[Senate Hearing 110-907]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-907

 
             EXAMINING THE TERRORISM RISK INSURANCE PROGRAM

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

MAINTAINING AND IMPROVING THE NATION'S SECURITY AND PROSPERITY THROUGH 
THE PUBLIC-PRIVATE PARTNERSHIP CREATED BY THE TERRORISM RISK INSURANCE 
   ACT OF 2002 THAT PROTECTS AMERICAN WORKERS, JOBS, BUSINESSES, AND 
                   INFRASTRUCTURE FROM FUTURE ATTACKS


                               __________

                      WEDNESDAY, FEBRUARY 28, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                   Alex Sternhell, Professional Staff
          Julie Y. Chon, International Economic Policy Adviser
                    Mark Osterle, Republican Counsel
                    Andrew Olmem, Republican Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor


                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 28, 2007

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Reed.................................................     5
    Senator Enzi.................................................     6
    Senator Brown................................................     7
    Senator Bennett..............................................     8
    Senator Martinez.............................................     9
    Senator Carper...............................................     9
    Senator Bunning..............................................    10
    Senator Menendez.............................................    11
    Senator Schumer..............................................    13

                               WITNESSES

Charles Clarke, Vice Chairman, The Travelers Companies, Inc., on 
  behalf of The American Insurance Association...................    14
    Prepared Statement...........................................    42
    Response to written questions of:
        Senator Enzi.............................................   162
        Senator Bunning..........................................   166
Thomas Minkler, President, Clark-Mortenson Agency, Inc., on 
  behalf of the Independent Insurance Agents and Brokers of 
  America, Inc...................................................    16
    Prepared Statement...........................................    47
Michael J. Peninger, President and Chief Executive Officer, 
  Assurant Employee Benefits, on behalf of the American Council 
  of Life Insurers...............................................    18
    Prepared Statement...........................................    56
    Response to written questions of:
        Senator Shelby...........................................   170
        Senator Enzi.............................................   173
James H. Veghte, Executive Vice President/Chief Executive Officer 
  of Reinsurance General Operations and Chief Executive Officer 
  of XL Reinsurance America, Inc., on behalf of the Reinsurance 
  Association of America.........................................    19
    Prepared Statement...........................................    62
    Response to written questions of:
        Senator Enzi.............................................   173
        Senator Bunning..........................................   175
Michael McRaith, Director, Illinois State Division of Insurance, 
  on behalf of the National Association of Insurance 
  Commissioners..................................................    21
    Prepared Statement...........................................    72
Travis B. Plunkett, Legislative Director, Consumer Federation of 
  America........................................................    23
    Prepared Statement...........................................    84
Arthur M. Coppola, President and CEO, Macerich Company, on behalf 
  of the Coalition To Insure Against Terrorism...................    25
    Prepared Statement...........................................   132
Janno Lieber, Senior Vice President, World Trade Center 
  Properties.....................................................    27
    Prepared Statement...........................................   141
Don Bailey, CEO, Willis North America, on behalf of the Council 
  of Insurance Agents and Brokers................................    29
    Prepared Statement...........................................   149

              Additional Material Supplied for the Record

Statement from the National Association of REALTORS.............   178
Hot Topics from the National Association of REALTORS............   185
Statement from the Property Casualty Insurers Association of 
  America........................................................   193


