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


 
                    POLICY OPTIONS FOR EXTENDING THE 
                   TERRORISM RISK INSURANCE ACT (TRIA)

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

                                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

                               __________

                             APRIL 24, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-24

                     U.S. GOVERNMENT PRINTING OFFICE

36-819 PDF                 WASHINGTON DC:  2007
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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             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
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             RICHARD H. BAKER, Louisiana
GREGORY W. MEEKS, New York           CHRISTOPHER SHAYS, Connecticut
DENNIS MOORE, Kansas                 PAUL E. GILLMOR, Ohio
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          SHELLEY MOORE CAPITO, West 
DAVID SCOTT, Georgia                     Virginia
NYDIA M. VELAZQUEZ, New York         ADAM PUTNAM, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin,               BLACKBURN, MARSHA, Tennessee
LINCOLN DAVIS, Tennessee             GINNY BROWN-WAITE, Florida
ALBIO SIRES, New Jersey              TOM FEENEY, Florida
PAUL W. HODES, New Hampshire         SCOTT GARRETT, New Jersey
RON KLEIN, Florida                   JIM GERLACH, Pennsylvania
TIM MAHONEY, Florida                 JEB HENSARLING, Texas
ED PERLMUTTER, Colorado              GEOFF DAVIS, Kentucky
CHRISTOPHER S. MURPHY, Connecticut   JOHN CAMPBELL, California
JOE DONNELLY, Indiana                MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia                KENNY MARCHANT, Texas
DAN BOREN, Oklahoma                  THADDEUS G. McCOTTER, Michigan




























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 24, 2007...............................................     1
Appendix:
    April 24, 2007...............................................    43

                               WITNESSES
                        Tuesday, April 24, 2007

Abraham, Janice M., President and CEO, United Educators 
  Insurance, a Reciprocal Risk Retention Group...................    12
Cotton, Leonard W., Vice Chairman, Centerline Capital Group, on 
  behalf of the Commercial Mortgage Securities Association (CMSA)     8
Ditchman, Joseph P., Jr., Senior Vice President, Colliers 
  Ostendorff-Morris, on behalf of the National Association of 
  Realtors, and the Coalition to Insure Against Terrorism (CIAT).    14
Donnelly, Vincent T., President and CEO, PMA Insurance Group, on 
  behalf of the Property Casualty Insurers Association of America 
  (PCI)..........................................................    17
Dowd, Brian E., Chief Executive Officer, Insurance-North America, 
  ACE Group, on behalf of the American Insurance Association.....    10
Watjen, Thomas R., President and CEO, Unum Group, on behalf of 
  the American Council of Life Insurers (ACLI)...................    16

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    44
    Abraham, Janice M............................................    45
    Cotton, Leonard W............................................    54
    Ditchman, Joseph P., Jr......................................    67
    Donnelly, Vincent T..........................................    78
    Dowd, Brian E................................................    88
    Watjen, Thomas R.............................................    96

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Statement of the American Bar Association....................   102
    Statement of the Risk and Insurance Management Society.......   116


                    POLICY OPTIONS FOR EXTENDING THE



                  TERRORISM RISK INSURANCE ACT (TRIA)

                              ----------                              


                        Tuesday, April 24, 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 1:36 p.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Present: Representatives Kanjorski, Ackerman, Meeks, Moore 
of Kansas, Capuano, Baca, Scott, Davis of Tennessee, Sires, 
Klein, Murphy, Donnelly; Pryce, Shays, Gillmor, Feeney, 
Garrett, Bachmann, Roskam, and Marchant.
    Also present: Chairman Frank and Ranking Member Bachus (ex 
officio) and Representative Maloney.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order. Without objection, we are going 
to limit opening statements to 15 minutes on each side. Mr. 
Ackerman, I understand you have an opening statement. Is that 
correct?
    Mr. Ackerman. Yes.
    We meet this afternoon to review the policy options for 
extending the Terrorism Risk Insurance Act, or TRIA. In the 
wake of September 11th, Congress designed TRIA as a temporary 
program with the expectation that the insurance industry could 
eventually model and price for terrorism risk. The private 
marketplace, however, did not recover as quickly as initially 
hoped. As a result, we extended TRIA for 2 years in 2005.
    While TRIA has increased the availability and affordability 
of terrorism risk insurance, the marketplace is still tenuous. 
Insurers still have limited capital to cover terrorism losses 
alone and without Federal assistance. Property/casualty firms 
had only $164 billion available to cover terrorism losses in 
2005, according to the Insurance Information Institute, but 
some models have predicted terrorism losses of more than double 
this number.
    TRIA as amended will, of course, expire at the end of this 
year. Because insurers remain uncomfortable with their ability 
to reliably price coverage for traditional terrorism, we need 
to extend this law once again in order to protect our Nation's 
economic security. In considering these matters, we must also 
act both in a timely fashion and in a deliberate manner so as 
to prevent marketplace disruptions, allow for careful 
consideration of the policy implications of our actions, and 
avoid unintended consequences.
    We have many important decisions before us, and I look 
forward to a thoughtful and bipartisan dialogue both today and 
in the weeks ahead. To help guide us going forward, I also want 
to outline five positions central to my thinking on these 
matters. First, we must make the extension of TRIA our primary 
goal and refrain from considering miscellaneous issues. A bill 
to further lengthen TRIA should not become a vehicle for moving 
non-related matters such as the surplus lines legislation and 
natural disaster reforms. Moreover, I have considerable 
skepticism about adding risk retention group reforms to this 
TRIA extension exercise. These separate issues need and deserve 
full, complete consideration on their own.
    Second, the duration of the extension will require us to 
maintain a delicate balance. We must choose a length of time 
that is long enough to provide greater certainty to the 
marketplace and short enough to encourage the private sector to 
develop its own solutions to the problems posed by conventional 
terrorism. Such an extension should be neither permanent nor 
even semi-permanent. At this time, I believe that a 6- to 8-
year timeframe provides the balance we need.
    Third, we should use the TRIA extension debate to pursue 
needed and important reforms to the program. We should, for 
example, protect individuals, and not just the buildings they 
work in, by adding group life to TRIA. We should also eliminate 
the distinction between foreign and domestic terrorism events.
    Fourth, we must explore how best to add nuclear, 
biological, chemical, and radioactive (NBCR) coverage to TRIA, 
and we will soon learn of a few different positions on this 
complex issue from today's witnesses. In the event of an NBCR 
attack, the marketplace already implicitly believes that the 
Federal Government will step in and respond. We therefore 
should explicitly address the government's role before an NBCR 
terrorism event occurs, rather than deal with such a 
significant problem during a time of great uncertainty and 
potential chaos.
    Lastly, we should explore whether or not to continue to 
decrease or limit the government's financial exposure within 
TRIA. The creation of a trust fund in this regard is one idea 
worth examining. Under the proposal, policyholders and insurers 
would pay surcharges in advance of a terrorism event to the 
Federal Government and the collected monies would then help pay 
the Federal Government's costs in the event of a certified 
terrorism act.
    In closing, I thank the witnesses for coming here today to 
share their perspectives on these five policy options and the 
many other important choices before us during these TRIA 
extension deliberations.
    Thank you. Ms. Pryce?
    Ms. Pryce. Thank you, Mr. Chairman, I wanted to thank you 
very much for holding this hearing and for scheduling the 
previous hearing that we had in New York City. We welcome the 
chairman back to the subcommittee. We missed your leadership in 
New York and we're thankful for your speedy return, sir.
    Ladies and gentlemen, our commitment to TRIA has never been 
stronger. We understand the importance of terrorism insurance 
to American consumers, businesses, and to our economic 
security. In the aftermath of the brutal terrorist attacks of 
September 11th, this committee led efforts to help restore the 
recovery of a nation's market, especially the availability of 
commercial insurance.
    According to reports by the Treasury Department, the 
Government Accountability Office, and others, our former TRIA 
efforts were a great success, providing American consumers with 
protection against terrorist attacks and the continued 
availability of insurance to protect our economy and job 
growth. Since TRIA's enactment, the insurance market has become 
healthier than ever before. Insurers have been able to restore 
lost surplus, diversify risk exposures, and develop 
increasingly sophisticated terrorism-loss modeling. Reinsurance 
availability for terrorism coverage has grown with TRIA's 
enactment with recent estimates of $8 billion of terrorism 
specific reinsurance available, growing by $1- to $2 billion 
per year.
    The private insurance marketplace is able to manage an 
increasing level of exposure and with the right combination of 
TRIA reforms, such as tax reserving and regulatory reform, 
including the expansion of the Risk Retention Act, the 
terrorism insurance marketplace will continue to strengthen and 
expand. I feel that expanding the Liability Risk Retention Act 
to include property and casualty insurance would be an 
important step in the direction of ensuring that the market 
will eventually be able to carry this risk without a government 
backstop.
    Risk retention groups often act as the insurer of last 
resort for unique or hard-to-insure risks, a category in which 
terrorism clearly belongs. I look forward to working with 
Chairman Kanjorski as we discuss the expansion of the Risk 
Retention Act, as well as other regulatory forms, such as 
streamlining surplus lines and non-admitted insurance and 
enacting speed-to-market reforms.
    Unfortunately, reforms in our bill of the last Congress 
were set aside as the Senate ran out of time to conference. 
Some specific reforms that were included in the bipartisan bill 
passed overwhelmingly here, and we look forward to reviewing 
those very important reforms as we proceed in this committee in 
this Congress. I want to thank Subcommittee Chairman Kanjorski 
for today's hearing and for all of his hard and thoughtful 
work. We hope to continue our committee's past bipartisan 
cooperation on insurance legislation. I look forward to working 
together on comprehensive, longer-term TRIA reform, and I'll 
reserve the balance of my time. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Ms. Pryce. Mr. Ackerman?
    Mr. Ackerman. Thank you, Mr. Chairman. It's good to have 
you back in the Chair again, rested and looking so robust. Mr. 
Chairman, at the subcommittee's field hearing that you 
scheduled in New York City on March 5th, we heard from 
developers, insurers, and reinsurers, and their assessment was 
unanimous. There is still not nearly enough supply in the 
terrorism risk insurance market to meet the huge demand, 
especially in higher risk urban areas. Indeed, if TRIA were to 
expire, it would certainly result in the destabilization of the 
insurance industry and, in all likelihood, the national 
economy.
    Every type of large-scale enterprise would be at risk, and 
the threat to our national economic health would be immense. I 
believe a permanent extension would be best, but in my view, as 
large development projects take many years, an extension of 
less than 15 or 20 years would be insufficient to developers, 
insurers and reinsurers, whose efforts fuel our Nation's 
economy and build our cities' skylines.
    If the House were to pass a 6- to 8-year extension, knowing 
that in conference with the Senate the extension period is sure 
to be compromised on a contentious issue, we will certainly 
find ourselves here again, Mr. Chairman, with TRIA set to 
expire yet again, but an entirely inadequate supply of 
terrorism insurance on the private market. I would also note 
that with the shorter extension period, there would be 
uncertainty as to when or if TRIA would eventually expire. 
Let's be clear.
    Uncertainty is the enemy we're fighting, and as we heard in 
New York, this uncertainty would threaten the reconstruction 
efforts at Ground Zero, the site of the worst terrorist attack 
on American soil and the symbol of our Nation's resilience and 
recovery, as well as many other sites. As I noted at your field 
hearing in New York, the 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. It matters 
not whether foreign or domestic terrorists is a distinction, or 
if it is impossible to make. In the new world we live in, 
nuclear, biological, chemical, and radioactive, NBCR, coverage 
must be included in the TRIA program. A government 
accountability report in September 2006 found that and I quote, 
``any purely market-driven expansion coverage for NBCR risk is 
highly unlikely in the foreseeable future.'' The 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.
    Mr. Chairman, I cannot emphasize strongly enough how 
important TRIA is to our Nation's economy, as you very well 
know, and I look forward to hearing from our very distinguished 
panel this afternoon. Thank you.
    Thank you.
    Chairman Kanjorski. Thank you, Mr. Ackerman. Mr. Bachus?
    Mr. Bachus. Thank you, Chairman Kanjorski. In the aftermath 
of the terrorist attacks on September 11th, this committee 
responded quickly and forcibly to stabilize the financial 
services marketplace and protect the economy. On the insurance 
front, within 2 months of the attacks, the committee passed by 
voice vote the original Terrorism Risk Insurance Act, or TRIA. 
This legislation has been a great success over the past 5 
years. Since its enactment, consumers have been generally able 
to obtain terrorist coverage, and harm to our economy by the 
unavailability of insurance, particularly in the commercial 
real estate sector, has been avoided. Insurers have been able 
to restore lost surplus, diversified risk exposures, and 
develop increasingly sophisticated terrorist-loss modeling.
    While the terrorist reinsurance marketplace has grown to 
nearly $8 billion, TRIA was intended to be a temporary program 
while the market recovered, and it was very carefully designed 
to require annual increases in the private sector 
responsibility with the corresponding reduction and the 
exposure to taxpayers.
    The private marketplace will always provide a more dynamic 
response than the Federal Government and we must continue to 
ensure that the Federal safety net of TRIA minimizes regulatory 
interference in the marketplace over time by government. When 
the original TRIA program was set to expire in 2005, our 
committee took the lead on legislation to extend the program, 
passing comprehensive TRIA reform by a bipartisan 64 to 3 vote 
in committee and 371 to 49 on the House Floor. This bill 
contained a number of critical reforms to TRIA to transform the 
safety net into a longer term program, which is essential.
    While we ultimately accepted a very short-term TRIA 
extension from the Senate without most of our reforms, as 
Congresswoman Pryce has said, members on both sides of the 
aisle in the House predicted we'd be back in 2 years, still in 
need of a long-term TRIA. Still in need of reforms and not that 
much further along in creating long-term stability for 
consumers, it will be a test of our leadership whether we can 
advance these reforms further with strong bipartisanship that 
has characterized this committee's deliberation on TRIA for the 
past 6 years.
    Most Republicans are committed to this effort, if the 
committee continues to focus on building capacity in the 
private marketplace while slowly reducing Federal displacement 
and regulatory interference over time. Taxpayers must be fully 
protected. Consumers should be able to obtain market price 
coverage without gaps, and the program should address not only 
pre-event stability, but also post-event stability to protect 
the ongoing functioning of our economy.
    For example, last Congress's TRIA extension legislation 
approved by the committee included a very slow increase in 
private sector retention over time, but with a reset mechanism 
that would significantly lower the deductibles and trigger 
levels in the event of another major terrorist attack. The 
reset mechanism is needed to promote post-event stability. 
Without it, the marketplace would inevitably pull back in the 
wake of a large-scale terrorist attack, jeopardizing consumers 
and our economy. The bill also incorporated a number of 
regulatory reforms to make commercial insurance more available, 
such as streamlining speed to market and surplus lines of 
availability. Taxpayers were protected by full recoupment and 
consumers received new protection for their most vulnerable 
risk--nuclear, biological, chemical, and radiological coverage, 
the NBCR coverage. Insurers were able to set aside long-term 
terrorist reserves without tax penalties, again to promote 
post-event stability and those reserves could be barred as a 
temporary pool to reduce the Federal exposure over time.
    In conclusion, TRIA has worked well for our country, but it 
is a short-term program according to its original design. In 
considering legislation a place to program on a long-term 
footing, I would hope we can build on prior bipartisan efforts 
and produce a bill to both promote private sector innovation 
and protect taxpayers while providing long-term predictability 
and stability.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you Mr. Bachus. Mr. Meeks, you 
are recognized for 3 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. It is good to see you 
back in your seat, and I shouldn't need the full 3 minutes, but 
we really want to thank you.
    We all know that the attacks of 9/11 brought about the need 
for the TRIA program, and since then, the city of New York has 
worked hard, very hard, to recover and rebuild not only the 
devastating loss of life that took place that day, but also 
from the catastrophic economic loss that New York City 
experienced. The amount of office and retail space lost on 9/11 
in a relatively confined area of New York City exceeds that of 
some whole cities.
    If you knew the area around the World Trade Center before 
9/11 in the way that most New Yorkers did and then compared it 
to post 9/11, the post 9/11 neighborhood was practically a 
ghost town. Never had it been so clear what an economic engine 
that the World Trade Center had been, and we know that plans 
are currently in place to rebuild the World Trade Center site 
along with other continuous development efforts. However, those 
plans and efforts like it will be jeopardized if we let TRIA 
lapse, and uncertainty of insurance coverage makes debt- and 
equity investors ``risk averse''.
    Not only do we need TRIA to be in place, but it needs to be 
in place for, I would say a minimum of 10 years; 15 years would 
be even better. The financial marketplace loves stability, and 
any permanent financing of facilities must be accompanied by a 
surety of insurance coverage. Ten years of financing, 
accompanied by 2 years of certainty in insurance coverage just 
won't work. And I hope that we do continue to work in this 
committee in a bipartisan manner so that we can show that we've 
gone to make sure that our businesses know that they will be 
able to obtain insurance. TRIA is tremendously important for 
New York City, but not only for New York City, I think for 
businesses throughout this country and this day and age that we 
live in. I look forward to hearing the testimony from the 
witnesses today and ultimately passing a bill that I believe 
will be truly bipartisan.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Kanjorski. Thank you, Mr. Meeks. Mr. Shays of 
Connecticut?
    Mr. Shays. Thank you. Just very briefly: this is a very 
important hearing, Mr. Chairman. Thank you for calling it. 
Thank you for being here today to call it, and I just want to 
say to you that I know all of our witnesses are very 
distinguished, but I have a personal friend, Lee Cotton, and I 
just want to thank him for being here. He is someone who knows 
this business through and through. So when you hear him speak, 
he speaks with a tremendous amount of experience, and he is 
very successful in his business, as well.
    I am eager to see that we have a period of time, at least 
10 years, where we don't have to keep coming back to this 
legislation. I think that foreign attacks should be dealt with. 
Obviously, they are, but domestic as well. I think it should 
include group life as well. I do think there should be higher 
deductibles and I'm hoping that we'll pay attention to all 
types of attacks: nuclear, biological, chemical, and 
radiological. I think these are issues that we need to address 
and I am going to apologize to the committee for giving a 
statement and then leaving. It's not my usual practice, but we 
have the Tillman hearing and it's a very personal hearing that 
I think I need to be back at. But thank you again for having 
this hearing. I'll be eager to work with my colleagues to form 
a good bill.
    Chairman Kanjorski. Thank you, Mr. Shays. Mr. Scott of 
Georgia?
    Mr. Scott. I want to join in welcoming you back, Mr. 
Chairman; it's good to have you back. Terrorism is the most 
significant risk facing our Nation's economic security today. 
The 9/11 attacks were a decapitation strike. They cut off the 
heads not only of our civilian and military leadership, but 
very significantly our financial leadership in the world. So a 
successful campaign against these radical ideologues requires a 
very definitive national strategy that includes plans to 
provide a backstop against possible massive insurance claims. 
And since terrorism is less predictable and possibly more 
severe than other catastrophes, it is necessary for the Federal 
Government to ensure that insurance remains available if the 
private market is not doing so. And if the private market 
cannot do so, Congress has passed a limited extension of TRIA 
through 2007 and I believe that Congress must work to provide a 
meaningful extension of TRIA while creating a long-term market-
based solution to this problem. And I furthermore believe that 
the people inside the buildings, the lives of the people need 
to also be insured, and, therefore, I support the inclusion of 
group life insurance in TRIA.
    Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you, Mr. Scott. Mr. Garrett of 
New Jersey?
    Mr. Garrett. Thank you, Mr. Chairman. I also wish you 
continued good health as you come back with us.
    I recently attended the TRIA field hearing the committee 
held in New York City. I thought it was a very productive 
hearing and focused on the issue that is important in New York 
and also the Fifth District. After the attack of 9/11, 
terrorism risk insurance either became unavailable or extremely 
expensive, and that was a problem not only for the insurance 
industry, but also for real estate, transportation, 
construction, energy, and utility sectors. So realizing this 
problem, Congress acted, and passed the first TRIA Act of 2002. 
And of course we then extended it for another 2 years, adding 
up the time additional reform to make it better.
    Now, since September 11th, insurers and reinsurers have 
cautiously, and I'd say responsibly, re-entered the market, 
allocating more capacity year-to-year, and more commercial 
policyholders are becoming insured year-to-year as well. At the 
same time, on the up-side, the Federal role has scaled back 
year-to-year with higher deductibles, higher co-payments, 
higher triggers and fewer lines of insurance covered, and I 
view this private sector involvement in decreased government 
exposure to be a positive development. Now, I've read a number 
of comments and quotes in the media, and hear, as well, 
recently from individuals who want to see TRIA become a 
permanent program or extended up to 20 or 30 years.
    If we do that, I have concerns that we will not revisit 
this important topic as we just don't and continue to try to 
make improvements, like we just recently did, after that long 
length of time. A short-term extension allows for periodic 
reassessment of the market conditions to see if there is more 
room for private sector participation and also allows for a 
gradual scaling back of the program going forward as we observe 
how private insurers and reinsurers continue to respond to the 
market. Given that the private sector continues to increase its 
capacity, I do believe that a shorter term extension is more 
appropriate than creating a very long-term or permanent 
program.
    I am really concerned that if we establish such a program, 
the private sector will lose some of the incentive that they 
have to look for the innovative things they've done, and new 
solutions. And the Congress also will lose our ability to step 
in and make the further reforms that we did, just a couple of 
years ago. So, again, I appreciate the focus of this hearing 
and the other hearings that we've had previously and I ask that 
we consider the possibility that Congress remain involved with 
this as the program goes forward. And with that, I yield back.
    Chairman Kanjorski. Thank you, Mr. Garrett.
    Are there any other members who wish to make a statement? I 
see no response. We have an unusually good panel today, six 
members, and we are going to try and move through them. I just 
want to say that we are anticipating votes, so we are going to 
take the opening statements, and then as soon as the votes 
ring, we will go into recess and return to take the remaining 
statements.
    And to all the members of the panel, now I say without 
objection, your written statements will be made part of the 
record. You will each be recognized for a 5-minute summary of 
your testimony, so, we would appreciate it if you would hold to 
that 5 minutes, or you can go on the light side.
    Our first witness is Mr. Leonard Cotton, vice chairman of 
Centerline Capital Group, and a friend of Chris Shays.

