[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                     TRIA AT TEN YEARS: THE FUTURE
                         OF THE TERRORISM RISK
                           INSURANCE PROGRAM

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         INSURANCE, HOUSING AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 11, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-155



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
BILL POSEY, Florida                  AL GREEN, Texas
MICHAEL G. FITZPATRICK,              EMANUEL CLEAVER, Missouri
    Pennsylvania                     GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia        KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri         ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin             ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York         JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio               GARY C. PETERS, Michigan
ROBERT HURT, Virginia                JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire

           James H. Clinger, Staff Director and Chief Counsel
      Subcommittee on Insurance, Housing and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice          LUIS V. GUTIERREZ, Illinois, 
    Chairman                             Ranking Member
GARY G. MILLER, California           MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia  NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin             BRAD SHERMAN, California
ROBERT J. DOLD, Illinois             MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 11, 2012...........................................     1
Appendix:
    September 11, 2012...........................................    45

                               WITNESSES
                      Tuesday, September 11, 2012

Bartlett, Hon. Steve, President and Chief Executive Officer, the 
  Financial Services Roundtable..................................    25
Copeman, Darwin, President and Chief Executive Officer, Jewelers 
  Mutual Insurance Company, on behalf of the National Association 
  of Mutual Insurance Companies (NAMIC)..........................    27
Hartwig, Robert P., Ph.D., CPCU, President and Economist, the 
  Insurance Information Institute................................     4
Jensen, Jon, President, Correll Insurance Group, on behalf of the 
  Independent Insurance Agents & Brokers of America (IIABA)......    29
John, David C., Senior Research Fellow, The Heritage Foundation..     6
Lanza, Michael H., Executive Vice President and General Counsel, 
  Selective Insurance Group, Inc., on behalf of the Property 
  Casualty Insurers Association of America (PCI).................    30
Lewis, Christopher M., Senior Vice President and Chief Insurance 
  Risk Officer, The Hartford Financial Services Group (The 
  Hartford), on behalf of The Hartford and the American Insurance 
  Association (AIA)..............................................    32
Lundberg, Rolf, Jr., Senior Vice President, Congressional and 
  Public Affairs, U.S. Chamber of Commerce, on behalf of the 
  Coalition to Insure Against Terrorism (CIAT)...................     8
Michel-Kerjan, Erwann O., Managing Director, Center for Risk 
  Management and Decision Processes, The Wharton School of 
  Business, University of Pennsylvania...........................    10
Ochenkowski, Janice, Managing Director, Jones Lang LaSalle, on 
  behalf of the Risk and Insurance Management Society, Inc. 
  (RIMS).........................................................    11
Ryan, Edward B., Senior Managing Director, Aon Benfield, on 
  behalf of the Reinsurance Association of America (RAA).........    33
St. Peter, Linda, 2012 Commercial Committee Vice Chair, the 
  National Association of REALTORS..............................    13

                                APPENDIX

Prepared statements:
    King, Hon. Peter.............................................    46
    Bartlett, Hon. Steve.........................................    47
    Copeman, Darwin..............................................    53
    Hartwig, Robert P............................................    61
    Jensen, Jon..................................................    78
    John, David C................................................    82
    Lanza, Michael H.............................................    87
    Lewis, Christopher M.........................................    92
    Lundberg, Rolf, Jr...........................................    97
    Michel-Kerjan, Erwann O......................................   104
    Ochenkowski, Janice..........................................   116
    Ryan, Edward B...............................................   127
    St. Peter, Linda.............................................   131


                     TRIA AT TEN YEARS: THE FUTURE
                         OF THE TERRORISM RISK
                           INSURANCE PROGRAM

                              ----------                              


                      Tuesday, September 11, 2012

             U.S. House of Representatives,
                 Subcommittee on Insurance, Housing
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:01 a.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Biggert, Hurt, Garrett, 
McHenry, Dold, Stivers; Cleaver and Sherman.
    Also present: Representatives Grimm; Maloney and Green.
    Chairwoman Biggert. This hearing of the Subcommittee on 
Insurance, Housing and Community Opportunity will come to 
order. We are having a ceremony today in the Rotunda and on the 
Capitol steps at 11 a.m., so we will have to adjourn for a 
while.
    Anyway, just keep that in mind, but good morning, everyone, 
and welcome to today's hearing to examine the future of the 
Terrorism Risk Insurance Program. It is no coincidence that we 
are holding this hearing on the 11th anniversary of September 
11th. The Terrorism Risk Insurance Act (TRIA) was established 
in direct response to the events of that tragic day in 2001, so 
it is appropriate to reflect on the simple fact that we, as a 
Nation, continue to grapple with the monumental consequences 
that 9/11 had on every facet of American life.
    Our goal today and always is to ensure that no act of 
terror or threat of violence can ever again interrupt the 
lives, prosperity, or liberty of the American people. For this 
subcommittee, this means talking a little bit about TRIA and 
how best to insure American commerce and families against an 
attack, which we pray will never happen again.
    That said, it is just one small part of a bigger 
conversation. Every day, American soldiers are fighting for our 
freedoms, while firefighters and emergency personnel here at 
home put their lives on the line for our safety, just as their 
colleagues did on 9/11.
    So before we get into the policy details on matters of 
terrorism risk insurance, I would just like to take a moment to 
honor those we lost on 9/11 and offer a simple ``thank you'' to 
the people still fighting for our way of life.
    While we examine ways to facilitate investment and job 
growth in America, let us never forget the heroes who 
sacrificed everything to give us an America worth investing in. 
That is something to remember.
    With that, I would like to announce that after the ranking 
member and I deliver opening statements, we will hear from our 
first panel of witnesses. We will then recess the hearing at 
10:30 so that Members can attend the 9/11 Congressional 
Remembrance Ceremony. At 11:45, we will resume this hearing.
    As we all know, in the aftermath of September 11th, our 
country was resilient. Even our financial services sector--
particularly the insurance industry--performed well. The record 
reflects that insurance firms, including those directly 
affected by the attacks, expedited claims processing and paid 
and absorbed the loss of $40 billion in today's dollars.
    The American people, businesses, and our economy emerged 
from this disaster but also asked Congress to step in to fill a 
temporary void in the market that threatened our economy. A new 
and unique insurance risk, terrorism, had emerged.
    For the private sector, this new risk was unpredictable, 
uninsurable, and excluded from commercial policies. To prevent 
further economic toil, Congress stepped in, enacting the 
Terrorism Risk Insurance Act in 2002, which stabilized the 
marketplace.
    TRIA temporarily created a form of reinsurance, a public-
private partnership to make available terrorism risk insurance 
until the private sector could model and price for this new 
risk. To give the private sector more time Congress has 
reauthorized TRIA twice. These congressional interventions were 
the right thing to do and I supported them.
    However, today, well in advance of the Terrorism Risk 
Insurance Program's December 2014 expiration, our subcommittee 
begins an important examination of the program, its impact over 
the last decade, and its future. This hearing will assess 
conditions in the insurance market and the private sector's 
capacity to offer reinsurance and insurance coverage without a 
Federal backstop for losses resulting from international and 
domestic terrorism.
    This hearing also will explore options for encouraging 
greater private sector participation in the market for 
terrorism risk insurance. I hope that this will be the first of 
many hearings that our subcommittee will hold on TRIA. It is 
critical to our families, workers, businesses, and economy that 
Congress develops a long-term solution to risk--terrorism risk 
insurance.
    With that, let me just welcome our witnesses and thank you 
for participating in today's discussion, and we look forward to 
your testimony.
    And I will now recognize the ranking member pro tem today, 
Mrs. Maloney from New York.
    Mrs. Maloney. Thank you very much. I am not even on this 
subcommittee. I just came by because I thought it was 
important, so I am sitting here as the ranking member for the 
moment.
    But I want to congratulate my colleague for calling this 
important hearing and assembling such a well-informed panel. We 
both had terrific conventions and it is very appropriate that 
our first hearing is on such a critically important issue for 
the future of our country.
    As one who lived through 9/11, and lost 500 constituents on 
that day, I know full well how united and determined our 
country was. I have never seen this Congress more determined 
and united and I have never seen the public and private sector, 
the financial industry bounce back so quickly. We opened up our 
markets within a week.
    It was an incredible example of American determination, 
will, and leadership, how we responded as a Nation to that 
terrible attack that killed 3,000 innocent Americans who did 
nothing more than what we are doing today. They woke up, went 
to work, sat at their desks, and were murdered. It was such a 
horrific crime that to this day, whenever I meet anyone 
internationally, or nationally, the first thing they tell me 
upon finding out I am from New York is what they were doing, 
how they heard about this tragic attack on us.
    This country responded in a multitude of ways to combat 
terrorism. We totally reorganized our government, our 
intelligence operations. But truly, the most important thing 
for our economy, in my opinion, was the enactment of the 
antiterrorism risk insurance.
    In terms of New York and other large cities, no business 
could get any insurance. There was a fear of terrorism. The 
economy could not move forward.
    I talked to businesses from New York who had to go to 
Lloyd's of London. All building stopped in New York because 
there was no insurance.
    With bipartisan support in 2002, and then we reauthorized 
it again in 2007, this tremendously important bill was put into 
place and has been very successful and has been part of the 
American dream, the American success story, and the American 
recovery story. We remember the attack but too often we forget 
that the response, the rescue, and the recovery were among the 
most dramatic achievements in our country's history.
    Since it is 9/11, I am going to share one story with you. I 
was at the site the next day. We assembled at a school next to 
the site. The workers were there, the mayor, the governor.
    The reports were that 25,000 people had died in the towers. 
That was their belief. And a decision was made that they would 
announce that only 6,000 had died because the number 25,000 was 
too much for the Nation to bear.
    So they announced 6,000; we all know the story. Because of 
the heroic efforts of volunteers--our police, our fire, our 
public sector, our private sector--it was the most incredibly 
successful rescue effort in the history of our country. All of 
these people were rescued and pushed out of the building and 
the number dropped every day instead of climbing every day.
    The rebuilding started and one of the most important 
building blocks was TRIA. I strongly support its 
reauthorization. TRIA has absolutely no cost to the taxpayer 
unless there is a terrorist attack. And if we have that 
terrible event, if it happens--and we certainly hope it 
doesn't--TRIA saves the government money by structuring what 
would otherwise be hastily drafted emergency spending.
    Of course, setting up a public-private partnership to 
provide insurance coverage is more cost-effective than throwing 
money at a disaster. This helps our insurance companies to 
measure and estimate their risk and it does not kick in until 
after $100 billion in cost.
    I believe that this is a very, very important program. It 
is part of the success of our economy, and our economic success 
is our people's success.
    So I look forward to the new ideas and I look forward to 
the new insights. I want to thank you all for coming. There is 
a New York meeting and a remembrance that is coming up, so I 
cannot stay the whole time, but my staff is here.
    I am so thrilled that you called this hearing, Chairwoman 
Biggert. I think it is appropriate and sensitive that you 
called it on this incredibly important day as we remember, and 
we continue to build.
    So I thank everyone for being here and being part of the 
solution.
    I yield back and will place more into the record. Thank 
you.
    Chairwoman Biggert. Thank you, Mrs. Maloney.
    And with that, without objection, all Members' opening 
statements will be made a part of the record, and we will have 
any of those when we come back if they wish. Without objection, 
it is so ordered.
    And now, I will introduce the panel of witnesses: Dr. 
Robert Hartwig, president, Insurance Information Institute; Mr. 
David C. John, senior research fellow, the Heritage Foundation; 
Mr. Rolf Lundberg, senior vice president, congressional and 
public affairs, U.S. Chamber of Commerce and the Coalition to 
Insure Against Terrorism; Dr. Erwann Michel-Kerjan, professor 
and managing director, Risk Management and Decision Processing 
Center, Wharton School of Business, University of Pennsylvania; 
Ms. Janice Ochenkowski, managing director, Jones Lang LaSalle, 
on behalf of the Risk and Insurance Management Society, 
Incorporated; and Ms. Linda St. Peter, operations manager, 
Prudential Connecticut Realty on behalf of the National 
Association of REALTORS.
    Welcome to you all. Without objection, your written 
statements will be made a part of the record, and you will each 
be recognized for a 5-minute summary of your testimony.
    We will start with you, Dr. Hartwig. You are recognized for 
5 minutes. And please be sure your microphone is on.