             EXAMINING THE TERRORISM RISK INSURANCE PROGRAM

                              ----------                              


                      WEDNESDAY, FEBRUARY 28, 2007

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:36 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order, if we can. 
I thank all of you for being here with us this morning.
    Earlier this year, upon assuming the chairmanship of this 
Committee, I stated that the Committee would focus on two 
overarching goals: maintaining and improving our Nation's 
security and prosperity. The subject of today's hearing--
namely, a public-private partnership created by the Terrorism 
Risk Insurance Act of 2002 to protect American workers, jobs, 
businesses, and infrastructure from future terrorist attacks--
is, in my view, critical to both the security and prosperity of 
our Nation.
    This morning, the Committee will hear testimony from 
policyholders, insurers, and regulators, those who have 
firsthand knowledge of the challenges associated with buying, 
selling, underwriting, and regulating terrorism risk insurance. 
I would like to thank our witnesses--we have a long panel here 
this morning--for being here. I would also like to thank them 
for the testimony they are going to give this morning on this 
legislation.
    Many of my colleagues on this Committee have worked very, 
very hard for a number of years on this issue. We have 
collaborated on a bipartisan and bicameral basis to enact both 
the Terrorism Risk Insurance Act, known as TRIA, in 2002 and an 
extension of the TRIA program in 2005. And I would be remiss at 
this moment if I did not thank my colleague from Alabama, who 
has some strong views on the issue and has been tremendously 
cooperative and helpful in trying to put together some 
worthwhile legislation in this area.
    In 2002, the Senate voted by an overwhelming margin of 86-
11 to pass TRIA. In 2005, the Banking Committee, under the 
chairmanship of Senator Shelby, reported by a unanimous vote 
legislation to extend TRIA for an additional 2 years. The bill 
later was approved by the full Senate, also by a unanimous 
vote.
    I think it is important to take a moment to talk about the 
importance of TRIA and why I believe we must act again to 
establish a more permanent Federal initiative to provide 
coverage from potential terrorist attacks. In the aftermath of 
9/11, the market for terrorism risk insurance disappeared--
disappeared--and the American economy dealt with a great deal 
of uncertainty. We repeatedly heard from businesses, large and 
small, from labor unions, manufacturers, builders, and lenders, 
from the nonprofits like universities and hospitals, and from 
insurers about the need for the Federal Government to help 
stabilize the market and ensure the availability of affordable 
insurance against the risk of future terrorist attacks.
    The critical U.S. industry sectors were in dire need of 
terrorism insurance to obtain credit, loans, and investments 
necessary for their normal business operations. Without 
terrorism risk coverage, the economy faced instability and 
dislocation, which is exactly what the terrorists hope to 
accomplish in many ways. The policyholder community and 
insurers together called for a response to the 9/11 attack on 
our Nation and our Nation's economy. Congress listened and we 
acted in 2002, creating the Terrorism Risk Insurance Act.
    TRIA created a 3-year program, as many of you will recall. 
The Terrorist Risk Insurance Program, located within the 
Department of Treasury, established a Federal backstop against 
catastrophic losses in the property and casualty insurance 
marketplace. In December of 2005, a 2-year TRIA extension was 
signed into law. The provisions of that bill will expire, as 
many of you know, on December 31st of this year--hence, the 
hearing today and the sense of urgency about moving rather 
quickly here.
    Under TRIA, the Federal Government shoulders a share of the 
financial risk of future attacks. The burden sharing makes 
sense, in my view. These attacks are against us as Americans 
and our way of life. The attacks are aimed at the American 
public and, therefore, require, in my view, a public role in 
addressing this threat in light of the circumstances we face. 
But TRIA also requires that the private sector bear a 
significant financial responsibility and help to impose market 
discipline in the claims and underwriting processes.
    In the past 5 years, we have heard an overwhelming response 
from policyholders across the country. TRIA has worked, and it 
has worked very, very well. According to a recent study by the 
Wharton Risk Management and Decision Processes Center at the 
University of Pennsylvania, roughly 50 percent of commercial 
enterprises through 2005 purchased terrorism insurance. 
According to Marsh, Inc., and cited by the President's Working 
Group on Financial Markets, take-up rates have increased from 
23 percent at the beginning of 2003 to 64 percent at the end of 
2005 while the price of terrorism insurance has actually 
declined. The median cost of property terrorism insurance was 
25 percent lower in 2005 than the 2004 rates. These trends 
demonstrate, in my view, that TRIA has achieved its primary 
goal: continued availability and affordability of insurance 
against future attacks. What we have seen and what we may hear 
and what many of our witnesses will explain today is that the 
re-emergence of limited terrorism risk insurance would not have 
happened without the enactment of TRIA. We will also hear that 
the private sector does not have the capacity to provide 
affordable terrorism risk insurance on its own without the 
existence of a Federal backstop.
    In a 2005 Treasury Department survey, nearly 50 percent of 
insurers said that they do not plan to write terrorism 
insurance after TRIA expires. So the question before us today 
is: Do we do nothing to financially protect our country against 
future attacks? Do we provide another short-term extension to 
meet the current market needs? Or do we try to create a longer-
term solution for the security of our people and our economy? I 
firmly believe that doing nothing is simply not an option and 
one that cannot even be considered here.
    The world has fundamentally changed since 9/11. Nearly all 
of the data and the experts say that there is no reason to 
think that private forces alone could and would provide against 
this very unique risk. We have every reason to believe that the 
Federal role for terrorism risk insurance coverage is needed 
for the foreseeable future. Several industrialized countries 
have already recognized this fact. The United Kingdom, France, 
Germany, and others have created permanent Government programs 
to manage terrorism risk. We know from the tragic attacks in 
London, Madrid, India, and Indonesia--and elsewhere, I might 
add--that terrorism has increased since 9/11. In a world of 
more terrorism, we should be providing more security, not less.
    Our Nation has truly been fortunate enough not to suffer 
the tremendous loss of life or destruction of property that we 
endured on September 11th of 2001. But by no means has the 
political climate, either domestically or abroad, returned to a 
sense of normalcy. We are engaged in a violent conflict in 
Iraq, and we have seen desperate terrorist attacks abroad in 
Europe and elsewhere. The threat of terrorism is not simply a 
short-term threat. It has potential to be a long-term reality. 
I think most of us recognize that.
    As a result, I believe that we must act once again to 
ensure that stability, availability, and affordability remain 
in the market for terrorism risk insurance. But I do not 
believe that we should continue to extend the program for 
short-term periods, causing further uncertainty and confusion 
in our economy. A more permanent Federal commitment, I think, 
is not only something we should do but something we must do. I 
am committed to finding a solution that will address the long-
term security needs of our people and our economy and ensure 
that our Nation is best prepared to deal with future terrorist 
threats. I believe that one of the most fundamental obligations 
of our National Government is to provide security and 
opportunity for our fellow citizens.
    With the expiration of TRIA approaching later this year, it 
is important to gather information about the current market for 
terrorism risk insurance, to assess the impact that TRIA has 
had in this marketplace, and to develop some ideas for creating 
more permanent terrorism risk insurance. Today's witnesses 
offer an extraordinary range of expertise and experience that I 
think can be very useful to this Committee as it undertakes 
this important effort, and I thank them again for their 
attendance and participation.
    More than 5 years after the tragic events of 9/11, we 
continue to see a need to provide a Federal backstop to protect 
our people, businesses, and critical infrastructure from these 
attacks. We have heard repeated dire warnings that terrorism 
will return to U.S. soil. We must be prepared against this 
threat, and in my view, providing insurance against those 
attacks allows our economy to function and is a critical part 
of our national preparedness. And I believe that by working 
together we can establish a more permanent solution.
    So, again, I thank my colleagues for their work over the 
years on this issue, many of whom on this Committee were very 
involved as we went through this process now twice before. And, 
again, my thanks particularly to Senator Shelby, who has been a 
leader on this issue over the last number of years as he 
chaired this Committee.
    So, with that, let me turn to my colleague from Alabama for 
any opening comments he has. I will then turn to my colleagues 
for any comments they might want to make on the subject matter. 
And I would ask them to be relatively brief, if they could, so 
we can get to our witnesses and their statements this morning.
    Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Chairman Dodd.
    In November 2002, Congress passed the Terrorism Risk 
Insurance Act, or TRIA, to address perceived failures in the 
terrorism risk insurance market stemming from the September 
11th terrorist attacks. The stated purpose of the legislation 
was to establish a temporary Federal program that would ensure 
the widespread availability and affordability of terrorism risk 
insurance. This temporary program was intended to provide, and 
I quote, ``a transitional period for the private markets to 
stabilize, resume pricing of such insurance, and build capacity 
to absorb any future losses.''
    This year, the Committee will consider once again whether 
to reauthorize the Terrorism Risk Insurance Program. The 
reauthorization of a program typically involves a careful 
review of the program's success at fulfilling its legislative 
mandate. A review of the Terrorism Risk Insurance Program, 
however, is particularly important due to the disincentives 
that the program creates for the private sector to devise 
solutions to terrorism risk. Because the program involves a 
commitment by the Federal Government to pay for a large portion 
of the losses incurred by a terrorist attack, the market has 
significantly less incentive to create new ways to manage 
terrorism risk.
    To prevent such crowding out of private sector solutions, I 
believe we need to ensure that the program is focused on 
addressing the market failure described in its legislative 
purpose. Considering the dramatic improvement in our Nation's 
economy and insurance market since TRIA was enacted, it appears 
that the program has made substantial progress in satisfying 
its purpose. In its report to the Committee, the President's 
Working Group on Financial Markets reported that the 
availability and affordability of terrorism risk insurance has 
improved since 9/11. It found that prices for terrorism 
insurance have fallen and take-up rates have increased. In 
light of the improved condition of our terrorism insurance 
market, additional scrutiny of the scope of the Terrorism 
Insurance Program appears warranted here.
    Finally, as we begin our review of TRIA today, we should be 
mindful of the inherent limitations of Government solutions to 
complex and technical problems. We should recognize that it is 
very unlikely that Congress can create an insurance program 
better than market forces, given the opportunity to do so. 
Congress might be able to devise a quick fix to a temporary 
market failure, as we have done, but in the long run, the most 
durable solution will in all probability come from our private 
sector. The creativity of our financial markets and their 
ability to innovate are factors that should be given great 
weight in this debate. Although we are likely to hear testimony 
today about the difficulties in insuring against terrorism 
risk, it is important to remember that innovation springs from 
necessity. While we need to appropriately address any market 
failures in the insurance industry, we must also encourage at 
the same time the facilitation and innovation beyond the 
Government program as well.
    I want to welcome all of our witnesses today, and, Chairman 
Dodd, I appreciate you bringing this to our attention and 
calling this hearing.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you very much, Mr. Chairman. 
Thank you, gentlemen.
    I, too, want to commend Chairman Dodd and former Chairman 
Shelby for their leadership on this issue. Terrorism, 
regretfully, is still with us. In fact, open-source reporting 
suggests that Zawahiri and Bin Laden are somewhere in Pakistan 
attempting to re-establish their network. So this threat has 
not gone away. In fact, many people have suggested that it is 
high probability that the United States will be attacked again. 
So this is not an academic discussion today.
    I think TRIA has worked very well. I think it should be 
extended on a more permanent basis. I think also, too, there 
are particular areas of concern that have to be addressed. One 
is workmen's compensation. Typically, the incidents that we 
have seen involve a concentrated attack on one facility 
involving in some cases employees of just one company or 
several companies. The workers' compensation insurers in those 
cases have an unusual liability and exposure. In fact, in my 
home State of Rhode Island, we have one agency, a quasi-
governmental agency, Beacon. There are 26 other States, 
including New York, Utah, Colorado, Wyoming, Kentucky, Hawaii, 
Ohio, Pennsylvania, Idaho, and Montana, that have a similar 
arrangement. If there was such an incident in any one of these 
States, it is quite possible that that insurer would fail 
without reinsurance, and that failure would be now the burden 
of the State or some other ad hoc arrangement. So I do think we 
have to continue support this effort.
    A final point I will make. We are concerned on this 
Committee--and I think the Chairman is going to lead us in our 
efforts--about the competitiveness of American financial 
markets and other markets around the globe. TRIA is one of 
those factors that provides a certain degree of certitude, 
safety, predictability that gives our market strength vis-a-vis 
other markets. I would hate to see a situation where we take 
this away and create competitive incentives to move business 
into other markets other than the United States.
    For all these reasons, I think we have to press forward on 
this reauthorization. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Reed.
    Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Mr. Chairman. You and I got to 
head up the Subcommittee under the direction of Chairman 
Sarbanes and Ranking Member Gramm that did the original TRIA 
bill.
    Chairman Dodd. Right.
    Senator Enzi. And I am glad that we are having this 
hearing. I hope that the testimony today and in future hearings 
on this subject will help us understand the state of the 
insurance industry since the 9/11 attacks, and specifically 
since the last reauthorization of the Terrorism Risk Insurance 
Act.
    Following the September 11th attacks, our insurance market 
suffered losses of approximately $32 billion, an enormous 
amount by any standard. The Committee responded by crafting 
legislation to create a shared public-private partnership to 
allow the markets to stabilize and make terrorism insurance 
available again. This program was envisioned to be limited and 
temporary; however, as I am sure some witnesses will testify 
today, it has taken longer than expected for the markets to 
recover, so now in 2007, this Committee is meeting to consider 
another reauthorization of the TRIA program, or possibly to 
make it permanent.
    As this Committee moves forward on this topic, I have some 
concerns that I will be focusing on. The first is taxpayer 
liability. In 2001, I supported a bill, along with other 
Members of this Committee, including Chairman Dodd, that would 
have created a temporary program containing explicit 
protections for the taxpayer in the case of terrorist attacks 
and lawsuits resulting from an attack. The bipartisan bill 
never came to a vote on the Senate floor. In fact, it never was 
allowed by Majority Leader Daschle to actually be introduced.
    Many of the taxpayer protections, including a ban on 
punitive damages and the regulations of out-of-court 
settlements, were later added. I believe these protections 
against punitive damage payments and settlements are very 
important to the American taxpayer, and I will be looking to 
ensure that they remain intact should this Committee consider 
reauthorization legislation in the future.
    I also supported the 2005 TRIA reauthorization because it 
represented a significant scaling back of the program, allowing 
the private market to grow in its place. And studies have shown 
that the insurance market has grown significantly in response. 
The 2006 report on terrorism risk insurance conducted by the 
President's Working Group on Financial Markets found that firms 
have had more success modeling and managing terrorism risk. 
Reinsurance capacity continues to grow, and insurance 
companies' net worth is rising. That is positive progress as a 
result of the 2005 reforms that increased event triggers and 
deductibles for the insurance companies and excluded number of 
eligible insurance lines. However, I am concerned that this 
progress will slow down or stop if the TRIA program is not 
allowed to continue along this projection.
    In 2005, the Congressional Budget Office stated that if the 
Government continued to subsidize terrorism insurance, it would 
probably contribute to deferring the private sector's long-term 
adjustment to the increase in risk. This is a significant 
issue, especially if some are considering an expansion of the 
program. We must allow the markets to continue to innovate and 
price terrorism risk accurately. I do not think this can be 
done with such a large Government presence in the marketplace. 
In a free market, prices are accurate and competition leads to 
innovation. I am worried that the continued presence of the 
TRIA program would distort the market in both price and 
competition. And as this Committee evaluates TRIA, I will be 
looking for ways to allow the market to grow and strengthen 
without large Government subsidies and without leaving the 
taxpayer on the hook.
    I thank you, Mr. Chairman.
    Chairman Dodd. Thank you.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman and Senator Shelby. 
I commend you for your leadership in scheduling today's hearing 
on such an important topic. I appreciate the witnesses for 
taking the time to come and share their perspectives on the 
proper roles for the Federal Government and for the private 
sector in responding to these terrorism risks.
    I think these roles are dynamic ones. Each year we learn a 
little more. Each year our economy and our Government adapt and 
change in response to the challenges we face. I think this is 
certainly true of the insurance market.
    In the wake of September 11th, we were, of course, stunned 
and uncertain as to what the future would hold. But the economy 
as a whole soon regained its footing, even though the economy 
since then and the recovery since then has benefited some 
Americans a lot more than it has others.
    We talk a lot today about risk. Many families in Ohio are 
facing different kinds of risks--lost health care, lost jobs, 
lost homes--and are struggling to make ends meet. While this 
may not seem to be the topic of today's hearing, it should 
always be relevant. I want to be absolutely sure that the 
burden assigned to those people personally who are taking risks 
in their lives every day, that the burden assigned to them as 
taxpayers in my State and elsewhere is as small as possible.
    The financial condition of the insurance industry, by 
contrast, seems to have grown stronger by many measures over 
the past few decades. While this country has experienced 
substantial losses due to terrorism and hurricanes, the 
headlines are not necessarily reflected in the bottom lines. At 
the same time, the ability of financial markets to disperse 
risk has become much more sophisticated over this period. This 
is not necessarily an unmitigated good, but it is a reality 
that we should bear in mind. We need to be careful that 
whatever action we take to extend the Terrorism Risk Insurance 
Program does not interfere with the assumption of more and more 
risk by the private sector. I am not sure that the Federal 
Government should be in the reinsurance business forever. I 
think our goal should be to withdraw the Federal Government 
from the market over time and permit private mechanisms to 
assume the risks now borne by taxpayers.
    I do not pretend to know at this point how long it might 
take or the exact route we need to follow to get there, but I 
think that needs to be our ultimate goal. I hope today's 
witnesses can help us find answers.
    Chairman Dodd. Thanks very much, Senator.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman. I have been 
honored to be a cosponsor with you of this legislation in the 
past and will do what I can to help move it forward. The one 
thing I think we should remember in this overall debate is that 
insurance companies do not take risks. Insurance companies 
manage risk. Insurance companies spread risk. Insurance 
companies make risk affordable. But if there is a huge risk 
that could eliminate the company, the company will not take it. 
And the cost, potential cost, of a huge terrorist act is so 
great that insurance companies will not take it.
    Now, by putting a cap on the amount of risk that is 
involved by virtue of the TRIA legislation that we passed, we 
have allowed the market that can be quantified, can be spread, 
can be made affordable to thrive. I am afraid if we take that 
cap off so that the insurance companies are faced with the 
entire risk, they will simply say, ``We cannot take it. It is 
too damaging to our shareholders. We will not write policies 
above a certain level.'' And if we do that, ironically, and 
there is a terrorist attack, the taxpayers will pay for it.
    What we have done with TRIA is create, in effect, a huge 
deductible for the Federal Government, and we have said, OK, 
whatever the level is set at--$80 billion, $100 billion, 
wherever it might be--this amount the insurance companies 
cover. Well, that amount we can handle. So if the price is 
higher than that, we have created a deductible for the taxpayer 
to say, well, we only have to pay whatever above that amount.
    I was here during 9/11. Most of us were. We remember the 
emotions that followed that. The attitude in the Congress was: 
Whatever it takes, we will pay. Whatever it costs to rebuild 
New York City, we will pay it. And there was no deductible.
    So for those who say, ``Gee, we do not want to put the 
taxpayer at risk,'' my attitude is we are doing the taxpayer a 
major favor when we are creating a very large deductible and 
thereby making sure the taxpayer does not have to pay the whole 
bill if we do not have TRIA and we have all of the problems of 
a future attack.
    It is for those reasons, Mr. Chairman, that I have been 
with you on this legislation in the past, and I will do what I 
can to help move it forward now.
    Chairman Dodd. I thank you very much, Senator Bennett. You 
have been a great asset as we have--we have had clarity talking 
about this issue and the importance of it.
    Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Thank you, Mr. Chairman. I, too, 
appreciate this very timely hearing, and I have been a support 
of terrorism insurance, understanding that, as has been pointed 
out, the private markets cannot always adjust to a terrorism 
event, as we saw on 9/11. And more recently, I also want us to 
make sure that I allow the group to know my interest in another 
problem that we have had. This past couple of days ago, 
Governor Crist led a group of Southern Governors, the Southern 
Governors Association, representing 15 States, Puerto Rico, and 
the Virgin Islands, passing a resolution asking for the 
creation of a national catastrophic fund relating to natural 
disasters and other issues that have been difficult for the 
private market to undertake. While that is a completely 
separate issue and should not be merged into this discussion 
today of this particular issue, which I know is so important 
and I support its continuation, I did want to highlight this 
issue for the Committee because it is so important to my home 
State of Florida where truly a crisis in insurance is 
unfolding, and one that is impacting not only everyday families 
as they struggle to make ends meet, but really is having a 
broader impact on business and the quality of life.
    So I hope at some point in the future we can also address 
this very, very serious issue facing the State of Florida.
    Chairman Dodd. Senator Martinez, I think I have told you 
and I have told your colleague, Senator Nelson, as Chair of 
this Committee, that we will have a hearing on the subject 
matter you raise here this morning. You are right. It is a 
separate issue, but a very, very important one, and certainly 
one that is deserving of this Committee's attention. So we are 
planning to schedule a hearing to talk about that and the ideas 
and suggestions coming out of the States that are most directly 
affected by it. So we look forward to working with you and your 
colleague as to a witness list and others so that we will have 
a good, comprehensive hearing on the subject.
    Senator Martinez. Well, thank you, Mr. Chairman. That is 
terrific. I appreciate that very much. Senator Nelson and I are 
working very closely together on this. He has expertise, having 
been Commissioner of Insurance in our State, and so we will 
look forward to working with you on a hearing.
    Chairman Dodd. Thanks very much.
    Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman. I will be very brief. 
We have got a lot of witnesses here. I am anxious to hear from 
them, as I am sure we all are.
    Mr. Chairman, you and our Ranking Member, and certainly 
Senator Bennett, have been very active on this front for a 
number of years. I hope I serve long enough in the Senate that 
we do not have to have this kind of program and that it is 
something that we talked about in the old days that we just do 
not need anymore. That would be a blessed event. But I thank 
you, especially, Mr. Chairman, for your leadership.
    I met earlier today with some of the Commissioners, the 9/
11 Commissioners--Lee Hamilton and others--to talk about the 9/
11 bill that is back on the floor today to sort of clean up and 
finish up the implementing and trying to enact the last 
recommendations of the 9/11 Commission that we did not take up 
before. It is an important bill that enjoys strong bipartisan 
support. While on the one hand we prepare to address the 
calamity or catastrophe, should it occur, through TRIA, through 
our insurance and reinsurance program, on the other hand, we 
are working to make sure that we prevent those kinds of events. 
And so the two really go hand in glove, and we appreciate your 
advice today as we try to improve on the TRIA legislation that 
I think expires later this year, while at the same time 
literally over on the Senate floor we are working to try to 
prevent these kinds of incidents.
    Thank you.
    Chairman Dodd. Thanks very much.
    Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman. I am glad we are 
discussing this issue early in the year rather than waiting 
until the expiration of the 2005 extension of the Terrorism 
Risk Insurance Program. While I do believe that at this point 
in time Congress needs to take action to ensure continued 
availability of terrorism insurance, I do not think we should 
make the current program permanent. Congress first authorized 
TRIA in 2002 because the private insurance market would not or 
could not cover terrorism risk in that time of uncertainty. 
Since 2002, our Nation is more secure and our private insurance 
market is more developed. Congress must be careful not to 
promote programs that may endanger further development of that 
market. Any legislation we pass this year should encourage more 
private insurance coverage for terrorism risk and reduce 
taxpayer exposure.
    Some of the witnesses today are going to ask for an 
expansion of the Federal program. To them, I would like to ask 
how industry can expand its own programs.
    In the 2005 reauthorization, Congress asked for a report 
from the President's Working Group on the Financial Markets. 
Last September, that report was completed, and it made some 
very interesting findings.
    First, private insurance has developed for almost all kinds 
of terrorism risk.
    Second, further expansion of TRIA is not needed to keep 
growing private markets.
    I am disappointed that the President's Working Group is not 
represented on today's panel, as I think the Committee needs to 
hear from them before we do anything. Instead of granting a 
blanket extension of TRIA, we should develop incentives to 
create private reserves. That may require tax incentives, which 
can complicate legislation, but we should not dismiss the 
possibility.
    Another viable idea is the creation of a private pool for 
terrorism risk similar to what has been done in Britain. I 
would remind my colleagues to look at what has happened with 
flood insurance before we give up on the private marketplace. 
The National Flood Insurance Program has cost the taxpayers 
billions of dollars, has stalled innovation of products, and 
has discouraged insurance companies from entering the market.
    Our financial service companies have some of America's 
brightest and most innovative people working for them. I have 
full confidence that they will develop better ways to address 
the terrorism problem if we give them the right tools.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. I want to thank 
you for holding what I think is an incredibly important hearing 
today. I want to acknowledge, Mr. Chairman, your leadership on 
this issue over the past few years and the work of so many 
Members of the Committee. I appreciate Senator Shelby as well 
in terms of moving forward on such a hearing.
    You know, Mr. Chairman, prior to coming to the Senate, I 
represented a district right across from Ground Zero. My State 
lost 700 residents on September 11th. That is an immeasurable, 
incalculable, priceless loss. But in addition to that priceless 
loss, what would have happened not just to the region's 
economy, but as a ripple effect, I would argue, to the national 
economy is if Congress has not passed TRIA, and the 
consequences that would have flowed from that would have even 
been more enormous, would have been magnified. The terrorists 
would have created much more damage than they did as it was.
    So the reality is that for so many of our private sector 
initiatives to have a robust economy, TRIA was incredibly 
important. I am all for the private marketplace trying to come 
up with its own products, but to be very honest with you, Mr. 
Chairman, I just simply have not seen it. And I do not see it 
on the immediate horizon.
    And so the question becomes what do we continue to do to 
ensure that economic security--which is how I view this. I do 
not view this as private sector security. I see this as 
economic security--that economic security is preserved. And so 
when I look at some of our own interests in the region, which 
are magnified, could be any place in the country for that fact, 
but, for example, we have the mega part of the east coast, the 
port of Newark and Elizabeth, the type of cranes, machinery, 
and equipment there to try to find them insurance in the 
marketplace, simply cannot happen. I know a lot of our 
colleagues are big promoters of trade. You cannot have that 
trade if you cannot get them in and out of ports, both for 
exporting our products and importing them. That is only one of 
many, many different dimensions.
    And so, ultimately, I do think we need to clearly at least 
extend TRIA and look at it to see how, in fact, we can continue 
to provide economic security. That is what this is all about, 
Mr. Chairman, and as someone who was actively promoting it 
formerly in the House, I look forward to working with you to 
promote it here in the Senate.
    Chairman Dodd. Thank you, Senator, very, very much.
    I would like to ask unanimous consent that the written 
testimony from the PCIAA, the trade association which 
represents small and medium-sized insurers, be included at the 
record. I would have liked to have had them here this morning, 
but, frankly, we just could not accommodate everyone at this 
table. So I appreciate their willingness to have testimony 
submitted. They are very important. We talk about the insurance 
industry as though it is a monolith. There are smaller 
insurers. I know Senator Enzi always reminds us on this 
Committee of the small and mid-sized companies out there that 
need to be represented at our tables, and I want to make sure 
that their thoughts and views on this are going to be included. 
And as we go forward, we will insist at later hearings, if we 
have them, they will be a part of the discussion as well. So I 
thank them very much for that.
    Our first witness this morning is Charles Clarke, who is 
testifying on behalf of the American Insurance Association and 
is Vice Chairman of the Travelers Companies, based in my State 
of Connecticut--Hartford, Connecticut. Mr. Clarke has been with 
the company since 1958 and has held various management roles 
for Travelers Insurance Group Holdings, including President and 
Chairman and CEO, and I welcome you to the Committee. We are 
very pleased to have you with us.
    Thomas Minkler is the President of Clark-Mortenson Agency 
and is testifying today on behalf of the Independent Insurance 
Agents and Brokers of America. Mr. Minkler has over 28 years of 
experience in the insurance industry, serves as Chairman of the 
Independent Insurance Agents and Brokers of New Hampshire. He 
has testified to the Banking Committee in the past, and we 
welcome you back to the Committee.
    Michael Peninger is testifying on behalf of the American 
Council of Life Insurers and serves as President and CEO of 
Assurant Employee Benefits Company, a position he has held 
since 1999. He joined that company in 1985 as a corporate 
actuary and has held various senior positions within the 
company.
    I am going to mispronounce this. I want you to pronounce 
your last name, Jamie.
    Mr. Veghte. Veghte.
    Chairman Dodd. Veghte. Jamie Veghte is testifying on behalf 
of the Reinsurance Association of America. He is the Chief 
Executive Officer of XL Reinsurance America, Inc., based in 
Stamford, Connecticut. Mr. Veghte was appointed CEO of the 
company in 2004, Chief Executive of Reinsurance General 
Operations in 2006, holds these positions concurrently.
    Michael McRaith is the Director of the Division of 
Insurance for the Illinois Department of Financial and 
Professional Regulation. He is testifying today for the 
National Association of Insurance Commissioners. Mr. McRaith 
represents the State of Illinois with the NAIC and serves on 
that organization's Property and Casualty Insurance Committee, 
is on the Reinsurance Task Force, and we welcome you here 
today. Thank you for being with us.
    Travis Plunkett, an old friend we have had here many times, 
is the Legislative Director for the Consumer Federation of 
America. The Consumer Federation is a nonprofit association of 
300 organizations and an advocacy, research, and service 
organization, and a regular witness, I might add, before this 
Committee.
    Arthur Coppola is the President and CEO of the Macerich--is 
that how you pronounce that?
    Mr. Coppola. Macerich.
    Chairman Dodd. The Macerich Company, and is here on behalf 
of the Coalition to Insure Against Terrorism. He has over 30 
years of experience in the shopping center industry, all of 
which has been with his company. Mr. Coppola is a lawyer and a 
CPA and Chair of the Board of Governors of the National 
Association of Real Investment Trusts. We welcome you here 
today as well.
    John Lieber is the Senior Vice President of the World Trade 
Center Properties and is responsible for managing the 
organization's efforts to rebuild the World Trade Center site. 
From 1994 to 1998, Mr. Lieber served with the U.S. Department 
of Transportation, first as the Deputy Assistant Secretary for 
Policy and later rising to Acting Assistant Secretary.
    And, last, Don Bailey here, who is the Chief Executive 
Officer of Willis North America, and he is testifying today on 
behalf of the Council of Insurance Agents and Brokers. Mr. 
Bailey joined Willis in March of 2003 to lead the firm's North 
American Executive Risk practice and, prior to joining Willis, 
served as senior vice president and chief underwriting officer 
of the specialty risk lines for the Alliance Insurance 
Corporation in Chicago.
    That is a long list of witnesses. I see my colleague from 
New York is here. Senator Schumer, do you want to make any 
opening comments?

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman, and I apologize. 
We had a JEC hearing, and I just got here.
    I would just make three points, and obviously I have real 
concern about this issue because it affects the city of New 
York probably more than any other.
    First, it is time for a permanent solution. We keep coming 
back and back and back. It discombobulates the markets. It 
leaves things hanging in doubt. Now is the time, if ever, to 
really make this permanent, if we can, Mr. Chairman.
    Second, I hope we will make an effort to include nuclear, 
biological, chemical, and radiological coverage available. In 
New York that is a worry. In larger cities that is a worry. And 
if we are going to do this, we ought to do the whole thing.
    And, finally, we ought to act swiftly. Right now contracts 
are being signed. When people think that we might not extend 
terrorism insurance or it would not affect them, it raises the 
cost of building at worst--or at the least, and at worst it 
prevents projects from not going forward in terms of jobs and 
growth and everything else.
    And so this is something, I know, Mr. Chairman, you have 
worked long and hard on. We have worked together on this over 
the years. It is sort of like squeezing a little bit of 
toothpaste out of the tube. Every time you get a little bit, a 
little bit, a little bit. I think now the time has changed. 
With the change in the Congress, I think we are going to find 
less of the ideological opposition to this program that seemed 
to me to be based on sort of how many angels can dance on the 
head of a pin instead of realities on the ground. And I hope we 
can move it quickly.
    Thanks, Mr. Chairman.
    Mr. Clarke, welcome. Delighted to have you here.
    By the way, all of your statements and supporting materials 
will be included in the record. I want you to know that, and 
that is true of my colleagues as well, any additional documents 
or statements they want to be included. And I am going to have 
a light on here, a clock on here. I am not so rigid about it, 
but try and keep an eye on it so we can move through the 
testimony and get to questions as well.
    Thank you.