   STATEMENT OF LEONARD W. COTTON, VICE CHAIRMAN, CENTERLINE 
 CAPITAL GROUP ON BEHALF OF THE COMMERCIAL MORTGAGE SECURITIES 
                       ASSOCIATION (CMSA)

    Mr. Cotton. Yes, that is true. Thank you, Subcommittee 
Chairman Kanjorski and Ranking Member Pryce. I also see 
Chairman Frank and Ranking Member Bachus, from the full 
Financial Services Committee.
    Thank you for having us here today. As stated, my name is 
Lee Cotton, and I am vice chairman of a company called 
Centerline Capital Group. Excuse me, we just changed our name. 
One of the Nation's leading real estate lenders and investors, 
I have been in the real estate business for about 35 years, and 
I am happy to have the opportunity to come and talk to you 
today. I am also the president-elect of the Commercial Mortgage 
Securities Association, otherwise known as CMSA, and it's in 
that capacity that I speak today.
    CMSA is an international trade group representing the 
collective voice of the capital markets for real estate around 
the world, primarily in the United States most recently. Our 
membership has included 400 financial institutions and 
thousands of individual members. We are a very broad and 
diverse group. The thing that distinguishes us from most trade 
groups is that we are vertical in the sense that we have 
everybody involved in our business in one group. We have the 
lenders, the people who securitize the loans, the people who 
service them, the people who are the trustees for them and the 
investors. So, everybody involved in commercial mortgage 
securities is part of our group. Our primary mission has been 
and continues to be to promote the ongoing strength and 
liquidity and viability of the commercial mortgage market.
    As you may know, commercial mortgages are now securitized. 
Approximately 40 percent of those mortgages made last year were 
in fact securitized and almost all of them are available to be 
securitized or sold into the market. In essence, we have 
brought liquidity to the marketplace and broader expansion of 
capital available to the real estate industry. Last year, over 
$200 billion of mortgages were securitized, almost 40 percent 
of the mortgages made last year. The mortgages are in every 
county in the country.
    Our own portfolio, I think, covers almost every county in 
the country, and the portfolios of the whole industry today 
exceed $750 billion. With an average loan size of around $8 
million, and an average maturity between 7 and 12 years, we are 
the lenders in the room, so to speak, and we care about the 
viability and the sustainability of all of those assets. There 
are thousands and thousands of assets around the company.
    We'd like to thank you for the hard work that this 
committee is doing on TRIA and its extension. We appreciate 
your efforts and we are here to support that extension, 
obviously. We had hoped that a private market would fill in. It 
hasn't. We don't think it's necessarily viable fully to be 
filled in, because it's an event that is unpredictable, unlike 
possibly even a hurricane. It's critical to the policyholders 
who are our clients. Remember, we're the lender, the 
policyholders are the borrowers. The borrowers own property and 
they borrow money from us. It's critical to them that they have 
this insurance, not only for the protection of their 
properties, but for the stability of the capital markets.
    Think, if you will, of those $750 billion plus mortgages 
all being in technical default as a result of no insurance on 
their buildings. What would that do to the stability and the 
viability of the capital markets? That's the issue that we're 
here to talk to you about. An interesting statistic for you, 
the CMSA, or the CMBS business for which the CMSA represents, 
has grown steadily from about a $4 billion business to the 
aforementioned $750 billion plus. The only time we had a 
reduction in issuance and a reduction in mortgages made was in 
the year 2002. It was a very steady climb. It stalled, and then 
it has come back into business. I credit TRIA for a lot of that 
reestablishment of stability. Simply put, the real estate 
markets around the country impact the economy around the 
country. The ability to attract capital that is stable and is 
available is important to the entire economy, not just the 
people who own the properties or those of us who own the 
mortgages on those properties. To that extent, we would 
recommend a TRIA extension for as long as is practical. 
Permanent is fine, but for as long as is practical.
    We would like to eliminate the distinction between foreign 
and domestic, as has already been stated, and we also believe 
that there should be an extension or an inclusion of 
radioactive and biological and nuclear as part of the coverage.
    Thank you very much for the time today. We are looking 
forward to a timely extension of this Act. Thank you, very 
much.
    [The prepared statement of Mr. Cotton can be found on page 
54 of the appendix.]
    Chairman Kanjorski. Next witness, Brian Dowd, CEO, 
Insurance-North America, ACE Group.
    Mr. Dowd.

