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




 
                    EXAMINING A LEGISLATIVE SOLUTION


                  TO EXTEND AND REVISE 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

                               __________

                             JUNE 21, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-43









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

                              ----------                              
                                                                   Page
Hearing held on:
    June 21, 2007................................................     1
Appendix:
    June 21, 2007................................................    69

                               WITNESSES
                        Thursday, June 21, 2007

Dalton, Jill M., Managing Director, Global Property and 
  Multinational Practice, Marsh, Inc., on behalf of the Council 
  of Insurance Agents and Brokers................................    50
Dinallo, Hon. Eric R., Superintendent, New York Insurance 
  Department.....................................................    15
Emek, Sharon, Ph.D., C.I.C. Partner, CBS Coverage Group, Inc., on 
  behalf of the Independent Insurance Agents and Brokers of 
  America........................................................    52
Heck, Warren, CPCU, Chairman and Chief Executive Officer, Greater 
  New York Mutual Insurance Company, on behalf of the National 
  Association of Mutual Insurance Companies and the Property 
  Casualty Insurance Association of America......................    54
Kunreuther, Dr. Howard, Ph.D., Cecilia Yen Koo Professor of 
  Decision Sciences and Public Policy, Co-Director Risk 
  Management and Decision Processes Center, Wharton School, 
  University of Pennsylvania.....................................    56
Nason, Hon. David G., Assistant Secretary for Financial 
  Institutions, U.S. Department of the Treasury..................    13
Nassetta, Christopher J., President and Chief Executive Officer, 
  Host Hotel and Resorts, Inc., and Chairman, The Real Estate 
  Roundtable, on behalf of the Coalition to Insure Against 
  Terrorism......................................................    48
Nutter, Franklin W., President, Reinsurance Association of 
  America........................................................    58
Racicot, Hon. Marc, Chief Executive Officer and President, 
  American Insurance Association.................................    47
Smith, Dennis W., President and Chief Executive Officer, Missouri 
  Employers Mutual Insurance.....................................    60

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    70
    Ackerman, Hon. Gary L........................................    72
    Brown-Waite, Hon. Ginny......................................    75
    Marchant, Hon. Kenny.........................................    77
    Dalton, Jill M...............................................    78
    Dinallo, Hon. Eric R.........................................    96
    Emek, Sharon.................................................   101
    Heck, Warren.................................................   109
    Kunreuther, Dr. Howard.......................................   124
    Nason, Hon. David G..........................................   175
    Nassetta, Christopher J......................................   183
    Nutter, Franklin W...........................................   192
    Racicot, Hon. Marc...........................................   204
    Smith, Dennis W..............................................   210


                    EXAMINING A LEGISLATIVE SOLUTION



                   TO EXTEND AND REVISE THE TERRORISM



                       RISK INSURANCE ACT (TRIA)

                              ----------                              


                        Thursday, June 21, 2007

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Paul E. Kanjorski 
[chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Ackerman, 
Meeks, Moore of Kansas, Capuano, Hinojosa, McCarthy, Miller of 
North Carolina, Scott, Bean, Sires, Klein, Perlmutter, Murphy, 
Donnelly; Pryce, Capito, Baker, Shays, Gillmor, King, Royce, 
Barrett, Brown-Waite, Feeney, Garrett, Davis of Kentucky, 
Campbell, Bachmann, and Roskam.
    Ex officio: Chairman Frank.
    Also present: Representative Maloney.
    Chairman Kanjorski. The committee will come to order. I 
would like to welcome everyone here. It looks like we have a 
huge show at the subcommittee level, so we have to get on with 
the course of action. Now we anticipate a lot of requests this 
morning, so Ms. Pryce and I have agreed to limit each side's 
opening statements to 15 minutes. That rule does not apply to 
the chairman or the chairman of the full committee, but we will 
apply it to everyone else.
    Of course this is a long-term sought hearing in the 
Subcommittee on Capital Markets and Insurance, regarding 
terrorism risk insurance. I think we can move along, and I 
recognize that a lot of members will have statements and desire 
in that regard. Without objection, all members' opening 
statements will be included in the record.
    We meet this morning to examine an important piece of 
legislation. This past Monday, Congressman Capuano, Chairman 
Frank, and several others introduced H.R. 2761, the Terrorism 
Risk Insurance Revision and Extension Act of 2007. Again, I 
want to commend my colleagues for putting forth this bill that 
will amend the Terrorism Risk Insurance Act. Before we hear the 
views of our witnesses, I want to outline some of my thoughts 
on these matters.
    Overall, I believe that this bill is a good product. I 
support 90 percent of the bill's contents. It will help to 
protect our Nation's economic security in several ways. For 
example, H.R. 2761 extends TRIA for 10 years, and creates a 
Blue Ribbon Commission. These provisions strike the right 
balance between providing greater certainty to the marketplace 
and encouraging the private sector to develop its own solutions 
to these problems.
    The bill also eliminates the distinction between foreign 
and domestic terrorism. Terrorism, regardless of its cause or 
perpetrator, aims to destabilize the Government. This change 
therefore has much merit.
    In addition, H.R. 2761 lowers the event trigger to $50 
million. This modification will assist small and mid-size 
companies in managing their exposures under the program. The 
legislation, moreover, adds group life insurance to the 
program. We need to protect the people who work in the 
buildings, not just the buildings in which they work.
    Finally, this bill improves coverage for nuclear, 
biological, chemical, and radiological terrorism events. If the 
goal of TRIA is to protect the economic security of our Nation 
against terrorist threats, then Congress specifically needs to 
address the threats posed by NBCR terrorism. Our Nation needs 
to plan for a potentially devastating attack by NBCR means by 
putting in place an explicit program, rather than an implicit 
promise now and a chaotic response later. By providing fairly 
low insurer deductibles, smaller copayments for larger NBCR 
events, and greater legal certainty, H.R. 2761 aims to limit 
the exposure of insurers to this risk and promote a private 
market to price and distribute this product.
    That said, I know that some parties in the insurance world 
have raised concerns about these NBCR provisions. I want them 
to know that I am very open to considering how we can improve 
them. We, however, should not ultimately decide to continue to 
study this problem. We need to act. While the aforementioned 
changes take important steps toward appropriately revising and 
extending TRIA, two other provisions contained on approximately 
five pages within H.R. 2761 take away from the final product. 
In my view, they create a certain Christmas tree for special 
interests, and provide special preferences. Before moving this 
bill to a markup, we ought to consider carefully the policy 
implications of these proposals.
    H.R. 2761 includes a retroactive reset mechanism, where 
areas previously impacted by terrorist attacks would benefit 
from lower deductibles and triggers in any subsequent attack. 
By altering the equity of the current program, this provision, 
as currently constructed, has the potential to undermine the 
broad national support that TRIA presently enjoys.
    After the 9/11 attacks, the terrorism insurance marketplace 
retracted nationally, and not just in the areas directly 
affected. During the 2005 debate on the first extension of 
TRIA, the House recognized the situation and passed a provision 
that would have provided reset relief nationally and 
prospectively. The reset provision in this bill is retroactive, 
regional, and much more generous than what we adopted in 2005. 
We should work to modify it in the weeks ahead.
    In addition, the bill includes a section affecting the 
underwriting of life insurance for purposes related to past and 
future lawful foreign travel. I am sympathetic to the end that 
this provision seeks to achieve, but I believe that it deserves 
separate consideration outside of the TRIA process. At least 
until Congress enacts an optional Federal charter, State 
legislators and insurance departments also probably have the 
best expertise to address this situation. In recent years, we 
have already seen 11 States do so by law or regulation.
    In closing, a bill at its introduction represents only the 
beginning of the legislative process. I hope that we can 
continue to discuss these two matters and others. We should 
also strive to follow a balanced process, designed to obtain 
overwhelming bipartisan support for our final legislative 
product on the House Floor.
    Ms. Pryce?
    Ms. Pryce. Thank you very much, Mr. Chairman. I want to 
thank you for holding this third hearing on TRIA. And also want 
to thank Chairman Frank and his staff for their continuing 
commitment to running this subcommittee in a bipartisan 
fashion. But I must say I am frankly disappointed that this 
TRIA bill that has been introduced this week has been done so 
with none of the Republican priorities included in the bill. I 
want to thank the Democrats for providing open lines of 
communication, but we have seen virtually nothing come of our 
ideas. So I am hopeful that today we can have a constructive 
conversation in discussing this bill and continue to work with 
the chairman toward a consensus document. I remain confident 
that if we continue to build in a bipartisan fashion on the 
work product of the last term we will have overwhelming support 
for TRIA. And as Chairman Kanjorski just noted, this is only 
the beginning of the process. Republicans are committed to a 
TRIA extension that embraces a responsible duration, a decrease 
in taxpayer financial exposure over time, and market reforms 
that increase insurance capacity.
    I strongly agree with Chairman Kanjorski's statement at the 
last hearing that 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.''
    This bill is in essence a semipermanent expansion of a 
temporary program. Since its inception in 2002, TRIA has 
included several mechanisms designed to phase down the Federal 
taxpayer supported safety net over time. Every year, both the 
overall program trigger level and individual insurer deductible 
levels have been increased. The bill before us today proposes 
to freeze these increases, not allowing the Federal backstop to 
gradually contract. It is important that the industry have some 
skin in the game to ease transition to a private market 
response for terrorism insurance.
    In addition to a raised trigger and deductibles, any 
extension of TRIA should also include a debate on tax deferred 
capital reserving. Our current Federal tax policy limits the 
capacity of the private market to provide coverage in the event 
of a significant attack. Currently, insurers that hold reserves 
for over 12 months can't expense the reserves and must pay 
income tax. Past versions of the House legislation included 
various risk pooling mechanisms and dedicated terrorism capital 
accounts. If there is any hope of lessening the burden on the 
Federal Government over the long term, we must get our tax 
policy right. Giving insurers the ability to increase private 
capacity is especially important, given the move to require 
insurers to make available coverage for nuclear, biological, 
chemical, and radiological attacks.
    Many view this as an uninsurable risk, which is made even 
more difficult for the private sector to cover when insurers 
are not given tools to properly reserve or price for the actual 
risk.
    I look forward to hearing from our witnesses today whether 
the NBCR program outlined in this bill is a responsible and 
workable option. In closing, I want to thank the witnesses for 
coming today, thank the chairman for calling the hearing, and 
hope we can work together to improve this product before us, 
and pass a responsible extension of the Federal terrorism 
insurance program. We need appropriate reforms to make the 
program more dynamic, and allow the Federal safety net to 
contract or expand according to the evolution of the terrorist 
threat.
    Thank you, Mr. Chairman, and I yield back.
    Chairman Kanjorski. Thank you, Ms. Pryce. Now we have two 
original cosponsors of the piece of legislation today, and one 
of them is the chairman of the full committee, Mr. Frank of 
Massachusetts.
    The Chairman. Thank you, and the chairman of the 
subcommittee is a very thoughtful student of insurance. He will 
in that capacity be undertaking some very significant 
initiatives later this year involving what the appropriate role 
would be in private insurance, and while he and I have some 
specific disagreements here, I am very appreciative of his 
expertise and of the impact he has had, and we will work these 
out going forward.
    Now as to the gentlewoman from Ohio, she said we are not 
sufficiently bipartisan. But that is not my fault. Bloomberg 
was a Republican when I started this process. Not being able to 
time the ups and downs of the mayor's calculation of his 
political advantage has put me somewhat temporarily in a more 
partisan position than I thought I would be. I would note, 
however, that there are Republican members of this committee 
who have been energetic and active in supporting this. In the 
end we may have some disagreements.
    And I would say to the gentlewoman, I would divide the 
partisan question into a procedural and a substantive view. It 
is very important that we be procedurally bipartisan. I think 
we have managed to achieve that in this committee. We have had 
an open process on every bill, and I have the worn-out pant 
seats to prove it. But there are legitimate differences between 
the parties, and sometimes in an open way they will be 
litigated--or legislated. And here I want to make clear what 
mine is.
    I disagree with the approach, and it is an honest 
disagreement, I think in principle, about whether or not there 
ought to be more of a market solution. I am a strong supporter 
of market solutions, as we are almost all in this committee. 
But I don't think Adam Smith is relevant to vicious fanatics 
trying to destroy this country. And I don't think we ought to 
allow them to pick and choose as to where it should be more 
expensive to do business in this country than elsewhere.
    The main purpose of this bill is not to help the insurance 
companies. The insurance companies can walk away. Our problem 
here is with the commercial real estate industry, particularly 
in big cities.
    And let me touch on nuclear, biological, chemical, and 
radiological: I have to admit that I felt somewhat bizarre 
sitting in my office a couple of weeks ago with members of my 
staff, discussing what we would do in the aftermath of a 
nuclear attack. But here is the problem. If we do not provide 
this level of insurance, in my judgment, banks in many cases 
will not lend the money that is necessary for the construction 
of large commercial buildings. And that will have a negative 
effect on the economy as a whole, and it will have a 
particularly negative effect on certain of the cities.
    So the gentleman from Pennsylvania is right, we want this 
to be national. New York gets the focus because New York was 
the victim of that vicious attack of 2001. But it's not the 
only big city where this could be a problem. And our job here 
is, I believe, not to allow vicious haters of our democracy and 
our system to be able to have an impact on our economy.
    I do not want the market to have to deal with this. This is 
part of the war on terror. And I do not believe we should try 
to have a market solution to the war on terror. We don't have 
consumers at home paying for screeners at the airports. We have 
devoted significant tax money for that. I regard this as 
similar. The purpose of this is to say to those who would 
physically harm us because they disagree so much with our 
values and our system, we will not let you be a factor in our 
economy. And the market should do a great deal. Certainly we 
want a market-related insurance approach. We want people to 
have incentives to diminish risks.
    I do not think it is reasonable to expect the builders of 
commercial office buildings to be able to diminish the risk of 
terrorism. I know they make an effort. They have those nice 
people who stand in the lobby and make us sign our names. Now 
the notion that a terrorist is going to sign his name, and 
therefore not blow up a building, does not persuade me. I think 
that is a very nice ``make work'' program, and I am happy for 
those people to have jobs. I think it has no more to do with 
preventing terrorism than this microphone.
    In fact, we are talking about an inability to deal with 
these threats. And yes, I do favor, and this is reflected in 
this bill, along with many others, a nonmarket approach. I 
believe that the insurance market is a very good one. I believe 
the chairman of this subcommittee will be looking at how we can 
expand it. But I don't want a market solution as part of the 
war on terrorism. I don't want the market to tell us how we are 
going to defend ourselves against these vicious killers. And we 
do not, and here is the fear that I have, it is bad enough if 
an attack comes. We should do everything we can to neutralize 
the extent to which the fear of attack disarranges and 
interferes with the conduct of our economic affairs.
    That is why I support this legislation, including the 
provisions that the gentleman from Pennsylvania correctly notes 
are somewhat controversial--not the travel one, we can deal 
with that separately--but the retroactive reset. Yes, one 
particular area was singled out.
    And I think it is very important that we make clear to the 
terrorists, domestic or foreign, as this bill says, but 
obviously we are primarily concerned about the fear appears to 
be worse from foreign areas, you will not influence the way we 
do business. We will not allow you to deter us, to inhibit us, 
to make us pick and choose as to where we carry out our 
economic activity. We will, as a united nation through a 
national piece of legislation, do everything possible to 
neutralize the extent to which fear of your savagery interferes 
with our way of life.
    I thank you, Mr. Chairman.
    Chairman Kanjorski. Now the Chair recognizes Mr. King from 
New York, for 1\1/2\ minutes.
    Mr. King. Thank you, Mr. Chairman. I thank you very much 
for conducting this hearing. I want to thank the ranking member 
for the cooperation that she has given to me and my staff on 
this issue, and I want to thank Chairman Frank and Mr. Capuano 
for the initiatives they have taken. Coming from New York, and 
I know Mrs. Maloney is here, we have seen firsthand the 
devastation of the World Trade Center, having been attacked 
twice, the last time with $32 billion in damage. And this is 
absolutely essential. Now it is New York, tomorrow it could be 
any other large city in the country or any other area.
    As the former chairman and ranking member of the Homeland 
Security Committee, I have a fairly sufficient knowledge of the 
extent of threats and plots against this country, how it is 
ongoing, and how, for our lifetimes, we are going to be 
threatened. And if we can't send a signal to the terrorists 
that we will stand by those who are attacked and do all that 
can be done to rebuild--and TRIA is essential to that--and that 
is why the reset provision is absolutely essential. Certainly 
the 10-year time frame, the duration is important for 
certainty.
    I am going to actually introduce an amendment at the full 
committee hearing to have that extended to 15 years, because 
this is not a giveaway, it is not a gift. It is America 
standing by areas that have been attacked and could be 
attacked, and a signal to terrorists, as Chairman Frank said, 
that we are not going to allow a terrorist to determine our 
economy.
    I am a conservative when it comes to the free market, but 
here we are not talking about people's own mistakes or 
accidents or behavior. We are talking about vicious actions by 
a vicious enemy who is out to destroy us. We have to send a 
signal to people in our own country and to the world that we 
are going to stand by those who are attacked and tell the 
terrorists they will not bring us down. Reset is essential. So 
is the certainty of 10 years, and I believe 15 years, and I 
look forward to this debate.
    I thank the chairman for having this hearing, and I yield 
back.
    Chairman Kanjorski. The gentleman representing the middle 
of America, from Kansas, Mr. Moore.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. I thank you 
for holding this hearing today and for your work on producing 
H.R. 2761, the TRIA Act of 2007. According to the State 
Department's annual report on global terrorism developments, 
entitled Country Reports on Terrorism 2006, our country faces a 
global threat that is only increasing. Congress needs to extend 
the TRIA program as a means of protecting our Nation's economy 
in the aftermath of a future attack that we all hope will never 
happen. H.R. 2761 is a good first step toward extending this 
program on a long-term basis, and I look forward to this 
committee's hearing today, and consideration of it in the 
future.
    This bill recognizes the important role the Federal 
Government needs to play in ensuring that our Nation's 
businesses will have coverage for the riskiest exposures they 
face, including nuclear, biological, chemical, and radiological 
attacks, and that the Federal Government has the responsibility 
to ensure that the economy continues to function after an 
attack.
    This legislation also recognizes the reality that without a 
Federal backstop for large scale terrorist attacks, insurers 
could face waves of insolvencies after an attack that could 
imperil our Nation's economy. While a permanent extension of 
TRIA would be preferable, the 10-year extension provided in 
this legislation will provide policyholders and insurers with 
much greater certainty than they have under the current 
program. The 7\1/2\ percent deductible for NBCR is a reasonable 
level, and a recognition, in the words of the President's 
Working Group Report of 2006, that no private market for NBCR 
terrorism risk insurance existed prior to September 11th, none 
exists today, and none is likely to exist in the foreseeable 
future.
    I also hope and believe that the inclusion of a reset 
mechanism for areas that have been previously impacted by 
terrorism in this country will encourage the growth of the 
capacity and the continuation of coverage in New York City. 
This area suffered most directly from the horrible attacks of 
September 11th; 5 years into the TRIA program, a private 
reinsurance marketplace has not developed for terrorism risk, 
and these risks remain inherently uninsurable.
    According to the testimony of Frank Nutter, the president 
of the Reinsurance Association of America, and one of the 
witnesses here today, the industry retention under TRIA, 
estimated at $35 billion, leaves plenty of room for the private 
reinsurance market to add capacity. The Federal Government has 
a responsibility and an obligation, in my opinion, to continue 
engaging in a public-private partnership with our Nation's 
insurers and policyholders to ensure insurance remains 
available before an act of terrorism and that the economy 
continues to function after an unthinkable terrorist attack. 
H.R. 2761 is a good bill and an important step in the right 
direction.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you. Now we will hear from the 
gentlelady from Florida, Ms. Brown-Waite, for 1\1/2\ minutes.
    Ms. Brown-Waite. Thank you, Mr. Chairman. And I want to 
thank you for holding this hearing, and I certainly look 
forward to hearing from the witnesses who will be 
participating. I wasn't here when the original TRIA passed, but 
for the past 4 years, serving on this committee, I saw how it 
worked quickly and in tangent with the industry when it came to 
terrorism reinsurance, passing reinsurance fund after 
reinsurance fund.
    Unfortunately, it has left constituents in Florida and 
homeowners around the Nation to their own devices, however, I 
do support TRIA. I voted in favor of it when Congress extended 
the program in 2005. Since its creation, not $1 of TRIA has 
been spent, yet insurers have allocated additional capacity to 
terrorism risk. Prices have declined, and takeup rates have 
increased.
    In 2003, only 27 percent of companies purchased terrorism 
insurance. In 2005, 58 percent of companies purchased that 
reinsurance. Deductibles have risen from 7 percent in 2003 to 
17 percent in 2006. Even with this increase, the total cost of 
coverage has fallen 3 to 5 percent. If this type of success can 
come from a terrorism risk insurance fund, we have to question 
why anyone would not feel the same about a Federal catastrophic 
fund.
    Unfortunately, this third extension is not being handled in 
the bipartisan manner that we previously were accustomed to. 
Nothing in the bill that has been introduced represents the 
agreement between the two parties. The provisions in the bill 
are the sum of the proposals of my colleagues on the other side 
of the aisle, obviously without any concessions to the minority 
party. The leaders on the Republican side offered very good, 
common-sense market reforms to gradually phase out TRIA and let 
the market continue to flourish. I hope this initial showing of 
partisanship is not indicative of how this committee will 
proceed as we extend TRIA.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Kanjorski. Thank you. Now we will hear from Mr. 
Hinojosa for 1\1/2\ minutes.
    Mr. Hinojosa. Thank you very much, Chairman Kanjorski. I 
want to thank you for holding this very timely and important 
hearing on the reauthorization of the Terrorism Risk Insurance 
Act. I have supported the Terrorism Risk Insurance Act in the 
past, including the reauthorization of the Act. To help me 
decide whether to cosponsor the current bill under 
consideration, I look forward to hearing the testimony of 
today's witnesses. I plan to meet with outside groups 
interested in this legislation, particularly consumer groups 
and community-based organizations and associations that have 
traditionally been interested in terrorism risk insurance. I 
will also contact constituents in my congressional district to 
determine if they want me to cosponsor H.R. 2761, the Terrorism 
Risk Insurance Revision and Extension Act of 2007.
    Again Mr. Chairman, I look forward to hearing from today's 
witnesses, and especially working with you, as our chairman, 
and your staff on the legislation as it moves through the 
committee and onto the Floor of the House of Representatives. 
And with that, I yield back.
    Chairman Kanjorski. Thank you, Mr. Hinojosa. And now we 
will hear from Mr. Royce of California for 1\1/2\ minutes.
    Mr. Royce. Chairman Kanjorski, thank you very much for 
holding this hearing. Following the terrorist attacks in 2001, 
Congress at that time attempted to limit the volatility posed 
by another potential terrorist attack by passing TRIA, and it 
was designed at the time to ensure reasonable, predictably 
priced terrorism coverage by providing a temporary Federal 
backstop. Congress hoped at that time to encourage insurers to 
offer affordable coverage for the unprecedented financial risks 
posed by foreign acts of terrorism in the United States. And 
given the economic uncertainty at the time I, along with many 
of my colleagues here today, believed TRIA was a worthwhile 
endeavor. However, going forward, instead of allowing the 
industry to develop as their ability to appropriately price the 
risk of terrorism improves, instead of looking at ways to get 
industry more fully in the market, I believe we are taking a 
step back with the proposed legislation. This bill fails to 
recognize the advances made in the industry since the enactment 
of this program and fails to look at, I think, some innovative 
ways to get the industry involved.
    Ronald Reagan once quipped that the closest thing to 
eternal life on Earth was a Federal Government program. And 
unfortunately, it appears TRIA is headed down that path. I 
believe the Terrorism Risk Insurance Act has accomplished its 
original purpose, and gradually should be scaled down.
    But again, Chairman Kanjorski, I want to really thank you 
for this hearing here today. I appreciate it.
    Chairman Kanjorski. Thank you, Mr. Royce. And now we will 
hear from the other sponsor of this legislation, Mr. Capuano of 
Massachusetts.
    Mr. Capuano. I guess I have been called worse. Thank you, 
Mr. Chairman. And again I want to echo my thanks for having 
this hearing, and for being so involved with the discussion on 
this important matter. I wasn't going to have an opening 
statement, but I think it's important for me to at least say 
one thing. I don't think anybody really has any empirical data 
on which to base any decisions. Everything we have done from 
day one relative to TRIA is kind of guesswork at best. And so 
therefore, I want to go right to one of the conclusion 
statements by the Treasury Department, that it would be better 
to have no TRIA than a bad TRIA. In general, I guess I agree 
with that concept. However, I don't know how you define bad 
TRIA. And to me it would certainly be worse to have no TRIA 
than an uncertain TRIA.
    I can't sit here and tell you that I am absolutely certain 
that anything in this bill is correct, and neither can you. And 
you can't tell me that anything in this bill is absolutely 
unequivocally incorrect. These are guesses. This is the best we 
can do in an uncertain world.
    For instance, I have no false ideas that we can cover or 
even try to cover a massive nuclear attack. Maybe we can handle 
a small one, a dirty bomb. I don't know; no one knows. We don't 
know what our response is going to be. However, I do know 
without question what would happen if we have no TRIA bill come 
the end of this year. Jobs will be lost, construction across 
this country will halt, the insurance companies will not, 
regardless of the philosophical arguments of some, they will 
not offer terrorism coverage, therefore banks will not make 
loans, construction will halt, people will lose jobs, and on 
and on and on.
    So for me, an uncertain bill is all we can ask for at this 
point in time, which is why I have been so insistent on various 
studies throughout this process. And up until this point, we 
haven't gotten studies on which we can base our opinions.
    So that is why I felt it was important to have a statement. 
I generally don't do these, but I think it is important to say 
the truth. And the truth is that no one in this room, no one in 
this country, no one in this world, really knows with actuarial 
or empirical certainty what we are getting into. We are groping 
in the dark and we are trying to do the best we can without 
certainty.
    That is why this bill is critically important. I don't want 
to pretend that anything here is somehow stuck in concrete. I 
know that several Members--whom I have the greatest respect 
for--have certain hesitancies about certain aspects. I agree 
with those hesitancies. I have fallen on the side that even 
with those hesitancies, I support the bill because something is 
essential. It is not just better than nothing, it is essential 
to the economy of this country. And I hope in a reasonably 
short period of time we can begin the process of getting that 
empirical data that we so desperately need to make intelligent 
decisions and to get to a point where the private sector will 
feel comfortable being involved with this without Government 
involvement.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Capuano. Again 
I want to congratulate you and your effort with Mr. Frank in 
putting this legislation together. We now have the gentleman 
from New Jersey, Mr. Garrett, for 1\1/2\ minutes.
    Mr. Garrett. Thank you, Mr. Chairman. You know, since I was 
last here, Congress extended the TRIA program, with some 
additional reforms and changes, for a 2-year period. And I 
supported that extension because I felt more time was really 
needed. And if you go all the way back since September 11th, 
insurers and reinsurers have cautiously reentered the terrorism 
insurance market, allocating more capacity year-to-year. And 
more commercial policyholders are becoming insured year-to-
year. I view this increased private sector involvement and a 
decrease in Government involvement exposure to be a positive 
element.
    But I just now recently have seen a copy of the legislation 
that the majority intends to move, and there are a number of 
changes that are being considered that are really alarming to 
me. And I am also greatly disappointed that in regards to an 
issue that this committee has historically acted on in a 
bipartisan manner, that the chairman of this committee has 
rebuffed in full, and without what I believe are proper 
considerations of a number of proposals that my colleagues on 
this side of the aisle have offered.
    One main concern I have is the proposed length of duration 
of this program. If we extend this program for too long a time, 
I fear, quite honestly, that we will not revisit this important 
topic and continue to try and make improvements like we did 
after the last time the program expired. A short-term, 
temporary extension allows for periodic reassessment of market 
conditions to see if there is more room for a private sector 
participation, and allows for that gradual scaling back of the 
programs going forward as we observe how the private insurers 
and reinsurers continue to expand in the market.
    Now given that the private sector continues to increase its 
capacity to cover terrorism risk insurance, I firmly believe 
that a short-term extension is more appropriate than creating 
some permanent revisionless program. I am concerned that if we 
redo it permanently, or for a long period of time, we will not 
revisit it, and the private sector will lose out. They will 
lose their incentive to look for innovation and newer solution, 
and Congress also will lose out, for we will lose our incentive 
to revisit this important program.
    With that said, Mr. Chairman, I do thank you again for 
having this hearing today, and I look forward to hopefully now 
going forward and working with you and the rest of the 
committee on the ideas that this side of the aisle has to 
improve this program. And with that, I yield back.
    Chairman Kanjorski. Thank you, Mr. Garrett. And now very 
quickly, Mr. Meeks of New York, for 1 minute.
    Mr. Meeks. Thank you, Mr. Chairman. And first I want to 
affiliate myself with what Mr. Capuano said. Every now and then 
there should be a bill that comes forward that makes good sense 
and everyone can agree upon. There is no better issue than TRIA 
to unite us, because TRIA has to be in place, not because of a 
major city or a rural town, it is because of the new world in 
which we live. We hope that no one will ever have to use this 
insurance, but we know that it has to be in place because it is 
a new world, a different world in which we live. And we do want 
to send a strong message that we are united as a country, and 
that we are going to protect our economy, our businesses, and 
our people, no matter what those from the other side may want 
because they are jealous of what we have here. And TRIA should 
be that uniting piece of legislation that sends a word out that 
we are going to make sure that we are going to hold, as best as 
we can, our economy up to the highest standards that it is, we 
are going to protect our businesses, and we are going to make 
sure that our people continue to work.
    That is what this is. There may be some differences. And we 
are going to have markups and we will have talks and we will 
have our process in which we can do that. But we need to move 
forward as a united body, understanding the importance that 
this TRIA insurance means to our economy, to our employers, and 
to our employees. It unites us all, whether we are a Democrat 
or a Republican, and whether we come from the East or the West, 
the North or the South. Because we have to send a strong 
message that we are going to protect our people and we are 
going to protect our economy.
    I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Meeks. And now 
from our Republican side, Mr. Davis of Kentucky, for 1\1/2\ 
minutes.
    Mr. Davis of Kentucky. Thank you, Chairman Kanjorski, and 
Ranking Member Pryce, for holding this hearing today. As a 
strong supporter of an extension of TRIA, I just want to take a 
moment to join with my colleagues on this side of the aisle in 
expressing our frustration and bewilderment at what I believe 
is a lack of good faith collaboration on H.R. 2761. Despite 
offering two pages worth of suggestions, only one minor 
Republican issue was included. No one on our side even saw a 
draft of the legislative text until just before it was 
introduced, thus preventing the opportunity for us to engage in 
a collaborative discussion.
    I appreciate the comments saying that it is not a Democrat 
or Republican issue; it is an American issue. I agree with that 
wholeheartedly, but it is a shame that I think this is just 
another example of feigning transparent and bipartisan 
governing and then failing to meet standards that we had in the 
last Congress for collaboration on such critical issues like 
this.
    TRIA has always been drafted and debated in a bipartisan 
fashion, passed by unanimous or nearly unanimous bipartisan 
votes. I am truly appreciative of the commendable efforts thus 
far by Ranking Member Pryce and Congressman Baker on TRIA, and 
I am hopeful that the majority will at least work with us on 
the manager's amendment to include some of the Republicans' 
proposed changes, especially market reform changes that would 
continue to grow the private sector participation in the 
program.
    And I would close with this one concern. Codifying for 
many, many years in advance something that would affect a 
market that is going to continue to adapt to changes, as well 
as the enemies of this country are adaptive and changing, our 
economy is changing, I think it is better to have a limited 
period of time, and in that limited period of time give us a 
chance and succeeding Congresses the opportunity to adjust this 
program so it fits the best needs of the country.
    I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Davis. And now 
very quickly for a little less than 1 minute, Mr. Scott.
    Mr. Scott. Thank you very much, Mr. Chairman. Terrorism, 
without question, is today the single most significant risk 
facing our Nation's economic security, bar none. The gentleman 
from New Jersey made a statement that said that we should do it 
over a shorter period of time. The one thing we need in this 
effort, certainty for the industry and for our economic system, 
is stability. And simply because you are extending it for a 10-
year period, could be even longer, 15 years, that gives some 
stability. It does not mean that you will not go back, if 
circumstances present themselves, and be able to adjust 
anything. We do it all the time here in the Congress.
    We can't predict the future. But make no mistake about it, 
the industry, the American people, deserve certainty and 
deserve stability. Those are exactly the cornerstones of TRIA, 
and that is what is needed.
    So Mr. Chairman, I really appreciate this hearing. Like I 
said, there is no more important piece of legislation. It is 
without question necessary for the Federal Government to ensure 
that insurance remains available and continues to require 
studies regarding the development of private markets for 
terrorism risk insurance. And I believe that Congress must work 
to provide a meaningful extension of TRIA, while at the same 
time creating a long-term market-based solution to this 
problem.
    There is no perfect situation in the world, least of all 
us. We are all imperfect, but we move towards a goal for good. 
And that is what this TRIA extension does. I am proud to be a 
part of it. And I want to thank you, Mr. Chairman, for putting 
forth the leadership on this. Thank you. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Scott. Now we 
will move on to the reason we are here, the testimony of the 
panel. We will start with the government panel. First, we have 
the Honorable David G. Nason, Assistant Secretary of Financial 
Institutions of the United States Department of the Treasury. 
Mr. Nason.

