is needed.
    Finally, NAMIC supports a long-term program of at least 5 
years, and more than that would be very helpful to prevent the 
destruction in the market that took place as TRIA was about to 
expire in 2005.
    My written testimony contains a more detailed description 
of NAMIC's views regarding a long-term program. I want to thank 
you once again for the opportunity to testify on this issue of 
vital importance. NAMIC appreciates your continuing leadership, 
and we stand ready to assist you in any way possible in 
developing an effective long-term terrorism insurance plan.
    Mr. Ackerman. Thank you very much, Mr. Heck, and I assure 
you as well as the other members of the panel that your full 
statements have already been distributed to all the members of 
the panel and will be carefully read.
    [The prepared statement of Mr. Heck can be found on page 
105 of the appendix.]
    Mr. Ackerman. Steven K. Graves is managing director and 
chief operating officer for Principal Real Estate Investors. 
Mr. Graves directs mortgage originations and mortgage servicing 
portfolios that include investment activities in more than 60 
markets nationwide. While TRIA certainly had a significant 
impact on the City of New York's market, we are looking forward 
to hearing from Mr. Graves about the impact that TRIA has also 
had on other markets as well.
    Mr. Graves.

    STATEMENT OF STEVEN K. GRAVES, CHIEF OPERATING OFFICER, 
  PRINCIPAL REAL ESTATE INVESTORS, ON BEHALF OF THE MORTGAGE 
                      BANKERS ASSOCIATION

    Mr. Graves. Thank you, Chairman Ackerman, Ranking Member 
Pryce, and distinguished committee members, for inviting me 
here to speak this morning.
    My company, Principal Real Estate Investors, is one of the 
Nation's largest commercial real estate lenders with $22 
billion in mortgages under management and administration. 
Consequently, we are a major stakeholder in the future of the 
Terrorism Risk Insurance Extension Act. In fact, because of 
TRIEA, terrorism insurance is in place for over 90 percent of 
the commercial real estate mortgages that my company 
administers. However, with the expiration of TRIEA looming at 
the end of this year, Congress must take action to implement a 
long-term solution.
    TRIA and its subsequent extension has been an unqualified 
success for increasing the availability and affordability of 
terrorism insurance. This is true not only for high valued 
trophy properties located in high profile markets, but for the 
entire commercial real estate market.
    In fact, an MBA study revealed that 84 percent of all 
commercial real estate projects included in the study had 
terrorism coverage in place. In addition, the study revealed 
that the average property value for properties with coverage 
was just over $5 million. This is a far cry from what most 
would consider a trophy property.
    The chief factor behind the success of TRIEA is the ``make 
available'' provision which requires insurers to offer coverage 
in order to participate in the Federal terrorism reinsurance 
program. In fact, most currently available policies are 
directly conditioned to the TRIEA ``make available'' provision.
    Thus, if the ``make available'' provision was excluded from 
a long-term or permanent terrorism solution, a wide range of 
borrowers and commercial real estate loan servicers would be 
caught between their contractual obligations to have terrorism 
insurance in place and a lack of available terrorism insurance. 
Accordingly, MBA strongly encouraged Congress to include a 
``make available'' provision in any TRIEA extension bill you 
consider.
    With over $2.8 trillion in debt outstanding, the commercial 
multi-family real estate debt sector is an integral and large 
part of the Nation's economy. This debt finances the vast 
majority of office, retail, industrial, and multi-family 
buildings. These buildings house the businesses that are the 
engines for the Nation's economy.
    A lack of available and affordable terrorism insurance 
would not only impact the commercial real estate finance 
sector, but would ripple through the economy as buildings 
become more difficult and costly to finance and purchase. 
Available and affordable terrorism insurance is not only 
necessary for commercial real estate finance sector. It must 
also be an important part of our Nation's response to the 
threat of terrorism.
    Typical commercial mortgages are highly leveraged. In 
addition, most commercial real estate lending is non-recourse, 
which means that in the case of default, the lender can only 
look to the underlying value of the property to recover its 
mortgage balance. As a result, lenders have an acute interest 
in preserving and protecting asset values.
    In order to protect their interest, lenders place paramount 
importance on requiring and verifying that uninterrupted 
insurance coverage, including terrorism insurance, is in place 
for the life of the loan.
    For these and other reasons, commercial real estate lenders 
mandate terrorism insurance be in place as a condition for 
funding a loan. Should terrorism insurance become unavailable, 
lenders would face a decision of violating their underwriting 
requirements, would no longer fund loans.
    A large scale cancellation of new construction projects and 
funding of new loans in the aftermath of September 11th 
strongly indicate that lenders would dramatically curtail their 
activity.
    MBA believes the Federal Government must act to achieve a 
long-term terrorist risk solution. An extension should include 
the following elements.
    Terrorism insurance needs to be widely available, requiring 
an extension of the ``make available'' provision in the current 
law. The bill should eliminate short term interruptions in 
terrorism insurance availability and price shocks when it is 
implemented. This will require at least a decade-long extension 
of the program.
    Terrorism insurance needs to be priced in an affordable 
manner and cover all perils, including nuclear, biological, 
chemical, and radiological threats from both foreign and 
domestic sources.
    Any long-term solution needs to preserve and implement the 
required notifications to loss payees and additional insurance 
of coverage lapses, gaps, and renewals.
    Once again, I appreciate the opportunity to provide our 
perspective on terrorism insurance to the subcommittee. As the 
Nation's largest representative of commercial real estate 
mortgage lenders and servicers, the MBA stands ready to provide 
any assistance that you may require.
    We look forward to partnering with you, government 
agencies, and the insurance industry to help craft a long-term 
solution for terrorism insurance that makes terrorism insurance 
coverage inclusive, available, and affordable.
    Thank you very much for your attention in this vital 
matter.
    [The prepared statement of Mr. Graves can be found on page 
79 of the appendix.]
    Mr. Ackerman. Thank you very much, Mr. Graves.
