[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]








                THE TERRORISM RISK INSURANCE ACT OF 2002

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 19, 2013

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-45



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel




















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 19, 2013...........................................     1
Appendix:
    September 19, 2013...........................................    61

                               WITNESSES
                      Thursday, September 19, 2013

Abraham, Janice M., President and Chief Executive Officer, United 
  Educators Insurance............................................    18
Beshar, Peter J., Executive Vice President and General Counsel, 
  Marsh & McLennan Companies.....................................    15
Capuano, Hon. Michael E., a Representative in Congress from the 
  Commonwealth of Massachusetts..................................    11
Ellis, Steve, Vice President, Taxpayers for Common Sense.........    21
Grimm, Hon. Michael G., a Representative in Congress from the 
  State of New York..............................................     8
King, Hon. Peter T., a Representative in Congress from the State 
  of New York....................................................    12
Maloney, Hon. Carolyn B., a Representative in Congress from the 
  State of New York..............................................    10
Smith, J. Eric, President and Chief Executive Officer, Swiss Re 
  Americas.......................................................    17
Woo, Gordon, Catastrophist, Risk Management Solutions Inc........    20

                                APPENDIX

Prepared statements:
    Capuano, Hon. Michael E......................................    62
    King, Hon. Peter.............................................    64
    Moore, Hon. Gwen.............................................    70
    Abraham, Janice M............................................    72
    Beshar, Peter J..............................................    77
    Ellis, Steve.................................................   121
    Smith, J. Eric...............................................   126
    Woo, Gordon..................................................   142

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the American Insurance Association (AIA)   164
    Written statement of the Financial Services Roundtable.......   186
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................   190
    Washington Times article by Representative Bennie G. Thompson 
      entitled, ``Terrorism Insurance Still Necessary to Foster 
      Resilience,'' dated September 18, 2013.....................   208
Capuano, Hon. Michael E.:
    Written statement of Accident Fund Holdings, Inc. (AFHI).....   210
    Written statement of the American Hotel & Lodging Association   212
    Written statement of the American Public Transportation 
      Association (APTA).........................................   213
    Bloomberg Government Analysis entitled, ``Extending Terrorism 
      Insurance,'' dated July 17, 2013...........................   214
    Written statement of the Building Owners and Managers 
      Association (BOMA) International...........................   220
    Written statement of the CRE Finance Council.................   221
    Written statement of Host Hotels & Resorts...................   222
    Written statement of the International Association of 
      Amusement Parks and Attractions (IAAPA)....................   223
    Written statement of the International Council of Shopping 
      Centers, Inc. (ICSC).......................................   224
    Insurance Journal article entitled, ``Private Market Will Dry 
      Up If Federal Terrorism Insurance Not Renewed: Aon''.......   225
    Written statement of The Jewish Federations of North America.   227
    Joint written statement of the National Association of Mutual 
      Insurance Companies, the Financial Services Roundtable, the 
      Property Casualty Insurance Association of America, the 
      American Insurance Association, the Independent Insurance 
      Agents and Brokers of America, and the Council of Insurance 
      Agents & Brokers...........................................   241
    Written statement of the National Association of Insurance 
      Commissioners (NAIC).......................................   242
    Written statement of NAIOP, the Commercial Real Estate 
      Development Association....................................   252
    Written statement of the National Association of Mutual 
      Insurance Companies (NAMIC)................................   254
    Written statement of the National Association of Real Estate 
      Investment Trusts (NAREIT)...............................   264
    Written statement of the National Conference of Insurance 
      Legislators (NCOIL)........................................   266
    Written statement of the National Conference of State 
      Legislatures (NCSL)........................................   267
    Written statement of the National Multi Housing Council 
      (NMHC) and the National Apartment Association (NAA)........   269
    Written statement of the Real Estate Roundtable..............   271
    Written statement of the U.S. Chamber of Commerce............   273
    Written statement of the U.S. Conference of Mayors...........   274
Capuano, Hon. Michael E., and King, Hon. Peter T.:
    Written statement of the American Gaming Association (AGA)...   275
    Joint written statement of Major League Baseball, the 
      National Football League, the National Basketball 
      Association, the National Hockey League, NASCAR, the 
      National Collegiate Athletic Association, and the United 
      States Olympic Committee...................................   277
    Written statement of New Mexico Mutual.......................   279
    Written statement of the National Association of REALTORS 
      (NAR)......................................................   281
    Written statement of the Real Estate Board of New York 
      (REBNY)....................................................   282
    Written statement of the Workers Compensation Fund (WCF).....   284
Green, Hon. Al:
    Written statement of Hilton Worldwide........................   286
    Written statement of Marriott International, Inc.............   287
Maloney, Hon. Carolyn:
    New York Post opinion piece entitled, ``Congress must move on 
      terror insurance,'' by Representatives Michael Grimm and 
      Carolyn Maloney, dated September 18, 2013..................   289
Abraham, Janice M.:
    Written responses to questions for the record submitted by 
      Representatives Royce and Sinema...........................   291
    Additional information provided for the record in response to 
      questions posed by Chairman Hensarling and Representative 
      Pearce during the hearing..................................   295
Beshar, Peter J.:
    Written responses to questions for the record submitted by 
      Representatives Royce and Sinema...........................   297
Smith, J. Eric:
    Written responses to questions for the record submitted by 
      Representative Royce.......................................   299
Woo, Gordon:
    Written responses to questions for the record submitted by 
      Representative Royce.......................................   301

 
                      THE TERRORISM RISK INSURANCE
                              ACT OF 2002

                              ----------                              


                      Thursday, September 19, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, King, Royce, 
Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey, 
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, 
Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross, 
Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, Maloney, 
Velazquez, Watt, Sherman, Meeks, Capuano, Hinojosa, Scott, 
Green, Cleaver, Himes, Carney, Sewell, Foster, Kildee, Murphy, 
Delaney, Sinema, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    Today's hearing is on the Terrorism Risk Insurance Act of 
2002. I now recognize myself for 5 minutes to give an opening 
statement, but I wish to let all Members know that I will be a 
little softer on the gavel today, since I know Members wish to 
be heard on this subject.
    Today, the Financial Services Committee meets to hold a 
hearing on the Terrorism Risk Insurance Act of 2002. This is 
the first full Financial Services Committee hearing on the 
subject since 2005. It is an important hearing for a number of 
reasons.
    Number one, this is a program that is due to expire in 15 
months, and there are many within our economy who rely on this 
program and need to know the will of Congress. I also note that 
roughly half of the members of our committee have never been in 
Congress when this subject was debated, so I hope that there 
will be multiple views presented today on the topic in this 
hearing.
    I will admit that the timing of the hearing--I had 
originally thought I would have this hearing in December, but 
the gentleman from New York, Mr. Grimm, is very persistent; 
there have been days where he was patiently persistent and days 
where he was painfully persistent. And so, due to his 
persistence, we are having this hearing today, and I certainly 
know of no more vocal or outspoken advocate for the continuance 
of this program than the gentleman from New York, Mr. Grimm.
    Obviously, the other gentleman on my side of the aisle from 
New York, Mr. King, has also been exceedingly vocal and active, 
as have, on the Democratic side, the gentlelady from New York, 
Mrs. Maloney, and the gentleman from Massachusetts, Mr. 
Capuano, who have also coauthored legislation to continue the 
program. Their voices are important, and we will hear from them 
soon, as part of a Member panel.
    Although I was not personally here in 2002, I know that the 
original purpose of the TRIA bill, and the report that 
accompanied the bill that came out of committee was to ``create 
a temporary industry risk-spreading program for foreign acts of 
terrorism and facilitate a transition to a viable market for 
private terrorism risk insurance.''
    Before I go on to what was debated as the purpose of the 
bill, I think it is important to say what the bill did not 
purport to do. I cannot find anything in bill text or 
legislative history to suggest that anyone thought that the 
passage of TRIA would somehow prevent future acts of terrorism. 
It could not take away 9/11.
    So to some extent, we are debating today who should bear 
the cost of terrorism acts? Should it be insurance companies 
and property owners, or taxpayers? I think we all acknowledge a 
far more important debate is the prevention. Our committee has 
some part of that jurisdiction; other committees down the hall 
have a far greater part of it.
    At the time, it was thought that originally the TRIA Act 
would give the insurance industry time to recapitalize and 
develop new models, that they could price for terrorism risk 
and increase industry capacity. Three years later, in 2005, 
Congress decided to make TRIA a little less temporary, and 
extended it for 2 years.
    Then, in 2007, Congress was back again to stretch the 
boundaries of modern linguistics by extending TRIA 
``temporarily'' for 7 additional years and expanding it to 
cover any acts of terrorism, foreign or domestic.
    So we all must recognize that in just 5 years, TRIA has 
leapt in scope and quadrupled in length, neither of which I 
think could be mistaken for facilitating a transition to a 
viable market for private terrorism risk insurance.
    I think this begs a number of questions that I hope will be 
addressed in our second panel. What does constitute a temporary 
program? And I am not sure how many of us actually have faith 
in an ex ante recovery scheme of funds, so it begs the 
question, if premiums are not gathered, is this truly an 
insurance program? Is it an insurance program? Is it temporary? 
I certainly don't want to get into any trouble with the 
Consumer Financial Protection Bureau (CFPB) for misleading 
advertising.
    Has TRIA--have the 11 years allowed the insurance industry 
to successfully model and to provide products for terrorism 
coverage without taxpayer support? Or has TRIA prevented it?
    And, in 2007, the Congressional Budget Office stated, ``In 
the absence of a Federal mandate, insurers have a strong 
incentive to offer terrorism coverage to their commercial 
customers because to do otherwise risks their losing business 
on other property and casualty lines.''
    Hasn't the capacity in the stand-alone terrorism insurance 
program increased significantly since 9/11? We all agree the 
risks of terrorism are unique, but are they so unique as to be 
uniquely uninsurable?
    There have been times in our Nation's past where other 
phenomena in American history were deemed unique--airline 
crashes, oil spills, power outages, criminal riots, data 
losses--and yet somehow the industry found the incentive and 
the ability to model and assess this risk. How is this done? 
How long did it take? Are some positing that all acts of 
terrorism cannot be modeled, or is it merely those nuclear, 
biological, and chemical acts that cannot be reserved against 
or cannot be sufficiently modeled?
    It probably comes as no surprise to anyone that if we posit 
that private insurance companies are incapable of modeling this 
risk, how can we be convinced that the Federal Government is 
any better, as our National Flood Insurance Program is 
underwater, pun intended? PBGC, $34 billion deficit.
    And as we look at the national debt clock, which I know is 
inconvenient to some, it principally turns because insurance 
programs, be it the social insurance programs of Social 
Security and Medicare, or others, the government has not done a 
particularly good job. That, ladies and gentlemen, represents a 
manmade disaster, and it will certainly color my opinion on 
this matter. I have an open mind. It is not an empty mind, but 
it remains a skeptical mind.
    I now recognized the ranking member for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    I would like to thank Chairman Hensarling for holding this 
hearing, which is the first in a series focused on the 
reauthorization of the Terrorism Risk Insurance Act, known as 
TRIA.
    For more than a decade, TRIA has been nothing short of a 
qualified success, supporting critical economic growth by 
ensuring access to terrorism coverage by our largest venues, 
businesses and employers. The terrorist attacks of September 
11, 2001, forever changed the way we live and do business. In 
addition to the tragic loss of life and disruptions to our 
financial system, insurance losses totaled an estimated $40 
billion in today's dollars. The enormity of the losses made it 
financially impossible for many insurers and re-insurers to 
offer terrorism coverage.
    Consequently, most fled the market, and State insurance 
regulators allowed providers to exempt terrorism coverage from 
their policies. Those that did offer coverage did so at a cost 
that was prohibitively high. As a result, in 2002 Congress 
stepped in, enacting TRIA. The program makes terrorism 
insurance both available and affordable by requiring insurance 
companies to offer coverage to commercial entities in exchange 
for a Federal backstop, which is used to protect against only 
those terrorism-related losses that exceed $100 million.
    By requiring private insurers to offer terrorism coverage, 
TRIA actually reduces taxpayer exposure, because it keeps most 
of the terrorism risk with the private sector. Without 
affordable terrorism insurance, many buildings, schools, and 
venues would remain uninsured against terrorist attacks, 
meaning that the government likely would pick up 100 percent of 
the tab for catastrophic losses.
    The success of the TRIA program has been remarkable and has 
fostered continued economic and commercial real estate 
development across the United States. TRIA is strongly 
supported by a broad coalition of businesses and organizations 
representing a wide array of industries including construction, 
manufacturing, retail, transportation, real estate, sporting, 
and entertainment. Entities from the National Football League 
to the U.S. Chamber of Commerce to the National Association of 
REALTORS have lauded the program's importance.
    Support for TRIA is so strong and so widespread that it has 
been reauthorized twice by the House, both times without 
controversy and with overwhelming bipartisan support, but as we 
approach its expiration in 2014, opposition to the quick, clean 
and long-term renewal of this popular and noncontroversial 
program remains a mystery to me.
    While opponents argue that the program inhibits private-
sector participation, the private sector itself maintains that 
without TRIA in place, insurers would fall into the same 
practices that followed the attack of September 11th. This 
would mean the exclusion of terrorism coverage that would 
cushion the economic shock of a large terrorist attack or a 
series of attacks, something that remains essential for 
economic growth and job security.
    Mr. Chairman, I support reauthorizing TRIA, and I am 
encouraged by the proposals on the table to do so, in addition 
to the bill by Representative Capuano, which I have co-
sponsored. We have seen bipartisan legislation from 
Representatives Maloney and Grimm, as well as a bill from 
Representative Thompson. While each bill differs slightly in 
form, it is of the utmost importance that TRIA is reauthorized 
quickly, cleanly, and for the long term.
    I thank you again for holding this hearing, and I look 
forward to the testimony of my colleagues and the other 
witnesses.
    I yield back the remainder of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, the chairman of the Housing and 
Insurance Subcommittee, for 3\1/2\ minutes.
    Mr. Neugebauer. I thank you, Mr. Chairman, and thank you 
for calling this important hearing. This, I think, is the first 
of what probably will be a number of hearings. We have planned 
some additional hearings in the subcommittee level, as well.
    Last week, we remembered 9/11, which was an event that was 
unwanted, unplanned for, and unexpected in this country. It 
created quite a bit of economic havoc in our country, and as a 
result of that, there was economic uncertainty, and so TRIA was 
put in place to give some confidence to the marketplace so that 
people could continue to insure buildings and lives in what can 
be considered high-risk areas.
    One of the things that I want to do when at some point in 
time I leave Congress is I want a temporary government 
contract, just like TRIA, one that lasts almost 11 years now. 
And one of the things that, as I said, was the purpose of this 
was to bring some stability to the marketplace.
    And so, let's look at what has happened since 2002. The 
insurance industry was able to absorb the shock. It was a 
pretty big hit, but they absorbed it, and subsequent to that, 
the industry has recapitalized almost twofold. The reinsurance 
market is very much up and running, and there is a lot of 
liquidity out there, a lot of capital, and a lot of interest in 
taking on some of these risks.
    The insurance for TRIA for terrorism has gone down. The 
take-up rate is up. And so when you look back, if you ask 
people what would need to happen for us to begin to transition 
off of TRIA 11 years ago, they would have told you, well, the 
industry needs just a little bit of time to get back on its 
feet. And when you look at the industry today, it is back on 
its feet.
    We have talked to a number of market participants, and we 
have talked to a number of people in the insurance business, 
and they are ready to take on these risks. Because really what 
is happening today--and it is a great business model if you are 
in that business--is that basically, the American taxpayers are 
furnishing free reinsurance for TRIA coverage in this country.
    It seems to be, and we have reached a period in this 
country--and it is unfortunate--where we now have the American 
taxpayers backing everybody's mortgages, backing their 
insurance, backing their flood insurance, and what we know is 
the government is not really good at the insurance business. We 
look at FHA, it is in the insurance business, but yet they are 
undercapitalized.
    And so, I think the debate needs to be not just about what 
we do with TRIA, but in the future, can we have economies where 
the American taxpayers don't have to take on risks that other 
people don't want to take on?
    I look forward to the discussion that we will have today. I 
think it is an important discussion. And I thank the chairman 
for calling this hearing. I appreciate my colleagues who are 
going to testify in the first panel and I look forward to 
hearing their testimony, as well as the testimony of the other 
panel members. I think this is a good discussion beginning 
point, and one that I think will have additional opportunities 
in the future.
    And with that, Mr. Chairman, I thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Connecticut, Mr. Himes, for 2 minutes.
    Mr. Himes. Thank you, Mr. Chairman. I appreciate you 
calling this very important hearing, and I would like to thank 
my colleagues for appearing on this panel on this very 
important topic.
    I will note that I am a co-sponsor of both Mr. Grimm's and 
Mr. Capuano's bills. I will note we have a wonderful 
opportunity here today, because Mr. Capuano finds himself on 
the other side of the witness table for this hearing. And I 
want to say that, Mr. Chairman, like it or not, the Terrorism 
Risk Insurance Program has become a critical element of the 
real estate industry in particular.
    Some 60 percent of total U.S. commercial property--and that 
is an $11 trillion market--is backed by TRIA reinsurance. The 
National Multi Housing Council believes that about 85 percent 
of the firms that they surveyed purchase terrorism coverage as 
part of their property programs.
    This is not just important to the industry; it is actually 
a really important debate. Mr. Chairman, I agree with you. We 
should be very, very cautious in how we proceed. We don't want 
to repeat the experience that we all just lived through with 
other insurance programs, in particular the GSEs. We want to be 
careful that this ends up being a well-underwritten program 
that does what it has always done, which is provide an 
insurance backstop without any cost to the Federal Government, 
and we do, I think, want to make sure that it is structured in 
a way that if the private market eventually can provide this 
insurance, it does so.
    The logic, of course, for government intervention in this 
market is that the insurance industry relies on a couple of 
things that don't exist when you think about terrorism. The 
events are utterly unpredictable. They are not subject to any 
sort of actuarial analysis, and, of course, there is dramatic 
asymmetric risk. The government--and I say this as a member of 
the Intelligence Committee--knows a lot more than the market 
does about the nature of this risk.
    So, Mr. Chairman, I hope that we will do something at this 
crossroads. We could do nothing, as we are wont to do. We could 
pass a bill that goes nowhere because it is so extreme. After 
the fashion of the day, we could pass TRIA reauthorization 
which relies on a repeal of Obamacare.
    And if we do one of these three things, we will earn our 
low approval ratings, or we can make an important statement to 
the American people that we are willing to govern in an 
intelligent way, and, Mr. Chairman, I hope that is the path we 
follow.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Illinois, Mr. Hultgren, for 1\1/2\ minutes.
    Mr. Hultgren. Thank you, Mr. Chairman, and thank you, all 
of you have done so much work on this.
    From the hearing today, and in the committee's discussions 
to come, I am not just interested in fully understanding the 
necessity of the Terrorism Risk Insurance Program, but also if 
it can be improved.
    I can recognize that some Federal backstop may be required 
if our Nation's worst fears are realized, but how can we 
maximize taxpayer protection? How can we fully realize private 
insurance capacity? Are there emerging threats being covered?
    Terrorism continues to evolve, and so must our response. 
Data centers and communication capacity are high-priority 
targets today, higher than when terrorism risk insurance was 
first conceived. Is TRIA meeting these challenges?
    Today, I have more questions than answers, but I start with 
this acknowledgement: Terrorist attacks that destroy individual 
lives and private property were not ultimately directed at 
those specific entities. The attack is meant to harm a much 
wider audience and is directed at our Nation.
    On 9/11, my friend from high school, Todd Beamer, was 
killed in the Flight 93 crash. He was not the terrorist target 
on that day, nor was United Airlines. We all were.
    Like so many of my colleagues, I have not voted on TRIA 
before, and I thank the chairman for the chance to explore this 
issue, and I thank the witnesses for sharing their experience. 
Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Illinois, Mr. Foster, for 2 minutes.
    Mr. Foster. Thank you, Mr. Chairman, for holding this 
important hearing.
    While it is important to periodically re-evaluate the 
effectiveness of every Federal program, I am increasingly 
concerned by indications that TRIA may only be extended for a 
short time, or not at all. The importance of terrorism 
insurance to our economy was in full view during the 14-month 
period after the September 11th attacks.
    In 2002, when terrorism insurance was largely unavailable, 
a survey from the Real Estate Roundtable found that $15.5 
billion in real estate projects in 17 States were stalled or 
canceled because of the lack of available terrorism insurance 
from the private market.
    In the midst of what is now a solidifying, but still 
fragile, economic recovery, congressional inaction on this 
issue could threaten the stability of our markets and delay 
progress in the real economy. Uncertainty alone may cause 
insurance premiums to spike and become unavailable in some 
markets.
    We have seen various arguments of opponents of catastrophic 
Federal backstops before. I believe that it is intellectually 
dishonest to believe that the Federal Government would not and 
should not step in following another large-scale terrorist 
attack or, for that matter, a collapse in our Nation's housing 
market.
    There will always be a range of disasters for which only 
the Federal Government has deep enough pockets to cover the 
losses. In the case of terrorism risk insurance, we should 
accept that reality and accurately price that risk.
    After having spent over 20 years as a particle physicist, 
modeling the probabilistic outcomes of very rare events, I 
understand the difficulty in modeling a terrorist attack, given 
our inability to predict the future, and attacks with very low 
probabilities, a small dataset on which to project 
probabilities in the future, and the fact that the 
probabilities are both random and correlated.
    But a failure to extend this program is unacceptable. Even 
sending signals to the market that we may not act rationally 
and decisively will raise the operational costs for businesses 
and jeopardize jobs, not just in Chicago, New York, and San 
Francisco, but across the banking, commercial, real estate, and 
construction industries of this country.
    Thank you, and I yield back.
    Chairman Hensarling. The last colleague I will recognize 
before I recognize four more colleagues is the gentleman from 
Georgia, Mr. Scott, who is recognized for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman.
    A couple of points. First of all, terrorism risk does not 
resemble any other commercial risk. Unlike natural disasters, 
in which insurers have had significant experience and data to 
project the risk of damage, terrorism is highly difficult to 
model projections of risk assessment.
    The Terrorism Risk Insurance Program provides a good risk-
sharing model between insurers, policyholders, and the Federal 
Government that provides insurance market stability and 
security, particularly considering the unpredictability of the 
tragic nature and uniqueness of terrorism.
    It is very important to point out that TRIA has provided a 
necessary service at nearly zero cost to the taxpayers. 
Numerous and diverse industries from insurance to real estate 
to travel and tourism have argued very hard for the necessity 
of extending TRIA, and we must do that.
    And so it is with great pleasure that I am pleased to sign 
on with both Mr. Grimm and Mr. Capuano's bills and support 
them. And I would urge the committee to do so, as well.
    With that, I yield back the balance of my time.
    Chairman Hensarling. The gentleman yields back.
    Today, we will have two witness panels. Our first panel 
will be composed of our colleagues who have authored and co-
authored this legislation. We certainly look forward to 
grilling them like well-done hamburgers.
    In all seriousness, without objection, we will dispense 
with questioning of the witnesses on this panel. Clearly, our 
colleagues need no introduction, so I will now yield to the 
gentleman from New York, Mr. Grimm, for 5 minutes for your 
statement.