  STATEMENT OF ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT AND 
         ECONOMIST, THE INSURANCE INFORMATION INSTITUTE

    Mr. Hartwig. Madam Chairwoman and members of the 
subcommittee, good morning. My name is Robert Hartwig and I am 
president and economist at the Insurance Information Institute, 
an international property/casualty insurance trade association 
based in New York. Our members account for nearly 70 percent of 
all property/casualty insurance premiums written in the United 
States and financed the overwhelming majority of losses on 9/
11.
    The terrorist attacks of September 11, 2001, produced 
insured losses larger than any natural or man-made event in 
history. Claims paid by insurers to their policyholders 
eventually totaled some $40 billion.
    The enormity of the loss combined with the possibility of 
future attacks led insurers and reinsurers to exclude coverage 
arising from virtually all commercial property insurance 
policies. The economic consequences of such exclusions were 
quick to manifest themselves.
    Major commercial property construction projects around the 
country, unable to secure coverage against the now very real 
risk of terrorist attack, were in jeopardy of being tabled, 
hurting job growth at a time of rapidly rising unemployment and 
recession. Banks threatened to choke off credit because their 
borrowers could not secure terrorism coverage. And even as 
exclusions proliferated, prices soared.
    It was not until 14 months later, when Congress approved 
the Terrorism Risk Insurance Act in November of 2002, that 
stability finally returned to the market and coverage for 
terrorism attacks resumed. Ten years later, the war on terror 
is far from over, but the Terrorism Risk Insurance Program, by 
all objective measures, is an unqualified success. The program 
not only succeeded in restoring stability to the country's 
vital insurance markets but it continues to deliver 
substantive, direct benefits to businesses, workers, consumers, 
and the economy overall, all at no cost to the taxpayer.
    Today, the vast majority of businesses in the market 
purchase terrorism coverage. The coverage is affordable and 
billions of dollars of private sector capital have been 
attracted to the market.
    Given these statistics, it is tempting to conclude that in 
the 10 years since TRIA was first implemented, insurance 
markets have fully adjusted to the post-9/11 environment, and 
insurers have concluded that terrorism is a fully insurable 
risk. The reality is quite different.
    The fact of the matter is that terrorism risk today is 
almost every bit as uninsurable as it was a decade ago. Recent 
major successes in the war on terror, including the killing of 
Osama bin Laden last year, do not alter this conclusion. This 
is because the current stability in the terrorism insurance 
market in the United States is due almost entirely to two 
factors: there has been no successful attack on U.S. soil since 
2001; and the Terrorism Risk Insurance Program remains in 
place.
    As you can see from Table 1 in my testimony, there has been 
no shortage of attempted attacks on U.S. soil. Fortunately, 
none have been successful. But without question, TRIA and its 
successors are the principal reason for the continued stability 
in the market today.
    In 2004 and 2006, as program expirations loomed, terrorism 
exclusions reappeared in the marketplace. With the current 
program's expiration now a little more than 2 years away, it is 
virtually certain that terrorism exclusions will reappear again 
in 2013.
    Simply put, acts of terror violate basic fundamental 
principles associated with insurance. In short, it is 
impossible for an insurer to reliably ascertain the likelihood 
or frequency of attacks. Also, losses or severity are potential 
unbounded, even exceeding the claims-paying ability of some 
insurers, or in some cases, even of the entire insurance 
industry.
    Acts of terror are clearly also intentional in nature. As 
such, it can be difficult or impossible for an insurer to 
ascertain the premium to be charged and difficult to achieve 
the necessary spread of risk to avoid exposing an insurer to an 
unreasonable risk of insolvency.
    In terms of factors that could influence greater private 
sector participation in the terrorism insurance marketplace, 
the committee might consider several alternatives, including a 
long-term extension or permanence of the Terrorism Risk 
Insurance Program--experience abroad suggests that both of 
these are effective at creating a stable environment--and also 
may revisit some early pooling proposals that the industry did 
propose in the immediate aftermath of 9/11.
    So in the 11 years since the tragedy of the September 11th 
terrorist attack, much has been learned about the nature of 
terrorism risk and its insurability. There is no question that 
TRIA and its successors brought much-needed stability to the 
marketplace. In the decade since, private sector insurers and 
reinsurers in the Federal Government have successfully created 
a structure that offers lasting stability, providing tangible 
benefits for the American economy.
    The looming expiration of the Terrorism Risk Insurance 
Program at the end of 2014 brings to a head the question of 
whether terrorism risk is now or ever will be a risk that can 
be managed entirely within the private sector. The evidence, 
both from the United States and from similar programs abroad, 
is that market stability, in terms of both pricing and 
availability of terrorism coverage as well as the ability to 
maintain adequate and expanding levels of capacity over time, 
are contingent on the continued existence of the Terrorism Risk 
Insurance Program.
    Thank you very much for the opportunity to testify. I would 
be happy to answer your questions.
    [The prepared statement of Dr. Hartwig can be found on page 
61 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Mr. John, you are recognized for 5 minutes.

    STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, THE 
                      HERITAGE FOUNDATION

    Mr. John. Thank you. Chairwoman Biggert and members of the 
subcommittee, I appreciate the opportunity to testify this 
morning. I am David John, a senior research fellow at The 
Heritage Foundation.
    The Terrorism Risk Insurance Act and its various successors 
served a very real purpose in the days after 9/11, when 
insurance companies and their customers feared the cost of 
providing coverage for acts of terrorism would be prohibitive. 
However, we have now reached the point where the private sector 
is increasingly capable of providing that coverage at 
appropriate prices without government support.
    In fact, the continued existence of TRIA may keep the 
industry from further progress. However, the industry will need 
time to make the transition to a fully private terrorism 
insurance program and it is greatly to the subcommittee's 
credit that you are starting this discussion now rather than 
waiting until 2014.
    Before TRIA and after 9/11 property and casualty insurers 
faced a serious dilemma. Many of their corporate policies 
issued before the 9/11 attacks insured against terrorism 
attacks in much the same way that they covered natural 
disasters and more conventional accidents.
    Then and now, insurance premiums on most types of loss were 
based on sophisticated estimates of the likelihood that a 
particular claim would have to be paid. Until 9/11, insurers 
and the rest of us never expected the scale of damage inflicted 
in those attacks. Thus, before 9/11, terrorism coverage often 
carried a very low price and was often included without much 
additional thought in more comprehensive coverage.
    Then, the world changed. Insurers and the rest of us 
discovered that these attacks were possible and could cause 
catastrophic damage. At the time, none of us had any firm idea 
whether the attacks were isolated incidents or not. As a 
result, insurers were unable to price terrorism coverage 
quickly and accurately and were unwilling to expose their 
companies to claims that could run into the tens of billions of 
dollars.
    Then TRIA came along and that changed the situation. But as 
we knew at the time, the wrong government response could 
prevent the market from taking necessary actions to return 
towards the private coverage of terrorism risks. Any program 
that essentially transferred the risk from companies to the 
government by promising that tax dollars would pay off most of 
the losses would only make it more difficult for private 
insurers to establish a real market price for terrorism 
coverage.
    While the problem in 2001 was real, it should have been 
temporary. By now, normal insurance industry processes should 
have been able to resolve it. The industry should have 
developed ways to price terrorism insurance properly, which 
included upper limits on corporate liability. And reinsurers 
should have found ways to involve sophisticated investors who, 
for a price, could face the type of losses that could occur.
    Recent industry data indicates that there has been a great 
deal of progress towards making insurance coverage more widely 
available and affordable. While coverage varies according to 
geographic area and industry, some industries show that over 
three-quarters of larger firms have purchased some form of 
terrorism coverage. In addition, the cost has been dropping.
    TRIA was never intended to be a permanent program. As the 
original bill stated, TRIA would provide temporary financial 
compensation to insured parties, contributing to the 
stabilization of the United States economy at the time of 
national crisis while the financial services industry developed 
systems, mechanisms, products, and programs necessary to create 
viable financial services market for the terrorism risk 
insurance. Returning this coverage to the private sector is an 
important goal because there is no reason why taxpayers should 
continue to have the ultimate financial responsibility for 
paying insurance losses on private property.
    There is no need to extend TRIA substantially beyond its 
2014 expiration date. Some insurance industry people claim that 
coverage will revert to same types of problems as before TRIA, 
but this is not necessarily the case.
    Insurer cooperation, increasing the event trigger, removing 
coverage for acts of domestic terrorism, and various other 
changes could start the process of enabling the insurance 
industry to phase back to private coverage. That should be 
followed by a full phase-out of TRIA so that the entire program 
has ended no more than 2 years after the current 2014 
expiration date.
    If such additional time is necessary, Congress should also 
increasingly indicate, at the time of passage in 2013 or 2014, 
to the industry that further extensions should not come, 
otherwise the industry is going to assume that this is a 
permanent program and that they never need to take any 
additional steps. And the insurance industry should expect to 
offer coverage without any further taxpayer subsidies.
    As I say, Congress should neither extend or expand TRIA 
without a firm and short phase-out, and if Congress passes any 
longer extension than I have proposed, whomever is in the White 
House after January 20th should reject such legislation. It is 
time now to end the temporary program and go back to the 
private sector.
    Thank you.
    [The prepared statement of Mr. John can be found on page 82 
of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Lundberg, you are recognized for 5 minutes.

    STATEMENT OF ROLF LUNDBERG, JR., SENIOR VICE PRESIDENT, 
CONGRESSIONAL AND PUBLIC AFFAIRS, U.S. CHAMBER OF COMMERCE, ON 
   BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM (CIAT)

    Mr. Lundberg. Thank you.
    Good morning, Chairwoman Biggert, and members of the 
subcommittee. I very much appreciate the opportunity to testify 
this morning regarding the key issue of terrorism risk 
insurance and its importance to the broad economy. My name is 
Rolf Lundberg and I am senior vice president for congressional 
and public affairs at the U.S. Chamber of Commerce.
    I am appearing today on behalf of the Coalition to Insure 
Against Terrorism, of which the U.S. Chamber is a founding 
member. CIAT is a broad coalition of commercial insurance 
consumers formed immediately after 9/11 to ensure that American 
businesses could obtain comprehensive and affordable terrorism 
insurance.
    The diverse CIAT membership represents commercial real 
estate, banking, energy, construction, hotel and hospitality, 
entertainment, manufacturing, transportation, and major league 
sports, as well as public sector buyers of insurance. CIAT is, 
therefore, the true consumer voice on terrorism risk insurance, 
as we are comprised of the principal policyholders of 
commercial property and casualty lines of insurance in this 
country.
    I am pleased today to offer the policyholder perspective on 
terrorism risk insurance, to highlight why the TRIA program 
continues to be vital to our broad economy.
    As we saw in the months following the 9/11 attacks, the 
lack of terrorism risk insurance contributed to a paralysis of 
the broad economy, especially in construction, tourism, 
business travel, and real estate finance. Enactment of TRIA 
changed that by making terrorism risk coverage widely available 
to commercial policyholders and delivering it through a private 
insurance mechanism that keeps private industry's skin in the 
game through the insurer deductible and co-share layers. It 
also protects taxpayers by providing for recoupment from the 
commercial policyholders of any Federal share paid out in the 
wake of a large-scale event.
    While private insurance capacity apparently has grown 
somewhat in the past decade, these years have also taught us 
that a continuing Federal role in this unique risk remains 
absolutely vital.
    The terrorism peril is simply too intrinsically linked to 
government policy and intelligence to be solely handled by the 
private sector alone. TRIA needs to be reauthorized.
    We therefore commend you, Chairwoman Biggert, and the 
subcommittee, for your leadership on this issue and for 
convening this important hearing.
    On the front of the U.S. Chamber building is a 26-foot tall 
banner that stretches across the building and it spells out one 
word: ``Jobs.'' That banner has served as a reminder to us all 
of what our focus must be.
    The Chamber believes that stronger and faster economic 
growth is the best way to successfully put Americans back to 
work. We must not only affirmatively clear away impediments to 
job creation but we must avoid taking steps that would create 
more uncertainty and strangle businesses, stifling our 
economy's ability to grow and also affect negatively job 
creation.
    America has strong demographics, abundant natural 
resources, the world's most productive workers, and a long 
history of picking ourselves up when we are down. We should not 
inflict additional and unnecessary damage to our fragile 
economy and possibly extinguish the prospect of economic 
recovery and new jobs for Americans by failing to properly deal 
with TRIA.
    The terrorists who perpetrated that terrible attack on 9/11 
sought to paralyze us and our economy with fear, but the best 
of America shone through that day and in the weeks and months 
that followed. It is incumbent to remember the lessons of 9/11, 
and among those is the importance of maintaining safeguards to 
ensure that such catastrophic events do not cause lasting harm 
to our economy. As we saw in the months that followed 9/11, 
managing the risk of terrorism is one of those imperatives.
    In recognition of the critical post-9/11 situation, 
Congress and the Bush Administration worked together in 2002 to 
enact TRIA, which is a public-private risk-sharing mechanism to 
deal with terrorism risk that has served our Nation and its 
economy extraordinarily well for nearly 10 years.
    We have no interest in seeing a return to the standard 
terrorism exclusions that became the norm in the months 
following 9/11. We saw that during the two reauthorizations in 
2005 and 2007, and we believe that we should not return to 
those kinds of exclusions in the upcoming renewals of terrorism 
policies.
    Let me just briefly talk about current market conditions. 
Because of TRIA, today terrorism risk insurance, with one 
exception--nuclear and biological, chemical, and radiological--
coverage is generally available for commercial policyholders. 
It would not be available were it not for TRIA.
    CIAT members have generally seen a decline in pricing for 
terrorism insurance, which we attribute not just to the normal 
ebb and flow of the insurance market but rather to the 
continued availability of the TRIA mechanism, which has worked 
extraordinarily well since its enactment.
    The TRIA program has worked well and we encourage the 
committee to examine it carefully and to extend it before its 
expiration.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Lundberg can be found on 
page 97 of the appendix.]
    Chairwoman Biggert. Thank you.
    Dr. Michel-Kerjan, you are recognized for 5 minutes.

STATEMENT OF ERWANN O. MICHEL-KERJAN, MANAGING DIRECTOR, CENTER 
FOR RISK MANAGEMENT AND DECISION PROCESSES, THE WHARTON SCHOOL 
            OF BUSINESS, UNIVERSITY OF PENNSYLVANIA

    Mr. Michel-Kerjan. Thank you, Chairwoman Biggert.
    Let me open by saying that if our common goal is to make 
the Nation more financially resilient to future terrorist 
attacks and also to limit the spending of taxpayers' money, 
then our debate should not be on whether to let TRIA expire. 
Rather, it should be on how we work together to make TRIA more 
effective. That is a very different question.
    As it was designed to do, TRIA makes a supply of coverage 
available and affordable. Terrorism insurance costs in the 
United States have been going down continuously and are among 
the least expensive in the world. In a recent study, I have 
also shown that insurers are willing to provide more capacity 
for terrorism than for other catastrophic risks because they 
collect all the premiums but are responsible for only the 
portion of losses.
    On the demand side, take-up rates among firms increased 
from just 20 to 27 percent in 2003 to 60 percent in--since 
2006, a figure which, by the way, combined all type of 
terrorism coverage, not just TRIA, from what U.S. companies can 
get for the market. Still, this means that about 4 out of 10 
large corporations don't have coverage against terrorism today.
    Let's remember that on 9/11, the coverage was virtually 100 
percent, which allowed for a quick economic recovery of the 
country. I think we can do better on the take-up rate than 
where we are today.
    I will now turn to challenging the main argument that 
ending TRIA will limit the financial exposure of the 
government. I think, to put it simply, the logic is wrong. The 
world without TRIA will actually mean not less but more 
exposure for all of us as taxpayers.
    Let's say we are in September 2016. TRIA expired in 2014; 
15 years have passed since 2001. Attention to terrorism has 
faded somewhat on the demand side. On the supply side, the only 
insurers that offer the coverage are at a very high price to 
account for the cost of capital needed to underwrite extreme 
events. Many firms go unprotected
    Terrorists inflict a large-scale attack with massive 
economic losses. An injured firm called on Congress to rescue 
them. Not only is it an election year--again, my scenario is we 
are in 2016--but a trend toward increasing Federal disaster 
relief and corporate bailouts in the past 10 years has created 
new and fairly high expectation. I detail that aspect at more 
length in my written testimony and refer you to figure one on 
page seven, which is fairly striking.
    The cost of government relief in the wake of that new 
terrorist attack will likely be very expensive for taxpayers. 
That is why I think a better option moving forward is to 
redesign TRIA.
    Some of the concepts developed by other OECD countries may 
be relevant here. I discuss five of them in my written 
testimony. Let me briefly mention three here.
    Israel: Israel has 100 percent government coverage. In the 
U.K., there had been a public-private risk-sharing arrangement 
based on pooling with unlimited government debt issuance that 
the pool can draw from. So contrary to what is often mentioned, 
this is not a reinsurance program; this is an unlimited line of 
credit from the British government. Germany, the largest 
economy in Europe, also uses a public-private risk-sharing, 
again based on pooling, but with limited reinsurance from the 
government.
    I would like to note here that in both cases--in the U.K. 
and Germany--the government receives a premium to cover that 
coverage. It is not free.
    To summarize, this is not a question of TRIA or no TRIA. 
This is about strengthening the current program to make the 
Nation more resilient financially to future attacks, not less, 
and to do that by making the American taxpayers less exposed, 
not more. My colleagues at the Wharton Research Center and on 
the OEC board that I have been honored to chair over the past 6 
years look forward to working with you and the President on how 
we do this.
    Before I stop here, and on a more personal note, I want to 
congratulate the subcommittee, and especially you, 
Congresswoman Biggert, for you leadership in supporting and 
renewing the National Flood Insurance Program that was signed 
by the President in early July. I trust you will be as 
successful in reforming TRIA. Thank you.
    [The prepared statement of Dr. Michel-Kerjan can be found 
on page 104 of the appendix.]
    Chairwoman Biggert. Thank you, Doctor.
    Ms. Ochenkowski, you are recognized for 5 minutes.