STATEMENT OF THE HONORABLE DAVID G. NASON, ASSISTANT SECRETARY 
  FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Nason. Thank you, Chairman Kanjorski, Ranking Member 
Pryce, and other members of the subcommittee for inviting me to 
appear before you today to discuss terrorism risk insurance. 
The market for terrorism risk insurance in the United States 
was, of course, significantly changed by the terrorist attacks 
of September 11, 2001. Of course prior to September 11th, 
terrorism risk clearly existed in the United States. However, 
the scale of losses associated with September 11th, 
approximately $32 billion, along with the recognition that 
terrorist attacks could cause insured losses of such scale 
across multiple insurance products led to changes in the way 
the insurance industry views terrorist risk.
    In response to this, Congress passed, and the President 
signed, the Terrorism Risk Insurance Act, or TRIA, in late 
2002. TRIA established a temporary Federal program of shared 
public and private compensation for privately insured 
commercial property and casualty losses resulting from acts of 
terrorism. TRIA was again temporarily extended in 2005 for an 
additional 2 years.
    My written statement provides an overview of the key 
features of TRIA, the extension act, and the President's 
Working Group Report on terrorism insurance. What I would like 
to focus on today is Treasury's view on the Federal 
Government's role and the market for terrorism risk insurance 
going forward, and H.R. 2761, which proposes a further 
extension of TRIA, and makes a number of changes to the 
program. As a basic principle, the Federal Government's role in 
any market, including the market for terrorism risk insurance, 
should be limited to those areas where the private market 
cannot function and broader costs are imposed on our Nation's 
overall economy.
    Our view of TRIA is shaped by the belief that the most 
efficient, lowest cost, and most innovative methods of 
providing terrorism risk insurance will come from the private 
sector. In playing a role at a time when it was needed, TRIA 
appears to have been successful. Subsequently, there have been 
positive market responses by insurers and reinsurers to the 
reduction in the Federal role during each of the 5 years that 
TRIA has been in place, most notably by taking on additional 
terrorism risk exposure in each year of the program. And as 
insurance companies have increased their terrorism risk 
exposure as TRIA has been scaled back, prices for terrorism 
risk coverage have declined or remained stable. In some sense, 
we have conducted a market experiment under TRIA that has 
illustrated that the private sector is capable of taking on 
increasing amounts of terrorism risk as the Federal 
Government's role recedes.
    Given the success achieved under TRIA to date, the obvious 
question is, should the Federal Government maintain a limited 
role in the provision of terrorism risk insurance? It is clear 
that some challenges still remain in the market for terrorism 
insurance almost 5 years after the passage of TRIA, and nearly 
6 years after September 11th. Insurers have made great strides 
in modeling loss exposure and managing concentration of risk; 
however, the ability of the insurance industry to model the 
frequency of attacks remains uncertain. As a result, insurers 
are cautious in allocating more capacity.
    Based on where the market for terrorism risk insurance is 
today, our view is that the following three elements are 
critical if TRIA is to be reauthorized a second time: First, 
the program must remain temporary and short term; second, 
private sector retentions need to be increased; and third, the 
program should not be expanded.
    First, it is important that the program remain temporary 
and short term given the positive market developments that we 
have seen in the last 5 years. We do not believe the 
Government's role should be permanent, nor should it be long 
term, which could lead to market complacency. We believe the 
10-year extension in H.R. 2761 is not consistent with this 
critical element.
    Second, it is also important to continue the trend of 
increasing the private sector's participation. Private sector 
retentions can be increased through deductibles, co-shares, or 
program triggers, and any extension of TRIA should not 
backtrack from current levels, but rather should reflect some 
real amount of increased private sector participation. As has 
been demonstrated by the increased willingness of insurance 
companies to take on terrorism risk exposure during the life of 
TRIA, there is ample opportunity to continue increasing 
retentions. A number of provisions of H.R. 2761 move away from 
this.
    Third, the program should not be expanded to introduce new 
lines or types of coverage willingly provided by the private 
market. Treasury would oppose such efforts that move the 
program in the wrong direction.
    Finally, there have been questions raised about the lack of 
coverage for chemical, nuclear, biological, and radiological, 
or CNBR, terrorism risks. Outside of workers' compensation 
insurance, coverage for CNBR risk has generally not been 
provided by insurers. However, TRIA does provide coverage for 
CNBR risk if insurers include such coverage in their policies. 
If policyholders were to demand CNBR coverage, and were willing 
to pay appropriate prices, we would expect some additional 
capacity for CNBR risk.
    Nevertheless, outside of the debate surrounding TRIA, we 
should continue to consider the potential economic implications 
associated with the limited amount of CNBR coverage that is 
currently being provided. We appreciate the efforts of the 
chairman and members of the subcommittee in evaluating these 
issues associated with terrorism risk insurance and TRIA.
    These three critical elements that we have set forth 
surrounding an acceptable extension of TRIA reflect the 
positive experience under TRIA to date, and are grounded in the 
basic principle of limited Government involvement in private 
markets. Without these critical elements, we would not be 
supportive of extending TRIA, as the program would be moving in 
the wrong direction. TRIA should be phased out in order to 
increase private sector participation. We look forward to 
continuing to work with Congress on this important issue.
    Thank you for having me here today, and I look forward to 
answering your questions.
    [The prepared statement of Assistant Secretary Nason can be 
found on page 175 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Nason. Now the 
second member of the panel, the superintendent of the New York 
Insurance Department, the Honorable Eric Dinallo.