 STATEMENT OF THE HONORABLE MICHAEL G. GRIMM, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF NEW YORK

    Mr. Grimm. Mr. Chairman, thank you. I appreciate very much 
your moving up this hearing, and I know I speak on behalf of 
all of my colleagues at the table.
    I also want to thank Ranking Member Waters and my fellow 
colleagues on the Financial Services Committee for holding this 
hearing to examine the Terrorism Risk Insurance Act of 2002, 
which we all know as TRIA. And I want to thank you for 
providing me this opportunity to testify today on this 
important program.
    As a 9/11 first responder, and a Member of Congress 
representing New York City, I am keenly aware of the 
devastation and destruction that a major terrorist attack can 
cause. I can also report that 12 years after that terrible day, 
we are finally seeing meaningful redevelopment of the World 
Trade Center site come to fruition, redevelopment that 
insurance proceeds helped make possible.
    Prior to 9/11, insurance companies in the United States 
routinely provided coverage for losses caused by acts of 
terror. However, after the devastating losses suffered during 
the largest terrorist attack in our Nation's history, insurance 
carriers were forced to totally re-evaluate the risks 
associated with insuring against acts of terror.
    This caused the availability of terrorism insurance to all 
but vanish. It created a situation in which many commercial 
property developments were either stalled or canceled, as 
developers and lenders were ultimately unwilling to move 
forward without terrorism insurance coverage.
    This lack of coverage was the driving force behind Congress 
creating TRIA in 2002, and reauthorizing it in 2005 and 2007. 
TRIA will expire at the end of 2014 unless Congress takes 
action, and I would like to express to my colleagues today the 
importance of continuing this vital program.
    Many of the reasons, if not all of the reasons that caused 
insurance to withdraw from the terrorism insurance market 12 
years ago are still present today. The risks and possible costs 
associated with terrorist attacks are still impossible for 
insurance actuaries to model.
    This is because, unlike natural disasters, which are random 
events, terrorist acts are manmade, malicious events. Such 
intentional acts do not easily fit into the standard principles 
of insurable risk.
    In addition, giving insurers the information needed to 
better model such risks would put our national security in 
severe jeopardy. It would require turning over top-secret 
intelligence information on current terrorist threats and 
plots.
    While I understand there is a perception that TRIA is only 
important to large cities, such as New York and Los Angeles, it 
is not. Our energy infrastructure, amusement parks, resorts, 
sports stadiums, universities, and major hospitals are some of 
the many at-risk targets across the entire country.
    For example, on any given autumn Saturday, there are 
hundreds of football stadiums on college campuses filled with 
fans, in some cases more than 100,000 people at any one time. 
Such facilities are as vulnerable as skyscrapers in New York 
City to a terrorist plot to kill and harm innocent Americans.
    Additionally, I feel it is extremely important to note that 
TRIA is not only vital to property insurance, it provides a key 
backstop to workers' compensation insurance across the entire 
country. State law prevents insurers from excluding risks, such 
as terrorism, from workers' compensation policies.
    Without TRIA, many workers' compensation insurers could be 
left in financial ruin in the case of a large claim caused by a 
terrorist act. This would not only harm those directly injured 
in the attack, but everyone else who also relies on the 
important safety net that workers' compensation insurance 
provides.
    To put this in perspective, workers' compensation was 
liable for $750 million for Cantor Fitzgerald alone. This was 
one financial company located in the Twin Towers on that 
fateful day.
    Compare this with the liability that could be created by a 
terrorist act striking a large hospital or a university that 
has thousands of employees on any site, on any given day. I 
submit to you that with regard to workers' compensation 
insurance, not only is the risk impossible to model 
actuarially, but it is virtually unlimited.
    It is important to note that workers' compensation insurers 
are mandated by State law to provide coverage for acts of 
terror. So, this is decidedly not a free market.
    Finally, I would like to make clear that TRIA is not a 
taxpayer bailout. It is not a bailout of the insurance 
industry, but it is, in fact, the most taxpayer-friendly way to 
deal with the long-term costs associated with a terrorist 
attack.
    TRIA, through a $100 million industry-wide co-payment, and 
its 20 percent of written-premium, individual-carrier co-
payments, places significant private capital in front of any 
taxpayer assistance. Additionally, TRIA's repayment mechanism 
provides an important vehicle for compensating taxpayers over 
time for assistance provided in the immediate aftermath of a 
terrorist attack.
    Again, I just want to thank all of my colleagues, and I 
want to thank my chairman again. This is an extremely important 
issue. And with that, I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, for 5 minutes.

STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF NEW YORK

    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Waters, for calling this full Financial Services Committee 
hearing. And I also would like to thank my colleagues who have 
co-sponsored this bill. I hope others seriously consider co-
sponsoring it, and I thank my colleagues who authorized this 
important program to begin with and reauthorized it.
    I also would like to ask unanimous consent to place in the 
record an article that my colleague, Mr. Grimm, and I co-
authored in the New York Post today entitled, ``Congress must 
move on terror insurance.''
    Chairman Hensarling. Without objection, it is so ordered.
    Mrs. Maloney. And extending TRIA really should be a no-
brainer, because it works, it protects taxpayers, it creates 
jobs, and it costs absolutely nothing. We all know that major 
U.S. cities, like New York and Boston, remain top targets for 
terrorists. Everyone also knows that a major terrorist attack 
would be devastating, not just for our citizens in our country, 
but for our overall economy. That is why reauthorizing TRIA is 
essential to our country's continued economic well-being.
    And the risk continues. Police Commissioner Kelly has 
reported that there have been 13 different attempts since 9/11 
to attack New York, which have been thwarted and stopped.
    After 9/11, businesses across this country, and especially 
in New York City, could not get terrorism insurance. This 
crippled the construction, real estate, and tourism industries. 
TRIA provided businesses and insurers with much needed 
certainty by establishing a stable, long-term Federal support 
system for terrorism insurance. This helped the economy bounce 
back after 9/11 and ensured that terrorists could not wreak 
havoc on our economy and our way of life.
    After 9/11, all construction stopped. You couldn't even 
build a hot dog stand. It completely stopped. They could not 
get insurance anywhere in America. The only place they could 
get insurance was Lloyd's of London was insuring some places in 
America.
    Over the long term, TRIA ensures that if, God forbid, 
another terrorist attack does occur, we will be able to keep 
our markets open, our cities vibrant, and our economy strong. 
As we all know, it is rare for Congress to pass a bill that 
ends up doing exactly what we intended it to do and at no cost 
to the Federal Government or to the taxpayer.
    Yet, that is precisely what TRIA has done. It has ensured 
that businesses have access to terrorism risk insurance for 
over a decade and has not cost taxpayers a single dime. Why 
then would we even think about ending this program? Ending this 
program would harm the fragile economic recovery in the short 
term, and in the long term would leave our economy dangerously 
exposed in the event of a future terrorist attack.
    Opponents sometimes question why we need TRIA at all, but 
it is important to remember that just because the Federal 
backstop in TRIA has never been used does not mean that it is 
unnecessary. On the contrary, as the terrorist attack at the 
Boston Marathon demonstrated just this year, TRIA remains as 
necessary as ever.
    Opponents also argue that the private sector has the 
capacity to step in and provide terrorist insurance even 
without TRIA, but there is no evidence to support this.
    To the contrary, we already know what will happen without a 
Federal backstop for terrorism insurance because we experienced 
it. During the 14-month period after 9/11, before Congress 
enacted TRIA, private insurers refused to offer any coverage, 
which resulted in stalled and stopped construction projects and 
thousands of lost jobs.
    This is why there is widespread support in the business 
community for reauthorizing TRIA in its current form. Insurers, 
developers, banks, and even the major sports leagues, 
hospitals, and schools all believe that the presence of the 
Federal backstop that TRIA provides is the only reason that 
terrorism risk insurance is available at all.
    This time, we can't just wait until the last minute to 
reauthorize TRIA like we do with everything else. Months before 
the last TRIA reauthorization was expiring, insurance companies 
were already notifying regulators of plans to drop their 
terrorism insurance, which started to stop and stall 
development and jobs in our country.
    That is why my colleague Mr. Grimm and I introduced a 
bipartisan bill to extend the current TRIA program for another 
5 years. Our bill currently has 76 co-sponsors on both sides of 
the aisle. And with such broad bipartisan support, I very much 
hope that the committee will schedule a markup without delay, 
please, Mr. Chairman, and Ms. Ranking Member.
    Thank you very much for this privilege to testify before 
this important committee and before colleagues that I respect 
so much. Thank you so much.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Massachusetts, Mr. Capuano, for 5 minutes.

STATEMENT OF THE HONORABLE MICHAEL E. CAPUANO, A REPRESENTATIVE 
       IN CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Capuano. Thank you, Mr. Chairman. And thank you for 
having this hearing, and allowing me to testify as representing 
what I consider to be 99 percent of America, which means those 
of us who do not root for the Yankees.
    Mr. Grimm. Objection.
    [laughter]
    Mr. Capuano. Mr. Chairman, let's be serious here.
    Chairman Hensarling. So much for bipartisanship.
    [laughter]
    Mr. Capuano. Always trying, Mr. Chairman. Always trying.
    Mr. Chairman, let's be serious. We are going to reauthorize 
TRIA pretty much as it is. We may tinker around the edges, 
changing some of the triggers, or the amount of time we do it, 
but it is going to be done. And we all know this.
    It is going to be done because of people like me. I don't 
like TRIA, either; I just don't have a better idea. I haven't 
heard anyone else suggest a better idea. The private market has 
not come back in, and they won't come back in. If there are 
better ideas, let's hear them.
    To me, TRIA is a necessary item, because without it we will 
have no construction, you have heard my colleagues testify, and 
we all know that. Without some sort of terrorism insurance, 
there would not be a new Dallas Cowboys Stadium today. There 
would not be fans in the Dallas Cowboys Stadium next week. This 
is a national issue. This is an issue that especially for me, 
the most important thing we did the last time is we put in a 
repayment mechanism.
    God forbid there is a need to use TRIA, but we now have it 
so that taxpayers will not lose a penny. They will put in the 
money upfront and get paid back over time. And, again, if 
others have better ideas, people like me want to hear them. 
This doesn't fit with my general philosophy, but, again, to me, 
it is necessary for the American economy to keep moving 
forward.
    And as far as bipartisanship goes, I do want to point out 
there were 32 members of this committee who were in Congress 
the last time we reauthorized TRIA. All but two of the members 
on this committee voted for it. But with my luck, one of those 
two happens to be the chairman of the committee today.
    [laughter]
    A minor point of consternation, but something we have to 
live with.
    Mr. Chairman, thank you for having this hearing. And with 
trueness in my heart, I look forward to your grilling, 
insightful questions.
    [The prepared statement of Representative Capuano can be 
found on page 62 of the appendix.]
    Chairman Hensarling. Well, in the spirit of bipartisan 
friendship, I would just suggest to the Member that in the 
future, if he wishes to get the chairman's attention, Kyle 
Field at Texas A&M University is more persuasive than the 
Cowboys Stadium.
    [laughter]
    The Chair now recognizes the gentleman from New York, Mr. 
King, for 5 minutes.

 STATEMENT OF THE HONORABLE PETER T. KING, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. King. Thank you, Mr. Chairman.
    And thank you, Ranking Member Waters. It is truly a 
privilege to follow Mr. Capuano.
    Very seriously, most of the points have been made. I would 
ask unanimous consent to have my full statement inserted in the 
record. And I will just--
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. King. There are several points I want to make at the 
outset, though. First, comments have been made that this was 
intended to be a temporary measure, and it is still around 12 
years later. The reality is this was passed in the aftermath of 
9/11, and we didn't fully realize at the time that the 
international terrorist threat would not be a temporary threat.
    The fact is, 12 years later--I say this as a member of the 
Intelligence Committee and former chairman of the Homeland 
Security Committee--in many ways, the terrorist threats are as 
great if not greater than they were on 9/11. So the threat is 
still there, and that is why to me it is so essential that this 
program be continued and not be just looked upon as a temporary 
program.
    Second, as has been said, TRIA has no debt. This is not 
like the Federal Flood Insurance Program. It has no debt. The 
Federal Government has never paid out one dime in claims. And I 
think it is important out there--because somehow there is this 
impression that this is a handout or people are making money 
off of this. The fact is, not one penny has been paid out in 
the 12 years.
    Now, I think this is perhaps the most successful example of 
a public-private partnership, and it is provided economic 
certainty and stability to businesses across the country. It 
has brought private insurers back into the business of 
protecting against terrorism following the devastating effects 
of 9/11.
    My district lost 150 friends, neighbors, and constituents. 
Thousands and thousands of constituents have worked in the area 
of the World Trade Center and continue to work there today. So, 
Mr. Grimm, Mrs. Maloney, and I certainly are very personally 
involved in this. Mr. Capuano, having gone through the Boston 
Marathon attack, knows the trauma that affects an area when a 
terrorist attack such as this occurs.
    But as also been said, this is not just a New York or a 
Boston issue. TRIA has allowed, as Mr. Capuano mentioned with 
the Dallas Cowboys, the fact is the Super Bowl, the Olympics, 
amusement parks, universities, we can go on, Las Vegas, 
favorite major league sports teams in all sports, TRIA has had 
a hand in allowing all these events to come to pass.
    So at this time, I would like to ask unanimous consent to 
enter into the record letters in support of TRIA's extension 
from Major League Baseball, the NFL, the NHL, the NBA, NASCAR, 
the NCAA, the U.S. Olympic Committee, the U.S. Chamber of 
Commerce, the National Association of REALTORS, the Real 
Estate Board of New York, the American Gaming Association, New 
Mexico Mutual, and the Utah Workers Compensation Fund.
    In other words--
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. King. Thank you. Thank you, Mr. Chairman. In a post-9/
11 world, we need the TRIA program more than ever. And also, 
this is a unique issue, because as we saw with 9/11, nothing 
the City of New York could have done, nothing the State of New 
York could have done could have prevented those attacks.
    It is the responsibility of the Federal Government to 
ensure the security of its citizens. A terrorist attack occurs 
when there is a breakdown in our national security system. If 
that happens, the Federal Government bears the responsibility 
to assist the victims of such an attack, which is akin to an 
act of war.
    We cannot expect the private market to ensure against 
failures in U.S. counterterrorism without the government taking 
on some responsibility for the failure. Americans are relying 
on us to keep them safe.
    Now, an attack--again, as I said before, not one dime has 
been paid out. As we go forward, an attack needs to cost over 
$100 million in claims, and an additional 20 percent insured 
deductibles before government cost-sharing even kicks in. And 
then, TRIA makes sure taxpayers are fully repaid, as Mr. 
Capuano pointed out, by assessing fees on the insurance 
industry to recoup any payouts.
    So this is a program which has not cost us anything, and 
which has allowed billions of dollars in real estate 
development to go forward. We are talking about thousands and 
thousands of jobs. And I just see no rationale in this not 
being extended.
    I strongly support a clean extension of the TRIA program. 
Mr. Capuano and I have one piece of legislation. I am proud to 
be a co-sponsor of the Grimm-Maloney legislation, and they have 
worked extensively hard on this.
    But let's not just, as we somehow rely on buzzwords, to put 
ourselves in a situation where we are hampering the economic 
future of this country. This is something--yes, as Mike said, 
if there are any improvements, let's make them. No one wants to 
see one penny or one dollar be spent unnecessarily.
    But until someone comes up with that, let's not stop one of 
the most effective programs we have ever had and which really 
goes to the heart of the main threat, one of the main threats, 
certainly the most life-threatening danger we face today, and 
that is a terrorist attack.
    So, let's go forward. Again, if there are ways that this 
can be done in a more efficient way, more effective way, let us 
know. But until then, I strongly urge an extension of the 
program.
    I yield back the balance of my time.
    [The prepared statement of Representative King can be found 
on page 64 of the appendix.]
    Chairman Hensarling. I thank my colleagues for their 
clarity and passion and leadership on this issue. You are now 
dismissed to assume your usual seats.
    We will take a moment to allow our second panel of 
witnesses to be seated at this time.
    We will now turn to our second panel. I will introduce our 
witnesses. First, Peter Beshar is the executive vice president 
and general counsel to the Marsh & McLennan Companies. He 
previously was a litigation partner in a large law firm, and 
served as assistant attorney general in New York.
    Eric Smith is the president and CEO of Swiss Re Americas, a 
position he has held since 2011. He leads the company's 
property, casualty, and life and health reinsurance businesses 
in North and Central America.
    Janice Abraham is the president and CEO of United Educators 
Insurance, a position she has held since 1998, where she is 
responsible for developing and executing business strategy and 
operational plans for the risk management and insurance 
company.
    Dr. Gordon Woo is a catastrophist for Risk Management 
Solutions, a Silicon Valley firm specializing in catastrophic 
risk modeling.
    Last but not least, Mr. Steve Ellis is vice president of 
Taxpayers for Common Sense, and is no stranger to the 
congressional witness table, having testified on numerous 
topics such as flood insurance and congressional earmarks.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. Without objection, each of 
your written statements will be made a part of the record.
    Mr. Beshar, you are now recognized for 5 minutes.