   STATEMENT OF CHARLES CLARKE, VICE CHAIRMAN, THE TRAVELERS 
     COMPANIES, INC., ON BEHALF OF THE AMERICAN INSURANCE 
                          ASSOCIATION

    Mr. Clarke. Good morning, Chairman Dodd.
    Chairman Dodd. By the way, all of your statements and 
supporting materials will be included in the record. I want you 
to know that.
    It is true of my colleagues, as well, any additional 
documents or statements they want to be included.
    I am going to have a light on here, a clock on here. I am 
not so rigid about it, but try and keep an eye on it so we can 
move through the testimony and get to questions, as well.
    Thank you.
    Mr. Clarke. Good morning, Chairman Dodd, ranking member 
Shelby, and members of the committee.
    As the Chairman said, my name is Chuck Clarke. I am Vice 
Chairman of Travelers. I really am an underwriter with a big 
title.
    The red umbrella and I started together in the company 
about 50 years ago and now, as you know, we are back together. 
The Chairman predicted this a couple of years ago. Thank you.
    Thank you for the opportunity to testify on behalf of the 
American Insurance Association. I would like to express my 
appreciation for the leadership shown by this committee, and 
Chairman Dodd in particular, in recognizing the importance of 
terrorism insurance to our national security and economy, and 
for supporting enactment and extension of the TRIA program.
    Since its enactment in 2002, TRIA has achieved most of its 
goals. It has made terrorism insurance more available and the 
cost has dropped for most policyholders. However, it has not 
made protection from CNBR events readily available for most of 
our customers and that is a challenge we still face together.
    In the past, AIA has testified about the factors that make 
terrorism an uninsurable risk. Rather than repeating that past 
testimony, I would like to discuss some themes arising from the 
President's Working Group report and offer some suggestions for 
framing TRIA extension legislation.
    The PWG report looks at the markets for CNBR terrorism 
coverage and confirms the past, present and future actions from 
any private market. The reasons are well understood by insurers 
who are trying to grapple with this issue on a daily basis, 
like myself.
    First, the loss estimates are staggering, exceeding $700 
billion in the case of a nuclear attack in New York City.
    Second, insurers have almost no ability to spread CNBR risk 
to reinsurers or the capital markets. Nobody wants it.
    Third, CNBR losses just simply and unequivocally threaten 
the solvency of insurance in the absence of a Federal program.
    The PWG report also examines the markets for conventional 
terrorism. Here, however, the practical realities that insurers 
face are at odds with some of the economic theories set forth 
in the report.
    First, the report is correct in that improvements in 
insurer modeling are helping insurers to estimate their 
aggregate loss accumulations at specific locations. But that 
does little to increase overall insurance capacity. The 
modeling is in its infancy and does little to reduce concerns.
    Second, TRIA has not reduced the demand for private 
reinsurance. In fact, demand far outstrips supply.
    Third, increases in policyholder's surplus augment 
financial capacity but do not affect or offset the need for 
TRIA. Removing the backstop or raising retentions would impair 
solvency.
    Recognizing that CNBR terrorism is uninsurable in the 
private market, we believe that Congress should consider 
recalibrating the current TRIA backstop to provide increased 
Federal financial participation in the event of such an attack.
    With regard to conventional terrorism, we believe that the 
current backstop has worked and should remain in place. At the 
current industry retention, which many of you know is $35 
billion today, the TRIA backstop would be accessed only in the 
event of a truly catastrophic conventional attack like a swarm 
or other multiple venue attack, that would exceed the 
dimensions of the 9/11 strike.
    Experience has shown that the distinction between foreign 
and domestic terrorism is artificial, impractical and 
meaningless from an economic perspective.
    Additionally, the State regulatory system poses significant 
challenges in managing this risk. We believe that State 
regulation of terrorism insurance, rates and forms that can 
undermine the program's basic objectives should be preempted.
    In summary, we continue to need your help in doing what we 
just can't do by ourselves. Our business is based on dealing 
with random accidents, not intentional catastrophic injury. We 
are getting better at protecting ourselves from the potential 
of conventional terrorism but it is simply impossible to deal 
with a potential CNBR event without more of your help.
    Unfortunately, one way or the other, you are the ultimate 
underwriter for the event we hope never happens.
    Finally, we strongly believe that the program should be 
made permanent and we look forward to working with you to 
address these important concepts.
    Thank you.
    Chairman Dodd. Thank you very, very much. It is very, very 
helpful.
    Mr. Minkler, thank you again for being with us.

STATEMENT OF THOMAS MINKLER, PRESIDENT, CLARK-MORTENSON AGENCY, 
INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS 
                        OF AMERICA, INC.

    Mr. Minkler. Thank you and good morning, Chairman Dodd and 
ranking member Shelby, and members of the committee.
    My name is Tom Minkler 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 the President of the Clark-Mortenson Agency, 
headquartered in Keene, New Hampshire, a regional insurance 
agency with eight locations and 55 employees in New Hampshire 
and Vermont. I also serve as the Chairman of IIABA's Government 
Affairs Committee.
    I would like to begin by complimenting this committee and 
Congress for passing TRIA in 2002 and extending it in 2005. The 
Federal backstop created by these laws has worked well. It has 
insured that terrorism insurance is available and more 
affordable and has allowed businesses to continue operating and 
growing at virtually no cost to the Federal Government.
    On behalf of IIABA and our more than 300,000 agents, 
brokers and their employees nationwide, I also want to applaud 
you for holding today's hearings to examine the future of TRIA. 
There is still no reason to believe that terrorism threat is on 
the decline or that the private passenger insurance market 
alone can adequately provide coverage. Therefore, we encourage 
Congress to develop a long-term solution for terrorism 
insurance that enables the private sector to serve consumers.
    The original enactment of TRIA and its extension have been 
successful in stabilizing the insurance marketplace and have 
helped eliminate the market disruptions and uncertainties that 
were witnessed in the immediate wake of September 11th. As a 
result of the enactment of TRIA and its extension, our members 
are currently able to offer consumers options with respect to 
terrorism coverage.
    Any analysis of long-term availability of terrorism 
insurance must acknowledge the unique nature of terrorism risk. 
Terrorist acts are nearly impossible to predict because they 
are intentional acts committed by those who wish to attack our 
country, our institutions, our livelihoods, and our sense of 
security. Given the unique nature of terrorism risk, the 
insurance market has proven unable to make meaningful 
assessments and judgments about possible terrorist events.
    Additionally, although potential terrorism losses have been 
estimated in the hundreds of billions of dollars, the current 
reinsurance capacity is only estimated at $6 billion to $8 
billion. Despite the warnings of experts, a specific plan for 
developing a private reinsurance mechanism to spread 
catastrophic risk from terrorism has yet to emerge.
    Specifically, IIABA believes that a private/public 
partnership remains essential to the challenge of making 
terrorism risk insurance available after the expiration of the 
Act and at the end of the year. It would take decades for the 
insurance industry to close the gap between the current 
reinsurance capacity and potentially hundreds of billions of 
dollars in losses from a terrorist attack. As a result, public 
participation is necessary to encourage private markets to get 
in and stay in the business of insuring terrorism risk.
    Without some form of meaningful solution, terrorism 
coverage will be extremely difficult if not impossible for most 
to obtain after December 31st of this year. Such an outcome 
would be especially troubling for small and mid-sized 
businesses which are already challenged by the current 
environment and are not in a position to self-insure.
    While our members remain open to Federal intervention--
opposed to Federal intervention in the insurance market in 
general, they nevertheless acknowledge the terrorism risk 
insurance coverage currently available to the policyholders 
they serve would not exist without TRIA. This is a clear case 
of marketplace failure. And in those rare instances, limited 
Federal involvement in a reinsurance capacity is warranted.
    If TRIA is not extended, based on my experience from 2005, 
I would fully expect my business customers to receive notices 
of non-renewal for their terrorism insurance coverages 
beginning in January 2008. Federal legislation is necessary to 
ensure that policyholders continue to have access to such 
coverage.
    I would like to stress that the interest in and the need 
for terrorism insurance backstop is not confined solely to 
large urban areas or to large businesses. IIABA represents 
agents and brokers selling coverages to consumers across the 
country. Our collective experience shows that terrorism 
insurance coverage is not just a big city or big business 
problem. It is truly a national issue.
    In fact, in the area that I do business in, which is 
primarily New Hampshire and Vermont, at least 70 percent of the 
business customers are purchasing terrorism insurance.
    Briefly, I also wanted to say that IIABA also believes that 
any long-term solution to protect the Nation's economy in the 
face of substantial terrorism losses must address the potential 
losses from nuclear, biological, chemical and radiological 
events. Although NBCR losses are perhaps the most catastrophic 
types of terrorist attacks, coverage for these types of losses 
is currently excluded from most existing terrorism insurance 
coverage.
    The IIABA believes and always has supported the mandatory 
availability of insurance coverage for both conventional and 
NBCR losses, and we still do.
    In conclusion, the IIABA applauds Congress for not ending 
TRIA abruptly in 2005 and for passing a 2-year extension. IIABA 
members, along with many in the insurer and policyholder 
community, recognize that we must find a long-term solution to 
our Nation's terrorism insurance problem and are committed to 
this process.
    We look forward to working with the Congress in this matter 
that is crucial to our country's economy and security.
    Thank you.
    Chairman Dodd. Thank you very much.
    Mr. Peninger.

STATEMENT OF MICHAEL J. PENINGER, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, ASSURANT EMPLOYEE BENEFITS, ON BEHALF OF THE AMERICAN 
                    COUNCIL OF LIFE INSURERS

    Mr. Peninger. Thank you, Chairman Dodd, ranking member 
Shelby, and members of the committee.
    My name is Mike Peninger and I am President and CEO of 
Assurant Employee Benefits, an operating division of Assurant, 
Inc., a premier provider of specialized insurance products, 
including group life insurance.
    I am here today on behalf of the ACLI. The ACLI is the 
primary trade association of the life insurance industry, 
representing 373 member companies that account for 93 percent 
of the industry's total assets in the United States.
    I would like to thank the committee for holding this 
hearing on the Terrorism Risk Insurance Program. While much of 
the ongoing discussion on extending TRIA has focused on 
property and casualty insurance, it is also important to 
discuss how this issue affects the life insurance industry, 
particularly with regard to group life insurance. While we 
certainly agree that there needs to be adequate terrorism 
insurance coverage for buildings, we also believe that the 
people who work or reside inside those buildings should be 
adequately covered.
    If Congress decides to extent TRIA, the ACLI and I 
encourage you and your committee to add group life insurance as 
a covered line, as the House did in the 109th Congress. The 
NAIC has also adopted a resolution in support of group life 
insurance.
    Group life insurance is a critical component of standard 
employee benefit packages. For millions of Americans, 
especially lower income workers, it is the only life insurance 
that their families have. In 2005, there were about 167 million 
group certificate holders with an average coverage amount of 
$49,500.
    Due to the nature of the coverage, group life policies have 
high concentrations of risk. Members of an insured group are 
often gathered in single locations and they obviously live near 
their workplaces. A single catastrophic event could cause many 
or all of them to die at a single time.
    For example, if a terrorist attack were to kill 20,000 
insured individuals, group life insurers could collectively be 
liable for almost $1 billion in death claims. If 1 million 
people were to perish, potential claims would increase to 
almost $50 billion.
    While these death totals and claim amounts may sound 
dramatic, unfortunately they are not inconceivable, especially 
of a nuclear, biological, chemical or radiological attach were 
to strike in a densely populated area such as New York, 
Washington, or Chicago. The amount of loss that a particular 
group insurer would incur would depend on many factors, 
including the amount of catastrophic insurance it has.
    While the life insurance industry as a whole would be able 
to absorb tens of billions of dollars in death claims resulting 
from a catastrophic attack, those insurers that receive an 
unexpectedly high number of death claims could be forced into 
insolvency. Such insolvencies would impact payments to 
beneficiaries at their time of need. It could also affect the 
payments of benefits to all the policyholders of the insolvent 
companies, not just the life policy holders.
    Group life policies are designed to provide simple, 
affordable protection for average Americans. They are not 
designed or priced to account for the immediate deaths of tens 
of thousands of people from a terrorist attack.
    Group life insurers could, in theory, protect themselves 
from the terrorism risk either by excluding coverage for deaths 
due to terrorism or by purchasing catastrophic reinsurance 
protection. However, neither Assurant nor the ACLI are aware of 
any States, except for Kansas and North Carolina under very 
limited circumstances, that allow the use of terrorism 
exclusions by life insurers. Nor do we believe that it is good 
business or sound public policy to exclude coverage for deaths 
due to a catastrophic event.
    Since exclusion are therefore not a viable solution, 
insurers must turn to reinsurance for protection. 
Unfortunately, such coverage continues to be unavailable in 
sufficient amounts. While such reinsurance has become slightly 
more available since 9/11, it comes with higher deductibles, 
various exclusions and most importantly, with overall coverage 
limits that are substantially lower than were available prior 
to 9/11.
    Without adequate catastrophic reinsurance, many group life 
insurers risk financial ruin from a significant terrorist 
attack. We believe that catastrophic reinsurance would become 
more available of group life were included in a TRIA extension. 
This additional reinsurance capacity would significantly reduce 
the risk of insolvency that many group insurers face in the 
event of a large-scale attack.
    If TRIA is extended again and group life is included, we 
urge that separate recoupment mechanisms be created for P&C and 
group life insurers. Recoupment of amounts paid by the Treasury 
for losses relating to P&C insurance should be made from P&C 
insurers. Similarly, recoupment for losses relating to group 
life insurance should only be made by group life insurers.
    We look forward to working with your committee and others 
in Congress, at Treasury, and in the Administration to ensure 
that group life remains available to the millions of Americans 
who depend on it and that this vital protection is there when 
it is needed most.
    Thank you for allowing me the opportunity to express our 
views on this very important matter.
    Chairman Dodd. Thank you very much.
    Mr. Veghte.

 STATEMENT OF JAMES H. VEGHTE, EXECUTIVE VICE PRESIDENT/CHIEF 
 EXECUTIVE OFFICER OF REINSURANCE GENERAL OPERATIONS AND CHIEF 
EXECUTIVE OFFICER OF XL REINSURANCE AMERICA, INC., ON BEHALF OF 
             THE REINSURANCE ASSOCIATION OF AMERICA

    Mr. Veghte. Good morning, Chairman Dodd, ranking member 
Shelby and distinguished members of this committee. My name is 
Jamie Veghte and I am Chief Executive Officer of XL Reinsurance 
America, Incorporated, headquartered in Stamford, Connecticut. 
I will be testifying on behalf of the Reinsurance Association 
of America.
    I want to thank Chairman Dodd and many members of this 
committee for the leadership shown on the terrorism insurance 
issue. Your role has been critical to the adoption and 
continuation of the successful TRIA program.
    The reinsurance industry appreciates the hard work and 
support you have provided on this most important issue. It is 
important that the committee understand that XL Re and the RAA 
strongly supported the adoption of the Terrorism Risk Insurance 
Act in 2002 and its extension in 2005.
    We believe the program has worked well to fill a vacuum in 
reinsurance capacity for this risk and help bring stability to 
the insurance marketplace and, indeed, the economy as a whole.
    I would like to address two important questions 
policymakers have posed as it relates to consideration of a 
long-term program. One, has the TRIA program infringed on the 
development of the private reinsurance market? And second, what 
is the current status of the private reinsurance terrorism 
market?
    Since the terrorist attacks of 2001, the global reinsurance 
industry has committed substantial resources and capital to 
develop a better understanding of terrorism risk. Despite these 
considerable efforts, the basic facts have not changed. 
Terrorism poses great challenges as an insurance risk. Unlike 
natural catastrophe exposures, where the reinsurance industry 
has models and underwriting expertise, the U.S. insurance 
reinsurance industry cannot adequately underwrite and model the 
scale and frequency of potential future terrorist attacks.
    Despite the addition of considerable capital in the 
reinsurance market in recent years, over $32 billion since 
Hurricane Katrina, little of that has been deployed to 
terrorism risk. Accordingly, the insurance and reinsurance 
industry cannot provide significant terrorism coverage for this 
country without a long-term Federal role in terrorism 
reinsurance.
    The TRIA program has not infringed on the development of a 
private reinsurance market. In fact, the opposite is true. 
Primary insurers seek to buy private reinsurance to help them 
reduce the large exposure they face for retention and loss-
sharing provisions under the program. The large retention 
requirements under TRIA, estimated at $35 billion industry-
wide, has left plenty of room for the private reinsurance 
market to provide capacity under the program. By establishing 
definitive loss parameters, TRIA has provided the defined layer 
for reinsurers to participate in sharing the retained risk 
primary companies face.
    Even with this large window to provide capacity, reinsurers 
have been willing to put only limited capital at risk to manage 
terror-related losses.
    To the second question, overall the RAA estimates the 
global terrorism reinsurance capacity written in the United 
States for 2007 at about $6 billion to $8 billion with TRIA 
certified stand-alone treaty reinsurance. Additionally, there 
appears to be no appetite in the capital markets to provide 
terrorism risk through catastrophe bonds or other financing 
products.
    It's also important to emphasize that there's very little 
reinsurance appetite in nuclear, radiological, biological and 
chemical risk. According to the RAA survey of reinsurance 
underwriters and brokers, NRBC capacity is estimated to be 15 
to 20 percent of the terrorism risk capacity I cited a minute 
ago. When NRBC is available, pricing for coverage is at a 
significant premium and coverage amounts restricted.
    Some insurers have been able to add terrorism peril to 
their worker's comp reinsurance program, but this coverage 
would also typically exclude NRBC losses.
    Due to the nature of the terrorism peril, the RAA believes 
that the private market mechanisms are insufficient alone to 
spread the risk of catastrophic terrorism loss. Since 
reinsurance is not covered under the TRIA program, the RAA 
chooses not to independently advocate suggested change or 
solutions for a Federal program.
    The RAA has a close working relationships with the direct 
insurance community and will continue to support their efforts 
for a long-term solution.
    In conclusion, without some form of a long-term Federal 
backstop, we would expect less coverage available at the 
policyholder level, increased prices for terrorism coverage, 
and more limited reinsurance capacity.
    The RAA looks forward to working with the committee as it 
considers legislation. Thank you very much for the high honor 
of appearing before this committee.
    Chairman Dodd. Thank you very much, Mr. Veghte.
    Mr.--is it McRaith? Did I pronounce that correctly?
    Mr. McRaith. Yes, you did, McRaith.
    Chairman Dodd. Thank you.