STATEMENT OF BRIAN E. DOWD, CHIEF EXECUTIVE OFFICER, INSURANCE-
 NORTH AMERICA, ACE GROUP, ON BEHALF OF THE AMERICAN INSURANCE 
                          ASSOCIATION

    Mr. Dowd. Thank you, Chairman Kanjorski, Ranking Members 
Pryce and Bachus, and Chairman Frank. I appreciate the 
opportunity to be here today on behalf of both ACE and the 
American Insurance Association.
    My name is Brian Dowd, and I am the CEO of ACE's operations 
in North America. ACE is one of the largest property and 
casualty insurers in the United States and we operate in 
virtually every State in the United States. I started in the 
industry as a property underwriter, and my first exposure to 
terrorism risk was really the bombings in the United Kingdom in 
the late 1980's and early 1990's. I remember thinking of risk 
for terrorism largely as a European and a Latin American event. 
You know, as time has gone by, the tragic events in Oklahoma 
City and both World Trade Center events, our perception of the 
risk as an industry has changed to encompass clearly the United 
States.
    I have been involved with ACE's Management of Terrorism 
Risk as well as public policy discussions throughout our 
industry since 9/11. First, let me say that the original TRIA 
was in fact a tremendous success. The availability and 
affordability of terrorism insurance has grown each and every 
year and has helped the economy in many, many ways. With all 
the technical information that is being discussed regarding 
TRIA and extensions, I thought I would spend a few minutes just 
talking about some practical matters that insurance companies 
think about with how much risk to take on. And essentially, we 
have a three-step process in how much risk we are willing to 
take.
    You know, essentially it starts with talking to our 
customers. What is the demand for a product? We design a 
product and we look at what the risks are. We try to decide how 
much capital we would risk based on what the profitability and 
the downside risks are. The second step is we generally look at 
can we measure in a mathematical way what those risks are? Can 
we accumulate the data and in some way control how much we 
underwrite?
    And, third, we generally buy reinsurance to protect those 
risks so that we can operate and continue in a stable 
environment. Terrorism creates some challenges in our 
traditional three-step method. You know, first, clearly our 
customers have a desire to buy terrorism insurance and they 
have a willingness to pay. However, the amount of risks that 
insurers take on as regards to terrorism insurance isn't our 
choice, based on how much of our earnings, our capital we are 
willing to risk. It's actually mandated by the TRIA Act.
    The original retention of the original Act was 7 percent. 
Generally, 7 percent of our direct-earned premium is basically 
within the underwriting guidelines and most appetites of most 
commercial insurers. Today, the retention is 20 percent and has 
an additional 15 percent coinsurance. For ACE, that translates 
into over $1 billion worth of deductible, as it is commonly 
referred to.
    By comparison, the amount of deductible or retention I take 
for hurricane or earthquake is only $250 million. The second 
step is, you know, most insurers today are spending more time 
gathering information and in fact attempting to model the risk. 
And essentially, what we are doing is deterministic methodology 
of looking at it. We are looking at an event, but one of the 
core pieces of information that we look at and decide how much 
we are going to risk is what is the probability of that event 
occurring, and no one has developed the model today that brings 
that into impact.
    And third, generally, reinsurance is available for most 
types of risk we take. I think as Ms. Pryce said, there is 
about $8 billion worth of reinsurance available, which has 
grown. But it's still far below the demand of what the insurers 
would like to buy to protect their deductible in the situation. 
With all that said, I think the P&C industry generally has 
found a comfort zone with conventional terrorism in the United 
States, and what they've done is essentially underwritten risk 
at below their full deductible level. Most companies aren't 
actually writing as much insurance to fill their deductible 
today.
    Terrorism insurance as it relates to NBCR is an entirely 
different story.
    Step 1, there is a clear customer need. Our customers are 
crying out for the cover. Today, only one product covers it--
worker's compensation--and frankly that's because statutes 
require it. You actually have an unwilling seller. Most 
insurance companies don't want to sell NBCR for worker's comp; 
we are mandated to do so.
    Step 1, our ability to determine and measure the size and 
probability of the loss, is severely limited when it comes to 
NBCR. We've seen estimates that range anywhere from hundreds of 
billions of dollars to trillions of dollars on what the impact 
of a loss can be, and both the magnitude and duration of the 
claims could last over 30 years, so it is very difficult for us 
to price for that risk.
    Step 3. Virtually no reinsurance today exists for this 
risk. And when we think about these three items together and 
the current retention of 20 percent and the 15 percent co-
insurance taken at NBCR, our risk is clearly an untenable 
situation for most insurers. We do believe that if the right 
provisions were mandated, NBCR could be available at a separate 
retention at a much lower level.
    Finally, the last thing I'd like to mention is the $100 
billion cap that's in the program. Currently, the statute 
provides that the financial responsibility ends once losses 
reach $100 billion. It's neither the Treasury's nor the 
insurer's responsibility. Congress will then decide how to deal 
with it. This is an impractical situation for the customer, for 
the Treasury, and in fact insurers, to leave that up in the 
air.
    It puts us in an untenable position of saying, as claims 
have already incurred, to somebody who's bought a policy, that 
potentially they won't get a recovery because the cap has been 
reached, and it really is uncertainty that we need to remove in 
the future on this program. We need to face the reality of that 
situation now so we can plan for it and be prepared. The 
Federal program should clearly pay the losses in the situations 
where the losses due to NBCR terrorism exceeds the cap.
    I've tried to spend my time focusing on the practical 
aspects of managing terrorism from a public policy perspective. 
We believe TRIA has worked to address the availability and 
state-wide marketing economy. The program not only must 
continue, but it should also be modified to better address the 
daunting challenge of NBCR closest to the insurance system and 
the economy, et al. We appreciate the opportunity to testify, 
and we're happy to take any of your questions. Thank you.
    [The prepared statement of Mr. Dowd can be found on page 88 
of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Dowd.
    We are going to sneak you in Ms. Abraham, if that is all 
right. Can you hold to 5 minutes so we can make the vote?
    Okay, well, Janice Abraham, president and CEO of United 
Educators.

   STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CEO, UNITED 
     EDUCATORS INSURANCE, A RECIPROCAL RISK RETENTION GROUP

    Ms. Abraham. Thank you, very much, Chairman Kanjorski, and 
Ranking Members Pryce and Bachus. I appreciate very much, 
Chairman Frank, the opportunity to be here. My name is Janice 
Abraham and I am president of United Educators. Given your 
healthy skepticism on risk retention groups as part of this 
hearing, I appreciate--I am president of a risk retention 
group, and I speak to you today on a policy option to consider, 
as with the extension of TRIA.
    I am representing United Educators, a risk retention group. 
We have 1,200 schools, colleges, and universities as members of 
United Educators. They range from MIT to Penn State, Stanford 
University, Purdue, Miami University, University of Scranton, 
public school districts in Ohio, California and New York, and 
hundreds of schools throughout the country.
    I am also representing various associations and business 
interests that have an interest in the extension of TRIA and 
finding a strong public/private partnership going forward. We 
strongly support the extension of TRIA and suggest authorizing 
risk retention groups to issue property coverage in addition to 
the liability coverage that we currently offer. We think this 
will be a strong public/private opportunity for a solution 
going forward.
    Over 20 years ago Congress, with great wisdom and 
foresight, passed amendments to the Risk Retention Act that 
allowed businesses and nonprofits with similar interests to 
join together to share liability risks. There was an insurance 
crisis in 1980 and Congress wanted to find a way to add 
capacity and competition to the liability insurance market. 
Risk retention groups now serve a wide range of businesses and 
nonprofits, including educational institutions, large and small 
law firms, churches, nonprofit agencies, healthcare providers, 
and manufacturers. As a risk retention group, United Educators 
is owned by and governed by our 1,200 educational institutions. 
Our policyholders are our owners and they share their risks 
with each other and make significant investments in risk 
management and loss control, to try to keep their students and 
employees safe and their campuses safe.
    As Congress explores policies options for extending the 
public private partnership in providing terrorism insurance, I 
think the successes of the Liability Risk Retention Act could 
be a model for you to consider that can add capacity and 
stability to this volatile market. Expanding the Liability Risk 
Retention Act to include property insurance with an extension 
of TRIA creating a long-term role for the government as a 
backstop or reinsuring our terrorist risks will allow 
businesses and nonprofits to pool our resources, to share our 
risks and our risk management lessons, to purchase reinsurance 
and with the long-term stability of TRIA be a reliable, 
committed source of capacity for both property and liability 
risks.
    Now, I want to be careful today not to oversell this for 
risk retention groups. Risk retention groups only comprise 
approximately 3 percent of the liability commercial insurance 
market, but it's an important 3 percent. At United Educators, 
we cover the risks that most others are afraid to cover: sexual 
molestation; tenure disputes; dealing with students with severe 
mental health issues; and catastrophic athletic injuries. These 
are some very challenging risks, and the risks for educational 
institutions of potential terrorist targets are real.
    Our schools and universities represent the very best of 
this country. Our campuses are open and accessible. Debate and 
free exchange of ideas are encouraged. A lot of people gather 
on our campuses for commencement, for football games, for 
Presidential debates. And some of the most important and 
dangerous research, that is very important to this country and 
supported by the Federal Government, is done on our campuses. 
In fact, the experts say that our campuses are ``soft 
targets''. A long term commitment from the Federal Government 
to be a partner with private industry in providing the high 
limits that we need--our campuses need--for terrorism insurance 
and extending the Liability Risk Retention Act so that we are 
able to offer property insurance is a creative and sound option 
to allow businesses and nonprofits the chance to help 
themselves. These two actions will add capacity and increase 
competition.
    That's a good thing. These mega risks require long-term 
commitments and extensive planning and investments. Risk 
retention groups are ideally suited to filling this void for 
select groups. They are owned and governed by their members. 
The interests are in mind and it's matching the long-term 
horizon that this kind of risk calls upon us.
    Thank you very much for the opportunity to speak with you 
today.
    [The prepared statement of Ms. Abraham can be found on page 
45 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Abraham.
    Members of the committee, we have five votes pending now. 
We anticipate that votes will run until 3 p.m., so I am going 
to put the committee in recess until then, but I urge the 
members to return as soon as possible, because we do have time 
constraints and we are limited on the hearing until 4 p.m. As 
you have noticed, we have some powerful members of the panel, 
and we certainly want to extract from them their best 
information.
    So, with no further adieu, we will recess until 3 p.m.
    [Recess]
    Chairman Kanjorski. Our next witness is Joseph P. Ditchman, 
Jr., Partner, Colliers Ostendorff-Morris.
    Welcome to the subcommittee.

 STATEMENT OF JOSEPH P. DITCHMAN, JR., SENIOR VICE PRESIDENT, 
     COLLIERS OSTENDORFF-MORRIS, ON BEHALF OF THE NATIONAL 
 ASSOCIATION OF REALTORS, AND THE COALITION TO INSURE AGAINST 
                        TERRORISM (CIAT)

    Mr. Ditchman. Thank you, Mr. Chairman, and Ranking Members 
Pryce and Bachus. Mr. Chairman, I'd like to extend my personal 
best wishes on your health and my hope that you recover soon.
    My name is Joseph P. Ditchman, Jr., and I am a partner in 
the commercial real estate brokerage firm of Colliers 
Ostendorff-Morris located in Cleveland. I am a member of the 
National Association of Realtors and am appearing today on 
behalf of the Coalition to Insure Against Terrorism, more 
formally known as CIAT. This coalition is represented by the 
National Association of REITs, the national chambers of 
commerces, and many other organizations. This coalition 
represents a broad range of businesses and organizations from 
across key sectors of the U.S. economy; businesses that are the 
Nation's principal consumers of commercial property and 
casualty insurance.
    NAR commercial members are involved in all aspects of 
commercial real estate. Our members broker commercial 
transaction, identify tenants, manage properties, and advise 
property owners. The availability of terrorism insurance 
touches every aspect of our industry. Terrorism insurance is 
often categorized as only an insurance institute. With respect 
to that, we believe terrorism insurance is vital to the 
national economic security of this country. It insures the 
businesses of individuals who own and manage real estate in 
which we live, work, and play--vital pieces of coverage that 
are so important to their survival. It is also an issue of 
protecting the investment of those pensioners, the 
shareholders, the bond holders, and individuals across the 
country who are the owners of that real estate.
    Since Congress worked hard to find the solution to the 
economic risk associated with terrorism, terrorism insurance 
laws is a solid step forward and we cannot lose it. But TRIA, 
as you know, is set to expire in less than 8 months. Consumers 
now in the marketplace are being told that they may not be able 
to get terrorism insurance for next year or that they will be 
repriced out of the market. This hearing recognizes the 
essential facts that have not changed from the congressional 
enactment of TRIA in 2000.
    Terrorism continues to be, at best, an unpredictable 
threat. But, at worst, as we all know, is a catastrophic event 
and staggering losses. The insurers continue to say that 
terrorism risk is uninsurable, yet, our economy depends on the 
helping hand of terrorism insurance to maintain the critical 
services that safeguard our Nation in the event of a terrorist 
act. That is why our support is market-oriented. But absent the 
current Federal program, there has never been a true market for 
terrorist risk insurance. There is no evidence a market will 
develop to provide the capacity that the American economy 
needs. Because of this, Congress must act soon.
    We believe our Nation is best served with a viable long-
term solution. In fact, we believe it should be permanent. 
While TRIA has been successful, there are some availability 
problems. For example, New York, a high-risk, major market in 
an urban area with ``fire following'' laws combines the 
aggregation of risk, high retention rates for the insurers, and 
rating agencies' pressures on the insurance companies. This 
causes capacity problems for the conventional terrorism 
coverage.
    In other words, some market businesses still cannot buy 
necessary levels of terrorism insurance. Even in my home City 
of Cleveland, I have seen significant increases in terrorism 
insurance in the office buildings that I personally own. 
However, the Government Accountability Office and the 
President's Working Group on Capital Markets have issued 
reports confirming that no meaningful amount of insurance 
against loss from nuclear, biological, chemical or radiological 
events, known as the NBCRs, is available in the property market 
today. Notwithstanding that TRIA backstops this insurance, we 
stand ready to work with this committee and Congress to find 
the proper long-term solution to the problem.
    To that end, CIAT has jointly developed, with the American 
Insurance Association, a set of joint principals that we 
believe should be part of any TRIA modernization. For 
conventional terrorism attacks, we recommend leaving in place 
the TRIA backstop. With the insurer's deductibility, industry 
retention levels, and the program triggers at the 2007 level, 
we would also leave the current make-available provisions as it 
is for the conventional terrorist coverage.
    The NBCR terrorism risk is a different matter. To make sure 
that businesses have access to this important coverage, we urge 
that NBCR perils be added to the make-available requirements 
under TRIA and to recognize that insurers cannot model this 
risk or price it either. We support a separate and lower 
insurer's deductibility and a lower co-pay with respect to the 
NBCR's risk. This legislation should clarify that the Federal 
Government is ``solely liable'' for the NBCR terrorism losses 
above the insurer's individual NBCR retentions, thus 
encouraging insurers to provide more capacity.
    Finally, we support removing the distinction between 
foreign and domestic terrorism in the current definition of the 
act of terrorism. As the London bombings demonstrate, there are 
serious difficulties distinguishing between foreign and 
domestic terrorism and the distinction makes no difference to 
the victims.
    In conclusion, we believe that the proper long-term 
solution should focus on a private market, having been 
unwilling or unable to do so. The ideal solution must enable 
businesses to purchase insurance for the most catastrophic, 
conventional terrorism risk. It must provide adequate insurance 
capacity in high risk urban areas. It must provide meaningful 
insurance against the so-called NBCR risk. An ideal program 
would seek, over time, to reduce the Federal role in the 
conventional terrorism risk market while maximizing the long-
term, private capacity by facilitating entry of new, private 
capital.
    I'd like to thank you on behalf of our group, and I 
appreciate the opportunity to have spoken today.
    [The prepared statement of Mr. Ditchman can be found on 
page 67 of the appendix.
    Chairman Kanjorski. Thank you, very much, Mr. Ditchman.
    Mr. Ditchman. Thank you.
    Chairman Kanjorski. Our next witness will be Tom Watjen, 
president and CEO of Unum Group.