  STATEMENT OF PETER J. BESHAR, EXECUTIVE VICE PRESIDENT AND 
          GENERAL COUNSEL, MARSH & McLENNAN COMPANIES

    Mr. Beshar. Chairman Hensarling, Ranking Member Waters, and 
all the members of the committee, thank you for the opportunity 
to be here.
    Terrorism is a deeply personal issue for our company, Marsh 
& McLennan. On that fateful day, 9/11, our company lost 295 
employees and scores of business associates.
    We also feel that we have a unique vantage point on the 
terrorism insurance market. Through our company, Marsh & 
McLennan, and our subsidiary, Guy Carpenter, we provide 
analytics and brokering services to really all of the players 
in the insurance marketplace, the buyers of terrorism 
insurance, the sellers, and also key reinsurers.
    We consider TRIA to be a model example of a public-private 
partnership. It provided crucial stability into the insurance 
marketplace at a vital time, and today it is instrumental in 
allowing the marketplace to function effectively. So, we 
strongly encourage its reauthorization and its modernization 
moving forward.
    This morning, I would like to briefly cover four areas: the 
current state of the terrorism insurance market; the aggregate 
levels of capital in the industry; our recommendations for 
reforming TRIA; and lastly, a couple of cautionary notes in the 
event that a different decision is made.
    This spring, our company, Marsh, released a sweeping survey 
of 2,500 clients across the country on the subject of terrorism 
insurance. And there were two big takeaways from the report.
    First, buyers across the country want this coverage. In the 
South, in the Midwest, and interestingly, in the West, the 
take-up rates are increasing faster than anywhere else, so this 
is not simply a phenomenon in the Northeast.
    And second, the take-up rates are really across all 
industries. We tracked 17 industries--real estate, health care 
services, nonprofits--really, at every level, the take-up rates 
have been consistent or increasing. So, policyholders want this 
protection.
    Meanwhile, on the level of capital in the reinsurance 
industry, our subsidiary, Guy Carpenter, recently released a 
report indicating that the level of capital in the reinsurance 
industry has increased over the last 5 years to approximately 
$195 billion, up from about $160 billion 5 years ago.
    Now, to be clear, not all of this capital is available for 
terrorism coverage in the United States. These numbers are the 
aggregate numbers for the reinsurance industry across the 
world.
    Nonetheless, there is more capital in the reinsurance 
industry today than there was 5 years ago, and were these 
trends to continue, we believe that there is space for the 
private insurance industry to take up more and to thereby 
reduce the position of the Federal Government.
    Against this backdrop, Mr. Chairman, we offer three 
specific recommendations.
    First, we recommend that Congress specifically clarify that 
coverage is available under TRIA for all forms of terror, 
including NBCR, if the underlying policy makes those provisions 
available.
    Second, TRIA should be modernized to reflect the fact that 
new terrorist risks have emerged, even since the last time that 
Congress reauthorized it in 2007. I think the most acute 
example is cyber terrorism, and we ask that Congress reflect on 
that and analyze how best to include cyber terrorism in a 
reauthorized TRIA.
    And third, the certification process. There is a clearly 
laid-out process, but it doesn't have a timeline associated 
with it. And as the bombings in Boston have revealed, in the 
absence of a timeline, there is ambiguity that is brought into 
the marketplace and for policyholders.
    So, a range of additional changes have been recommended 
from abolishing the program in its entirety to scaling back the 
deductible, and expanding the co-pay. We will leave that to 
you, Congress, to grapple with, but we would offer just a 
couple of thoughts about potential market disruption that can 
occur as you analyze those issues.
    First, a critical component of TRIA is the make-available 
component. We take it for granted, but up until that point, 
unless that make-available is there, there is no guarantee 
whatsoever that property and casualty carriers will, in fact, 
make terrorism coverage available.
    And our research suggests that, indeed, if TRIA is not 
there, there are many P&C carriers who will, in fact, choose 
not to underwrite the peril.
    Similarly, on workers' compensation coverage, where 
carriers have to pay their claims without regard to fault, 
absent a Federal backstop, a number of carriers will likely 
decline to provide coverage.
    So, in sum, we believe TRIA is the backbone to a healthy 
terrorism insurance market, and in our judgment, its existence 
actually serves to protect taxpayers from absorbing virtually 
all the loss associated with a significant terrorism event.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Beshar can be found on page 
77 of the appendix.]
    Chairman Hensarling. Mr. Smith, you are now recognized for 
5 minutes.

   STATEMENT OF J. ERIC SMITH, PRESIDENT AND CHIEF EXECUTIVE 
                   OFFICER, SWISS RE AMERICAS

    Mr. Smith. Chairman Hensarling, Ranking Member Waters, and 
members of the committee, good morning. My name is Eric Smith, 
and I am the president and CEO of Swiss Re Americas, a U.S.-
based corporation with thousands of employees in 30 offices 
around the United States. We began doing business here in 1893, 
and we have helped people rebuild their lives and businesses 
after every major catastrophe since the San Francisco 
earthquake of 1906.
    Thank you for allowing me to appear before the committee 
today to discuss the Terrorism Risk Insurance Act. TRIA 
protects the American economy and provides certainty in the 
insurance marketplace.
    Swiss Re supports this important partnership between the 
government and the private sector as a means of managing the 
terrorism risk that our country faces. We urge you to 
reauthorize the program.
    Swiss Re offers insurance and reinsurance coverage for 
terrorism risk in the United States. We believe this gives us a 
unique perspective on two critical issues: first, why the risk 
of terrorism continues to be uninsurable; and second, how 
traditional and nontraditional reinsurance markets view the 
risk of terrorism.
    We are celebrating our 150th anniversary as an enterprise, 
and the risk of terrorism and natural catastrophes has existed 
since our company began operations. Today, insurance for 
natural catastrophes is much more available and affordable than 
it is for terrorism.
    Why is this the case? Because even though natural 
catastrophes like hurricanes and tornadoes can be just as 
devastating as acts of terrorism, we can model them with 
accuracy. Terrorism risk can't be modelled. Terrorism risk 
remains largely uninsurable today because terrorists are 
unpredictable.
    Terrorists actively work against being detected so they can 
inflict as much damage as possible. The same isn't true for 
hurricanes or other natural catastrophes. And until we have a 
means of modeling the human element of terrorism risk, we don't 
believe the risk can be underwritten or priced with accuracy.
    Because Swiss Re is the leading global reinsurance company 
in the United States, I would like to comment on the U.S. 
market capacity and the potential for growth in terrorism 
reinsurance.
    Reinsurers face the same basic challenges as primary 
insurers in underwriting and pricing coverage for terrorism 
risk. And this uncertainty affects our business appetite for 
taking on the risk.
    The fact is, we earmark very limited capital to terrorism 
reinsurance, and the capacity we do offer goes to support our 
clients in their TRIA mandates. The reason Swiss Re offers 
capacity for terrorism risk in the United States is because 
TRIA is in place.
    Reinsurance capacity for terrorism risk in the United 
States is generally limited to conventional terrorism losses. 
There is virtually no capacity available for unconventional 
terrorism losses from nuclear, biological, chemical, or 
radiological attacks. And even for conventional terrorism, 
reinsurance capacity is limited in large metro areas because of 
the risk concentration challenges.
    There have been recent reports about capital flowing into 
the reinsurance market from hedge funds and large pension funds 
and some have made the assumption that this capital will be 
deployed for terrorism risk. Our experience does not lead us to 
believe that this will be the case. Investors have not shown an 
appetite for terrorism risk, whether the investment is made in 
insurance-linked securities or in a more traditional manner.
    There are two reasons for this: first, the unknowable 
characteristics of the underlying risk; and second, the 
correlation of risk. Pension funds and hedge funds are usually 
heavily involved in financial markets. After a terrorist act 
causing large-scale destruction, they would face the prospect 
of losses from their reinsurance investments and possible 
losses from a downturn in financial markets. This contrasts 
with investments geared solely toward natural catastrophe 
risks, where market downturns are less likely after an event.
    Such dual uncertainty is not attractive to investors. This 
brings me back to the central problem with terrorism risk. 
Until it can be reliably modeled by insurers and reinsurers in 
the financial markets, U.S. businesses will face challenges 
getting the commercial insurance coverage they need to protect 
their operations and meet financing requirements. And without 
TRIA, U.S. taxpayers would be at greater risk.
    We have worked hard at building the TRIA public-private 
partnership. We are very thankful that the program hasn't been 
tested. It is the elusive nature of terrorism that underscores 
the continuing need for the partnership. TRIA has proven 
effective in balancing the challenges of terrorism risk, 
national security, and economic stability. It provides an 
important foundation for orderly economic recovery following a 
catastrophic terrorist attack on U.S. soil.
    Mr. Chairman, thank you for allowing me to appear today. I 
look forward to answering your questions.
    [The prepared statement of Mr. Smith can be found on page 
126 of the appendix.]
    Chairman Hensarling. Ms. Abraham, you are now recognized 
for 5 minutes.

 STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, UNITED EDUCATORS INSURANCE

    Ms. Abraham. Thank you.
    Mr. Chairman, Ranking Member Waters, and members of the 
committee, thank you for this opportunity to testify today. I 
am Janice Abraham, president and CEO of United Educators, 
speaking today on the concerns of schools, colleges, and 
universities.
    United Educators is an A-rated risk retention group, a 
liability insurance company owned by more than 1,200 schools, 
colleges, and universities throughout this country. Our goal is 
singular and focused on this issue, to help schools and 
colleges recover as quickly as possible after a terrorist 
event, if a terrorist event occurs.
    Although United Educators insures institutions in Boston, 
Los Angeles, and throughout the country, we are mindful that 
the terrorists found Oklahoma City as a target. And close to 
92,000 fans will gather in Lincoln, Nebraska, to watch a 
football game this fall. This is not a rural or urban issue; 
this is an issue about having a plan to recover in the event of 
a natural catastrophe.
    Our policyholders fit the profile of potential targets. 
They are icons of America, with open campuses and cultural 
landmarks, a high concentration of people, and a strong role in 
their community as economic engines.
    Schools are potential targets for their Saturday afternoon 
football games, and their research labs, not just the labs at 
major research universities, are targets, especially of 
terrorists who would seek to harm the Nation's national 
security apparatus. And schools are targets when they host 
major speeches or Presidential debates.
    United Educators views TRIA as a national terrorism risk 
management plan that enables our schools to manage their risks 
responsibly through a four-way collaboration.
    First, the policyholders, the schools through their 
insurance deductibles have the first level of risk. They are 
also obligated to have well-documented and tested crisis 
response plans that ensure the security of research labs and 
safe evacuation plans for large gatherings.
    Second, United Educators, as the primary insurer, 
underwrites this terrorism risk considering the schools 
location, its vulnerabilities, and its crisis response and 
recovery plans. We take on considerable risk of loss ourselves 
as a company; 100 percent of our general liability insureds 
hold the terrorism insurance endorsement now, 100 percent.
    Third, U.E.'s reinsurers support our high limits of 
coverage, particularly in the case of multiple catastrophic 
events, such as a coordinated terrorist event across the 
country. Our reinsurers have advised us that this broad 
coverage will disappear if the Federal program is not renewed.
    So that leaves the Federal Government, a fourth and 
critical collaborator, by capping the liability and providing 
stable and predictable limits on terrorism insurance allows 
insurers and reinsurers to offer the sufficient capacity, even 
for multiple events.
    If the Federal Government steps away from its current role 
in terrorism risk management, I think two things will happen.
    Number one, the policyholders will not be adequately 
protected. U.E. could not responsibly provide coverage knowing 
that our balance sheet could be hit by coordinated terrorist 
attacks on multiple campuses. This would leave colleges and 
schools with few options, and none of them are good. They may 
be unable to purchase terrorism coverage, relying on government 
aid and private gifts to slowly recover after a catastrophic 
event, or they may obtain some form of limited coverage with 
exclusions and uncompetitive rates and pass this cost on to 
students through tuition.
    Second, insurance companies' insurance capacity would be 
reduced and market competition would suffer. Like United 
Educators, small and midsized insurers--and that is the 
majority of companies and the insurance companies in this 
country--many of which are mutual companies--would not be able 
to provide this coverage. This would result in less capacity to 
support terrorism risk and a much less competitive insurance 
market. If caps on catastrophic terrorism losses expire, only 
the large insurers will be left to offer coverage, and they may 
have limited appetite to fill this gap.
    The U.S. insurance industry thrives through diversity and 
competitiveness, and it may be counterintuitive, but capping 
the limits on private sector liability for catastrophic 
terrorism losses encourages more competition and more options 
for policyholders.
    No one here wants, after a catastrophic terrorist event, 
for the government to hand out recovery money based on 
political pressures. What we want is an orderly recovery, and 
TRIA supports this.
    Thank you, again, Mr. Chairman. I would be pleased to 
answer any questions.
    [The prepared statement of Ms. Abraham can be found on page 
72 of the appendix.]
    Chairman Hensarling. Dr. Woo, you are now recognized for 5 
minutes.

    STATEMENT OF GORDON WOO, CATASTROPHIST, RISK MANAGEMENT 
                         SOLUTIONS INC.

    Mr. Woo. Chairman Hensarling, Ranking Member Waters, and 
members of the Financial Services Committee, I am very pleased 
and honored to be here today to give my testimony on terrorism 
insurance risk modeling.
    Terrorism has become and will remain a catastrophe 
insurance risk. The possibility of a malicious aircraft impact 
in a central business district of a major U.S. city will exist 
as long as there is air travel.
    The private sector market for any catastrophe insurance 
peril requires risks to be quantified. To meet this need, 
catastrophe insurance modeling has progressed in covering 
earthquakes and hurricanes in the 1990s to terrorism after 9/
11.
    In 2002, when TRIA was introduced, and subsequently 
reauthorized in 2005 and 2007, some attention was given to 
insurance risk models, but experience was still too limited for 
them to be accorded much weight.
    Now, in September 2013, with a doubling of experience since 
2001, terrorism risk insurance risk modeling has attained a 
level of capability, validation, and maturity to make a more 
notable contribution to the discussion of the future of TRIA.
    What has become clear since 2007 is this: Terrorism risk is 
as much about counterterrorism action as about terrorists 
themselves. U.S. terrorism insurance is essentially insurance 
against the failure of counterterrorism. This is true not just 
in America, but across the Western alliance, Canada, Western 
Europe, and Australia.
    Numerous terrorist plots are developed, but the vast 
majority are interdicted through the diligence of Western 
intelligence and law enforcement agencies. Mass surveillance of 
communication links, and intrusion of intelligence models 
elevates the likelihood of plot interdiction with plot size. 
The ambitious plots that might have a potential to cause 
massive insurance loss would tend to involve a significant 
number of operatives and thus be very prone to interdiction.
    Too many terrorists spoil the plot. Attacks by a lone wolf 
or a pair of operatives such as the Boston bombers may be 
horrific acts of murder and destruction, but they are unlikely 
to cause large catastrophe insurance payouts.
    Now, an earthquake is a deadly and destructive force of 
nature, but an earthquake is not a crime. After the Japanese 
tsunami of March 2011, a Japanese boy asked his father why the 
earthquake that caused the tsunami could not be arrested.
    Terrorism is a crime. Criminals can be arrested in a way 
that earthquakes and hurricanes cannot. With every terrorist 
brought to justice, the evidence of counterterrorism control of 
loss volatility is accumulating across the Western alliance. 
Progressively, the courtroom record of terrorism convictions, 
combined with low terrorism insurance losses and risk modeling 
of terrorist social networks, should encourage cautious 
expansion of the U.S. terrorism insurance market. However, 
terrorism is not geographically diversifiable. The terrorists 
predominantly choose iconic targets with a recognition in 
populous urban centers.
    The lack of geographical diversification inherently limits 
the insurance market capacity for covering terrorism risk in 
the central business districts of Manhattan and other main 
metropolitan areas. An ongoing challenge for future terrorism 
insurance market development is lack of capacity in some 
prominent ZIP Codes.
    I want to make this point, that the Federal Government has 
a permanent, implicit involvement in terrorism insurance, in 
that it provides extensive--and massive, even--counterterrorism 
resources to stop terrorists before they move to their targets. 
And these resources have been deployed very effectively since 
9/11.
    Now, the greater these resources, the less the insurance 
loss burden. So the billions which have been spent on 
counterterrorism, quite rightly, to protect citizens from 
terrorist assaults, have helped to reduce the insurance loss 
burden.
    And to minimize the cost to the American taxpayer of TRIA, 
continued development, continued proficiency of 
counterterrorism action provides a solid security platform for 
future development of the terrorism insurance market, provided 
that a government backstop is in place for the most extreme 
losses.
    Thank you very much for your attention.
    [The prepared statement of Dr. Woo can be found on page 142 
of the appendix.]
    Chairman Hensarling. Last but not least, the Chair now 
recognizes Mr. Ellis for 5 minutes.

STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON 
                             SENSE

    Mr. Ellis. Thank you. Good morning, Chairman Hensarling, 
Ranking Member Waters, and members of the committee. I am Steve 
Ellis, vice president of Taxpayers for Common Sense, a national 
nonpartisan budget watchdog. Thank you for inviting me here 
today to testify on the Terrorism Risk Insurance Act and the 
Terrorism Risk Insurance Program.
    Congress enacted TRIA to ``establish a temporary Federal 
program that would allow for a transitional period for the 
market to stabilize, resume pricing of such insurance, and 
build capacity to absorb any future losses.''
    Taxpayers for Common Sense, to be clear, opposed the 
creation and the extensions of the temporary program and 
believe that nearly a dozen years after the tragic events of 9/
11, the terrorism marketplace has settled to the extent that it 
is past time for the government to step aside and let the 
private sector handle the portfolio.
    Much of our concern with the terrorism reinsurance program 
comes from the experience with the National Flood Insurance 
Program, where the availability of subsidized Federal insurance 
has largely prevented the development of a private market, 
forcing taxpayers to pick up the tab for approximately $25 
billion in losses to date.
    In addition, below-market rates serve as a disincentive to 
mitigate for risks, something which is concerning in both the 
flood and terrorism context. President Reagan once observed 
that Federal programs and agencies are ``the nearest thing to 
eternal life we will ever see on this Earth.''
    And so, you have this 3-year, explicitly temporary 
terrorism reinsurance program extended for 2 years, then 
extended for 7 years. And legislation, as we have heard about 
today, has been introduced to extend the program for another 5 
to 10 years. That will result in a temporary program that is 
just about old enough to vote.
    I know that insurance companies and insureds would like to 
see the program extended as is. No wonder; it is a good deal. 
But as then-CBO Director Douglas Holtz-Eakin has observed in 
the 2005 reauthorization debate, it is not such a good deal for 
taxpayers: ``It is easy to exaggerate the overall cost to the 
economy of reducing the Federal subsidy for terrorism 
insurance.''
    In fact, those costs are likely to be small. One reason is 
that TRIA does not lower total costs of terrorist attacks, but 
rather shifts them from property owners to taxpayers. Indeed, 
total cost might be lower without TRIA, because efforts to 
mitigate risk could pay off in smaller losses from a terrorist 
attack.
    For more than a decade, insurance companies have been 
pocketing terrorism insurance premiums with nary a payout. 
Thankfully, I admit. For the insureds, the take-up rate for 
terrorism insurance is roughly steady at a little over 60 
percent since 2009.
    Terrorism insurance premiums as a percent of total property 
insurance premiums is fairly consistent, as well, from 4 
percent to 5 percent. Reinsurance and insurance response to 
disastrous events is to initially pull back, only to return 
with greater capacity, like pruning a tree, even after 9/11.
    A Journal article describes an airport director's testimony 
to this committee on obtaining insurance in 2001: ``The 
significance of the testimony is apparent. The insurance 
industry has learned sufficiently about terrorism risk 
insurance that, while on September 20th, insurance was 
unavailable, a short while later, it was available at a price, 
and by the third week of October, available at a lower price, 
all without Federal support.''
    As has been mentioned by my colleague here at the table 
from Marsh, in their report from the spring, they noted that 
capacity in the standalone terrorism insurance market has 
increased significantly over the years. In the report, they 
estimate that terrorism insurance market capacity is $4.3 
billion, and there is up to $2 billion per risk in standalone 
capacity.
    It is important to note that in the United States, the 
reinsurance market is servicing a very small slice of the 
reinsurable pie. Some insurance companies are purchasing 
reinsurance to cover a portion of their deductible. This market 
would clearly grow if the Federal Government was not providing 
reinsurance for free.
    We believe TRIA should expire at the end of 2014. However, 
it is important that this be an affirmative decision by 
Congress and the Administration that can lead to an orderly 
transition in the market.
    If Congress should decide to continue TRIA in some form, we 
have several recommendations, short term. A long-term extension 
was done in 2007--a long-term extension, like what was done in 
2007, lends itself to more permanence in transition. A 2- or 3-
year extension should be the maximum. Further, the law should 
explicitly state that this is the last extension.
    Skin in the game: The 2007 extension did nothing to shift 
more responsibility onto the private sector, like was done in 
2005. Any new extension should increase the trigger for Federal 
involvement significantly, to as much as $50 billion or more. 
In addition, the deductible should be increased throughout the 
extension, and companies should pay a premium to the Federal 
Government for reinsurance coverage.
    TRIA was created in a much different time, with extensive 
uncertainty about future risks in the marketplace for terrorism 
insurance and reinsurance. The program doesn't reduce any of 
the risks to people or property from terrorist attacks, nor 
does it encourage companies to minimize and mitigate those 
risks through security measures.
    It simply shifts much of the fiscal risks off of property 
owners and insurance companies and puts it on the backs of 
taxpayers. It is time for that to end. Thank you very much.
    [The prepared statement of Mr. Ellis can be found on page 
121 of the appendix.]
    Chairman Hensarling. I thank all the members of the panel 
for their testimony. The Chair now recognizes himself for 5 
minutes for questions.
    There have been a number of references to 9/11, and the 
tragedy of the Boston terrorist massacre. In fact, I have made 
some of those allusions in my own opening statement.
    But I want to ensure, I guess following up somewhat on Dr. 
Woo's testimony about counterterrorism, does anybody on the 
panel believe that TRIA has anything to do with lowering the 
risk of terrorism?
    If not, I believe Mr. Ellis referred to the Congressional 
Budget Office, the nonpartisan Congressional Budget Office, 
that concluded in an earlier report, ``TRIA does not lower the 
total cost of terrorism risk, but rather shifts more of the 
burden from commercial property owners and their tenants to 
taxpayers.'' Is there anyone on the panel who wishes to take 
issue with the Congressional Budget Office?
    If not, we are trying to isolate the debate here. In fact, 
Mr. Ellis, I think--
    Ms. Abraham. I actually do have a comment.
    Chairman Hensarling. Please.
    Ms. Abraham. Mr. Chairman, I think TRIA will support an 
orderly, speedy recovery. That is what TRIA is for our members 
at our schools, colleges, and universities. It provides surety 
that we can provide the primary insurance, our reinsurers will 
be--
    Chairman Hensarling. But does that lessen the cost of an 
incident of terrorism to our society, or does it shift the 
cost?
    Ms. Abraham. If you look at the total cost, it would reduce 
the cost, because the economy would recover faster. Schools 
would open their doors faster. Businesses would be moving 
faster.
    Chairman Hensarling. I understand the argument.
    Ms. Abraham. You look at a total cost of risk, yes, I 
think--
    Chairman Hensarling. I understand. Now, for something 
completely different, Mr. Ellis, I think in your testimony, you 
actually are making the case that TRIA can potentially increase 
the cost of incidents of terrorism. Is that what I read in your 
testimony?
    Mr. Ellis. Yes, Mr. Chairman. One of the social benefits of 
insurance is that it serves to encourage, through the price 
mechanisms, to mitigate your risk, to essentially take measures 
that are going to reduce your risk. If you don't smoke, you 
have lower health insurance costs.
    And so it is a similar sort of thing, that if it is priced 
appropriately, the companies, the entities are going to be 
required to take more security measures. I am not saying that 
it is going to--that not having TRIA is going to eliminate 
terrorism or the impacts of terrorism, but the price signals 
try to mitigate the risk and diversify the risk.
    Chairman Hensarling. Dr. Woo, yes, go ahead?
    Mr. Woo. I wonder if I could just--
    Chairman Hensarling. Again, if you could pull your 
microphone closer, please.
    Mr. Woo. I'm sorry. What is very interesting, to make a 
comparison between the amount of money spent on risk mitigation 
against natural hazards as opposed to terrorism. What is 
remarkable is that a far greater amount is spent on mitigating 
terrorism risk than on natural hazards, because terrorism is 
something that people are especially fearful about.
    So with regard to the comments of Mr. Ellis here, I would 
say that if you just compare how much money is spent on 
counterterrorism nationwide, it is a massive figure which far 
outweighs the amount spent on natural hazards. If I could just 
make a comment about the U.S. Geological Survey's budget, 
annual budget of about, I think, $1 billion a year, that is 
completely dwarfed by the budget for counterterrorism. So, I 
think this is a very interesting comparison between natural 
hazards and counterterrorism.
    And it is one of the reasons the terrorism insurance losses 
have been low since 9/11, because there has been this massive 
expenditure on terrorism risk mitigation.
    Chairman Hensarling. If I could, Dr. Woo, unfortunately, my 
time is running out here, but I will give you another chance to 
comment. Clearly, you believe there have been great advances in 
the ability to model for terrorism attacks. I suspect it is one 
reason why you are employed as a catastrophist, that you 
actually believe this can be done.
    And you talk about, every time a terrorist is brought to 
justice, greater evidence, counterterrorism control, courtroom 
record, low terrorism insurance losses, ``should encourage 
cautious expansion of the U.S. terrorism insurance market.''
    I think you go on to say that a plot involving as many as 
10 operatives has only a slim 5 percent chance of avoiding 
interdiction, as opposed to lone wolf attacks, which can be 
very deadly to human life, but not necessarily economically 
catastrophic.
    But in the few seconds I have left--and I hope that other 
members of the panel will answer this--you say, Dr. Woo, that a 
future challenge is that lack of capacity in prominent ZIP 
Codes. Ms. Abraham talked about, I think, 1,200 universities 
and colleges that are members.
    So I am trying to get a feeling, again, is this limited, 
this risk to certain large, metropolitan areas, where the risk 
cannot be effectively spread throughout the Nation? Because I 
seem to be getting contrary testimony from others that there 
are many soft targets that also have an incentive to be 
insured.
    But I have long since gone over my time. Perhaps others 
will pursue that.
    I now yield 5 minutes to the ranking member.
    Ms. Waters. Mr. Chairman, I have listened with great 
interest, of course, to all of the testimony. And I perhaps 
have 101 questions for Mr. Woo to the degree risk mitigation 
can reduce the cost of insurance or create models that could be 
handled by the private sector.
    But let me, before I ask any questions, just say this: I am 
thinking very much about patriotism. And I am thinking a lot 
about the fact that--I am thinking about 9/11, and I am 
thinking about the fact that companies, both public and 
private, were attacked. Jobs were lost. Lives were lost, on and 
on and on.
    And it seems to me that we would be thinking about 
everything that we can do to make sure that the government 
plays a role to reduce the losses, to get the private and the 
public sectors back up and operating as quickly as possible and 
all of that, and recognize that at this time we have not 
experienced any losses, but we have a safety net for public and 
private.
    It seems to me that even with the thought of cost that 
would be incurred by the citizens, that is just something we 
should assume is what we should do and what we must do.
    And so having said that, Ms. Abraham, in your testimony, 
you indicated support not just for TRIA reauthorization, but 
specifically for TRIA reauthorization in substantially the same 
form as TRIA exists today. Can you explain briefly why 
reauthorization with substantially similarly insured 
deductibles is as important as TRIA reauthorization generally?
    Ms. Abraham. Yes, thank you very much for the opportunity. 
I think there are reasons for some improvement, and I would 
agree with Marsh & McLennan's recommendations, but I mentioned 
in my testimony the importance of making sure small to mid-
sized insurance companies are in the market providing capacity.
    And if these deductibles are significantly raised above the 
current 20 percent, then many of us will be forced to exit the 
market. We wouldn't be able to take that kind of loss from 
multiple events. Currently, the 20 percent is 10 percent of 
United Educators' capital. That is a lot of money. That is a 
risk that most businesses wouldn't put at loss. And so, if you 
make the deductibles or the co-pay significantly different from 
what it is, you will run small to mid-sized insurance companies 
out of the market, reducing capacity.
    So I really understand that it is counterintuitive, but the 
Federal Government having a role in this encourages 
competition, encourages more companies to play a role in 
providing capacity and having opportunities for, in my case, 
colleges and schools. Whether you are insuring a mutual in New 
York or a mutual in Texas, you need to be able to have more 
capacity entering the market.
    So if it significantly changed, raising the deductibles, a 
lot of our small and mid-sized companies will not be able to 
absorb those kinds of hits to our balance sheets in the case of 
a catastrophic event.
    Ms. Waters. Thank you very much. I want to move to Mr. 
Peter Beshar from Marsh.
    Earlier this year, Marsh released a report that included 
among other findings a section on standalone market capacity. 
Can you please discuss these findings? In your opinion, is 
there a willingness by the private sector to offer terrorism 
coverage, absent a mandate such as TRIA?
    Mr. Beshar. It is an excellent question, Congresswoman. 
Clearly, the make-available provision is critical in inducing 
property and casualty carriers to provide terrorism insurance. 
And were that not to exist, our belief is that there are many 
carriers that would not, in fact, be willing to provide 
terrorism insurance.
    Ms. Waters. Mr. Smith, reinsurance is a vital component of 
terrorism insurance coverage. In the aftermath of September 
11th, the reinsurance industry essentially fled the market. Can 
you discuss the extent to which the reinsurance industry has 
re-entered the market, if at all? How limited is current 
reinsurance capacity?
    Mr. Smith. The reinsurance market is very active in the 
terrorism risk space. We believe that balance occurs today with 
insurers. Whether you are individuals or businesses, you have 
to take steps to fortify and to do what they can.
    The primary insurance companies are taking a great load, 
and they serve a wonderful purpose, but there is significant 
capital from the reinsurers that are in the marketplace. And 
when we had the attacks of 9/11, it was the reinsurers that 
provided the majority of the funds to help rebuild our country.
    So, we are there. With TRIA, we will stay there.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the chairman of our Housing and 
Insurance Subcommittee, the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Dr. Woo, you heard a number of our panelists say that one 
of the problems with terrorism insurance is that it can't be 
modeled. Do you believe that terrorism insurance can be 
modeled?
    Mr. Woo. Thank you very much, Congressman. Since 2007, one 
of the major developments in terrorism risk modeling has been 
the study of terrorist social networks, in particular to assess 
the likelihood of a plot being interdicted as a function of the 
size of the plot.
    And, in fact, I have submitted with my testimony a 
PowerPoint presentation which includes a table showing how the 
chance of a plot being interdicted increases with the number of 
operatives involved in it. This is work that I did in 2009, 
2010, so it wasn't available at the time that TRIA was last 
being discussed.
    So this, to my mind, is a major development, because what 
we are all interested to know is, what is the severity, the 
likelihood of a given attack? If you just consider vehicle 
bombs, there are bombs of all different sizes, from a car bomb 
to a small truck bomb to a large truck bomb to a 5-ton or 10-
ton truck bomb.
    The key point here is that there is no way that a 10-ton 
truck bomb can be implemented as a terrorist attack without 
having a substantial number of operatives involved. And if you 
have a large number of guys involved in a plot, the plot most 
likely is going to be interdicted.
    If I can just make a point about the Federal Government's 
involvement, any major successful terrorist attack almost 
certainly would involve a substantial number of operatives. And 
in any inquiry as to how this plot was allowed to get through 
the security net, there is going to be a question of government 
responsibility, liability, negligence around it. I live in 
London. Just in May, we--
    Mr. Neugebauer. Dr. Woo, I'm going to take that as a yes.
    Mr. Woo. Yes. Yes. I'm sorry.
    [laughter]
    Mr. Neugebauer. And I appreciate that. One of the things, 
when we talk about TRIA--and I want to go to Mr. Beshar, Guy 
Carpenter, which is one of Marsh & McClennan's subsidiaries, 
put out a report in 2010 which stated more than 80 percent of 
the reinsurers are actively seeking new or expanded terror 
insurance business. And two-thirds of the global insurers now 
offer coverage for nuclear, biological, chemical, and 
radiological events, a substantial shift in underwriting 
appetite from the period immediately following 9/11.
    This seems to make a strong case that there is an appetite 
out there for TRIA, for terrorism insurance without necessarily 
a Federal backstop, because in other markets there is not a 
Federal backstop. So do you agree that there is an increasing 
appetite for terrorism insurance out there?
    Mr. Beshar. Congressman Neugebauer, I think the critical 
fact is there is an increasing appetite in the presence of 
TRIA. And the concern is that if you take that backstop away, 
this is not a peril that most property and casualty carriers 
are eager to underwrite.
    And so, when we speak about some of the capital levels that 
exist in the overall industry, I referenced a figure earlier of 
$195 billion. That is for all lines across the world. And when 
you shift to just the United States and then just to the United 
States for terrorism insurance, the issue is much smaller, the 
amount of capital.
    Mr. Neugebauer. So what do buildings that are insured in 
London and Paris and Hong Kong that don't have TRIA, what is 
the appetite for insuring those buildings?
    Mr. Beshar. It is part of the same public-private 
partnership. So in the United Kingdom, there is a pool 
reinsurance facility that the government has helped establish 
that is similar to the case in Germany and France, for example.
    Mr. Neugebauer. What if you separate the NBCR component 
from that and you had a backstop for that, but the rest of the 
risks were separated from that? Is there an appetite to assume 
those risks?
    Mr. Beshar. I think it is a gradual process, Congressman. 
Right now, if you can validate that if there is underlying 
coverage for NBCR, then TRIA will backstop that. That process 
will encourage the P&C market to begin to expand its 
willingness to go into broader NBCR. Again, in the absence of 
TRIA there is not the appetite, just given the immensity of the 
potential exposure to a catastrophe.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. I would like to ask Peter Beshar from Marsh & 
McClennan--and note that Marsh & McClennan was located in one 
of the two towers. So we appreciate all of the panelists' 
testimony today on this incredibly important issue.
    I would like to ask you, in the last 5 years, how much have 
property and casualty firms received in premium payments for 
terrorism coverage in the United States?
    Mr. Beshar. Congresswoman Maloney, I don't know that 
specific answer, but I would be happy to have some of the 
experts within Marsh and Guy Carpenter work with members of 
your team.
    Mrs. Maloney. Okay. And in the last 5 years, how much have 
those firms paid in claims for terrorism events in the United 
States?
    Mr. Beshar. Thankfully, the response to that is very 
little.
    Mrs. Maloney. Now, when you look at the alternatives that 
may be out there for TRIA that would result, are there any 
alternatives, and if so, what are they, that would result in 
the level of availability and terrorism risk insurance 
sufficient to protect the broader economy? Are there any 
alternatives that you can think of that could--
    Mr. Beshar. We think that the existing framework that the 
Congress developed first in 2002, and then reformed and 
modernized, is probably the best available structure that can 
exist, this public-private partnership, where particularly, the 
Federal Government is trying to backstop the true catastrophe.
    Mrs. Maloney. And as I mentioned in my own testimony, 
during the days after 9/11, everyone halted their insurance. No 
one could get any insurance. I don't think anyone was supplying 
insurance in the United States.
    The only place some companies could get insurance was 
Lloyd's of London. Why was Lloyd's of London able, in very 
limited ways, to provide insurance, yet no insurance company in 
America was providing insurance to anyone, to any business in 
New York?
    Mr. Beshar. It was actually--aviation insurance was one of 
the first issues that really came up and crystallized, because, 