STATEMENT OF MICHAEL McRAITH, DIRECTOR, ILLINOIS STATE DIVISION 
    OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                    INSURANCE COMMISSIONERS

    Mr. McRaith. Chairman Dodd, ranking member Shelby, members 
of the committee, thank you for inviting me to testify today. I 
am Michael McRaith, Director of Insurance for the State of 
Illinois, and I speak to you today on behalf of the National 
Association of Insurance Commissioners.
    My Chicago office is in a landmark building visited by 
thousands of tourists above the main switching station for 
hundreds of thousands of daily subway commuters, including 
those taking the El to O'Hare and Midway Airports. Within a 
mile are five of the Nation's 10 largest buildings, 10 tallest 
buildings, the world's premier commodities trading centers, and 
Lake Michigan, one of the Great Lakes that comprise 84 percent 
of all North American fresh water.
    TRIA and its extension ensure the affordability and 
availability of terrorism insurance. The current program should 
not expire without renewal of an appropriate Federal backstop.
    While some advocate for you to deregulate the insurance 
industry through a so-called ``Federal charter'', this Federal 
backstop illustrates when Federal support for a State-regulated 
private insurance market provides real value for consumers, 
your constituents.
    The extension quickly approaches its expiration date but 
the NAIC remains convinced that a Federal backstop is an 
essential platform for our national economy. The U.S. economy 
remains vulnerable to terrorist attack and requires this 
backstop, in the absence of which terrorism insurance will 
become unavailable and unaffordable, thereafter causing the 
market disruptions and economic uncertainty seen in 9/11's 
aftermath.
    By requiring insurers, through the make available 
mechanism, to offer terrorism coverage, the Federal backstop 
has been successful in bringing marketplace confidence and 
stability. The President's Working Group reported, as has been 
stated already, that the terrorism insurance market has grown 
to a take-up rate of over 60 percent.
    Important urban markets demand terrorism insurance. And in 
the absence of private market innovation, available and 
affordable terrorism insurance depends upon a Federal backstop. 
Insurers need to understand frequency, severity and loss costs 
in order to price and offer insurance. Terrorist events cannot 
be predicted, either in approximate time, location, or level of 
tragic consequence. This reality, coupled with the geographic 
concentration of risk, makes terrorism extremely difficult to 
insure.
    A Federal backstop obviously cannot impact frequency but it 
does cap severity, giving insurers the knowledge to price and 
offer the coverage and not risk insolvency. 9/11, one of the 
most costly insured events ever, was carried out by a handful 
of men. We cannot choose to be naive and ignore the potential 
for even greater financial loss with another event.
    Actuaries predict that a nuclear, biological, chemical or 
radiological event in Manhattan could result in as much as $778 
billion in insured losses. Total capital and surplus available 
in the entire property and casualty market is roughly $427 
billion, half of which is available for commercial lines and a 
fraction of which is available to any one company.
    The private market lacks the wherewithal to survive the 
catastrophic risk of terrorism and to simultaneously cover all 
other losses without a Federal backstop. As Congress and this 
committee evaluate alternatives, we stress the following 
priorities: the duration of any program should allow for 
sustained stability that reflects the commercial insurance 
cycle.
    Second, any program should avoid the fictional distinction 
between domestic and foreign acts of terrorism.
    Third, any program should include coverage for group life 
insurance due to the concentration of risk and prospective 
insolvency.
    Four, any program should consider inclusion of NBCR events 
at a level that leverages the private market strength against 
the challenge of insuring those events.
    And finally, if you consider a shift to total private 
market responsibility, we do recommend amendment to the tax 
code to require companies to reserve for catastrophic events on 
a tax-deferred basis.
    We ask that you act to ensure this essential partnership 
between the Federal Government and the private market is set 
before the expiration of the current program.
    The NAIC stands with this committee and with Congress in 
your effort to develop and support that partnership. I pledge 
the NAIC's support for the constructive process that you begin 
today.
    Thank you for your attention.
    Chairman Dodd. Excellent testimony, Mr. McRaith. Thank you 
very, very much.
    Mr. Plunkett, welcome again.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Thank you, Chairman Dodd, Senator Shelby, 
members of the committee. My name is Travis Plunkett. I am the 
Legislative Director of the Consumer Federation of America.
    On behalf of myself and our Director of Insurance, Bob 
Hunter, I appreciate the invitation to appear before you today 
to examine the temporary Terrorism Risk Insurance Act.
    In the wake of the horrific terrorist attacks of September 
11th, CFA supported the creation of a broad Federal insurance 
backstop. We changed our views, however, to support much 
narrower Federal assistance when it became clear that during 
the year before TRIA was enacted, that the lack of Federal 
backup had not caused the crippling coverage gaps and economic 
disruption feared by many and predicted by the insurance 
industry.
    In fact, as I listen to the arguments of insurers for the 
expansion and permanent extension of a temporary program more 
than 5 years after September 11th, I am struck by how little 
real acknowledgment there is of the truly dramatic improvements 
that have occurred in the insurance marketplace since the 
attacks.
    In fact, there is very strong evidence that insurers no 
longer need TRIA subsidies to provide adequate terrorism 
capacity in all but the most extreme cases. NBCR coverage has 
been mentioned here, and we agree. That is an extreme case.
    The property and casualty industry's three most profitable 
years in history were 2004, 2005 and 2006, with profits in 
excess of $157 billion, despite significant hurricane losses. 
Retained earnings or surplus for the industry stood at just 
over $600 billion at the end of last year. The very significant 
$12.2 billion in after tax losses experienced by insurers after 
September 11th amounts to about 2 percent of this unprecedented 
surplus.
    As the Department of Treasury has reported, terrorism risk 
insurance is now much more available and affordable than after 
September 11th even though, as we have heard, insurer 
retentions have increased substantially and Federal assistance 
has declined. In fact, policyholders have enjoyed deep premium 
cuts in recent years in all insurance lines, which frees up 
money for businesses to pay for terror coverage.
    As you have heard, the take-up rate has increased 
substantially.
    The evidence is very clear that the TRIA program, as 
currently structured, is standing in the way of the development 
of a more vibrant private market for terrorism coverage. The 
Department of Treasury, for instance, has reported that 
although the amount of reinsurance available for terrorism has 
increased since September 11th, federally subsidized 
reinsurance has depressed the demand for private reinsurance. 
Insurers who have consistently come to Congress and said that 
they cannot offer more terror coverage because of a dearth of 
reinsurance capacity need to acknowledge that it is the TRIA 
program itself that has helped to keep demands, and thus 
capacity, low.
    We have several recommendations for adapting the TRIA 
program, not ending it but adapting it, to these new market 
realities. First, convert TRIA to a program that covers truly 
catastrophic terrorism events. As you have heard, there is very 
little coverage for chemical, nuclear, biological and radiation 
events, or for that matter for truly large-scale attacks of 
over $100 billion. In our written testimony, we lay out a 
detailed plan to cover all losses of between $100 billion and 
$200 billion, including those resulting form CNBR attacks.
    Covering losses of over $100 billion--excuse me. Covering 
losses of under $100 billion is clearly within the financial 
grasp of property casualty insurers, who would be able to write 
off approximately $35 billion of the $100 billion in losses and 
who, as you have already heard, are responsible for over $30 
billion in retentions under the current program.
    Second, if TRIA is renewed, we urge you to end the practice 
of providing free reinsurance to an industry that can afford to 
pay for it. We estimate the taxpayers will have provided a 
subsidy for this reinsurance of at least $3.7 billion by the 
end of the year. As the Congressional Budget Office has noted, 
requiring insurers to pay premiums for this coverage, premiums 
that are slightly higher than are actuarially estimated, will 
encourage private insurers to quickly compete by offering lower 
rates. It will also encourage loss mitigation.
    Third, we strongly urge you not to expand the lines of 
insurance covered by the programs, especially to group life. 
There is no meaningful evidence that justifies expanding TRIA 
to cover group life insurance, which is why the Treasury 
Department has twice rejected this idea. Treasury pointed out 
that group life coverage has been and is expected to continue 
to be widely available at rates that have been declining, 
despite the lack of TRIA coverage. This is because the market 
is so competitive.
    In fact, we urge you to carefully consider reducing the 
lines of insurance covered by TRIA, for which there would 
likely be relatively few terror losses or low aggregate risk 
exposure. Candidates for such a reduction would include 
fidelity, boiler and machinery lines, and general liability.
    Finally, if you do decide to renew TRIA, we strongly 
recommend that you keep the program temporary. Extending the 
program permanently or for more than 5 years would freeze the 
program in time, inhibiting the further ability of the private 
market to expand and making it very difficult, if not 
impossible, for Congress to adjust the program as market 
conditions change. We think this would be a significant error.
    If we have learned anything about terrorism insurance since 
September 11th, it is that developments in the marketplace that 
were once thought to be highly unlikely can occur with 
startling speed. For example, very few people would have 
thought, in the wake of the significant terrorism losses 
incurred on September 11th, that the property casualty 
insurance industry would develop into a financial tiger, with 
record profits and surpluses and an enormous financial capacity 
to handle terrorism losses.
    Thank you very much.
    Chairman Dodd. Thank you very much.
    Mr. Coppola.

  STATEMENT OF ARTHUR M. COPPOLA, PRESIDENT AND CEO, MACERICH 
COMPANY, ON BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM

    Mr. Coppola. Good morning, Chairman Dodd, ranking member 
Senator Shelby, and members of the committee. Thank you very 
much for allowing me to testify today.
    My name is Arthur Coppola and I am President and CEO of the 
Macerich Company, one of the Nation's largest retail real 
estate investment trusts. We own and operate major retail 
centers in many of your home States, including Tysons Corner 
here locally.
    I also serve as the Chair of the National Association of 
Real Estate Investment Trusts, NAREIT. I am on the board of the 
Real Estate Roundtable, as well as a member of the 
International Council of Shopping Centers.
    Today I am here to testify on behalf of CIAT, the Coalition 
to Insure Against Terrorism. The diverse CIAT membership 
represents virtually ever sector of the U.S. economy. CIAT is 
the true consumer voice on terrorism risk insurance, as we are 
comprised of the principal policyholders of commercial property 
and casualty lines in the United States. It is from this 
perspective that we offer our testimony today.
    We are gratified that you have so clearly made this issue a 
priority by scheduling this hearing as one of the committee's 
first items of business in the year. We hope that this hearing 
will be followed promptly with an introduction and passage of a 
bill that will ensure the modernization and the seamless 
continuation of the terrorism insurance program.
    There is no question that TRIA accomplished one of its main 
objectives, which was to stabilize the U.S. economy following 
9/11. TRIA and its extension in 2005 TRIA and its extension in 
2005 were part of a series of measures that Congress passed to 
protect the U.S. economy from terrorism threats and continues 
today to be an integral part of our homeland security strategy.
    For example, the U.S. airlines today are directly insured 
by the Department of Transportation for both terrorism and war 
risk. The Federal Government, through the Overseas Private 
Investment Corporation, OPIC, also directly insures U.S. 
investors overseas for both terrorism and political risk 
outside the U.S.
    It would ironic and senseless of TRIA, which is the only 
similar protection of the domestic economy, and which unlike 
the DOT and OPIC programs is not a directly liability to the 
Federal Government, were allowed to expire or even linger in 
limbo throughout the remainder of this year.
    Terrorism is the major threat facing our Nation today. We 
hear about it on a daily basis from the Administration, our 
national security team, and from almost every corner of Capitol 
Hill.
    The market conditions that necessitated TRIA and then its 
extension have not gone away. Primary insurers remain largely 
averse to exposing themselves to potentially catastrophic 
terrorism losses without adequate reinsurance and the private 
reinsurance market provides only a fraction of the capacity 
needed.
    At least 14 other major industrial nations have recognized 
that the private markets are unable to effectively manage 
terrorism risk and have adopted permanent national programs. 
The U.S. market is no different. Terrorism risk is a national 
problem that requires a Federal solution.
    We believe that the Federal role should focus on what the 
private markets have been unwilling or unable to do, enabling 
policyholders to purchase insurance for the most catastrophic 
conventional terrorism risks and ensuring adequate capacity in 
high-risk urban areas, and providing meaningful insurance for 
nuclear, biological, chemical and radiological NBCR risks.
    The CIAT proposal seeks to minimize over time the role of 
the Federal Government for conventional terrorism, but also to 
ensure that NBCR risks will be covered and that the Federal 
Government will have an insurance mechanism in place so that 
the Nation can more easily recover from a truly catastrophic 
attack, whether by conventional or unconventional terrorism.
    For risk of conventional terrorism attacks, the CIAT 
proposal would leave in place the TRIA backstop with the 
insurer deductibles, industry retention, and program trigger, 
all maintained at no higher than their 2007 levels. This 
ensures that policyholders will continue to have access to 
coverage through the make available provision.
    CIAT also suggests the committee consideration of a 
privately funded terrorism risk trust fund that would be 
maintained by the Treasury and used to help cover a portion of 
the Federal share of insured losses under the TRIA program. We 
believe that over time this trust fund will accumulate enough 
capital through pre-event surcharges and assessments that the 
likelihood of taxpayer exposure to terrorism risk will be 
limited to only the most extreme events.
    NBCR terrorism risk is a different matter, however. Even if 
the Federal backstop exposure to conventional terrorism can be 
reduced over time to all but the most catastrophic attacks, the 
challenges are different for NBCR, according to all of the 
expert actuarial estimates. The GAO, the Treasury Department, 
and the President's Working Group, have all recognized that the 
market simply cannot price the risks associated with NBCR 
perils.
    Accordingly, our proposal addresses this by adding NBCR 
perils to the make available requirement under TRIA and calling 
for lower insurer deductibles and copays with respect to NBCR 
risks. The proposal would also remove the annual $100 billion 
program cap to clarify that insurers are not liable for truly 
catastrophic attack, whether NBCR or conventional.
    CIAT urges removal of the distinction between foreign and 
domestic terrorism in the statute's definition of acts of 
terrorism. As the London bombing demonstrated all too well, 
there can be serious difficulties in distinguishing between 
foreign and domestic terrorism, and the distinction makes no 
difference to the victims.
    Finally, in order to enhance the stability of our financial 
markets, the modernized program will be made permanent or will 
at least be in place until Congress declares that terrorism is 
no longer a risk.
    In all, we believe that the CIAT modernization principles 
for TRIA are fair and we urge the committee and Congress to 
incorporate these features into the legislation it adopts this 
year.
    I thank you very much for the opportunity to testify at 
this very important hearing.
    Chairman Dodd. Thank you very much.
    Mr. Lieber.

 STATEMENT OF JANNO LIEBER, SENIOR VICE PRESIDENT, WORLD TRADE 
                       CENTER PROPERTIES

    Mr. Lieber. Good morning. Chairman Dodd, Senator Shelby, 
members of the committee, I am Janno Lieber, Senior Vice 
President of Silverstein Properties where I have responsibility 
for overseeing the World Trade Center redevelopment.
    I want to thank you for the opportunity to participate in 
this important hearing.
    As most of you know, the Silverstein organization leased 
the commercial office portions of the World Trade Center just 6 
weeks before 9/11. Today, after several years of planning and 
extensive public dialog, all parties, including the State of 
New York, the State of New Jersey, the city of New York, the 
Port Authority, are united in the vision of what will be built 
at the World Trade Center, four world class skyscrapers 
designed by renowned architects, new mass transit facilities, a 
performing arts center, and most important, the 9/11 memorial 
to commemorate those lost on those terrible day.
    In order to accomplish this, of course, we need to do some 
very extensive financing which will require us to obtain 
terrorism insurance. The most important thing that Congress can 
do to assure the availability of terrorism insurance for 
projects in high-risk, high-density areas like lower Manhattan 
is to have a permanent TRIA program.
    A long-term program is necessitated by the interplay 
between insurance, financing, contracting, and design in these 
kinds of large-scale projects. Large scale developments can 
take a very long time from start to finish: three to 5 years 
for design, planning, and approvals, several years of 
construction, then several years of lease-up following.
    TRIA needs to be tailored to match the timelines that the 
construction industry, lenders and insurers are looking at when 
they make their decisions about whether to go forward with 
these kinds of projects. The failure to do so will impede new 
construction. And a short-term renewal just will not solve the 
problem.
    Further, we do need, if the standard that you set, Mr. 
Chairman, in your remarks, the certainty of the ability to 
obtain insurance is to be met, we need to know that the Federal 
backstop is going to be there. Because lenders are making their 
decisions, in part, looking at what their risk is of the 
circumstances of insurance changing.
    Often today, most large loans are securitized in order to 
create bonds that are purchased by institutional investors. 
Lenders often do not hold the loans that they originate, but 
sell off a portion of the loans for regulatory or liquidity 
reasons.
    In order to receive investment grade ratings from rating 
agencies, which are required to get investors to purchase the 
bonds, the underlying collateral has to be secured. The lack of 
access to terrorism coverage may impact on a project's ability 
to obtain those kinds of investment grade ratings, and that is 
especially true of projects in these types of concentrated, 
high-risk areas like lower Manhattan.
    Another point that I wanted to take up with you briefly 
today is that--and this is the species of the point that 
Senator Bennett made in his opening remark--is that the risk/
reward is--although TRIA has been a success across the board, 
clearly the risk/reward is not working for every area. And 
lower Manhattan and certain high-risk areas are in that 
category. A major challenge faced by projects in these kinds of 
areas is the shortage of capacity which is prevailing today.
    The World Trade Center rebuilding is going to cost 
something in the range of $13 billion to $15 billion in total. 
But according to leading insurance consultants and brokers in 
New York City, who we have consulted extensively, even with the 
current TRIA program in place, as is, there is a shortfall. 
There is currently less than $750 million total worth of 
coverage available to the entire lower Manhattan market.
    And I should add, there is really no viable alternative to 
private insurance at all. In other words, even with TRIA, we 
are not meeting the test that, Chairman, you and Senator Shelby 
said in your opening remarks, which is availability, 
affordability and stability for these kinds of areas.
    We strongly believe that a TRIA extension ought to address 
the capacity problems in high-risk, high-density areas and 
other types of areas where there is a maximum aggregation of 
risk and of value. Today you are hearing from Mr. Coppola of 
the CIAT Coalition, and others testifying about addressing the 
problem in the current program with respect to the foreign 
versus domestic distinction, and the NBCR issue. These general 
fixes to TRIA are badly needed in order to free up capacity for 
terrorism insurance.
    However, even if these changes are made, there will still 
be questions about whether they will be sufficient to attract 
more capacity to high-risk areas like lower Manhattan. 
Therefore, we are suggesting that consideration be given to 
some additional actions, for example perhaps adjusting 
retentions or the current $100 million TRIA program trigger. We 
are not wedded to any particular solution but we ask the 
creativity and leadership of the committee in helping us in 
other areas like lower Manhattan to address the capacity 
shortfall.
    Finally, there is one other step that Congress can take to 
free up terrorism insurance for these kinds of areas, and that 
is to clarify the scope of TRIA coverage to make it absolutely 
clear that the TRIA backstop applies to all proximate 
consequences of the terrorist attack, including a fire or 
collapse following the attack. There is currently some 
uncertainty in the marketplace about that, and it causes 
terrorism risk to bleed into other insurances. And therefore, 
you absorb capacity that otherwise should be made available in 
areas like lower Manhattan.
    So I thank you for the opportunity to appear before you 
today. The TRIA program has been a success. It ought to be made 
permanent.
    I just want to emphasize again that even with the fantastic 
program you have put in place, it would not be possible at the 
present time to adequately insure even one of the office 
buildings that are being built at the World Trade Center, let 
alone everything that his happening in lower Manhattan. So we 
would like to work with you to address that dysfunction in the 
market.
    Thank you.
    Chairman Dodd. Thank you very, very much.
    I want to congratulate you and others who have worked very, 
very hard over the last number of years in putting this project 
together. We have all watched it, obviously, Bob Menendez 
obviously very directly, and Chuck Schumer obviously very 
involved in this. It has not been easy. But you have done a 
good job so I commend you. The Silverstein Group deserves a lot 
of credit for doing that.
    Mr. Lieber. Thank you so much, Mr. Chairman.
    Chairman Dodd. Mr. Bailey.