STATEMENT OF THE HONORABLE ERIC R. DINALLO, SUPERINTENDENT, NEW 
                   YORK INSURANCE DEPARTMENT

    Mr. Dinallo. Thank you, Chairman Kanjorski and Ranking 
Member Pryce. It is an honor to be here, and I am happy we are 
here discussing not whether TRIA is extended, but how exactly 
it should be extended. It is a fantastic accomplishment, and I 
want to commend and thank the subcommittee for its careful 
work, including incorporating some of the suggestions from the 
field testimony, and for coming all the way to New York and 
collecting that evidence. We greatly appreciate it.
    But I know there is still some concern about the program 
and that it crowds out private sector involvement or that it is 
a form of a bad subsidy. And as I said in the field testimony, 
I think it is actually a program that makes private sector 
involvement possible, because it solves what I termed before 
the ``blind pricing'' problem, where there just simply is not 
enough data, especially the upper reaches of potential 
terrorist activity, for underwriters to accurately price it.
    I showed that chart, which I have here again, but I won't 
bore you with the chart unless I am asked to during the 
question and answer period. But I think it is important to 
understand what it does. By cutting off the far end of the bell 
shaped curve, it permits that pricing. And it is at least 
possible that the positive market developments that we see now 
are due to the existence of the TRIA program. Taking it away 
will cause that pricing clarity to go away, and you will be 
back to the same unclarity and blind pricing problem that you 
had before.
    I also don't think it is subsidy in the classic sense, 
because I don't think it encourages morally hazardous conduct, 
as economists say. We want people to collect in cities and work 
in concentrated areas, and so I think that it is not the kind 
of subsidy for the industry or for society that is viewed as a 
negative in encouraging ill behavior.
    Having said that, I think the program should benefit all of 
the United States, and not just New York City. A lot of people 
seem to think that this has become kind of a New York City only 
issue, and I just can't disagree more. As we review some of the 
provisions today, I would like to recommend that they in fact 
be adjusted with that in mind. Specifically on the duration and 
the reset provision, I would make some modest suggestions that 
they be changed in a manner that incorporates more of the 
country. So for instance, I think on duration, longer is 
better. The two markets need the longest and best certainty. 
The insurance market needs it to be able to price accurately 
and include as much capacity as possible. Every time the 
renewal comes up, there is a hesitancy on the part of the 
insurance market, which I can feel as a regulator. I am sure 
you have heard a lot of testimony on that, and I think a 
shorter period undermines that confidence. The other market, of 
course, of building and real estate needs the longevity 
because, as you have heard from your fellow members today, the 
loans are of such a duration, and the bonds that back them, 
that the markets need that kind of certainty.
    My understanding is that for the large real estate bonds, 
they tend to cluster around 10 years and greater. So even with 
a 10-year longevity, as soon as the bond is in place, the 
insurance companies are going to begin to doubt whether the 
insurance will be there. The bonds similarly, and the bond 
markets and the financing, begins to doubt whether it will be 
there. And I think for the correctness of financing, you need 
as long of a period as possible, and more and more bonds are 
being used to finance the largest construction projects. 
Certainly that is what is going to happen with the Freedom 
Tower.
    Finally, I think 15 years is better than 10, because I 
strongly believe that Oklahoma City should be included in the 
TRIA and the reset provision; I think that anything that has a 
definition of ``impacted area'' should be extended and the same 
benefits should be put in for Oklahoma City. And that would 
require you to go back, I think the horrible event was on April 
19, 1995, and so I would look for an extension to sweep that 
up, because it is not just a New York City problem. It is not 
even just technically the largest cities in the country 
problem, as we saw there.
    And similarly on pricing, I would even consider 
recommending that you lower it to $500 million, because again, 
I think the damage in Oklahoma City was $600 million. I believe 
the London subway bombings and the bombing in Madrid would also 
similarly not qualify on the money scale. And those to my mind, 
when you think about those kind of attacks, if those occurred 
here, I think many of you would concede that is exactly the 
kind of terrorism attack that would cause underwriters to sort 
of shun away from the jurisdiction. The reset provisions that 
give that kind of consideration I think should be in place for 
that magnitude, and so I would consider it.
    To me, the reset provisions for numerocity are simply the 
opposite of what underwriters normally do, which is if you have 
car insurance, and you have had three accidents, they 
justifiably raise the premiums. That is the reasonable 
actuarial approach. And I think what the reset provision does 
there is sort of the opposite; it disrupts that. But here I 
think it is appropriate, because you want to do everything you 
can to invite and to create capacity when there is an act.
    So to me, it is not just a New York City phenomenon. 
Likewise, the attack on the Pentagon, which I understand would 
be excluded because it was not a private insured event, but 
again I would expand the definition to be able to include that. 
It is not about whether private insurance had to step in 
specifically, it is about whether that jurisdiction is now 
viewed as a likely target for terrorism based on the past. They 
are trying to predict the future with the past. And so to the 
extent that the reset provision is controversial because it 
looks like it only favors New York City, because we were 
attacked in the World Trade Center twice, I would do everything 
I could to recommend to you that you finesse it, so to speak, 
or change it to include a Virginia, a D.C., Oklahoma City, and 
like sizes that we know have already recently occurred that 
would not otherwise be subject to the billion dollar mark.
    I would give the Secretary of the Treasury that kind of 
discretion. Whether you actually make a precise amount, I think 
you could give more discretion in that regard so that the 
Secretary could designate such events as qualifying for the 
reset provision. Because I could imagine an attack of less than 
$100 million dollars where the reset provision would be 
appropriate based on how the underwriters would approach and 
begin to actuarially evaluate the jurisdiction.
    Finally, I commend the concept of the Blue Ribbon 
Commission. I think this is a very long-term program that needs 
to be evaluated along the way. I think there does need to be 
better self-help by the industry, and the Blue Ribbon 
Commission could certainly help evaluate and make 
recommendations and incentivize industry to that. I think that 
experience will to some extent improve the situation, and the 
Blue Ribbon Commission along the way can take that into 
account.
    But I think experience, God willing, will be very limited 
in this area. That is exactly why you need TRIA, and why you 
have a limited pricing opportunity due to the lack of events. 
But to the extent the department can offer any help or 
expertise on the commission, we would be honored to assist, and 
I will be happy to answer any of your questions. Thank you.
    [The prepared statement of Mr. Dinallo can be found on page 
96 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Dinallo. I 
appreciate the testimony of both Treasury and the State of New 
York. I look at Treasury as being somewhat limiting, and the 
State of New York as saying we have not gone far enough, so we 
have a little bit of conflict there. However, putting all 
things aside, Mr. Nason, do you anticipate that whatever 
ultimately comes out of the subcommittee or the committee in 
the markup will be a product that will be able to be readily 
supported by the Administration? Or do you really see a 
conflict that we should take into consideration that we have to 
negotiate through every stage and every amendment with the 
Administration?
    Mr. Nason. Thank you for that question. What I would say, I 
don't want to presuppose exactly what will come out of the 
committee, but the three main points that I articulated in 
terms of the length of the program, whether or not private 
sector retentions need to be increased, and an expansion of the 
program, those are the three key elements that we would like to 
see in any TRIA reauthorization legislation. So if those three 
issues were addressed--
    Chairman Kanjorski. Well, 10 years is too long. What is the 
Administration's position as to length of time?
    Mr. Nason. Well, I don't have a particular number to give 
you here, but what we have seen in the past is that there was a 
significant improvement after 3 years, and there was a period 
of time to study. In the next 2 years, there was a period of 
time to study, and we have a significant data set after 5 
years. So 10 years is too long, 2 years would give you another 
data set of information, and 3 years would give you a data set 
of information. Those are the time periods that we would be 
looking at.
    Chairman Kanjorski. In terms of the other provisions that 
you are interested in, what would your suggestions be?
    Mr. Nason. In terms of modifications to H.R. 2761?
    Chairman Kanjorski. Right.
    Mr. Nason. Sure. The Administration does not believe that 
we need to add group life to the program. The President's 
Working Group Report and the Treasury's 2005 report are quite 
clear that it is a functioning market, so that is inconsistent 
with our view that we shouldn't expand the program.
    I am concerned about the make available provision for CNBR, 
although I will acknowledge that is by far the most complicated 
issue associated with this debate. And if I could elaborate a 
little bit on how I feel about the CNBR provisions, or how we 
feel about the CNBR provisions, there are two ways we look at 
this.
    First, I want to acknowledge that, of course, the 
President's Working Group Report, and the GAO report, say that 
there is no private sector capacity for these risks. That is 
clear, and I am not going to debate that.
    But second, what we do see is that adding a make available 
requirement is inconsistent with the original intent of TRIA, 
which was to stabilize the environment to deal with economic 
dislocations. Commercial development is happening right now 
throughout the country, even in the urban areas, without a 
private market for CNBR risk. So I am concerned that adding 
that now is not necessary.
    Just as important is that in our 5-year experience with 
TRIA, we have learned that it is not the most effective vehicle 
to create a market for CNBR risk, if a determination is made 
that one needs to be created. And the reason I say that is 
because, as I mentioned in my testimony, CNBR risk is already 
covered for workers' compensation. It could be covered if the 
insurance industry wanted to participate in the market. But 
because the insurance industry is unwilling to participate in 
the market, the changes to H.R. 2761, we are skeptical as to 
whether or not they would be effective. Because there is a very 
important distinction, changing the make available requirement 
is not mandating coverage. The statute does not mandate CNBR 
coverage; it just requires the insurance industry to make an 
offer. For most companies, it would be subject to pricing 
discretion.
    Chairman Kanjorski. Do you think that since we recognize a 
need for that coverage, we should make it mandatory?
    Mr. Nason. No. What I said to you is I don't recognize that 
there is a need for coverage. I will acknowledge that there is 
no coverage. But the reason that you would want to mandate 
coverage is if you thought that the country wasn't moving and 
developing, and there are some risks that the country may be 
comfortable with being uninsurable. This very well may be one 
of those categories. But as I said in my testimony, it is 
something that needs to be considered. I am just concerned that 
with the TRIA structure, we haven't had a good experience with 
that thus far.
    Chairman Kanjorski. On the NBCR coverage, you would prefer 
that we wait until an event occurs?
    Mr. Nason. No, I wouldn't say that at all. What I would say 
is that right now, TRIA has been pretty ineffective in creating 
a CNBR market, but we should think pretty creatively outside 
the debate about TRIA about what, if anything, the Government 
should do in preparation for an event of that kind.
    Chairman Kanjorski. So you are thinking a separate piece of 
legislation is appropriate for NBCR tasks?
    Mr. Nason. It is something that the President's Working 
Group has tried to study. It is something we could have a 
dialogue with industry about. It seems clear to us at the 
Treasury Department that TRIA has not been particularly 
effective in dealing with the CNBR issue.
    Chairman Kanjorski. Well, we have not been challenged yet. 
I sit in on a lot of the discussions as to whether to include 
it or not include it, and the point is that most terrorist 
experts in the country think that our largest challenge of the 
future is to predict how we will be attacked. I sat through 9/
11, and the 6 weeks thereafter, and saw a discombobulated 
Administration and Congress trying to get together to handle 
just 9/11. I imagine a dirty bomb attack on New York, Los 
Angeles, Chicago, or Oklahoma City would cause that same and 
maybe even more discombobulated reaction by the leadership of 
this country as well as the general population. So I cannot 
understand why the Administration's argument would be, do not 
do anything unless you can do it perfectly. In fact, the 
majority of terrorist experts feel that is going to be the next 
challenge if we have one.
    Mr. Nason. If I in any way suggested that ``Don't do 
anything,'' would be the Treasury's policy, that is not what I 
meant to say.
    And I also would like to say, it is unfortunate to be 
talking about something of this magnitude in a clinical 
fashion. It is not something that gives me great comfort. All I 
was trying to say is that while it is an important issue, and 
it is a complicated issue, we are very skeptical about whether 
or not TRIA and changing the available provision would get you 
the market.
    Chairman Kanjorski. May I make an invitation to the 
Administration that, in the next several weeks, you prepare 
what you think would be ideal in this legislation. Then, we can 
have the advantage of that in a markup, and as we go to the 
full committee hearings for markup?
    Mr. Nason. I would be happy to work with you and your staff 
on it.
    Chairman Kanjorski. I appreciate it.
    The gentleman from New York. I heard an interesting figure 
yesterday by one of the talking heads in regard to the change 
of party affiliation by the mayor of New York and his 
prospective political future. The thing that struck me as most 
interesting was that there was a little bit of bragging going 
on that the mayor was very successful in creating a $4 billion 
surplus in the budget of New York, and I thought that was 
great. It immediately struck me that since we are struggling 
with a $275- to $300 billion deficit at the Federal level, 
maybe we should include in the legislation some provision to 
call upon the City of New York or the State of New York to make 
a major commitment or contribution to the program instead of a 
reset.
    Mr. Ackerman. If I might suggest, Mr. Chairman, you might 
ask the mayor to do that personally. Ask the mayor to do it 
personally.
    Chairman Kanjorski. What is your thought on that, Mr. 
Dinallo?
    Mr. Dinallo. I think the City and State did, in fact, put 
up quite a lot of resources and money to respond to 9/11. I 
think it is appropriate for jurisdictions to be responsible and 
to self-govern in the appropriate circumstances, but I don't 
think there is any reasonable doubt that the attacks on the 
World Trade Center and, in fact, the attacks on Washington, 
D.C., were not jurisdictionally based attacks. Those were 
attacks on America. Those were attacks based on trying to 
destroy the financial services economy of this country and 
strike at the heart of our capitalism. And therefore, I think 
that while it is not an unreasonable idea that, as was done 
there, local police, fire, emergency workers, and the Salvation 
Army should come in and do everything they can, I really don't 
believe that it would be appropriate to have a rule that 
basically said that each city--because I don't even know which 
city, God forbid, would be next--is responsible to put up 
billions of dollars that is mandatory because the next one may 
not have the surplus that Mayor Bloomberg, I suppose, is 
credited for so skillfully managing.
    Chairman Kanjorski. Yes. You understand, I am a very strong 
proponent of TRIA. I withheld my name as a sponsor of the piece 
of legislation based primarily on two areas identified in my 
statement, the Christmas tree effect of policies on foreign 
travel and, of course, the reset. It struck me that we have had 
almost an unspoken commitment between two sides of this 
committee and in the Congress in making a bipartisan effort 
that there would not be special favoritism either regionally or 
on economic class. This legislation probably moves to the 
extreme of sending a message to my constituents and the rest of 
the constituents of the United States that New York wants a 
special provision that no other area in the country will have. 
And quite frankly, we thought we were rather generous with New 
York in responding to 9/11 with the Federal response and 
getting involved in creating this legislation--
    Mr. Dinallo. Yes.
    Chairman Kanjorski. --for future response. Can you 
understand why with the retroactivity--
    Mr. Dinallo. Yes.
    Chairman Kanjorski. --of reset is so disturbing for me? I 
would have probably supported a prospective reset.
    Mr. Dinallo. And I am here to do everything I can, Mr. 
Chairman, to try to urge you to change your perspective on 
this. I personally was disappointed when I realized, when my 
staff educated me, that, no, Oklahoma City would not be covered 
by this, and the Pentagon would not be covered by this. And 
therefore--I might say the Pentagon, I mean the jurisdiction 
around the Pentagon, and, you know, similar incidents, because 
I believe that on some level, our perspective has been skewed 
horribly by the magnitude and the cost magnitude of the World 
Trade Center coming down.
    I think the next terrorism event will not be in that 
ballpark, so to speak. It will be in the more tens to hundreds 
of millions of dollars. And I am surprised that the reset 
provision--which I think is actually a good idea from a 
regulatory pricing point of view and inviting of capacity--when 
the events occur, will not reach those kinds of events.
    And, I mean, I don't know what power I have; I am just a 
simple State regulator. But I would urge you to take a look at 
this and say, why shouldn't Oklahoma be reached? I would 
imagine that if I were riding the subways in Washington, D.C., 
I would imagine that my sense of dread at times is equal to New 
York City because of what Washington, D.C., represents and 
because of the prior attacks. And therefore, if that is true, I 
would imagine the underwriters kind of price that in and shun 
it in a similar way, and that is the point of the reset 
provision. It is basically to correct for the natural market 
forces where they try to predict the future with the past and 
price accordingly. And I think the reset provision from that 
point of view is rational and ought to be extended so that it 
doesn't look like--which wasn't the intent, I believe, but it 
certainly looks like it is a New York-based provision, which I 
simply dispute, with all due respect, but agree with the 
appearance.
    Chairman Kanjorski. Very good. Now that you have frightened 
the economy in Washington, D.C.--no, this is a serious matter, 
and it is a difficult matter to discuss when we are talking 
about huge destruction of property and a total loss of 
thousands of future lives. All we are trying to do is put a 
mechanism in place that will forge the opportunity to go on and 
meet that challenge in the future.
    But I appreciate that. I look forward to working with New 
York, both the State of New York and the City of New York. Of 
course, I am always aware of our 29 active members of the New 
York delegation who have been very successful in coming forth 
and putting this proposal together. We are going to work with 
them over the future years.
    But now, since I have eaten up more than twice of the 
allotted time I should have, I would like to recognize the 
gentlelady from Ohio, Ms. Pryce.
    Ms. Pryce. Thank you, Mr. Chairman.
    I want to once again thank the panel for the time you have 
taken with us.
    Secretary Nason, I think that you testified that you have 
seen, or Treasury has seen, positive market adjustments in each 
of the 5 years since 9/11 vis-a-vis terrorism risk insurance. I 
wonder if you could elaborate a little on how you see the 
terrorism insurance marketplace evolving. Has it been fits and 
starts? You said 3 years and 2 years, and how this 10-year 
extended period, if we go that long or even further as has been 
suggested this morning, would affect that evolution.
    Mr. Nason. Sure. I would be happy to do that. And I do want 
to say that we have seen a lot of progress with TRIA in the 
last 5 years, and the best way to explain that progress is 
that, to put it quite simply, as the Government's role has 
decreased, the private sector has been ready and willing to 
step up and fill that void. And that is indicated by the fact 
that there is more terrorism coverage throughout the country 
and in the major urban cities so more people are buying the 
coverage. But just as important, the prices for that terrorism 
coverage are either lower, or they are stable, which suggests 
that we are not getting to a point where the private sector is 
uncomfortable with providing that coverage.
    And we have seen that the industry capacity, starting in 
2003, which was around $12 billion, has increased in 2007 to 
about $36 billion. That is the deductible retention capacity, 
by a factor of three, so we have seen that the amount of 
private sector skin in the game has been increased 
significantly. We have seen that take-up--which means more 
people are buying coverage--has increased significantly. We 
have seen prices stabilize or decrease as the insurance 
industry has gotten better--has a better understanding of how 
to kind of manage their risk exposure for terrorism insurance. 
And that is exactly what we had hoped the private sector would 
do during each of the 5 years of the TRIA program.
    And how I view the 10-year extension is that there are two 
things. One, a short-term program encourages the private sector 
to innovate because there is always an expectation the program 
may go away. It also encourages the insurance industry to 
innovate internally, because if there is no Government 
backstop, they are going to have to be able to manage their 
risk better. And we have seen an enormous amount of progress on 
the insurance company side as to how to manage their risk. It 
also gives the Congress and the Government an opportunity to 
kind of study where things are, and that is a very important 
aspect. If we have a 10-year program, you can make the argument 
that there will still be as much looking into the program, but 
the fact that the program resets and needs to be reauthorized, 
or there is a consideration about reauthorizing really 
creates--really compels people to study where we are. And I 
wouldn't want to give up on that opportunity.
    Ms. Pryce. Thank you.
    And, Superintendent Dinallo--is that how you pronounce your 
name?
    Mr. Dinallo. Yes.
    Ms. Pryce. Noting that the NAIC has in the past recommended 
that Congress change tax laws for insurers to avoid penalties 
and encourage the accumulation of reserves, and I mentioned 
that in my statement, would you support including in TRIA or in 
a separate provision out of a different committee, obviously, 
allowing for tax reserving or pooling? Will you be requiring 
your insurers in New York to increase their capital to back up 
risk? And how do you see that from your position as a State 
regulator?
    Mr. Dinallo. I think I alluded to this a little bit in my 
prior testimony that I am definitely a supporter, and we in the 
Department are considering the regulation that will mandate the 
insurers do some kind of reserving around catastrophic and 
terrorist premiums, because I think it is important for the 
public to see, and for the Government to see, where the money 
is going so that we can point to it and say, here is the amount 
that is reserved for a rainy day, and if it is below the event, 
then presumably premiums will have to be raised because the 
reserve was sufficient to cover the event.
    I don't know if it is necessary to give the industry the 
tax-deferred status that you are asking about. The problem 
would be, I think, many of the larger insurers could deal with 
it, and, in fact, have privately told me they could handle it. 
It might have a difficult impact on the smaller insurers, who 
might not have the capital to do the reserving. But then there 
is a fair argument that maybe for catastrophic coverage and 
terrorism coverage, you only want certain players in the game 
anyway. So it kind of cuts both ways. I am wrestling with that 
right now.
    Ms. Pryce. So you don't necessarily go along with the 
majority of your Commission?
    Mr. Dinallo. Well, I think what they are saying is that 
there ought to be a tax-deferred status, and I am saying I 
think it could go either way. I think it would help more of the 
underwriters, but I think the first step would be to mandate 
it, and maybe see who can handle it, frankly. But I think it is 
a really good mechanism for fiscal responsibility and for the 
public to be able to see why there is an increase in the 
premiums and where they are going.
    The only thing I would like to just comment about, when you 
talk about how the companies are better managing their risk, 
the take-ups have improved, and pricing has improved, capacity 
has improved, I want to make sure we don't lose sight of what, 
I guess, is arguably the obvious. Arguably this is because TRIA 
is in place; in other words, you put in the backstop. I don't 
know if you recall the curve that I did, but you have cut off 
that right end of the curve. If you uncut off the right end of 
the curve, I would at least want to make the subcommittee aware 
that the pricing potential that you have put in place is erect.
    Ms. Pryce. Well, in my statement I actually had my staff 
change it from ``phase out'' to ``phase down,'' and it is 
important that there is a Federal backstop. I am not one who 
proposes there be none at all, but I do think we need to look 
at it more often than 10 years.
    I am aware of my time, and I yield back. Thank you, 
gentlemen.
    Chairman Kanjorski. Thank you, Ms. Pryce.
    Now from the State of New York, our good friend, Mr. 
Ackerman.
    Mr. Ackerman. The great State of New York. A word about New 
York. We are special. We are special like every other State is 
special. One of the things that make us special is the fact 
that we are in great measure one of the largest donor States to 
our Federal system, putting into this great country so much 
more in dollars than we receive back, much more than many other 
States, and we do not do that begrudgingly. We are happy to do 
that. We are proud to do that.
    And one of the reasons that we are able to do that is 
because of the economy of the State of New York. Part of that 
economy makes our real estate very, very valuable. We don't 
want to be treated any differently than any other State, but we 
want to be treated as part of this country, and if there is an 
attack on New York, it is not because someone declared war on 
New York; it is because somebody has declared war on America.
    Nobody is writing a check for hundreds of billions of 
dollars to the State of New York for fun or for free. There is 
no outlay of Federal dollars coming from this at the outset. 
The only way New York gets this great benefit of which we speak 
today is if we suffer another tremendous attack. If anybody 
thinks that makes us special, I hope and pray and don't wish 
anything bad upon you, but relieve us of that burden. If 
somebody could tell us how we can get rid of that target on our 
back, which we have not placed, but certainly do have, we would 
gladly give that up if somebody else would want to assume that 
risk.
    There is no payday here from which we benefit. There is 
just relief in the case that we suffer, and only in case we 
suffer. This money appears only if there is an attack on New 
York or anyplace else that has an attack of that kind of 
dimension. This isn't something that we seek advantage over 
somebody else in the country. Believe that of us if you can. 
And our congressional delegation bipartisanly has supported, 
and will support, any disaster that takes place anywhere in the 
country. I don't know if New York has ever voted against aid or 
assistance in the history of this republic to anyplace else in 
the country. Nobody is sending us money unless there is a 
disaster.
    I do have a question, Mr. Chairman, first of Secretary 
Nason, if I might. The Administration prides itself on being 
tough on terror, and the President said many things in addition 
to, ``Either you are with us or against us.'' He said, in 
addressing the Congress of the Nation, ``Terrorist attacks can 
shake the foundation of our biggest buildings, but they cannot 
touch the foundation of America. These acts shatter steel, but 
they cannot dent the steel of American resolve.''
    If, after listening to and reading the Administration's 
testimony, I think maybe the President meant to say that they 
can't dent the steel of American resolve. And unless terrorist 
acts are successful in manipulating the private market for 
terrorism insurance, in that case we fold. I don't know if that 
is the President's position, and it shouldn't be our position. 
You know, if we let the terrorists dictate the terms of the 
market and the terms of our real estate and the terms of where 
we build or how we build, then the terrorists have won. If they 
tell us we can't rebuild what they have destroyed where we want 
to build it, they have won.
    They should not be dictating this. And the claim that the 
market will take care of the marketplace, these are 
extraordinary circumstances, and the reset position, if you 
blow up the subway system in--whether it is New York or some 
other great subway system in America, you are going to tell 
that municipality to rebuild the subway system in a different 
location? Rebuild your subway system in some other city or 
State? I mean, it makes no sense. How might you respond, Mr. 
Secretary?
    Mr. Nason. Let me begin my remarks by saying that I agree 
with the President's sentiment in that quote, and I also agree 
with your sentiment that New York is special and needs to be 
treated as such, because it has experienced what it had to 
experience after September 11th. So I agree with that.
    Mr. Ackerman. Let me just say, we are not treating New York 
special because of that. It is only if that happens again.
    Mr. Nason. When I said that, I wasn't referring to the 
retroactive reset provision. I was saying that New York 
experienced something awful on September 11th, and I am not 
going to sit here and not acknowledge that. It did. And how I 
respond to that is in my testimony today, and the 
Administration's position on TRIA is not inconsistent with 
saying that these are difficult risks. Our position is simply 
that we shouldn't backtrack; we should continue to build on the 
progress that we have seen over TRIA in the last 5 years, and 
we should continue to build on that success. Those are the 
three points that we made in our testimony, and that is our 
position on TRIA.
    Mr. Ackerman. Superintendent Dinallo?
    Mr. Dinallo. I agree with you that the reset provision has 
unfortunately been viewed as somehow a New York-only benefit, 
and I just have this--respectfully, as I have been able to do, 
both disagree with that and urge the subcommittee to consider 
some changes to extend it, to make it the fact as opposed to de 
facto pro-New York. I think that it should be expanded to--in a 
manner that would give benefit or acknowledgment to Oklahoma 
City, or the Virginia-D.C. area because of the Pentagon attack, 
and I think that is perfectly appropriate. And I do believe 
that the amount even is set high because I don't believe that 
the underwriters approach it from a question of exactly how 
much the loss was, but--within reason, but whether it is a 
likely target of attack, and in part they base that on the 
past, and that is like someone's driving record.
    So I think that you are 100 percent right, Congressman. It 
is not about New York. It is about attacks on America, and for 
a lot of reasons, it is often concentrated in cities because 
they are considered somewhat symbolic of certain ways of life, 
and capitalism and financial services often, and because there 
are high concentrations of people in those areas. But, you 
know, the next place could be the heartland under a similar 
attempt to terrorize and get at other parts of America that are 
beautiful.
    Mr. Ackerman. A final question for Secretary Nason. If the 
terrorists blow up Baltimore Harbor, where should we rebuild 
it?
    Mr. Nason. I don't have an answer for that, sir.
    Mr. Ackerman. Exactly. Exactly my point. But it shouldn't 
be the terrorists' choice.
    Mr. Nason. Sure.
    Chairman Kanjorski. The gentleman from New York Mr. King.
    Mr. King. Thank you very much, Mr. Chairman. And, Mr. 
Chairman, I can understand why people might think that there is 
some special treatment here for New York, but let me just 
mention several things.
    There is no doubt, under every threat and risk analysis 
that has been done and is being done, not only is New York 
number one on the list, no one else is even a close second. 
That is the reality. Believe me, it is an honor we could very 
much do without, but it is the reality we are going to have to 