you will remember, essentially no planes were flying for a 
period of time. And so, that was the first issue that the 
insurance industry had to grapple with.
    Marsh & McLennan actually worked with Lloyd's and other 
brokers and carriers in the marketplace to first try to 
stabilize the aviation so that the planes could begin to fly 
and then worked beyond that into property and other areas.
    Mrs. Maloney. Your work reminds me of the great resiliency 
of our country. The fact that we bounded back after that 
catastrophe in such an extraordinary way is a credit to every 
public-private effort. If TRIA is not reauthorized, what do you 
expect the impacts will be on the availability and pricing of 
terrorism insurance or terrorism coverage?
    Mr. Beshar. There are two principal concerns that we have, 
Congresswoman Maloney: first, that P&C carriers will pull back; 
and second, that in the workers' comp area, in particular, 
where carriers have to make the coverage available, that if 
there is not the backstop, they will simply decline to 
underwrite the insurance.
    Mrs. Maloney. And what do you think would be the material 
changes or the economic impact if we were not able to continue 
to current TRIA program, in terms of job creation, the overall 
economy? What would be the effect on development?
    Mr. Beshar. It is very difficult to estimate it, 
Congresswoman. In the workers' comp area, if the coverage is 
mandatory, in order to employ people, and there is very limited 
coverage that exists in the marketplace, clearly, under that 
scenario, that could be an inhibitor on job creation.
    Mrs. Maloney. Some have attacked the program as ``corporate 
welfare'' and a potential liability to the hardworking 
taxpayers of America. Can you discuss the level of 
responsibility private insurers continue to face under TRIA? 
And can you more fully explain the relationship between the 
public insurers, the private insurers, and the public, the 
government, in paying claims which result from a terrorist 
attack?
    Mr. Beshar. Sure. I will focus just on one provision that 
was implemented in 2007, the recoupment provision, so that if 
there was to be a significant terrorist attack and the Federal 
Government did have to, in fact, advance funds to carriers, 
both on the reinsurance and insurance side, then the Federal 
Government has the right to recoup those outlays over time 
through increases in premium.
    Mrs. Maloney. My time has expired. I just want to thank all 
of you for your testimony. It is important. Just seeing you 
reminds me of visiting with your survivors shortly afterwards. 
And thank you for the leadership your company has had in this 
area. Thank you.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, the chairman of our Capital Markets 
Subcommittee, Mr. Garrett, for 5 minutes.
    Mr. Garrett. I thank the chairman.
    So, let's begin. First, let's just take a look to see how 
well the system is working right now. Someone on the panel, I 
forget who, made reference to the trigger mechanism in the 
current law and I believed referenced also the Boston bombing 
situation. If my recollection is correct, the mayor of Boston 
said, ``This is not a terrorist event.'' And I guess--Mr. 
Beshar is shaking his head. Is that--
    Mr. Beshar. I don't know that specifically, Congressman.
    Mr. Garrett. Okay, yes. But you will confirm that has not 
been, as of yet, officially declared a terrorist event. Is that 
correct?
    Mr. Beshar. That is correct.
    Mr. Garrett. Right. Many months ago. And so, I can 
understand why a mayor or governor or actually the Federal 
Government would want to say that it is not a terrorism event, 
because if you declare it a terrorism event, all of those 
businesses which did not secure coverage would then be 
basically ineligible to seek their normal coverage on their 
policy. I will look to--Mr. Beshar, is that your understanding?
    Mr. Beshar. That is part of the complexity of it, is that 
some businesses will have terrorism protection, and some will 
not. And so, if there hasn't been a formal declaration, it 
makes it harder for the marketplace to respond.
    Mr. Garrett. Right. And so that is going to--it has been 
apparent, from that incident, since it is many months later and 
we still don't have a determination on it, I guess that is one 
of the issues that is brought to my attention as a flaw in the 
system, because you can imagine the political pressure for, 
unfortunately, if there is another event, political pressure 
not to declare that a terrorist event, because then there will 
be a lot of people who will be basically uninsured.
    Mr. Ellis, do you have a comment on that?
    Mr. Ellis. No. No comments. I think it is a very valid 
point.
    Mr. Garrett. So as long as you are--I am talking to you, 
let me just reference a report that Chairman Hensarling raised. 
It was a 2007 report by the CBO, and as it said, ``TRIA 
legislation raises difficult questions about economic 
deficiencies. For instance, some analysts and policymakers 
maintain that TRIA does not lower the cost but simply shifts 
the cost.''
    As you are all aware, TRIA has a trigger set at $100 
million. I believe, in your testimony, you said you had thought 
we could lower the thresholds, lower the deductibles. I think 
you probably also heard from the colleague just to the right of 
you, figuratively speaking, Ms. Abraham said that the threshold 
at 20 percent is problematic.
    I will look to you first, Mr. Ellis. Is there potential 
that those numbers will be changed, if there was reform to this 
legislation?
    Mr. Ellis. Certainly we would advocate that if we are going 
to extend the program, we would be trying to lay off more risk 
onto the private sector and allow the reinsurance market to 
grow. And so certainly, what some insurers have done is to lay 
off some of that 20 percent deductible.
    We heard about how the terrorism reinsurance market is 
growing. That is the place where it can actually grow, is in 
that 20 percent. So if we actually increase the deductible, 
then we would be able to lay off more risk to the private 
sector and not have the taxpayer on the hook.
    Mr. Garrett. Right. Although this law has been here in 
place longer than what was intended, the numbers have changed 
over time. Originally, I guess it was at 15 percent, and then 
it went to 17.5 percent, and now we are at 20 percent.
    And memory doesn't serve me too well, whether there were 
statements at those times, as well, that the industry was not 
able to absorb it. So, I assume that is the case today.
    Mr. Smith, there is a Swiss Re publication that came out 
after September 11th, which was entitled, ``Terrorism Risk in 
Property Insurance and their Insurability after September 
11th.'' And it said, ``Swiss Re basically agrees that property 
and business interruption losses resulting from terrorism are 
insurable, even in the aftermath of September 11th.''
    Do you all still stand by this?
    Mr. Smith. Congressman, we are actively involved in 
insuring terrorism risk today, so--
    Mr. Garrett. Right.
    Mr. Smith. I think you have--the full report talks about 
the presence, or the hopeful presence of a government backstop. 
Being a global reinsurer, we have to deal with terrorism risks 
all over the globe, and, unfortunately, our country in the 
United States, we are the main target. So, we are very 
concerned about TRIA--
    Mr. Garrett. I understand.
    Mr. Smith. That it is with the presence of a backstop, that 
it has to be there.
    Mr. Garrett. Was that part of that report?
    Mr. Smith. I believe so.
    Mr. Garrett. Okay. I see my time is--I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Smith, historically, smaller firms have much lower 
take-up rate of terrorism insurance when compared to larger 
companies. Some reports show as few as 10 percent of small 
businesses have such coverage. In your opinion, what is the 
reason for this lower take-up rate?
    Mr. Smith. That is part of the dynamics of the marketplace. 
So terrorism risk is something that is--for smaller businesses 
that tend to work on thinner margins and in a more 
straightforward business approach, it is one of those optional 
coverages that oftentimes they don't feel that they can afford.
    It is not just terrorism risk. There would be other 
optional coverages that small businesses oftentimes will 
exclude, that a larger, more sophisticated business, perhaps a 
publicly traded company with a board and a risk management 
apparatus in place, would not be able to avoid.
    Ms. Velazquez. Mr. Beshar, do you have any stats on 
terrorism insurance coverage by small businesses pre-9/11 and 
post-9/11?
    Mr. Beshar. I don't believe we have data pre-9/11, because, 
really, the coverage was embedded in property and there was so 
much less focus on it. In this Marsh report that we released 
earlier in the spring, there is a lot of analysis about the 
pricing, based on the size of companies. So, larger companies 
generally are paying a smaller rate online, in terms of 
percentage of premium, than smaller companies.
    Ms. Velazquez. And do you have any opinion as to any 
mechanism that we should explore to make terrorism insurance 
more affordable for small businesses?
    Mr. Beshar. I think the continuity of the program--if there 
is less uncertainty about whether the program is going to 
continue, I think the market will naturally evolve so that 
there are higher take-up rates, particularly in some of the 
small businesses that you have referenced.
    Ms. Velazquez. Thank you.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman. Thanks to each one of 
you for your testimony today. I generally am concerned about 
businesses and the ability of businesses to work through the 
problems they face. I would like to ask questions kind of from 
the other direction this morning, though.
    The idea that safe and orderly speedy recovery of an 
industry would result by having this coverage, I wonder if any 
of you are familiar with Sri Lanka? In 2001, they lost 5 or 6 
of their 12 aircraft. And do they employ some sort of a process 
to rebuild the industry? Or what was their aftermath? I will 
just ask that as an open question to anyone who might want to 
take it on.
    Mr. Smith. Let me go with that. When you look across the 
globe at developed nations versus developing nations, you are 
going to find much lower participation in insurance programs. 
Whether we are talking about Sri Lanka, or whether we are 
talking about the tsunamis, there tends to be a slower 
recovery, so the resilience that we enjoy in the United States 
unfortunately just doesn't exist in many parts of the world. 
So, the recoveries are very slow. They tend to be much more 
community-based. They tend to involve a very different mindset 
of the population.
    Mr. Pearce. I would note that Sri Lanka, at that point, had 
12 aircraft. Now they have 22 in about 10 years, and so it 
looks like the industry has not suffered and it didn't just 
stall out.
    I also am kind of drawn to the situation with the two 
successive hurricanes. Hurricane Katrina, of course, came in 
and off-course out of the Gulf. Then, I think it was the next 
year or the next hurricane sat out there and jammed around on 
Cancun. We had been to Cancun a year or two before, and were 
scheduled to go back, but we didn't bother.
    But I asked the travel agent about a year later, did they 
ever get fixed? Yes, they were fixed in a matter of weeks. They 
understood that if they didn't fix Cancun, nobody was going to 
come, and yet it took years, with $100 billion more or less 
sent to Louisiana.
    And so, again, I am sympathetic to the argument. I tend to 
feel a little bit like Mr. Capuano described, that I might not 
like it, but I am not sure what else to do with it, and I am 
still processing this idea of, is it essential?
    One of you mentioned--I am not sure which one--that many of 
the underwriters simply wouldn't tolerate the risk, they 
wouldn't carry the insurance. What would companies do, for 
instance, if they lost an airliner, let's say, or a building? I 
am not willing to discount the human loss, but let's say that a 
major facility was damaged and a business did not have risk 
insurance, did not have terror insurance.
    Mr. Beshar, I really appreciated your testimony. It was 
clear and precise, and I appreciated that. How do businesses 
react when they don't have that coverage?
    Mr. Beshar. It is not a great scenario, because if you 
have, obviously, a substantial loss and there is really no 
third party, not a private insurer, not the government that you 
can turn to, you have to absorb that loss.
    One other brief point, Congressman, in Mexico--you cited 
the example--they have recently issued, together with Swiss Re, 
catastrophe bonds to try to protect against certain risks, 
earthquake risk, for example, and it has been quite successful. 
It is a very unusual program of the Federal Government trying 
to essentially market something like that. And over the years 
ahead, hopefully there are those types of alternative 
instruments that might play an increasing role in the 
marketplace.
    Mr. Pearce. Let me crowd one last question in here, if you 
don't mind.
    A couple of you have mentioned the risk of lawsuits 
downstream. If what we are doing is to give trial lawyers 
access into unlimited pools of taxpayer money, then I become 
greatly more resistant, and so probably you will have to answer 
in writing, but if any of you could address how we could limit 
the frivolous lawsuits downstream, I would be a lot more 
interested in the program.
    But, Mr. Chairman, I see my time has expired. I appreciate 
the opportunity, and I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New York, Mr. Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    And I want to thank all of the panelists for their 
testimony today on this very important issue. I think it is 
important to all of us, given the day and time in which we 
live.
    Let me first ask Ms. Abraham the question about terrorism 
insurance being an uninsurable risk, but the capacity of the 
private sector to--if they had to insure on their own, do you 
think that they would be able to have the capacity without the 
public-private partnership to cover?
    Some have said because of their financial capacity, it 
could be meaningless if they issued insurance and they didn't 
have the capacity. So, I wonder if you could just give me your 
thoughts?
    Ms. Abraham. No, I do not believe, Congressman--thank you 
for the question--that there is capacity to insure the type of 
losses that we have all read about that could come either in 
major gatherings--I noted, as others, a football gathering or a 
major city or anywhere around the country.
    So, no, I do not believe there is an--although there is a 
lot of capital in the world now supporting insurance companies, 
that capital is both for natural catastrophes, it is for global 
risks, as well as domestic risks. I do not believe there is 
enough capital to support the type of losses and multiple 
losses that could occur in this country from a major terrorist 
event. This is about catastrophic losses.
    Mr. Meeks. Thank you.
    And, Mr. Smith, every time that Congress has extended TRIA, 
we have passed additional risk retention to the private sector. 
What has been the impact on terrorism insurance pricing and 
coverage? Have the private insurers, for example, bolstered 
their capacity to be able to cover up to $40 billion in losses 
should another tragic event like 9/11 happen again, that we 
hope never does happen?
    Mr. Smith. There are a couple of elements there.
    The first is that, as time has gone on and as businesses 
especially have learned more about terrorism risk and have 
chosen to take on the coverages, with the partnerships that are 
in place between primary insurers and reinsurers and TRIA, the 
market has been stable, the coverages have been, we think, 
affordable, and there has been a greater uptake.
    But it is kind of two steps. First, businesses have to 
better recognize the risk they have, but then they are able to 
turn to primary insurers with the backing of reinsurers and 
TRIA and fulfill upon what their desires are.
    Mr. Meeks. It seems as though we are making progress, as 
the longer we go without a major incident, et cetera. So as we 
debate--we have several bills that are before us. Could you 
tell us what you think? Some say 5 years extension, some says 
10 years, some say even longer. What do you think would be the 
appropriate extension of TRIA?
    Mr. Smith. I think this is an exceptional program. There is 
great balance to it. The majority of the costs are going to be 
borne by the primary insurers and the reinsurers. But terrorism 
risk is just in a league of its own, and it cannot be modeled. 
The extreme events will be devastating to our industry. So, 
therefore, without the backing of TRIA or a similar-type 
program anywhere in the world, you won't see the presence of 
insurers and reinsurers being able to participate.
    We would say that the program we have today is in great 
balance. It does allow smaller and mid-sized companies to 
participate and to provide important coverage. If we start to 
go higher, we are going to start to lose some of those smaller 
and mid-sized players. So we would urge, keep it as is, and 
let's stop going through this over and over again every so many 
years. We would urge a 5-year minimum, and we would prefer 10 
years.
    Mr. Meeks. Ms. Abraham, would you agree?
    Ms. Abraham. Absolutely. I hope we are all alive when 
terrorism is not a risk. Dr. Woo said it has existed for a 
millennium. But it exists. The partnership works; the 
collaboration works. If we can rule out terrorism, this law can 
have a sunset. It works. It is not broken. It is effective. It 
allows us to provide capacity. I strongly encourage extension, 
as long as you feel comfortable.
    Mr. Meeks. And in the 35 seconds that I have left, Mr. 
Beshar, would you agree that it is important for Congress to 
send a message now that we are going to extend TRIA insurance? 
Would that be an important stability factor as we move forward?
    Mr. Beshar. The more certainty that you can have in the 
marketplace, the better.
    Mr. Meeks. Thank you.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Royce, for 5 minutes.
    Mr. Royce. Thank you very much, Mr. Chairman.
    I know it has been said that you never really know if an 
event is insurable until after that event happens. We can, 
however, attempt to put parameters around what is insurable and 
what is uninsurable based on the industry's ability to price 
risk, to reserve for risk, to pay claims. And we know, for 
example, that the very tragic attack on 9/11 on the World Trade 
Center, at that time, was insurable at a cost of approximately 
$32 billion in dollars then and $42 billion in today's dollars.
    Also, in a 2003 publication from one of the companies 
testifying today, we read that Swiss Re basically agrees that 
property and business interruption losses resulting from 
terrorism are insurable, even in the aftermath of September 
11th. We had that exchange, but I just re-read that document, 
and that is the attestation in the document.
    So we have read in testimony that the TRIA program trigger 
could increase substantially to $1 billion from $100 million, 
in the case of Mr. Beshar, and to as much as $50 billion in the 
words of Mr. Ellis. And this, of course, assumes that the 
private sector could insure the losses up to the program 
trigger.
    So let me ask the panel specifically, what are the most 
important factors when discussing where to draw the line on 
insurability of terrorism insurance? Clearly, size and 
frequency of events is important. The type of attack, whether 
it is a conventional attack or something beyond that, has to be 
a factor. The lines of insurance covered, as we discussed, also 
weigh in on this calculation.
    Mr. Smith, if I could start with you, do you agree that 
certain lines of coverage--property and business interruption, 
for example--are easier to price when looking at terrorism 
risk? Are these insurable without a government backdrop, as is 
implied in the study cited earlier by Mr. Garrett?
    Mr. Smith. My recollection of the study, Congressman, is 
that it is a broad study. It talks about different types of 
perils that can be covered and different types of covers that 
we can put in place.
    But it does make reference to government programs. It may 
not mention TRIA specifically, given the timing of it, but it 
does talk about government programs and the ability to 
backstop.
    So the element of terrorism that I would encourage us to 
stay keenly focused on is that, unlike natural catastrophes and 
other large catastrophic events, the top end on these types of 
attacks are phenomenal. They are just beyond what--
    Mr. Royce. We understand that. But I am looking at this 
report. As we have seen so far, it says that business and 
interruption losses resulting from terrorism are insurable, 
even in the aftermath of September 2001, provided certain 
criteria are met. The liability for losses caused by terrorism 
must be limited in normal property and business interruption 
policies.
    I think it strongly implies that in these cases, the market 
could have sufficient capital. But go ahead with your 
observations.
    Mr. Smith. Congressman, I believe that we are in the 
market. We are actively in the market. We deploy tremendous 
capital against terrorism risk in the United States. And so to 
our investors, to people across the globe who rely upon us to 
make responsible decisions, I think that is the context that it 
is and are in the market.
    Mr. Royce. Okay. Let me go to Mr. Beshar. You put the 
program trigger at $1 billion. My question is, why draw the 
line there? Couldn't the private sector cover a conventional 
attack at $10 billion, or $20 billion, or even $30 billion?
    Mr. Beshar. Congressman Royce, just as a point of 
clarification, in our written testimony we referenced a number 
of different views that exist in the marketplace, from 
abolishing the program in its entirety to raising the trigger 
to $1 billion. That is not the position of Marsh & McLennan.
    Mr. Royce. Yes, I understand. But I am asking you right now 
to comment on a question. Wouldn't there be $10 billion, $20 
billion in the market? Anyway, I think my time is up. But I 