 STATEMENT OF THOMAS R. WATJEN, PRESIDENT AND CEO, UNUM GROUP, 
   ON BEHALF OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Watjen. Thank you, Chairman Kanjorski, Ranking Member 
Pryce, and members of the subcommittee. My name is Tom Watjen 
and I am president and chief executive officer of Unum Group.
    Unum is, among other things, the fourth largest writer of 
group life insurance, including accidental death and 
dismemberment, in the United States. We insure approximately 8 
million lives and provide over $800 billion of group life and 
AD&D coverage.
    I am here today on behalf of the American Council of Life 
Insurers. The ACLI is the primary trade association of the life 
insurance industry, representing 373 member companies that 
account for 93 percent of the industry's total assets in the 
United States. I would like to thank the committee for holding 
this hearing. Your committee has had a proven track record of 
supporting group life insurance coverage within TRIA, and we 
remain grateful for your sincere efforts and consideration of 
this issue.
    While much of the ongoing discussion on extending the TRIA 
program has focused on property casualty insurance, it is also 
important to discuss how this issue affects the life insurance 
industry, particularly with regard to group life insurance. We 
believe that the individuals who work or reside inside our 
Nation's buildings should be adequately covered as well.
    Group life insurance is a critical component of a standard 
employee benefit package. For millions of Americans, especially 
lower income workers, it is the only life insurance that their 
families have. In 2005, there were about 167 million group 
certificate holders with an average coverage amount of $49,500. 
Due to the nature of the coverage, group life policies have a 
very high concentration of risk. Members of an insured group 
are often gathered in single locations and live near their work 
places. A single catastrophic event can cause many or all of 
them to die at one time.
    While the life insurance industry as a whole would be able 
to absorb tens of billions of dollars in death claims resulting 
from a catastrophic attack, those insurers that receive an 
unexpectedly high number of claims could be forced into 
insolvency. Such insolvencies would impact payments to 
beneficiaries at their time of need. They would also impact the 
payment of benefits to all the policyholders of insolvent 
companies, not just the group life insurance policyholders.
    Group life policies are designed to provide simple, 
affordable protection for average Americans. They are not 
designed or priced to account for the immediate deaths of 
thousands of people from a terrorist attack. Group life 
insurers could protect themselves from the terrorist risk 
exposure, either by excluding coverage for deaths due to 
terrorism, or by purchasing catastrophic reinsurance 
protection. However, neither Unum nor the ACLI are aware of any 
States, except for Kansas and North Carolina under very limited 
circumstances, that allow the use of terrorism exclusions by 
life insurers.
    Furthermore, we do not believe it is good business or good 
public policy, frankly, to exclude the coverage for deaths due 
to catastrophic events such as terrorism. Since exclusions are 
therefore not a viable solution, insurers must turn to 
catastrophic reinsurance for protection. While such reinsurance 
has become more available since 9/11, it comes with higher 
deductibles, various exclusions and most importantly with 
overall coverage limits that are lower than were available 
prior to 9/11.
    Without adequate catastrophic reinsurance, many life 
insurers risk financial ruin from a significant terrorist 
attack. We believe that catastrophic reinsurance would become 
more available if group life were included in the TRIA 
extension. This additional reinsurance capacity would 
significantly reduce the risk of insolvency that many group 
insurers face in the event of a large-scale terrorist attack.
    If TRIA is extended again, and group life is included, we 
urge that a separate recoupment mechanism be created for 
property casualty and group life insurers. Recoupments of 
amounts paid by the Treasury for losses relating to P&C 
insurance should only be made by P&C insurers. Similarly, 
recoupment for losses relating to group life insurance should 
be only made by group life insurers.
    We look forward to working with your committee and others 
in Congress, at the Treasury, and in the Administration, to 
ensure that group life remains available to millions of 
Americans who depend on it and that this vital protection is 
there when it is needed most.
    Thank you for providing the opportunity to share our views 
now and we certainly look forward to having a chance to answer 
your questions at the appropriate time.
    [The prepared statement of Mr. Watjen can be found on page 
96 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Watjen.
    Our final panelist is Vincent Donnelly, president and CEO, 
PMA Insurance Group.

   STATEMENT OF VINCENT T. DONNELLY, PRESIDENT AND CEO, PMA 
 INSURANCE GROUP, ON BEHALF OF THE PROPERTY CASUALTY INSURERS 
                  ASSOCIATION OF AMERICA (PCI)