STATEMENT OF JANICE OCHENKOWSKI, MANAGING DIRECTOR, JONES LANG 
    LaSALLE, ON BEHALF OF THE RISK AND INSURANCE MANAGEMENT 
                      SOCIETY, INC. (RIMS)

    Ms. Ochenkowski. Thank you, and good morning, Chairwoman 
Biggert, and members of the subcommittee. I am Janice 
Ochenkowski, the managing director responsible for global risk 
management at Jones Lang LaSalle, a real estate and financial 
services company headquartered in Chicago.
    I am pleased to testify this morning on behalf of the Risk 
and Insurance Management Society, known as RIMS, and I thank 
the subcommittee for this important policy debate regarding the 
reauthorization of the Terrorism Risk Insurance Act, especially 
on this anniversary of 9/11.
    RIMS is a not-for-profit organization dedicated to 
advancing the practice of risk management for the benefit of 
our nearly 4,000 members. Those members span all types of 
organizations and they include corporations, universities, 
hospitals, and public entities such as the City of San 
Francisco, the Miami-Dade School District, and Orange County, 
California. However, as diverse as RIMS members organizations 
are, they share the common characteristic of wanting the 
availability of terrorism insurance.
    At Jones Lang LaSalle, we purchase insurance for properties 
owned by our clients, which in the United States is just under 
70 million square feet of real estate with an aggregate insured 
value of just under $9 billion. All of them are commercial 
properties. They span various investment types, such as 
warehouses, but most are office buildings.
    Since the enactment of TRIA, although there are some 
limitations on specific high-risk locations, in general we are 
able to buy the coverage we need at a premium that can be 
absorbed by our tenants and our investors. TRIA has been a 
success.
    And if we consider the economic impact of the lack of 
terrorism insurance, we have to consider that the inability to 
acquire sufficient terrorism coverage could result in the 
inability to secure financing for new schools, factories, and 
construction projects. Without TRIA, many companies would not 
be able to comply with loan requirements and the buying and 
selling of real estate would be impacted, which also would 
affect the general economy.
    Public entities also face terrorism exposures. Public and 
private transportation, schools, hospitals, and special and 
sporting events all have terrorism coverage needs but they 
don't have unlimited budgets to purchase it.
    Because there is no historical data, insuring the terrorism 
risk is not like other insurance. We are not able to predict 
frequency or severity of a potential terrorist event because 
the timing, the location, and the target can't be identified in 
advance. Without some form of backup like TRIA, RIMS believes 
that insurance companies will review their portfolios of 
business and will refuse to insure risks in areas where the 
exposure is greatest. Large and small businesses as well as 
public entities would be affected by this.
    As we evaluate the success of TRIA, we should look back to 
congressional actions since 9/11. Following 9/11 and prior to 
the passage of TRIA in 2002, the required limits of terrorism 
insurance were not available. RIMS members had difficulty 
purchasing the insurance needed for their operations as well as 
to protect their employees through workers' compensation 
programs.
    Passage of TRIA in 2002 was followed by a demonstrable 
increase in the number of insurers willing to write the 
coverage. In 2006, prior to the passage of TRIPRA, 75 percent 
of RIMS' members reported that terrorism coverage was 
conditioned upon the extension of TRIA; 76 percent of our 
members stated that their terrorism coverage limits would 
decrease and 82 percent felt that premium would increase if 
TRIA was not extended.
    However, in 2010 our members indicated that capacity and 
pricing was available. In July 2012, nearly 85 percent of our 
members wanted Congress to reauthorize TRIPRA and said that 
without another long-term extension, issues of affordability 
and availability will resurface.
    In our written testimony, we outline several policy 
principles for the subcommittee's consideration. I will 
highlight three of them.
    First, a completely private market solution in the long 
term is probably not feasible because of the difficulty in 
predicting and pricing the risks. Insurers, as part of their 
corporate governance, need to be able to assess what business 
risks are and how they can be quantified and treated.
    Second, a public-private partnership provides the best 
alternative and the Federal Government will likely continue to 
be involved in a reinsurance capacity at some level, with that 
involvement decreasing over time.
    Third, the solution needs to address insurance coverage for 
nuclear, biological, chemical, and radiological events caused 
by terrorism. Our Federal Government has stated that potential 
acts of terrorism from these sources are likely, so including 
them in the solution is reasonable.
    That concludes our formal remarks, and RIMS appreciates the 
opportunity to testify and thanks the subcommittee for 
beginning this very important discussion. We stand ready to 
serve as a resource as you begin your work.
    Thank you.
    [The prepared statement of Ms. Ochenkowski can be found on 
page 116 of the appendix.]
    Chairwoman Biggert. Thank you.
    Ms. St. Peter, you are recognized for 5 minutes.

 STATEMENT OF LINDA ST. PETER, 2012 COMMERCIAL COMMITTEE VICE 
       CHAIR, THE NATIONAL ASSOCIATION OF REALTORS (NAR)