would like to follow up with some questions to the panel. And I 
appreciate the opportunity, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Massachusetts, the ranking member of the Housing and 
Insurance Subcommittee, Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. I want to thank the 
panel for being here today. You are the second-best panel of 
the day.
    [laughter]
    Mr. Chairman, I would also like to ask unanimous consent to 
submit a group of 28 different communications all in support of 
extending TRIA.
    Chairman Hensarling. Without objection, although I don't 
know if the Member's earlier opinion is universally held.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Ellis and Mr. Woo, I just want to--I respect your 
testimony. I will accept the fact that we just disagree on 
certain things. That is fine. It is not a big deal. I could be 
wrong, I guess. That is possible.
    But I would like to just probe for a minute exactly where 
our differences lie. And I would just ask you, if tomorrow--we 
are in hurricane season--a hurricane rolled up on Galveston, 
Texas, a Category 5, and wreaked $100 billion worth of damage, 
and killed 700 people, would you suggest that the United States 
Government should not participate in that response, that we 
should just sit on our hands because it was a local disaster?
    Mr. Ellis?
    Mr. Ellis. No, sir. Not at all.
    Mr. Capuano. I didn't expect that you would, but I just 
wanted to hear it. Mr. Woo, do you suggest that we would sit on 
our hands or we should sit on our hands?
    Mr. Woo. If I can make a modeler's comment, which is--
    Mr. Capuano. It is a simple question. Do you think the 
United States Government should sit on its hands if a Category 
5 hurricane hit Galveston tomorrow?
    Mr. Woo. Well, no.
    Mr. Capuano. I appreciate that. So the answer is, even you 
believe that there is some role for the Federal Government in 
natural disasters. And I respect that. Now, we are arguing 
where the line should be. And that is a fair argument. That is 
always a fair argument.
    I just wanted to see what kind of purists--and I am glad I 
am not dealing with a purist, because that is really not fun. 
But, look, we are going to have differences of opinion. I 
accept them, and I respect them.
    And I just--I also want to know, did any of the panel, did 
you see a CBS News report today which said that Al Qaida has 
just been found to be trying to get chemical weapons in a 
Somali lab? Did anybody read that report?
    I presume it is true, it came from a reputable news source, 
and it is based on a court case in New York City. On the 
presumption that is true, and the presumption--let's presume 
for a minute that Al Qaeda does succeed in getting itself 
chemical weapons somewhere around the world, either developing 
them or getting them from somebody else, let's presume for the 
moment that they still hate us, and they still want to wreak 
damage on us.
    And let's presume that, God forbid, they actually can get 
them to the United States and set them off. Does anybody on the 
panel think that the United States Government should not 
respond if Al Qaeda were to set off a chemical device in the 
United States of America? Do you think we should sit on our 
hands and do nothing, because--let the private market deal with 
it?
    Mr. Beshar, do you think that?
    Mr. Beshar. No.
    Mr. Capuano. I didn't--Mr. Smith?
    Mr. Smith. Absolutely not.
    Mr. Capuano. Ms. Abraham?
    Mr. Woo, do you think?
    Mr. Woo. No.
    Mr. Capuano. Mr. Ellis?
    Mr. Ellis. No.
    Mr. Capuano. So we clearly understand that there is a role 
for the Federal Government in dealing with both natural 
disasters and terrorism when things get so bad that no one else 
can deal with this. And now we are arguing about detail, which 
is a fair point. Details are important, and where the line is, 
is a fair point.
    I guess for the three people who are professionals in this 
market, if I were to tell you I want to build a huge structure 
that is going to cost $450 million, and I want to put $300 
million out to bond to pay for that humongous structure, a big 
icon in the middle of my community, but I said, you know what, 
I don't really want to have terrorism insurance on that 
facility, or for the people going to that facility when it is 
done, what would you do if I said, ``Please, buy my bonds?'' 
Would you say yes? And if you said yes, would you say, ``okay, 
and I want to pay you the lowest possible rate?'' Or would you 
charge a premium if I said I don't want to have terrorism 
insurance?
    Mr. Beshar, I know that some of you do buy, some of you 
don't buy, but I also know that all of you know the market. If 
you can't--I wouldn't ask you to answer on behalf of your 
companies. That would be wrong. But you are professionals. On 
your own personal experience, what would you say to somebody 
who wanted to do that?
    Mr. Beshar. I think a lot of bank lenders and bondholders 
would require the existence of terrorism coverage, for example. 
And in the absence of that, there probably would be some 
pricing ramifications to it.
    Mr. Capuano. Mr. Smith?
    Mr. Smith. It would be irresponsible as an investor.
    Mr. Capuano. Ms. Abraham?
    Ms. Abraham. I would agree with Mr. Smith.
    Mr. Capuano. So if I were to build a humongous icon of a 
football stadium, and if I would have named it Kyle Field, I 
would then be--the market would want me to have terrorism 
insurance or ask my taxpayers to pay more, probably a lot more, 
to pay off those bonds.
    I just wanted to get the facts straight. And I appreciate 
your input. Thank you all. My time has run out.
    Chairman Hensarling. We are glad the gentleman from 
Massachusetts has learned his Texas geography lesson.
    [laughter]
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Just following up a little bit on that last comment with 
regards to the regulators, I think it is important to note that 
there may not be the ability to build big structures if we 
don't have this backstop, if the regulators require that there 
be a terrorism policy in place in order for them--for the 
lending institution to have their i's dotted and t's crossed. 
It may prohibit the ability of these large projects. Has 
anybody studied that effect at all? Mr. Smith, have you seen 
that at all anywhere?
    Mr. Smith. I can't cite a specific study, Congressman. But 
our experience has been that a large global corporation, if 
they are going to make an investment somewhere, they will take 
into account what is the extent of terror coverage, wherever 
they are going, and what is the likelihood of terrorist 
attacks. So we have a particular challenge in our country to 
keep those global investments coming here.
    Mr. Luetkemeyer. So there may be the possibility of 
somebody not coming here with investment if we didn't have this 
in place. Is that what you are saying?
    Mr. Smith. Absolutely. That would happen.
    Mr. Luetkemeyer. Okay.
    Ms. Abraham, you made the comment, and it kind of spurred a 
question from me with regards to activities that sometimes 
occur on college campuses. Do you, with your company, cover 
political speeches, or band concerts, or some other sort of art 
shows, or anything there that could spur an attack of anything? 
Are those things that you cover?
    Ms. Abraham. Absolutely. Colleges and schools and 
universities are often magnets of controversy. And whether or 
not it is--I think all of the debates were held on college 
campuses, as controversial as the Presidential debates, as 
controversial as those were. But concerts, and speakers, 
college campuses are the first format, the first forum for 
controversial exercise of First Amendment rights.
    Mr. Luetkemeyer. So if terrorism insurance--
    Ms. Abraham. And we absolutely cover any liability that 
would come to the university from events occurring from that.
    Mr. Luetkemeyer. If your company would not be available to 
the universities, if that coverage would not be available to 
the universities, what would happen?
    Ms. Abraham. We currently do provide that coverage. And 
after January 2, 2014, policies written after that point would 
not have this coverage. If TRIA goes away, our reinsurers have 
told us that the unlimited, the broad capacity that we have now 
would disappear, and they would not have, as members of United 
Educators, the broad liability coverage for terrorism that they 
currently have.
    Mr. Luetkemeyer. So the inference would be there, the 
normal assumption of how this would all play out then would be 
probably, at the very least, a restriction of those types of 
activities on the campus, if not a lot of it going away all 
together?
    Ms. Abraham. I am a trustee of a college in Washington 
State. I think there would be very hard thinking about 
attracting elements to a campus and holding events that would 
cause more of a magnet or more of a potential--and emphasize 
the iconic nature that they already have within the country. 
So, yes, I think that is true.
    Mr. Luetkemeyer. Mr. Smith, if TRIA goes away and the 
markets--the Wild, Wild West, everything opens up, how much 
additional cost do you think the average policy would go up to 
be able, again, like I say, build that big building or sponsor 
that concert? How much of more an increase do you anticipate 
would happen if TRIA went away?
    Mr. Smith. It is hard to have an exact number, but the 
market would become extremely disrupted. Some people would not 
be able to get terrorism coverage. Others would have to acquire 
it at an extremely high price. So, it would be an enormous 
disruption to the market.
    Mr. Luetkemeyer. I would think, though, that after a while 
the market would settle down. There would be a period of 
disruption, but eventually it would settle down. Now it is 
going to be disrupted forever and ever?
    Mr. Smith. Not in the United States.
    Mr. Luetkemeyer. Okay.
    Mr. Smith. And I'm sorry, I wish I had a better answer, but 
not here in our country.
    Mr. Luetkemeyer. It is interesting, from the standpoint 
that we are talking about something here that is really a 
backstop for all the activities or these terrorist activities 
that could occur, have occurred in the past. When we look at 
other catastrophic losses, a lot of those have been--the tab 
for them has been picked up by the government eventually as a 
backstop anyway. And what we are trying to do here really kind 
of, in my thinking, is quantify our limit or somehow the 
government's exposure to the loss by having the private sector 
take part of it and being able to price that accordingly. It is 
kind of an interesting situation, kind of backwards.
    But, very quickly, I just have one quick question for Mr. 
Ellis. You made the comment that TRIA can actually cause 
insurers to take on more risk. I have a hard time believing 
that somebody would want to lessen their security so they could 
actually have the opportunity to have more of an attack, but 
that is like one of your comments a while ago. Does that--
    Mr. Ellis. I am not sure I am following what you are 
referring to, Congressman. I indicated--
    Chairman Hensarling. If you could be brief, the 
Congressman's time has expired. Can you summarize your answer 
quickly?
    Mr. Ellis. Sure, yes, Mr. Chairman.
    No, I am saying that if you don't price it appropriately, 
then you don't take the efforts to mitigate your risk, and it 
may be not knowledgeable, but you would do more to reduce your 
price.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Yes. We don't know what or we don't know when, 
we don't know who. But one thing is for certain: We know that, 
as we are sitting in this room, there are people all over this 
world who are plotting terrorist attacks against the United 
States.
    And before I get to that, I must respond to something that 
Chairman Hensarling--whom I respect so greatly--said regarding 
the taxpayers' expense, but the budget office said to me these 
words, that the TRIA has provided a necessary service at nearly 
zero cost to the taxpayer. So, I want to make sure that is out 
there.
    Now, back to my point, we don't know where, we don't know 
when, but we are targets. We are here. And Mr. Woo and Mr. 
Ellis, you all have made some interesting points, but we know--
you can count the times in New York City alone, as Mrs. Maloney 
pointed out, that attacks have been prevented. And, Mr. Woo, in 
your calculations of this, the regularity of attacks.
    I am out of Atlanta, Georgia, where we had the Olympics 
attacks, where we have constant surveillance. We have our 
intelligence sources that I cannot tell you in public how many, 
when, where, how, but we have to be serious about this. This 
ought to be in place right now. It ought to be at least 10 
years so we can plan appropriately.
    And let's get off of this nonsense that we can play around 
with this. We owe it to the American people who are themselves 
the targets, not knowing when, not knowing where, not knowing 
who, but knowing they are on their way.
    Now, Mr. Ellis, it is amazing to me how you and others who 
are opposing TRIA can be certain that a market could exist 
without TRIA, especially given that insurance companies and 
reinsurance companies all say that they would have to leave 
that market without the certainty of TRIA. How do you respond 
to that? How can you--
    Mr. Ellis. Congressman Scott, especially among the 
insurance companies, there is absolutely--they are getting 
reinsurance for free. Of course they are going to say that they 
are not going to--why would they negotiate with themselves 
right now?
    And as far as--I just point out, I completely agree with 
you that there are people all around the world who are scheming 
to hurt us. I absolutely agree. TRIA doesn't stop that. TRIA 
doesn't prevent terrorism. TRIA doesn't--it is a way to respond 
for--to recover from terrorism--
    Mr. Scott. Yes, I know it doesn't do that.
    Mr. Ellis. --doesn't do any prevention.
    Mr. Scott. I know it doesn't do that, but TRIA prepares for 
the storm before the hurricane is raging. It is there to give 
protection awareness. The point is, we are not being realistic 
about the continuity. When you say, okay, sure, maybe short 
term, what is short term? When we know that we are in a serious 
situation. There is no country on this planet that is a target 
of terrorists like the United States of America.
    But I only have 55 seconds, and I wanted to get to you, Ms. 
Abraham. Tell me, in your opinion--and, Mr. Smith, if you 
could--what happens if we in Congress wait until the last 
minute to authorize TRIA? And what would be the real-world 
effects if this Financial Services Committee drags its feet on 
moving this legislation forward?
    Ms. Abraham. That is a great question. I will take a first 
stab at it very quickly.
    Our reinsurance treaty is under negotiation now for January 
1st, and that would begin covering policies that we underwrite 
that would expire over the course after TRIA expires. And so, 
we are in a position, on January 1st of this year, of having a 
reinsurance treaty that will not cover, if there is not 
certainty with TRIA.
    So it is disruption, and it is confusion, and I am in a 
real quandary as to what we should tell our colleges and 
universities, because we are in this as of January 1, 2014, not 
December 31st.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman responsible for 
bringing us together today. The gentleman from New York, Mr. 
Grimm, is recognized for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman, and you can thank me 
later for all the fun we are having. Seriously, thank you, Mr. 
Chairman.
    Excellent discussion. But I just want to tidy it up a 
little bit, because I think some of the questions are 
misleading. And most of all, let's remember, no one is saying 
that TRIA prevents terrorism. This is all about recovery from a 
terrorist act. That is first of all.
    And the underlying premise that every Member I have ever 
spoken to, if there is a catastrophic event, regardless whether 
it is terrorism or not, if a community is devastated, that 
mayor is going to come out, that governor is going to come out, 
most likely the president of the United States is going to come 
and they are going to say we are going to rebuild it better and 
stronger and the taxpayer is going to be on the hook. If anyone 
doesn't believe that, then they don't know the history of this 
Congress, and Hurricane Sandy is a good reminder.
    So this is about protecting the taxpayer as much as we can. 
This is the fiscally conservative, prudent way to do so.
    We have also heard about why not changing the numbers--$10 
billion or $10 million or $100 billion, $1 billion--$100 
million is only the trigger that says now it is a TRIA event if 
it was an act of terrorism. But if there was an act, and all 
the insurance companies were collectively responsible, the 20 
percent deductible would equal $34 billion. So the event would 
have to be more than $34 billion in losses before the cost-
sharing even kicks in.
    Now, before that, there is 15 percent shared first by the 
insurance companies. So, there is $34 billion in the 20 percent 
deductibles possibly, then there is 15 percent in front of 
that, then the taxpayer. I think that is fiscally responsible 
and prudent.
    But I want to go to Mr. Smith for a second. If an insurance 
company takes on too much risk, because we have heard about 
raising these numbers, the problem with raising these numbers 
is the smaller insurance companies drop out, they just can't--
they can't take that risk. They are not big enough. So then you 
are left with just a few large insurance companies, which will 
have concentration risk in major cities so that doesn't work, 
either. That is why this is well-thought-out, and you have to 
really understand insurance to completely understand that.
    But if an insurance company did take on too much risk, 
wouldn't they lose their rating by the rating industry, 
especially if they are AAA or AA?
    Mr. Smith. Very possible, correct.
    Mr. Grimm. Ms. Abraham, you mentioned it is 
counterintuitive by capping the liability, can you explain 
that? Because I understand that if you increase--if you capped 
the liability, the mid-sized companies can then enter the 
market. If there is no cap, they cannot, the small insurance 
companies without a doubt. Can you just elaborate on that?
    Ms. Abraham. That is absolutely right, Congressman, and it 
allows the reinsurers, as they are pricing their risk, to 
reinsure a small insurance company, to understand and charge 
for the appropriate level of risk. It is extremely difficult to 
price an unlimited, unknown risk that we have no control in 
preventing.
    But by capping the liability, the reinsurers and insurers 
understand this is what I have to price for, this is what I 
have to charge for, this is what I have to reserve for. So it 
provides a level of certainty which allows us in a very unknown 
environment to put capital at risk. So we are able to go and 
actually understand how much we could lose--
    Mr. Grimm. But, again, if the losses are--knowing what you 
can lose also means that if I am a smaller company and there is 
too much at risk there, I simply can't participate.
    Ms. Abraham. Absolutely, sir.
    Mr. Grimm. And if the smaller companies can't participate, 
you are left with just the larger companies.
    Ms. Abraham. And a lot of capacity exits the market. We 
bring, as small as we are, a lot of capacity to the market, and 
you want all of those small and mid-sized companies--many are 
mutuals--in the market, providing capacity. So, we are part of 
that flow.
    Mr. Grimm. Thank you. I would posit--and I mentioned in my 
remarks, that when it comes to the workers' comp portion, you 
don't know how many employees could be--a massive hospital 
could have 2,000 to 3,000 employees at any time, and the same 
with a university.
    So, Mr. Ellis, I would ask you, with the workers' comp 
portion being somewhat of an unlimited risk, because of the 
number of employees, and also, employees could be maimed--an 
employee, not only could they be killed, but they could be on 
disability for the rest of the lives, it is almost impossible 
to calculate for that many employees what the risk would be. 
And it is mandated by the State to have that insurance.
    What CEO, what president of any company, whether an 
insurance company or any financial company, would take on an 
unlimited risk if they were prudent? Can you name even one that 
would take on an unlimited risk if they were prudent, 
executive, president or CEO?
    Mr. Ellis. I can't name anybody who would take on unlimited 
risk if they were prudent, but I don't believe that is exactly 
how that would end up being in the workers' comp, and they 
would be able to lay off some of the risk in other markets. And 
that is part of the whole thing that--where I think we just 
disagree, Congressman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing. I thank the ranking member, as well, for her 
statements, and I would like to associate myself with the 
statements of the ranking member.
    While I have really paid close attention to all of the 
testimony, and I appreciate what all of you have said, I do 
want to ask a few questions of just a few of you, and I hope 
that the others won't feel that somehow I am slighting you in 
any way, because, candidly speaking, I assume that all of you 
can give us additional credible testimony.
    But, Mr. Ellis, you have indicated that you believe a short 
extension would be in our best interest, if it must be extended 
at all. Is this correct?
    Mr. Ellis. Yes, Congressman.
    Mr. Green. And what I would like for your colleagues on the 
panel to do is explain why they perceive a short extension to 
be something that is antithetical to our best interests, so 
let's start with Mr. Smith. Mr. Smith, why would you oppose a 
short extension?
    Mr. Smith. Because it is an unnecessary disruption to the 
marketplace. This is a wonderfully well-thought-out program. It 
is functioning extremely well. The longer we can renew it, the 
less disruption we have to the marketplace.
    Mr. Green. And let's go to--all right, Mr. Woo?
    Mr. Woo. My opening statement, in my testimony, was that 
terrorism has become and will remain a catastrophe insurance 
risk, so I personally would recommend not just an extension for 
a finite period of time, but one without a specific time limit, 