face as far into the future as any of us can foresee.
    As far as whether or not New York makes a contribution, I 
will just give you one specific example. The City of New York 
Police Department has 1,000 police officers, 1,000 police 
officers focusing entirely on counterterrorism. This is around 
the clock. They have more Arabic translators than the FBI. They 
are working in many ways undercover. They are in many ways 
public displays.
    As far as the World Trade Center itself, one plot or threat 
we can discuss was the one that was made known last year, which 
was thwarted, the attempt to blow up the subway leading to the 
World Trade Center. That was just within the last year was 
stopped. Now, not only do we know that, terrorists know it, of 
course, but so do insurers, and so do real estate developers. 
This has a real impact on the economy of New York.
    And, Superintendent Dinallo, if I could just ask you, I 
know in your prepared statement you made the point that to get 
a good rating on bonds to finance construction, it should be in 
coterminous with the length of TRIA, quite frankly.
    Now, let me ask you very factually. Since those go at 10 
years, what impact would that have, as opposed to 15 years, as 
far as getting the financing you need at a decent rating on 
bonds? And how will it impact the market?
    Mr. Dinallo. My objective opinion is that 10 years is good, 
but 15 years is significantly better, because the bonds for 
large real estate development projects are clustered around 10 
years. So if the median is 10 years, you are going to have 
quite a few that are beyond 10 years, and the ones that are 10 
years are going to immediately be questionable, so to speak, 
upon the first day of issuance when there is only a 10-year--so 
right now if TRIA were passed today with the 10-year horizon, 
you would quickly be into 7 or 8 years, where you would have 
10-year bonds being the preferable and the preferred way the 
market would approach it. But a TRIA life span less than that, 
and that would not be good for the market.
    Mr. King. I know that the rebuilding is being planned, some 
of it is under way, some of the World Trade Center is up. But 
how much--is there a sufficient insurance and reinsurance 
available? How difficult is it to obtain?
    Mr. Dinallo. Well, the experts--the large commercial 
brokers that have been consulted on this say that the 
estimation is that there is $750 million available now, and the 
World Trade Center project alone is an insurable asset, so to 
speak, of $20 billion. So we are--right now we are well, well 
short. Now, much like settling the World Trade Center private 
litigation, which some people said, well, what is the big deal 
about that, it was already starting to go up, but what you 
really end up insuring, as we saw on 9/11, is the buildings 
themselves to a large extent and so right now the insurable 
interest, so to speak, and what is there is not very much. So a 
lot of the money and the work has been put in on the plans, the 
contractors building the foundation, the famous bathtub and 
other aspects. Where you are really going to need the insurance 
is when the actual tower goes up and World Trade Center site--I 
guess it is 2, 3, 4, 5 are put up.
    So I think that the answer is that there is quite a lot to 
go, and there is a real capacity issue in lower Manhattan, 
which I personally believe again is starting to sound like New 
York is, you know--is, like my grandmother used to say, you 
know, crying poverty with a loaf of bread under each arm. But 
it is that way because we have suffered the attacks, and I 
think any other city that suffered these attacks would have a 
similar capacity problem.
    Mr. King. If I could just also then just ask one final 
question before my time runs out. On CNBR, we know whether it 
is New York, Chicago, L.A., or anyplace in the country, if they 
are hit with a nuclear attack, the Federal Government is going 
to come in to help alleviate the cost, to put in money. Doesn't 
it make more sense to try to get the insurance industry engaged 
up front rather than have just the Federal Government coming in 
to bail everyone out at the end?
    Mr. Dinallo. Well, I agree. The observation that there has 
not been a lot of activity on the private side because of CNBR, 
I think, is because of the lack of it in the TRIA existent 
legislation. That backstop that we have discussed that I showed 
in my chart is essential to get capacity and rational pricing, 
because when you are talking about CNBR in particular, which 
was the far end of the curve that I showed, you are talking 
about potential events that have been estimated in the $750 
billion range, and that from a pricing perspective just makes 
it essentially impossible to price unless you have certainty 
that at some upper level whether it is $50 million or $100 
million, it is going to be cut off. And without that for CNBR, 
although we can all instinctively know the Federal Government--
I thank them greatly--would step in, you need to have, from the 
pricing perspective, some cutoff.
    Mr. King. Thank you, Mr. Dinallo.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. King.
    The gentleman from New York, Mr. Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    I am sitting here shocked, quite honestly, because never 
have I ever thought that this hearing or a large part of it 
would be having to defend the City of New York. To me, this 
issue is not about the City of New York; it is about protecting 
our country. New York happened to be a victim of terrorism, and 
to some degree, I am hearing, you could almost say, because the 
victim happened to be the financial center in this country, it 
doesn't matter that they are victims. So what? They were 
victimized, or New York was victimized because it is the 
financial capital of this country. It is representative of the 
United States of America. And so as opposed to saying, you 
know, or thinking that New York is just one that has all of 
this money and, as a result, it is receiving some treatment 
unfairly, it is shocking to me.
    I am here, and I think that, you know, when we have a 
crisis anywhere in this Nation, what should be important is to 
make sure that we fix it. I don't think any member of the New 
York delegation objected to anything that goes--I mean, I 
agree, Oklahoma City should definitely be included here. 
Virginia and Washington, D.C., should definitely be included 
here. And if we have a crisis anyplace in this country, we have 
to come together. The tragedy that took place in New Orleans 
with Katrina, I don't think any member of the New York 
delegation said, ``Oh, Louisiana should not receive funds 
because of that natural disaster.'' This should be something 
that is uniting us as a country because we are all one. In 
these kinds of incidents, it is not a New York City incident, 
it is not--when we had the tragedy in Oklahoma City, that was 
not an Oklahoma City incident. What took place in New Orleans 
wasn't a New Orleans or Louisiana incident. It was an American 
incident. And when we are talking about fighting terrorism, we 
are talking about fighting it as Americans.
    When I look at this bill, I am not looking at this bill 
simply because of New York. God forbid something happens in Los 
Angeles. God forbid something happens in Chicago. I want to 
make sure that they are protected. I want to make sure that we 
as a Nation continue to move on and that our economies continue 
to strive.
    Clearly this is not about New York, and so I am just taken 
aback that we are talking so much about, well, New York, this 
is exclusively for New York. But if, in fact, other cities are 
not included in this bill, then we should change it. And I will 
be the first to fight and support any amendment that includes 
every State if some States feel that they are left out, because 
this is what this is really all about.
    My question, and I guess I will give it to you first, Mr. 
Superintendent, because it is just about the structure of CNBR. 
I have had a number of small insurers who are concerned about 
the structure, you know, because with the amount of money, it 
seems like both are small as far as deductibles are concerned. 
I was wondering, what would your comments be about how best to 
structure CNBR for small insurers?
    Mr. Dinallo. Well, I think that is actually a fair issue. I 
think the small insurers do have a concern that is appropriate 
that if others make available a requirement, it could be too 
expensive. But right now, you know, I think what will happen is 
the work with the insurance regulators on what the correct 
price should be, and I don't see why the pricing would really 
be any different than what they are already giving for the 
terrorism coverage. The enormity of it is obvious, but the 
incident numbers would be about the same potentially. And I 
think that the way to deal with it is--what you have already 
done, you have given a lower deductible from 20 percent to 7.5 
percent, which I think is a very good thing, and maybe it could 
be further modified to take into account the smaller insurers 
that I think have an argument that they will be impacted by it. 
But they are already now going to be impacted by offering 
terrorism coverage, the conventional terrorism coverage, and 
CNBR which has such an alarming aspect to it, but it really has 
an alarming aspect on the uppermost reaches, which I am kind of 
presuming for these discussions is going to be part of TRIA, so 
I don't see such a serious distinction.
    Just to note on the financial capital center of the world 
being New York, I will just say one thing: Heading the Blue 
Ribbon Commission for the Governor on financial services 
competitiveness, you know, it will not be Chicago or Denver or 
Los Angeles that picks up and becomes the new--and, I mean, our 
competition on that is London and Asia and Paris. And so to the 
extent that people don't feel comfortable doing business in New 
York from a financial services perspective because of 
terrorism, it will go to other countries' benefits, not to 
other cities, I believe. And it is just going to be a tragedy 
for the country's economy, not for New York City specifically.
    Mr. Meeks. Thank you. And, Mr. Secretary, let me just ask 
one quick question. I see my time is almost out. And when we 
unfortunately talk about terrorism now, generally it is not 
something that we think about that is from a government 
necessarily. But we also--and we fear that some of these rogue 
nations could get their hands on a nuclear weapon. But in CNBR, 
let's say, for example, it did get in the hands of a country, 
and there was a nuclear attack or a biological attack from a 
country, which basically means there is an act of war, should 
TRIA be--does it trigger in then because it is an act of war?
    Mr. Nason. The definition of whether or not a terrorist 
event would be a certified terrorist event is quite broad. With 
the facts that you have suggested right there, if an individual 
undertook such an attack, I have to believe that the process 
that we have in place at the Treasury Department would call 
that a certified act, because that would be acting on behalf of 
a foreign person or an interest. And you have to be comfortable 
with the fact that we are going to--we are going to cut the 
right direction if there is some ambiguity there.
    Chairman Kanjorski. Thank you, Mr. Meeks. I am going to 
take the prerogative of the chair for a moment because--not 
that I was offended--but I hear your plea that this seems to be 
a hearing directed at New York. I want to assure you that it is 
not.
    I also want to assure you that for 5 years, we have had 
terrorism insurance provisions in the United States without 
reset provisions. According to the testimony of the 
superintendent, the program has worked rather well and we 
encourage it. As late as yesterday, after discussing this reset 
with a group of people, I heard the comment back from some 
people not formally representing New York, but in the business 
community of New York, that the reset is so important to New 
York that they would rather have no bill if it did not include 
the reset provisions.
    Now, I want to put it very directly to you, Mr. 
Superintendent, is that your position or the position of New 
York?
    Mr. Dinallo. No.
    Chairman Kanjorski. Because if it is, I could save an awful 
lot of time and go on to other legislation.
    Mr. Dinallo. I would prefer you not save that time. As I 
said in my opening statement, I think you have done a 
remarkable job. I think the bill, with or without the reset 
provision, is a great achievement. I just--all I was trying to 
get at was--and I think Congressman Meeks's point is well 
taken--that I really was personally shocked when I realized 
that other attacks on this country were not covered by the 
reset provision.
    I am just calling it like I see it. I have my staff here. I 
was appalled and surprised by the optics of it and apparently 
the de facto reality of it only being a New York benefit, and I 
would rather see it extended to other jurisdictions, and that 
the Secretary be given the opportunity to define self-insured 
out of it.
    Chairman Kanjorski. We appreciate that. Let me go one step 
further. We do not look at this as a benefit of New York to 
have a reset provision. This is all a question of who will pay 
when or if there is another attack. What is the fair allocation 
of this? Quite frankly, so that my friends from New York 
understand, look, what we are arguing about is the investors 
and the buyers of this insurance that are either going to save 
money or pay a little bit more if we do or do not have a reset 
provision. This is not going to affect one iota of people of 
the State of New York or the governmental institutions of the 
State of New York. It is going to affect really a very small 
group of real estate investors within New York and potentially 
bond buyers and mortgage holders of the property of the State 
of New York. We do not want to hurt them. On the other hand, we 
do represent the entire country, and we have made a 
representation in our response to terrorism insurance for the 
last 5 years that everybody has been treated fairly and equally 
in the country. This is the first time that we have this 
significant request for a change from fairness, and some of us 
are not comfortable with it. That is it.
    Now we will move on to our next gentleman, Mr. Feeney of 
the great State of Florida, for 5 minutes.
    Mr. Feeney. Well, thank you, Mr. Chairman. You may be 
interested to know that I am originally from the great State of 
Pennsylvania.
    Chairman Kanjorski. I knew there was something good about 
you.
    Mr. Feeney. Like many transplants in Florida. And Florida 
had some experience in insurance markets collapsing. I was in 
the State legislature after Hurricane Andrew in 1992, and I 
will tell you, I view the TRIA issue through the lens of my 
experience as a policymaker in Florida. And the chairman of the 
full committee, Mr. Frank, said earlier that Adam Smith really 
isn't relevant to this conversation, given the nuclear threat, 
but I believe that Adam Smith is always relevant when we are 
talking about capital because nobody ever explained how and why 
capital moves better than Mr. Smith.
    I would suggest that I was growing bias in favor of free 
markets, so I am very sympathetic to the Treasury's position 
here. Having said that, there are times when the markets 
collapse in insurance. We have seen that in Florida, hurricane 
responses, and there are times when the market simply is not 
capable of reacting quickly enough. And unfortunately the 
government's choice is either to allow a recession or a 
depression to occur or to find a way to transition from a 
catastrophic event, whether it is man-made or in this case--in 
this case man-made, or whether it is a natural event.
    But my preference is always to give back to the private 
market. I believe that reinsurance ultimately ought to work in 
a terrorist threat because we have commercial buildings in 
Malaysia, in Hong Kong, and all over the Far East and Europe, 
in any developed countries that potentially could be targeted 
by terrorists. There is this huge need and market globally for 
terrorist reinsurance.
    And so my goal, Mr. Nason, is exactly the same as 
Treasury's, even if I think some of the picture you have 
painted may be a little bit rosy in terms of the length of time 
it is going to take. I want to vote for a TRIA bill, but I want 
to only vote for one that is going to get us back towards a 
healthy market, whether that is 7 years or 10 years or 12 or 14 
years.
    Mr. Nason, could you give me some encouragement that we 
could craft a bill, and give me some ideas of what ought to be 
in that bill as we continue the transition from 9/11 and go 
back to a healthy market. What types of things would you 
suggest that we have in this bill other than the timeline which 
we have talked about?
    By the way, the Ways and Means Committee hopefully will 
encourage commercial insurance companies to build up their 
reserves with favorable tax treatment. That is one way we can 
reduce the risk over time to taxpayers, and I think that ought 
to be done post haste. I don't know why the Ways and Means 
Committee hasn't made that a priority.
    Could you give me some additional ideas of what we ought to 
have in this bill to move us steadily and surely towards 
private reinsurance dominating the market once again in the 
future?
    Mr. Nason. I would be happy to do that, and I also wanted 
to say at the outset that we at the Treasury strongly support 
the chairman's views on the reset provisions and the fact that 
we have had a program that has worked quite well, and changing 
it in that way doesn't seem to be a step in the right 
direction.
    In answer to your question, Congressman, what I would do is 
I would look at the extension act in 2005 as the template for 
what we would like to see going forward. There are some very 
clear things that we can do. We can continue to increase 
private sector retentions. They have gone up every single year 
that we have had the program. For some reason we have stopped 
that. We are not at all convinced that private sector capacity 
is at its maximum, so we don't see any reason why we shouldn't 
continue to increase private industry retentions. That is the 
first thing.
    The second thing I would say is the trigger amount. There 
are three ways that you can increase retentions--increasing the 
deductible, copay, and triggers. This bill lowers the trigger 
amount; $50 million seems like a lot of money, $100 million 
seems like a lot of money, and it is a lot of money. But it 
isn't a lot of money when you consider the aggregate loss that 
a particular event may cause; $50 million or $100 million is 
essentially a small amount in terms of a loss that the 
insurance industry can handle from the private sector. So I 
would certainly not want to see the trigger levels decrease. I 
would want them to be--
    Mr. Feeney. The argument there is that if you penalize 
small companies, you may drive them out of the market. How do 
you respond to that?
    Mr. Nason. I don't believe that to be true, and here is 
why: The trigger right now is $100 million. It is an aggregate 
loss for the entire event, not insurer by insurer. So what 
happens is if you had a $100 million event, then the TRIA 
program is triggered. Then you move to a separate calculation 
to figure out how much each separate insurance company's skin 
in the game is. It is very unlikely that for a $100 million 
event, you would have $100 million, $90 million, or $70 million 
of exposure for a particular small insurance company.
    Mr. Feeney. Ben Franklin started the first insurance 
company, and he knew at that time that you should diversify the 
risks that you have in your portfolio.
    Mr. Nason. That is exactly where I was going to go, 
Congressman, because if that is the case, if a small insurance 
company has all its surplus tied to one disaggregated risk, 
that is bad risk management practice.
    Mr. Feeney. We had some companies after Hurricane Andrew 
that did exactly that in south Florida; they had 90 or 100 
percent of their policies. So our regulators in some of our 
States learned what Ben Franklin taught us years ago.
    I see my time is up. You understand what my goal is. I am 
not thrilled with the bill, although I understand the need for 
some sort of TRIA transition.
    Chairman Kanjorski. Thank you very much, Mr. Feeney.
    We are going to pass on to the gentleman from 
Massachusetts, Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, let me be clear. I have some reservations 
about the reset provision, particularly the retroactivity of 
it. At the same time, on balance I support the concept of the 
bill for the very simple reason that I don't see it as a major 
item either way, if you want the truth. The prospective reset I 
do see as a major item. I think that is an important aspect of 
it. The retroactive one, financially I just don't see a major 
financial impact by it, number one.
    Number two is, let us be serious. There is nobody here who 
has had more difficulty with the City of New York than me. 
Fenway Park is in my district.
    Mrs. McCarthy. That is your problem.
    Mr. Capuano. To get a little revenge, the Yankees still 
haven't won a world championship in this century. That is okay.
    But at the same time I also realize, again, it doesn't take 
empirical data, just common sense, that New York has the 
highest chance, the highest likelihood of the next terrorist 
attack. There is no way around it. It is for 1,000 different 
reasons that we all know, you know, intuitively. And that being 
the case, a minor financial impact, which I am not even sure 
there will be one, but whatever minor financial impact there is 
shouldn't be enough to derail a necessary bill, number one.
    Number two, it recognizes the reality that New York 
developers will probably have a more difficult time getting 
ahold of affordable insurance.
    So for me, yes, I have some concerns. They are 
philosophical concerns. I share them. At the same time, they 
don't rise to the level of substantive concerns that I have on 
the retroactive aspect of it. I do, however, have some concerns 
about CNBR, nuclear, biological, chemical attacks. And I say 
that for the very simple reason that people, when they use the 
term--first of all, most people don't use the term, but those 
of us who come to use it always think in terms of the biggest, 
most catastrophic issues, a major nuclear attack on any major 
American property. I don't believe that we can cover that. I 
believe that Congress should be back in session doing pretty 
much what we did for New York if, God forbid, that ever 
happens. But each one of those situations presents a real 
possibility in today's world of a small attack.
    For some reason, people have forgotten that we had an 
anthrax attack that wasn't widespread, didn't affect millions 
of people, but did impact this economy very greatly. We could 
have a dirty bomb that might impact only a small area of any 
one of our cities; that a chemical release like the one in 
London's subway, again, not the entire city, but a significant 
aspect of it. And I don't disagree that private enterprise 
should do it, but right now they are not doing it. It is 
effectively not offered. And I totally agree. I would love to 
hear either today or anytime suggestions on how we can get it 
to be offered without these provisions, these provisions that I 
said right from the beginning are not necessarily there because 
they somehow came down on the tabloids, and we decided that 
this is the way to do it, it is the best idea we have at the 
moment. If there is a better way out there to get CNBR coverage 
affordable and available to our major developers, I, for one, 
am more than open to hearing how to do it.
    So I want to make it clear, as I said right from the 
beginning, there is nothing in this bill, not the trigger, not 
the CNBR requirements, not the reset, that is somehow 
sacrosanct to those of us who worked on this bill. This bill, 
like everything else, is the best we can do in an area where 
nobody is a true expert, trying to cobble together enough 
people who would be satisfied with the bill to move it forward 
because something is better than nothing. And I would ask both 
gentlemen, if they have suggestions, specific suggestions, 
positive suggestions, on how we can improve this bill 
specifically relative to CNBR, I would love to hear them. I am 
not trying to put you on the spot today. I am not suggesting 
you are going to whip it out of your pocket and give it to us. 
But if you have them, please get them to us.
    I won't speak on behalf of everyone else, I will speak for 
myself. I won't just reject it out of hand. If it works and it 
makes sense, I am more than happy to embrace it. And with that, 
if either of you can offer insight on those items, I would be 
happy to hear them.
    Mr. Nason. Let me just say as a native New Englander, I 
share your angst about what the Yankees have done to our great 
community. I want to make something very clear. I in no way 
want to suggest that the CNBR issue isn't complicated, and I in 
no way want to suggest it isn't a problem. The only thing I was 
trying to suggest in my testimony and in my points is that 
right now if insurance companies were to offer CNBR coverage, 
TRIA will pay for it. Right now, TRIA will pay workers' 
compensation aspects of CNBR coverage.
    All we are doing is changing our offering provisions; I am 
skeptical we will change the market. That doesn't in any way 
suggest that it is not an issue, and it doesn't in any way 
suggest that we don't consider it. I am not here to say because 
it is not perfect, it isn't good. I want to be clear that 
changing the make available provision in the statute is 
unlikely within the TRIA construct to create a large market for 
CNBR. That was my only point.
    Mr. Capuano. That is a fair point, and I accept it. Again, 
I am not sure, I don't know. If there are suggestions on how to 
do it, that would be very helpful.
    Mr. Dinallo. I have two comments. One is I really do 
believe that the problem for underwriters is, again, pricing 
rationally is the far end of the curve. If you see it in health 
insurance, you see it in life insurance, and you see it in 
property insurance. So I think by putting it in, you will 
encourage a lot more pricing incapacity, and you will see a 
difference. That is my belief.
    The other is what Ranking Member Pryce was getting at, and 
Congressman Feeney, is that it is maybe the area for a small 
experiment, which is if you put in a requirement or the option 
for tax-free reserving coupled with--this is what I wanted to 
tell you before, I forgot--you have to also adjust FASB 5, 
because there is a good argument that if you put in tax-free 
reserving, they can't take advantage of it because FASB 5 
requires that the reserving--having been a company and done 
this, it is very difficult--the reserving has to be probable 
and estimatable. So you have to have enough data to give a 
probability to it and an estimation to the event, like a 
litigation, say, for instance. You reserve for a litigation. 
You have a concept that it is going to cost you $40 million to 
pay it, and you have a greater than 50 percent chance of losing 
it, so you could reserve for it. That is the basic rule.
    On terrorism, it is very hard, obviously, because all this 
discussion we are having, is very hard to both estimate and 
give a probability to it, so you may have to put in a change 
and an exception in a sense under FASB 5 accounting rules to be 
able to reserve for terrorism or CNBR events. And if you go for 
the tax-deferred reserving, I am almost certain the companies--
I have talked to them about this--will feel a lot more calm 
from an FEC perspective and enforcement perspective if you give 
them some latitude on reserving there because technically they 
could be in violation of the reserving requirements.
    Mr. Capuano. Thank you, gentlemen.
    Chairman Kanjorski. The former chairman of the 
subcommittee, my good friend from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman.
    I have had casual interest in the topic in years past and 
want to renew a broad observation as opposed to specific 
elements of the bill before us.
    It seems that in the prior efforts on terrorism extension, 
that we gradually, but with certainty, increased private market 
skin in the game while gradually, but with certainty, reduced 
taxpayer exposure. Note, Mr. Nason, that in your testimony, or 
in answer to questions, you said that private sector retentions 
were up year over year throughout the existing programs. This 
is in a period of time when U.S. commercial real estate has 
enjoyed significant profitability. Now, that doesn't appear on 
its face to represent a dilemma that requires us to now move to 
a system where we are going to set a 10-year program clock, 
which in essence means you don't reopen this thing until it is 
about to need reauthorization, expand the required classes of 
coverage, you freeze the ability after 1 year to significantly 
price-risk appropriately.
    Is that likely, Mr. Nason, to bring more private capital 
into the market? Or what in a very broad systemic analysis--and 
make it short--do you think the two differing approaches offer 
to the taxpayer and to continue commercial real estate success?
    Mr. Nason. Thank you for that question. I can keep it very 
short. It is a step in the wrong direction. What we have seen 
over the last 5 years is exactly what we had hoped to see.
    Mr. Baker. Great answer. You can stop there. Let me give 
you one more follow-up. Given that, and some have said make a 
suggestion about what we should do. Well, we should go back 
to--I wasn't really that enthused about the 2005 version, but 
that is a starting point and make modifications. If you start 
there, and you really must do something, if you just had a 
mandate urge and you just had to mandate at all costs, how 
about this? How about you tell people you must carry, and you 
must offer, but let the market price the risk?
    Now, what does that mean to New York and what does that 
mean to Pennsylvania and what does that mean to Baton Rouge? 
That means if you have a relatively low likelihood of exposure 
to claims, you are going to have a relatively, comparably 
speaking, low premium. But if you are in New York, guess what? 
You are going to pay more. Guess what? Katrina victims are 
going to pay incredibly higher premiums for property and 
casualty coverage if you live below Interstate 10 in south 
Louisiana.
    That is fair. I am not even going to get into all the reset 
business. I am just going to simply say you ought to get 
Government out of the pricing business, preempt the State 
regulatory constraints on the market, and if you are going to 
mandate, which if you got the votes you will, then at least let 
market function work in response to your dictatorial 
requirements. Otherwise, I feel almost with a high degree of 
certainty, that there will be withdrawals from the markets, 
either involuntarily because of small claims against the little 
guys who can't afford a $50 million trigger, certainly can't 
afford a $100 million dollar trigger. And why, on the face of 
it, would we not accept a pooling mechanism, where companies 
could voluntarily enter into circumstances for voluntary 
pooling for tax-free reserves to offset against the adverse 
consequences of that $50 million trigger? That seemed to me to 
be a harmless give. It is not in the bill.
    So there are very specific suggestions that can be made to 
help move this bill along in a significantly less threatening 
way to the United States taxpayer. Otherwise just nationalize 
the whole business. Just put the taxpayers on the bottom line 
and say if we have a car wreck on Third Street in downtown 
Baton Rouge we are going to cover it. We seem to be sliding 
slowly down that big hill. But there is just no sensibility in 
telling anybody in this country you must do something, and by 
the way we are not going to pay for it.
    I yield back.
    Chairman Kanjorski. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. The September 
2006 report from the President's Working Group on Financial 
Markets concludes that, ``No private market for CNBR terrorism 
insurance existed prior to September 11th, none exists today, 
and none is likely to exist in the foreseeable future.'' That 
conclusion is consistent with that of the GAO Office on NBCR 
Risks released at the same time.
    Do you believe that the threat of terrorism--I am 
addressing this to either or both of you--do you believe the 
threat of terrorism in the United States has disappeared since 
2005, when Congress extended TRIA?
    Mr. Nason. I do not, no.
    Mr. Dinallo. No. I don't believe it at all.
    Mr. Moore of Kansas. Well, we would certainly be in 
agreement on that. Are you aware of the State Department's 
Country Reports on Terrorism 2006, which concluded that global 
terrorist attacks increased over the last year, and that al 
Qaeda has rebuilt itself? Are you familiar with that?
    Mr. Dinallo. I am not precisely familiar with the report, 
but it sounds like a logical, if not data supported, fact.
    Mr. Moore of Kansas. All right.
    Mr. Nason. I have the same views as the superintendent.
    Mr. Moore of Kansas. Do you consider the State Department's 
report based on statistics from the National Counterterrorism 
Center to be credible? And if so, doesn't that suggest the 
continued need for TRIA with a NBCR component? If there is in 
fact a terrorist threat that still exists, and I think we all 
agree that is the case, shouldn't there be a TRIA with a NBCR 
component?
    Mr. Dinallo. When I testified previously, I thought that 
NBCR should be included in TRIA, as this bill has. And part of 
it was actually, to get at Congressman Baker's point, which was 
that those are the events that will be so far off the curve 
that actually even if you are an unlikely target, compared to 
say New York City, those events drive the pricing.
    Mr. Moore of Kansas. Mr. Nason, do you have a comment?
    Mr. Nason. Yes. My comment is that of course I am not going 
to challenge the conclusion that there is a terrorism threat. 
My only comment is a more technical one, which is that I am not 
sure that the provisions in H.R. 2761 are going to get you the 
market for CNBR that you are looking for.
    Mr. Moore of Kansas. To the best of your knowledge, has a 
significant private market for terrorism reinsurance been 
created since 2005, and does a private terrorism reinsurance 
market look likely to exist in the future, particularly for 