 STATEMENT OF DON BAILEY, CEO, WILLIS NORTH AMERICA, ON BEHALF 
         OF THE COUNCIL OF INSURANCE AGENTS AND BROKERS

    Mr. Bailey. Good morning, Chairman Dodd and ranking member 
Shelby. My name is Don Bailey. I am the CEO of Willis North 
America, a unit of Willis Group, a global insurance broker.
    It is a distinct pleasure and honor for me to join you this 
morning.
    Willis works with corporations, public entities and 
institutions around the world on all matters of commercial 
insurance, reinsurance, risk management, financial and human 
resource consulting.
    In addition to representing Willis today, I am also 
speaking this morning on behalf of the Council of Insurance 
Agents and Brokers. The Council represents the Nation's leading 
commercial property and casualty insurance agencies and 
brokerage firms.
    With our North American headquarters located in lower 
Manhattan, not far from where the World Trade Center used to 
stand, we experienced firsthand the devastation wrought on New 
York City by the events of September 11th, 2001. Since that 
time, we in the United States have been fortunate that we have 
not experienced another terrorist attack on our soil. However, 
if you look to London, Madrid and other locations around the 
world, I think we can all agree that terrorism is a permanent 
problem for which we need a permanent solution.
    Regrettably, the question of another terrorist attack here 
in the U.S. is a matter of when and not if. We thank the 
committee for convening this hearing to explore the long-term 
solutions to terrorism risk insurance.
    Prior to September 11th, terrorism insurance was readily 
available. It was offered as an add-on to many policies at a 
very modest price because the threat of loss was perceived to 
be low. Clearly, after September 11, the paradigm shifted quite 
significantly and terrorism insurance was almost entirely 
unavailable. And the small amount that was available was 
prohibitively expensive.
    Planes did not take off. Many constructionsites, as was 
just detailed, in what were now perceived to be high-risk 
zones, fell silent. And commerce in many cities came to a 
complete halt.
    Congress, realizing the dire need, acted quickly by passing 
TRIA and subsequently the extension to provide available and 
affordable terrorism capacity for U.S.-based risk. The program 
has also allowed the private market to progressively increase 
its role in covering terrorism risks.
    The Federal funds provided by the TRIA backstop have never 
been tapped. Not one taxpayer dollar has been spent on claims. 
But the program has been an unqualified success in stabilizing 
the insurance markets and allowing insurers to provide much-
needed terrorism coverage at affordable prices.
    Policyholders, the business of our economy, have not had to 
deal with extremely high and volatile terrorism insurance costs 
and have been able to budget for their business plans.
    For many commercial policyholders, obtaining terrorism 
coverage means more than just piece of mind. It is essential to 
doing business. It may be required, sometimes by State laws and 
regulations, and often by contract, to obtain a mortgage, for 
financing of new construction, for the expansion of business or 
for a new entrepreneurial venture.
    Some suggest that the private market can handle these 
losses. Consider: estimates indicate that there is only about 
$6 billion to $8 billion in global terrorism reinsurance 
capacity available. But terrorism losses from a single attack 
could reach $100 billion. Industry numbers indicate that there 
is a $1 billion to $2 billion in capacity available for 
nuclear, biological, chemical and radiological coverage. Yet 
the American Academy of Actuaries modeled the impact of a 
medium-sized nuclear, biological, chemical or radiological 
attack on New York City and put the losses at $450 billion.
    Clearly, there is simply not enough February 28, 2007 
capacity in the private market to cover losses due to 
terrorism. And the limits of such an attack are bound only by 
the imagination of terrorists whose thought processes are 
beyond the scope of models and calculations.
    Some contend that dealing with the risk of terrorism 
insurance is a matter for the industry to handle on its own. 
Collect the premiums, assume the risk of potential losses as 
they do with other categories of risk. But consider that a 
terrorist attack is not perpetrated against a company or a 
building. The terrorists who flew planes into the World Trade 
Center and the Pentagon, and the plane that crashed in the 
Pennsylvania field, were attacking our country.
    Could you imagine a scenario where the Federal Government 
knew an attack was going to happen and did not take the steps 
to either prevent it or to at least prepare for the aftermath? 
I suggest that not developing a long-term terrorism risk 
insurance program would be just that.
    The objectives of TRIA are clear: harness private industry 
capacity to directly contribute to terrorism-related losses, 
deliver Federal assistance in a fair and efficient manner, and 
repay the Government for any outlays.
    Because of TRIA, the terrorism insurance market has been 
largely stabilized, terrorism coverage has been steadily 
expanding, and the price of coverage has become more 
affordable. Now is decidedly not the time for the Federal 
Government to withdraw its involvement in the terrorism 
insurance market. The terrorism threats facing our country 
remain significant, unpredictable, our reinsurance industry 
still lacks sufficient capacity to address terrorism risks on 
its own, and the primary insurers are still not willing to 
expose themselves to enormous terrorism risks without charging 
prohibitively high prices.
    Allowing TRIA to expire at this time will certainly 
cripple, if not completely paralyze, a significant portion of 
our economy. We must all work to keep that from happening. TRIA 
is not about protecting the balance sheet of insurers and 
brokers. It is about protecting commercial policyholders and 
creating and sustaining a national economy that encourages 
investment and development.
    This is a matter that far transcends the insurance 
industry. It is a matter of our national economic security.
    I thank the committee for your time this morning.
    Chairman Dodd. Let me thank all of you again. This is, I 
know, a real crowd. Senator Bunning, while walking out, said he 
thought this may be a record number of witnesses this Committee 
has had at one panel here at any given time. And I thank you 
for your patience and for being a part of this.
    I am going to put a clock on ourselves for about 7 minutes 
here with Senator Shelby, myself, and my colleagues who are 
still here, and I am going to open up the record as well for 
the next several days for questions from members who were here 
or who did not make it here this morning but have an interest 
in the subject matter as well and ask you to respond to those 
questions in a timely fashion, if you would.
    Let me just say at the outset to all of you here, I speak 
for myself at this point here. I wish we were not here talking 
about this, quite candidly. I mean, I would love to think the 
idea would be that actually a market would develop these 
products. There is no appetite that I know of from my 
colleagues for coming up with a program here to deal with this. 
There may be some, but I do not know of anyone who would opt 
for this option. The ideal option is, of course, to have the 
market produce a product that was available, affordable, that 
did not require any Federal intervention here at all. That is 
the ideal situation. It is what has happened in most areas. But 
I think all of you, one way or the other, including Mr. 
Plunkett and others, have pointed out that we are dealing with 
some very unique situations and growing problems.
    I was looking at the numbers here. We have had actually -
yes, here it is. The terrorist attacks worldwide have increased 
fourfold in the last year alone. We have a tendency--because we 
have been fortunate in this country not to be affected by it, 
there is sort of a distanced approach to this thing. But from 
2004 to 2005, more than 14,500 people, noncombatants, have died 
as a result of terrorist attacks worldwide. According to the 
National Counterterrorism Center, 2005 was the first year in 
which the number of terrorist attacks worldwide exceeded 
10,000--the number of attacks, 10,000. So the problem is 
growing, and obviously a lot of means are being taken to try 
and minimize this. And it is a major challenge for all of us to 
deal with this.
    But it is very, very important that people understand that 
some--one of you said it. I think each one of you said here 
that this is not a question of if but when. That is the reality 
here. None of us want to say that, but the reality is we know, 
given the nature of our country, the openness of our society in 
many ways, that it is going to happen. And to say otherwise is 
to be terribly naive about this. So we need to do everything 
possible, obviously--in fact, we are debating today, I think, 
on the floor of the U.S. Senate measures we can take. Many of 
us here have fought very hard for the first responder records 
over the last 2 years to do everything possible, to the transit 
security issue, which this Committee dealt with here a few 
weeks ago and marked up a bill unanimously here to deal with 
investing more given the London and Madrid experiences.
    So we have a lot of things we have to do here to deal with 
this issue--this is one of them here--in terms of how we 
minimize the kind of impacts economically to our country.
    Again, I remember Senator Bennett and I working on the Y2K 
issue a number of years ago in anticipation of the problem of 
the computer glitches that occurred. We did not have any major 
problems, but I remember Alan Greenspan testifying before this 
Committee that, as a result of our work, a lot of efforts were 
made by the private sector to upgrade their information 
technology systems; and as a result, while we did not have 
major glitches here, we took steps to hedge against the 
possibility of having major disruptions occur economically.
    So the purpose of these hearings is to look at an option 
here. And I am not overly enthusiastic about some absolutely 
permanent program here. I want one long enough here that gives 
us a chance to take a look at this and to make sure we are not 
back here every 2 years. I cannot come back here and Dick 
Shelby and I year after year coming back and trying to rewrite 
a bill again and getting 533 other Members of Congress and the 
administration to go along with this. It just does not make a 
lot of sense for us to do it. Clearly, this is a problem that 
we had hoped after 2002 would begin to emerge, that the ideal 
situation was that a market would begin to develop here and 
that the need for any extension--I remember making the case I 
did not think we would have to come back. Of course, we did in 
2005.
    So we are here for those reasons, and I have just a couple 
of questions I want to raise with you about--and I will ask Mr. 
Coppola and Mr. Lieber, although the rest of you jump in if you 
want, if you feel compelled to talk about these things. I think 
it may have been Jack Reed, maybe Chuck Schumer, who raised the 
issue here earlier. We are hearing a lot of reports about 
global competitiveness in financial services, and one of the 
concerns is, of course, what is going on in the London markets 
and so forth.
    One of the worries I have here is that if we--given the 
fact that the U.K. and Germany and France and others have come 
up with their own ideas on how to have a permanent program to 
hedge against terrorist attacks from an economic standpoint and 
the fact that we have not done that yet here, is there any 
danger in your mind that some of these projects we are talking 
about here could end up going offshore where there is a more 
reliable system in place to deal with these risks as they 
emerge? Is that a legitimate concern for the Committee to raise 
here with this issue?
    Mr. Lieber. Well, thinking about how this works in New 
York, if we cannot build the real estate that will hold onto 
the first-class jobs that you are talking about, the high-
value-added securities industry type jobs, because they want 
new--they need first-class new real estate. If we cannot build 
that, those very large projects, those very complex projects of 
the kind I was referring to, and in these densely populated 
areas, they will be built elsewhere. It is a fair question that 
you have raised, Senator Dodd, about where they will be built. 
Whether they would be built abroad I think is a very fair 
question in light of some of the other dynamics that you have 
identified in the market encouraging those types of companies 
to relocate operations abroad.
    Mr. Coppola. Certainly in the area of global financial 
services, that is definitely a possibility. Separate from the 
terrorism issue, it has already happened in places like Canary 
Wharf, where many of the global firms have decided to locate. 
And were they to have the opportunity or the desire to do that 
here in the U.S. and should developers not be able to build 
because of a lack of proper insurance, then clearly they will 
land in other countries if need be.
    Chairman Dodd. So you believe that is a legitimate issue.
    Mr. Coppola. It could be, yes.
    Chairman Dodd. And you have alluded, Mr. Lieber--all of us 
have noted here over the last 5 or 6 years some 300,000 
manufacturing jobs in this country have disappeared. I would 
point out a million of those in the defense production areas. 
But, clearly, as you start talking about it, this becomes a 
ripple effect and people begin to look elsewhere. Then, 
obviously, the effects on manufacturing jobs and construction 
jobs would also be certainly a casualty of this process.
    Mr. Coppola. Yes. You know, 6 years ago seems like a long 
time ago, but we cannot forget that in the 14 months following 
9/11, it is estimated $15 billion of new construction was put 
on hold or canceled and some 300,000 construction jobs were 
displaced. While in most cities in any corner that we look, we 
see construction cranes today and so we may feel complacent, if 
terrorism insurance were not to be made available, those 
construction cranes would begin to disappear, and there is no 
question about that.
    Chairman Dodd. Does anyone else want to comment on this at 
all, this specific question?
    Mr. Plunkett. Senator, I would just add that the Treasury 
Department's 2005 report is one area--this question of 
construction is one area of where the broader Treasury view of 
the market would disagree with what you just heard. There was 
considerable concern at the time that TRIA was initially 
enacted that construction would be affected. I remember the 
President talking about let's put the hard hats back to work. 
But in looking at the marketplace retroactively and in talking 
about the effect of the lack of terrorism coverage on 
construction, Treasury concluded that there was not a 
significant impact.
    So I think it is important to keep in mind that Treasury, 
at least, has done broad reviews of the entire marketplace and 
is in a better position than any of us in most cases to draw 
conclusions about these questions.
    Chairman Dodd. I am glad to see the Consumer Federation of 
America embracing the Treasury these days here.
    [Laughter.]
    It has been a strong advocate of the TRIA program, of 
course, over the years.
    Yes, Mr. Coppola
    Mr. Coppola. If I might just add one thing, I cannot speak 
for Treasury, but I can speak for myself. And we had a $300 
million expansion of a major retail center in New York City, in 
Queens, that was scheduled to break ground in early 2002. And 
we waited for TRIA to ultimately get put into place because we 
knew that we would not be able to obtain the proper 
construction and permanent financing. And had it not been put 
into place, we would not have started that job, and we would 
not have completed that major $300 million expansion.
    So speaking from my own personal experience, I can assure 
you it is a big factor.
    Chairman Dodd. Thank you.
    Did you want to say something?
    Mr. McRaith. One other angle to the question about 
construction, Mr. Chairman, is that every construction project 
requires workers' compensation insurance. There are no 
exclusions from workers' compensation insurance. To the extent 
that one insurer has to be more invested in one project than 
another, workers' compensation will not be available--insurance 
will not be available for another project.
    Chairman Dodd. That is a good point. This is Mr. McRaith, 
by the way, for the record--I appreciate that--for the 
Insurance Commissioners.
    Senator Shelby.
    Senator Shelby. It was kind of interesting, the question 
Senator Dodd asked and the one several of you picked up on. But 
I personally believe that maybe Sarbanes-Oxley is running some 
jobs to London, but I am not sure that it is a lack of building 
in New York or elsewhere is. I agree with Mr. Plunkett on that.
    Mr. Plunkett, I also believe that if Treasury and Consumer 
Federation of America are together, Treasury must be doing 
something.
    Mr. Plunkett. They sure are, Senator.
    Senator Shelby. I think that is a good sign.
    Mr. Plunkett, I want to ask you three quick questions.
    First, is group life widely available in the private 
market?
    Mr. Plunkett. Yes, sir.
    Senator Shelby. Second, is group life presently offered at 
affordable rates, falling rates?
    Mr. Plunkett. It is, yes. And there was----
    Senator Shelby. Third, can life insurers obtain reinsurance 
for group life?
    Mr. Plunkett. Well, the Treasury report says that 
reinsurance capacity is growing. It also said, Senator, that 
life insurers have fallen behind their property casualty 
colleagues in modeling risk, that they are not as aggressively 
improving their risk modeling as property casualty insurers.
    Senator Shelby. Mr. Clarke, since the passage of TRIA, the 
insurer deductible has increased from 7 percent to 20 percent. 
During that same period, take-up rates for terrorism insurance 
have risen substantially, according to the President's Working 
Group. These facts suggest that increasing the insurer 
deductible had little impact on the willingness of insurers to 
underwrite terrorism insurance because they had the big risk on 
behalf of the Government.
    Accordingly, should the insurer deductible be increased 
further in order to create additional room for the private 
market to grow? And if the purpose of TRIA is to provide a 
backstop for only those risks insurance companies are unable to 
handle, shouldn't the insurer deductible be as high as possible 
as long as the market worked?
    Mr. Clarke. It is interesting. Some of the reason why the 
rates have come down as the deductible has gone up--we have 
personally in Travelers a $2.2 billion deductible. What happens 
as we retain risk within the deductible, we are not in the 
business of selling terror insurance. We are in the business of 
protecting ourselves against it. So if we write the whole----
    Senator Shelby. You are managing risk, are you not? That is 
what you are into.
    Mr. Clarke. We manage risk.
    Senator Shelby. You insure it, but you do this by managing 
it the best you can based on your experience and your model.
    Mr. Clarke. Well, we manage the whole account, the whole 
risk, and if terrorism is in there, we then protect ourselves 
by whatever model we have. But we basically charge almost 
nothing for terrorism. In fact, if somebody--I would give back 
the last 5 years at a multiple if someone would relieve us of 
this responsibility.
    Senator Shelby. Say again explicitly why do you charge very 
little, if anything, for the terrorist risk?
    Mr. Clarke. I cannot get----
    Senator Shelby. It is because the Government backs up the 
big risk. Is that correct?
    Mr. Clarke. No. It is my retention----
    Senator Shelby. It is?
    Mr. Clarke. It is my $2 billion.
    Senator Shelby. Well, what about the Government's risk? 
That is what you want out there. That is what has worked. That 
is what has caused the--that is why this program has worked, I 
believe.
    Mr. Clarke. If you would like us to pay more or pay for the 
reinsurance, it will just detract from what we will take.
    Senator Shelby. Well, I am not interested in wanting you to 
do anything except I want the insurance market to work.
    Mr. Plunkett, would you please comment on the importance of 
keeping TRIA a truly temporary program as opposed to making it 
permanent?
    Mr. Plunkett. Senator Shelby, I think the main issue here 
is what I raised in my testimony, that adjustments to the 
program would be very difficult politically to make as the 
market changes. We are not calling for a 2-year extension or a 
3-year extension, but we think 4 or 5 years would give the 
program some continuity, but give you adequate time to also 
make changes, if necessary.
    Senator Shelby. Thank you.
    Mr. Peninger, in its report to this Committee last year, 
the President's Working Group found that, despite not being 
covered by TRIA, group life insurance was available in the 
private market and that prices for group life have generally 
declined since September 11, 2001. Mr. Plunkett just echoed 
these findings on the availability and the affordability of 
group life.
    In the absence of any evidence of market failure in the 
group life market, it appears that your proposal to have group 
life covered by TRIA is another example of an insurance company 
seeking to reap the profits of insurance while transferring the 
losses ultimately to the taxpayer.
    Would you comment on that?
    Mr. Peninger. I can make a few comments, Senator.
    First, I guess I do not believe that--our experience at 
Assurant--and that is what I can speak most credibly to--is 
that catastrophe reinsurance is not, in fact, available. We 
have scoured the market every year since 9/11. We have been 
unable to get catastrophe protection in anywhere near the 
limits that we had prior to 9/11. So I think to say it is 
available in the market is in our experience false.
    I would also say that we cannot use exclusions to protect 
ourselves against deaths due to terrorist events. And if you 
say we should just exit the business, I would say that it is 
very difficult to exit one of the most highly desired benefits 
markets in a coverage that for millions of Americans it is 
their only means of protection.
    So I think right now, we are in a situation where in the 
event of a major catastrophe, group insurers will potentially 
fail, and you will have to deal with chaos after the fact.
    Senator Shelby. Mr. Clarke, in your testimony you indicated 
that TRIA has achieved its goals by making terrorism risk 
insurance widely available and help stabilize the market for 
terrorism risk insurance. Based on your testimony, is it fair 
to conclude that you believe that both the program's insurer 
deductible and insurance marketplace aggregate retention amount 
are set appropriately? The system seems to be working under 
this.
    Mr. Clarke. For everything except NBCR.
    Senator Shelby. Except what?
    Mr. Clarke. The nuclear----
    Senator Shelby. OK.
    Mr. Chairman, thank you.
    Chairman Dodd. Thank you.
    Senator Menendez.
    Senator Shelby. Mr. Chairman, could I ask, I have several 
more questions that I would like to submit for the record in 
the interest of time.
    Chairman Dodd. The record will remain open.
    Senator Shelby. Thank you very much.
    Chairman Dodd. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. I am going to 
have to preside, so I just want to get one question out there, 
the core of the differences. I am normally with Mr. Plunkett 
and not the Treasury Department, so I find it interesting 
today, I am not with him today.
    But I want to ask you all to--or those of you--some of you 
to comment on the core of what I understand his statement is, 
which is that the TRIA program as currently structured is 
standing in the way of development of a more vibrant private 
market for terrorism coverage that would have the capacity to 
handle all but the most catastrophic attacks; and, second, that 
you have heard the Treasury Department referred to here several 
times has, in essence, said that federally subsidized 
reinsurance has depressed the demand for private reinsurance.
    What is wrong about that statement? Is there something 
underpinning it that is missing?
    Mr. Veghte. As a reinsurer, if I may comment, it has not 
depressed demand for reinsurance. We----
    Chairman Dodd. Could you speak up, Mr. Veghte? It is a 
little hard----
    Mr. Veghte. We are often asked to provide private 
reinsurance for terrorism. The difficulty in underwriting it as 
opposed to, say, a natural catastrophe, the analytics, the 
predictability of severity and frequency just simply does not 
allow us to provide the same leverage off of our balance sheet. 
Providing capacity for a risk such as terrorism--which is 
virtually impossible to model from a frequency perspective. We 
are making some progress on the severity side, but it is a much 
different dynamic to underwrite.
    Senator Menendez. So it is the frequency versus severity?
    Mr. Veghte. It is both. It is both.
    Senator Menendez. Both.
    Mr. Veghte. But, clearly, if terrorism exposure was sort of 
blended into natural catastrophe reinsurance, nat-cat 
reinsurance for States such as Florida would actually be 
constricted because the reinsurance industry would have to 
reduce their limits because of the uncertainty of the terrorism 
risk embedded in the private reinsurance market.
    Senator Menendez. Mr. Plunkett, what do you say about the 
GAO's report last year that said the risks from nuclear, 
radiological, biological, and chemical threats are distinctly 
different from those hazards that are predictable, measurable 
in dollar terms, random, and unlikely to result in catastrophic 
losses for an insurer. Given those challenges, the GAO found 
that, ``Any purely market-driven expansion of coverage for 
these specialized terrorism risks is highly unlikely to be seen 
in the foreseeable future.''
    Mr. Plunkett. Senator, we agree with the GAO, and others 
have made the same observation. That is why we proposed a 
higher-level program that would cover nuclear, biological, 
chemical, and radiation attacks. And we think it is one of the 
parts of the market that is not yet working.
    Senator Menendez. And if that were to be the coverage, then 
what would be the problem for those of you who are involved in 
the insurance, if that were to be the coverage? For those of 
you who are insurers, what would then be the issue? If you were 
to concentrate it, as Mr. Plunkett suggests, would that still 
meet the market's challenges?
    Mr. Veghte. I would suggest there would still be a major 
amount of uncertainty as to the precise exposure to non-NBCR 
and, therefore, still make underwriting the risk very 
difficult, and potentially contract capacity in the non-
terrorism exposures.
    Senator Menendez. One last question. Mr. Lieber, even as we 
talk about having reauthorization of a Federal program, aren't 
there some challenges on the private existing insurers today? I 
have been following the problems of the former World Trade 
Center insurers, and aren't there those who seek to walk away 
even from the existing insurance?
    Mr. Lieber. Yes, and this is--you are right--a separate 
issue. We have to obtain financing to rebuild, and the TRIA 
program and Federal terrorism insurance are essential to that. 
Separately, we do have to resolve the outstanding claims with 
the insurance companies who provided coverage on the World 
Trade Center, and after two jury verdicts affirmed by the U.S. 
Court of Appeals, some of them are still unwilling to make good 
on that.
    So while we are thrilled to be at the same table on the 
same side of an issue with our friends in the insurance 
industry on TRIA, obviously, to make sure the World Trade 
Center is rebuilt, we are going to have to resolve those 
disputes as well and make sure we collect them from our friends 
in the insurance industry.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Menendez.
    Let me just raise a couple more questions, if I can here. I 
want to come back to the group life issue that was raised by 
Senator Shelby and others here as well. Let me ask you, Mr. 
McRaith, to comment on this as an Insurance Commissioner and 
looking at these questions. How do you answer the criticism 
that since most, if not all, group life policies currently 
cover terrorism losses, that seemingly the capacity already 
exists to cover those losses?
    Mr. McRaith. As insurance regulators, Mr. Chairman, our 
priority concern is that the promises made to the consumers are 
kept. The primary obligation we have to fulfill that 
responsibility is to ensure that--to examine and regulate 
companies for solvency.
    If, for example, one company in a group life policy had 
1,000 participants in one location, they would normally expect 
three to four people to die during the course of a year. When 
that same company has--that site is the location or the target 
of a terrorist attack, you can lose 1,000 people, 
hypothetically, in one event on 1 day. And at the same time, 
all the other policyholders of that company around the country 
are still dying at their normal rates. Solvency is the issue, 
and that is why we encourage consideration of group life in the 
renewal or extension of the current TRIA.
    Mr. Peninger. Senator, could I add to that?
    Chairman Dodd. Certainly.
    Mr. Peninger. My company in the early 1990's happened to 
insure Cantor Fitzgerald. We did not have them insured at the 
time of the attack, but that company cost their insurer $700 
million due to 9/11, at which they had full catastrophe 
reinsurance protection. That would not be available for them 
today, so I think that speaks to the solvency risk.
    Mr. Plunkett. Senator, I would like to say that our 
Insurance Director, Bob Hunter, recommended to the NAIC shortly 
after 9/11 that the NAIC push group life insurers in the 
direction of cross-insurance. When you have these highly 
concentrated risks in distinct geographic areas, he recommended 
that group life insurers use cross-insurance mechanisms similar 
to what are sometimes used in the property casualty area to 
cross-insure each other, a building in San Francisco cross-
insuring with a building in New York, so to speak, to deal with 
the unique aspect of aggregate risk that we are talking about 
here. To the best of our knowledge, not much has been done here 
by group life insurers.
    Chairman Dodd. What is your reaction to that, Mr. Peninger?
    Mr. Peninger. There has been some talk about that. It is a 
very complicated problem. I will not say it is impossible, but 
I think you have to have mechanisms for ranking the risk of 
various areas. There are just lots of factors that would go 
into that. It sounds great in theory. I think the devil is 
definitely in the details on that.
    Chairman Dodd. Do you agree with that, Mr. McRaith?
    Mr. McRaith. Absolutely, Mr. Chairman. We certainly respect 
the opinions of the Consumer Federation, and they often make 
valuable points. That is not one, however, that is valuable 
beyond a hypothetical discussion.
    Chairman Dodd. Yes. Let me come back to a question. Senator 
Bunning raised this in his opening comments, and Senator 
Menendez talked about it. It is the capacity issue, and I am 
trying to project ahead in questions that my colleagues will 
have and others will have about this. It is maybe not a 
sophisticated question in your minds, but one that I can see 
them raising all the time. You know, this is a very talented 
and creative industry, the insurance industry, and it has been 
able to model in all sorts of areas to be able to assess risk 
and to make judgments about it, and in a very sophisticated 
economy.
    Now, obviously, I think all of us understand with terrorist 
attacks we are dealing with a unique feature here, but let me 
raise this. A study conducted by the Treasury Department in 
2005 found that 50 percent of the insurers surveyed would cease 
providing terrorism risk insurance if TRIA expired. They would 
cease it, 50 percent said that they would.
    The Marsh report found--I am quoting them here--``If TRIA 
is not renewed or if there is no permanent solution in place, 
the stand-alone insurance market is unlikely to have sufficient 
capacity to meet demand.''
    I have basic questions, and I will ask who may be the most 
competent to address it. How much capacity is currently 
available in the private sector? And how has that capacity 
changed over the last few years? And what are the factors 
limiting--and this is the question--the private sector from 
expanding that capacity?
    First of all, does someone have the answer to that first 
question on how much----
    Mr. McRaith. Our estimates, Mr. Chairman, are that the 
entire property casualty industry has a capacity of about $427 
billion. Approximately one-half of that is for commercial 
lines.
    Chairman Dodd. You mentioned this earlier.
    Mr. McRaith. Right. And each company is some fraction of 
that.
    Chairman Dodd. OK. Well, give me some of the factors, 
again, this limiting capacity issue here, and the response to 
the question of why can't the industry begin to address and 
deal with this question of capacity.
    Mr. Bailey. Mr. Chairman, maybe I can jump in on a little 
bit of this. The whole concept--and I have listened to some of 
it--of a private solution is a complicated one for a lot of 
reasons. Our industry has not done, frankly, a lot of mundane 
things well. Mastering just the art of getting an accurate 
policy issued is not something that we would put in the to-do 
list at this point.
    The extraordinary at that it would require, the effort that 
it would require for all of these parties to come together to 
create a private solution that was effective in every aspect is 
just impractical. It would be a big bet for us to say let's 
shut down TRIA and hope that everybody will come together, the 
private sector, and come up with a reasonable solution. And 
given what is at risk, it is just not a bet we should make.
    Mr. Plunkett. Mr. Chairman, couldn't Congress facilitate 
such a private solution? We recommend as part of our higher-
level TRIA proposal that, under the NAIC's direction, Congress 
facilitate the construction of a private pool at lower levels 
of losses, under $100 billion. That is an approach, if done 
fairly, that could involve a public-private partnership with 
Congress merely facilitating, allowing, encouraging, and 
mandating that NAIC do it under certain specific conditions.
    Chairman Dodd. It is a thought. Well, listen, thank you all 
very much. We are going to try and move on this. And I am 
pleased to see even--and I thank you, Mr. Plunkett, as well 
here--that the need for some continuations here may differ on--
and obviously you do on the length and some of the areas we 
cover, but my sense is here that there is a general consensus 
we cannot let this--the option of doing nothing is really not 
acceptable. I think, Mr. Plunkett, you would agree with that. I 
am trying to get your attention, Mr. Plunkett.
    Mr. Plunkett. Oh. Excuse me. Pardon me.
    Chairman Dodd. Doing nothing is not an option.
    Mr. Plunkett. We agree.
    Chairman Dodd. All right. And so what we need to try to 
pull together is--if we cannot--what I do not want to have 
happen is us to get into next fall, late fall, with this clock 
ticking on us here. So I am going to try and urge my colleagues 
here on the Committee to come up with some proposals on this 
and then move the process so we get some clarity on this, and 
earlier, rather than waiting later, when I think the clock can 
become a tremendous disadvantage with people who just want to 
be obstructionist for the sake of being obstructionist.
    Senator Reed has, I know, indicated--I don't want to try 
and speak for him here, but a strong interest in the subject 
matter as well, and I am very appreciative of his concerned 
about this. So we will be trying to move as quickly as we can 
here, but listening to people and trying to package something 
together.
    I want to say how grateful I am to Senator Shelby. He and I 
differ on this issue to some degree, but he has been very 
cooperative in the past in trying to work on something here 
that will allow us to build a consensus here that will work.
    So I am grateful to him for his cooperation, and I am 
thankful to my colleagues here who showed up today as 
expressing their interest in the subject matter. It is very 
important, and I am very grateful to all of you who bring a 
wealth of knowledge to this, and understanding. It has been 
very helpful to hear your testimony here this morning.
    This Committee will stand adjourned.
    [Whereupon, at 12:40 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