    Ms. St. Peter. Good morning, Chairwoman Biggert, Ranking 
Member Gutierrez, and members of the subcommittee. On behalf of 
more than 1.1 million REALTORS, I want to thank you for 
inviting me to testify about the future of the Terrorism Risk 
Insurance Program, an issue of great importance to commercial 
real estate.
    My name is Linda St. Peter and I am the 2012 vice chair of 
the NAR commercial committee. Currently, I am the operations 
manager for Prudential Connecticut Realty in Wallingford, 
Connecticut. I have specialized in commercial and investment 
real estate brokerage since 1988.
    I am pleased to testify on behalf of the National 
Association of REALTORS and its commercial affiliates: the 
CCIM Institute; the Institute of Real Estate Management; 
REALTORS Land Institute; and the Society of Industrial and 
Office REALTORS.
    Although we have been safe at home since September 2001, we 
continue to fight the threat of terrorism. Given the existing 
global and economic realities, it is in the best interest of 
America's economic security to ensure the maximum coverage for 
our commercial real estate industry.
    Immediately following the horrific 9/11 terrorist attacks, 
terrorism insurance coverage was virtually nonexistent for 
commercial property owners. Only when Congress enacted the 
Terrorism Risk Insurance Act in 2002 did coverage for terrorist 
attacks resume. The passage of TRIA made terrorism coverage 
available and, over time, more affordable.
    Today, there is a concern that the uncertain future of TRIA 
may cause insurance prices to fluctuate. Further, this 
uncertainty may prompt insurers to drop terrorism coverage if a 
reauthorization of the program is not in place by the end of 
2014.
    This became evident in 2005 when private insurers became 
more reluctant to offer terrorism coverage due to uncertainty 
regarding the program's extension. Ultimately, the uncertainty 
of insurance pricing impacts our net operating income and 
property values. The potential unavailability of this coverage 
at the end of 2014 will impact our financing agreements and 
potentially hurt the fragile commercial real estate market.
    Affordable and available terrorism insurance is a vital 
component of most commercial real estate transactions. It is 
estimated that 84 percent of outstanding commercial mortgage 
balances require terrorism insurance. Thus, if TRIA were to 
expire and insurers subsequently dropped terrorism coverage, 
these loans would be in technical default.
    While the commercial real estate finance market is starting 
to show signs of life, any disruption in the availability of 
terrorism insurance in this sector would have serious 
consequences on its fragile road to recovery. Currently, we are 
seeing improved access and lower premiums due in part to the 
continued improvement in an insurer's ability to manage 
terrorism risk and to model the measurement of an insurer's 
aggregate loss exposure.
    Despite improvements in the measurements, the frequency and 
severity of terrorism attacks cannot be reliably assessed by 
insurance companies. Insurers remain largely averse to exposing 
themselves to potentially catastrophic terrorism losses and 
continue to have limited availability to reinsurance. Thus, 
without the Federal program for potential insurance losses 
related to terrorism, we believe coverage availability could 
decline significantly.
    Furthermore, we believe an effective homeland security 
strategy is central to our Nation's economic security. To 
protect our economic assets, we believe the time has come for 
Congress to enact a long-term solution for insuring against 
terrorism. Ideally, we would envision a structure that would 
finance all terrorism risks.
    In conclusion, affordable and accessible terrorism 
insurance is an integral part of the health of all commercial 
real estate markets. The TRIA program has been successful 
because it provides for the sharing of risk between government, 
private insurers, and policyholders.
    Ultimately, it is critical for the U.S. economy that 
commercial policyholders be able to obtain coverage for 
terrorism risk. Therefore, I strongly urge that TRIA be 
extended beyond its 2014 authorization.
    Thank you.
    [The prepared statement of Ms. St. Peter can be found on 
page 131 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    As I previously announced, the subcommittee will recess and 
reconvene promptly at 11:45. At that time, any Members wishing 
to give opening statements may do so, and then following any 
Member statements, panel one witnesses should plan to 
participate in a question-and-answer period with Members, and 
then we will go to the second panel.
    The subcommittee stands in recess.
    [recess].
    Chairwoman Biggert. This committee will reconvene, and we 
have an opening statement from Mr. Green from Texas.
    You are recognized for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman.
    I especially thank you for this hearing. I think that it is 
one that is quite timely and needed.
    Madam Chairwoman, having just left the 11th observance of 
the September 11th circumstance, the Congressional Remembrance 
Ceremony, I think it is appropriate for me to take just a 
moment and remind ourselves that we are the land of the free 
because we are the home of the brave--not an original quote, 
but one that is still a reminder to us that we should 
appreciate the many persons who make it possible for us to have 
all of these opportunities that we have in this great country, 
who make liberty and justice for all real, government of the 
people, by the people, for the people real, more than just an 
ideal.
    And I would just like to thank all of those first 
responders who rushed in on that day 11 years ago, and all of 
the persons who were not first responders but who stayed behind 
to help people, just ordinary citizens who found themselves in 
an extraordinary circumstance. I just want to be grateful. To 
live in the United States of America is really a blessing and I 
am grateful to those persons.
    And I am also grateful to those who are in distant places 
who risk their lives on a daily basis to protect the freedoms 
that we cherish. They mean something to me and I want them to 
know it. So for just this moment, I want to be grateful and 
thankful to our first responders and those who serve in our 
military, wherever they happen to be.
    Now, this hearing addresses TRIA and I will be quite candid 
with you, dear friends. My feelings on this topic are somewhat 
ambivalent; my thoughts are ambivalent because on one hand I--
Mr. John, I appreciate what you said about developing a private 
market. I really do.
    But on the other hand, I have some degree of consternation 
as to what happens if we back off and the market doesn't step 
forward? How does that impact an economy that is fragile now--I 
am not sure what the circumstance will be then, but I do have 
some concern.
    So hearing you today has been a benefit to me, and I will 
have some questions in just a moment, but this is not an easy 
question to answer. It really is not. I think that this 
requires that we be exceedingly thoughtful because of the broad 
implications associated with our actions. This is not something 
to take lightly.
    A lot hinges on how this program will work, and ultimately 
the question seems to be ``to backstop or not to backstop?'' I 
am sure that there are other ways to express it, but will the 
Federal Government have a hand, whether hidden or openly 
available to be seen, have a hand in this program?
    Thus far, it seems to have functioned rather effectively. 
Perhaps some tweaking is necessary, but it is not a program 
that I am eager to abandon although, Mr. John--I hate to keep 
singling you out and mentioning your name--I think you make a 
good point about how will you ever know if there can be a 
private market if you don't give the private market an 
opportunity to become the market--to accept its responsibility 
and do what it can to the extent that it will?
    So my feelings are ambivalent. I want to hear more about 
what you have to say, but I respect every one of you and the 
positions that you have outlined.
    Ms. St. Peter, what you said about the REALTORS was 
important and I appreciate your positions, all of you, and I 
look forward to having you answer some questions.
    And I yield back the balance of the time, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    Are there any further opening statements?
    Then, we will proceed with the questions and Members will 
be recognized for questions for 5 minutes, and we will try and 
keep to that time. And I will yield myself 5 minutes.
    Obviously, I think what Mr. Green has just talked about is 
the crux of the problem right now or what is going to happen 
for the future, so I wanted to start with that. And obviously 
TRIA, and what you have all said, it was created on the 
assumption that it would be temporary until the private sector 
develops models to assess and price for terrorism risk.
    So part of the question is, why have the basic assumptions 
that the creation of TRIA changed from a temporary nature to 
show now something resembling a permanent government insurance 
program? And have government or private sector entities 
developed those models anticipated at the creation of TRIA?
    And so, could someone explain why the models haven't been 
developed and described, if they can be developed and--whoever 
would like to start with that.
    Dr. Hartwig?
    Mr. Hartwig. I could start with that. You talked about TRIA 
being a temporary solution 10 years ago, but unfortunately, the 
war on terror, as it turns out, is not temporary and it is 
going on today, and it is a constantly evolving threat. It 
morphs over time, the nature of the threat, from when at one 
time we were all haunted by the face of Osama bin Laden, okay? 
Now he is dead but we know that there are plenty of other 
problems even if you listen to the report--in my testimony, I 
quote the State Department's most recent point on country 
risk--on country risk, and they talk about even al Qaeda and 
other entities as being an ongoing risk and threat to the 
United States.
    It is also the case that the nature of terrorism risk is 
different in that we harden targets like the new World Trade 
Center, but then terrorists move to softer targets. If you look 
at the list of targets where there were attempted attacks in my 
testimony, it is only by the grace of God that we escaped some 
of those. And we might be having a very different hearing 
today.
    But, at the end of the day, we have a number of issues with 
respect to being able to model terrorism risk and I hinted at 
them. We have no sense of when or where or how these attacks 
might occur.
    This is very different from hurricanes. We know where they 
occur, we know roughly what they do, we know when they occur. 
We don't know anything, really, about that with respect to 
terrorism.
    And it is also the case that the tactics are changed by 
terrorists over time. Whereas, we can design stronger buildings 
and we know that is ultimately going to reduce losses from 
hurricanes, we don't know that about terrorist attacks because 
terrorists can change their strategies at any time.
    It is very much the situation that the war on terror is, in 
fact, a war. And war risk has always been excluded from all 
policies basically worldwide, and that is the situation we find 
ourselves in today.
    Chairwoman Biggert. Thank you. I know with hurricanes and 
tornadoes and everything, we know about the time, but we never 
know about the extent of them or how dangerous they are going 
to be, or whether it is going to be another Katrina, or whether 
Isaac doesn't hit as hard.
    Mr. Hartwig. Right. But we do have good models that tell us 
what range they are likely to fall in, and all insurers model 
these and make sure they have enough capital on hand to handle 
this. And unfortunately, we are not able to do that with 
terrorism.
    Chairwoman Biggert. We have had the flood insurance bill 
and, similar to the flood insurance, does the existence of TRIA 
preclude any meaningful development of the private sector 
terrorism insurance market? In the flood insurance bill, we are 
having a study but want to phase in or have some of the 
insurance companies take over the risk there when we have more 
of the actuarial tables. Is this similar, is that something 
that we could do with the terrorism factor?
    Mr. Michel-Kerjan. Let me say I think that is exactly what 
TRIA has done. When you look at how TRIA was designed 
originally to--but that program being temporary, I think being 
temporary gives you, Congress, and the White House the 
flexibility to renew the program as things change around the 
world or within the United States. I think that being a 
temporary program is not necessarily a bad thing if it is not 
to be renewed every 3 months, as we have seen with the--until 
you took the leadership on that.
    I think TRIA has evolved from heavily exposing the Federal 
Government and the American taxpayers at the beginning of TRIA 
to being less so today, and one route would be to continue that 
increased take-up rate of the private sector. The question is 
at what price, and that is really what this is about.
    We talk a lot about capacity, what the private market can 
do. The question I would like to raise is, what would be the 
price of that coverage as we go up, and up, and up in terms of 
coverage? So I don't think that being a temporary program is a 
bad thing in itself.
    We had the same discussion back in 2002 and 2003 about 
whether it should be capped at $100 billion. Is $100 billion a 
magic number? What about $90 billion? What about $150 billion?
    Chairwoman Biggert. If I may, then, reinsurance assumes 
some or all of the risk currently assumed by the Federal 
Government and the taxpayers?
    Mr. Michel-Kerjan. It is already happening, but maybe other 
companies would like to--already happening for the deductible 
that these insurance companies have today.
    Chairwoman Biggert. Is there a percentage of what is being 
done by reinsurance now? Do we know that?
    Mr. Michel-Kerjan. Mr. Hartwig--
    Chairwoman Biggert. Okay.
    Mr. Hartwig. I don't know that offhand. I believe there is 
a substantial share that is reinsured, and the share that is 
reinsured is a decision that each individual insurer makes 
based on many criteria according to how much exposure they 
have, and how concentrated that exposure is. But reinsurance 
plays an extremely important role in this, as it does in any 
major catastrophic or potentially catastrophic event.
    Chairwoman Biggert. Thank you. Maybe if you could get back 
with--if there is a percentage or numbers there. Thank you.
    Mr. Green, you are recognized for 5 minutes,
    Mr. Green. Thank you very much, Madam Chairwoman.
    So that the record will be very clear and I will gain some 
degree of clarity, if you are for simply extending TRIA as is 
would you kindly extend a hand into the air? I am sorry I have 
to do it this way. It probably will make it a lot faster. Just 
raise your hand if you are for extending it as is--TRIA--
persons on the panel.
    Some of you are conferring. All right.
    All right, so Mr. Lundberg, is that correct?
    Mr. Lundberg. That is correct.
    Mr. Green. Anyone else? Okay.
    If you are for extending TRIA, but with some modifications, 
give me your yea or nay. Okay. So that is Ms. St. Peter and Ms. 
Ochenkowski. Okay. All right. So only two?
    Okay. Mr. Hartwig and Dr. Michel-Kerjan? Okay. All right.
    Now, if you are for eliminating TRIA and moving straight to 
the private market--I knew your hand would go up, Mr. John. 
Okay, Mr. John, you are there. Okay.
    So, did I cover everybody with those questions? Is 
everybody in one place or another now?
    Mr. Hartwig, you said--actually, your comments led me to 
conclude that you are concerned about risk assessment and the 
inability to engage in intelligent risk assessment causes you 
to conclude what, that we--
    Mr. Hartwig. Right. The conclusion is that terrorism 
fundamentally is not fully insurable in the private sector 
because the risk cannot be fully assessed either in terms of 
the likelihood of such events or the ultimate cost of such 
events.
    Mr. Green. And as a result, you would have a hybrid 
system--a system that has the Federal Government as well as the 
private market involved in the insurance process?
    Mr. Hartwig. Right, that there is a role for the Federal 
Government there, and after a 7-year extension such as we have 
had, it is appropriate to take a look at that program and see 
where it might be tweaked in hopes of improving that program. 
But the experience here in the United States and abroad 
suggests that these programs work best when there is a 
sovereign or a--
    Mr. Green. That is a great segue into my next question. How 
are other industrialized countries managing this problem? Is 
anyone aware?
    Mr. Hartwig. Probably a number of us may be--I will just 
take one shot and then maybe--
    Mr. Green. Okay. If you can do it quickly, I have a couple 
of questions--
    Mr. Hartwig. In our testimony, I think these are documented 
on the part of some of us, but maybe the most commonly cited 
example is in the U.K., which established a pool, the Pool 
Reinsurance Company, literally known as Pool Re. It is a mutual 
insurance company. It was established in 1993 as a result of 
the IRA, so it has been in operation, very smoothly been 
operating for 20 years now.
    It has since been expanded to incorporate all sorts of 
terrorism risk. And that was actually the original model--
something like that was put forth in the wake of 9/11 right 
here in Congress.
    Mr. Green. Mr. John, I have to give you an opportunity to 
offset, to the extent that you desire--how would you have the 
model work, please?