    Mr. Donnelly. Thank you, Chairman Kanjorski, Ranking Member 
Pryce, and members of the subcommittee. Thank you for the 
opportunity to testify before you today regarding the terrorism 
risk insurance program.
    My name is Vincent Donnelly and I am the president and CEO 
of the PMA Insurance Group, which is a member company of the 
Property Casualty Insurers Association of America, PCI, 
representing more than 1,000 member companies. I am testifying 
today on behalf of PMA and PCI.
    I am pleased to be here this afternoon to share my 
perspective on the uniqueness of the risk that terrorism 
presents to our economy, resulting in the need for the Federal 
Government to continue to play a major partnership role with 
the property and casualty insurance industry. Furthermore, the 
partnership role needs to be sensitive to the unique 
characteristics of small- and medium-size insurers when 
considering the key elements of the continuation of TRIA.
    The PMA Insurance Group is headquartered in Blue Bell, 
Pennsylvania, and has been underwriting commercial lines of 
insurance for over 90 years, with worker's compensation 
business producing about 84 percent of our premium. Our total 
2006 written premiums was $430 million, placing PMA within the 
parameters which the insurance industry would consider to be a 
small- to medium-size insurer. In the nearly 5 years since its 
inception, TRIA has become an essential part of our Nation's 
preparedness for responding to acts of terrorism. As Congress 
debates its continuation, we ask that you will consider the 
importance of TRIA in making it possible for small- and medium-
size insurance companies to play its role in protecting the 
American economy.
    I believe there are several basic principles that most of 
us here today can agree upon. One, without this program, the 
randomness and catastrophic risk associated with terrorist 
attacks pushes terrorism outside the realm of insurability. It 
is not possible for the insurance industry to calculate the 
probability of loss, nor to determine a reasonable range of 
outcomes.
    Secondly, participation in this effort by the Federal 
Government is necessary, especially when it's apparent that the 
threat of terrorism has not abated. In effect, the Federal 
Government is in the best position to be the ultimate risk 
manager for handling this exposure to loss of life and 
property.
    Third, a response by insurers to terrorism losses resulting 
from an event that occurs in New York City, here in Washington, 
D.C., or near my company home town of Philadelphia has 
financial implications that are widespread and extend to all 
policyholders who are depending on an insurer's capital and 
surplus to respond to their everyday losses. All acts of 
terrorism should be covered by TRIA and the Federal 
Government's participation should not be limited to only 
foreign-motivated terrorist attacks or to certain types of 
attacks (i.e., NBCR).
    Let me now address the specific concerns that are 
particularly important to small- and medium-size insurers, all 
of which are even more acute for worker's compensation insurers 
who are challenged to manage the uniqueness of terrorism risk. 
Many small- and mid-size insurers are regional in nature, 
serving both niche markets and tightly defined markets, as well 
as a broad spectrum of employers across the country in many of 
the States that are represented on this subcommittee. They 
insure a variety of businesses, some small and some large. 
Indeed, 94 percent of companies writing TRIA policies are 
small- and medium-sized (as defined by total premiums less than 
a billion dollars) representing a quarter of the Nation's total 
TRIA lines.
    So, as you consider the extension of TRIA, I believe it is 
important for you to consider the impact that two key elements 
have on the competitive landscape of the insurance industry. 
First, a higher program trigger (the point at which the program 
kicks in) increases the number of insurers whose capital is in 
jeopardy. Already, at today's trigger of $100 million, 75 
percent of insurers--all of whom are small- and medium-size 
companies--have total capital below that level. In effect, TRIA 
provides no protection.
    Just to give you an example, suppose there was a terrorist 
attack on a business resulting in 100 employee death claims in 
the State of Pennsylvania. That could result in $75 million in 
worker's compensation benefits that would have to be borne 
entirely by the insurer. Needless to say, no insurer can endure 
the risk of any single loss that can wipe out its entire 
capital base. In order to manage the risk of the magnitude on a 
going forward basis, small- and medium-size companies may be 
required to reconsider their risk appetite, an outcome that 
could potentially limit the access of businesses to a wider 
range of choices and a robust, competitive market.
    The second aspect is the deductible. A high TRIA deductible 
means that a greater proportion of the terrorism loss is paid 
by the insurance company, putting more of its capital at risk. 
This threatens solvency for smaller and mid-size insurers to a 
greater degree. And while I cannot speak this afternoon for the 
rating agencies' position on this issue, I do believe that the 
impact of TRIA's deductible and trigger requirements upon 
future financial performance has become a greater focal point 
in their evaluation of individual insurers.
    The characteristics that make terrorism a unique, and even 
more importantly an uninsurable risk, are as present today as 
they were after the events of September 11th. It is essential 
that the Federal Government continue to be a long-term partner 
with the insurance industry in addressing the potential 
economic effects of terrorism. In designing the program, the 
economic interest of all market participants needs to be 
balanced, yet with special recognition that the small- and 
medium-sized insurers are essential to the health of the 
insurance market and, as such, the economy as a whole.
    The size of the program trigger and the deductible retained 
by insurers needs to promote a robust market for the consumers 
that it serves. I want to thank you for giving me the 
opportunity to share our perspective this afternoon.
    [The prepared statement of Mr. Donnelly can be found on 
page 78 of the appendix.]
    Chairman Kanjorski. Thank you, very much, Mr. Donnelly.
    And now for the record I ask for unanimous consent to have 
two statements, one by the American Bar Association and the 
other by the Risk and Insurance Management Society, entered 
into the record and made a part thereof.
    It seems to me that we have almost unanimous agreement on 
the panel that we should continue TRIA, which is not 
surprising. But it is surprising in terms of the fact that 
there seems to be a strong indication that you prefer an 
extension for a longer period of time rather than a shorter 
period of time and some permanency to the program.
    Is that to indicate from your statements that you have 
concluded that the private market will never come back to fill 
this vacuum? Do you believe it its really a government program 
from now on and that we should treat it as such?
    Mr. Ditchman. Mr. Chairman?
    Chairman Kanjorski. Yes.
    Mr. Ditchman. Mr. Chairman, we believe strongly, CIAT 
believes strongly, that it is very difficult to handle that 
type of magnitude of issues and it really belongs in the hands 
of the Federal Government to handle, certainly, the NBCRs, but 
when one looks at business and handles when one buys a mortgage 
or gets a mortgage, they get 15 to 25 years, depending on what 
the terms are. Companies need surety; they need clarity; they 
need some safety level. And if--over some period of time they 
need to know how that process can fare, so I would say longer 
is better--15 to 25 years.
    Chairman Kanjorski. It does not create any fear on your 
part that this is the camel's nose under the tent, if you will, 
and that we can make the same argument about catastrophic 
insurance? Can you make the same argument about size of 
coverage, that maybe some companies and some markets just 
aren't capable. Certainly, you could make the argument, if you 
wanted to make workmen's compensation uniform among the 50 
States, that it would be justified to turn that program into a 
totally Federal program.
    What is stopping that effect?
    Mr. Donnelly. Mr. Chairman, if I could add my thoughts on 
that, I believe, as I said in my remarks, that this is a very 
unique exposure, and in my opinion uninsurable, and I believe 
probably forever it will be uninsurable. But I think when you 
balance the fact of that issue with also the need to have more 
stability in the market so that we're not looking at this issue 
every 2 or 3 years, there does need to be a fair amount of time 
for it to evolve and to see if there are changes and to look at 
some of the parameters of the program, to look at what does 
happen in the marketplace. The world does evolve.
    So, I echo some of the other comments that were made, is 
that probably looking at something that is similar in the 10 to 
15 years, so that there is some permanency in terms of the 
market being able to react in a stable fashion to dealing with 
this, both for worker's compensation and non-comp. The fact 
that this is unique is a very important point that I made today 
and, I want to emphasize again that terrorism is unlike any 
other risk that I can think of, that we deal with. It is the 
uninsurability of terrorism that puts this on sort of an island 
by itself when you evaluate this particular exposure.
    Chairman Kanjorski. So, you don't see the private market 
having the flexibility to find a way to solve that problem?
    Mr. Donnelly. I think I certainly don't see that in the 
short-term, and even when I look out further, sir, because when 
I think of insurability, I think of the need, the ability to 
predict loss, the frequency of loss, and the ability to measure 
that loss. I don't see either of those issues here.
    And the third issue is, and I mentioned it in my comments, 
at the end of the day I believe the Federal Government is 
ultimately the risk manager. I'll give you an example: in 
worker's compensation, over the last 15 years, what we've seen 
is the frequency of loss change over time and decline. And it 
has declined because of the risk management techniques that 
have been brought to bear with respect to worker's compensation 
and potential injuries, by manufacturers, by insurance 
companies, by consultants, and so forth.
    Those three elements, the ability not to predict loss, not 
to be able to measure loss, and the fact that the government is 
ultimately the risk manager, puts this in a unique, I think, in 
a very unique picture, and I don't foresee, as I look out in my 
crystal ball, the ability for any of those three things to 
change.
    Chairman Kanjorski. Yes?
    Mr. Watjen. Mr. Chairman, if I could just add the group 
life perspective a little bit, because this is certainly a new 
piece to the discussion around TRIA, not for this committee, 
but more broadly around the inclusion of group life.
    Similar characteristics: it is very difficult to predict 
and price the terrorism act into your group life pricing; and, 
in fact, if you tried to do so, I had almost postured the fact 
that the employer may not actually offer that coverage to their 
employees, which very much is contradictory to good public 
policy right now. As I said in my comments, oftentimes the only 
place an individual employee can actually acquire group life or 
any life insurance coverage is in the work place, and what we 
don't want to do is to create an atmosphere where the employer 
is no longer incented to provide that coverage, because the 
cost is too high. So, again, it is very difficult to price that 
into the product, given the randomness of the events.
    The second thing I'd point to is that actually since 9/11, 
we've really not seen a material amount of capital come back 
into the industry in the form of reinsurance coverage, 
because--again, for those very same reasons. So, even though 
there is a lot of capital out in the marketplace looking for a 
place to find a home, it's actually not migrating to the 
reinsurance business in terms of covering--group life coverage. 
And so again this is where I do believe there is a more active 
involvement of the government. It is very essential for us to 
have some stability, create some sense of comfort that 
encourages capital to come back into the business. Whether it 
needs to be a support mechanism that's in place for a long 
term, that remains to be seen, but at least in the short term, 
that's the force necessary to attract capital and restore 
confidence.
    Chairman Kanjorski. Are there any other free enterprises 
here?
    [Laughter]
    Mr. Dowd. I probably qualify.
    The biggest thing for innovation, I think, is the 
challenge, because a lot of times the innovation comes from 
very private companies in the capital markets and the challenge 
for the capital markets who are innovating and adding more 
capacities is they are so quantitatively driven, right? You 
know, I use the capital markets for some of my other risks that 
I use, rather than traditional reinsurers.
    And how do you get their interest is, when you can model 
and quantify the risk with the greater certainty, the more they 
are willing to risk their money. They really want to be able to 
bucket, slice and dice and move the market. That is how credit 
cards, that is how mortgages, everything else, if they can 
repackage it and quantify it, they can sell it to different 
groups of investors. And, the real trick with terrorist 
insurance is that we don't have probabilities. Right? We don't 
know what the likelihood of loss is.
    We can do estimations on the severity of loss, but the 
probability is missing, and so there is not a good way to 
repackage and slice and dice the product so that the average 
investor wants to buy it, and that really stifles the 
creativity in terms of more capital wanting to handle terrorism 
risk.
    Mr. Cotton. Well, it stifles the capital market in the 
sense that it provides volatility with the uncertainty of 
whether or not an event would occur and whether or not it were 
covered. As I said in my remarks, the mortgages that are 
supporting the bonds that we own or sell or buy are 10 or 15 
year mortgages, as was pointed out earlier, and all we have to 
gain back from our position is the mortgage to get paid back if 
something happens.
    And it seems to me that if we are not going to have a 
volatile capital market, we need to have some certainty, and 
that's where I think long term is important, though I am a free 
marketer.
    Chairman Kanjorski. You know, the arguments that you are 
making could have been made regarding commercial mortgaging 30 
years ago or 40 years ago, that there wasn't a secondary 
market. We found a vehicle to create a secondary market, which 
now the private market is coming in and saying, ``Get Fannie 
Mae and Freddie Mac out of the picture and let the private 
market handle the whole proposition.'' It's interesting where 
30, 40, or 50 years ago they said it was something that 
couldn't be done, could not be put together.
    Let me pose a question that goes to why I would favor a 
limitation of time as opposed to a long extension. If we do a 
15- or 20-year extension, for all intents and purposes, that is 
permanent for several reasons. One, the institutional memory of 
this committee will be gone when we reconsider. Now, that 
sounds stupid, but there are only about three of us who 
remember the S&L crisis. Other than the three of us who still 
remain, everybody else here are virgins to that; they never 
heard of that problem before. So, if we do this 15 or 20 years 
from now, there will really be no institutional memory left 
here at the committee level. That being the case, they won't 
really know the nuances or the reasons why certain things were 
done or not done.
    The second proposition that bothers me is if we go too long 
a period of time. As I indicated in my opening remarks, I 
prefer a 6- to 8-year extension. I am not sure that the private 
market can handle all of these things. But I don't feel as 
guilty talking that way as a Democrat that you all, being 
Republicans, should feel.
    [Laughter]
    But, that being beside the point, if we reexamine this 
proposition in 6 or 8 years, will we have a crisis of 
catastrophic insurance? What is going to happen; how can it be 
done? What is going to be done on ``all peril'' insurance? 
Regarding disaster insurance, certainly in the coastal States 
of the United States, it is a catastrophe, a second 
catastrophe. What is happening there?
    We will not face that issue unless we have something that 
requires us to reexamine it so that maybe, ultimately, this 
issue of terrorism may make us recognize and separate what 
becomes a public interest issue of insurance that may be 
covered. It will give us the requirement to come back and 
revisit the system, 6, 8, or 10 years down the road as opposed 
to making it permanent, or 15 or 20 years down the road, when, 
as I said, the institutional memory of all these issues will be 
gone.
    Now, the last legislation was lacking one thing that I am 
sure my colleague, Ms. Pryce, is going to join me in 
supporting. We really have to get a commission to do a total 
in-depth study of this issue and have it returned to the 
Congress within 3 years or so. Not just a paper, but a real 
analysis, not only on this issue, but on catastrophic insurance 
and all these elements, how they fit together and how they 
could be attacked. The study should be returned to us so that 
we have enough time to really work on the issues and examine 
them.
    Right now we're doing patch work, and that does disturb me, 
particularly 2 years to 2 years. And I think, didn't the last 
leader in Congress only want to do 6 months? You know, which 
reminds me, there is that famous picture of the President 
balancing the basketball, and he bounces it and it just doesn't 
return, because there is no air in it. Well, doing 6 months of 
catastrophic or terrorism insurance is about the same thing. It 
really does nothing. We are already getting to a danger point 
in time. I think we really have to make sure that we move this 
legislation as quickly as possible, and I am probably partially 
responsible for its delay and I hope to not be any more 
responsible for that in the future.
    So, we are going to try to move this along in the next 
couple of months as quickly as possible.
    Ms. Abraham. Chairman Kanjorski, excuse me; one comment on 
this. Stability is one of the most important issues that we are 
looking for. We plan at educational institutions really for a 
generation and make very large investments. And your 
recommendation for a major study of this, I think, is spot on, 
because risk management issues are evolving. There are new 
technologies; there are new issues that are coming up that may 
in part reduce the risks longer term. But, currently, the 
probability issue is very real for us. What's the probability 
of an attack on Boston, Philadelphia, Seattle, or Chicago 
campuses on any given day? I don't know that and so I can't 