    Donald K. Bailey is the chief executive officer of Willis 
North America, one of the largest risk management firms in the 
United States. Mr. Bailey is responsible for managing the 
company's strategic direction throughout the United States and 
Canada. We appreciate his appearing before our committee this 
morning and look forward to hearing his perspective on 
terrorism risk insurance and the impact of TRIA.
    Mr. Bailey.

STATEMENT OF DONALD J. BAILEY, CHIEF EXECUTIVE OFFICER, WILLIS 
                               NA

    Mr. Bailey. Good morning, Chairman Ackerman, and Ranking 
Member Pryce. My name is Don Bailey, and I am the CEO of Willis 
North America, a unit of The Willis Group, the global insurance 
broker. It is a distinct pleasure and honor for me to join you 
this morning.
    Willis works with corporations, public entities, and 
institutions around the world on all matters of commercial 
insurance, reinsurance, risk management, financial, and human 
resource consulting.
    In addition to representing Willis here today, I am also 
speaking this morning on behalf of the Council of Insurance 
Agents and Brokers. The Council represents the Nation's leading 
commercial property and casualty insurance agencies and 
brokerage firms.
    With our Willis North American headquarters located not far 
from where we are gathering this morning, we experienced 
firsthand the devastation wrought on New York City by the 
events of September 11, 2001. Since that time, we in the United 
States have been fortunate that we have not experienced another 
terrorist attack on our soil. However, if you look to London, 
Madrid, and other locations around the world, I think we can 
all agree that terrorism is a permanent problem for which we 
need a permanent or at least a sustainable solution.
    Regrettably, the question of another terrorist attack here 
in the United States is a matter of ``when'' and not ``if.'' We 
thank the committee for convening this hearing to explore the 
long-term solutions to terrorism risk insurance.
    Prior to September 11th, terrorism insurance was readily 
available. It was offered as an add-on to many policies at very 
modest prices, because the threat was perceived to be very low. 
Clearly, after September 11th, that paradigm shifted quite 
significantly. Terrorism insurance was almost entirely 
unavailable, and the small amount that was available was 
prohibitively expensive. Planes didn't take off. Many 
construction sites in what we now perceive to be high risk 
zones, including those here in New York City, fell silent, and 
commerce in many cities came to a halt.
    Congress, realizing the dire need, acted quickly by passing 
TRIA and subsequently the extension to provide available and 
affordable terrorism capacity for U.S-based risks. The program 
has also allowed the private market to progressively increase 
its role in covering terrorism risks.
    The Federal funds provided by TRIA backstop have never been 
tapped. Not one taxpayer dollar has been spent on claims, but 
the program has been an unqualified success in stabilizing the 
insurance markets and allowing insurers to provide much needed 
terrorism coverage at affordable prices. Policyholders, the 
business of our economy, have not had to deal with extremely 
high and volatile terrorism insurance costs, and have been able 
to budget for their business plans. For many commercial 
policyholders, obtaining terrorism coverage means more than 
just peace of mind.
    It is essential to doing business. It may be required 
sometimes by State laws and regulations and often by contract, 
to obtain a mortgage, for financing of new construction, for 
the expansion of a business, or for a new entrepreneurial 
venture. Think of the impact none of those activities happening 
would have on the business of New York.
    Some suggest that the private market can handle the losses. 
Consider this: Estimates indicate that there is only about $6- 
$8 billion in global terrorism reinsurance capacity available, 
but terrorism losses from a single attack could reach $100 
billion.
    Industry numbers indicate that there is $1- to $2 billion 
in capacity available for nuclear, biological, chemical, and 
radiological coverage, yet the American Academy of Actuaries 
modeled the impact of a medium sized nuclear, biological, 
chemical, or radiological attack in New York City at in excess 
of $450 billion.
    Clearly, there is simply not enough capacity in the private 
market to cover losses due to terrorism, and the limits of such 
an attack, potentially exponentially beyond what we saw at the 
World Trade Center, are bound only by the imagination of 
terrorists and thought processes that are beyond the scope of 
models and calculations.
    Some contend that dealing with the risks of terrorism 
insurance is a matter for the industry to handle on its own: 
Collect the premiums; assume risk of a potential loss, as they 
do with other categories of risk. But consider that a terrorist 
attack is not perpetrated against a company or a building. The 
terrorists who flew planes into the World Trade Center and the 
Pentagon and the plane that crashed into the field in 
Pennsylvania--they were attacking our country. Could you 
imagine a scenario where the Federal Government knew an attack 
was going to happen and did not take steps either to prevent it 
or at least prepare for the aftermath? I suggest that not 
developing a long-term terrorism risk insurance program would 
be just that.
    The objectives of TRIA are clear: Harness private industry 
capacity to directly contribute to terrorism related losses; 
deliver Federal assistance in a fair and efficient manner; and 
repay the government for any outlays. Because of TRIA, the 
terrorism insurance market has largely stabilized. Terrorism 
coverage has been steadily expanding, and the price of coverage 
has become more affordable. Now is decidedly not the time for 
the Federal Government to withdraw its involvement in the 
terrorism insurance market.
    Terrorism threats facing our country remain significant and 
unpredictable. Our reinsurance industry still lacks sufficient 
capacity to address terrorism risks on its own, and the primary 
insurers are still not willing to expose themselves to enormous 
terrorism risks without charging prohibitively high prices.
     Allowing TRIA to expire at this time will certainly 
cripple, if not completely paralyze, a significant portion of 
our economy. TRIA is not about protecting the balance sheets of 
insurers and brokers. It is about protecting commercial 
policyholders and creating and sustaining a national economy 
that encourages investment and development.
    This is a matter that far transcends the insurance 
industry. It is a matter of our national economic security, and 
I thank the committee for your time this morning.
    [The prepared statement of Mr. Bailey can be found on page 
48 of the appendix.]
    Mr. Ackerman. Thank you very much, Mr. Bailey.
    Our final witness, Edmund F. Kelly, is chairman, president, 
and chief executive officer of Liberty Mutual Group, the sixth 
largest property and casualty insurer in the United States. So 
terrorism risk insurance is, obviously, a very important issue 
for Liberty Mutual Group, and we look forward to hearing Mr. 