    Mr. John. We have a model, basically, that was developed--
    Mr. Green. Could you get closer to your microphone or turn 
it on? I am not sure which.
    Mr. John. Sorry. We have a model that was developed with 
negotiations with the Bush Administration as--after the 9/11 
situation. The problem is that the model is flawed, and this 
is, unfortunately, true with most Federal insurance programs or 
reinsurance programs because it assumes that it will continue 
precisely as is until a set date when hypothetically it ends. 
And essentially what happens is that industry gets comfortable 
with it and their customers get comfortable with it because 
they know what the--
    Mr. Green. What would you have us do? I have about 40 
seconds left. What would you have us do?
    Mr. John. What I would have us do basically is phase it 
out, that essentially there were a series of measures that were 
ironically put forth in the 2011 Obama budget, which is not 
something I usually praise, that actually would set to 
gradually end the government involvement and we will see 
precisely how the industry develops and how they react to that. 
I expect they won't be happy. I expect there will be a lot of 
catastrophic talk about the disaster that will overtake their 
customers and the like. I expect that--
    Mr. Green. How will this talk--a lot of things have to do 
with certainty in the minds of consumers as well as in the 
marketplace. How will this uncertainty impact the economic 
order, is the question?
    Mr. John. Oh, I think any change is going to have some 
impact on the economic order. However, if you give them a firm 
glide path to end the program and phase it out, they will deal 
with it.
    Mr. Green. My time is up.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    Mr. Hurt, you are recognized for 5 minutes.
    Mr. Hurt. Thank you, Madam Chairwoman. Thank you for 
holding this hearing on this important subject at this 
auspicious time.
    It occurs to me it is proper to agree with Mr. Green and I 
know everyone on this dais agrees that obviously what we saw 11 
years ago is something that we don't want repeated and we 
certainly should always take the time to recognize those who 
made that ultimate sacrifice and who lost their lives in that 
terrible, tragic--on that occasion.
    I think as we just left from the Capitol steps and I think 
it was said more than once that we will not forget, I think 
this is--this hearing is a reminder of--that we will not forget 
in many ways. I don't think we as Americans should live in fear 
and I think that we are committed to doing that, but I think 
also there are very real impacts of what happened on September 
11th and how we go about doing our business.
    And so I appreciate each of the witnesses being here and 
helping us try to figure out as Members of Congress how to go 
forward in making sure that we protect ourselves and our 
property as best we can.
    I guess my first question would be for Mr. Lundberg. I 
would be interested to know from your perspective, if the 
program were to expire are you all able to--is the Chamber able 
to give us some idea of what the immediate impact or the short-
term, long-term impact of just having--suddenly not having this 
insurance available would be?
    Mr. Lundberg. Sure. Congressman, I think we already have 
experience with what the impact might be as an expiration date 
approaches of the TRIA program. We saw it in 2005 and we saw it 
again in 2007 where insurers began to inform policyholders that 
their terrorism coverage would be withdrawn and that coverage 
would no longer be available after the expiration of the TRIA 
program.
    So TRIA really has been, in our view, kind of a silent 
pillar supporting the economy--the broad economy--and to pull 
it out from under the economy would be a grave mistake. And we 
just merely need to look back at our experience with two 
reauthorizations already to know how the market and how 
insurers react as that expiration date approaches.
    Mr. Hurt. Great.
    Dr. Hartwig, I was wondering if you could elaborate a 
little bit on some of your testimony, and I apologize for 
missing your initial testimony, but I was wondering, are there 
figures that are widely accepted for what insurance companies 
paid out as a consequence of September 11th and what the 
government ultimately paid out as a consequence of September 
11th for losses?
    Mr. Hartwig. The private insurance sector, including 
reinsurers, at the time paid $32.5 billion. In today's dollars, 
that is exactly $40 billion.
    Mr. Hurt. Okay.
    Mr. Hartwig. That is $40 billion in private insurance 
losses.
    The Federal Government obviously declared disaster areas 
and there was a lot of aid not just to the New York 
metropolitan area but other areas as well. That did total, I 
think, tens of billions of dollars, but in terms of direct aid 
to businesses, that money was--essentially the vast majority of 
it came from private insurers. The dollars that came to treat 
workers who were killed--sorry, who were injured or the 
families of those who were killed, that was all private sector 
dollars that came in there.
    And so it really was the case that the private insurance 
industry was the economic first responder at ground zero and 
helped literally--literally, when you go there today is 
rebuilding those towers.
    Mr. Hurt. Mr. John, could you elaborate a little bit more 
on--I think in a perfect world, everybody would like to see the 
taxpayer not bear any burden for something that is a proper 
risk function in the private sector, but what stands between 
having a policy--having the private marketplace offer this 
insurance? You talked about his modeling that is not complete. 
Is it realistic to think that is something that is going to 
emerge?
    Mr. John. Yes. I hear the stories of how every terrorism 
risk is different. But the fact is that every hurricane is 
somewhat different, also. If you look at the effect of 
Hurricane Katrina on the property prices--the property 
insurance prices all along the east coast in relatively low-
lying areas you see that in the years--couple of years 
immediately succeeding that you see an adjustment where 
companies raised rates, they dropped risks, and things along 
that line.
    Yes, we can start to model this sort of thing but the fact 
is that the industry has no need to model it at this point. The 
industry has a situation that it is very comfortable with and 
it doesn't need to do anything else.
    Mr. Hurt. I think my time has expired.
    I thank you all.
    Chairwoman Biggert. Thank you.
    Mr. Stivers, you are recognized for 5 minutes.
    Mr. Stivers. Thank you, Madam Chairwoman. I would like to 
thank you for calling this important hearing on this 
appropriate day to talk about terrorism risk insurance and the 
future of the program, even though we have a couple of years 
before we have to worry about expiration.
    Mr. Hartwig already discussed how the exposure to terrorism 
at 9/11 was about $40 billion to the private marketplace. At 
what point would--if 9/11 had happened and TRIA had been in 
place as it exists today, at what point would TRIA have kicked 
in and how much would it have helped the private insurance 
market?
    Mr. Hartwig. The overall--and subject to check, I believe 
the overall industry retention today is about $27 billion or 
so, so it is--the vast majority of attacks that would occur 
today would likely be covered in whole or at least the majority 
by the private sector. And over time the industry's retentions 
have been ratcheted up, I think precisely for that reason.
    Mr. Stivers. So if 9/11 were to occur today, how much of 
that $40 billion would the private sector pay?
    Mr. Hartwig. The private sector would wind up paying 
somewhere around 70 to 75 percent of that.
    Mr. Stivers. Okay.
    Mr. Hartwig. And then ultimately, of course, there are 
recoupment mechanisms in place so that the Federal Government 
does not wind up with any obligation.
    Mr. Stivers. And the recoupment mechanism today is at 133 
percent, no 100 percent. Is that correct, or--
    Mr. Hartwig. I am not quite sure at the moment. I would 
have to check.
    Mr. Stivers. Okay.
    I will move on to the next question, again for Mr. Hartwig, 
and then I do want to move to Mr. John.
    One of the key points you brought up, Mr. Hartwig, was that 
the private sector in the reinsurance market doesn't have the 
information they need to be able to price the risk. So, for 
example, unlike a hurricane, where there are many predictive 
models, all the information is public, many of the risks that 
are associated with terrorism are not public information and 
are hard to price because of that. Is that what you were saying 
earlier?
    Mr. Hartwig. Absolutely. Much of the information insurers 
would need to actually price this risk, were it possible, is 
classified. We do not have any access to information at the NSA 
or the CIA or anyplace else like that so we don't have any 
understanding other than what we can read and glean from the 
ordinary press and public sources about what the likelihood of 
an attack might be.
    This is very different, whereas such things as hurricanes 
and earthquakes and tornadoes are the subject of research 
constantly. We learn more and more about it every year.
    Mr. Stivers. Great. Thank you.
    Mr. John, at the end of Mr. Hartwig's testimony he called 
for a pooling proposal similar to what they do in Great 
Britain. It is not similar to what you would like to see, the 
whole program just expire. But is that better than the current 
TRIA program, the way you see it, or is there no good answer 
other than just letting it expire?
    Mr. John. There is no great answer. Let's put it that way.
    The pooling mechanism would probably be superior depending 
on what was done to limit the taxpayer risk. That is going to 
be the continued question here and the industry, as I say, is 
going to continue to press for just a continuation of what they 
have had in the past.
    Mr. Stivers. And I do want to follow up with you, because I 
share your concern, Mr. John, and I think the empirical 
evidence shows that government does not price risk very well. 
In this subcommittee, we have tried to shore up the flood 
insurance program, which is one example of that. Fannie Mae and 
Freddie Mac are a second example of that. FHA's pending 
financial crisis--I won't call it a collapse--is a third 
example of that. And today, the only reason TRIA hasn't been a 
problem is there have been no claims under TRIA because we 
haven't had a big incident to cause that.
    So I am concerned with the issues you bring up but I am 
intrigued, I will say, by Mr. Hartwig's pooling mechanism 
because I do think that there needs to be some type of way to 
price this risk, and it might be an example that can do it with 
some reserves, and there would have to be some information-
sharing with this mutual insurance company. But it is an 
intriguing proposal to me, I guess, I would like to say, and I 
wanted--since you were kind of the hardest-core witness on the 
panel, I figured I would ask you about it.
    Mr. John. You have a couple of years, and that is one of 
the beauties about starting this process early. You can examine 
a wide variety of different situations and proposals and make a 
decision accordingly.
    Mr. Stivers. Thank you.
    Does anybody else have any comments on the pooling 
proposal? I have 19 seconds left.
    Mr. Michel-Kerjan. I might say, I think it is important in 
the case of Pool Re that it is not just a pooling proposal. The 
pool has an open line of credit from the British government in 
case of something that happens. The pool today has 4.7 billion 
pounds of reserve, which is barely taxed by the British 
government. There are a lot of details to be looked at, and 
there are other countries with developing pools with and 
without intervention from the Federal Government as well.
    Mr. Stivers. Thank you. I yield back the nonexistent 
balance of my time.
    Chairwoman Biggert. The gentleman yields back.
    The gentleman from California, Mr. Sherman, is recognized 
for 5 minutes.
    Mr. Sherman. Thank you.
    First, a general comment about the whole idea of Federal 
involvement in disaster insurance: I remember, I think it was 
Midas Muffler that had the commercial, ``You can pay me now or 
you can pay me later.''
    Disasters are going to happen, and when they happen, Ayn 
Rand is not going to be in control of the United States 
Congress and we are going to appropriate money for the 
uninsured losses of victims. This may not have been true in the 
1800s; it may have not been true in ``The Fountainhead.'' But 
it is true in today's America and it has been true since the 
great floods along the Mississippi radically changed the view 
of what the Federal Government should do in a disaster.
    Those who believe that if we spend zero money promoting 
disaster insurance now we can also have a zero special 
appropriation when a disaster hits had better get themselves 
time machines because that is the only way they are going to be 
able to live in the 1800s.
    So it is in our interest to make sure that uninsured losses 
are as low as possible.
    Ms. St. Peter, the commercial real estate industry is in 
the midst of a really tough liquidity crisis, perhaps the worst 
since the Great Depression. How would the limited availability 
of affordable terrorism insurance impact the ability of 
commercial tenants and property owners to access credit?
    Ms. St. Peter. Thank you, Congressman, for that question.
    As you mentioned, financing is still a challenge in our 
fragile market. And I don't work in large towers, I work in 
what I will call ``Industrial Way'' and ``Main Street,'' where 
manufacturers are looking to finance 10,000- or 20,000-square 
foot properties where 30, 40, or 50 people are employed. What 
we are seeing now with the limited financing available, the 
``yes'' may have a qualifier of about 45 contingencies, which 
is sort of like a ``no,'' but it is a ``yes, but.'' If the 
terrorism insurance were not available that could be a deal-
breaker. That could be a deal-breaker--
    Mr. Sherman. So you find that banks are not willing, 
lenders are not willing to loan to an industrial facility with 
50 employees, not particularly in the news, not one of the 
places that al Qaeda dreams of hitting, that even then the 
lenders have on their list, ``Do you have terrorism 
insurance?''
    Ms. St. Peter. Yes, they do. And a host of a whole other 
contingencies as well.
    Mr. Sherman. Okay.
    Now, some of my colleagues have raised the concern over the 
Federal Government's costs in this area. I just want to confirm 
with the panel: So far, TRIA has cost the taxpayers virtually 
nothing? Is that true, Ms. St. Peter?
    Ms. St. Peter. Not a red cent, save, of course, the 
administrative fees.
    Mr. Sherman. Does everybody else on the panel generally 
agree?
    Mr. John. I am just going to point out, it has never been 
used so the--
    Mr. Sherman. Yes.
    Mr. John. --one of the ways of reducing costs is never to 
use--
    Mr. Sherman. Right. The most important thing we can do is 
prevent another terrorist attack, and that is the work of other 
committees in this Congress.
    Ms. Ochenkowski. An additional comment to the question on 
lenders, with respect to my own company, Jones Lang LaSalle, as 
well as some of my colleagues in the risk management group, I 
do know that in addition to the comment about lending, we also 
have tenants who require that they have terrorism insurance 
before they move into certain property, and absent having 
evidence of terrorism insurance, they will choose to go to a 
different property.
    And in addition to tenants, there are also investors in 
commercial real estate who look for confidence in the ability 
to rebuild following an event, and if they can invest in a 
country that has--because investments are global, if they can 
invest in a country in which a concern about terrorism is not 
going to impact their investment, they may take their money out 
of America and put it into another area.
    Mr. Sherman. Thank you.
    I believe my time has expired.
    Chairwoman Biggert. Thank you.
    And this will conclude the questions and answers. The Chair 
notes that some Members may have additional questions for this 
panel, which they may wish to submit it writing. Without 
objection, the hearing record will remain open for 30 days for 
Members to submit written questions to these witnesses and to 
place their responses in the record.
    I would like to thank you all so much for your testimony. 
You really gave us a lot of knowledge that we will be using in 
the future. So with that, this panel is dismissed, and we will 
bring up the second panel now. Thank you so much.
    We will resume with the second panel: the Honorable Steve 
Bartlett, president and chief executive officer, the Financial 
Services Roundtable; Mr. Darwin Copeman, president and chief 
executive officer, Jewelers Mutual Insurance Company, on behalf 
of the National Association of Mutual Insurance Companies; Mr. 
Jon A. Jensen, president, Correll Insurance Company, on behalf 
of the Independent Insurance Agents and Brokers of America; Mr. 
Michael H. Lanza, executive vice president and general counsel, 
Selective Insurance Group, Incorporated, on behalf of the 
Property Casualty Insurance Association of America; Christopher 
M. Lewis, senior vice president and chief insurance risk 
officer, The Hartford, on behalf of the American Insurance 
Association; and Mr. Edward B. Ryan, senior managing director, 
Aon Benfield, on behalf of the Reinsurance Association of 
America.
    I would like to welcome all of you here today. This is 
probably the easiest panel I have had in a long time as far as 
how to pronounce your names, so I thank you for that, and I 
thank you all for being here.
    And we will start with Mr. Bartlett. You are recognized for 
5 minutes.