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         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI 
                      FROM CHARLES CLARKE

Q.1. Access and affordability of terrorism risk insurance has 
improved since 2001, and since TRIA's reauthorization in 2005. 
This has happened even as the TRIA program has been scaled back 
significantly. Do you forecast this trend continuing under 
current market conditions?

A.1. While the data show that access and affordability for 
terrorism insurance have improved since TRIA was enacted in 
late 2002, and that the federal legislation has had a 
stabilizing effect on the market, this was not the case during 
the period following September 11, 2001, and the passage of 
TRIA. Equally important, without a federal program that 
continues to fulfill these goals, there are predictions that 
market conditions would return to those that commercial 
insurance consumers saw post-September 11 and pre-TRIA. For 
example, according to the American Academy of Actuaries, 
``without a federal backstop, there will be a long-term, rather 
than just an immediate negative effect where there will be 
higher prices, decreased availability, and lower take-up 
rates.''
    On the other hand, with federal legislation in place, we 
have seen the types of market improvement that you describe. 
The most recent (July 2006) ``Marketwatch'' report by Marsh 
indicates that the percentage of companies buying terrorism 
insurance covering property risks has increased consistently 
since TRIA was enacted, reaching nearly 60 percent as of mid-
2006. The Council of Insurance Agents and Brokers' most recent 
``Market Survey'' (covering the fourth quarter 2006) indicates 
that terrorism premium rates are stable for most policyholders. 
These market data are an indication that TRIA and the TRIA 
Extension Act are working effectively to achieve the goal of a 
stable insurance market despite the ongoing difficulties of 
managing terrorism risk.
    Although the TRIA Extension Act requires private insurers 
to assume a significant amount of terrorism risk through per 
company retentions, quota shares, and the removal of several 
commercial lines from the program, the presence of the federal 
backstop puts a box around the volatility associated with 
terrorism risk and therefore facilitates both the availability 
and affordability of coverage.
    Many insurers--particularly those with large, diversified 
client portfolios--manage their terrorism accumulations to a 
level that is significantly less than their very substantial 
retentions. This may be why scaling back the program, as was 
done in the TRIA Extension Act, did not change the market 
dynamic significantly.
    Removing the backstop or further increasing retentions, 
however, could have a more adverse impact, and undermine the 
legislative goal of stability achieved under TRIA and its 
successor. The current TRIA retention levels are already so 
high that they preclude meaningful backstop protection for some 
insurers, while for others, the program functions as more of a 
solvency protection mechanism than an underwriting tool. 
However, if retentions are raised further or the program is 
scaled back to the extent that it ceases to perform even this 
vital solvency role, regulators and rating agencies may step in 
to limit exposure levels. As noted, this could lead to market 
conditions akin to those we saw between September 11, 2001, and 
the statute's enactment in November 2002, and the long-term 
negative effects described by the American Academy of 
Actuaries.

Q.1.a. Is the goal of the insurance industry to operate in a 
market without a TRIA program? Should it be their goal?

A.1.a. The insurance industry's goal is to manage terrorism 
insurance as efficiently and effectively as possible, given 
myriad factors that make this an uninsurable risk, particularly 
for chemical, nuclear, biological, and radiological (CNBR) 
attacks. Right now, and for the foreseeable future, there is no 
way to change the characteristics of terrorism risk to ``make'' 
it insurable and much of the information necessary to assess 
the frequency of acts of terrorism understandably lies solely 
in the hands of the federal government. Therefore, the 
government is a necessary partner in managing our Nation's 
exposure to terrorism.
    Nonetheless, the industry is doing everything it possibly 
can in the private market to enhance its understanding of this 
risk and to assess the probability and severity of another 
attack or series of attacks on U.S. soil. Improvements to 
computer-based modeling are an example of what private insurers 
are doing to assess and manage their exposure both at 
individual locations and for aggregates of exposures. However, 
the models do not quantify the likelihood of a terrorist attack 
or provide insurers with any additional capacity to insure 
terrorism risk. In fact, by helping insurers to allocate 
capacity more efficiently, they actually may reduce the amount 
of coverage provided by individual insurers in perceived high-
risk or high-density locations in the absence of federal 
involvement in the management of this risk, or as the federal 
program becomes only a solvency protection mechanism.
    Additionally, the high degree of state regulatory 
restrictions and the resulting lack of free market is a further 
impediment to insurers' ability to operate without a federal 
backstop. These price and product controls impede insurers' 
ability to price terrorism adequately and therefore restrict 
the supply of insurance that they are able to make available, 
consistent with sound financial management, a situation that 
would be exacerbated were TRIA to expire.
    Thus, if Congress's goal is to stabilize and, hopefully, 
improve the availability and affordability of terrorism 
insurance, then a meaningful federal program must be continued. 
We also strongly support preemption of state rate and form 
regulation.