Kelly's perspective this morning.

 STATEMENT OF EDMUND F. KELLY, CHAIRMAN, PRESIDENT, AND CHIEF 
            EXECUTIVE OFFICER, LIBERTY MUTUAL GROUP

    Mr. Kelly. Thank you, Chairman Ackerman, Ranking Member 
Pryce, and distinguished members of the committee. I also thank 
you for the opportunity to testify on what we view as one of 
the great challenges facing our Nation, the economy, our 
policyholders, and industry.
    As many of the members remarked, it is fitting that we meet 
here in New York, which bore the brunt of the cost of 
terrorism. We at Liberty Mutual are proud to insure such well 
known New York institutions as Macy's, Morgan Stanley, New York 
University, and J.P. Morgan, Chase, as well as our role in 
insuring the private contractors who cleaned up the World Trade 
Center after the event.
    The economic security of this City is of great importance 
to us and the Nation, and I commend the chairman and ranking 
member for their commitment to extend TRIA, and look forward to 
working toward that end.
    The economic consequences of terrorism present a very 
difficult long-term challenge. In particular, it is important 
that we are assured the financial resources are available 
quickly to rebuild the lives and businesses that will be 
damaged by an act of terrorism.
    It is with great pride that we can look back--we in the 
insurance industry look back--at the events following 9/11 as 
we quickly, fairly, and sensitively met our legitimate 
obligation and paid every single legitimate claim quickly. We 
are proud of that record, and I stand here to reaffirm our 
commitment to do it again.
    Unfortunately, the possible scope of a terrorism act is too 
great for us to withstand. We need more permanence. The ranking 
member echoed former Chairman Mike Oxley in saying we can no 
longer kick the can down the road. We have been doing that now 
for too many years.
    Fundamentally, I would agree with the other panelists that 
the public-private partnership represented by TRIA is sound and 
has worked remarkably well. Look at the effect of the industry 
deductible. It is far from a gift to insurers. Under the 
current Act, our deductible, Liberty's retention would be close 
to $2 billion before TRIA would kick into help us--$2 billion, 
hardly a handout to the industry. But because of those 
deductibles, we and our competitors have worked with the 
policyholders to increase the security and safety of their 
buildings and their employees.
    It is that role that we in the private sector can play so 
well. We understand risk, and we understand how to work with 
our policyholders to reduce that risk, so maintaining that 
deductible is critically important.
    Also the deductible allows some development of private 
market capacity to meet the terrorism risk. I say some 
development, because there is not enough private capital in the 
world to meet a large terrorism event. It is easy, very easy, 
to construct an event that would cost up to three-quarters of a 
trillion dollars, and yet as mentioned earlier, the entire P&C 
industry has only roughly $150 billion in capital to address 
the TRIA risks.
    So we do need an extension. However, there are several 
things we could improve on. People have all mentioned before 
permanency, the elimination of the distinction between foreign 
and domestic terrorism, and of course, increasing the overall 
cap from $100 billion, which would be meaningless in the case 
of a significant event.
    Others have mentioned the recovery surcharges. I urge you 
to think long and hard before assessing post-event premium 
surcharges. Those surcharges will not be borne by large 
businesses. Surcharges, mandatory charges, inevitably become a 
burden for small and medium sized businesses, as large and 
wealthy businesses increase their self-insured retention and 
reduce their premium, so it would be a tax on mid-size and 
small businesses.
    Second, we at Liberty Mutual are very encouraged by the 
discussion of tax deductible reserves. However, our public 
counterparts may have a problem with the gap accounting for 
such reserves. So there are technical issues to look at. 
However, we think it is a very good idea, well worth exploring.
    So in summary, we need TRIA. We need a permanent TRIA. The 
current structure worked basically very well. With a little bit 
of tweaking, it can work very well for the long run, and we at 
Liberty Mutual and the rest of the industry look forward to 
working with you as we address this significant issue.
    [The prepared statement of Mr. Kelly can be found on page 
116 of the appendix.]
    Mr. Ackerman. Thank you very much, Mr. Kelly.
    The Chair notes that, despite the seemingly unwieldy size 
of the witness table and the power therein represented, that 
you are probably one of the most disciplined panels that I have 
ever seen, keeping within the time constraints that we 
indicated. We appreciate that.
    The Chair, with the consent of the members, unless there is 
any objection, will limit to 3 minutes the questions of each 
member, and see where that takes us. I think, that way, we 
could possibly get out--that is for the question and answer--so 
that we can get out on time.
    I think most people at the panel referred to either 
permanency or long term. Nobody is advocating for mid-term or 
short term extensions, at least on this pretty diverse panel. 
Yet there is some controversy in the Congress as to the length 
of time of the extension, going anywhere from 3 years to a mid-
range of 6 to 8 years, to 10 years, to 15 years and permanent.
    Anybody want to advocate other than--well, let's just pick 
a number? What would be the barest minimum that you think would 
make any real sense for planning and other purposes? Maybe just 
a quick answer from each of the--anybody who would want. Let me 
put out that way. Mr. Green?
    Mr. Green. 10 years.
    Mr. Ackerman. 10-year minimum?
    Mr. Green. Yes, or until the threat is depleted, whichever 
occurs first.
    Mr. Ackerman. I know how to measure 10 years. Anybody else 
want to?
    Mr. Graves. The Mortgage Bankers Association favors a 
permanent solution, but 10 years, we would view, as a minimum.
    Mr. Heck. I would suggest--I said a minimum of 5 years, but 
I do think that 10 years is a better minimum, and the reason is 
that in the last year when the TRIA or the government backstop 
is running out, insurance companies have a dilemma, and they 
never know whether it will be extended, and they begin to non-
renew business, and it really is very disruptive of the 
economy. So I think the longer, the better, and of course, 10 
years is a minimum, and my hope is that it will be indefinite.
    Mr. Kelly. I believe in starting a football game inside the 
other team's 10-yard line. So permanent is a minimum. That 
having been said, I think anything that is not double digit 
would be disruptive. So I believe that 15 years would be a 
target, 10 years would be acceptable, but anything less would 
be really disruptive.