NBCR risks?
    Mr. Dinallo. No.
    Mr. Nason. If there is not primary coverage for CNBR risks, 
it is unlikely there is going to be reinsurance for CNBR risks. 
That is right.
    Mr. Moore of Kansas. Final question. Does it make sense in 
your opinion for Congress to continue extending TRIA in 2-year 
intervals or other short-term intervals, or does it make more 
sense from an economic and financial standpoint, and as a 
matter of public policy, to extend TRIA for a longer period of 
time, ideally until a time when we don't have to worry about 
terrorism and threat of terrorism in the future? Are 2-year 
extensions the way to go?
    Mr. Nason. As I mentioned earlier, I don't believe a long-
term extension is necessary. I don't think it is necessary to 
secure financing for commercial development. And I do think it 
will encourage market complacency. And I do think it will make 
sure that we don't continue to study the effects of the program 
going forward.
    Mr. Dinallo. I think 2-year extensions are highly 
disruptive to both the insurance market and the real estate 
market, which seems to be the primary market that we are 
discussing today. I think from a pricing perspective, it gives 
a lot of uncertainty to both of those activities, especially in 
that short of a period.
    Mr. Moore of Kansas. Thank you.
    Chairman Kanjorski. Thank you, Mr. Moore. Mr. Roskam?
    Mr. Roskam. Thank you, Mr. Chairman. Just a couple of quick 
questions really. Could you both comment on whether you believe 
NBCR is an insurable risk? And I have heard from a whole host 
of folks in the industry who have come into my office and said 
you can't put a number on this. You can't put a price tag on 
this. You can't put any predictable model around this. And it 
just strikes me that that is a threshold question that is 
really before us today. Do either of you have an opinion?
    Mr. Dinallo. The markets will price anything if people are 
willing to pay for it. I think it is an insurable risk. I think 
Congressman Capuano's comments are well taken. Not all NBCR 
events are going to be of the trillion dollar variety. Some 
could be very much less. In fact, arguably, the Oklahoma City 
event was a chemical attack. It was built basically out of 
chemicals bought at Home Depot at the time, I think. And so you 
could argue that you could have quite a sizable event, but not 
a, you know, a $750 billion event that is an NBCR. I think that 
because of the lack of a backstop, because of a lack of 
chopping off the far end of the curve, which those events are 
the ones that drive the farthest end of the curve, it is 
therefore essentially impossible for insurers to price. If you 
put the backstop in place, they will price even on NBCR, 
because they are only going to be responsible, as we discussed 
today, for a certain portion of the curve.
    Mr. Roskam. Okay. So your view is it is insurable absent 
that further extension of the curve, or it is predictable, or 
it is measurable and you can get your hands around it, but you 
can't get your hands around the top end. Mr. Secretary?
    Mr. Nason. My view is that--and I am not an insurance 
underwriter--but my view is that the markets have struggled 
with this issue for years and years. The market has had a 
difficult time dealing with CNBR from terrorist events and from 
accidental events. I would say the State regulators have had 
problems with dealing with the insurability of CNBR risks. And 
the fact is that they have permitted exclusions for these 
because it is a very difficult thing to deal with from their 
perspective. And my view right now is the best evidence we have 
on the uninsurability or difficult aspects of this is the fact 
that today, right now, if an insurance company decided to offer 
CNBR coverage it would be backstopped by TRIA, and none of them 
are offering it, or to a very, very small extent are offering 
it.
    I am not an insurance underwriter, so I don't want to say 
whether or not it is, but the evidence that I said in those 
three buckets seems to suggest strongly that it is an issue the 
insurance industry does not want to take on.
    Mr. Roskam. Do you both have an opinion about the sort of 
natural pressure that takes place between--with State 
regulators, in particular maybe, Mr. Commissioner, what kind of 
pressure are you under to--I don't know if you are elected, in 
which case there is a certain type of natural pressure. If you 
are appointed, you are insulated from some of that pressure, 
depending upon how the appointment is structured, but you know 
what I am getting at. How much pressure are we putting State 
regulators under to underprice the coverage of NBCR?
    Mr. Dinallo. I happen to be appointed.
    Mr. Roskam. Which in this context is a good thing.
    Mr. Dinallo. But I work for Eliot Spitzer, so I am under 
tremendous pressure all the time. The answer I think is that 
one of the reasons to have regulated pricing is because it is 
appropriate for the regulator, in partnership with the 
industry, to set prices for which the industry can accept. And 
my point is particularly with NBCR, where you have a mixed 
industry, both small and large, and the small industry has 
appropriately objected, as this committee has heard, to the 
burden for NBCR, it may be the exactly right time for there to 
be a certain, as you say, pricing pressure or artificiality 
that it is not a perfect market for the pricing, because if you 
priced it to the extent that say a Travelers could handle, it 
is not going to be something as say some of the smaller 
regionals can handle, and therefore it is probably an 
appropriate opportunity for a regulated price.
    Mr. Roskam. Regulated by who? Regulated by you as the 
regulator or in negotiation back and forth?
    Mr. Dinallo. Yes, in the property area, at least in New 
York State, it would be a price, it would be--we would end up 
in a--I use this term very carefully--a negotiated but 
regulated price.
    Mr. Roskam. So negotiated in that you both have this 
ability--you have the ultimate stick, but they have the ability 
to pull out of the marketplace.
    Mr. Dinallo. That is right. There are two kinds. There is 
file and use, where they just put it on the table, which is 
what we have with health insurance, and then there is prior 
approval, which essentially ends up with a worked out price. I 
think here, at least for some of it, we would be in that.
    Mr. Roskam. You can imagine the scenario where you would 
have a popularly elected insurance commissioner, and I don't 
know how many of those there are around the country, I would 
assume that there are some--
    Mr. Dinallo. Yes.
    Mr. Roskam. --and would be under tremendous pressure then, 
just in the force of a political campaign, to drive the actual 
cost of that down. Mr. Secretary, do you have an opinion on any 
of that?
    Mr. Nason. Sure. I mean generally what I would like to say 
is that price controls lead to ineffective pricing and 
inefficient economic outcomes. So whenever you have a 
Government regulatory body setting prices, you generally will 
force people in and out of the market, because the pricing is 
not right for the people to participate in a market. The 
argument I would add to this is that--and it is relevant to the 
CNBR debate--we haven't seen a lot of CNBR coverage despite the 
fact that most of these products, at least for the bigger urban 
areas or the large developers, they could buy these products 
outside of the regulated market in the surplus lines market, 
where there isn't as much--where there isn't any price 
controls. So the fact that you have full price discretion in 
those markets and you still don't see a lot of movement in this 
area seems to suggest what we may get if we change the make 
available provision here.
    Mr. Roskam. Thank you both. Thank you, Mr. Chairman. I 
yield back.
    Chairman Kanjorski. Thank you very much. Mr. Scott of 
Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Let me ask this 
question first of Mr. Nason. Given the gravity of this issue, 
given the need for certainty, given the need for stability, 
what are your arguments against a 10-year extension?
    Mr. Nason. I would argue that the insurance industry right 
now is in a much more stable place than it was after September 
11th. We have enormous amounts of policyholder surplus that 
are, if I am not precisely right, I want to be right, but we 
are at or above pre-September 11th levels in terms of 
policyholder surplus. So there is a significant amount of 
stability within the insurance industry right now. Even taking 
that into account, our view is that in order to continue to 
promote more stability, TRIA should just continue to build on 
the path of progress that we have seen in the last 5 years.
    Mr. Scott. So what length of extension would you recommend?
    Mr. Nason. I am trying to be constructive here, and saying 
that short term is better than 10 years, because I see 10 years 
as long term. I don't have a magic answer for you, whether it 
is 2 years, 3 years, 4 years, or 5 years. What we do believe, 
and we believe it is very important, is that it constantly be 
reevaluated. So short term requires a constant reevaluation.
    Mr. Scott. Why would you think if it is 10 years, it would 
not be reevaluated?
    Mr. Nason. Evidence of looking at how other Federal 
Government programs have kind of evolved and expanded over time 
seems to suggest the rigorous analysis associated with 
reauthorization would provide us the type of rigorous analysis 
that we at Treasury would be looking for.
    Mr. Scott. Have we ever had another Government program with 
the magnitude, the tragic consequences of inaction of these 
terrorist attacks? Do we have something of a comparable level 
that we have done to compare it to?
    Mr. Nason. I am not exactly sure how to answer that 
question. There have been temporary programs that have been 
reauthorized over a period of time. I certainly would in no way 
mean to suggest that terrorism isn't a very serious subject.
    Mr. Scott. How do you feel about this, Mr.--
    Mr. Dinallo. Dinallo.
    Mr. Scott. --Dinallo. What is your recommendation on the 
best amount of time?
    Mr. Dinallo. My recommendation when I first testified on 
this was either a permanency or 15 years, because I don't think 
you are going to ever get the amount of data that you will need 
for accurate pricing at the far end of the event horizon. And 
so I think that you are always going to have this problem. And 
in some sense it is a good problem that you have that you don't 
have so many events that you can actually accurately price. But 
it is a very bad situation, because underwriters are not going 
to step in when they are, as I said, pricing blind. And it is 
not about the--this is--I can't think of any other way to 
phrase it--the averagely priced terrorism event. It is about 
the far end of the curve that moves the median, it moves the 
average pricing for the rest of the curve, for the overall 
premium pricing. Because they have to take into account the 
largest events, and that drives up the prices for the more 
average pricing.
    And so I think that you are always going to be faced with 
this problem, because the potential for a trillion dollar event 
exists, and the potential for things well in excess of $100 
million exists. So Congress in its wisdom has put in a 
backstop, which is a form of subsidy, I suppose, but it is one 
that just permits there to be any pricing at all rather than 
none at a rational price.
    I actually agree with Mr. Nason that one could argue that 
the backstop could be raised a bit. In other words, it is not 
as if the industry has shown a lack of ability to pay for these 
events. We are talking about how they would price for these 
events. And you could go in and say, well, we are going to 
change the backstop to a higher amount and see how that changes 
the pricing. They just need--I believe, this is my opinion--
they just need some backstop so they can accurately price, 
because essentially it has a close to infinite end to the curve 
and without anything in place for a long period of time they 
can't accurately price.
    Mr. Scott. Now, finally, you mentioned 10 or 15 years. 
Which would you recommend if you had your choice?
    Mr. Dinallo. I would recommend 15 years for three reasons: 
It is longer than 10 years; it would encompass Oklahoma City if 
you changed the floor on the reset provision; and the mean of 
bond pricing duration for large scale real estate projects 
across the country, not just in New York, is clustered around 
10 years, which means 10 years is an unfortunate number, 
because just when you begin to put TRIA in place, you are going 
to create uncertainty on those bond pricing, because they are 
10-year bonds. So I would do 15 years because you would net a 
large, large percentage of the bonds also, which would give 
certainty to the financial markets which fund the real estate 
projects that we have been discussing today.
    Mr. Scott. Thank you, sir. I yield back.
    Chairman Kanjorski. Thank you, Mr. Scott. The gentleman 
from Connecticut, Mr. Shays.
    Mr. Shays. Thank you very much. Mr. Chairman, I note this 
is your first panel, and you have another panel that is not 
small. I would just like to say that Mr. Nason, I read your 
entire statement, which obviously you couldn't have read at 
this hearing, and the theme is pretty clear. You come right 
back to your three critical elements: that programming be made 
temporary and short term; that private sector retentions are 
increased; and that there is no expansion of the program. It 
seems to me that if you weighted it, number two, from my 
perspective, outweighs number one and number three big time. 
And the challenge we had is last time around this committee was 
able to use a jurisdictional issue of allowing for greater 
reserves to be built up through our pooling mechanism in the 
committee. But really, the Ways and Means Committee needs to 
weigh in on this. For me, unless we are able to allow companies 
to build up reserves, we don't have any other alternative than 
to move forward with the legislation that we have. It seems 
obvious to me. We are just not going to not do something.
    I would like you to comment.
    Mr. Nason. We would--any advancement in the private 
sector's ability to take on this risk in a more efficient way, 
that would be a step in the right direction from our 
perspective. There seems to be a question as to whether or not 
those reserving mechanisms will actually get you the more 
capacity that you are looking for, but it is certainly 
something.
    Mr. Shays. Why wouldn't it get you there? Because one thing 
we can say is that a terrorist attack doesn't happen, at least 
not now, every day. But the attacks on the Twin Towers were in 
1993 and 2001, so, you know, based on that calculation, 2009 is 
going to be an interesting year. I mean it is not going to 
happen every day, but when it happens it is going to be 
something we are well aware of.
    My point to you is if they build up reserves over a course 
of 10, 15, or 20 years, wouldn't that be something we would 
want? And what kind of effort is the Administration making 
with, particularly Ways and Means, to see that happens?
    Mr. Nason. Well, building up reserves is something that we 
want, and I am happy to work with the folks on Ways and Means 
to talk about that. But as to your first question, why wouldn't 
it get us there? Well, unless you require that those tax-free 
build-up reserves to be segregated to deal with terrorism risk 
or restrictions of that nature, there is nothing that would 
prevent the insurance company from using the tax-free build-up 
to pay a bigger dividend or write more policies. So there is a 
tension in terms of you are giving them a benefit, but--if you 
are giving them a benefit to deal with terrorism insurance, and 
you want to make sure that benefit is yielded--
    Mr. Shays. That is not hard to do. Everything plows back 
into the reserve. Everything.
    Mr. Nason. All right. So with the proper constraints it 
certainly is worth talking with Ways and Means about. I 
certainly agree.
    Mr. Shays. Well, I think it is certainly worth more than 
talking. It is one of your basic three points. It is worth 
fighting for. Otherwise, I am going to go with the committee 
bill. Do you want to make a comment?
    Mr. Dinallo. I would just urge you--I actually support 
that. And I would just urge you again to keep--for the 
subcommittee and Ways and Means to keep their eye on the ball 
of FSMI 5, as I said before. You put publicly traded companies 
in an uncomfortable position if you offer them this reserving 
opportunity, which some have kind of gotten into lots of 
trouble for, as we know, improperly reserving, if they can't be 
given some latitude under FSMI 5 for the must be estimable 
and--well, estimable and probable requirement. So you need to, 
along with changing the tax law, you need to probably change 
FSMI 5. It is a small adjustment, which I am sure they would 
support, and I don't think the SEC would come down on them like 
crazy, but you should probably do that.
    I would also just say it is sort of an interesting 
question, you might also ask people to do the following study. 
Tax-deferred reserving or tax-free reserving is also a form of 
subsidy, right? You are saving--I mean you are doing something 
that is favorable to the industry there. They are not paying 
out taxes or giving policy money back. It would be an 
interesting question to just ask what kind of a benefit or 
subsidy is that to the insurance industry.
    Mr. Shays. Or a cost to the Federal Government.
    Mr. Dinallo. Yes. I meant on taxes that they are not 
paying, yes.
    Mr. Shays. Exactly. The opportunity costs.
    Mr. Dinallo. I don't know. It is an interesting trade-off. 
Maybe across the whole insurance industry, tax-free reserving 
is less--
    Mr. Shays. I hear what you are saying, and it is a very 
helpful response. The bottom line for me is we can't raise 
those three points, though, without having it mean something. 
And the only way you are going to see point two in your 
recommendation of your three critical points is if they are 
allowed to build up reserves.
    Mr. Nason. I agree there are lots of ways to address point 
two, which is what we did in the 2005 extension as well, which 
is just increasing retention. And one way of getting there 
would be increasing reserves. So I agree with that.
    Mr. Shays. Thank you.
    Chairman Kanjorski. Thank you very much. The gentlelady 
from Illinois, Ms. Bean.
    Ms. Bean. Thank you, Mr. Chairman, and to our panelists for 
your testimony today. Mr. Dinallo, it is a pleasure to see you 
again. I know you were kind enough to testify for those of us 
who traveled to New York for a hearing on this subject earlier 
in the year, and I think you, at that time, and earlier today, 
had eloquently stated your case for a longer term extension, I 
think ideally 15 years, of this TRIA bill. So I appreciate 
that.
    My question is for Secretary Nason relative to the CNBR 
risks, and what the private sector is willing to do or not do 
relative to those risks. From what I have heard in some of your 
responses to some other questions, it appears you are not 
contradicting the conclusion that I am coming to that when the 
President's Working Group in late 2006 indicated that there was 
no private market for CNBR terrorism risk insurance prior to 
September 11th, that none exists today, and none is likely in 
the foreseeable future, it sounds like you are not 
contradicting that or suggesting that one has since developed. 
Is that correct?
    Mr. Nason. That is correct.
    Ms. Bean. Okay. So that being the case, who should cover 
those risks from such a catastrophe?
    Mr. Nason. There are two ways to look at it. There is a 
question as to whether or not the Government should participate 
in those markets, and there is a question about whether or not 
they should be uninsurable risks, as they have been for 
decades.
    Ms. Bean. And your own recommendation?
    Mr. Nason. I believe it is something worth considering. 
What I am most concerned about is a hope, and it is just a 
hope, that the private market will evolve with some of the 
changes in H.R. 2761. I think that we need to have a broader 
discussion about what, if anything, to do about CNBR. And I 
don't think that changing the make available requirement is 
going to get you there. I wish I could give you an answer as to 
how to solve this problem, but it is a problem that has existed 
for decades.
    Ms. Bean. Thank you very much. I yield back.
    Chairman Kanjorski. Thank you. Mr. Donnelly?
    Mr. Donnelly. Thank you, Mr. Chairman. This would be for 
Mr. Nason. Do you think a TRIA period of 2 years would reduce 
the amount of investors in construction in a place like New 
York City or have an effect on values there? Would it create 
additional uncertainty?
    Mr. Nason. Well, I will start with the end of the question, 
which is, would it create additional uncertainty? It might. 
What I would say is that if you look at what has happened in 
the last 5 years, we have had commercial development with the 
existence of a temporary program. So I don't see construction 
stopping with a short-term extension of the TRIA program.
    Mr. Donnelly. So the extension to 10 years in your view 
would not--it would provide additional certainty for investors, 
but the 2-year program doesn't slow down the potential 
construction that would occur?
    Mr. Nason. What I would say is the benefits--the negatives 
associated with a long-term program in terms of insuring 
market--basically insuring market complacency, insuring that we 
don't study this issue regularly outweighs the marginal amounts 
of uncertainty associated with 2 years simply because the facts 
are clear that commercial real estate is being developed with a 
short-term program.
    Mr. Donnelly. Thank you very much. I yield back, Mr. 
Chairman.
    Chairman Kanjorski. Thank you very much. And now to the 
ever patient lady from New York, who has been so involved in 
this program. To explain to the audience, we have not been 
ignoring the young lady, who showed up much earlier than most 
members, but because she is not a member of the subcommittee, 
she must wait until the end. Mrs. Maloney of New York.
    Mrs. Maloney. Thank you so much, Mr. Chairman. And I 
particularly want to thank you for responding to my request to 
come to New York and hear from our elected and business 
community about the tremendous need. And you did that very 
early on. It was very important. Our mayor, when he was a 
Republican, spoke passionately about the need for 15 years. And 
whatever party he is in, he is committed to this issue. Let me 
just put that straight. And he has called many of us 
repeatedly, expressing the need for 15 years. I want to 
underscore what our superintendent has testified so eloquently, 
that part of our homeland security is our economic security, 
and terrorists should not be able to dictate where we are going 
to build and expand in our country.
    After that terrible event of 9/11, I thank all of my 
colleagues, and really this country, that responded to New 
York, who helped us in so many ways. But truly the most 
important way was TRIA, the antiterrorism risk insurance. 
Because before TRIA, respectfully, Mr. Nason, we could not 
build anything. All of our building stopped until we got TRIA. 
We weren't rebuilding. People were afraid to build without 
insurance. And what I am hearing from my constituents, and 
maybe we need to clarify that in another report, or more 
factual evidence, but what I hear from my constituents is that 
they cannot get insurance, and the insurance that they are 
getting now is predicated on an extension of TRIA. They are 
telling me that they get a policy that says TRIA will insure 
you until January, it is January of this year, when it expires. 
And if it expires, they have no more insurance. And they are 
paying through the roof for it. I have heard that some have 
even gone to London to get insurance, because even with the 
provision of getting it afterwards, they cannot get it. And I 
congratulate the Administration for really now supporting TRIA. 
At one point there was testimony and reports that we did not 
need it. And I congratulate Secretary Paulson and you and 
others that realize that we need this program. But I really 
feel that we need it long term for the stability of our 
financial markets.
    We heard in that testimony in New York that they could not 
rebuild lower Manhattan without a bill that gives at least 15 
years, so that the bonds necessary to finance the rebuilding of 
Ground Zero can be issued. And I just would like to ask 
Superintendent Dinallo to really make clear the statement or 
clarify the need for a long-term stable solution. Really, we 
need to get a factual study, but what I am hearing from the 
real estate industry and from the trade organizations is that 
our people to this day cannot get insurance unless there is a 
guarantee that there is going to be a TRIA there, and if it is 
not there, then they don't get it.
    So I would like you to clarify on that. And also I support 
his testimony to expand the reset. I think that was very, very 
important. I would like to ask him whether he thinks the reset 
should be made permanent.
    Mr. Dinallo. On the 15 years, I would say that the most 
cogent driver of it is that you want these projects to be done 
by investment grade rated bonds that have a time horizon of at 
least 10 years. That seems to be the preferred method of 
financing, and it is increasingly the method of financing. So 
10 years to me was just kind of an unfortunate number, because 
they are clustered, I am told, they are clustered around 10 
years. And so you invite a lot more high grade bond investment 
if you are at 15 years, which is--I should have mentioned the 
grade quality of the bonds. I do believe that no matter what we 
do we will be back to this issue again. It will never be--
``knock on wood'' as one of the Congressman did--there will 
never be enough events that you would ever get accurate pricing 
such that you would ever seriously consider anything other than 
adjusting TRIA, which is what I think the Blue Ribbon 
Commission will ably do. So you could have it 15 years and 
still have the Commission weigh in with recommendations every 
couple of years. And you certainly are correct that without 
TRIA, there is not going to be a pricing possibility. And the 
longer you put it in place, I believe the more capacity you 
will attract to the market.
    You had a second question, but I forgot. I apologize.
    Mrs. Maloney. Well, also the Blue Ribbon Commission, you 
mentioned your support for that. Could you indicate some of the 
issues you would like them to explore and possible people you 
would like to see appointed to it?
    Mr. Dinallo. I think--well, I volunteered the department's 
expertise if it could be at all helpful. But what I was saying 
was, for instance, one of them we have hit upon today. I really 
believe that the tax-deferred reserving, for instance, is 
something that should be looked at, but it needs to be studied, 
the cost-benefit analysis needs to be done, and the proper 
adjustments to FSMI 5 and the tax code have to be put in place. 
And that might be an excellent thing, for instance, for the 
Blue Ribbon Commission to do.
    Also whether reinsurance can be brought in, in a more 
robust way, is something that seems to be an issue here that 
should be discussed. And NBCR, I agree with Mr. Nason, it is a 
very complicated issue. And maybe that is something that in 2 
years you see whether there has been takeup, and whether 
adjustments have to be made. You have to look at the markets 
and see whether you had a negative impact on the small insurers 
through NBCR, because they seem to believe that is going to 
happen. And so I think it is a good way--to me what I heard 
about, I thought it was a rational compromise to putting in a 
long life span for TRIA, but saying but we are not just going 
to throw up this forever Federal program without adjustment, 
which I think is appropriate, and instead we are going to put 
in some experts to help adjust it along the way. And Congress, 
I would assume, would be able to deal with those changes not 
just every 15 years, but in a more regular periodicity.
    Mrs. Maloney. And also briefly on the reset provision, I 
certainly support your testimony to expand it, but do you 
believe it should be made permanent, the reset provision?
    Mr. Dinallo. I think--I am in favor--I am a proponent of 
the reset provision applied nationally, encompassing all 
significant terrorist attacks. I don't think there should be a 
reset provision if someone throws a firecracker through a 
window. I think there should be a reset provision for all 
significant terrorist attacks. Because underwriters will 
rationally want to raise premiums and price higher for that 
jurisdiction based on experience. They are also mandated from a 
fiduciary duty point of view to do that. And I think that is 
really not how we should be dealing with terrorism coverage. It 
is not quite the same as car insurance coverage. If you have 
multiple accidents you should be paying a higher premium. But 
that goes to what kind of a driver you are for whatever reason, 
and the risk there needs to be accounted for by the insurance 
company. But here, if you have multiple terrorist attacks in a 
jurisdiction, well, I don't think that is something the 
jurisdiction should have to carry without something else that 
countervails the natural tendency of the reinsurers to shun 
away from that jurisdiction. I thought the reset provision was 
a good way to attract capacity and counterweigh against that 
natural shunning away based upon past events.
    Mrs. Maloney. My time has expired, but if I could just ask 
this one question of Treasury. Mr. Nason, you testified that 
Government has no role in NBCR, but you have no answer for how 
to deal with it. If Government has no role, and everyone agrees 
it is a huge threat, how do we deal with it?
    Mr. Nason. I am not sure I testified that Government has no 
role. What I testified for is there is no current market for 
it. And what I also said is that I wish I had an answer for 
this to you, but this is a question that hasn't been answered 
for the decades where we have had nuclear risks. So I wish I 
had an answer for you, but I don't.
    Mrs. Maloney. Well, my time has expired. Thank you very 
much, Mr. Chairman, for your leadership. Thank you.
    Chairman Kanjorski. Thank you very much, Ms. Maloney.
    Mrs. Maloney. I thank particularly our superintendent from 
New York for your help on this issue. And thank you, Mr. Nason.
    Chairman Kanjorski. That completes the first panel. I want 
to thank the Secretary and the superintendent for being so 
patient with all of us. I want to note that there are probably 
members who may have additional questions of this 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. Thank you very much, Mr. Secretary.
    Mr. Dinallo. Thank you, Mr. Chairman.
    Chairman Kanjorski. We will get started with the second 
panel if we may. If I am counting correctly--do we have all 
eight in place? I think we do. Yes. Let me proceed with the 
introductions. We have the former Governor, the Honorable Mark 
Racicot, chief executive officer and president of the American 
Insurance Association. Then we have Mr. Christopher J. 
Nassetta, president and chief executive officer of Host Hotels 
and Resorts, Incorporated, and chairman of The Real Estate 
Roundtable, on behalf of the Coalition to Insure Against 
Terrorism. After that, we have Ms. Jill Dalton, managing 
director of global properties and multinational practice, 
Marsh, Incorporated, on behalf of the Council of Insurance 
Agents and Brokers.
    Now I would like to call upon Mrs. Maloney to introduce her 
constituent.
    Ms. Maloney. Thank you, thank you so much. I am so thrilled 
that one of my friends and neighbors is here. I am delighted to 
introduce my constituent, Karen Emek. Dr. Emek is a partner in 
CBS Coverage Group, a major New York insurance agency, and she 
is widely regarded as an expert on insurance issues, and has 
literally testified before this committee many, many times. She 
has also played a leadership role in the industry for many, 
many years, most recently as the immediate past chair of the 
Independent Insurance Agents and Brokers of New York. She has 
been very involved in this issue of terrorism risk insurance, 
and is the author of numerous articles and testimony on the 
permanent solution to the problem, as well as TRIA as we know 
it.
    I look forward, as always, to seeing her and hearing her 
testimony, and I thank you for this courtesy to allow me to 
introduce my constituent. Thank you.
    Chairman Kanjorski. Thank you, Ms. Maloney. And since she 
is your constituent, she must be brilliant.
    Mr. Warren Heck is chairman and chief executive officer of 
Greater New York Mutual Insurance Company, on behalf of the 
National Association of Mutual Insurance Companies and the 
Property Casualty Insurance Association of America. Then we 
have, from the good Commonwealth of Pennsylvania, Dr. Howard 
Kunreuther, Cecilia Yen Koo professor of decision sciences and 
public policy, co-director of risk management and decision 
processes center, the Wharton School of the University of 
Pennsylvania. Mr. Frank Nutter, president, Reinsurance 
Association of America. And then finally, Mr. Dennis W. Smith, 
president and chief executive officer, Missouri Employers 
Mutual Insurance.
    Welcome all. May I say that we are going to take your 
written statements and submit them in their entirety in the 
record.
    Of course, as you heard, the last session carried on 
considerably longer than we thought it would. Although 
terrorism insurance is a very important subject, at 2:00 this 
afternoon, this room is being reserved for another hearing on 
housing. There are more people in housing than there are who 
buy risk insurance, therefore, they are going to throw us out 
of this room to allow the Housing Subcommittee to proceed. So 
we are constrained to about an hour and 15 minutes.
    With that in mind, I am going to ask my colleagues when 
they come up for questioning to certainly talk or ask questions 
for no longer than 5 minutes, and even rein them in from there.
    The participants on the panel, I would ask you, knowing 
full well your full statement will be submitted for the record, 
to restrict your overall comments on your statement to 5 
minutes so that we can move through the panel. That will give 
us approximately 40 minutes, and that will allow us 
approximately half an hour for questions after that.
    May we start with the Governor?