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF 
      EXECUTIVE OFFICER, THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Bartlett. Thank you, Chairwoman Biggert, Congressman 
Green, Congressman Hurt, and other members of the subcommittee.
    Let me confess to you, I don't relish my role today, and I 
suspect the other witnesses don't either--the role to be the 
bearer of bad news. It had been my hope, and I think the hope 
of most of those in the industry that today we would be able to 
come to you and say there is no longer a need for TRIA, but in 
fact, there is an enhanced need for TRIA today moving forward. 
The nature, the severity, and the predictability, or lack of 
predictability, of a terrorist attack in fact ensures that a 
continued Federal backstop for insurance--paid for by the 
industry but a Federal backstop--continues to be essential.
    The threat of terrorist attacks is just as real today as it 
was 10 years ago. There still exists that essential need--it is 
not an option--of a public-private partnership, a backstop, if 
you will, to protect against catastrophic losses arising from a 
terrorist attack. And let me stop at this point, and I will 
repeat this again and again. That backstop would be paid for, 
the cost would be borne by the private sector. Most of the 
costs would be--in the event of an attack would be borne up 
front by the private sector, and should there be a need for 
additional funds, you would be using the backstop.
    TRIA sets in place a vehicle to recoup those losses. So the 
fundamental of TRIA is that it sets in place an ability to 
recoup the losses. Without the Terrorism Risk Insurance Act 
reauthorized, there would be no mechanism for recoupment.
    So in at least a considered opinion of the entire 
industry--lending, insurance, business, operations, real 
estate--TRIA should be renewed by this committee in this 
Congress sooner rather than lately. I don't come to that 
conclusion lightly. I looked for other answers but did not find 
them.
    Roundtable member companies, as you know, consist of 
finance, lending, insurance, and investing in the economy, so 
we come at it from all places. There is no government money 
involved in TRIA except in the event of a catastrophic loss 
that cannot be contained within the private sector, which is 
quite large. And even then, there would be no government 
losses; all the government losses would be recouped.
    So the two parts: One is, what does TRIA mean for the 
economy ongoing in the absence of an event? TRIA is designed to 
mitigate the negative economic impact from stalled or stopped 
real estate development and activities of ongoing operations 
that did occur following 9/11 and then began to occur in the 
run-up to the reauthorization of TRIA subsequent to that.
    So in fact, after 9/11 we saw fairly quickly $15 billion in 
real estate-related transactions delayed or cancelled and 
300,000 jobs lost, and it was getting bigger and faster and 
worse by the day. TRIA includes a make-available provision, 
which means that insurers must offer terrorism insurance to 
commercial clients. With that coverage available then banks 
looking to lend and investors looking to deploy their capital 
can do so while also protecting their investments from the 
threat of an attack.
    Without that Federal backstop, insurers' limited ability to 
manage terrorism risk would become unstable and they would 
withdraw from the market. That is not supposition or hyperbole. 
That is exactly what would happen.
    Even in the case of operations that are currently in place 
with an existing loan would be as they did begin to shut down, 
because if you have a loan in place and you lose your insurance 
you are in default on the loan and really bad things start to 
happen in the market.
    Now, in the event of an attack--I am going to the other--so 
either no attack or in the event of an attack--in the event of 
an attack TRIA, at its heart, establishes a mechanism for the 
private sector to absorb most of the loss, and anything that 
the private sector does not absorb would be repaid to the 
government by a mechanism put in place by mutual assessment on 
all policyholders.
    Some would contend erroneously that TRIA exposes U.S. 
taxpayers to losses. The opposite is true. Without TRIA, 
taxpayers would be subject to those losses but they would be 
uncontained and there wouldn't be a legal ability to recoup 
those losses.
    The initial losses--nothing triggers it until $100 million. 
The initial losses of each company pays their entire loss up to 
20 percent of its direct written premium. In most cases, that 
is about $1 billion. And then losses above that 20 percent 
deductible would trigger a 15 percent copay or co-insurance.
    So if government funds are used it would be a loan and TRIA 
provides for a recoupment of the loan.
    Thank you, Madam Chairwoman.
    [The prepared statement of Mr. Bartlett can be found on 
page 47 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Mr. Copeman, you are recognized for 5 minutes.

  STATEMENT OF DARWIN COPEMAN, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, JEWELERS MUTUAL INSURANCE COMPANY, ON BEHALF OF THE 
   NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