    Mr. Bailey. I think a lot of people struggle with the word 
permanent, that it's something that can't be undone. So I put 
in my remarks ``sustainable.'' I think you do start talking 
about 10 years, 15 years-plus, but something that is 
sustainable is really what we are trying to achieve in the end.
    Mr. Ackerman. Mr. Lieber.
    Mr. Lieber. If I may, just from our standpoint, I think 15 
years is a minimum, and here is why, is that in large scale 
development projects, between the time it takes to get a 
project planned, designed and approved, built and leased up to 
the point where you are going to be in a position to have 
takeout financing, could be in excess of--is very frequently in 
excess of 10 years, so 15 years for a large scale project is 
really what you need, because you need the construction lender 
to know terrorism insurance will be there. So there could be a 
takeout by a permanent lender, and all the other participants 
in the project.
    There is one other variable. It's a little technical, but 
if you had an act of terrorism, clearly, there would be 
lawsuits about design defects and was the project physically 
designed well. The statutes of repose that affect those 
lawsuits go in--I think in the State of Nevada it is 12 years. 
In California it is 10 years. So you need the project to be 
built and for that statute of repose to expire before the 
exposure, the need to have terrorism backstop, goes away. So it 
has to be 15 years.
    Mr. Ackerman. Thank you very much. The Chair hears that his 
time is up. The distinguished minority leader.
    Ms. Pryce. Thank you. I would love to be the minority 
leader, but today I am, I guess.
    Mr. Ackerman. You are today.
    Ms. Pryce. The Mayor and others mentioned the distinction 
between international and domestic terrorism. Several of you 
did as well. I don't think we need to look any further than 
Oklahoma City to see that we can home-grow our own forms of 
terror, and I don't know where that distinction came from, and 
I am not sure what sense it makes. But if any of you could 
comment on that, why--I think it came up in the Senate, did it 
not? Does anybody have any thoughts? Does anybody here think 
that it should be only international, foreign? I wouldn't think 
so.
    The other thing that everybody has mentioned is NBCR, and 
you know, it is very, very hard to predict terror. It doesn't 
lend itself, especially the NBCR component, to actuarial 
digestion or modeling, but my prediction is, if we don't cover 
this in some way, that is exactly where we will be hit. These 
terrorists are intent on doing as much damage as they can, not 
only to human life, but to our economy if they see a hole in 
coverage or see an opportunity. I just think that there is 
absolutely no way we can go without addressing this.
    Does anybody disagree with that?
    Mr. Kelly. Distinguished Member, there are two ways to 
think of the insurance risk, and I think--
    Mr. Ackerman. Pull that a little bit closer.
    Mr. Kelly. I think the Superintendent did an excellent job 
with his diagram. There is the frequency risk and the absolute 
scale. The absolute potential loss from NBCR dramatically 
overwhelms the absolute potential loss from a physical--
conventional, if one can think of conventional terrorism.
    When we think of hundreds of billions of dollars of loss, 
that is under either numerous coordinated traditional terrorist 
acts or a single NBCR attack, so we absolutely have to have 
NBCR coverage. It is unacceptable, if that is appropriate to 
say to Congress, but to me it would be unacceptable not to have 
significant coverage of NBCR.
    Ms. Pryce. One other thing that intrigued me, Dr. Ferguson. 
You mentioned that there is a difference between a certified 
act and an uncertified act, and I don't understand that.
    Mr. Ferguson. I am sorry. That is the technical language 
being used in the Act for this foreign versus domestic story 
that you just touched on.
    Ms. Pryce. Oh, okay.
    Mr. Ferguson. I'm sorry. I knew as I was saying it that 
there might be some confusion, but this whole issue that you 
have raised is right.
    I should add that you raise another important issue that, 
as an economist, I have been thinking about, which is: If you 
leave open certain areas such as NBCR, that is obviously an 
area that our enemies could exploit in some way, and so in some 
sense closing these important risks such as NBCR or the group 
life issue, I think, is very important, just for the reasons 
you point out for the incentive effect.
    Mr. Ackerman. If the Chair might, under the existing Act it 
is the Secretary of the Treasury that certifies that indeed the 
incident was an act of international terrorism, rather than 
something else. The Act is currently silent on an act of 
domestic terrorism or some kind of combination of domestic 
terrorists inspired by international terrorists, which we don't 
contemplate necessarily.
    We would have to add language, if indeed we do cover 
domestic terrorism, as to who would declare it, whether it is 
the Treasury Secretary or some other authority, but I think the 
consensus seems to be, starting with the Mayor, that it would 
make no difference who the attack was caused by. We just have 
to decide how to put the language in. Mr. Heck?
    Mr. Heck. Yes. I would like to say something on behalf of 
medium and small size companies with respect to NBCR. I suggest 
that NBCR should be covered by the government, but it should 
apply as a separate program, and it should apply--it should be 
covered by the government from first dollar.
    The reason that I suggest that is that it is such a serious 
and complete destructive event that the small and medium sized 
companies just could not afford to have that exposure for their 
retentions and for the co-insurance limit.
    Ms. Pryce. Thank you. My time has expired.
    Mr. Ackerman. Thank you. Ms. McCarthy.
    Ms. McCarthy. Thank you. I would appreciate just a little 
bit of clarification on a number, and I hope I have my names 
down right on who said it.
    Basically, actually, it was Mr. Graves who was talking 
about the life of the loan. Now how long is the life of the 
loan when you are talking about the kind of monies I think we 
are talking about?
    Mr. Graves. The life of the loan can be--they range 
anywhere from as short as 2 to 3 years to as long as 20 or 25 
years. So there is a wide range of loan terms available for 
commercial properties, and it usually depends on how the 
property is leased. I would say the most prevalent permanent 
loan in the market would be 10 years.
    Ms. McCarthy. Really? So it is not like us paying off a 30-
year mortgage?
    Mr. Graves. No.