STATEMENT OF THE HON. MARC RACICOT, CHIEF EXECUTIVE OFFICER AND 
           PRESIDENT, AMERICAN INSURANCE ASSOCIATION

    Mr. Racicot. Thank you, Mr. Chairman. I would like to 
express AIA's deep appreciation for this committee's steadfast 
commitment to the TRIA program and the vital role it plays in 
protecting our Nation's economic security. I would also like to 
commend your recognition that more needs to be done to 
strengthen TRIA with respect to NBCR--nuclear, biological, 
chemical or radiological-related risk. I intend to offer brief 
remarks today to discuss three important aspects of H.R. 2761: 
Number one, the importance of a workable TRIA program to the 
health of the terrorism insurance market; number two, the 
critical need to address unique challenges posed by NBCR risk; 
and, number three, the need to preempt State regulatory 
constraints that impair, rather than enhance, private sector 
capacity.
    First, the importance of TRIA and the urgent need for its 
extension. Every expert who has examined the program agrees 
that it has worked to make terrorism insurance more widely 
available and affordable. However, it is clear that we know 
more now about terrorism risk and terrorism insurance markets 
than we did in 2002. TRIA can be improved to better reflect 5 
years of real world experience. To this end, several of the 
provisions of H.R. 2761 would improve the program's record of 
success. These include incorporation of domestic acts of 
terrorism, strengthening the program's duration, and 
maintaining the current per company retention levels for 
conventional terrorism attacks. We urge you to act decisively 
to keep these provisions intact. We also strongly advise that 
you advance the bill as quickly as possible in order to avoid 
the type of market disruption that thrives on uncertainty.
    Second, the need for a more robust NBCR backstop. NBCR 
attacks are the 21st century equivalent of war, plain and 
simple, and they require a resolute response from our 
Government. A one kiloton bomb, which is about one-tenth of the 
size of the Hiroshima explosion, can be easily transported in a 
truck, a container ship, or even a backpack, and could 
devastate any U.S. city.
    We support the bill's provisions to strengthen TRIA's NBCR 
provisions, and respectfully suggest that they could be made 
even more effective. The bill establishes a 7.5 percent insured 
deductible for NBCR events, in part to account for the 
inability of insurers to spread NBCR risk to any entity other 
than the Federal Government. It also calibrates the co-shares 
paid by insurers depending on the magnitude of the loss above 
the per company retentions.
    These are very positive steps. However, we believe that 
eliminating or further reducing the insurer co-share would help 
to build capacity to manage what remains a very difficult risk 
to understand and to quantify. The bill also recognizes that 
NBCR attacks may well exceed the current TRIA program cap of 
$100 billion. It therefore provides additional legal certainty 
to insurers by clarifying that the limits of an insurer's 
financial exposure to all losses, including workers' 
compensation and other State-mandated coverages, are limited to 
the carrier's applicable deductible and co-share payments. 
There are also provisions to reimburse insurers for payments 
exceeding the cap in certain defined situations.
    It is indeed unfortunate that we need to grapple with 
scenarios where horrific terrorist attacks could result in 
losses that exceed the nearly unimaginable level of $100 
billion. Nonetheless, we believe that H.R. 2761 deals with this 
situation in a fiscally responsible, sensible manner, and we 
highly commend the committee for the effort you have made in 
this regard.
    Third and finally, it prevents States' regulations from 
undermining TRIA's goals. The current State regulatory system 
has made it more difficult for insurers to commit capacity to 
terrorism risk and provide policies that can be adapted to what 
policyholders really want. H.R. 2761 takes limited steps to 
preempt State regulation and terrorism risk insurance rates and 
forms that might undermine the program's basic objectives by 
reinstituting the year one limited rate form preemption of the 
original TRIA, but only for NBCR risk. This is a good start in 
our judgment, but insurers' experience during TRIA's first year 
of demonstration back in 2002 and 2003 reveals that the 
preemption was easily disregarded in some States. We believe 
that a stronger preemption would further improve the health of 
terrorism insurance markets.
    The private property casualty industry system provided 
essential economic support in helping our Nation to recover 
from the tragedy of 9/11. Insurers and their policyholders have 
worked tirelessly to adjust to the new realities of terrorism 
risk. TRIA has played, and must continue to play, a critical 
role. At this important juncture, the program inevitably, in 
our judgment, must be extended and improved if we expect to 
preserve the economic security of this country.
    Thank you, Mr. Chairman, for your efforts to do both 
through H.R. 2761.
    [The prepared statement of Governor Racicot can be found on 
page 204 of the appendix.]
    Chairman Kanjorski. Thank you very much, Governor. Our 
second presenter will be Mr. Christopher J. Nassetta.

   STATEMENT OF CHRISTOPHER J. NASSETTA, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, HOST HOTEL AND RESORTS, INC., AND CHAIRMAN, 
   THE REAL ESTATE ROUNDTABLE, ON BEHALF OF THE COALITION TO 
                    INSURE AGAINST TERRORISM

    Mr. Nassetta. Good morning, Chairman Kanjorski, and members 
of the subcommittee. Thank you very much for holding this 
hearing and allowing me to testify today. My name is Chris 
Nassetta, and I am the CEO of Host Hotels and Resorts, one of 
the largest owner of hotels in the world. I also serve as 
chairman of the Real Estate Roundtable, and second vice chair 
of the National Association of Real Estate Investment Trusts. I 
am appearing today on behalf of the Coalition to Insure Against 
Terrorism, or CIAT.
    CIAT 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. CIAT commends the 
sponsors of the Terrorism Risk Insurance Revision and Extension 
Act of 2007 for developing a proposal which is responsive to 
the major issues identified by CIAT and other stakeholders. We 
look forward to working with Congress and other stakeholders in 
completing this very important legislation.
    Sometimes the subject of today's hearing is characterized 
as an insurance industry issue. I respectfully suggest that it 
is not. Instead, it is an issue of national economic security. 
It is ultimately an issue of jobs, and it is an issue of 
protecting the investments of pensioners, shareholders, 
bondholders, and individuals from across the Nation.
    Since 9/11, you have worked hard to find solutions to the 
economic risks associated with terrorism. The terrorism 
insurance law you enacted certainly has been welcomed and very 
much appreciated. But the current law, as you know, is set to 
expire at the end of this year. Holding this hearing here today 
certainly demonstrates that you know that the essential facts 
that caused Congress to enact TRIA in 2002 have not changed. 
Terrorism continues to be an unpredictable threat, with 
potentially mammoth losses associated with it.
    Insurers continue to say terrorism risk is uninsurable. Our 
economy continues to need terrorism insurance in order to 
function in the face of a continuing terrorist threat. American 
businesses must have adequate insurance and coverage to 
effectively manage economic risks and protect the economic 
value of their underlying assets. Without terrorism risk 
coverage, America's economic infrastructure would be totally 
exposed, and America's businesses, lenders, shareholders, 
pensioners, and bondholders would be forced to bear the full 
brunt of terrorism risk.
    I support market solutions to problems, but the fact is 
that a meaningful private market for terrorism risk insurance 
has not existed and is not likely to develop. Terrorism risk is 
a national problem that requires a Federal solution.
    I commend you for the work you have done in crafting H.R. 
2761, and I am pleased to announce today that the Coalition to 
Insure Against Terrorism supports this legislation. This bill 
includes the key provisions proposed by CIAT over the past 
months. Perhaps most important to policyholders are four 
provisions. First, the program term would be extended to 10 
years. We applaud you for recognizing that long-term extension 
affords policyholders with the certainty necessary for long-
term projects and economic activity to move forward.
    Second, the bill would eliminate the distinction between 
foreign and domestic acts. As the London bombings and the 
foiled Kennedy Airport plot demonstrate, we must be prepared 
for homegrown terrorism, as well as threats from abroad.
    Third, the bill would give businesses the option to 
purchase insurance for the most catastrophic terrorism risks, 
the types of risks our Government warns us about repeatedly, by 
encouraging meaningful insurance against weapons of mass 
destruction through a mandatory make available program for 
nuclear, biological, chemical, and radiological--so-called 
NBCR--risks.
    Fourth, the bill returns the program trigger to last year's 
level of $50 million, which should encourage smaller insurers 
to return or remain in this market.
    In conclusion, we stand ready to assist this subcommittee 
and the Congress in enacting this very important legislation.
    Thank you for the opportunity to testify here today, and I 
am happy to answer any questions you might have.
    [The prepared statement of Mr. Nassetta can be found on 
page 183 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Nassetta. Our third 
presenter is Ms. Jill Dalton.