simply because this issue is not one which will ever go away. 
Okay?
    So, I do consider that some thought should be given to the 
whole issue, not just in the short or medium term, but in the 
long term, as Mr. Smith said, that the market's ability is 
important, that this whole issue of the backstop be addressed.
    And I am speaking as someone who lives in England, where we 
have a terrorism insurance pool which has no finite term or 
limitation. That is because the terrorism risk in London is 
permanent. It doesn't go away; there will be terrorism risk in 
London for as long as one can consider.
    So my personal response to your question, Congressman, is 
that there should be serious consideration given for a long-
term reauthorization of TRIA, and that is something which to my 
mind should be discussed.
    Mr. Green. I see that Ms. Abraham wants to respond, and I 
have another question.
    Ms. Abraham. We are in the business of taking risks. We 
understand that. But uncertainty in this is disruptive. It is 
difficult to plan a major construction project, it is difficult 
to plan a major program when you don't know whether these risks 
will be there and covered in the foreseeable future.
    Mr. Green. Do we find that we have some companies--let's 
call them megacompanies--that would have serious concerns about 
locating in a country that does not provide this kind of 
insurance? Does this help us to attract business, Mr. Smith?
    Mr. Smith. Absolutely. Given the corporate governance that 
is in place today and all the enterprise risk management that 
is occurring at all these large corporations, they have a very 
sophisticated decision tree they go through as to where they 
are going to make their investments.
    We have a challenge here in our country, because of our 
risk of terrorism. Without great coverage, it is going to be 
very difficult for us.
    Mr. Green. All right. Let me do this with the remainder of 
my time--and, Mr. Chairman, if you find that I go beyond the 
time that I have left, would you just kindly sound the gavel 
and I will cease and desist.
    But what I would like to do is read the list of entities 
that are supportive of extending TRIA. And the list is rather 
long, but I think it is important to not only place these in 
the record, but for the American people to know what is 
actually in the record.
    So, here is the list: The National Association of 
REALTORS, the U.S. Chamber of Commerce, the American Gaming 
Association, the International Association of Amusement Parks 
and Attractions, the Jewish Federations of North America, the 
National Association of Insurance Commissioners.
    We have a joint letter from the national sports leagues and 
organizations, the National Conference of Insurance 
Legislators, the National Conference of State Legislatures, New 
Mexico Mutual, the American Public Transportation Association, 
the U.S. Conference of Mayors, the workers' compensation Fund, 
the National Association of Mutual Insurance Companies, the 
National Association of Real Estate Investment Trust, the 
Commercial Real Estate Development Association, the 
International Council of Shopping Centers, Inc., the Building 
Owners and Managers Association International, the Real Estate 
Roundtable, the CRE Financial Council, and the Real Estate 
Board of New York.
    I yield back the balance of my time.
    Mr. Neugebauer [presiding]. I thank the gentleman. Is he 
requesting that those be made part of the record, as well?
    Mr. Green. Yes, sir. Thank you, Mr. Chairman.
    Mr. Neugebauer. Without objection, it is so ordered.
    Now the gentleman from Ohio, Mr. Stivers, is recognized for 
5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate it.
    I am going to try to get to four questions, so I am going 
to ask some yes-or-no questions. The first question is for Mr. 
Beshar, Mr. Smith, and Ms. Abraham.
    Insurance is the business of pricing risk. And because the 
information related to both the likelihood and intensity of 
terrorism events is classified information--this is the yes-or-
no part of the question--do private insurers have access to 
classified information with which they could price the risk 
associated with both the likelihood and the intensity of 
terrorism acts?
    Ms. Abraham. No.
    Mr. Stivers. We can just go down the--
    Mr. Smith. No.
    Mr. Stivers. Okay.
    Ms. Abraham. No.
    Mr. Stivers. Verbal responses would be best.
    Mr. Smith. Okay.
    Mr. Stivers. No, no, no. I got three noes, right? One of 
them was a shaking of a head. This question is also for the 
same three folks. Are acts of war insurable or uninsurable 
risks, if you could give me verbal responses?
    Mr. Beshar. Generally excluded.
    Mr. Smith. Same, generally excluded.
    Ms. Abraham. Generally excluded.
    Mr. Stivers. Generally uninsurable, because governments 
have historically taken on that role.
    Ms. Abraham. Correct.
    Mr. Stivers. So acts of terrorism are merely acts of war by 
non-state actors, and this is more a statement, because I want 
to get to my last couple of questions--because they are the 
same things of acts of war by non-state actors, they should be 
treated the same way, in my opinion. So, thank you for your 
answering that question.
    Mr. Grimm did a good job of talking about the private money 
that comes in front of any government money that would be 
associated with TRIA, but I think it is important to talk about 
how the government money would work, and how it would work with 
TRIA and without TRIA.
    So--and this is one that may take a little longer--but 
because there is 133 percent recoupment of any taxpayer-related 
costs of events over time, do you believe--and, again, for the 
three insurance professionals--that the system under TRIA would 
result in higher or lower total cost for the taxpayers than a 
non-TRIA system?
    Ms. Abraham. I believe it would be lower. TRIA would have a 
lower recovery than without it.
    Mr. Stivers. It would cost the taxpayers less, right?
    Ms. Abraham. It would cost the taxpayers less, correct.
    Mr. Stivers. Because there is private money in front and 
there is an incentive with the recoupment--
    Ms. Abraham. Correct.
    Mr. Stivers. --to make sure that is the difference between 
the TRIA system and, say, the flood insurance system. Our flood 
insurance system has no recoupment, and the only people who buy 
it are people who are guaranteed to file claims.
    So, you wouldn't make those policies in the private 
insurance world because there is that moral hazard that only 
people who are going to file a claim are going to take it out.
    For the other two insurance professionals, do you believe 
the total cost of the government would be higher or lower 
because of the recoupment mechanisms in TRIA?
    Mr. Smith. We believe it would be lower.
    Mr. Beshar. We agree.
    Mr. Stivers. Great. Thank you for that.
    The last thing that I want to ask everybody on the panel 
relates to the term of a TRIA bill. There has been some 
disagreement on the term of the TRIA bill. I came to Congress 
to reduce uncertainty for businesses, and I believe a longer-
term TRIA bill reduces uncertainty more than a shorter-term 
TRIA bill.
    For everyone on the panel, do you believe a longer-term 
TRIA bill will reduce uncertainty? And you can give me a few 
seconds of why, because we have a minute and 30 seconds.
    Mr. Beshar. Yes. Yes, it absolutely will.
    Mr. Smith. Yes.
    Ms. Abraham. Absolutely.
    Mr. Woo. Absolutely.
    Mr. Ellis. It reduces uncertainty, but it also doesn't 
allow Congress to actually reform and change the program, 
because we know the only time they look at it is when it comes 
up for reauthorization. It was supposed to be a temporary 
transition.
    Mr. Stivers. I understand it was intended to be a temporary 
transition, and I appreciate that, but it does reduce 
uncertainty, which I think is really important as we try to get 
our economy back on track.
    And so for those reasons, I think the TRIA bill is pretty 
well thought out; I think it will result in lower cost to the 
taxpayers, and I think it will actually work well.
    I am going to yield the balance of my time--45 seconds to 
the gentleman from New York, the sponsor of the bill.
    Mr. Grimm. Thank you very much. I appreciate the gentleman 
yielding.
    I just wanted to know two things. One, the correlation of 
flood insurance has been brought up before; it doesn't work 
well. We all know that. I would say that what we should be 
doing is looking at TRIA to use as a model for flood insurance. 
So, TRIA really works; it is doing well, and that could be the 
fix for flood insurance. That is number one. So, I like the 
argument, I just think it is being used in reverse.
    The other idea, that this was because the legislation was 
originally temporary, that is a big argument on why we need to 
sunset it. It shouldn't be temporary. It should be permanent. 
It is a program that works; it works well, and it protects 
taxpayers, which makes it fiscally responsible. So, when 
something is working well, we should keep it.
    Those are my only comments, and I yield back.
    Mr. Neugebauer. I thank the gentleman.
    And now, the gentlewoman from Alabama, Ms. Sewell, is 
recognized for 5 minutes.
    Ms. Sewell. Thank you, Mr. Chairman. First, I want to thank 
all of our witnesses for your testimony today and the time that 
you are taking to both educate us as well as to make sure that 
we are making the right kinds of legislative decisions.
    I especially want to thank Mr. Beshar and his colleagues at 
Marsh & McClennan for your continued use of your expertise in 
helping younger Members like myself understand the importance 
of TRIA and answering the questions that we may have. And I 
want to thank you for personally doing that.
    My question to you is we have talked a lot about the time, 
the sunset, whether it should be 5 years or 10 years. Mr. 
Beshar, I was wondering if you could elaborate on other fine-
tuning that we can do in TRIA and the reauthorization of other 
provisions related to TRIA, workers' compensation or trying to 
reduce their ambiguity in other areas of this Act since we are 
taking up the totality of the act.
    Mr. Beshar. Congresswoman Sewell, thank you for your 
gracious comments. Two suggestions. First, we spoke about NBCR, 
so that if coverage is provided on the underlying policy to 
validate that concern, TRIA would backstop that. And then 
second, cyber terrorism. What does it mean? What is the best 
way to try to address that new emerging risk?
    Ms. Sewell. Mr. Smith, would you have any additions as to 
what other things we can be looking at?
    Mr. Smith. Our aspiration is it renews the way it is for a 
long period of time. We are more than willing to engage in 
debate on specifics as far as modeling how this might work out, 
but we would hope to just renew as is.
    Ms. Sewell. Okay. Are there any ambiguities with respect to 
workers' compensation or others that--
    Ms. Abraham. Mr. Beshar mentioned earlier his third point 
for improvement on the bill, and that is clarity on the 
certification process. I think that would help. Again, 
uncertainty is never good when you are running a business or 
running a university, and clarity around that would help.
    Ms. Sewell. Can either one of you explain to me sort of the 
relationship between the private insurer and the government in 
paying claims as a result of a terrorist attack, how that works 
now, and whether that is a good thing or a bad thing?
    Mr. Smith. Let me make sure I understand your question. As 
far as the mechanisms as to if there is an act of terrorism--
    Ms. Sewell. Yes. The levels of payment, how the payment 
structure would work as between private insurer and government. 
Basically, I want to know how much money are the taxpayer is on 
the hook for.
    Mr. Smith. Right. To Congressman Grimm's earlier point, you 
can think of $34 billion as kind of the starting point. Most 
acts of terrorism that are likely to occur are going to be in 
what we call the lower layers. The first layer is the primary 
insurers, the second layer is the reinsurers, and the third 
layer is the TRIA program, the government backstop.
    So, it is going to take a substantial event to get to that 
third layer. Most things that we would see are going to be in 
those lower layers.
    Ms. Sewell. Great.
    I yield back the rest of my time. Thanks.
    Mr. Neugebauer. I thank the gentlewoman. Now, the gentleman 
from South Carolina, Mr. Mulvaney, is recognized for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    A couple of different questions all across-the-board.
    Dr. Woo, I will start with you. Help me understand. Is this 
modelable or not? I hear that maybe it is. I hear that maybe it 
isn't. Maybe it might become more modelable over time as we 
have more experience. Help me understand where we are on that.
    Mr. Woo. Thank you, Congressman. Can I just answer the 
question about the need for classified information? There is 
information which is in the public domain which is the outcome 
of terrorist trials. In every democratic country, someone who 
has been arrested on terrorist charges has the right to have 
his day in court. If he is convicted, that counts as a plot. If 
he is acquitted, it is not a plot.
    And on the basis of terrorist courtroom outcomes across the 
Western alliance, not just in America but in Britain, France, 
Germany, and so on, we can calculate how many terrorist 
convictions there have been and we can figure out what 
proportion of those have not been interdicted.
    Typically, what happens is you have 10 guys who have been 
convicted in court. You have 10 plots, and maybe one out of 
those 10 is a plot which the intelligence staff did not know 
about. This does not require classified information because it 
is all public domain information.
    Again, it is known that obviously there are rumors of plots 
and so on, but that is fine. But in a democracy, a plot--
    Mr. Mulvaney. Is it fair to say we are getting more 
information as we move forward?
    Mr. Woo. The point I would like to make is that--I would 
not be making these comments in 2007. It is just that there is 
a time lag of about 2 to 3 years for people who have been 
indicted on terrorism charges to have their day in court.
    And here I am speaking in 2013, and I have done analysis of 
all the terrorist convictions in court in the Western alliance. 
And it is on that basis that our estimate of frequency is 
calculated. It does not require any intelligence information.
    Mr. Mulvaney. Thank you very much.
    Mr. Ellis, I very rarely agree with Mr. Capuano, although 
when I do, I like to celebrate that fact. One of the things he 
said was that he didn't like the program very much but he 
couldn't think of anything else. Help me think of something 
else. Give me ideas of things we should be looking at that 
possibly could replace this or act as substitutes.
    Mr. Ellis. Congressman, certainly--
    Mr. Mulvaney. Other than just having the government write a 
check at the end, which is not acceptable to me. It probably is 
to him, but that is where we would disagree.
    Mr. Ellis. Yes, Congressman. I did lay out a few ideas in 
my testimony. I think it really is about increasing the skin in 
the game for the insurers and allowing the industry to continue 
to develop. Because right now, the reinsurance industry is 
really only playing in that 20 percent deductible.
    So if you can change the deductible, you can change the 
threshold of what is an event, then that is going to eventually 
move the government out of the role of being the reinsurer. And 
you can see that in the--
    Mr. Mulvaney. It would involve moving the deductible down, 
correct, not up?
    Mr. Ellis. Right. The deductible--yes. Yes. Increasing the 
amount that is retained by the insurance companies that they 
then have is what I am saying.
    Mr. Mulvaney. Mr. Beshar, I guess that will lead to this 
question, a follow up on--excuse me, Mr. Smith.
    Mr. Grimm asked about the triggers. There is some 
discussion about whether we should increase the triggers. And 
my understanding is that if we do that, it actually might 
weaken the program and make less capital available to fewer 
participants in the program. Am I understanding that correctly?
    Mr. Smith. We believe very strongly that is what will 
happen. The small and mid-sized insurers are numerous and they 
provide tremendous capital into this space. As you lift up the 
limits, you are going to squeeze out the small and the mid-
sized insurers, and that is not a good outcome.
    Mr. Mulvaney. With that, I will yield the balance of my 
time back to the Chair.
    Mr. Neugebauer. I thank the gentleman.
    And now the gentleman from Washington, Mr. Heck, is 
recognized for 5 minutes.
    Mr. Heck. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    I want to add my expression of gratitude to the five of you 
for spending so much time with us this afternoon. And even 
though they have departed, I would like to acknowledge 
Congressmen Grimm and Capuano for their advocacy and leadership 
in this area.
    Mr. Smith, you drew the short straw. This program's 
opponents have suggested that you are being crowded out of 
profitable opportunities by TRIA and yet you say you are not. I 
am tempted, tongue-in-cheek, to ask you what is it that they 
know about your business that you don't know.
    But instead I would rather ask you, beyond the oft-repeated 
premise that by their very nature acts of terrorism do not lend 
themselves to actuarial projections, what more can you say to 
give color or depth to why it is you can't or won't enter this 
market in a more robust fashion in the absence of TRIA?
    Mr. Smith. Sure. The dynamic that is in place is that the 
nature of the terrorism risks are the serious events that are 
so large and the prospects for frequency are so unpredictable.
    We have legions of Ph.D.s who work with Swiss Re across the 
globe. We have been building models for 150 years. We know the 
flood business inside and out. So, we would love to engage 
around the NFIP. We could bring much value to that.
    But when it comes to terrorism, it mathematically doesn't 
work. The upward occurrence limits are too high and the 
unpredictability of frequency, it is just not there. And so we 
are playing, we are contributing, we are committing capital 
because we are comfortable in the layer that we are in.
    And we know that we can pay billions of dollars of claims 
in the years ahead in that layer. We know that. We are 
comfortable with that. But if that upper limit goes away, if 
the backstop goes away--and we do not believe that is in any 
way, shape, or form subsidized reinsurance.
    If it was subsidized reinsurance, the dynamic goes away, 
and then we are more comfortable going up and taking more risk. 
If that goes away, we go away. We will not play in terrorism 
risk if the backstop goes away.
    We can't. It would not be financially prudent to our 
shareholders and to all of our policyholders across the globe, 
all the governments, and all the insurance companies that we 
back. We wouldn't be able--we just can't do it.
    Mr. Heck. Thank you.
    I would interject that I thought the gentleman from Ohio 
had this exactly right. There is a material effect on our 
economy and economic growth if we don't do this correctly, and 
it is one of the very good reasons to be supportive of some 
continued direction here.
    Mr. Beshar, in your addendum you had the following 
statement I would like to briefly follow up on: ``Notably, as 
the severity and frequency of cyber attacks have grown more 
prominent, several proposals have been made to clarify that 
TRIA could apply as reinsurance in the event of a massive cyber 
attack. Were that clarification realized, TRIA could spur 
additional capacity in the cyber market.''
    My question is, do you have any suggestions about exactly 
how we might clarify in this regard? If so, please provide 
them.
    Mr. Beshar. It is something that I think really warrants 
further study. It is clearly something that wasn't envisioned 
as recently as 2007. So as people speak about cyber 9/11 and 
cyber Pearl Harbor and speak about it with a degree of emphasis 
in terms of the potential for catastrophe, we have to figure 
out what is the best way of incorporating that into TRIA.
    There is an increasing cyber liability market that is 
developing right now. It tends to be at more modest levels. 
People buying coverages for $10 million, $20 million. And so, 
this is something really very different. Where is the right 
flex point between the private market and what the government 
might do?
    Mr. Heck. Okay. I get that you are not yet ready with the 
specific recommendations. But I, for one, feel that the threat 
here is so real, and has the potential to have such a magnitude 
of impact that if you are right, and we are not yet ready, we 
ought to at least get started on the process.
    So at a minimum, I would request that anybody listening who 
has any skin in this game suggest language about how we might 
undertake that process. Because the threat of cyber attacks is 
very real.
    Thank you, Mr. Chairman, for your indulgence. I yield back 
the balance of my time that I don't have anymore.
    Mr. Neugebauer. I thank the gentleman.
    The gentleman from Illinois, Mr. Hultgren, is recognized 
for 5 minutes.
    Mr. Hultgren. Thank you very much, Mr. Chairman.
    Thank you all for being here.
    First of all, Mr. Beshar, if I could address this first 
question to you. I am just really trying to understand triggers 
here, and wonder if you could describe how a terrorism event is 
certified to trigger TRIA coverage if necessary?
    What agencies or departments are responsible for gathering 
information? What determinations are required? And do we think 
it works? Is that the right way for the triggers to happen?
    Mr. Beshar. I am dealing with this from memory, but my 
understanding is that it is the Attorney General, the Secretary 
of State, and the Secretary of the Treasury, that all three of 
them have to agree to certify an event as a TRIA-covered event.
    And so our recommendation was that may well be the sound 
process, the right people involved in making the determination. 
But to just try to put some sort of a time focus, there are 
obviously circumstances where it may not be immediately clear 
whether it is a terrorist event or not.