    Ms. McCarthy. Because that is what, actually, I was 
thinking. If someone else could answer the question on building 
risk insurance. I am not exactly sure if I know building risk 
insurance. Is that at the process for like where we were down 
at the Twin Towers where it has been already spent a lot of 
money to get to where we are today?
    Mr. Lieber. It insures against damages that may take place 
during the construction process, and what is happening, the 
reason I mentioned it, is that although you would get builder's 
risk insurance without terrorism, and that is really the option 
that is mostly available to us, what is happening is that 
because in New York State a builder's risk or a property 
insurer is liable for a fire following an event.
    Some of the builder's risk insurers are, in effect, taking 
some terrorism risk, even though we don't have--they are not 
selling us terrorism insurance, because they could 
theoretically be liable if there is an impact, and then 
subsequently a fire that causes damage, they could be liable, 
even though they haven't sold this terrorism insurance. That 
was the reason I made the point that we should clarify the 
scope of TRIA to make it clear it covers all the consequences 
of an attack.
    Ms. McCarthy. Then just to follow up on one other question: 
Obviously, everyone is concentrating here on New York, because 
that is where it happened. That is where we are rebuilding. 
What do you see as far as other parts of the country on buying 
terrorist insurance? Have you seen, certainly, an uptick, and 
what are the cost analyses? Is it like other insurance, like if 
it was in the middle of Wyoming, are those costs cheaper than, 
say, here in New York?
    Mr. Kelly. Well, the costs vary a little bit, but it is not 
so much the cost. It is the mindset. I think it is not 
surprising. We have mandatory offer, which is part of the 
current law. We get roughly a 60- 62 percent take-up in New 
York, the Manhattan area, but a 50 percent take-up outside 
Manhattan.
    So people outside the northeast, Manhattan--Manhattan and 
the northeast have a lot less concern, which, of course, is a 
political problem, too--have a lot less concern about the 
impact of terrorism. However, our modeling--and we work with 
various experts--indicate that some of the greatest exposures 
are, in fact, outside Manhattan, because people have done a 
good job of hardening buildings in Manhattan, and in Manhattan 
large buildings protect each other from events.
    Mr. Green. The biggest issue is, whether we want to or not 
get insurance and what is our appetite for risk is really 
beyond--it is not an issue here, because our mortgages in New 
York--you have a big office building. The mortgage holder will 
require you to have a certain amount of casualty, a certain 
amount of terrorism insurance. We don't have a choice.
    Now when you go outside of New York, I don't think the 
mortgage lenders are as extreme in requiring you to have 
terrorism insurance, so it is really not a level playing field 
at all.
    Mr. Heck. With regard to cost, there are really two 
different ways to look at it. The cost on the primary end when 
we sell an insurance policy to a business, the cost is kept 
down because of TRIA, and if TRIA wasn't there, the cost--you 
would have a risk based cost. It would have to go up if the 
regulations would permit it.
    On the reinsurance end, and that is the insurance that the 
insurance companies buy, the cost is exorbitant. It is 
extremely high, and there is a limited amount of reinsurance 
available, and as Mr. Kelly said, I don't see much distinction 
from city to city in that expense. It is very, very high.
    Ms. McCarthy. Thank you.
    Mr. Ferguson. May I speak to this, as the only person here 
from the reinsurance industry. I think we ought to be a little 
careful. There are a range of products and services for sure. 
With TRIA in place, there seems to be sufficient capacity in 
the reinsurance industry to do backing.
    It is certainly true that the pricing may vary somewhat 
from location to location, but I would be cautious. I think the 
word exorbitant doesn't fully describe all of the economics of 
this. So we should be a little cautious about being sure about 
the pricing between reinsurance and insurance.
    Mr. Kelly. One other thing. We keep talking about real 
estate and property, and that is a huge and important market to 
us and a very important good. But there is also worker's 
compensation.
    There are people, and there is where it is important we 
understand it isn't just a matter of protecting, albeit 
important--protecting the lender. We also have to make sure we 
protect the workers in the building and that we can put those 
workers back on their feet or take care of their families in 
case of disability or death. Let's not lose sight of that 
hugely important part of TRIA.
    Mr. Bailey. I would just chime in, actually in validation 
of that. That might be one of the greatest arguments for the 
fact that this is not just a New York City issue. We have 
clients all over North America, and where there is a 
concentration of risk relative to employees in a single 
location, it is very difficult for us to currently get worker's 
compensation insurance. You take the backstop away. It would be 
almost impossible.
    Mr. Ackerman. Unless there is any objection, the Chair 
would ask the timekeepers to afford 4 minutes to our Republican 
colleagues, because to pass this we want to make sure that 
everybody's questions are answered. Mr. King.
    Mr. King. Thank you, Mr. Chairman. I want to thank all the 
witnesses for their testimony. I would like to direct my 
question to Mr. Lieber on the issue that you were talking 
about, the insufficient capacity, even with TRIA.
    Now if I could be clear, if we do resolve the issues 
regarding NBCR, regarding the foreign and domestic terrorism, 
and the issue of proximate consequences, how much would that 
cut into the problem of insufficient capacity?
    Mr. Lieber. It is a very good question. It is impossible to 
foresee. Those will have significant positive consequences, we 
believe, as to capacity, permanency, NBCR and the other items 
that you mentioned.
    We believe there will still be--and again, it is based on 
input from experts and insurance brokers like Aon and Willis--
that we are so far from having sufficient capacity that we 
ought to discuss some other steps that might be taken to 
incentivize insurance capacity to come into areas like Lower 
Manhattan.
    Mr. King. I don't know if this is the appropriate forum, 
but since Chairman Ackerman gave me 4 minutes, could you just 
expand on what you think those other steps would be?
    Mr. Lieber. Well, one of the other members of the panel 
talked about reducing the trigger level where the TRIA Federal 
backstop kicks in, and you were talking about, I think, in the 
case of the small insurers, to incentivize them to come in. 
That, for example, might induce some small insurers who 
otherwise can't play in this marketplace where you have to, 
under the current program, wipe out 20 percent of your capital 
before the Federal backstop kicks in--that might induce them to 
come in and participate in this marketplace.