STATEMENT OF JILL M. DALTON, MANAGING DIRECTOR, GLOBAL PROPERTY 
   AND MULTINATIONAL PRACTICE, MARSH, INC., ON BEHALF OF THE 
            COUNCIL OF INSURANCE AGENTS AND BROKERS

    Ms. Dalton. Good afternoon, Chairman Kanjorski, and members 
of the committee. Thank you very much. My name is Jill Dalton. 
I am a managing director at Marsh, and I am the leader of the 
terrorism specialty practice there. I am also very pleased here 
to be a representative of the Council of Insurance Agents and 
Brokers. And again thank you for your leadership on this issue. 
We are very glad that you are addressing the extension of the 
Terrorism Risk Insurance Act.
    We have reviewed the draft bill that has been proposed, and 
for the most part, we support it. We like the 10-year term that 
is proposed because, as Mr. Nassetta said, our clients need the 
certainty of coverage in the long term.
    Now, I know that when TRIA was first proposed that Marsh 
was a strong advocate for a short-term and a temporary 
solution. Instinctively, we don't necessarily support a large 
Government role in our business. So maybe this seems a little 
bit like a flip-flop, but the truth is that the assumptions we 
made in 2002 have not been realized. Back then, we thought that 
the reinsurance market would rebound with capacity, and we 
thought the risk would abate. It is really a simple equation of 
supply and demand. But we know now that the reinsurance market 
doesn't have nearly enough capacity to meet the demand, and 
there appears to be little appetite to expand the supply that 
they do offer.
    We also know that the demand is high and is increasing. 
Marsh supplies data to the committee and our clients, which we 
have included in our written testimony, and based upon our data 
in 2006, 60 percent of Marsh's clients purchased property 
terrorism risk in 2006, and in the first quarter of 2007, it 
was 64 percent.
    I would also like to point out that even with TRIA, not 
every client is able to buy all the coverage they want. Wisely, 
the insurers are carefully monitoring their accumulations, and 
they pay attention to the fire-following laws where they apply. 
Sometimes this means that underwriters offer reduced limits to 
our clients or they decline completely. And this is an 
especially big problem when terrorism insurance is required by 
lenders or through other contractual obligations.
    Our data also debunks the myth that the risk of a terrorist 
attack is only a concern for large banks or real estate 
developers in the big cities. I will give you a few examples. 
In 2006, we saw takeup rates for educational institutions go up 
by 17 percent, and for energy concerns, it went up by 26 
percent. Geographically, in the Midwest we saw takeup rates go 
from 58 percent to 63 percent, which is a meaningful increase.
    So with the demand, the shortage of supply, and the fear of 
more events, which is heightened by the 2005 bombings in 
London, and more recently the arrests around the threats at 
Fort Dix and JFK, which were thankfully averted, we feel that 
the longer term program is needed, and so we thank you for your 
recognition of that.
    We are also happy that the bill eliminates the distinction 
between domestic and foreign terrorism acts, and we are pleased 
to see the committee grappling with the difficult issue of the 
NBCR events. There definitely is a concern among policyholders 
that the next event could be a chemical or a biological attack, 
and if that happened tomorrow, it would be largely uninsured. 
We support this as an offer for make mandatory because even 
though it is included in the bill today, there is little or no 
offering for it. We recognize the insurers' concerns, which I 
am sure my colleagues down the row will talk about. So we are 
glad to see the committee's recognition of those concerns with 
the significantly reduced retention and the step down 
mechanism. It may not be enough to satisfy them, but again that 
is why we are here today, to talk about that. On this subject, 
the details of the bill will really matter. And as the 
committee goes forward, we hope that we can help out with that.
    We think that separate pricing for our clients for NBCR and 
for conventional terrorism risk is very important. Our clients, 
we want to help them make informed decisions, and our objective 
is to make sure they have as many options as possible. We also 
want to see that this extension enhances capacity and doesn't 
undermine it.
    To summarize, and to end up, we support the other 
provisions of the bill, the reduced trigger. We support the 
addition of group life. We support the changes to provide the 
legal certainty and to clarify the application of the cap. We 
as brokers know what can happen when a policyholder and an 
insurer have a disagreement over how these aggregates apply and 
how caps are applied. We support the formation of the 
Commission. And we will continue to provide our data, which we 
hope will help the group find a long-term, permanent solution 
that will benefit all the stakeholders.
    So again Mr. Chairman, I want to thank you, and also 
Ranking Member Pryce, and the other members of the committee 
for your leadership, and for allowing me to appear before you 
today. Thank you.
    [The prepared statement of Ms. Dalton can be found on page 
78 of the appendix.]
    Chairman Kanjorski. Thank you, Ms. Dalton. Now, Ms. Emek.

 STATEMENT OF SHARON EMEK, PH.D., C.I.C. PARTNER, CBS COVERAGE 
GROUP, INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND 
                       BROKERS OF AMERICA

    Ms. Emek. Good morning, Chairman Kanjorski, Ranking Member 
Pryce, and members of the subcommittee. My name is Sharon Emek, 
and I am pleased to be here today on behalf of the Independent 
Insurance Agents and Brokers of America to present our 
association's perspective on terrorism insurance. I am 
currently a managing director and partner at CBS Coverage Group 
in New York, and also the immediate past Chair of the Board of 
the Independent Insurance Agents and Brokers of New York.
    Members of the Big I, as we are known, serve as the 
intermediaries between consumers and insurance companies. We 
see the insurance market from both perspectives. We understand 
its capabilities and constraints.
    I would like to begin by complimenting this committee and 
Congress for passing TRIA in 2002, and its extension in 2005. 
The Federal backstop created by these laws has worked well. 
However, as we all know, TRIA is again scheduled to expire at 
the end of this year. Without a long-term extension, we 
anticipate that coverage would become very expensive and not 
affordable to smaller and mid-sized businesses. And it is not 
just in big cities. It is crucial that all businesses have 
access to affordable insurance to protect them from this risk. 
Without affordable terrorism insurance, businesses are at risk 
of not only losing all their hard-earned assets, but putting 
all their employees and their families in economic jeopardy. 
And I personally have seen what can happen without proper 
protection in a catastrophe.
    The Big I believes that a long-term private-public 
partnership remains essential to the challenge of keeping 
terrorism risk insurance available, and we fully support H.R. 
2761's 10-year extension of the backstop. The terrorism 
insurance market is not ready to stand on its own by the end of 
this year, nor is it likely to be ready until such time as the 
threat of terrorism has significantly diminished.
    All the experts have weighed in on the issue that terrorism 
does not fit within insurable criteria. The Big I believes that 
a long-term extension of TRIA is essential to maintain economic 
security in this country and to provide our businesses with 
certainty and the ability to do long-term planning. Businesses 
do not want to be left wondering whether they will still be 
able to obtain terrorism coverage in a few years. They need 
certainty, not only for peace of mind, but to carry out their 
business.
    For example, some building projects in Manhattan require a 
10-year builder's risk policy, and they need to know that 
terrorism risk will be covered.
    H.R. 2761 also provides a number of provisions that would 
give insurers additional legal certainty, an important element 
to keep coverage affordable and to build more market capacity. 
Moreover, maintaining the current company deductibles and 
copays over the extension period will keep small and regional 
insurance companies competitive, which is essential for 
maintaining available and affordable terrorism coverage. 
Accordingly, the Big I strongly supports these provisions of 
H.R. 2761.
    We also believe that any long-term solution to protect the 
Nation's economy in the face of substantial terrorism losses 
must address potential losses from nuclear, biological, 
chemical, or radiological events. Although NBCR losses are 
perhaps the most catastrophic type of terrorist attacks, 
coverage for these types of losses is currently excluded from 
most terrorism insurance despite policyholders' desires for 
such coverage. H.R. 2761 would fill this gap and further 
enhance TRIA's vital public-private partnership by expanding 
its make available requirement to include NBCR.
    The bill also recognizes the difficulties insurers face in 
providing this by providing a lower deductible and a step down 
mechanism to decrease insurer copayments for large NBCR events. 
We believe these provisions reasonably balance both consumers' 
needs for such insurance and insurers' difficulty in 
underwriting such exposures.
    I would also like to stress the point that terrorism risk 
is not just a big city problem, which highlights the importance 
of maintaining a reasonable trigger level and the program to 
ensure coverage for all communities large and small. H.R. 2761 
returns the trigger to $50 million, which is essential for 
small and regional insurance companies. It will create more 
capacity for these companies, enabling them to compete in 
higher concentrated risk environments. This will have a 
significant benefit for small businesses, whose offices and 
buildings are in these environments, as they will have more 
competitive premiums.
    The Big I strongly supports this position. The Big I 
strongly supports the elimination of the distinction between 
domestic and international terrorism. Domestic terrorism, which 
presents many of the same characteristics as international 
terrorism, is a very serious threat, and coverage for this risk 
is largely unobtainable in the marketplace today. My business 
customers don't see a distinction between foreign and domestic 
terrorism and don't want this distinction in their insurance 
coverage.
    H.R. 2761 wisely includes a number of provisions that 
facilitate long-term solutions over the course of the proposed 
10-year extension, including reports from Treasury at regular 
intervals and a 19-member commission to propose solutions. The 
Big I strongly supports this approach, and is pleased that the 
views of the Independent Insurance Agents and Brokers will be 
represented on the commission. With the program's expiration 
only 6 months away, the need for action is urgent.
    The Big I strongly supports H.R. 2761. This type of 
thoughtful approach is essential to insuring the affordability 
and availability of terrorism insurance.
    We thank Representative Capuano and Chairman Frank for 
introducing this important legislation and thank Chairman 
Kanjorski and Ranking Member Pryce for holding the hearing 
today. We look forward to working with this committee and the 
House leadership to pass this bill.
    Thank you.
    [The prepared statement of Ms. Emek can be found on page 
101 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Emek.
    Our next witness is Mr. Heck.

 STATEMENT OF WARREN HECK, CPCU, CHAIRMAN AND CHIEF EXECUTIVE 
 OFFICER, GREATER NEW YORK MUTUAL INSURANCE COMPANY, ON BEHALF 
 OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES AND 
     THE PROPERTY CASUALTY INSURANCE ASSOCIATION OF AMERICA

    Mr. Heck. Thank you, Chairman Kanjorski, and members of the 
committee. My name is Warren Heck, and I am chairman and chief 
executive officer of Greater New York Mutual Insurance Company. 
I am testifying today on behalf of the National Association of 
Mutual Insurance Companies, NAMIC, and the Property Casualty 
Insurers Association of America, PCI, who share many member 
companies in common. My views are informed by my firsthand 
experience as a major writer of terrorism risk insurance in New 
York City both before and after the horrific events of 9/11 and 
as chairman of NAMIC's TRIA Task Force.
    Before turning to the point on which I wish to focus today, 
the mandatory inclusion of NBCR coverage, let me say that NAMIC 
and PCI strongly support all of the provisions of the new 
extension except for the NBCR provision.
    I would also like to say something about the trigger, which 
we heard testimony on today. Earlier we heard that small and 
medium-sized companies do not have an exposure to the trigger, 
whether it is $50 million or $100 million, because it is an 
industry trigger, and nothing could be further from the truth 
of that. I speak to you as the chief underwriting officer of my 
company, a company that writes many, many properties in New 
York. We are the largest writer of co-op apartment buildings 
and office buildings, and those properties--as you know, New 
York has very large properties. We write properties up to $100 
million on a single building. If we had a loss, a terrorism 
loss, that was under $100 million with a $100 million trigger, 
we would not have TRIA coverage. That would utilize at least a 
third of our surplus. So it might impair the company. And I 
just want to emphasize that the $50 million trigger is 
essential for small and medium-sized companies.
    Getting into NBCR, most respectfully we do not believe that 
the bill should include NBCR coverage. Attacks utilizing 
weapons of mass destruction, NBCR, are the ultimate in 
uninsurable events and can have a qualitatively different 
consequence than non-NBCR risks. In contrast to the attacks on 
9/11, for example, an attack in which a 10-kiloton-suitcase-
type device was exploded 120 feet above the ground would kill 
everyone in the surrounding 30-mile radius and destroy or 
render unlivable all properties in that area. This type of 
threat presents dramatically larger and more concentrated risk 
exposure than any other threat we know of.
    Providing our citizens with financial protection against 
attacks using weapons of mass destruction is fundamentally a 
duty of the Federal Government, not the insurance industry. For 
that reason, except for workers' compensation, all States 
allow, and most commercial property insurance property contain, 
nuclear exclusions. All States also allow nuclear radiation 
exclusions, and most policies contain filed and approved 
nuclear pollution exclusions. That is how the private sector 
insurance industry and its regulators have historically handled 
NBCR risk.
    As for the capital markets, while they have limited 
appetite for non-NBCR terrorism risk, they have zero appetite 
for NBCR coverage. In this regard, they take their signals from 
the reinsurance market. Given the market's response, NAMIC and 
PCI believe strongly that the Congress should not overturn 
State law and rewrite insurance contracts to include these 
uninsurable risks.
    I would also note that demand for private NBCR coverage 
appears to be focused narrowly on large and commercial 
developments in a few at-risk cities. It does not appear to be 
widespread throughout the economy. Moreover, construction 
activity, as we heard today, has recovered from its post-9/11 
losses without this protection. Rolling NBCR into terrorism 
coverage would likely result in significantly increased 
premiums and have the unintended effect of reducing the take-up 
rate for terrorism insurance.
    Requiring any retention of the NBCR risk by primary 
insurers even when the Federal program bears most of the risk 
would be counterproductive if insurers cannot find private 
reinsurance and are unable to resolve a set of very serious 
operational concerns and issues. Importantly, because insurers 
would be immediately required to have capital sufficient to 
back this new risk and would face potentially reduced financial 
strength ratings, we would also expect to see an immediate 
diminution of capacity available to provide this coverage. Many 
small and mutual insurers would probably not be able to raise 
sufficient capital quickly enough to stay in business. The most 
likely outcome would be reduced, not expanded, capacity for all 
lines of insurance as insurers divert capital from other 
products to support this risk they would be required to bear.
    In addition, creating new stand-alone NBCR coverage would 
lead to adverse selection in that only the most vulnerable 
risks would opt for the coverage.
    NAMIC and PCI agree that we should address this issue of 
NBCR risk, but requiring retention of any level of NBCR risk by 
primary insurers, even with a significant level of Federal 
participation, could jeopardize the market for terrorism 
coverage. The 2005 RAND Center for Terrorism Risk Management 
Policy report concluded that NBCR attacks, ``pose a challenge 
that may be most appropriately covered through a direct 
Government insurance program.''
    NAMIC and PCI recommend that rather than rushing in to add 
NBCR to an effectively working TRIA program, Congress should 
commission a study to include the complex economic, legal, 
moral, and practical issues surrounding the losses from weapons 
of mass destruction.
    We also heard today something about the American Academy 
report of about a year ago in which they indicated that a 
nuclear attack in New York could amount to as much as $778 
billion. We heard from several people testifying that the 
insurance industry can handle that. It is hard to understand 
how the industry can handle that when the industry has capital 
which totals about $750 billion. And, of course, we all know 
that capital is allocated to other lines; it is not only for 
terrorism.
    Mr. Chairman and committee members, thank you again for the 
opportunity to talk with you today on this issue of vital 
importance to me, NAMIC and PCI, member companies, 
policyholders and the U.S. economy. The proposal before you 
goes a long way toward establishing an effective long-term 
terrorism insurance plan to maximize the ability of our country 
to recover from terrorist attacks. We urge you to remove the 
NBCR make-available requirement and to move the legislation 
forward. Thank you.
    [The prepared statement of Mr. Heck can be found on page 
109 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Heck.
    Dr. Kunreuther, from the University of Pennsylvania.

  STATEMENT OF DR. HOWARD KUNREUTHER, PH.D., CECILIA YEN KOO 
 PROFESSOR OF DECISION SCIENCES AND PUBLIC POLICY, CO-DIRECTOR 
RISK MANAGEMENT AND DECISION PROCESSES CENTER, WHARTON SCHOOL, 
                   UNIVERSITY OF PENNSYLVANIA

    Mr. Kunreuther. Thank you, Chairman Kanjorski, and members 
of the subcommittee. It is a real honor to be here today, and I 
appreciate the opportunity to have a chance to share some ideas 
with respect to the new bill and some general principles.
    I should say at the outset, our Wharton Risk Management and 
Decision Processes Center has been studying low-probability, 
high-consequence events over the last 23 years, and in 
particular, since 9/11, we have focused on the challenges 
associated with terrorism insurance.
    What I would like to do in these 5 minutes is three things: 
One, to summarize a few key principles which should guide the 
analyses of insurance and other risk-transfer mechanisms for 
dealing with extreme events; two, to indicate what are some of 
the special features of terrorism that need to be considered in 
determining whether this risk is insurable through some public-
private partnership; and three, to discuss how these principles 
and special features tie into the current bill. And I will be 
very brief here because my prepared statement includes a great 
deal more information.
    First on principles, risk-based premiums, principle, number 
one. Insurance and reinsurance premiums should reflect the risk 
to the extent possible, for two principal reasons. One is it 
signals to people living in hazard-prone areas or wherever they 
may live what hazards they face and encourages them to engage 
in mitigation measures to the extent that this is feasible.
    Second principle, equitability. Insurance and risk-transfer 
mechanisms should be fair to insurers, reinsurers, 
policyholders, and the general taxpayer where there is Federal 
participation.
    Third principle: Insurers will want to minimize the 
likelihood of insolvency.
    Fourth principle: There should be sufficient demand for 
coverage so that insurers can feel that they can market it.
    Fifth principle: You should minimize gaming. There 
shouldn't be economic incentives for insurers or policyholders 
to take advantage of provisions of the insurance or risk-
transfer programs by undertaking strategic behavior.
    Let us turn to terrorism. Terrorism really differs from 
other events that are insurable, like automobile or even 
natural hazards. It has certain characteristics. I want to 
highlight three of them here. One is the potential for 
catastrophic losses that we have heard about from many of our 
witnesses throughout the day, and clearly the committee is very 
aware of. It is very hard to put a probability on these events, 
and the losses can be catastrophic. The recent RAND study on 
nuclear bombs concluded that it can cause $630 billion in 
damage to commercial property and workers' compensation claims 
from that kind of an accident. So we have issues associated 
with the possibility of insolvency of some insurers if the 
private sector is going to handle this on its own.
    Second, interdependent security. This is an issue that we 
have been spending a good deal of time on over the last few 
years. Interdependencies can cause problems even indirectly. I 
will give you one example that we are all aware of. In the case 
of the 9/11 attacks, security failures at Boston's Logan 
Airport led to crashes at the World Trade Center, and any 
protective efforts that could have been taken would have been 
useless given what happened. And so we do have this question of 
interdependency.
    And the third--and this really differs from natural 
hazards. There is a shifting to unprotected targets. The 
terrorists may respond to security measures by shifting their 
attention to more vulnerable targets. They may choose those 
less protected targets simply because there may be heightened 
security in other areas.
    There are other aspects as well, but I don't have time at 
the moment to go through them. What I would like to do is just 
highlight a few features of the bill and raise them for your 
consideration as you go forward with respect to these 
principles.
    First, on risk-based premiums. Even though it may be 
difficult to achieve risk-based premiums for terrorism, State 
insurance regulators should not restrict rates unduly to the 
extent that insurers will not want to offer terrorism coverage. 
Currently, some States limit the premiums that insurers can 
charge for terrorism coverage.
    Secondly, on equitability. There are several features of 
this bill that are very attractive on these grounds. First the 
notion of reducing the trigger from $100 million to $50 million 
really helps the small companies. We heard from Mr. Heck and 
other witnesses that this may be a very important aspect.
    Second, including domestic and foreign terrorist attacks as 
issues for TRIA makes good sense because it is very difficult 
to necessarily distinguish between them.
    The third consideration is equitability, which is one I 
know that the committee has considered, has been part of the 
other bills, is who should pay for the losses following a 
terrorist attack? We have done some studies on this in terms of 
the current TRIA legislation and have concluded that anything 
below a $25 billion loss, insurers will fully cover, between a 
$25 billion and a $40 billion loss, insurers and policyholders 
will share the costs with the proportions depending on how many 
policyholders purchase coverage. When the losses are at $100 
billion, the taxpayers will pay about 50 percent of the loss.
    The final principle is to minimize gaming. If TRIA is 
reviewed on a regular basis, this reduces the likelihood of 
insurers engaging in gaming behavior.
    Let me conclude with a few summary points. The extension of 
TRIA is an important and necessary solution to providing 
insurance protection to commercial firms. The current bill 
should address the five key principles that I put forward. The 
bill does create a Blue Ribbon Commission to propose long-term 
solutions for covering terrorism risk by the private industry. 
Such a commission in consultation with the Presidential Working 
Group and financial markets could explore the objectives of a 
terrorist risk-financing program, how to achieve them through 
alternative risk-sharing and risk-reducing mechanisms, such as 
more effectively deploying the capital of reinsurers, 
facilitating the use of terrorism insurance-linked securities, 
the reserving question that has been discussed this morning, 
mutual insurance pools, and developing incentive programs for 
encouraging mitigation and investment in security. Finally, the 
Commission could also examine how other countries cope with the 
terrorism risk to determine whether these approaches merit 
consideration for the United States.
    Thank you very much for the honor to be able to testify 
here this morning.
    Chairman Kanjorski. Thank you very much, Professor.
    [The prepared statement of Dr. Kunreuther can be found on 
page 124 of the appendix.]
    Chairman Kanjorski. Mr. Frank Nutter.