Q.1.b. What is your reaction to the CBO statement that a long 
term program would contribute to marketplace distortions?

A.1.b. We disagree strongly with the Congressional Budget 
Office's (``CBO's'') statement, taken from a January 2005 
Report (``Federal Terrorism Reinsurance: An Update''), that a 
long term program would contribute to marketplace distortions. 
The industry retention under the TRIA Extension Act, estimated 
at $35 billion in 2007, allows private reinsurers ample 
opportunity to play a significant role in taking on and 
managing terrorism risk. Yet, since CBO made those statements, 
there have been only incremental increases in the amount of 
private sector terrorism reinsurance capacity. According to Mr. 
Veghte's testimony at the hearing, there is currently about $6-
8 billion in private sector terrorism reinsurance capacity, 
about the same as a year ago.
    Reinsurers view this risk much the same way that primary 
insurers do. As a result, they are reluctant to take on more 
risk than is prudent. The one important distinction between 
primary insurers and reinsurers is that reinsurers do not 
operate under government price controls and are able to charge 
free-market, competitive rates for reinsurance. The current 
regulatory differences between the primary and reinsurance 
markets mean that the premiums that reinsurers require from 
primary insurers often exceed the amount of terrorism premium 
that primary insurers are able to obtain from policyholders, 
due to these state rate regulatory restrictions and the 
policyholders' interest in purchasing coverage required to be 
made available under TRIA. According to the PWG, a little less 
than $1 billion in primary terrorism insurance premiums is 
collected annually. Virtually all of this is being used to fund 
the $6-8 billion private reinsurance layer, and many carriers 
are self-insuring their retentions by exposing more of their 
capital to risk. TRIA is not distorting the market; rather, it 
is allowing it to function in a manner that addresses 
fundamental economic realities facing insurers and 
policyholders.

Q.2. Accurate risk modeling is key to increasing the 
availability of insurance. Mr. Veghte discusses risk modeling 
in his testimony. Like other catastrophic events, terrorist 
attacks are unexpected, unpredictable, and carry a large 
potential for destruction. What makes terrorism risk impossible 
to model where other catastrophic events can be modeled with a 
certain degree of accuracy?

A.2. While both natural catastrophes and terrorism are capable 
of causing extreme loss, they are fundamentally different from 
an insurability perspective. For terrorism, private sector 
reinsurance or other risk-sharing capital remains woefully 
inadequate and shows no signs of robust growth in the near 
future. This is a strong indicator that the capital markets 
have reached the same conclusions about the private 
insurability of terrorism risk. Moreover, there is no reliable 
method for determining the likelihood of a terrorist attack 
(event frequency) within the United States, a critical 
component in determining the insurability of a risk. This is 
complicated by the fact that terrorism is a deliberate act 
committed by individuals bent on doing the worst possible harm. 
Additionally, the interdependence of terrorism risk also limits 
the potential effectiveness of mitigation. Finally, for 
national security reasons, vital information necessary to 
assess the terrorism threat is strictly classified and 
unavailable to insurers as they attempt to manage this risk.
    Unlike natural catastrophe models, which take both 
frequency and severity into account, current terrorism models 
in use are deterministic, not probabilistic--i.e., they 
quantify the impact of representative terrorist attack 
scenarios but do not assess the likelihood of an attack. 
However, both the frequency and severity of attacks are 
important considerations with respect to the underwriting and 
pricing of terrorism coverage. As long as the frequency of such 
events remains unpredictable, the models will be of limited 
assistance to insurers as they grapple with the dimensions of 
terrorism risk.

Q.3. According to the President's Working Group study, about 
forty percent of all policyholders do not purchase terrorism 
insurance. A contributing factor to this may be the belief by 
some that the federal government will step in if another attack 
occurs. Do you think government subsidies to the insurance 
industry contribute to this perception?

A.3. TRIA does not provide a subsidy to the insurance industry. 
It is a federal program intended to stabilize terrorism risk 
insurance markets, that provides a benefit to policyholders and 
enables the U.S. economy to operate and grow in the face of 
potential terrorist attacks in this country. Pursuant to the 
National Association of Insurance Commissioners Model 
Disclosure form (which has been accepted by the U.S. Treasury), 
insurers are required to warrant that the premiums paid by 
policyholders do not include any charges for the portion of 
losses covered by the TRIA backstop.
    According to research by the Center for Terrorism Risk 
Management Policy at RAND, the structure of the current program 
helps to keep premiums more affordable for policyholders and 
therefore encourages a higher take-up rate. Moreover, RAND 
believes that, ``if TRIA is allowed to sunset, given the likely 
increase in prices [paid by policyholders], and assuming no 
change in the perception of risk by those who are insured, it 
is likely that take-up rates will fall.'' Thus, rather than 
depressing take-up rates, we believe that the federal backstop 
in TRIA helps to keep rates affordable and encourages the 
purchase of insurance.
    Prior to Hurricane Katrina, most post-disaster response and 
recovery grants provided by the federal government went to pay 
for products and services that traditionally are not covered by 
private insurance, such as government infrastructure repairs 
and small business loan programs. Hurricane Katrina changed 
that equation by expanding the categories of federal assistance 
to some areas that traditionally have been covered exclusively 
by insurance. Changing expectations about the role of post-
event government assistance, rather than TRIA's support for the 
insurance marketplace, may change the willingness of 
policyholders to purchase insurance in the future. To 
understand this better, we encourage a thorough analysis of how 
federal aid following a natural or man-made catastrophe should 
be distributed in the future, particularly as it relates to 
losses that typically are covered by private insurance.

Q.3.a. Would increased purchases of terrorism insurance 
increase availability of policies in the marketplace?

A.3.a. TRIA requires that insurers make terrorism insurance 
available for all TRIA-covered lines, on the same terms and 
conditions that they make non-terrorism insurance available. 
Thus, to increase property insurance take-up rates, it is not a 
matter of more insurers making the coverage available, but of 
more policyholders choosing to purchase it. For workers' 
compensation, state laws in every jurisdiction not only require 
insurers to make insurance available, but also mandate its 
purchase as part of comprehensive workers' compensation 
policies that cover all workplace accidents and injuries. As a 
result, for workers' compensation, the take-up rate is 
effectively 100%, so there is no need to increase take-up 
rates.
    As I noted previously, the percentage of companies buying 
terrorism insurance covering property risks has increased 
consistently since TRIA was enacted, suggesting both increased 
demand and more acceptable pricing. The 60 percent take-up rate 
actually compares favorably to other voluntary purchases of 
catastrophic risk insurance, particularly flood insurance and 
earthquake insurance.
    Looking ahead, supply is dependent on underwriters' 
perception of risk and it will remain very limited for certain 
target exposures and concentrations of risk. Increased ability 
of insurers to provide coverage beneath the TRIA retentions 
will only occur with the improvement in terms and conditions of 
reinsurance available to the industry.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM CHARLES 
                             CLARKE

Q.1. Has industry proposed a long-term private sector solution 
or is the federal program the only long-term solution? If the 
federal backstop is the long-term solution, then what 
modifications does industry propose?

A.1. TRIA is a public/private partnership which requires 
insurers to retain significant losses before the federal 
backstop is triggered. Based on the current year's retention 
levels (20 percent of premiums covered lines), it is likely 
that an event would have to exceed the magnitude of the 
September 11, 2001 attack on the World Trade Center--more than 
$30 billion--before the backstop comes into play. Additionally, 
there are mechanisms in TRIA which provide for a post-event 
policyholder surcharge through which Treasury can recoup 
federal dollars that are expended. Through the per-company 
retentions and policyholder surcharges, both insurers and 
insureds make a significant private sector commitment to 
managing terrorism risk.
    We continue to believe, however, that a federal backstop, 
particularly for CNBR risk, will remain necessary for the 
foreseeable future. As I outlined in my testimony, the 
characteristics that make terrorism an uninsurable risk remain 
as strong today as they were immediately following September 
11, 2001. While TRIA and its extension do not change this basic 
dynamic, they put a box around the volatility associated with 
terrorism risk and, therefore, facilitate both coverage 
availability and affordability.
    For the past six and a half years, we have been working 
diligently with Congress, the Administration, capital markets 
experts, the policyholder community, and others to examine 
alternatives to TRIA. We continue to believe it is the most 
operationally effective and fiscally efficient structure for 
balancing market needs and solvency concerns. While well-
intentioned, the ``pool'' proposals that we have analyzed could 
undermine sound underwriting and are unlikely to provide 
significant new capital for the spreading of this risk.
    We believe that the most important change that could be 
made to TRIA is to provide financial certainty for insurers and 
increased federal financial participation in the event of a 
CNBR attack. Our greatest concern relates to the current $100 
billion program cap, which would be wholly insufficient in the 
event of a nuclear strike on a U.S. city. We also support 
recalibrating insurer participation in a manner that is 
consistent with the potential financial and operational 
consequences of a CNBR attack. In my testimony, I outlined 
several other suggested program changes applicable to 
conventional terrorism risk, but we believe that appropriately 
addressing CNBR risk is the highest priority in terms of 
proposed modifications to the current program.

Q.2. What effect would tax-deductible reserves for future 
terrorism losses have on an insurer's balance sheet? What 
effect does it have on the ability to provide coverage?

A.2. Under current federal tax laws, GAAP, and state insurance 
regulatory accounting standards (known as SAP), insurers are 
not permitted to establish reserves for events which have not 
yet occurred. This results in considerable volatility of losses 
and earnings, depending on catastrophe loss experience (natural 
catastrophes as well as terrorism) in a particular year.
    To address this issue fully (i.e., from both a tax and an 
accounting perspective), it would be necessary to amend the 
Internal Revenue Code, GAAP, and SAP. Insurers then could 
establish tax-deductible terrorism/catastrophe reserves, and 
reflect them on their accounting statements.
    These changes might reduce volatility initially as a 
reserve buildup would allow for payment of some or all claims 
with potentially little impact on an insurer's capital; 
however, the reserve fund would have to be built up again over 
time and those costs would have to be factored into perspective 
costs and could create volatility post event. There are 
differences of opinion in the financial community as to whether 
this would put companies in better position to manage 
catastrophe risk. There are, for example, concerns that a 
catastrophe reserve would decrease insurers' surplus (because 
the money is taken from surplus and put into a reserve), thus 
``trapping'' capital that may be needed for other purposes, as 
well as potentially reducing the capital that would otherwise 
be used to underwrite risks. There is also a timing issue. 
Certainly, in the case of a CNBR terrorist attack, it would 
take many, many years for insurers to build reserves sufficient 
to pay losses that could total hundreds of billions of dollars. 
As this is occurring, money that otherwise would be paid in 
taxes is allocated to the tax-deductible reserve, leading to a 
federal revenue loss that might actually exceed the budgetary 
impacts of the TRIA program.
    Additionally, absent a federal backstop, tax-deductible 
pre-event reserves are not likely to aid availability in a 
material way because insurers must continue to manage their 
terrorism risk based on exposure models and overall exposure 
levels. They cannot take on more risk than is prudent in the 
short-term because of the possibility that a tax-deductible 
reserve will grow in the future. Moreover, rates are not likely 
to decline, and in fact could increase, because the money that 
is being set aside in the reserve to pay for future events is 
not available to pay non-terrorism losses in the current year, 
but both must be funded.

Q.3. If it does not become mandatory for insurers to offer CNBR 
coverage, how would insurers adjust or allocate a loss in the 
event of a terrorist attack involving both a conventional and 
unconventional weapon? In the case of, say, a dirty bomb it 
causes a large amount of physical damage to the building, but 
only a small amount of radioactive or chemical clean-up. Would 
insurers look to exclude the entire loss?

A.3. Absent the specific facts as they apply to each 
policyholder, it is not possible to comment on how insurers 
would adjust or allocate a loss in the event of a terrorist 
attack involving both a conventional and unconventional weapon. 
However, your question underscores one of the problems that 
could arise from the current statutory framework, which 
recognizes that the current TRIA backstop is not robust enough 
to alleviate the solvency threat posed by unconventional 
weapons and therefore allows insurers to utilize CNBR 
exclusions to the extent permitted by state law. For workers' 
compensation, there would be coverage for both conventional and 
CNBR terrorism losses, with no distinctions.

Q.4. If industry could understand the long term probabilities 
of terrorism occurrences, how could the industry price the risk 
in a reasonable way that would spread the cost over time? In 
other words, if the private industry could learn to model and 
price the risk should insureds be able to expect little to no 
charge in advance of an event, and enormous charges after, 
dwindling over time? Is that desirable?

A.4. As a general proposition, insurers use terrorism models to 
estimate the amount of insured loss from a static event so that 
they can manage their respective accumulations of risk; this is 
known as a deterministic model. This technique allows insurers 
to spread their allocations of capacity geographically so that 
the insurers' responsibility to compensate for physical damage 
and human loss is expected to fall within its risk tolerance. 
It does not, however, allow them to factor in the likelihood of 
a future terrorist attack, which requires probabilistic 
modeling. Probabilistic modeling for terrorism is in its 
infancy, and it is likely to take years, if not decades, for it 
to advance to the point where insurers have any confidence in 
the predictions.
    Even if credible probabilistic models were available, one 
should not confuse the ability to quantify terrorism risk with 
the ability to insure it. Models do not provide insurers with 
any additional capacity to insure terrorism risk and in fact 
may result in reducing the amount of coverage provided by 
individual insurers in perceived high-risk or high-density 
locations. While developing this improved understanding of the 
terrorism loss potential is important to protect solvency, it 
does not further TRIA's goals of improving availability and 
affordability of terrorism insurance.
    State rate regulatory requirements generally prohibit 
insurers from retrospectively recouping past losses in their 
rating base (i.e., rates are based on projected future costs, 
not recovery of past losses). Even if state regulations 
permitted such charges, they probably could not be sustained in 
the market, because new entrants who are not burdened by the 
losses in question could undercut insurers who need to recoup 
past losses. Thus, private insurers do not have the legal or 
practical ability to charge ``little or no'' premium in advance 
of an event, and larger amounts after the fact, as suggested by 
your question. TRIA, however, provides such a framework for the 
federal government to recoup monies its pays for insured losses 
through a post-event policyholder surcharge (capped at 3% of 
premium annually). The federal backstop results in lower 
premiums in the absence of a terrorist attack and the 
policyholder surcharges result in higher post-event costs to 
allow for recoupment to the Treasury.

Q.5. Granting that TRIA provides insurers some certainty about 
Federal support and their own retention of risk, whether we 
have TRIA in place or not, is it not true that a severe 
terrorist event will end up in the lap of the Federal 
Government to fund, after the fact, since insurers' equity is 
insufficient?

A.5. TRIA provides certainty not only to insurers but also to 
policyholders, the Treasury, and the economy at large. For 
insurers, the per-company retention has increased each year 
since TRIA was enacted (7% in 2003; 10% in 2004; 15% in 2005; 
17.5% in 2006; 20% in 2007) and is unlikely to be breached in 
any but the most extreme terrorist attacks. Nonetheless, the 
backstop does provide stability to the marketplace and solvency 
protection in the event of a large scale terrorist attack. TRIA 
also provides policyholders who purchase terrorism coverage 
with the certainty of knowing that they have an economic safety 
net in place to cover workers' compensation, property loss, and 
liability claims.
    The policyholder surcharge mechanism in TRIA provides 
fiscal certainty for taxpayers through recoupments to Treasury. 
The program imposes mandatory policyholder surcharges for 
aggregate loss levels to the extent those losses are paid by 
the federal government up to $27.5 billion, and allows 
policyholder surcharges at Treasury's discretion above that 
level, up to the $100 billion annual program cap.
    Greater certainty in each of the aforementioned areas 
provides short- and long-term benefits to the economy. This 
certainty would be severely compromised in the absence of TRIA, 
however. Insurers would face the risk of ruin in the event of a 
catastrophic terrorist attack. As noted above, this could 
result in higher costs and reduced availability of terrorism 
insurance coverage, leading to more uninsured losses in the 
event of a large-scale attack and adversely affecting not only 
the policyholders who are the targets of the terrorists, but 
also the broader economy. The federal government may step in to 
pay these losses, but without TRIA's policyholder surcharge 
mechanism, there is little likelihood that these federal 
expenditures will be recouped.
    Thus, while TRIA is perceived to be providing a federal 
benefit to the insurance system, it is altogether possible that 
federal payments would be higher if the program is allowed to 
expire than if a backstop remains in place.

Q.6. Would it not be preferable for all parties to provide for 
some advance funding of this risk (possibly in combination with 
other risks to lower the burden of any one on the taxpayers and 
the society), so the cost could be spread over time, so the 
uncertainty concerning the consequences be diminished and so 
that the government would receive some income for its 
inevitable support?

A.6. As noted above, insurers do not charge any premium to 
policyholders for the protection provided by the federal 
backstop, with the understanding that policyholders will be 
assessed for post-event surcharges if a terrorist attack 
triggers federal payments under the program to the levels 
specified in the legislation. Should TRIA become ``pre-funded'' 
in some fashion, terrorism insurance rates are likely to 
increase to finance the layer of risk that currently is funded 
through the post-event policyholder surcharge, potentially 
resulting in a drop in take-up rates and less protection for 
the economy. We believe that an appropriate balance between the 
per-company retentions, which provide advance funding through 
the private insurance system, and policyholder surcharges, 
which provide after-the-fact recoupment to Treasury, provides 
greater overall economic efficiency than would a program that 
requires more advance funding of the loss layer that currently 
is post-event funded, and therefore higher insurance rates.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MICHAEL J. 
                            PENINGER

Q.1.a. In your testimony, you state that if group life 
insurance is added as a covered line under TRIA, a separate 
recoupment mechanism should be created for group life insurers 
because they take on different types of risks than P&C 
insurers. Please explain why the risk covered by TRIA--the risk 
of loss from an act of terrorism--is not the same for both 
group life and P&C insurers?