    Mr. Copeman. Good afternoon, Chairwoman Biggert, and 
members of the subcommittee. Thank you for the opportunity to 
speak with you today.
    As mentioned earlier, my name is Darwin Copeman and I am 
president and chief executive officer of Jewelers Mutual 
Insurance Company, a small company licensed in all 50 States, 
and the only insurance company in the United States that 
specializes exclusively in protecting the jewelry industry. The 
majority of our policyholders are one-to three-location 
enterprises. Our company participates in the TRIA program and 
understands firsthand its importance.
    I serve on the board of directors of the National 
Association of Mutual Insurance Companies. NAMIC represents 
more than 1,400 property and casualty insurance companies, 
including small farm mutuals, State and regional insurance 
carriers, and large national writers. NAMIC members write about 
one-third of the commercial business in the United States.
    The subcommittee has our appreciation for its attention to 
the Terrorism Risk Insurance Act and for discussing its vital 
role in helping protect our country and our economy as we 
continue to consider how best to handle the terrorist threat.
    It is our firm belief that the presence of the TRIA program 
has provided the stability and predictability needed to allow 
insurers to actively participate in the market for terrorism 
risk coverage. Without the TRIA program, coverage for terrorism 
will become very difficult to find and the result when the next 
terrorist attack occurs will be more, not less Federal exposure 
as the government will be under extreme pressure to pay for all 
losses.
    Before the events of September 11th, the abstract 
possibility of a major terrorist attack on the United States 
was known but largely dismissed and was included in most all-
risk commercial policies. After the tragedy in 2001, every 
American's understanding of the nature of terrorism risk 
forever changed.
    Insurers also realized this new risk threatened the 
solvency of their businesses. Accordingly, the terrorism 
coverage market greatly contracted, particularly in high-risk 
urban areas. This had a punishing effect on the U.S. economy. 
It was estimated at the time to have delayed and canceled $15.5 
billion in real estate transactions and to have cost 300,000 
construction workers their jobs.
    The significant lack of coverage prompted Congress to pass 
the Terrorism Risk Insurance Act in 2002 to create a viable 
market for terrorism coverage, which allowed lenders to provide 
the necessary capital to resume building in high-risk areas. 
TRIA set a ceiling on potential insured losses and reduced the 
fear that a worst-case terrorist event could render an insurer 
insolvent.
    At the time it was thought that a truly private market for 
terrorism would develop after insurers had time to build 
capacity and study the risk. However, it soon became apparent 
that the program is indispensible to protect our national 
economic security.
    The nature of the terrorist threat presents significant 
complications for the insurance industry. The lack of relevant 
event data usually used in disaster modeling makes it 
impossible to meaningfully calculate the likelihood, the 
nature, or the extent of a potential event, particularly in an 
age of mass casualty terror. This makes adequate pricing and 
reserving virtually impossible.
    The interconnected nature of our local, national, and 
global systems complicates both underwriting terrorism risk and 
mitigating against it. The vulnerability of one organization is 
not simply dependent on its own security decisions but also on 
the choices and actions of other organizations and agents 
beyond its knowledge or control.
    For example, a company might spend a significant amount of 
money to secure a facility, while a neighboring company does 
not, and is then used as a staging area for an attack.
    The only truly effective mitigation tools, if there are 
any, reside within the government's national security 
apparatus, and these are understandably kept secret.
    Finally and most importantly is the human element. In other 
words, terrorist events are not random events. The presence of 
human volition drastically reduces the value of preventative 
measures. A hurricane cannot study wind damage mitigation 
efforts and then think up new ways to get around them; but 
humans intent on committing acts of terrorism can and do find 
ways to circumvent security measures.
    Over the last 10 years, the private insurance industry has 
increased its capacity to handle risk from terrorism events. 
However, we must recognize that the marketplace, as it stands 
today, has developed with TRIA in place. We should not hastily 
conclude that because the private sector can handle a portion 
of the risk, it could handle all of it. In fact, we know that 
it can't.
    Without a Federal program that provides a clearly defined 
cap on the potential risk to an insurer, the supply of 
terrorism risk insurance would be drastically curtailed, just 
as it was in the aftermath of 9/11, and in the end the 
government would bear the ultimate risk of uninsured losses. 
The presence of a well-managed partnership between the 
government and private insurers serves to ultimately reduce, 
not increase Federal liability for terrorism losses.
    In conclusion, in order to encourage private sector 
involvement in the terrorism insurance marketplace and thereby 
protect and promote our Nation's finances, security, and 
economic strength, we must maintain a long-term Terrorism Risk 
Insurance Program. While there is room for debate about the 
proper scope of government involvement, there should be no 
question that the Federal Government should continue to 
collaborate with the private insurance industry to allow 
Americans to recover and rebuild if such an attack should ever 
occur.
    As we move forward, NAMIC stands ready to work with 
Congress on this vital issue. Again, thank you for the 
opportunity to speak here today, and I look forward to 
answering any questions you may have.
    [The prepared statement of Mr. Copeman can be found on page 
53 of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Jensen, you are recognized for 5 minutes.

STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON 
BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA 
                            (IIABA)

    Mr. Jensen. Good afternoon, Chairwoman Biggert, and members 
of the subcommittee. My name is Jon Jensen and I thank you for 
inviting me to testify today on behalf of the Independent 
Insurance Agents and Brokers of America, also known as the Big 
``I.''
    I began my insurance career over 35 years ago and now serve 
as president of Correll Insurance Group, a South Carolina-based 
insurance agency with 12 offices and 132 associates. 
Independent agents sell nearly 80 percent of all commercial 
lines policies in the country, which affords our membership a 
one-of-a-kind perspective to speak to the topic of terrorism 
insurance and businesses' needs for such coverage.
    The first point I would like to make is that the need for 
terrorism insurance is not limited to simply urban areas. My 
agencies operate in primarily rural and suburban areas and I 
have many clients with a need for this coverage.
    For example, I have two colleges, a large public hospital 
system, and more than 300 emergency service organizations such 
as volunteer fire departments, municipal fire departments, 
rescue squads, and first responders who opt to purchase 
terrorism insurance. Serving the needs of these and other 
clients is a top priority for me, and the Terrorism Risk 
Insurance Program has helped ensure that they have their 
necessary coverage.
    With the scheduled expiration of the program quickly 
approaching at the end of 2014, I applaud the committee for 
holding this hearing now to examine the program and how it is 
serving businesses throughout the country. Even though the 
program expires on December 31, 2014, because of the forward-
looking nature of insurance contracts, the real deadline for 
congressional action is December 2013.
    The enactment of TRIA in November of 2002 was a key element 
of our government's response to the heinous acts of 9/11. The 
attacks quickly produced severe disruptions in the insurance 
marketplace and in our national economy. The underwriting and 
pricing of these unique exposures proved nearly impossible due 
to the inability of carriers to measure the likelihood and the 
magnitude of future terrorist attacks and many insurers were 
forced to stop providing terrorism coverage to commercial 
policyholders as a result.
    The inability of businesses to secure adequate terrorism 
coverage also had negative effects across broad sectors of the 
national economy, particularly in commercial real estate. The 
original enactment of TRIA, and its extension in 2005 and again 
in 2007, successfully stabilized the insurance marketplace and 
helped eliminate the market disruptions that followed the 
September 11th attacks.
    In addition, Congress wisely structured the program so as 
to involve the private sector as much as possible and created a 
successful and limited public-private partnership for 
commercial property and casualty insurance that is operated at 
virtually no cost to taxpayers. Should the worst happen and a 
need for the backstop arise, TRIA also has numerous cost-
sharing provisions that limit the exposure of the Federal 
Government and ensure skin in the game for the private sector. 
These include provisions such as a program trigger as well as 
deductibles, copays, and minimum loss retention amounts for the 
private sector.
    The bottom line is that many of the factors and marketplace 
realities that caused Congress to originally enact and 
reauthorize TRIA largely remain in place today. Despite the 
significant progress that has been made in protecting our 
country from terrorists, the threat of terrorism remains with 
us daily.
    Such risk can still not be assessed by traditional methods. 
In many instances, insurers simply do not have access to the 
data and information to perform proper underwriting as much of 
the information does not exist, is available only to 
governmental entities, and they fiercely guard it for 
understandable security and law enforcement reasons.
    We believe that it will be extremely difficult or even 
impossible in some instances for many businesses to obtain 
adequate and affordable terrorism insurance coverage if the 
program is allowed to expire with no public policy solution in 
its place. Although our Nation has thankfully been spared from 
further terrorist attacks in recent years, the threat of an 
attack is as great as ever and our country must take the steps 
necessary to protect itself and its economy from a similar 
future event.
    The Big ``I'' believes that the TRIA backstop has worked 
well and that some form of limited Federal involvement is still 
needed to maintain a stabilized and viable market for terrorism 
insurance. Again, we applaud the committee for its foresight to 
review TRIA now, and we look forward to working with you as 
Congress considers solutions to address the unique nature of 
the risk presented by terrorist attacks.
    [The prepared statement of Mr. Jensen can be found on page 
78 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Mr. Lanza, you are recognized for 5 minutes.

  STATEMENT OF MICHAEL H. LANZA, EXECUTIVE VICE PRESIDENT AND 
GENERAL COUNSEL, SELECTIVE INSURANCE GROUP, INC., ON BEHALF OF 
  THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

    Mr. Lanza. Thank you.
    Good afternoon. I am Michael Lanza, executive vice 
president and general counsel of Selective Insurance Group. 
Selective is America's 49th largest property/casualty insurance 
group. Today, I am testifying for the Property Casualty 
Insurers Association of America, our national trade 
association. PCI members write about 40 percent of America's 
home, auto, and business insurance. Today marks the 11th 
anniversary of the terrorist event that killed thousands and 
created significant economic loss and disruption.
    With investment markets freezing, this committee responded 
swiftly to President Bush's call and passed the Terrorism Risk 
Insurance Act, or TRIA, in just 2 months. The House approved 
TRIA in 2002 and renewed it in 2005 and 2007. All three votes 
passed by wide margins under different Majorities, reflecting 
TRIA's bipartisan support.
    Since 9/11, terrorist attempts have continued. Fortunately, 
our national security apparatus detects and thwarts most of 
these. TRIA is part of our economic national security defense. 
It provides a low-cost, fiscally prudent economic safety net 
if, God forbid, another attack is successful.
    Absent TRIA's extension, and as State law permits, insurers 
in 2013 will begin to send notices excluding terrorism coverage 
or not renew policies on major underlying risks.
    PCI and Selective strongly believe in the private insurance 
market. We also believe the private market can cover fully 
insurable risks.
    TRIA protects American taxpayers in two important ways by 
intruding into the private insurance markets. First, by keeping 
the private sector largely responsible, it avoids the kind of 
Federal bailout that occurred after 9/11 when victim protection 
funds had to be established. Second, because terrorism, like 
crime or acts of war, is not fully insurable, TRIA creates a 
private market for terrorism insurance coverage. In short, it 
makes private capital ultimately responsible for all but the 
most catastrophic terrorist attack.
    To be fully insurable, a risk potential loss and loss 
severity must be predictable. With freely available information 
and experience, insurers can estimate roughly how many car 
accidents, house fires, or industrial accidents will occur and 
what their costs will be. Similarly, with free access to 
weather pattern science and over 100 years of weather history, 
insurers can model storm paths and predict weather losses.
    We can't do that for terrorism. The experience--notably 
what happened 11 years ago--is very limited. More importantly, 
the information needed to underwrite is not freely accessible. 
Properly, thin information is classified and in the hands of 
our government national security experts.
    National security is the Federal Government's primary 
responsibility. That is why there is a myriad of agencies 
focused on anticipating and preventing terrorist acts and 
assessing their likelihood against major economic centers and 
other public and private symbols of our country. These agencies 
also track the pool of potential terrorists that fluctuates 
with changes in U.S. domestic and foreign policies.
    Insurers and their policyholders cannot and should not 
replicate these efforts. Companies such as Selective, which 
writes primarily in 22 States east of the Mississippi, 
certainly don't have the necessary resources, and Selective's 
small business clients, who pay an average of $10,000 for 3 
commercial policies and elect to pay for TRIA coverage 86 
percent of the time, certainly don't either.
    That is why we need TRIA. TRIA enables the private 
insurance market to provide terrorism coverage without having 
the information it does for other risks.
    By providing insurance for terrorist events TRIA also does 
three other things. First, TRIA permits business capital to 
remain unrestricted and available for economic investment 
before and after a terrorist event. Second, because State 
workers compensation laws mandate terrorist coverage, TRIA 
facilitates reinsurance and keeps worker comp rates lower. And 
third, TRIA protects taxpayers. According to CBO, TRIA's net 
cost to taxpayers through 2017 is roughly zero.
    We would appreciate your support for the extension of TRIA. 
Thank you very much.
    [The prepared statement of Mr. Lanza can be found on page 
87 of the appendix.]
    Chairwoman Biggert. Thank you.
    Mr. Lewis, you are recognized for 5 minutes.

 STATEMENT OF CHRISTOPHER M. LEWIS, SENIOR VICE PRESIDENT AND 
 CHIEF INSURANCE RISK OFFICER, THE HARTFORD FINANCIAL SERVICES 
    GROUP (THE HARTFORD), ON BEHALF OF THE HARTFORD AND THE 
              AMERICAN INSURANCE ASSOCIATION (AIA)

    Mr. Lewis. Thank you.
    Chairwoman Biggert, Congressman Green, and members of the 
subcommittee, thank you for the opportunity to appear before 
you today to discuss terrorism risk insurance. My name is 
Christopher Lewis and I am the chief insurance risk officer for 
The Hartford. In the interest of time, I would respectfully 
request that my written testimony be submitted into the 
official record, and I will just briefly highlight a couple of 
key points for the committee.
    First, over the past 11 years, the capabilities, tactics, 
preferred targets, weapons of choice, and even the main 
protagonists in the war on terrorism have dynamically changed 
and evolved. We are fortunate that the United States has not 
experienced another major attack on our soil and sincerely 
grateful for the tremendous efforts of our security forces to 
interdict and defend our country from these attacks.
    Unfortunately, what has not changed over the past decade is 
the fundamental fact that the risk of terrorism remains an 
uninsurable risk. Insurers still have no credible basis for 
quantifying the likelihood of a terrorist attack and a limited 
ability to understand the potential impacts of an attack if 
carried out using nuclear, biological, chemical, or 
radiological weapons. The private sector simply does not have 
the information to assess this risk.
    Further, the benefit of private sector mitigation is 
somewhat limited, as hardening security at one location only 
shifts terrorist selection of target or access point to a 
different location. And unfortunately, the capacity of the 
reinsurance through capital markets to finance the peril of 
terrorism remains de minimis. Why? Because reinsurers face the 
same insurability challenges that primary insurance companies 
face.
    Second, TRIA and its successors have worked and serve as a 
critical component of our national economic security. By 
helping to finance and limit private insurers' exposure to the 
largest catastrophic terrorism events--events with projected 
losses greater than any historical commercial insurance loss on 
record for any peril--TRIA enables insurance companies to offer 
terrorism coverage to commercial policyholders.
    In the event of a future attack, private insurance payments 
will immediately flow to affected businesses that have 
purchased coverage and to their employees--payments that will 
provide stability and minimize economic disruptions not only to 
the people and businesses that suffer the attack directly, but 
to all Americans, keeping the wheels of commerce moving.
    Finally, TRIA is not a giveaway to insurers but an 
effective means of pooling terrorism risk over time. The 
program preserves significant industry skin in the game. 
Federal assistance occurs only in the case of an extremely 
large-scale terrorism loss. For a large, wide-area terrorist 
event, insurers would need to absorb an estimated $25 billion 
to $30 billion in insured losses before Federal payments are 
even triggered.
    And in the unlikely event that government funds are needed, 
they are ultimately recaptured and returned to the U.S. 
Treasury through a recoupment mechanism established in the 
legislation. As a result, any program costs are greatly 
mitigated.
    Bottom line, TRIA has brought stability to the private 
market for terrorism insurance and it is a critical component 
of our national economic security. The program has been a 
success. From a risk management perspective, letting the 
program expire is simply not a risk that our country should 
take.
    Thank you.
    [The prepared statement of Mr. Lewis can be found on page 
92 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Lewis.
    And Mr. Ryan, you are recognized for 5 minutes.