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                     ASSOCIATION OF AMERICA

    Mr. Nutter. Mr. Chairman, I represent today the Reinsurance 
Association of America. It is an honor to appear before the 
committee. The Association represents property and casualty 
companies specializing in assuming reinsurance. We wish to 
applaud you, Mr. Chairman, and Ranking Member Pryce, for your 
leadership on this issue. We also thank the members of the 
committee that have sponsored this legislation.
    Reinsurance is commonly referred to as the insurance of 
insurance companies. One of the most important purposes is to 
protect insurers from catastrophic losses resulting from 
various perils, including hurricanes, earthquakes, fires, and 
floods. To this end, reinsurers have assisted in the recovery 
after virtually every major catastrophic event in the country. 
With respect to the events of September 11th, two-thirds of the 
losses that were absorbed by the insurance industry were passed 
through to the reinsurance industry.
    The RAA strongly supported the adoption of TRIA in 2002 and 
its extension in 2005. We believe the program is necessary and 
working well. The RAA supports H.R. 2761 as an important step 
toward the continuation of this Federal program.
    We understand the committee's interest in understanding the 
impact certain features of the proposal may have on the growth 
of the private reinsurance market under the program and thus 
offer the following observations. With respect to program 
duration, we applaud the bill's sponsor for acknowledging that 
a 2-year extension is commercially very difficult. An extended 
program will provide an opportunity for insurers to continue to 
build capacity. There is no reason to believe at this point 
that private reinsurance will significantly develop over the 
next 10 years, thus a continued public-private program for an 
extended period is appropriate.
    With regard to the copays and deductibles, the RAA supports 
maintaining a 20 percent direct earned premium deductible and 
the 15 percent copay. We believe retentions provide plenty of 
room for the private reinsurance market to operate under the 
program.
    With regard to the event size, the RAA supports lowering 
the event size to provide small companies with meaningful 
protection. The RAA supports the addition of group life as a 
covered line under this legislation.
    With respect to NBCR and the mandatory offer, we have not 
taken a position on this, largely because reinsurance is not 
covered under the legislation. But it should be noted that 
there is even less private reinsurance for NBCR risk than for 
conventional terrorism risk. It is very difficult, and it will 
continue to be very difficult for direct companies to purchase 
private reinsurance to help them manage their 7.5 percent NBCR 
retention.
    We support the creation of a Blue Ribbon Commission to 
study long-term solutions, and appreciate the committee's and 
the bill's supporters inclusion of reinsurance representatives.
    We also support something that has been mentioned by 
several members of the panel, and that is that the committee 
should consider including a key market reform that addresses 
the challenges that the State regulatory system pose for direct 
companies in managing this risk. State regulation of terrorism 
insurance rates and forms can undermine the program's basic 
objectives and should be preempted.
    Primary insurers seek private reinsurance to help reduce 
the large gap in terror coverage they face under the company 
retention and the loss-sharing provisions of TRIA. The industry 
retention under TRIA, which we roughly estimate to be $35 
billion, leaves plenty of room for private reinsurance to 
operate. Five-and-a-half years into this program, the 
reinsurance market is only providing about $6 billion to $8 
billion of reinsurance protection for primary insurance 
companies. Observations by some that TRIA may be infringing on 
the development of a private reinsurance market are, in our 
view, without basis. In fact, the opposite is true. TRIA has 
established definitive loss parameters that provide reinsurers 
with a defined layer in which to share the retained risk of 
loss the primary insurers face.
    Favorable loss experience and surplus growth may moderately 
increase the supply of private reinsurance terrorism coverage, 
but not to the extent that it would fill the current capacity 
needs of the primary industry. NBCR capacity is believed to be 
about 15 to 20 percent of the non-NBCR capacity for terrorism 
provided by the reinsurance market, and when it is available, 
pricing for coverage that includes NBCR is reported to be at a 
significant premium and coverage amounts restricted.
    One key question asked by policymakers is the role that 
capital markets may play in assuming terrorism insurance risks 
through the use of catastrophe bonds, which have been used 
increasingly by the financial markets to absorb and spread 
natural catastrophe risk. I have included in my statement the 
size of the catastrophe bond market. It should also be noted 
that nearly $32 billion of new capital is created in the 
reinsurance area since Hurricane Katrina, yet none of this new 
capital has been dedicated to terrorism risk because the 
capital markets lack any real appetite for terrorism coverage.
    There is no reason to believe that terrorism bonds or 
capital markets are likely to be a significant provider of 
terrorism coverage in the foreseeable future. Due to the nature 
of the terrorism peril, the RAA believes that private-market 
mechanisms alone are insufficient to spread the risk of 
catastrophe terrorism loss in a meaningful way. The RAA 
believes that H.R. 2761 goes a long way towards establishing an 
effective long-term solution. Thank you.
    [The prepared statement of Mr. Nutter can be found on page 
192 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Nutter.
    Our final presenter is Mr. Dennis Smith.

  STATEMENT OF DENNIS W. SMITH, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, MISSOURI EMPLOYERS MUTUAL INSURANCE

    Mr. Smith. Thank you, Mr. Chairman. Chairman Kanjorski, and 
Ranking Member Pryce, thank you for the opportunity to come 
here. Having been a former State senator in Missouri, I can 
appreciate the complexity and difficulty of your decisions, so 
I applaud you.
    Missouri Employers Mutual Insurance was established by the 
legislature in 1993. I am also the first vice president of the 
American Association of State Compensation Insurance Funds. 
There are 26 such funds in the Nation, the Commonwealth of 
Pennsylvania among them. Ohio, New York, Arizona, Texas, 
California, Colorado, Oklahoma, Louisiana, New Mexico and 
several others, all of those are ones that are represented on 
the committee, Mr. Chairman.
    The State funds support the extension of TRIA, and the 
length of the extension you have proposed should bring 
stability to the marketplace. However, for reasons I will set 
out in my testimony, further changes to the trigger levels, 
copays, and deductibles are crucial to the ability of State 
funds to survive financially a catastrophic event.
    State funds for insuring workers' compensation are very 
unique, in a very unique line. In that regard, most State funds 
are the markets of last resort in their respective States, 
therefore, they are always in the market. They cannot deny 
coverage. There are no exclusions. It is a statutory coverage 
including all terrorism events, NBCR and everything else. 
Injuries have a very long tail. Many single-claimant losses can 
result in multimillion-dollar cases, and can last for in excess 
of 40 years. So in that unique nature, Mr. Chairman, one of our 
requests is that you consider the possibility of State funds or 
some element of them to be included on the Blue Ribbon 
Commission because of the unique nature.
    As I said, Treasury Secretary Nason indicated that if we 
wrote risk in a certain area, concentrated risk in a certain 
area, that is not good insurance practice. I will submit to the 
committee, Mr. Chairman, that we do not have that choice by-
and-large. We have to insure them no matter what. Should an 
event, NBCR or other terrorism, occur in a high-risk 
concentration area, solvency of the State fund would be 
threatened, and it would not be there for other normal injuries 
that occur on a regular basis.
    Mr. Chairman, there is a trio of TRIA provisions that holds 
especially negative consequences for State funds in the event 
of a terrorism loss: high program trigger; high deductibles; 
and high copays. The current trigger of $100 million could 
consume the entire surplus of Missouri Employers Mutual and all 
or a substantial portion of other State funds surplus. The 
trigger of $50 million would therefore be an improvement. 
Nevertheless even this reduced trigger, along with deductibles 
and copays, would consume such a large percentage of our 
policyholder surplus, that they could threaten our solvency and 
our rating by the rating bureaus. Leaving the deductibles 
copays unchanged has the effect of substantially mitigating any 
potential relief offered by a lower trigger; therefore, I urge 
the committee to seek further trigger reductions as the 
legislative process moves forward.
    What is the real exposure here? I think it was alluded to a 
couple of times that it would be difficult for an entity to 
have this kind of loss. We had modeling done by Guy Carpenter, 
who is a recognized international reinsurance broker, and they 
said a 2-ton bomb in one of our strategically placed sports 
venues that we have insured on a regular basis over the years 
in a large city in Missouri would create a $200 million 
workers' comp loss. That is just a 2-ton bomb, Mr. Chairman, 
not a 5-ton or not an NBCR event. That would, therefore, make 
us insolvent, and without these funds in place, the taxpayers 
of the State would be required to pick up the costs in the case 
of an insolvency. This is from an attack on the United States, 
we think, and not on our State in particular.
    Mr. Chairman, in your consideration of extending the 
Federal terrorism insurance program, it is crucial to recognize 
the impact that high program triggers, and copays and 
deductibles will have on smaller insurers and on State fund 
insurers. We do not have the discretion to withdraw from our 
market if high triggers, copays, and deductibles create 
unreasonable financial risks for the size of our policyholders' 
surplus. Terrorism exposure under the current terms clearly 
puts safety and soundness of my company and other State funds 
at risk in the event of a catastrophic terrorist attack.
    I urge the committee to adopt lower triggers along with 
lower copays and deductibles for both conventional terrorism 
and NBCR coverage. Such action will provide the meaningful 
backstop necessary to preserve the viability of this important 
coverage when it is most urgently needed.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Smith.
    [The prepared statement of Mr. Smith can be found on page 
210 of the appendix.]
    Chairman Kanjorski. Well, thank you to the whole panel for 
being concise. I think it would be reasonable to say that this 
panel supports the authorization and reenactment and an 
extension of TRIA; is that correct? Did I miss something? That 
is a good question. Are there any specific parts of it that are 
so onerous to any member of the panel that if they are included 
in the final legislation, you would prefer to have no 
legislation as opposed to those onerous parts, such as NBCR?
    Mr. Heck. I could take a stab at that. You know, I have a 
great fear that the inclusion of NBCR mandatory make available 
is going to undermine the program. The program has worked very, 
very successfully. We see the availability is there. The take-
up rate has been increasing. I think if you add NBCR, you are 
going to lose the smaller companies.
    We all know that in an extreme event, there are going to be 
a lot of failures of insurance companies. It is not the kind of 
exposure that private industry can assume, I believe, in 
private enterprise, and if we had a product that we could put 
out on the market, charge a premium, and we think could work 
for us, we would certainly adopt NBCR. It just isn't something 
that private carriers can do.
    Chairman Kanjorski. I tend to agree with your position, 
with one or two elements. One, if we have such an attack on a 
large scale, a $750 billion event, I suspect that the country 
will be substantially shaken to its core, and potentially could 
fail to survive economically as a result of that event.
    Secondly, the experience that we had after 9/11 was that it 
really did take 6 to 12 weeks to even get a piece of 
legislation structured and put together. Then ultimately, 
because of the ridiculous handling by the Administration, it 
took us 14 months to have it on the street and in place. If we 
get a nuclear-type attack or chemical-type attack, this will 
force us to pre-think how things should be handled. At least we 
will have had some thought out there as to how to respond to it 
without just waiting for the Congress to come together and act. 
That is basically our thinking.
    Mr. Heck. Well, you know, I agree with that; however, I 
think we should implement something that is workable. And if 
you really think about what the industry can do, the industry 
could be a great help. It has thousands of personnel that are 
involved in adjusting claims. It can assist in recovery from a 
terrible, horrific event, but it doesn't have the capital to 
pay the losses. And to have companies fail at a time when there 
is such chaos in the country after a horrible event like, you 
know, a weapon of mass destruction killing people and 
destroying a lot of property doesn't seem to make sense. And in 
addition to that, I think we are going to lose a lot of 
policyholders from the take-up rate.
    Chairman Kanjorski. What would you think if we were able to 
lower the deductible to a de minimis level?
    Mr. Heck. I don't think it is the deductible that is the 
problem, I think it is the coinsurance, because if you take 15 
percent of a $750 million event--and, you know, we talk about 
the industry event. There are individual companies that are 
much smaller. They can't sustain that kind of a loss. So really 
it is the coinsurance that is a problem. If you eliminated the 
coinsurance, that could be helpful.
    Chairman Kanjorski. Well, I am pleased to hear your--
    Mr. Kunreuther. Can I make a very brief comment on this, 
Mr. Chairman? There are two key issues, it seems to me, that 
need to be put on the table with respect to NCBR. One is who is 
going to be providing that coverage? It may very well be that 
the larger firms are the ones who are going to have to deal 
with that. And we have heard it this morning. It may be very 
difficult for the small firms to do that.
    The second point relates to the State regulatory agencies 
and what role they will play in terms of restricting rates, 
because to the extent that they say, you can't charge more than 
a certain amount, that could be a problem.
    And then the third point that we are all aware of is that 
it is included in workers' compensation today, and the fact 
that it is included in workers' compensation requires some kind 
of treatment, I think, in terms of how one will deal with that. 
So I just want to put those three issues on the table
    Mr. Heck. Can I make one point about that? If you look at 
all of the insurance companies, there are a lot of insurance 
companies in our country. The number that have either writings 
or capital structures, surplus of $1 billion or more, very, 
very small number. It is under 60. It is under 60 companies in 
the whole United States that have in excess of $1 billion in 
surplus and $1 billion in writings.
    It is essential that we keep the small companies in the 
business of writing insurance, including workers' compensation. 
I believe when you eliminate all the large companies, the 
smaller companies--I read a statistic recently--have over 40 
percent of all the workers' compensation business. So I don't 
think--and if you look at my company, it is a medium-sized 
company. We are the fourth largest writer of commercial 
multiperil in New York State. We insure a great amount of New 
York City. We couldn't stay in the business. So I think it is a 
serious matter if we eliminate the smaller companies.
    Chairman Kanjorski. No, I agree with you. That is one of 
the reasons we wanted to reduce the trigger mechanism, in order 
to get some coverage in there.
    That is a segue into something else that I ask generally: 
reset. Are there any strong feelings, as I have, on reset? And 
if we were to change reset, would that cause you to not support 
the continuation and reauthorization of the legislation? Is 
there anybody that wants to address the reset issue? Or do you 
just want to be politically nice and put it on the shelf?
    Ms. Emek. I would be glad to address it.
    We support the reset, and Superintendent Dinallo's point 
about making it cover Oklahoma City and other areas so that it 
is more equitable makes sense.
    Chairman Kanjorski. I appreciate you are generally in the 
New York area, so stay consistent. There is nothing wrong with 
that. But if we were to change it, make it only prospective or 
actually do away with it as it exists today, would that cause 
you not to want us to pass an additional extension?
    Ms. Emek. Absolutely not. We would totally still support 
passing the legislation. I would like to just add, the same 
thing holds true for NBCR. I think that is the first 
legislation. It is better to have something in place than to 
have nothing in place. We have to be proactive. We can fix it 
as we go along, as we see the take-up rates in NBCR. So the key 
here is to get this legislation passed as quickly as possible, 
and then we can fix things as we see things come up.
    Chairman Kanjorski. Very good.
    Mr. Racicot. Mr. Chairman, can I just offer one thought or 
comment about both of those questions?
    Chairman Kanjorski. Sure.
    Mr. Racicot. I believe that there is a certain 
misimpression about retention levels and deductibles 
contributing to capacity. Simply by increasing those numbers, 
cosmetically it appears at first glance that somehow private 
markets have more invested in the process. Literally the reason 
that you see more coverage available, more take-up rates and a 
decline in cost is because TRIA is in place and offers some 
boundaries to the potential insolvency or financial risk to the 
individual companies regardless of size. So it is a fact that 
the reset mechanism will, in fact, increase capacity for those 
very same reasons. But I don't know a company that I work with 
that writes to 20 percent of their direct written premium 
because they are placing 20 percent of their company at risk by 
doing so. So you can increase that to 25 percent or 30 percent 
if you want, but it will not provide one additional dollar. In 
fact, it may diminish what is available because they have to 
plan to that number.
    And that is why this notion that somehow just simply 
cosmetically rearranging the numbers, which really have no 
relationship to anything to begin with, will somehow increase 
capacity is a fallacy. And that is the sad circumstance 
surrounding, I think, some of the testimony this morning we 
heard from Treasury. They make that assumption. They simply 
don't want to be confused by the facts.
    Chairman Kanjorski. Thank you very much, Governor.
    I will pass it on to my good friend, Ranking Member Pryce, 
so we can keep to our time constraints.
    Ms. Pryce. Thank you very much, Mr. Chairman. And I want to 
add my thanks for the panel's patience. It has been a long 
morning and dragging into a longer afternoon.
    I am sorry that I missed your testimony, Governor Racicot, 
and Mr. Nassetta. Is that how you say it? Nassetta. All right. 
It is the glasses.
    Anyway, but I do appreciate the insights that we have all 
gathered today from your expertise.
    Now, it is no mystery to anyone that many people on this 
side of the room up here believe that this is too long a bill 
in duration; that we as a Congress need to oversee these types 
of programs on a more regular basis; that 10 years doesn't even 
give us the institutional memory, as you once referred to it, 
Mr. Chairman, of having the same group of members even around 
when the next reauthorization comes.
    And, Professor Kunreuther, you mentioned something in your 
testimony that I am curious about, and I am not even sure what 
it means, but you use the term ``gaming.'' I mean, is that in 
the common parlance definition of gaming? Or what is gaming, 
and how would a shorter duration help us to eliminate gaming?
    Mr. Kunreuther. Well, I appreciate the fact that term can 
be interpreted in many different ways, particularly the word, 
``game,'' so let me explain what at least we have done in terms 
of raising that question.
    There are opportunities, particularly if a program is 
permanent, for some insurers, particularly depending upon their 
deductible surplus levels, to actually take steps by insuring 
very, very large blocks of property in one area where, after it 
actually exceeds the deductible surplus level, they only have 
to pay 10 percent of the loss because then it gets transferred 
on to other commercial policyholders. And we point that out, 
and I point that out in my written statement as to how that 
might actually work. But what essentially it does is it says 
you don't want to have a situation which is inequitable because 
everyone else is paying for the losses simply because one 
insurer is then only having to pay 10 percent and all the other 
policyholders pay more.
    Now, that will logically not happen if it turns out a 
program is reviewed on a more regular basis or--and the Blue 
Ribbon Commission is a part of that whole process--if there is 
a way of taking a look at that. If there was a permanent 
program in place, there could easily be incentives for that to 
happen.
    So we just point that out, not necessarily saying that it 
will happen. We have some caveats as to why it may not happen. 
But we also wanted to raise the issue in general that 
strategizing in the context of a program is something you would 
want to avoid. This is one example of that, and the fact that 
you could have a more regular review--and I don't want to come 
down on any terms of time period, but rather to say, you know, 
that it is a regular review, and also you have people looking 
at the program is an important element in terms of going 
forward.
    And I would be happy to talk further with obviously you and 
other members about that at another time. I don't want to 
monopolize--
    Ms. Pryce. Okay. I think that is one of many reasons that 
we probably would prefer a shorter duration.
    I am also very interested in anyone on this panel's 
impressions as to the reserving that would be required as a 
result of some of these mandates and how we might better 
prepare the insurance industry with the tools they need in 
terms of our tax code and whatever else we could do to make 
that more sensible. And whoever wants to go first may.
    Mr. Heck. I could comment on that. I think if we had such a 
program to enable carriers over time to set money aside, we 
know that these extreme events are not frequency events, they 
are severity. They may not happen for 5, 10, or 20 years, and 
if companies have the ability to set reserves without paying 
taxes on those funds, they could accumulate enough money to pay 
a loss when it does occur. So it is something worth 
considering.
    Ms. Pryce. And so what if they don't have these reserves? 
Then who pays the loss? I guess I don't understand--
    Mr. Heck. They take it out of their surplus. The money that 
goes into surplus is taxed money by the time it gets into its 
surplus, and so it accumulates at a very, very slow pace. If 
there is a way to revise the tax code so that companies can set 
reserves prior to declaring those moneys as net income, then 
they can set that money aside. So it is a way to build the 
reserve for an eventual event that could be catastrophic, and 
it is really a very good idea.
    Ms. Pryce. Anybody else care to comment on that?
    Mr. Nutter. If I could just offer a comment. There are 
several moving parts here. I just remind you that one of the 
things that Superintendent Dinallo mentioned is that you do 
have accounting guidance that also is at play here. The 
insurance commissioners and the NAIC have statutory accounting 
requirements which do not permit this now, and the premise for 
not having reserves of this nature is that they are so 
contingent in nature that it is so difficult to assess what the 
risk is, and the probability of loss, that it is difficult to 
set the reserves. So there is--
    Ms. Pryce. According to the accounting guidance?
    Mr. Nutter. According to the accounting guidance, that is 
right.
    Mr. Racicot. Congressman Pryce, just one other thought that 
you might keep in mind, and that is when you allocate capital 
to such reserves, you obviously are removing it from other 
possibilities, more diverse products, more coverages, more 
places, more time. So there is a competing imperative that one 
has to keep in mind as well.
    Ms. Dalton. I would like to just also mention the impact 
that the rating agencies have on those reserves that do get set 
aside. They have an awful lot of influence in how the insurers 
behave and what kind of capacity they will set aside for 
catastrophic risks, whether it is terrorism or earthquake or 
flood.
    And also another factor that is definitely impacting 
capacity is the fire-following laws in some of the States--
    Ms. Pryce. Which laws?
    Ms. Dalton. The fire-following laws. Those laws also have--
for example, in New York, have a very serious impact on how 
insurers allocate capacity.
    Ms. Pryce. Okay. All right.
    Mr. Kunreuther. I would like to make a very brief comment 
that if you don't have reserves, then insurers will have to 
hold more capital, and as a result of that, premiums will go 
up. So I think there are these trade-offs. Without getting into 
the details on how the reserve system would work, the less 
opportunity insurers have for this, the more they will have to 
hold capital on their own, and the higher the premiums would 
have to be to reflect the fact they have that capital on hand.
    Ms. Pryce. Thank you.
    My time has expired. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much. Ms. Pryce.
    I want to thank the panel for their patience again; we 
appreciate it.
    Professor, I just want to comment on the University of 
Pennsylvania. I am very prejudiced toward it because I have a 
peculiar history in my family. My father was a Wharton 
graduate, 1919, and law, 1922. My brother was a graduate in the 
1960's of the Wharton School, and I have a nephew who went 
there. So I do not know that there is any other family, 
certainly in Pennsylvania, with three generations at the 
Wharton School and university law school.
    Mr. Kunreuther. Thank you very much. We would love to 
invite you to visit us.
    Chairman Kanjorski. We will be, and particularly as we take 
up other insurance issues, which the committee is going to be 
very active on. I look forward to using your great wisdom. 
Thank you very much.
    The committee stands adjourned. Incidentally, if members 
have additional questions, they can submit them in writing. 
Without objection, the hearing record will remain open for 30 
days for members to submit written questions to the witnesses, 
and to place their responses in the record.
    Chairman Kanjorski. The hearing is adjourned.
    [Whereupon, at 1:50 p.m., the hearing was adjourned.]

                            A P P E N D I X


                             June 21, 2007
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