A.1.a. The business of group life insurance is very different 
than that of P&C insurance. P&C policies are generally priced 
to take into account the immediate and complete destruction of 
each property from various events, including fires, tornadoes, 
earthquakes and hurricanes. Terrorism risk simply adds to the 
probability of total loss (although at an indeterminable rate). 
Group life policies, on the other hand, are priced according to 
actuarially-sound mortality and morbidity tables that 
accurately estimate the independent death rates of individuals 
over various periods of time. These tables, and the resulting 
policy premiums, do not, and cannot, take into account 
unpredictable man-made terrorist attacks that can kill a 
significant number of insured individuals all at once. In this 
case, the probability of death is not just increased by the 
terrorism risk (once again, at an indeterminable rate), but 
magnified by the concentration risk prevalent by having groups 
of people all located in one place.
    In addition, unlike most P&C carriers, most (if not all) 
group life insurers do not exclude nuclear, biological, 
chemical and radiological terrorist events from coverage. As a 
result, life insurers are more susceptible to financial 
distress than P&C insurers if a major NBCR attack were to 
occur.

Q.1.b. Please explain why the taxpayer should not have the 
right to recoup payouts under TRIA from all of the 
beneficiaries of the program? If an insurer receives the 
profits associated with writing a line of insurance covered by 
TRIA, why would they not also have to pay for the costs of the 
government backstop provided by TRIA? If TRIA is an insurance 
program, should not beneficiaries have to pay for the cost of 
the insurance even if a beneficiary does not receive any 
payments under the program?

A.1.b. We agree that the beneficiaries of the TRIA program 
should pay for the cost of the program. The proposal for 
separate recoupment provisions does nothing to prevent that 
from occurring. It simply allocates the recoupment in 
proportion to the benefits received from the program. Because 
group life and P&C insurance are very different from each other 
in terms of risks that are assumed, premiums that are charged 
and duration of coverage, we believe it would be inappropriate 
and inadvisable to commingle the recoupment of funds that were 
remitted for group life and/or P&C claims. Separate recoupment 
provisions should be included in any TRIA extension in order to 
properly and equitably match the repayment of taxpayer funds 
(via ``terrorism loss risk-spreading premiums'') with those 
major lines of insurance that triggered the disbursement of 
such funds.
    Group life insurers should not have to reimburse the 
Treasury for financial assistance that relates to P&C losses, 
and vice versa. Otherwise, in the event of a terrorist attack 
that causes mostly P&C losses in terms of dollars, life 
insurers would have to pay the Treasury billions of dollars for 
P&C losses that are completely unrelated to their line of 
business and for which they derived no benefit from. Group life 
insurers would not derive any benefit under TRIA (e.g., amount 
of deductibles, recoupment) by P&C insurance being covered in 
the program, just as P&C insurers would not derive any benefit 
by group life insurance being added to the program.
    Our recommended approach is similar to how our nation's 
insurance guaranty association system works. All states but one 
(Wisconsin) have separate guaranty associations for P&C and the 
life/health insurers. This system is designed so only life/
health insurers are responsible for contributing toward the 
unpaid claims of another life or health insurer, while only P&C 
insurers are responsible for contributing toward the unpaid 
claims of another P&C insurer. The TRIA program should be 
designed similarly.

Q.2.a. In your written testimony, you argue that group life 
insurance should be covered by TRIA because competitive 
pressures will force companies to write group life insurance. 
You state that ``unless the entire industry took the same 
approach, any group life insurer that tried to prudently manage 
its risk exposure by excluding terrorism coverage would be 
placed at a severe competitive disadvantage in the 
marketplace.'' As a general proposition, do you believe that 
life insurance companies have the discipline necessary to abide 
by their own underwriting standards and not to sell insurance 
that exposes them to risks they can not effectively manage?

A.2.a. It is not a matter of discipline, but instead, a matter 
of economic necessity and good public policy that group 
insurers offer group life insurance to its policyholders at 
affordable rates. Since group life is generally offered to 
employers or associations as part of a package of other 
insurance benefits (e.g., medical, dental, disability, 
accidental death and dismemberment), an insurer would be 
significantly jeopardizing its ability to obtain any group 
insurance business if it decided not to include group life in 
its benefits packages (since its competitors are including 
group life in their packages).
    While it is true that each and every insurer could decide 
not to offer group life (which would eliminate the competitive 
disadvantage of not offering it), group insurers believe that 
its policyholders and their employees and members (for whom 
group life is often their only form of life insurance) are 
better protected if group life is included in these benefit 
packages, despite the additional risk and potential financial 
loss if a major terrorist attack were to kill an extraordinary 
large number of certificate holders.
    Insurers attempt to minimize their own risks of loss by 
purchasing appropriate amounts of reinsurance. Immediately 
after September 11, 2001, group life insurers were generally 
unable to obtain catastrophic reinsurance, especially for 
terrorist events. While such reinsurance has generally become 
more available, it is often limited (e.g., it usually comes 
with higher premiums, deductibles, various exclusions and lower 
coverage limits).

Q.2.b. If so, does not the fact that life insurers are 
presently offering group life at affordable rates, as the 
President's Working Group on Financial Markets has reported, 
demonstrate that there is no need to include group life 
insurance as a line covered under TRIA?

A.2.b. No. The fact that group life remains affordable is a 
function of competitive pressure as described above. To be able 
to sell employee or group benefit packages in today's 
competitive market, insurers must not only offer group life 
insurance, but they must also price it low enough to remain 
competitive enough to obtain the underlying contracts.
    The life insurance industry is highly regulated in order to 
make sure that it has sufficient reserves and surpluses to 
withstand expected, as well as unexpected, death claims. 
Notwithstanding, a group insurer's reserves and surplus 
accounts are not designed or expected to withstand a terrorist 
attack that kills a disproportionately large number of its 
insured. In addition, most carriers have limited amounts of 
catastrophic reinsurance that could be used to pay such claims. 
Furthermore, if a multi-line insurer's reserves and surplus are 
completely depleted by group life claims, there would not be 
any other funds available to support other lines of insurance 
(e.g., health, disability).
    If one or several insurers are unable to meet some or most 
of its obligations after a small or medium-sized terrorist 
attack, state life and health guaranty associations are in 
place to assure that such obligations are indeed met (up to 
state-set limits). However, in the case of a major, cataclysmic 
terrorist attack (e.g., NBCR event), several (or many) 
insurers, including medium to large-size carriers, may become 
insolvent, and the guaranty association system may not have the 
capacity to fund unpaid claims. It is this potential system 
collapse that concerns the group life industry and is why it 
urges that group life be included in any TRIA extension.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                    FROM MICHAEL J. PENINGER

Q.1. Studies have shown that terrorism risk insurance in group 
life policies remains available, and that prices have even 
declined, despite the fact that group life insurance is not 
part of the TRIA program. What is the rationale for including 
group life given these facts?

A.1. As mentioned above, group life insurance remains available 
and affordable largely due to market competition, and will 
probably remain so regardless of whether group life is included 
in the TRIA program. What will change if group life is included 
in TRIA is the insurance industry's increased ability to 
withstand a major terrorist event (since the reinsurance market 
for group life will be rejuvenated, just like it was for 
workers' compensation when it was included in TRIA). TRIA would 
provide the necessary backstop for the group life industry, its 
policyholders and certificate holders--it would prevent many 
insurers from becoming insolvent after such an attack and 
provide the assurance that death claims will be paid.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                      FROM JAMES H. VEGHTE

Q.1. Accurate risk modeling is key to increasing the 
availability of insurance. Mr. Veghte discusses risk modeling 
in his testimony. Like other catastrophic events, terrorist 
attacks are unexpected, unpredictable, and carry a large 
potential for destruction. What makes terrorism risk impossible 
to model where other catastrophic events can be modeled with a 
certain degree of accuracy?

A.1. In an attempt to better understand terrorism risk, 
reinsurance companies have created task forces, consulted 
military and intelligence experts, hired specialty risk 
modeling firms, invested in research and development, and 
developed new underwriting standards with the intention of 
trying to determine if a private market could develop to absorb 
this risk. Despite these efforts, a key struggle in the 
development of a private market is that terrorism is not 
conventional. It has characteristics, particularly with regard 
to frequency, severity, and correlation, unlike any other peril 
or risk.
    Terrorists act willfully and unpredictably to cause fear 
and inflict maximum harm and damages and confound those who 
study terrorism. They can learn from their prior attacks and 
attempt to defeat loss prevention and mitigation methods. In 
addition, the insurance industry does not have access to all 
potentially relevant information because the government keeps 
it confidential due to national security interests.
    The potential severity of terrorism losses, particularly 
nuclear, radiological, biological and chemical (NRBC), is 
enormous. The extreme loss scenarios would cause losses that 
far outstrip insurer financial resources and therefore are 
uninsurable.
    Unlike natural disaster risk, reinsurers achieve virtually 
no spread of risk or diversification with terrorism coverage. 
Natural disasters such as hurricanes in Japan and Florida and 
earthquakes in the far west are not correlated. This means that 
premiums can be collected from each risk knowing that one loss 
will not lead to another. With terrorism risk there is an 
aggregation of losses arising from multiple clients and 
multiple insurance products implicated in the same occurrence. 
Thus, terrorism risk in Europe and North America may lead to 
closely related loss events. Such high correlation thus 
minimizes any benefit of risk spreading geographically.
    At the same time, a terrorist attack can lead to major 
disruptions in the financial markets, where reinsurers may be 
liquidating assets to pay claims, while the asset values 
themselves may be under market pressure due to investors' 
concerns over the terrorist risk.
    For these reasons, it has been impossible to effectively 
model terrorism.

Q.2. The President's Working Group study noted that TRIA 
appears to negatively affect the emergence of private 
reinsurance capacity. How do you respond to this?

A.2. In fact, the opposite is true. By establishing definitive 
loss parameters, TRIA has provided a defined layer for 
reinsurers to participate in sharing the retained risk of loss 
that primary companies face under the federal terrorism 
program. The limited emergence of a private reinsurance market 
is explained by the factors in question 1.

Q.3. You estimate that reinsurance capacity is currently 
between $6 billion and $8 billion. This is an increase from 
2005, when the capacity was estimated by RAA to be between $4 
billion and $6 billion, correct?

A.3. This is correct.

Q.3.a. This growth also corresponds with a significant scaling 
back of the TRIA program from the 2005 reauthorization. Do you 
project this growth to continue?

A.3.a. Favorable loss experience and surplus growth may 
moderately increase the supply of private terrorism reinsurance 
but not to the extent that it would fill current capacity needs 
of the primary industry to meet its retentions under TRIEA. It 
would be difficult to expand participation in the current 
environment. First, there is only so much capital that 
companies are willing to dedicate to a TRIA-type program due to 
the nature of terrorism risk. Second, because of the 2005 
hurricane season, rating agencies and catastrophe modelers 
began requiring companies to maintain more capital/surplus to 
write the same amount of business as before the 2005 
hurricanes. The private reinsurance market does not provide 
coverage in the layers retained by the government under the 
program.

Q.3.b. Do you envision a marketplace without TRIA?

A.3.b. Although progress has been made in modeling terrorism 
loss scenarios, forecasts of the frequency and the severity of 
terrorism losses are extremely problematic. Absent a lessening 
of the risk of terrorism, the RAA does not see a time in the 
foreseeable future when the frequency or severity of terrorism 
risk can be successfully modeled and underwritten such that 
reinsurers will be able to provide enough capacity to replace 
TRIEA coverage. Reinsurers can provide only limited capacity 
for terrorism because the magnitude of these potential losses 
would otherwise put these companies at risk of insolvency. 
Reinsurers' capital is necessary to support many other 
outstanding underwriting commitments made by reinsurers, 
including natural disasters, workers' compensation, and other 
casualty coverages.
    The insurance industry's retention under TRIEA is 
approximately $36 billion now, but the reinsurance market is 
only $6 to $8 billion. Since this gap has not been closed even 
with TRIEA, it does not make sense to significantly alter TRIEA 
at this time.
    There is even less reinsurance appetite for NRBC risk, 
which is even more difficult to model and underwrite.

Q.4. Mr. McRaith, you stated in your testimony that any 
successor program should be of, ``sufficient time and means for 
the private sector to build the appropriate capacity.'' Mr. 
Veghte, you noted that RAA does not see an industry without a 
TRIA program. Do you disagree here?

A.4. We seem to agree that the industry currently is unable to 
provide enough capacity to replace TRIEA coverage and will not 
be able to do so for the foreseeable future. Mr. McGraith notes 
that TRIEA coverage must continue until the private sector can 
build the appropriate capacity, but does not address how the 
private sector could do that, how long it would take or if, in 
fact, it would necessarily occur. Thus, we do not appear to be 
in serious disagreement at this time.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM JAMES H. 
                             VEGHTE

Q.1. Has industry proposed a long-term private sector solution 
or is the federal program the only long-term solution? If the 
federal backstop is the long-term solution, then what 
modifications does industry propose?

A.1. Due to the nature of the terrorism peril, the RAA believes 
that private market mechanisms alone are insufficient at this 
time to spread the risk of catastrophic terrorism loss in a 
meaningful way. Instead, a continued public-private partnership 
is critical to address terrorism risk. Without some form of a 
federal role we would expect less coverage available at the 
policyholder level, rising prices for terrorism cover and even 
more limited private reinsurance capacity.
    With regard to modifications to TRIEA, because reinsurance 
is not covered under the program, we generally would defer to 
the primary industry as to modifications that would be 
necessary for a long-term program.

Q.2.a. What effect would tax-deductible reserves for future 
terrorism losses have on an insurer's balance sheet? What 
effect does it have on the ability to provide coverage?

A.2.a. The effect on insurers and reinsurers would be 
different. For insurers, the ability to set aside terrorism 
reserves for events that have not yet occurred and the 
attendant investment securities and related investment income 
would increase the surplus of the insurance industry. This is 
because insurers could record a tax deductible reserve for 
losses that have not been incurred or paid, thus reducing 
current taxes that must be paid. These funds would be invested 
and would grow and earn investment income until a qualifying 
terrorism event occurred. The qualifying terrorism event (if 
and when it occurs) would cause these reserves to be released 
and the investments disposed to pay terrorism claims.
    Tax deductible reserves for terrorism would be used as an 
alternative to traditional reinsurance by insurers. Instead of 
transferring terrorism risk, tax deductible reserves would 
likely encourage insurers to retain it. That does not 
necessarily mean, however, that insurers' appetite to assume 
that risk would increase.

Q.2.b. What effect does it have on the ability to provide 
coverage?

A.2.b. The effect on capacity may be different for insurers and 
reinsurers. In theory, if insurers have a larger pool of assets 
and surplus they would be able, all other things equal, to 
write more insurance business. There are several important 
caveats to this. First, the additional surplus and assets in 
the terrorism reserve are supposed to be earmarked to pay 
terrorism claims, so it is questionable whether this excess 
surplus would be allowed to be counted to support additional 
writings. The rating agencies, state insurance regulators or 
even the federal legislation may limit or prohibit this. 
Second, if insurers are allowed to use the additional surplus 
to support additional writings, there is no guarantee that the 
insurers will write additional terrorism insurance. The 
concentration of terrorism exposures may be too high or there 
may be alternative lines that are more profitable or prudent to 
write. Finally, whether or not the additional terrorism 
reserves are used to support other writings, other capital 
considerations would have to be considered such as when the 
price of coverage in the market is too low based on the 
insurer's assessment of risk, etc.
    For reinsurers, the effect of tax deductible catastrophe 
reserves on capacity is clearer. A government tax incentive for 
insurers will discourage participation in the private 
reinsurance market. Risk transfer will suffer as insurers 
retain risk.

Q.3. If it does not become mandatory for insurers to offer NRBC 
coverage, how would insurers adjust or allocate a loss in the 
event of a terrorist attack involving both a conventional and 
unconventional weapon? In the case of, say, a dirty bomb it 
causes a large amount of physical damage to the building, but 
only a small amount of radioactive or chemical clean-up. Would 
insurers look to exclude the entire loss?

A.3. Each reinsurance company would makes its decisions based 
on the relevant law and contract language.

Q.4. If industry could understand the long-term probabilities 
of terrorism occurrences, how could the industry price the risk 
in a reasonable way that would spread the cost over time? In 
other words, if the private industry could learn to model and 
price the risk should insureds be able to expect little to no 
charge in advance of an event, and enormous charges after, 
dwindling over time? Is that desirable?

A.4. Insurers do not, and generally cannot by law, price 
coverage to recover past losses. Prices are based on estimates 
of future events. Improvements in modeling will obviously 
assist in pricing.

Q.5. Granting that TRIA provides insurers some certainty about 
Federal support and their own retention of risk, whether we 
have TRIA in place or not, is it not true that a severe 
terrorist event will end up in the lap of the Federal 
Government to fund, after the fact, since insurers' equity is 
insufficient?

A.5. It is true that without insurance, the Federal Government 
likely would decide to pay for the vast majority of recovery 
after a terrorist event. Through a public-private partnership 
developed in advance of such an event, the Government creates a 
viable market wherein the insurance industry can participate up 
to a certain cap, which allows insurers to maintain solvency in 
the event of an attack. This ultimately reduces the cost to the 
Federal Government in the event of an attack because the 
insurance industry is sharing in the costs.

Q.6. Would it not be preferable for all parties to provide for 
some advance funding of this risk (possibly in combination with 
other risks to lower the burden of any one on the taxpayers and 
the society), so the cost could be spread over time, so the 
uncertainty concerning the consequences be diminished and so 
that the government would receive some income for its 
inevitable support?

A.6. Current insurance coverage is pre-funded to the extent 
insureds buy policies covering acts of terrorism. TRIEA 
provides for post-event funding for any government contribution 
by requiring insurance companies to pay back the federal 
government for the reinsurance through post-event assessments 
on insurance companies. The RAA supports this provision.

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