    More broadly, you know, you could consider adjusting the 
retentions, the deductibles, for areas that are identified by 
Congress as high risk.
    Those are a couple of the suggestions that we think are 
worth considering as part of this result.
    Mr. King. Thank you.
    Mr. Kelly. Congressman, I think we should take a hard look 
at the current tax structure as it relates to catastrophe 
bonds, particularly terrorism bonds. U.S. tax laws sort of end 
up forcing us to create bond structures overseas in better tax 
jurisdictions.
    If one could look at the tax laws to create--make it easier 
for us to work with the capital markets and through our 
reinsurers with them to create cat bond structures, it would 
fill that layer, that layer between the private sector and the 
government sector. I think that is an area we need to look at 
very closely.
    Mr. King. Thank you. Mr. Kelly, sorry I had to jump up when 
you were answering the question. I just got a--MediGroup called 
my wife. Everything was fine. We were 50/50. So I will give you 
and Gary Ackerman the credit for that. Thank you.
    Mr. Ackerman. I'm glad you got good news.
    Mr. Heck. May I say something about the trigger? And just 
to explain why the trigger at $100 million is so difficult. My 
company insures buildings. We are a big building insurer in New 
York. We try to stay at $50 million, no larger than a $50 
million building, but we do go up to $100 million on many of 
our risks.
    If we should have an incident with a direct hit to a 
building we insure that might be $90 million, TRIA does not 
apply. We would be in serious difficulty, because $90 million 
would represent a very significant part of our capital 
structure. So without TRIA, we would have to bring that $50 
million way down. That is why it is so important.
    Mr. Ackerman. Thank you very much. Mr. Murphy, for 3 
minutes.
    Mr. Murphy. Thank you, Mr. Chairman. I wanted to explore 
with a little bit more depth the questions that Representative 
McCarthy started to query on the difference between this issue 
in New York City and in outlying areas, because I think 
politically it is obviously very important to make people 
understand the national implications here.
    I would open this up to whomever may want to answer it, but 
to talk a little bit more about the difference in capacity of 
the system to respond in New York and outside of New York, and 
also the willingness to write for terrorism absent TRIA in New 
York versus outside of New York.
    Mr. Heck. I could begin. One of the reasons that New York 
City is so vulnerable is that it contains the largest number of 
the largest buildings across the Nation, so it has more targets 
in New York. But I think that every large city is vulnerable, 
and there are some very big buildings in many cities.
    Mr. Murphy. And I guess to maybe ask the question 
specifically, did we have a problem in the months following 
September 11th with insurers being unwilling to write for 
terrorism risk outside of New York as well as inside of New 
York?
    Mr. Heck. I think there was a problem all over. For 
example, pre-9/11 my company wrote up to $250 million on a 
single building. After 9/11 we took that limit down to $50 
million, and that was true everywhere we did business, which is 
regional. We are a regional company.
    So I think that there is no question that that was an 
issue. After 9/11, companies in New York withdrew, and even to 
this day--and you read a lot about the success of the insurance 
industry last year, and it had been one of the best years for 
many, many years for the industry, but we do not see more 
companies coming into Manhattan writing business.
    As a matter of fact, the longer we are here writing 
business, the higher our concentrations, and then we have to 
refine those concentrations by reducing coverage and non-
renewing some business, because all of the companies that are 
in New York now geo-track everything we write. We know what we 
have in each building, how many employees reside in the 
building, and we have to keep track and not permit these 
aggregations to get too large.
    So there is no question about it. It limits the market, and 
it limits availability.
    One of your questions was about how much there is. 
Recently, I was involved in a single risk on a very, very large 
building in New York, a very large building, where the risk 
required $1.3 billion in coverage. The most they were able to 
get was $700 million with terrorism, with TRIA.
    I was called. My company couldn't participate in that; it 
was too big for us. We wrote a good part of the account, and 
the producer, the broker, called me to ask whether I had any 
ideas, and I told him I would try some of the large reinsurers. 
He had been dealing with insurance companies.
    I called the large reinsurers. They seemed interested. They 
later got back to me to say that they were supporting the 
primary companies, so they had no more capacity.
    What the broker did do was to go offshore and was able to 
form some sort of an offshore arrangement to get access to 
TRIA. Then I said to him, ``Well, what are you going to do at 
the end of this year?'' He said, ``I have no idea.''
    So there is really a distinct small limit of coverage 
available on an individual building basis.
    Mr. Kelly. There are two thoughts here. Unlike natural 
catastrophe where there is more than ample insurance and 
reinsurance coverage to meet anything we can foresee, and that 
will be solved easily in the private market, but with some 
bumps along the way.
    With terrorism, it is the absolute scale that scares us--
after September 11th, it wasn't in property insurance that 
shortage was found. It was in worker's compensation insurance. 
We are not allowed by any standard to exclude any act from 
workers' coverage. All acts, all causes of damage, they must be 
mandatorily covered by worker's compensation. It is in the 
insurance of people that the most harmful immediate impact of a 
lack of TRIA would be felt.
    Mr. Ackerman. Thank you. Mr. Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman. Just a couple of 
questions, gentlemen, and thank you very much for your 
testimony today.
    Mr. Heck, you mentioned on the nuclear, biological threat 
that you would like to see dollar one. So in effect, no 
insurance, just something picked up by the Federal Government. 
Does the rest of the panel join in that? So basically, you are 
not selling insurance for that. It is just something that we 
pick up as a whole?
    Mr. Heck. I will say that right now the insurance policy 
for property excludes nuclear. That was excluded sometime in 
the 1940's, and it has been a complete exclusion since then. 
The reason for it is that it is certainly uninsurable. There is 
no way to cover it, and it is complete. If, God forbid, there 
is a nuclear event, it is a very complete situation, and it is 
something that none of us can really deal with. It should not 
really be a private insurance matter.
    Mr. Perlmutter. I mean, I am new at this. So at this point 
in TRIA, there is nothing that talks about nuclear. Are you all 
held responsible in the event of a nuclear event?