  STATEMENT OF EDWARD B. RYAN, SENIOR MANAGING DIRECTOR, AON 
 BENFIELD, ON BEHALF OF THE REINSURANCE ASSOCIATION OF AMERICA 
                             (RAA)

    Mr. Ryan. Thank you, Chairwoman Biggert, and members of the 
subcommittee. I am Edward Ryan, senior managing director at Aon 
Benfield, the world's leading reinsurance intermediary and 
full-service capital advisor with more than 80 offices in 50 
countries around the world. I thank you for the opportunity to 
testify on behalf of the Reinsurance Association of America on 
the reinsurance perspective of this hearing entitled, ``TRIA at 
Ten Years: The Future of the Terrorism Risk Insurance 
Program.''
    As we mark the 11th anniversary of the attacks on the 
United States, we remember all the victims of 9/11. Aon 
Benfield and the 1,100 of us who worked in the World Trade 
Center continue to mourn the 176 colleagues and friends whom we 
lost that day.
    We know the commercial insurance market and know that 
reinsurance availability is a key component of our economy. We 
therefore urge Congress to act to extend the Terrorism Risk 
Insurance Act.
    Aon and the RAA supported the adoption of the Terrorism 
Risk Insurance Act in 2002, its reauthorization in 2005, and 
the 2007 Extension Act. The response to 9/11 by the insurance 
industry was to pay tens of billions of dollars in claims but 
also to exclude terrorism losses going forward.
    TRIA created an essential Federal backstop that enabled the 
primary insurance industry to provide terrorism insurance to 
our Nation's businesses. The program has enhanced the private 
market for such coverage and has had a stabilizing influence on 
the economy. Under TRIA, the availability of terrorism risk 
insurance has increased.
    There is a role for private reinsurance under the program. 
In an event certified by the Secretary of the Treasury as a 
terrorist attack, TRIA provides reinsurance-like protection for 
primary commercial insurance loss. The program provides 
coverage for 85 percent of the eligible loss up to an industry 
loss of $100 billion. Coverage is subject to an individual 
company retention of 20 percent of the prior year's direct 
earned premium on covered lines.
    These company retentions and the 15 percent copay above 
that mean that insurers retain a significant portion of the 
loss before TRIA funding is triggered. Private reinsurance 
provides the vehicle for insurers to manage that retained loss.
    Since 2001, insurers, modelers, and reinsurers have worked 
to develop a better understanding of terrorism risk. Companies 
have consulted military and intelligence experts and hired 
specialty risk modeling firms. Despite these efforts, terrorism 
risk poses great challenges as an insurable risk.
    The main hurdle in assessing and underwriting terrorism 
risk is that the frequency of loss is neither predictable nor 
random. Terrorists continually attempt to defeat loss 
prevention and mitigation strategies. In addition, the 
insurance industry does not have access to all the existing 
information about terrorism targets and potential attacks for 
obvious national security reasons.
    Despite these issues, reinsurers have but capital at risk 
to manage terrorism losses. Reinsurers offer coverage for 
foreign acts of terrorism--that is, acts committed by non-U.S. 
agents--in stand-alone terrorism contracts rather than in all-
peril catastrophe contracts. The amount of such stand-alone 
terrorism treaty reinsurance capacity available in the private 
market is estimated to be between $6 billion and $8 billion, a 
figure largely unchanged in recent years.
    The bulk of the terrorism reinsurance currently comes via 
existing reinsurance programs. Coverage for personal illnesss, 
which is not subject to the program, coverage for workers 
compensation, as well as for acts of terrorism committed by 
U.S. agents is generally available in existing catastrophe 
programs. Insurers with exposures in rural or suburban areas 
have generally secured terrorism coverage within existing 
reinsurance programs with limitations on the size of subject 
risks or events.
    Regarding NBCR--nuclear, biological, chemical, and 
radiological exposures--there is little reinsurance appetite 
for this risk. When it is available, pricing for NBCR coverage 
comes at a significant premium and capacity is significantly 
less than that available for conventional terrorism.
    For the foreseeable future and based on current demand, 
there is adequate supply of reinsurance capacity for coverage 
around the structure provided by the Federal program. However, 
were the program to terminate in 2014, we expect insurers to 
curtail the provision of terrorism insurance.
    U.S. businesses would be more exposed to the financial 
consequences from terrorist activities. To the extent that this 
additional risk forces businesses to seek insurance, insurers 
would offer meaningful but not unlimited insurance products. 
The private reinsurance marketplace would work productively 
with insurers to provide reinsurance coverage for terrorism but 
the capacity would be severely constricted.
    TRIA has served an important role to our Nation's economy. 
As TRIA expires in 2014, we urge this committee and the 
Congress to reauthorize the program in 2013 to eliminate any 
uncertainty around reauthorization and to meet the needs of 
insurers and insureds whose contracts will expire throughout 
the year. We commit the full resources of the Aon Corporation 
as well as the Reinsurance Association of America to work with 
the committee to achieve this goal.
    Thank you.
    [The prepared statement of Mr. Ryan can be found on page 
127 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Ryan.
    And I note that without objection, the written statements 
of all the witnesses will be made a part of the record. And we 
will now turn to the question-and-answer period.
    I will recognize Members for 5 minutes each to ask 
questions, and I will first yield 5 minutes to myself.
    Mr. Bartlett, on page four of your testimony you state that 
TRIA puts in place an orderly system to make sure that the 
private sector absorbs most if not all of the losses. If the 
private sector would already absorb such losses, why could it 
not be put in place an orderly system of its own and continue 
to absorb the losses absent a government backstop?
    Mr. Bartlett. Terrorism risk is nearly impossible to model. 
You cannot predict frequency, location, or severity. It is an 
asymmetrical risk, so the upside from the premiums cannot begin 
to compensate for the potential downside of covering the 
losses.
    In addition to that, the core of TRIA is a make-available 
provision, so that all coverage would have to make that 
available. Without a make-available provision, what we found 
out when we didn't have TRIA was the insurers would be forced 
to avoid the risk and they would limit their product offerings. 
They would limit the coverage.
    So TRIA ensures that coverage is offered. It makes sure 
that the private sector absorbs most of the initial losses. And 
if there are any additional losses, then the private sector is 
required to recoup the losses and repay the government. So it 
protects all three.
    Chairwoman Biggert. Thank you.
    And then, Mr. Copeman, you say on page three of your 
testimony--or in the context of discussing the actuarial data 
insurers need to underwrite and price for terrorism risk, you 
state that much of the relevant data that might be used by an 
insurance company is appropriately kept secret by the Federal 
Government for national security reasons. What kind of 
actuarial data that is inaccessible to insurance is--that they 
need to underwrite and price for terrorism risk?
    Mr. Copeman. Thank you. The primary information that would 
need to be available for our actuaries as well as those who 
develop the models is really the incidence or potential 
incidence of terrorism that may have occurred that we are not 
made aware of--those that have been stopped rather than those 
that actually occurred.
    So again, building a model requires a great deal of data 
points, and the only data point that we have, for all intents 
and purposes, to develop these models is really two: the 
Oklahoma City issue, which was a domestic violence level of 
terrorism; as well as the New York incident. With two data 
points, it is inadequate information for us to be able to model 
that kind of data--that information.
    Chairwoman Biggert. Okay. Thank you.
    Mr. Jensen, you mentioned that terrorism coverage will once 
again become extremely difficult or impossible for many 
businesses to obtain if the program is allowed to expire and no 
policy solution is in place. Beyond TRIA, what other kinds of 
policy solutions do you envision?
    Mr. Jensen. Thank you, Madam Chairwoman. I am not sure what 
will be there. What we hear from our company partners, of 
course, is that coverage may be limited and very--a broad 
spectrum. It concerns us and it concerns me on behalf of my 
clients that without TRIA in place, they truly won't have 
options available to them from the private insurance carriers. 
And our concern, of course, is to make sure that their 
insurance portfolio and the products that we provide them do 
provide them all the coverage that they need.
    Chairwoman Biggert. Okay. Thank you.
    Mr. Lanza, you state that absent its extension, insurance 
policies will begin in 2013 to exclude terrorism coverage, or 
to the extent permitted under State law not be renewed for 
major underlying risk. This is supposed to be a temporary 
program, but it appears that the industry is unanimously asking 
for a permanent extension of the program?
    Mr. Lanza. We are asking for an extension to match the 
risks of terrorism.
    Chairwoman Biggert. Okay. At what point could the private 
sector assume the risk?
    Mr. Lanza. I think that has been touched on. The issue is 
related to what information is available about what kind of 
risks are taking place against the country. In addition to 
that, you have a correlation issue, which is, for example, we 
can know that a hurricane in Florida is not correlated with an 
earthquake in California. In terrorist attacks, we have shown 
that they are correlated. In addition to that you have a 
concentration problem, which makes the severity or the amount 
of the loss very complicated to predict.
    Chairwoman Biggert. Thank you.
    My time has expired.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    I hope this question is not ideological, and if it is, I 
apologize. I am more interested in learning than ideology.
    Why couldn't the private sector handle this program 
completely on its own? Why is it absolutely necessary? I am 
assuming that all six of you believe that it is necessary for 
the government to play the backstop role. But is it necessary? 
Is it absolutely essential? Can't we do it without the 
government involvement?
    Mr. Bartlett. Congressman, Steve Bartlett. I wish that it 
could be done without any government involvement at all. This 
program at least establishes it so there is no government money 
involved that would be recouped. But without a backstop it is 
unpredictable--the risks are unpredictable and they are 
uninsurable because they are so large. And the frequency and 
the location are totally unpredictable and the size is 
uninsurable. There is simply not enough money in the overall 
market to provide the--in the private market to provide the 
initial backstop, but it could be recouped over time and this 
law provides that it would be.
    Mr. Cleaver. Mr. Lewis?
    Mr. Lewis. Yes, thank you. I think it is also important to 
keep in mind what a private market solution could be. Given the 
insurability issues that we have mentioned with respect to 
terrorism insurance--we can't predict the frequency, we don't 
understand the severity, these are non-random acts, terrorists 
are out to inflict maximum damage by picking the soft points. 
As insurance companies in the private sector trying to just 
intermediate that risk for our policyholders, if we can't price 
it and we can't manage it like a traditional risk and we need 
to be there to make sure that we can meet the payment 
obligations of our clients when they have a claim we can't put 
too much risk against our surplus.
    So the private market solution is really to start 
restricting coverage and reducing exposure so a private market 
solution in this context may be a non-insured coverage and more 
of it goes back to companies which have to self-insure or goes 
into residual markets. The best example of unregulated markets 
you can look at are the reinsurance markets and the capacity 
there, as we mentioned earlier, is de minimis.
    So I think a private market solution here, given the nature 
of terrorism, is really less of an insurance peril. TRIA 
actually gives you an orderly process for a Federal loss-
sharing program with the private sector so that, in fact, there 
is a response mechanism already in place should, heaven forbid, 
we ever have a future terrorism event.
    Mr. Copeman. Congressman, if I could give an example, too, 
as the smallest company sitting at this table, we insure 
jewelry. And for anyone who has been to the diamond district in 
Lower Manhattan, 47th and 5th Avenue is one of the greatest 
concentrations of jewelers in the country.
    Given the TRIA program that is in place today, our exposure 
between the deductible and the co-participation is 16 percent 
of our policyholder surplus. That is $150 million of surplus; 
16 percent of that would go away.
    The only way we can participate and provide our customers 
coverage in that location is because TRIA is in effect and we 
are able to purchase private reinsurance as well as rely on the 
Federal Government to be the backstop.
    Mr. Cleaver. Ideologically, the biggest discussion in 
Washington, no matter how it comes across, is really a 
discussion about the role of government. And you can't answer 
that question. For me it is, when is the government intruding?
    What is the difference, then, between flood insurance and 
terrorism insurance, particularly as it relates to pricing? 
Everything that you said, Mr. Lewis, about TRIA is also true 
about floods. They are unpredictable; we don't know the scope 
when they hit. You could say the exact same thing.
    Mr. Lewis. Let me follow up. With respect to natural 
catastrophes--and it applies to floods, it applies to 
hurricanes and earthquakes--we actually have hundreds if not 
thousands of years of data to look at frequency and severity of 
these events. Now, they could be highly uncertain and it could 
be a challenge, but with respect to terrorism we have no basis, 
no understanding of frequency for a terrorist event.
    The second thing is that fortunately, floods happen largely 
in floodplains or just outside floodplains. The floods don't 
actually seek out the weakest spot, like a terrorist would. 
These are actually non-random acts trying to find that soft 
spot and actors who really have a political agenda trying to 
strike at the soft belly of the country.
    So there is a difference, and I appreciate the challenges 
on the flood program and natural catastrophe, but we do draw 
the distinction with terrorism.
    Mr. Cleaver. I was the mayor of Kansas City from 1991 to 
1999. We had two 500-year floods.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you.
    The gentleman from Virginia, our vice chair, Mr. Hurt, is 
recognized for 5 minutes.
    Mr. Hurt. Thank you, Madam Chairwoman.
    Mr. Bartlett, I had a couple of mechanical questions. We 
have talked a little bit about the fact that--and you have 
stated in your testimony that the losses would ultimately be 
paid back to the government. I guess the first question is, 
under the current TRIA program--and forgive me for not knowing 
this--there are no premiums that are paid up front into the 
program, like with flood insurance, are there?
    Mr. Bartlett. There are premiums but they are paid as part 
of your regular commercial insurance, and they are used to pay 
the deductible that an insurance company would pay--the 20 
percent deductible, which is a large number, and also the co-
insurance. It is only in the event that you surpass that, then 
the government would pay the backstop, so it is included in the 
premium--
    Mr. Hurt. How does the recoupment work and what are the 
circumstances in which it would not be paid back?
    Mr. Bartlett. My understanding is that it would be paid 
back. As I understand it, the Secretary of the Treasury would 
certify it is a terrorist attack, certify that it meets the 
threshold, it is above the $100 million, and that the 
deductibles have been exceeded, and then would, as I understand 
it--at that time would have the pre-established authority to 
assess commercial policyholders universally until the 
government is repaid. That is my--
    Mr. Hurt. It could take years--so $100 million--industry 
loss of $100 million, we just heard testimony that the--is the 
threshold, and then--and then my understanding is that above 
that, and we just heard testimony that the 9/11 attacks cost 
the insurance industry approximately $40 billion in current 
dollars--$100 million to $40 billion is--so it does get 
confusing to me real fast.
    $100 million is the trigger, so it is not--unless the total 
losses are $100 million. And then after that every company 
would pay their own policies up to 20 percent, or roughly $1 
billion for a large company. And only after that would the 
government come in.
    So one would suppose, with a large attack, that private 
money would front the first--and this is rough justice--the 
first, say, $20 billion or $30 billion, and only after that the 
government would step in as a backstop. Anything the government 
pays as the backstop would then be recouped by a tax on all 
policyholders.
    And it could take years?
    Mr. Bartlett. It would be whatever the Secretary of the 
Treasury decided it would take, frankly.
    Mr. Hurt. Okay.
    I was intrigued by Mr. Lewis' testimony. I guess the first 
question I would ask is what do we know now that we didn't know 
10 years ago when we enacted this program as a temporary 
program? What is it that we know now that we didn't know then? 
I would imagine that we now know a whole lot more.
    Mr. Lewis. Yes. It is a challenge, and I think you heard 
some of the sentiment earlier that we had hoped 10 years ago 
that we would know a lot more now that would enable a better 
management of the science, but the terrorists' tactics and 
weapons continue to evolve. What we do know more now is when we 
look at some of the more conventional attack modes--truck 
bombs, car bombings, you see some of these overseas--the 
potential impact of those may help us model losses from a 
severity perspective.
    We have done a lot of work to try to manage aggregations. 
As you have seen, the industry, even though it has very high 
retention, so a ground-up loss is, per company, $100 billion-
plus is a lot. And we bear that risk ourselves and we try to 
manage that.
    So we have been able to develop the tools to manage within 
the current retentions, but when you start getting to events 
larger--
    Mr. Hurt. So how do you do that?
    Mr. Lewis. What we basically do is we limit our exposure--
the potential ground-up loss has to be no more than a certain 
amount of capital. I will go back to the comment to make sure 
we can't put the rest of our policy--
    Mr. Hurt. But what do you say to the insured in terms of 
how they manage risk? Because obviously you--I would think that 
an insurance company can require as a condition of a policy 
that the insured take certain actions to minimize losses. So, 
can it?
    Mr. Lewis. That is a good question. When we are talking 
about our exposure, it is typically not one policy. At The 
Hartford, for example, we provide a lot of insurance to small 
businesses. So it is aggregations of policies. It is not 
limiting the amount of coverage on any one policy; it is making 
sure you don't write too many policies in one area.
    There has been a kind of a redistribution of policies in 
general, and in the industry we have reached a balance. If TRIA 
goes away, companies are going to be faced with the decision 
about how do we bring the overall exposure down, and that is 
the problem that you are hearing in terms of people dropping 
coverage.
    Mr. Hurt. Last question really quickly--I have 5 seconds--I 
would assume, though, that while we have not had a massive 
attack like we had on September 11th, I would think that you 
could still--there are a lot of terrorist attacks that take 
place all across the world. You all could use those in trying 
to figure out modeling, can't you?
    Mr. Lewis. The issue is frequency--not really, because 
those are different locations, different tactics, and then when 
you start getting into attacks with the potential for nuclear, 
biological, chemical, and radiological weapons, there is no 
precedent. And we have heard that terrorists say that their 
intention is to try to deploy those weapons. We have no basis 
to try to price for them.
    Mr. Hurt. Thank you.
    Chairwoman Biggert. Thank you.
    Mr. Green, you are recognized for 5 minutes.
    Mr. Green. Thank you again, Madam Chairwoman.
    Mr. Cleaver has covered this, but I would like to make sure 
I have it for the record. Are you, indeed, all of the opinion 
that TRIA should be extended? If someone differs, will you 
kindly speak up just so that I will have a record that reflects 
that you are all in agreement?
    If you are in agreement and you believe that it should be 
tweaked to some extent, would you kindly extend a hand into the 
air, because I would like to know what your opinion is about 
tweaking? What would you have us do to make it better than it 
is? Anyone?
    Am I to assume that you all think it is fine as it is and 
that--let's just sort of stay the course, is that what I am 
hearing?
    Mr. Lanza. I think it is we understand what TRIA does and 
so we understand that. We are covered for an uninsurable risk 
and we understand what TRIA does for us, and that is why we 
like it.
    Mr. Ryan. Representative Green, if I could offer--
    Mr. Green. Yes, sir?
    Mr. Ryan. The insurance and reinsurance industry has had 10 
years to grow accustomed to the current backstop and the 
program and the way the insurance industry responds to that. It 
is not too hard to envision a situation that was better for the 
insurance industry. I think any tweaking would reduce the 
benefit of the Federal program and introduce some uncertainty 
into the insurance industry and be to the detriment of insureds 
and insurers.
    Mr. Green. Mr. Bartlett, I read your testimony and I am 
appreciative of what you said on pages three and four. You sort 
of explain how the system works. Thank you very much for the 
way you have codified this and explained it.
    The 3 percent is especially important because it helps us 
to recoup after, God forbid, some devastating incident occurs. 
But I do want to ask this, Mr. Bartlett: Are we putting the 
insurance companies in a position wherein they can make a bad 
bet but they won't ever suffer the ultimate loss--meaning 
companies now that they don't assess risk properly, they can 
possibly go out of business. Will the companies--are they--are 
we putting them in a position now such that they are insured, 
or are we insuring them to the extent that they will always be 
in business?
    Mr. Bartlett. It is actually quite the reverse. TRIA, as it 
was finally authorized in the last round, was quite--was--at 
least proposes to be quite expensive to insurance companies 
should there be a terrorist event, as it should be. But I have 
to say, it is--had you asked if there were any tweaks that we 
should make--if you had asked me 5 years ago, I might have 
hesitantly put up my hand and said it is too expensive.
    But it is a very expensive program--the 3 percent 
surcharge, the 20 percent deductible, the 15 percent copay, in 
fact, put the burden where it should be, and that is squarely 
on the private sector, both insurers, but also developers, 
property owners, and lenders. So there is full and adequate and 
very overwhelming incentive to mitigate against terrorism risk, 
to ensure properly, and to--and there is a large amount of 
payment that insurance companies would pay if it were to.
    Would companies go out of business if a terrorist attack 
happened? Perhaps. This is a--if a terrorist attack happens it 
would be very expensive for the insurance industry, and it 
should be, because they are in the insurance business. But it 
would be achievable for the overall economy, and that, of 
course, is the goal.
    Mr. Copeman. Congressman, as a small mutual insurance 
company--and I emphasize mutual because we exist for our 
policyholder; we have no stockholders; we have no one who 
invests in us--we certainly take very seriously the fact that 
we put, as I mentioned earlier in this particular example in 
New York, 16 percent of our policyholders' surplus on the line 
just for the risk of terrorism. There is still fire, there are 
still other catastrophic losses that can take place and we have 
to align our capital against those particular exposures.
    So as a small company, TRIA makes a huge difference in 
whether or not we are able to make a marketplace for our mutual 
insurance company policyholders.
    Mr. Green. Thank you.
    Mr. Lanza, I believe you indicated that we should do this 
by 2013. Was that you who made the comment that we should 
extend it by 2013?
    Mr. Lanza. No. The issue is that in 2013, as we go about 
renewing policies or issuing quotes on new policies, we will be 
advising insureds that the TRIA would be subject to sunset, and 
that would have issues for us and our ability to provide 
terrorism coverage.
    Mr. Green. So is your request that we do whatever we are 
going to do by 2013--the end of 2013--
    Mr. Lanza. By the end of 2013.
    Mr. Green. --just so that--to help the market to build in 
the necessary risk factors and take the uncertainty out of it. 
Is that what you are saying?
    Mr. Lanza. Correct.
    Mr. Green. Okay.
    Mr. Ryan. Congressman Green, I might have been the person 
who made that reference. I think it is vitally important for 
the reinsurance industry, too, to know where they stand in 
terms of what reinsurance they will be required to give for 
terrorism.
    Mr. Green. Thank you, Madam Chairwoman.
    And I would like to thank all of you for appearing. I truly 
don't want to see anybody go out of business. My questions have 
more to do with how much we do to--
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Green. Thank you, Madam Chairwoman.
    Chairwoman Biggert. Mr. Sherman, you are recognized for 5 
minutes.
    Mr. Sherman. Propitious time.
    Mr. Lanza, without TRIA would the private sector offer more 
terrorism coverage or less, and how would that affect the 
availability of commercial insurance overall?
    Mr. Lanza. Without TRIA, there would be no terrorism 
coverage, and so availability would be limited. And for the 
reasons we spoke of earlier, there is no way to underwrite the 
risk, and that is why we won't be able to extend the coverage 
without TRIA.
    Mr. Sherman. I assure you, there is simply no way to 
predict that risk. You could put the whole Foreign Affairs 
Committee together and try to guess what the risk is and none 
of us would be able to do it.
    Mr. Ryan. Congressman Sherman, may I interject? Sorry.
    Mr. Sherman. Yes.
    Mr. Ryan. Aon Corporation, in advance of the last two 
pending terminations of the TRIA legislation, surveyed 
insurance carriers, and we determined that we would lose about 
80 percent of the insurance capacity that was currently devoted 
to terrorism were TRIA to lapse.
    Mr. Sherman. And while it is getting more difficult to 
predict the weather and hurricanes, that is easy compared to 
predicting a major terrorist attack.
    What are the take-up rates of your company, Mr. Lanza, and 
for the industry as a whole?
    Mr. Lanza. We are slightly above the industry average, 
which is around 64 percent. We are at about 86 percent for the 
commercial lines that are not mandatory, so that is not 
workers' comp. Workers' comp is 100 percent.
    Mr. Sherman. So you are saying 86 percent of your customers 
choose to buy terrorism insurance?
    Mr. Lanza. Correct.
    Mr. Sherman. And so terrorism insurance isn't just for La 
Guardia, LAX, and the Empire State Building, who I assume are 
not your clients. It is for medium-sized businesses from cities 
that terrorists have heard of and some they don't know about or 
they haven't focused on.
    Mr. Lanza. Correct. Terrorism doesn't have any boundaries.
    We primarily write for small businesses that have an 
average of 3 commercial policies and about $10,000 in total 
premium, and they elect 86 percent of the time when they have 
the choice to have TRIA. And we distribute--
    Mr. Sherman. Mr. Lewis, did you have a comment on that?
    Mr. Lewis. I think you raise an important point. After 9/
11, one of the great lessons that we learned is a lot of 
attention was paid on the large buildings and the large 
companies. Horrible losses, but they shifted production to 
other areas.
    We also are a large provider of small business insurance 
and the critical thing was there are a lot of small businesses 
in Lower Manhattan that were just down because they closed down 
Lower Manhattan. If the claim checks did not keep coming to 
keep them in business then those would have all been out of 
business--
    Mr. Sherman. So even if you are not in an iconic location, 
you could be half a mile away and be affected.
    Mr. Lewis. Absolutely.
    Mr. Sherman. But even--for Mr. Lanza's 86 percent, I am 
sure the vast majority of his clients are not within walking 
distance of one of the 500 most notable sites in America. But 
they want and need the terrorism insurance.
    Do you find that your clients are taking--are getting the 
terrorism insurance because they need to do it in order to 
satisfy their creditors, or they simply think they want to do 
it for their own business, or is it a combination?
    Mr. Lanza. I believe it is a combination. Also, we 
distribute exclusively through independent agents, such as Mr. 
Jensen, who do a lot of consulting with the clients.
    Mr. Jensen. Mr. Sherman, if I may?
    Mr. Sherman. Yes.
    Mr. Jensen. As I testified before, most of my clients and 
my agencies are in smaller rural and suburban communities. An 
awful lot of my clients do purchase coverage because they still 
have the need even though we are not in one of these highly 
visible properties.
    As a note, I insure an awful lot of volunteer fire 
departments, as an example. These are folks who need to have 
claims payments quickly if something were to arise. They are 
also, as our Nation is, and they are the ones that respond to 
the bad things and they are running to the circumstances rather 
than away from them, and they may very well respond to a larger 
city to help in other communities, so it is very important for 
those communities as well.
    Mr. Ryan. Congressman Sherman, if I may, in addition to 
some of the other studies we have done, we have analyzed the 
take-up rate by segment of the economy, and I would like to 
introduce with my written testimony, if I have not already, 
some--
    Mr. Sherman. I would ask unanimous consent to allow this 
document into the record.
    Chairwoman Biggert. Without objection, it is so ordered.
    Mr. Sherman. I think the testimony has been very 
interesting today. I know my time has expired, and I think a 
lot of us have learned that terrorism insurance is something 
that the vast majority of medium-sized businesses need and 
want, and that these are risks that cannot be priced by the 
private sector.
    I yield back.
    Chairwoman Biggert. Thank you.
    Let me--just some food for thought, maybe, from Mr. Ryan 
for the reinsurance, and maybe some of you, but just thinking 
about this, in science and some other areas of the government 
there are public-private partnerships and classified 
information is shared. It does cause concern about 
intelligence, but could such a partnership be developed to 
model for terrorism risk, and then pricing for reinsurance and 
then ultimately for insurance?
    So maybe if you could think about this, Mr. Ryan, and get 
back to us. I don't know that you want to answer right now.
    And any of you--
    Mr. Ryan. Actually, could I make one comment along those 
lines?
    Chairwoman Biggert. Sure.
    Mr. Ryan. There has been a lot of concern expressed 
regarding the severity of terrorist attacks, and while that is 
certainly true, there is a lot of science that has been shared 
regarding the impact, physically, of terrorist attacks, but 
fundamentally it is the frequency issue, and I think everyone 
on this panel has said and most of the people on the previous 
panel, unless there is some hard science behind the frequency 
of it I don't know that that will be addressed.
    But certainly in terms of the severity issue, I think we 
have a head start on that portion of it, yes.
    Chairwoman Biggert. All right. Thank you.
    I ask unanimous consent to insert the following material 
into the record: a September 11, 2012, statement by Congressman 
Peter King from New York.
    Without objection, it is so ordered.
    With that, I would like to thank the panel for a really 
good discussion. The Chair notes that some Members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for Members to submit written questions 
to these witnesses, and to place their responses in the record.
    Again, I would like to thank all of you. You have been a 
wonderful panel. And we will be having some more hearings, too.
    So thank you so much for being here, and with that, this 
hearing is adjourned.
    [Whereupon, at 1:24 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           September 11, 2012


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