possibly underwrite for it, nor can our reinsurers.
    We can pool. We can try to do some things, but that 
stability and lack of ability to judge when it will happen and 
what the probability may be is significant. But there are new 
things that we are looking at; the government is learning. 
Institutions are learning issues and learning new things. So I 
think we need stability; we need multiple years. Permanent, I 
think, is never say never; but, I think there is an opportunity 
for us to dig in. Look at the changing technology. Look at the 
changing issues that are evolving in this world of terrorism, 
and I think we'll be better prepared in 6 to 10 years, both for 
capital markets as well as loss control and risk management, 
which is an important part of this.
    Chairman Kanjorski. I hope from the academic world, there 
is some emphasis. Pay attention. One of the things that has 
always disturbed me about insurance is that we failed to 
recognize its implications in regard to social and economic 
policy. When we under price insurance to make a sophisticated 
market like New York or Miami very attractive and very 
competitive, because we have been artificially subsidized by 
prices and other markets, we really have a tremendous impact on 
location of population investment policies in the future. 
Catastrophic insurance really points that out, but terrorism 
insurance also points that out.
    On the other hand, with my good friend from New York here, 
terrorism insurance is one thing, probably, that I am not at 
all certain that we shouldn't underwrite on a national level. 
It is the importance of our financial centers of the world or 
our capital city that are much more highlighted and make them 
likely to be the subjects of those attacks because they are 
icons of the entire Nation and should be covered that way.
    But as we get into catastrophic insurance and other forms 
of insurance, I think we have to be very careful not to further 
destabilize the natural supply and demand of the private 
marketplace to see how growth occurs, how population shifts 
occur, and how investments occur. Or we just may populate the 
first 10 miles of the shoreline of this country to the extent 
that we cause an earthquake in California.
    Ms. Abraham. Well, I couldn't agree with you more. In fact, 
I think you speak to why risk retention groups really make a 
lot of sense for some particularly tough risks, because we 
really know the risks of our institutions better than others 
and can really work both to price appropriately, give risks and 
rewards, give carrots and sticks in order to both encourage 
investments and risk management, and encourage changes and 
behaviors, both societal behaviors and campus behaviors. So, 
knowing the risks, giving the right kind of incentives is 
something that we do day in and day out, whether it is athletic 
injuries, date rape, discrimination, harassment training, or 
some of the emerging terrorism risks.
    So, I absolutely agree with you that we have a role as 
insurance makers to help encourage societal behavior that's 
positive.
    Chairman Kanjorski. Thank you very much, Ms. Abraham. I 
have just been notified by my chief of staff here on the 
committee that I broke my first rule, and I have over spoken 
and misused my time. And, therefore, I am responsible for the 
further delay of this process. I will yield and change that.
    [Laughter]
    And now, if we can, we will move on to a charming ranking 
member, Ms. Pryce.
    Ms. Pryce. Thank you so much, Mr. Chairman. Ms. Abraham, 
while we are on the topic let's continue with, well, first of 
all, I know that you've been traveling and I appreciate the 
accommodations you made for the committee to be here today.
    Ms. Abraham. I am honored. Thank you.
    Ms. Pryce. We especially appreciate that. And you have 
testified that expanding the Liability Risk Retention Act would 
create more capacity and more stability and more competition 
and all the things we see as good in this picture. But, I know 
that this committee has been approached by consumer groups and 
others in the past to include this in TRIA or freestanding, so, 
there must be some opposition. There must be some--are there 
policy considerations against what you are proposing, and who 
would come forward with arguments counter to yours?
    Ms. Abraham. A good question. I don't know who will come 
forward. I'll get to them soon though, if you let me know on 
our own side. But we clearly see this as an opportunity to be a 
small part, and I want to be clear on that, a small part of the 
solution. So we think that we have the ability to understand 
risk, to add capital. Because risk retention groups, all of the 
capital is owned by the policyholders.
    So when a member joins, a new institution joins United 
Educators, they make a capital investment. So, we're a co-op, a 
mutual, a reciprocal, so it is an ability to add capital and to 
try to solve a problem. We rely on reinsurance as well, but the 
members have an investment. They make an investment. Our net 
income is their net income. I can't invest in United Educators. 
Only Penn State can invest, or another educational institution. 
So, it is an ability for like-minded, whether it is a hospital, 
real estate agents, shopping malls, to be able to join 
together, so it is adding capacity.
    It's not going to solve personal lines problems. It's not 
going to solve every issue, but some of the toughest risks. And 
I would say MIT and Cal Tech would be some of the toughest 
risks out there to be able to join together and find a 
solution. Some, there may be some out there. They have not 
approached us, but I think it adds competition and is a part of 
your very complex solution, not the magic dust, but part of the 
solution.
    Ms. Pryce. Well, I welcome comments of the other witnesses 
and let's ask Mr. Ditchman since he's a fellow Ohio Buckeye, if 
you have any opinion, and if the others would like to weigh in 
on the pros or cons of this, attaching this to TRIA or a free-
standing bill. Mr. Ditchman?
    Mr. Ditchman. Thank you. Mr. Chairman, the CIAT is a wide 
ranging group of organizations. And when one asks who may come 
out in opposition to the positions held at this table, one only 
needs to look at the United States Chamber of Commerce, who is 
involved in our organization. The Real Estate Roundtable, the 
National Association of Manufacturers, the National Retail 
Federation are members; the Association of American Railroads, 
the General Aviation Manufacturers Association, Taxicab and 
Limousine Association, the American Association of Gas, the 
American Public Power Association, Edison Electric Institute, 
the National Rural Electric Cooperative Association, the 
American Bankers Association, and the American Community for 
Bankers, the Mortgage Bankers Association and the Commercial 
Mortgage Backers and Securities Organization. What more can I 
say? There are a lot of organizations that support under the 
CIAT position.
    So, I think you are going to find it difficult to find a 
large group that's going to be in opposition to the positions 
held at this table. Thank you.
    Ms. Pryce. Anybody else care to comment? I mean, this has 
obviously been considered in the past and for some reason has 
not made it in, made the cut. And so I just wonder if there's 
something I'm overlooking.
    Mr. Dowd. I think for the large insurance group, I don't 
think that there's any opposition to the risk retention groups 
being added. I think Ms. Abraham was correct that probably in 
her view it doesn't have a lot of the excess we've seen in the 
House, though don't add a meaningful amount of capacity when 
you consider the billions and billions and billions of dollars 
that we are talking about.
    But from the fringe of the situation, if insureds are 
interested in taking more of their own risk, which essentially 
this is, you know, we have no opposition to that.
    Ms. Pryce. All right, thank you.
    Mr. Watjen. If I could just add, I represent, I know again, 
a different group, which is the life insurance industry. And 
again, I can't see where the opposition would come from. The 
national insurance agents, the commissioners have all supported 
legislation like this, as we said. Frankly, protecting the 
buildings is a part of the object of all of us, but also the 
individuals in the buildings as part of that. So I can't see 
where the opposition would come from.
    Ms. Pryce. And, Ms. Abraham, the proposal is to add 
property too, and, the liability experience has been a very 
positive one. Is that what I am to understand?
    Ms. Abraham. It's been a very positive one. The market has 
grown over the past 21 years. We, in fact, are 20 years 
overrated by A.M. Best. Our member retention rate would mean, 
year-after-year, is 95 to 96 percent. So across the board it's 
been very strong comparable to the commercial insurance market, 
but very strong loyalty. These are institutions that, or 
businesses or nurse-midwives, that invest in their company. 
They run their company. So, it's not for everyone. Not 
everybody should join a co-op. But for those who believe in 
long-term investments, a risk retention group is a very good 
alternative.
    Ms. Pryce. All right, thank you. My time has expired. Thank 
you, Mr. Chairman.
    Ms. Abraham. Thank you.
    Chairman Kanjorski. Thank you, Ms. Pryce. Our good friend 
from New York, Mr. Ackerman?
    Mr. Ackerman. Thank you, very much, and just for the record 
I want to make sure it indicates that I, too, am charming.
    Chairman Kanjorski. You are.
    [Laughter]
    Mr. Ackerman. Thank you. To stipulate, all the members of 
the community are charming.
    Chairman Kanjorski. All the guys are charming, come on.
    Mr. Ackerman. This issue gets more complicated the more we 
look at it and I think that's because of the changing dynamics 
of our times as individuals or groups tend to become more and 
more violent. I think we're going to have to possibly look at 
redefining some things, at least for the purpose of insurance, 
if not in other areas under other committees' jurisdictions as 
well.
    If we take away, for insurance purposes, the difference 
between international and domestic terrorism, which as I 
indicated I am in favor of doing, how do you define each of 
these terms and how? And to consider it may be necessary not 
just to redefine the word domestic, but the word terrorism 
itself, I know there are distinctions in the law for some 
purposes between massacres and mass murders and serial 
killings, and the like. And each one is a different kind of 
category. But how, what category would you put the incident at 
Virginia Tech, for example?
    All of these horrific examples have a terrifying effect, 
but is it an act of terrorism that I think we're going to have 
to collectively think about and reason out? I do not know that 
there's any answer right now. Certainly, if I were an insurance 
company, I'd have one argument. If I were a victim or relative 
thereof, I'd have a different argument for Virginia Tech, and 
I'm sure somebody's going to make those arguments at one point 
in this or some other case.
    Do we need to redefine these terms?
    Mr. Donnelly. Well, I think, sir, what I'd say with respect 
to the domestic and the foreign, I'm not a lawyer. And I think 
when you were commenting, I think of the example in London of 
the subway bombings, where it was caused by British citizens 
who were creating, what I would say terrorist attacks. And I 
think before when we said foreign, we would think about 
literally people from outside of this country coming upon 
American soil and creating an event.
    So, when I think of domestic, saying all events should be 
covered is something that we need to consider. We need to sit 
down and make sure we take a look and define exactly what we 
mean. But I reference, I use the London example as something 
that I say was a terrorist, you know, whether it was a British 
citizen doing it or an American citizen doing that versus 
somebody from another country coming here, because they were 
attempting to basically attack the way of life that we have 
here in our economy.
    You know, the Virginia Tech issue, I guess I view as an 
unfortunate event. You know, an individual person that 
obviously had a lot of personal issues to deal with and created 
a lot of tragedy for a lot of people for not only the victims 
themselves, but the families and all of the people at Virginia 
Tech and a lot of other people in the country.
    I don't necessarily consider that a terrorist event in the 
way--that particular event anyway, and I know that we have to 
write some legislation that's broad enough so that it doesn't 
take into account--we get in a situation that we'd have to 
redefine it every time there's an event happen. But I do think 
we have to make it broader than what we have today.
    Mr. Ackerman. Yeah, I'm not sure that we have to look at 
this from the perspective of checking somebody's passport to 
identify what they've done. I think we get into the sticky 
area, and I guess maybe we do have to get into it, of what the 
motivation is of the person who is making the attack. And it 
doesn't necessarily have to be that they have the passport of 
some country that gave them a passport, whether or not they 
really--there are a lot of countries for example in the Middle 
East and other places that give people passports, who are not 
of that country. They just carry passports of other countries. 
An international terrorist attack, I would presume, is one 
where somebody is attacking our country in what they view as 
the interests of another country.
    And we're dealing with other societies as well as other 
countries right now. You know, somebody could carry the 
passport of one country and commit a terrorist attack on behalf 
of some beliefs of another country. And something like Virginia 
State was more of an attack on our society or our culture, or 
you could make the argument that it was just the ramblings of a 
mad individual.
    Do we have an obligation on the terrorism insurance to 
insure against acts, individual acts of individuals?
    Mr. Cotton. I might add a comment. I think you used the 
word intent. The intent to disrupt society in the government, 
operation of the government, it seems to me as a way to look at 
it. But I think the marketplace as we see it, CMSA sees it, 
will not make a distinction between who the person is or where 
they came from.
    But when you see an act like this you'll recognize it and 
we think the distinction should not be there.
    Mr. Ackerman. Well, it's like pornography, then.
    Mr. Cotton. That's what he said.
    Mr. Ditchman. Mr. Chairman, may I?
    Chairman Kanjorski. Yes, Mr. Ditchman.
    Mr. Ditchman. The National Association of Realtors recently 
did a study of voting Americans and determined that 64 percent 
believe that in the next few months there would be an attack on 
this country and 42 percent believe it's going to be in their 
neighborhood.
    And, candidly, the whole process of terrorism is to create 
horror. The horror of it all is to influence governments to act 
differently. The Rand study clearly indicated that these fringe 
organizations rely on the violence against civilized people to 
make a political point.
    And that Rand study, which you have available to you, but 
more importantly is the effect that it has on one personally, 
and how one lives with that after the person who is down the 
hall from the person at Virginia Tech; or what happens to the 
person on 9/11. All you have to do is to look into that huge 
crevice today and realize what happened to those 3,000 people 
who passed away. I mean, it's just so--they want to create the 
fear within the individual and they don't really care who they 
are. They just want to do an economic damage to this country 
and create the horrors.
    Thank you.
    Mr. Ackerman. Let me just be clear on that before I further 
abuse the time the chairman has allowed. Are you saying it 
should or should not go to motive for insurance purposes? We 
have a different standard because we struggle with this and 
hate crimes, whether, you know, you bury someone's head in it 
because of their color or religion. Or you bury someone's head 
in it because they kissed your girlfriend, there's a different 
penalty, sometimes. But that was the intent of the hate crimes 
thing. Should we go to intent for purposes of insurance? I 
would think the purpose of insurance is to figure out from an 
actuarial standpoint, which is continually a moving target and 
what we're talking about--do we figure out just what the risk 
is and insure everything?
    Mr. Cotton. Is it possible to say that this whole debate is 
around the fact that the only gap that really exists in the 
insurance world is as it relates to terrorism, and that's why 
we're sitting here?
    Mr. Ackerman. I think it's a new frontier--a terrible but 
new frontier. I yield back my time.
    Chairman Kanjorski. Let's see. I don't know who is going to 
remain or who is here, but because we have some time 
constraints, I ask unanimous consent that we move on with only 
the remaining members being justified to be heard. Mr. Bachus 
of Alabama, Mr. Scott of Georgia, Mr. Murphy of Connecticut, 
Mrs. Bachmann of Minnesota, Mr. Donnelly of Indiana, and Mrs. 
Maloney of New York, in that order. And now, I recognize the 
ranking member of the committee, my good friend Spencer Bachus 
from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman, and I appreciate your 
work on this issue over the years. I am going to try to ask 
really short questions, so I can get long answers. And my first 
question, and I'll just start with Mr. Dowd, because I read 
your testimony and you sort of touched on this; how would you 
rate our current program on a one-to-ten basis?
    Mr. Dowd. You know, if we look at the goals of increasing 
availability and affordability of terrorism insurance as one of 
the main goals, I think we probably got about an eight. I think 
when it comes to conventional terrorism, for the most part, the 
customers who want to buy it at a reasonable price do today, I 
think.
    When it comes to the non-conventional at the NBCR, I would 
probably rate it closer to a two. Really, the only available 
insurance today is worker's comp and it's only available 
because it's mandatory. So, I think we need improvements there 
if you wanted to move the total scope of the bill up to a ten. 
But the truth is, I think, that's the main area that I would 
focus on for improvement to move it up to that. Because 
generally the economy, clearly as a direct result of this bill, 
took off in leaps and bounds. In our own industry, you know, 
people think of this as an insurance bill. Frankly, we're like 
the tail on this thing. The rest of all the issues that were 
mentioned over here really are what took off, because this bill 
is high. I would rate it very, very high on its goals of 
availability and affordability.
    Mr. Bachus. In fact, you touched on something that 
absolutely, when you said workmen's comp was the only coverage 
that doesn't exclude nuclear, biological, chemical, or 
radiological. You know, after 9/11 when we were working on that 