    Mr. Heck. Under worker's compensation, there is no 
exclusion for nuclear, and as Mr. Kelly said, the carriers 
would be responsible for that, so it is a really sensitive 
subject. The best way to handle it would be to keep it out of 
TRIA as a separate government program.
    Mr. Bailey. Just a point of clarification. Nominally now, 
NBCR is within the scope of coverage, but you can't get the 
coverage; it is just not available. It is an automatic 
exclusion from any coverage, even terrorism coverage.
    Mr. Perlmutter. So then at this point, the mortgage bankers 
aren't demanding it of the real estate developers, who then 
have to go get the insurance company to provide it?
    Mr. Graves. We would like it available. It is a risk. It is 
a risk that we are not being paid for as a lender, so we would 
strongly encourage the inclusion of that.
    Mr. Perlmutter. Just one last question. I can't remember 
who, maybe it was you, Mr. Lieber, or somebody mentioned that 
group life insurance is not being covered at this point. Dr. 
Ferguson, maybe that is what you were addressing?
    Mr. Ferguson. Well, it is exactly the same point you have 
heard with worker's comp. It is again a very large 
concentration of risk. The exclusions do not exist, and I am 
not sure of the history of why worker's comp and group life 
were treated differently, but it would seem they are very, very 
similar kinds of risk and should be treated consistently, and 
it is just that straightforward an argument. But it is 
extremely important, for the reasons that my friend from 
Liberty Mutual has talked about in terms of just covering life 
is very important.
    Mr. Perlmutter. The last thing, and I know that the Federal 
Government operates--doesn't account quite the same as all of 
you must do your accounting, but any sense of what this is a 
cost to the Federal taxpayers in establishing a reserve?
    Mr. Ferguson. First let's get the facts. As you well know, 
it has cost absolutely nothing at this stage. It is a backstop. 
Secondly, the way I would think about it, in addition to this 
budget scoring issue which, obviously, is fairly complicated, 
is should an event occur, the government would undoubtedly be 
involved anyway.
    So I think the challenge from a budgeting standpoint is in 
some sense you create certainty up front by having this 
backstop. You leave uncertainty with the real probability that, 
should a very large event occur, the government would step in 
anyway.
    So while it is not in any sense unimportant how the budget 
scorers account for it, as I think about it as a former 
government policymaker, it is one of these events where, 
frankly, because there is so much market failure, the 
government has to step in. So I think there is really no way to 
get around that fundamental issue of why the government is 
required and why I am sitting here today.
    Mr. Ackerman. Mr. Garrett, 4 minutes.
    Mr. Garrett. Thank you again, Mr. Chairman. You know, I 
think the first panel and then the members of this panel also 
made the comment with regard to the number of projects that are 
out there potentially at risk, and if we don't move forward 
that they would be certainly subject to risk.
    I can assure you from both sides of the aisle that we want 
to do nothing that would put these projects that are on the 
board or potentially on the board at risk.
    On the upside of all this, you know, both the testimony I 
have heard today and also from the President's Working Group, 
you would see that both in the original TRIA and the subsequent 
extension that you have seen some positive sign from it.
    The PWG found that insurers have a better understanding of 
the geographic mix and the concentration issues that they have 
to deal with. They are better able to make underwriting and 
pricing decisions, as testimony has already indicated, and 
there is more terrorism insurance sold year to year, and 
financially it indicates in the report that most insurers have 
policyholder surplus levels that are exceeding those levels of 
2001 and, as the report said, that certain industries, certain 
carriers, are doing pretty well with the profits.
    They found that with the extension, the revision of TRIA, 
that when it was scaled back, the private sector capacity 
increased, premiums fell, and overall policy purchases called 
takeup grew as well.
    So we have the upside of both the original and revised 
version of TRIA. One of my findings in government is that we 
don't do anything unless, especially on complicated issues such 
as this, unless we are compelled to, either through tragedy or 
through time. Obviously, we did something right after 9/11, 
because that was tragedy. We did something after the 3-year 
first period time, because that was a time constraint, and we 
pushed it off--we did it for a 2-year period of time.
    I am concerned that, if we do as the bottom line number 
that the panel comes here with 10 years--others say 15 years; 
others say a permanent level--that we will not be compelled to 
come back like we did after the first 3 years and make some 
improvements to it, and what we are about to do right here is 
make some improvements to it.
    Mr. Lieber, you mentioned also some other ideas of 
potential improvement besides those. Once we fix a problem, 
Congress doesn't usually go back and re-fix it unless those 
issues come up again. I have a feeling that Mr. Lieber and 
others may come up with ideas 3 or 4 years down the road to re-
fix it again in a positive way.
    So I am wondering why should we be reauthorizing for 5 
times what we just did in this last time, and can't we do it 
still in this manner?
    Secondly, tied to that, if we do do a permanent solution or 
a long term solution, wouldn't this take away some of the 
incentives that are currently on the industry to be creative 
and innovative and try to address some of the problems, as they 
have done over the last 3- and then 2-year period?
    Mr. Lieber. I will take a crack at that as probably the 
person at hand who is least expert in insurance matters, 
technical insurance matters, but I will tell you this. I 
believe that, if you had a permanent solution, if you had the 
stability of knowing what the box was, what the rules of the 
game were, where the Federal backstop was, and that you knew it 
was in place for a substantial period of time, that would give 
the opportunity for private sector creativity to come in and 
help us to resolve some of the shortfalls of capacity, to 
develop new products, to work on the pricing and the actuarial 
issues.
    So, Congressman, our hope and expectation is that, if you 
had a stable framework, and we think that it ought to be 15 
years--you have heard other views on that--that you would have 
a lot of creativity and a lot of improvement over time as a 
result of the insurance industry working with its customers.
    Mr. Green. If I could just take it back on that a little 
bit. I have spent my career in the insurance industry and have 
probably learned a couple of things. Insurance companies, 
carriers, are not big fans of government involvement in what 
they do and, too, I would tell you that they are very 
innovative and creative, and if they can find a way to make a 
profit on something, they will do it. They will innovate.
