[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
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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
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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)
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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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