bill, we didn't hear as much about that. Now, we are told 
pretty much in briefings which have been released to the 
public, so this is not confidential information. And most 
securities and analysts tell us that probably the next attack, 
if it's a large-scale attack, will be nuclear, biological, 
chemical, or radiological.
    I mean, that's what, and you know, we don't have the 
coverage there, except workman's comp. Normally, it's excluded 
otherwise. So, I would give that part of the program a two 
also. Now, let me ask a follow-up question, then I'll let 
everybody else answer it, but I'm going to put him on the spot 
first. But then, everybody else knows the two questions, 
because I'll ask anybody else who wants to answer them.
    How could my side and both sides I think--cost is always a 
concern on the Hill--how do we increase coverage and at the 
same time not expose government involvement or reduce the cost? 
Is there a way to both, you know, to increase capacity, while 
at the same time lessening government involvement?
    Mr. Dowd. I think it's actually tricky. I think we've 
probably reached the tipping point where increased deductibles 
and co-insurance from the perspective of putting on insurance, 
is actually reducing capacity today. I said before that I don't 
think very many insurers today are selling enough insurance to 
actually fill their deductible, because their deductible is 
greater than their appetite for any other risk. So, you've 
actually probably, with the increases in the deductible, 
lowered the available capacity.
    I would sell more and was selling more when I had a lower 
retention. You know, the truth is that today's deductible is 
greater than the World Trade Center. We would get no recovery 
on the World Trade Center and from a conventional point of 
view, we have difficulty finding any scenarios that we would 
get recovery under. So, I think it sounds counterintuitive, but 
I think to increase more capacity, the first thing I would do 
is think about the deductible and the co-insurance layers.
    And, I think if you are interested in how then to keep the 
government's participation at the same place, then you do have 
to come to some sort of fund mechanism, whether it's a pre- or 
post-event surcharge of some kind. I think that's where you end 
up with if you want to leave the government where it's at in 
terms of attachment point, but yet encourage people to write 
more insurance, I think you are going to have to joust with 
``someone else has to pay for it''.
    Mr. Bachus. Okay, Mr. Cotton?
    Mr. Cotton. From the point of view of the consumer, and I 
think we represent that to a degree here, I don't think there 
is a seeking of a free ride. And, if there are recoupments 
appropriate that help to repay, that makes sense. I agree with 
Mr. Dowd. And I also think that the more that it gets done, the 
market picks up on what's happening. Again, to what Mr. Dowd 
just said, you have a better chance for the market to 
understand what it's doing.
    Mr. Bachus. Okay, Ms. Abraham, do you have any comment?
    Ms. Abraham. I do. In fact, I represented Mr. Donnelly's a 
small company, I mean a micro-nano kind of company. But I think 
you want that. You want small- and mid-sized companies in their 
adding capacity. And if you make the deductible too high, make 
the triggers too high, we're out of the game. But I think you 
want us in there. I want to be in there providing capacity, 
giving some capital, making more of a market. If he's 
frightened by those kind of deductibles as a percentage, you 
can imagine what it does to our institution. So, making it so 
high that there's a safety and a release for the Federal 
Government really saps capital out of the market, because we 
can't be players.
    So, you want a lot, not just the big guys in there. You 
want the small, midsize, and nanos in there as well.
    Mr. Bachus. Okay, anybody else? Mr. Ditchman?
    Mr. Ditchman. Yes, sir. One thing that's very important is 
to understand that if we ratchet it up, it actually puts the 
insurance companies out of business and the reality is that 
this is an economic issue facing this country. You want more 
companies involved, so ratcheting down might be a more 
practical approach than that and we have always suggested that 
the event of the trigger should remain in the current level. 
You know, we believe that a question of the domestic acts and 
so forth, so I think that deductibility issues, you know, if 
they can come down on some basis, I think that will only help 
the process.
    Mr. Bachus. Thank you. Mr. Watjen?
    Mr. Watjen. Yes, I'd like to just add to--back on your 
comment--about NBCR. Actually, group life insurance coverage 
does include that now. There are few exceptions. For the most 
part, that is not an exception. And again, in a couple of 
States there are limited exceptions. But again, we are very 
much contained to provide that coverage to our insureds, which 
actually raises the point that, you know, because we can 
actually price for the terrorism exposure, because those are 
such event-driven events and there is limited reinsurance out 
in the marketplace, I think our industry basically is taking on 
greater financial risk at this point.
    So, one of the goals as we think about legislation and 
support going forward is to provide a little more of a safety 
net because our industry, frankly, is taking those risks on 
without the type of coverage and catastrophic reinsurance 
coverage that used to be available to it in the past.
    Mr. Bachus. Okay.
    Mr. Donnelly. I guess I would just echo Ms. Abraham's 
comment about what I believe is good for the economy, good for 
the consumer, is more competition. So the need to lower the 
trigger, lower the deductible, and deal with the co-insurance, 
is important to make sure that the playing field is level.
    I will tell you that I did mention in my comments, I think, 
the rating agency is one of the things that's evolved over 
time. In reference to your question about how things have 
evolved is, I believe, the rating agencies will continue to 
play a greater role in evaluating the parameters of the key 
elements of TRIA or an extension of TRIA and what that means 
for the competitive landscape. And, I think not lowering and 
not addressing those needs is going to constrict competition, 
not expand it. The other thing; I am a free enterpriser, but I 
do believe, and I probably have said it too many times is this 
is unique exposure, including the fact--and I think the 
government has done a fabulous job being a risk manager since 
September 11th--we've not had an event.
    And I certainly don't want the job of being the risk 
manager--I have enough trouble sleeping at night. I don't want 
to know about all of those things. But the fact is the 
government really is ultimately the deterrent here and the 
protector and this puts a lot of responsibility on the Federal 
Government to play a major role here today in going forward. 
And while that may evolve over time, I do see that continuing 
because of that very fact.
    Mr. Bachus. Can I just close with a statement? One thing 
that, Mr. Donnelly, you were sort of saying this, I think. 
Another thing that's happened since 9/11 that members ought to 
reassess, not doing everything we can do to create the private 
market insurance, and that's Katrina. Because, you know, one of 
the biggest lessons out of Katrina, the difference, Katrina was 
much larger than any other hurricane. But the other thing about 
it was there was so much uninsured loss, because they were in a 
floodplain or there was a wave and all that.
    And it's costing the government just untold amounts, 
because they're not very good at compensating people. Insurance 
companies have done it for 200 years. They have a good claims 
process, and, so when I say cost, I mean the government cost. 
If we don't create private sector insurance, we are going to 
come in like Katrina, just like we did on 9/11, and there's 
going to be a public outcry, and they're going to say, make 
everybody whole. And it's going to cost the Federal Government 
and the taxpayers 3 or 4 times what private insurance companies 
could do it for.
    So we're really not saving any money. If there's an event 
and there's not coverage, we just don't do it well. I mean, I 
can tell you. You know that; the public knows that. But 
government is just not in the business of running an insurance 
company and of compensating people for claims. It's not what we 
do well.
    Mr. Donnelly. And that's why I am not going to criticize 
the government, but I echo the need to look at TRIA, the 
extension of TRIA in a pretty orderly fashion, which this 
committee has done. And I also go back to Chairman Kanjorski, 
your suggestion about a study over the next few years probably 
addresses that too. So that we can look at collectively 
government and the insurance industry and business in general 
to look at the issues. So that if going forward, there needs to 
be adjustments, those adjustments can be done in an orderly 
fashion, not in a time of chaos.
    Mr. Bachus. Thank you.
    Mr. Cotton. Might I add one thing? I wholeheartedly agree 
with you on the proactive nature of what you are talking about 
as opposed to the reactive nature. If you look at it from the 
CMSA's point of view in the capital market, the lenders need 
the insurance, because after all the skin in the game we have 
is a loan to get paid back. The rating agencies who rate the 
bonds demand it, because they are looking for stability, not 
volatility as it relates to the bonds that are sold.
    And the investors who are buying these bonds can't 
withstand the thought of the loss of 100 percent of their 
investment, which is not an equity investment. It's a mortgage 
as a result of something like this. So from the capital 
market's point of view, the lack of insurance is untenable.
    Mr. Bachus. Thank you.
    Chairman Kanjorski. Thank you, very much, Mr. Bachus. Mr. 
Scott of Georgia?
    Mr. Scott. Thank you. Mr. Chairman, this has been a very 
interesting hearing, and a very informative one. I have a 
couple of questions, but I first want to get a better 
understanding about the state of the discussion within the 
industry on the nuclear, biological, chemical, and radiological 
threats and how each of you feel about that, including an 
extension of the legislation. And I noticed here recently that 
there's been a split among the industry as to this. Could you 
just share a little bit on the status of that and sort of a 
summary of where we stand on that particular issue? Maybe the 
lady from--are you from Scranton?
    Ms. Abraham. No. I've been to Scranton. We insure the 
University of Scranton; they're a member of United Educators.
    What I can tell you is from United Educators' perspective, 
we don't believe that it's an insurable risk. We insured some 
isotopes. If there's an accident in the lab, we'll do some work 
at that level, but we have no idea how to underwrite the kinds 
of catastrophic risks that this would bring to one of our 
campuses. And, if it is included in a terrorism bill--a 
different deductible would be--a much, much lower deductible 
would be required for us to be able to have any role in taking 
part of this risk.
    It's simply something that we don't know how to underwrite 
at the scale that the experts are talking about. So, my 
colleagues will have to speak to their own industry, but it's a 
level of risk that we can take a piece of, because we do that 
with a lot of other issues. But to take a major risk, the kind 
of deductibles you are thinking about for the rest of TRIA that 
are in place now, is something that would fall into the 
uninsurable level.
    Mr. Scott. Okay. Yes?
    Mr. Ditchman. CIAT clearly believes that the NBCRs are non-
insurable and it just is not a possible way to cover it given 
the mechanisms that currently exist. And so, we stand, and all 
the organizations behind us clearly believe that's the case.
    Mr. Scott. Thank you.
    Mr. Cotton. CMSA would echo that and say that we are 
supportive of it: (1) because it's uninsurable; and (2) if it 
is included, it will provide a much more efficient mechanism by 
which to deal with it, as opposed to the government coming in 
after the fact and dealing with it.
    Ms. Abraham. Right.
    Mr. Donnelly. I would say that I think there's more 
fundamental agreement than there is disagreement. I echo 
comments made that I think it scares everybody in lots of ways. 
But as a CEO of an insurance company, and especially where it's 
mostly worker's compensation, it is clearly on the far spectrum 
of insurability. I think the range of possible outcomes is just 
staggering. And so, I'm sure there are some details as the 
legislation is worked out and recommendations are made from the 
industry that will require further study.
    There are some nuances in terms of details, but I think we 
are fundamentally united on the fact that this is, if I could 
say, it's the scariest of when you think about the terrorists, 
of potential events, and therefore the outcomes.
    Mr. Watjen. Yes. I was just going to say, again, as I 
mentioned before; it's not excluded from a group life contract 
for the most part. That's mandated by the States that we all in 
our industry operate within. That doesn't mean, though, that 
we're not, as I said earlier, taking really significant risk as 
part of that. Which is why again it's created under some 
scenario, some solvency issues for some companies.
    If they, in fact, found that there was a terrorist act 
where they had some unusual exposure, it could actually mean 
substantial solvency for some of our member companies.
    Mr. Dowd. Truly, from the large insurer's point of view, I 
think it's probably the most troubling. Our customers uniformly 
want the coverage. And, generally speaking, when that's true, I 
want to find a product I can sell. The trouble is the 
quantification; we will have a very difficult time quantifying 
the size, magnitude of loss, and the probability of it 
occurring. And when you add that to the fact that there's no 
capital markets or no reinsurance solution and the limited 
capital base is what makes it so difficult.
    And those that would like to have it in the bill, I think 
the insurance industry is good at delivering the mechanism. 
Right? We can deliver the policies. We can deliver the claims 
handling service. We can deliver some services around that, but 
we do have difficulty with the financial side. So, to the 
extent that it is talked about from our perspective, the cap is 
very, very troubling, a $100 billion-event. All of us can come 
up with scenarios that are greater than that and the size of 
that would have to be either zero or very, very low before I 
think you'd get many people that want to put their capital at 
risk.
    Mr. Scott. Well, I'd really appreciate those responses, 
because from all indications, and from information we get from 
Homeland Security, all of the experts are saying that if we do 
have another event of catastrophic nature, it's not going to be 
like the one we had because we're pretty well protected from 
that. It in all probability would come from a biological or 
chemical attack. And there's so much more work we need to do on 
that, but I appreciate those comments.
    I would just like to ask, Mr. Chairman, some logistical 
questions. One, as we continue to pass short-term extensions of 
TRIA, is it not possible or plausible to extend the legislature 
for a longer period of time and if so, what would be the 
appropriate length for the extension. I would like to start 
with--I don't know. When I referred to Scranton, I just heard 
somebody at the very beginning say they were--
    Ms. Abraham. I'll be Scranton. That's all right.
    Mr. Scott. Both the chairman and I went to elementary 
school there.
    Ms. Abraham. Actually, I'm Pittsburgh, but I'll do 
Scranton, so, that's all right.
    Chairman Kanjorski. You have to understand, Mr. Scott was 
born in Scranton, Pennsylvania.
    Ms. Abraham. I'm getting that.
    Mr. Scott. Mr. Chairman, of course, will represent 
Scranton. We love Scranton and I just thought I heard Scranton 
mentioned up there. Go ahead.
    Ms. Abraham. We spoke before about the lack of stability 
and is that causing the real problem? A 2-year windows is 
really very difficult. Is this a forever kind of bill? I don't 
agree that it is a forever. I respect the institutional memory 
issues, but we need a long-term solution: (a) for the 
government to share with the industry the data, the 
underwriting for us to get better at it; and (b) for a study of 
new loss control and risk management issues. So, I see this as 
a 10-year kind of horizon that seems like a very long period of 
time. But I think it's going to be very difficult for the 
capital markets to develop, fill in the voids, and for the 
evolving nature of this risk to really come to a level that we 
will be able to underwrite it.
    And, more importantly, the capital markets will step in and 
be able to, as Mr. Dowd said, develop a probability associated 
with it. So, anything less than that creates an instability in 
the market that I think is a real problem for us.
    Mr. Cotton. For those of us who finance these assets, 10 
years sounds like a good number. Permanent also sounds good. 
The issue is sustainability and the ability for our borrowers 
and their customers, to have affordable and available insurance 
to conduct their businesses, and for our investors to be able 
to have a sustainable income stream that they can understand 
and see not be interrupted as a result of these 2-year 
exchanges like this.
    Mr. Ditchman. To answer your question, Mr. Scott, the 
business certainty and stability are the key elements here and 
CIAT clearly believes it would be wonderful to have it 
indefinitely. But the reality is that 15 to 25 years is a 
reasonable time that any large corporation will study or have a 
plan for, so we hold to a 15 to 25-year time-line if not 
indefinitely.
    Mr. Donnelly. Mr. Scott, PMA Insurance Group provides 
workers compensation insurance to the University of Scranton.
    Ms. Abraham. I'd echo the comment about 10 years. I think 
that 10-plus years is in one way a long time, but I do think it 
is something that gives a lot of stability and allows, you 
know, the studies that Chairman Kanjorski mentioned before to 
take place and to be able to monitor, in fact, if there are 
innovations.
    The world is going to change over the next 10 years, and it 
does make sense to have some point at which evaluations can 
take place in terms of the key parameters. But we do need 
something. I believe it's in the best interest of everybody to 
have more stability. Certainly something a lot longer than 2 
years, because 2 years can go by very quickly and we're back 
debating the issue, and I don't think that's constructive for 
anybody.
    Mr. Scott. Okay. Just a final question, if I may. Anyone 
agree on inclusion of group life insurance?
    Mr. Watjen. Certainly, speaking for myself, yes sir.
    Ms. Abraham. I can't think of a reason to exclude it.
    Mr. Cotton. I don't have a dog in this hunt.
    Mr. Ditchman. Nor do I.
    Mr. Donnelly. Nor do we.
    Mr. Scott. Thank you very much. I yield back, sir.