    In this situation, you have carriers begging for government 
involvement, because they have not found any way to generate a 
reasonable profit in this area. So the thought that the private 
market is somehow going to come up with a solution to this, if 
we just get rid of TRIA, I think, is just naive. It is not out 
there.
    Mr. Kelly. Congressman, the current Act has led to 
creativity, because there is significant retention of risk by 
the industry. The impermanence of the current Act has militated 
against creativity, because our policies, as Mayor Bloomberg 
indicated--are not coterminous with the Act.
    So we are frozen in place, effectively, starting January of 
this year. In fact, the impermanency militates against 
creativity. It is the exact opposite of what you would expect. 
I believe that with permanency and with the significant 
retentions we have right now, you will see the private sector 
continue to work, whether it's real estate customer or 
employers, to make the workplace safer and to meet whatever is 
needed in the capital markets below the government involvement.
    Mr. Heck. I would also like to add that, at least in New 
York City, the availability of terrorism coverage other than 
the coverage that is required under TRIA has not increased in 
any significant way since 2002. What has improved is the takeup 
rate, because I think it takes time for the consumers and the 
business community to get adjusted.
    You know, let's face it. On the primary side, we are not 
charging a lot of money for terrorism because of TRIA. Second, 
the retentions have gone up, because TRIEA required higher 
retentions. But in terms of more carriers coming into the 
market to provide, you know, like reinsurance availability, it 
is just not there.
    Mr. Garrett. Thank you.
    Mr. Ackerman. Thank you, Mr. Garrett. Ms. Maloney for 3 
minutes.
    Ms. Maloney. Thank you, Mr. Chairman, and I would like to 
thank all of the members of the panel for your really important 
contribution. You all represent important stakeholders in this 
industry, and what you have said today will help us craft a 
bill.
    We are all working on it now. Chairman Frank and 
Subcommittee Chairman Kanjorski have indicated that they would 
like a bill drafted and considered by the end of April so that 
the Senate and the Executive Branch would have time to respond 
and get an appropriate law in place.
    I would like to ask Mr. Green: Since we enacted TRIA, it 
has proven that it works. Takeup rates for terrorism insurance 
have increased from 23 percent in early 2003 to 64 percent at 
the end of 2005, and these are numbers cited by the President's 
Working Group on Financial Markets.
    So my question is: Would this growth, or rather regrowth of 
terrorism risk insurance have happened without TRIA? And as a 
follow-up to you and other members of the panel, what is the 
appropriate role for the private sector in a long term 
solution?
    Mr. Green. Let me, in answer to your question, give you a 
story, real life, it happened, rather than talk about concept 
and philosophy.
    We had a policy. Our total terrorism policy, casualty 
policy, was expiring on October 31, 2005. If you remember, at 
that time TRIA was set to expire December 31, 2005. August, 
early September, we had gone around to many of our insurance 
companies, Chub, AIG. These are big companies. We have a great 
relationship, and they have insured us over the years.
    At that time, sometime in September--I may get the names 
wrong, but I believe Senator Phil Gramm from Texas, Secretary 
Snow was making speeches about the possibility that we needed a 
free enterprise system to work, and maybe the government should 
not be part of this solution. Then there was, I think, the 
chairman of the Banking Committee in the Senate from Alabama--I 
forgot his name--Selby was making speeches to this extent.
    So all of a sudden, in September, all of our insurance 
companies would not give us terrorism insurance, because they 
felt that TRIA was going to end come December 31st. They 
weren't sure. There was an uncertainty.
    We needed it because of our mortgage requirements. We went 
around to the world, literally to the world. There was one 
company who came back. I won't mention the name of the company. 
It is of no value, but a major, major United States, an icon of 
corporate America came back to us and said they gave us 24 
hours. If we did not adhere to what they wanted, which was a 
$10 million increase to the premiums we were paying then, $10 
million more, 24 hours, they would allocate it to somebody 
else.
    We had no choice. We didn't quite say thank you in those 
terms, but we had to take that insurance. That will give you a 
real life perspective of what happened with uncertainty that 
the TRIA backstop was going to be renewed.
    Mr. Ackerman. Thank you, very much.
    Ms. Maloney. And if anyone would comment on the appropriate 
role for the private sector in a long term solution, anyone, 
Mr. Green.
    Mr. Ackerman. Briefly.
    Mr. Green. I think Mr. Lieber had a good recommendation. We 
believe in competition, Democrat, Republican. We love the free 
enterprise system to work. That is our goal. And if you want 
the free enterprise system to work and insurance companies to 
come into this market, reduce the $100 million deductible so 
that companies--this gentleman, I think, said it well.
    His company--if you can only do a $50 million building in 
New York, you can't insure very many buildings. I think, if you 
reduce that, smaller companies would come in, and you would 
have increased competition and increased product.
    Ms. Maloney. Thank you.
    Mr. Ackerman. Thank you, very much.
    With great appreciation to all involved, let me just add 
one thing to the mix that we all are going to give some 
consideration to, and that is post-event occurrences.
    If indeed we do positively consider the chemical, 
biological, and radiological losses that might occur, we don't 
know exactly what we are talking about because of things that 
could happen, depending on what kind of weapons might be used 
in the attacks, new things that come along, and how and when 
they manifest themselves.
    We are all going to have to give some considerable thought 
to that. Is there something like in the medical profession 
where they have tail insurance that months or years or years or 
more years after an event people start getting sick from 
something that we don't even know about today, the results of 
the unknown, about the unknown and how we deal with that.
    This is something that we may have to take up. This is 
something that you may want to think about. In the meantime, we 
promised to have the committee out of here and on buses and 
other transportation before one o'clock.
    I want to thank this very distinguished panel. You have 
each individually and collectively lent to the base of 
knowledge that we have as we ponder what we are going to do 
with the reauthorization of this bill.
    I thank you for participating. The panel is dismissed with 
the thanks of the Chair and the Congress, and this hearing is 
adjourned.
    [Whereupon, at 12:25 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 5, 2007


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