    Chairman Kanjorski. Thank you, Mr. Scott. Mr. Murphy of 
Connecticut?
    Mr. Murphy. Well, thank you very much, Mr. Chairman, and 
that actually provides a fairly apt segue to my question and 
that is mainly directly to Mr. Watjen to help many of us make 
that case for the inclusion of group life. Explain to us why 
we've gotten to the point where the market has treated group 
life in a slightly different way, why both insurers and 
reinsurers to an extent have been able to price a group life 
product in a way that we have not been able to for property and 
casualty, and why there still is a major risk for either 
originators of products or reinsurers to pull out of that 
market.
    I myself certainly share the view that this should be as 
comprehensive and long-term a solution as possible, and that 
certainly in my mind includes the composition of a program with 
group life. But, I think that there are some members who maybe 
need to understand why the market has treated them differently 
and still given that differentiation, why it makes sense to 
include group life as part of this package.
    Mr. Watjen. I'd be happy to answer that and again I do 
think this committee certainly has been very supportive of 
group life for some time. It just has never reached its way to 
a final bill. And some of the characteristics that I think we 
discussed a couple of years ago very much exist today and 
actually came out with some of the discussion here today from 
the property casualty program, which is that there's still a 
high certainty around the event of a terrorist act, which makes 
it very difficult to price and underwrite for this business. 
That characteristic has existed ever since 9/11 and has 
continued to exist actually for all companies in our industry. 
And as I said in my prepared comments, there has been no return 
in meaningful ways of reinsurance capacity to provide some 
catastrophic coverage to give all those group life insurers 
frankly to really have some degree of support to the extent 
there was a catastrophic event like that that they'd actually 
make good on.
    And so, as I said earlier, we can't really fully pass the 
price law, because again, what would happen, if you think about 
the whole dynamic here is that our group life products are 
basically for the most part paid by an employer. In many cases, 
that's the only insurance that the employee actually has is 
actually the insurance provided at the employer. So it's a 
discretionary expense, if you will, by the employer.
    So, we try to overload the cost with what could be a 
theoretical cost of a terrorist act. Employers may consider 
dropping that coverage, which actually is not good public 
policy, because in fact in many cases this is the only safety 
net the individual actually has is the coverage they receive at 
the employer. So, really our whole industry is taking on more 
risk right now, because in the past we used to have some level 
of catastrophic exposure that we could rely on.
    Our own company, for example, on 9/11 had a fairly 
extensive catastrophic reinsurance program in place, which 
minimized the cost of the tragic events of 9/11. Those programs 
are no longer available. So, the private sector hasn't stepped 
back in to provide that capacity, to provide that safety net 
for insurance companies. And the reason it hasn't is because 
these are still events that are very random. How does the 
reinsurer actually price for those events?
    And so we, as an industry, are frankly taking on more risk 
right now, more risk than we think is acceptable in the long 
term. We are still waiting for new capital to come in and 
accept some of this risk, but that capital has not been coming 
in for very obvious reasons.
    Mr. Murphy. Now, you mention in your written testimony, I 
don't know if you touched on it in your verbal testimony, about 
a limited number of reinsurers starting to creep back into the 
market but at a price apparently that's not terribly--could you 
talk a little bit about what's happening in the reinsurance 
market on life?
    Mr. Watjen. Very much so. And again, we were very 
fortunate. We, up until 9/11, were very active users of 
catastrophic reinsurance, even though we're a fairly large 
company, to protect our capital, to manage volatility. That was 
a very important part of our risk management. And again those 
programs for all intents and purposes have completely been 
eliminated.
    What you can find is some limited amounts of coverage with 
more significant deductibles, with more limits of coverage, so 
again there are pieces of the marketplace that have returned. 
But in terms of having a more holistic market that provides 
that safety net if you will for small, medium and large 
companies that has not returned in anything close to the levels 
we saw pre-9/11.
    Mr. Murphy. Thank you. The second question I guess I'll 
direct to Mr. Ditchman, because you are on the real estate side 
of this, but open it up to the panel, is a question of 
geography. I guess I'd be interested in hearing to what extent 
on the property insurance side this is an issue that has been 
more of a problem in terms of our urban areas, metropolitan 
areas. To the extent that from a real estate perspective, you 
have lenders across the country, no matter of areas that may be 
at greater risk of terrorism, and other areas requiring this 
kind of coverage.
    In some parts in the short time that I've spent in this 
building, it's been talked about as an issue really to one that 
relates to the east coast's more densely populated areas. But 
it certainly seems to be an issue that from a real estate 
investment side really has no discrimination as to geography.
    Mr. Ditchman. The situation is not limited to the coast. As 
I indicated, we own an office building in Cleveland. One of the 
ones that we have, have a large number of telecommunication 
companies that reside in it. Our terrorism insurance--this is 
something that I own personally with a couple of partners--has 
just skyrocketed because of the types of uses. That's in 
Cleveland, Ohio, a 21-story office building.
    Most people don't even know that it has telecommunication 
companies in it, but the insurance company knows, and so we do 
it. And, the same thing is true for other parts of Ohio, and, I 
know is certainly in the major cities it has affected. We do 
the real estate for Goodyear, Goodrich, Eaton Corporation, some 
of which are self-insured and some that rely on other companies 
to provide the insurance, all of which is a question that they 
ask and make a determination when they determine the location.
    For example, Albuquerque, New Mexico: We are doing 
something for Goodrich in Albuquerque, New Mexico, right now. 
Goodyear got out of Paris. We sold an office building in Paris 
for them. The problem is they are trying to concentrate in 
areas where they believe they have the least number of risks. 
Does that answer your question?
    Mr. Murphy. Yes.
    Ms. Abraham. Mr. Murphy, I would say that I think of a 
Saturday afternoon and I think of the University of Michigan 
and Notre Dame and University of Nebraska, and those are not 
necessarily urban centers but they are certainly worldwide-
known centers. Some of them might be streaming video, and so 
these risks are not simply New Haven, New York, Pasadena. These 
are truly ``in heartland'' issues that we face and I worry 
about every single day, that we have a large number of people 
at the big house or any other major establishment that are on 
our campuses in usually remote areas, very rural heartland 
areas.
    Mr. Murphy. Thank you very much.
    Mr. Watjen. Congressman, I can echo that too, again. In the 
group life world, again, it's the concentration of employees 
that are really the issue that we need to consider. And those--
that can be a large plant, that can be an office park. That can 
be just large concentrations of people all in one position, 
which again could mean it's not just the metropolitan areas. 
It's all across the country and I would echo those comments.
    Mr. Donnelly. That's certainly true about workers 
compensation insurance as well.
    Mr. Murphy. Thank you very much, Mr. Chairman.
    Chairman Kanjorski. Mr. Donnelly?
    Mr. Donnelly of Indiana. Thank you, and I'll try to keep it 
to 5 minutes so we can go vote.
    I just want to tell you the extreme wisdom I thought that 
the gentleman at the far right of the panel, I think Mr. 
Donnelly--
    Mr. Donnelly. I appreciate that, cousin.
    [Laughter]
    This question is for Mr. Cotton, then maybe for the entire 
panel. And that is we are talking about a timeline of 2 years, 
5 years, 10 years, indefinite, and you have to talk to 
investors. We were talking about a timeline. We were talking 2 
years, 5 years, 10 years and you talk to investors. Is there a 
tipping point on this legislation where if this is renewed for 
an additional 2 years or something your investors will say, 
we're not real comfortable with that kind of horizon.
    Mr. Cotton. I will tell you that I'm not sure I'm smart 
enough to know where the tipping point is. The issue is 
stability versus volatility and if the rating agencies or the 
investment grade buyers in our world smell volatility, they 
leave. If they leave, that's a liquidity issue. If there's a 
liquidity issue, it affects the real estate industry, which 
affects the entire U.S. economy, is the way we look at it.
    So, I don't know that I could tell you 2 years versus 4 
years. I think sustainability and permanence are really 
critical. I understand the free market desire to have free 
market fill it, and I think Mr. Dowd said it very well when he 
said, more availability, more people participating may in fact 
encourage more participation. It's sort of an ongoing cycle. I 
think that's the point he was trying to make and I echo that. 
But I don't think I could tell you what the tipping point is.
    Mr. Donnelly of Indiana. And that follows into my next 
question, which is if it's 5 years or 10 years, do you 
anticipate a time when the market itself can start to step up 
and fill this in, or do you see the government as being almost 
a permanent partner in this process?
    Mr. Cotton. That's not a question for us, because we're not 
in the insurance business. I will tell you from the investor's 
perspective, if they keep seeing the volatility, it discourages 
them from investing.
    Mr. Dowd. I'll take a shot at the last one. Right now, 
there's nothing that I see from talking. I spend a lot of time 
with capital markets reinsurers, our own investors. Right now, 
there's nothing on the 5-year time horizon that leads us to 
believe there is going to be another solution. I'm with Mr. 
Kanjorski. I would hate to say in 15 to 20 years something else 
wouldn't develop. Things always develop over long periods of 
time.
    Mr. Donnelly of Indiana. And I guess that's where I was 
trying to go is in 5 years do we see anything developing?
    Mr. Donnelly. I would echo Mr. Dowd's comments about that. 
I don't see over the next, you know, four, five, six and maybe 
beyond, you know, a situation where the government doesn't play 
a partnership role with the industry. And as for the first 
question about if this were to be renewed for 2 years or 3 
years, and I guess I'll go back to the insurance company 
perspective as I can't speak for the rating agencies.
    But for smaller and mid-size companies, looking at the 
elements, looking at first of all whether or not TRIA is going 
to be renewed, and what the elements are going to be to that, 
it is my perception that they are becoming more important in 
terms of the evaluation of companies. And I think so, and they 
generally take a time horizon, looking out more than 1 year, 
more than 2 years. So, I think, and we probably would be back 
if this thing were renewed at the end of the year. You know, 
we'd probably be back in the middle of 2008, starting to talk 
about, you know, the same issues over.
    So, I certainly believe that another rollover in 2 or 3 
years again is not in anybody's best interest in terms of it. 
And I don't think it really solves what we are trying to get at 
and you folks are trying to do from a committee perspective. 
One of the gentlemen mentioned before, the issues; I sort of 
feel from what I am hearing is that, you know, the complexity 
of the issues. And you guys have been studying the issues and 
they are more complex than maybe what was thought 5 years ago.
    Mr. Donnelly of Indiana. So, we're probably, I mean, to 
provide comfort factors and comfort levels to everybody, we may 
be looking at 10 years.
    Mr. Cotton. Yes.
    Ms. Abraham. That's what we see.
    Mr. Ditchman. And the CIAT organizations that I referred to 
earlier clearly believe that this is not something that's going 
to be solved in the short term, and I concur with the other 
gentleman. But from an investment point of view, one who owns 
real estate, who buys real estate and sells real estate, we 
want security. You know, we want the ability to know that it is 
there, that we are protected and the tenant that we have in 
that real estate is protected.
    So you need security. You need that certainty and stability 
that it's going to happen, which is why although we'd like to 
see it for a much longer period, the 15- to 25-year term, which 
is the standard term of a mortgage as Lee would indicate. I 
mean, you know, that's how people think.
    Mr. Donnelly of Indiana. Thank you.
    Mr. Ditchman. Thank you.
    Chairman Kanjorski. Thank you, Mr. Donnelly. Ms. Maloney, 
you have patience beyond.
    Mrs. Maloney. This is an important issue, Mr. Chairman, and 
it's wonderful to see you back in the chairman's seat. And I 
want to add my voice in thanking you for your leadership on 
this and your statement to have a bill before us to consider by 
April and hopefully to move something forward. As a New Yorker 
who represents many people who suffered from 9/11, absolutely 
nothing that Congress did, and I thank all of my colleagues for 
their support, was more important than the creation of TRIA.
    We couldn't even sell a building. No one was building. No 
one was doing anything. Our economy just moved to a grinding 
halt and what I am hearing now from New York and from business 
is that no one can get insurance now. The only insurance they 
can get goes up through the extension and then it dies, or 
there's no insurance unless there is an extension. And so it's 
absolutely critical for the economy in New York, and I would 
say in many areas of the country. I've talked to some people, 
some constituents, who say they've had to go to London to get 
insurance. They couldn't even get it in America.
    So, it's a really, really important issue, and I think it's 
the most important really for our national security, because 
part of our national security is our economic security, and our 
economic security is not going to go forward without a TRIA 
extension in place. I want to take this time to really thank 
the chairman for organizing a hearing in New York City that 
many of us went to. And we were there with many representatives 
and we heard loud and clear from all the witnesses, as I've 
heard from most of you today, that we need a long term 
extension and that a long term extension gives a certain amount 
of stability to our economy and allows the developers, 
investors, and insurers the guidelines to properly prepare for 
the future.
    Now, what we heard in this hearing, and it may be somewhat 
unique to New York, is that some of the investors and 
developers, they were saying to build a building takes 15 
years. To get the bonding for some of these buildings they are 
trying to replace is a 15- to 16-year deal, and they are very 
concerned to be able to put the financial packages together. 
And when I asked the question that I'd like to ask the 
panelists now--we've been called to a vote so we'll have to 
move very quickly. We don't want to miss a vote. You know, I 
asked the question of how long at a minimum must we extend TRIA 
in New York, and what I heard at that hearing was 15 to 16 
years. And then of course some wanted a permanent one. But I'd 
like to ask each panelist going down in your opinion, what is 
the minimum Congress should do to extend TRIA for the stability 
in our economy that all of you have been talking about.
    And why don't we start with Mr. Donnelly and come down. And 
I'd like to hear what you think is the minimum for stability in 
our markets.
    Mr. Donnelly. I think 10 years is a minimum.
    Mrs. Maloney. Ten years is a minimum.
    Mr. Donnelly. So, my first priority is to get us included 
in TRIA, but with that, then 10 years would certainly be--
    Mr. Ditchman. Mr. Chairman, Congresswoman, we believe 
strongly in the longer the better. The 15- to 25-year timeline 
should be the absolute minimum.
    Ms. Abraham. The minimum should be 10 years.
    Mr. Dowd. My customers want at least 10 to 25 years. It is 
more my customers' issue than it is mine, so I say 10 years.
    Mr. Cotton. I would say an absolute minimum of 10 years and 
the inclusion of NBCR, for sure.
    Mrs. Maloney. Okay, that's my second question. NBCR--do you 
think NBCR should be included? And, also, do you think we 
should mesh together domestic and international and just go 
down the line again?
    Mr. Donnelly. I believe that the bill should cover all, 
both domestic and foreign terrorism, and certainly including 
NBCR, absolutely.
    Mr. Watjen. It should be inclusive of both domestic and 
foreign, and again in our particular case, group life is 
mandated and covered and already covers NBCR.
    Mr. Ditchman. We also conclude or agree that it should be 
both domestic and foreign. We also believe that the NBCRs 
should absolutely, positively be covered.
    Ms. Abraham. Both included but a very different structure, 
very low deductible for the NBCR, very low deductible or first 
dollar. It's just not something that we can have a high 
deductible on, but both international/domestic included.
    Mr. Dowd. Domestic and international I think is unanimous. 
NBCR; different challenges and clearly the structure of the 
program as referred to deductible co-insurance and ultimately 
limit are going to be critical factors.
    Mr. Cotton. NBCR, no question, and the market does not 
distinguish the passport that the person carries.
    Mrs. Maloney. Well, I want to thank everybody. And, we may 
miss our vote, but we've enjoyed your testimony. It's very 
important. It's very important to our economy and, I would say, 
to the security in general of our Nation.
    Thank you for your work and for your leadership and thank 
you, Mr. Chairman. No one has been better on this issue than 
you. We thank you.
    Chairman Kanjorski. Thank you. First, some members may have 
additional questions for the panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and to place their responses in the record.
    And, with that, I would like to thank the panel. It has 
been really quite an enjoyable session. We are going to try and 
run off and make that vote, and this hearing stands adjourned.
    [Whereupon, at 4:45 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             April 24, 2007

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