    So the idea that it takes some time is perfectly 
appropriate. We were just suggesting that there be some sort of 
a limit on that time.
    Mr. Hultgren. Remind me again of your suggestion of what 
would make a common-sense limit. My guess is there would be 
needs immediately, or very quickly, to respond if something 
like this happened.
    As you also said, we may find out more information as time 
goes on. So I wonder, too, if there is a possibility to have a 
response, but maybe a follow up, or a look back after 60 days 
or something like that.
    But is there some thought of what a reasonable amount of 
time would be, our current process, how long it would take: 
what you would recommend as a reasonable length?
    Mr. Beshar. We would suggest 90 days, with some sort of 
provision that if there is not clarity, then it can obviously 
be extended.
    Mr. Hultgren. Okay.
    Dr. Woo, if I can address this to you and get your 
thoughts, first of all--and maybe somebody has already said 
this--but I definitely think we need a catastrophist here in 
Congress watching over everything that is going to happen over 
the next couple of weeks. What a great title.
    Dr. Woo, I wonder, the World Trade Center attack totaled 
about $42 billion in today's dollars and insured losses, but 
the majority of that was property.
    Modeling for a terrorist attack, can you talk a little bit 
about how you model the potential losses from workers' 
compensation claims, and for a wider-area event, how you model 
that? And also maybe how State mandates and State-based 
regulations might make it more difficult to model some of this 
specifically to workers' compensation?
    Mr. Woo. Thank you very much, Congressman. Of course, 
workers' compensation applies to natural hazards, as well as 
for terrorism. And so at RMS, we have a model, a workers' 
compensation, say for earthquakes, as well as for terrorism.
    Now, as far as the claims consequences of an event are 
concerned, there are similar ambiguities between earthquakes 
and terrorism. We don't exactly know how many people would be 
affected in a given event.
    And so what I have tried to focus on is on the threat 
dimension of terrorism. And the key point I would like to 
emphasize is simply that terrorism is a control process. We 
can't control earthquakes. We can't control hurricanes.
    But there are people out there, the FBI and the CIA, who 
are trying to control these. And if I can just quote from 
Robert Mueller, when he left office he said that through the 
hard work of his staff, dedication, and adaptability, the FBI 
is better able to predict and prevent terrorism and crime.
    It is not my job to predict the next terrorist event, but 
it is their job. It is the FBI's job, okay. My job is to figure 
out what the net result is of the terrorists trying to cause 
loss. And what the FBI's job is, is to stop it, okay, these key 
points. Can I just make this point, that the need for TRIA is 
based on what Donald Rumsfeld would have called the ``known 
knowns,'' which are: (A) that the terrorists are trying to 
cause a maximum loss; (B) they target high-value properties in 
big cities; and (C) that responsibility for stopping these 
losses rests with the Federal Government.
    So it is the ``known knowns'' which make the renewal of 
TRIA essential. And again, I come back--I know that there is a 
lot of controversy about the modelability of terrorism risk.
    And in fact, if I can just say that in less than 2 weeks' 
time, I should be giving a keynote address at the Casualty 
Actuarial Society in Chicago at the major catastrophe insurance 
conference. And as they have very kindly given me 75 minutes to 
explain myself in terms of the modelability of terrorism risk. 
Anyone who is skeptical about it, please send their staff along 
to Chicago.
    Mr. Hultgren. It is a little hard in 5 minutes to get much, 
but I appreciate it.
    And again, thank you all. We will follow up with questions 
that we have as well, if that is all right. So thank you for 
being here.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman.
    We have a system for providing insurance for the property, 
we have workers' comp for the personal losses suffered by 
individuals who are working. Under our current system, if 
somebody is not working and happens to be the victim of a great 
terrorist attack, do they have any coverage? Somebody just 
happens to be visiting the World Trade Center, because they 
want to see what the building looks like.
    Ms. Abraham. I would think there is a liability component 
potentially associated with it; not just a visitor, but if 
there is something where the evacuation plans weren't as 
efficiently developed, there is a potential for liability 
associated with it, but generally speaking, I would say no.
    Mr. Sherman. Okay.
    Do any of you favor collecting monies in advance by the 
U.S. Government, rather than just a post-event, ex ante 
approach?
    Mr. Ellis?
    Mr. Ellis. Yes, Congressman. We do support the idea of a 
premium and having that approach.
    Mr. Sherman. Anyone else?
    Mr. Ellis. We believe the program is constructed in the 
most efficient manner possible. So, we do not.
    Mr. Sherman. Okay.
    Watching this hearing has been--there is so little 
disagreement. We have two major proposals that are pretty 
similar. It seems odd that we have a lot of anonymity.
    Who on the panel would argue for a major change in the two 
pieces of legislation, other than the gentleman, Mr. Ellis, who 
is of a different view than the rest of the panel?
    Mr. Ellis, the floor is yours.
    Mr. Ellis. Thank you, Congressman. As I said in my 
testimony, we just think that if Congress decides to extend the 
program, that we need to, just as we did in 2005, continue to 
move it more onto the shoulders of the private sector, and to 
protect the taxpayer.
    And so that is what we are looking at, as far as any kind 
of reauthorization.
    Mr. Sherman. So it is not that you like what we did in 
2005, it is just you thought that was a step better than the 
previous legislation. You want to go one step further beyond 
that; is that correct?
    Mr. Ellis. Sir, in my dozen years of being an advocate for 
taxpayers, I have learned that a lot of times I have to swallow 
incremental progress. And so, that is what we are looking at.
    Mr. Sherman. I would point out that for those who want to 
protect the Treasury, not only do you have to look at what 
risks do we have of under TRIA, but every time there is a 
disaster of the magnitude of a major hurricane, we end up 
writing checks for far more than we are technically liable for.
    And I know Citizens for Common Sense might argue for us to 
be more stingy, but I don't think that is what my future 
colleagues will do.
    Mr. Ellis, does it make sense to be fighting to limit the 
legal liability of taxpayers if, when we have the major 
publicized instance, we are going to write checks far and in 
excess of that?
    Mr. Ellis. No matter what, even with TRIA, we are going to 
be writing checks. There is going to be the public 
infrastructure, there is the rebuilding. There are roads. That 
has always been the case. And that is not insured.
    So essentially, we recognize that. And Mr. Capuano asked me 
about that earlier, do I think that there will be a Federal 
role after a major disaster, whether it is a hurricane, or 
whether it is a terrorist attack. And, yes, and I think it is 
appropriate.
    But it needs to be--I want to see that the checks are as 
small and are reasonable and appropriate to help these 
communities recover and become more resilient in the future. 
And my concern about not actually pricing this terrorism risk 
appropriately is, again, it doesn't prevent the terrorist 
event, but it will help companies mitigate the risk more 
effectively, or encourage them to.
    Mr. Sherman. For the first time ever, I am going to yield 
back my time when I still have time. Thank you.
    Chairman Hensarling. The Chair takes note.
    The gentleman from Florida, Mr. Ross, is now recognized for 
5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    I would like to begin by first explaining why I, as a 
capital purist and one who believes in free markets as the best 
regulator of all, who also served in the Florida legislature, 
and chaired a committee that oversaw the efforts to bring back 
the private market and our property insurance, and who, quite 
frankly, was one of two votes against the expansion of a 
government-run insurance company in the State of Florida that 
cost me my chairmanship.
    But I still believe that in this particular situation, a 
TRIA bill is necessary. And I go back to the fundamental 
principles of insurance that not only do we need to have 
prefunding of events in an actuarially adequate fashion, but 
also that we have adequate capital set aside, and that those 
who are responsible for maintaining and administering that risk 
have the ability to do risk management.
    And unfortunately, when it comes to terrorism, risk 
management is predominantly a function of homeland security.
    So, Mr. Woo, I agree with you that there may be a way to 
assess or predict or forecast terrorist events, but until such 
time as we learn how to mitigate against these, I foresee maybe 
State Farm sponsoring gas masks, Farmers Insurance sponsoring 
flak jackets, and maybe AIG sponsoring F-16s in order to 
mitigate against attack, which of course is an absurdity.
    But I bring that out as saying that if we are going to say 
that we want a private market backed, then we need to allow 
them to have what traditionally private markets have in 
providing insurance. I think adequate capital is necessary.
    Mr. Ellis, you talked about in your opening that in 1992 
after Hurricane Andrew, the markets dried up, but then the 
reinsurance came back. It came back as a result of a 
legislative change that created a Florida Hurricane Catastrophe 
Fund not unlike TRIA. It came back because they allowed pup-
companies which were subsidies of major insurance companies to 
be based in Florida and limit their liability. They came back 
because they had joint underwriting associations for homeowners 
and also the wind storm pool.
    What I am getting at is that as much of a purist as I am, 
practically speaking from a political perspective, government 
is going to be involved, and to that end, how do we minimize 
government exposure.
    Mr. Ellis, I agree with you on pre-funding. I think that is 
absolutely important that if we are going to look at 
transitioning over into a market to come back, we have to have 
some sense of pre-funding.
    Mr. Woo, based on your assessment, let me ask you, can you 
actuarially, adequately price terrorism insurance?
    Mr. Woo. I think the question has to be put in the context 
of other catastrophe perils like the natural hazards. If you 
take Hurricane Irene, on its path towards New York City at one 
stage, RMS did a review, an analysis to show that when it was a 
Category III in the Atlantic, the loss potential was $200 
billion.
    Mr. Ross. I agree with you, Mr. Woo, but we also have a 
cone--we know 5 days in advance pretty much where it is going 
to go. We have ways to mitigate and prepare once we know that 
the event is about ready to occur. We don't have that luxury in 
terrorism.
    So my question to you is, can you actuarially, adequately 
price terrorism insurance?
    Mr. Woo. Well, what--
    Mr. Ross. You can't, can you? And that is the key here 
because if you could actuarially, adequately price terrorism 
insurance, would it be less than, equal to, or greater than 
what people are paying now?
    Mr. Woo. The key part to actual pricing is allowing for a 
factor for uncertainty.
    Mr. Ross. Right.
    Mr. Woo. And uncertainty has an element of perception to 
it. I am the first to admit, sir, that obviously the perception 
of the uncertainty is very high within the insurance community. 
But if I can just make this point, which is that over time, 
again, with the kind of process I have mentioned, namely people 
tracking courtroom convictions, people tracking plots through 
social network analysis, and so over time, I think there will 
be a gradual better understanding of the nature of terrorism 
risk.
    Mr. Ross. But the pricing is what concerns me, because 
right now, we have a government backstop and my history in 
government backstops, as you look at the National Flood 
Insurance Program, and as you look at citizens' property and 
causality insurance program in the State of Florida, is it 
leads to bad behavior.
    It leads to building a high-risk area. It leads to 
rebuilding in high-risk areas. And so what I am saying is if we 
are going to bring back a market, we are going to have private 
capital at risk, we have to give them some opportunity.
    In my State, people say well, give us adequate actuarial 
pricing. I don't know if we can do that in TRIA. I don't think 
we can, and until we can answer that question, we have to have 
a government backstop. But I think we also have to look at Mr. 
Ellis' points where we have to be able to pre-fund it.
    Because in the workers' compensation--you don't have 
exclusions in workers' comp other than fraud and--basically 
other than fraud because it is a strict liability. How are you 
going to be able to fund workers' compensation other than have 
a regulator who says, we don't have much of a market so we are 
going to lower our standards, then you have thinly capitalized 
companies out there that are going to go to a guarantee fund?
    Any comments on that? I have 14 seconds.
    Mr. Woo. I don't know if there is a distinction between 
modelability and insurability. As I said, TRIA is needed for 
the absolutely known knowns. Terrorists, unlike natural 
hazards, target high-value properties in central business 
districts.
    Mr. Ross. I am not disagreeing with you, I think--yes, TRIA 
is needed.
    Mr. Woo. Okay, but--
    Mr. Ross. But we have to transition it over time.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman, and I appreciate again 
the panel staying here so long today.
    Mr. Smith, I just want to understand what you do at Swiss 
Re, you guys offer primary insurance and reinsurance, is that 
correct, both products?
    Mr. Smith. We are about 85 percent a reinsurance company, 
so mostly what we do is reinsurance. We have a small commercial 
insurance presence.
    Mr. Duffy. Okay.
    Ms. Abraham?
    Ms. Abraham. We are exclusively a primary insurance 
company.
    Mr. Duffy. Do you buy reinsurance?
    Ms. Abraham. Yes.
    Mr. Duffy. Okay.
    Ms. Abraham. We buy extensive reinsurance, and without 
TRIA, our reinsurers have said they would not provide the kind 
of protection that we want to provide.
    Mr. Duffy. Mr. Smith, if at Swiss Re, you were trying to 
price your reinsurance with the terrorism component as part of 
your product without a government backstop, could you actually 
do that and would it be pretty expensive?
    Mr. Smith. We believe that mathematically, that is not 
possible. So we feel, Congressman, that we cannot do that.
    Mr. Duffy. Would it be expensive if you did try to price 
that?
    Mr. Smith. It would be extremely expensive.
    Mr. Duffy. Okay.
    On your primary products, the 15 percent that you offer the 
primary products on, for the terrorism reinsurance, through 
TRIA, what do you pay the Federal Government as a premium?
    Mr. Smith. The only mechanism for payment to the government 
through TRIA is at the backend of a loss. There is no upfront.
    Mr. Duffy. There is no premium that is paid to the Federal 
Government for taking on this risk, right? It is paid at the 
back end.
    In your business, at Swiss Re, you don't say to your 
customers, we will take on the risk if you have losses, we will 
come back to you and re-collect for the payments that we have 
paid out, right? You have to collect the premium up front. And 
then if there are claims, you pay them out of the money that 
you collected. But that is not how this system is working with 
TRIA in the Federal Government, is it?
    Mr. Smith. That is correct.
    Mr. Duffy. Do you think it is a good deal for the American 
taxpayer--
    Mr. Smith. Absolutely.
    Mr. Duffy. --to try to collect on the back end?
    Mr. Smith. Absolutely.
    Mr. Duffy. Okay. So you would say that it is a bad idea to 
have some premium--we could debate how much that should be. We 
would probably agree that you can't price the full risk, but 
there probably should be some payment made to build up some 
fund so that if there is an attack, we can draw upon that fund. 
But your position would be there should be no pre-funding, we 
should come at the back end and try to collect it. Is that your 
position?
    Mr. Smith. You can argue it either way.
    Mr. Duffy. I am asking--
    Mr. Smith. Our perspective is that the way it works today 
is extremely efficient because the--
    Mr. Duffy. Because you don't have to pay for it, right? It 
is free.
    Mr. Smith. Well, we would--
    Mr. Duffy. Of course--
    Mr. Smith. --disagree with that. We cover what we cover.
    Mr. Duffy. You don't pay a premium. There is no premium for 
the American taxpayer taken on the risk.
    Mr. Smith. Except they are not covering what I cover. We 
are at different layers. I pay what I pay, that is what I 
cover, that is what I charge for, and that is what I am on the 
hook for.
    Mr. Duffy. Right, the Federal Government is on the hook for 
the terrorism component and--
    Mr. Smith. The extreme upper layer.
    Mr. Duffy. --there is no premium charge for that, right?
    Mr. Smith. Right.
    Mr. Duffy. And you don't take on risk without charging a 
premium, right?
    Mr. Smith. That is correct.
    Mr. Duffy. How come it is a good deal for you to collect a 
premium, but it is a good deal for the American people to not 
collect a premium? Why is it a great standard for you at Swiss 
Re and bad for America and the American taxpayer to collect 
some form of a premium to build some form of a fund to actually 
draw upon if there is an attack?
    Mr. Smith. Again, Congressman, you can argue it either way, 
and you are asking--and our point of view is that the 
efficiency of how it is done today we think is rather brilliant 
because the odds of the U.S. Government of it getting it up 
into that layer are so small that to pre-fund it, how are you 
going to do that? You are going to have make--
    Mr. Duffy. With a premium.
    Mr. Smith. --you don't have a model so you can't model it.
    Mr. Duffy. So the model is, ``don't collect anything?''
    Mr. Smith. You have a model that--you have a--
    Mr. Duffy. We could place some premium--
    Mr. Smith. --mechanism in place to try to build a--
    Mr. Duffy. [Off mike.]
    Mr. Smith. --only if there is a claim paid.
    Mr. Duffy. I am sure Ms. Abraham would love to say, ``You 
will reinsure us for free, and we will pay you on the back 
end.''
    I support TRIA. I want you guys to be aware of that. I 
think we have to have some action here, but to say that we are 
not going to try to collect some form of a premium that may not 
correlate with the risk that the taxpayer is taking on, but 
some premium, to have a fund set up that we can draw upon if 
there is an attack.
    Mr. Ellis, do you agree that we should have some form of 
prefunding?
    Mr. Ellis. Absolutely, Congressman.
    Mr. Duffy. Some premium should be paid, you would agree?
    Mr. Ellis. Absolutely. Right now, there have been insurance 
companies that have been collecting terrorism insurance 
premiums from their clients for a decade, and haven't paid 
anything for the Federal backstop that they have.
    Mr. Duffy. I would just make a note to the panel, I think 
you could get better buy-in if there was some premium paid to 
the American taxpayer to offset the risk. They are not going to 
get a full premium, as you mentioned, Mr. Smith. You can't 
assess it, but if we are paying some form of a premium for the 
American taxpayer risk, we will get a far better buy-in. I 
yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    Thanks for your testimony today. I have a question for Mr. 
Smith, and a question for Dr. Woo, and I would like for both of 
you to respond to some testimony of each other.
    For Mr. Smith, Dr. Woo testified earlier that TRIA is 
insurance against counterterrorism failure. And I thought that 
was very interesting testimony. He said that--you heard his 
testimony, but what occurs to me, the takeaway from what he is 
saying is that perhaps as the Federal Government invests more 
aggressively in counterterrorism measures through the 
intelligence community and other assets, perhaps the need for 
the Federal backstop in TRIA might, as a percentage, decrease 
as the Federal Government maybe increases its efforts on the 
counterterrorism side.
    I would be interested in your reaction to that potential 
takeaway from his testimony.
    For Dr. Woo, I would be interested to hear you respond to 
Mr. Smith's point, that while you say there may be some 
actuarial certainty, or some experience that you are gleaning 
from, since 9/11, based on convictions, that what seems to be 
pretty compelling from Mr. Smith is that the gravity and the 
seriousness, or the level of the catastrophe is so great, that 
it is very difficult to quantify.
    Even if you can quantify some experience based on 
convictions on declassified instances of terrorism, what seems 
pretty compelling from Mr. Smith is that it is very hard to 
quantify on an actuarial basis the severity of the losses that 
could occur. And that is why the risk is difficult to quantify. 
So, if both of you could respond to those two items.
    Mr. Smith. I will go first. It is an interesting concept, 
but when you build mathematical models around such 
catastrophes, there are many elements to it. So he has an 
interesting theory about one element, but there is just not 
enough real data.
    There is no model that has been tested yet, and so for 
those of us who actually deploy capital, we just don't feel 
comfortable that it is something that you can model.
    Mr. Woo. I would just like to make a comment about the 
massive amounts of investments the U.S. Government makes in 
counterterrorism. Precisely because of this huge investment, 
the effective cost of the TRIA backstop is really tiny compared 
with the investment in counterterrorism. Okay, talking about 
many billions spent, tens of billions spent on 
counterterrorism.
    And the effective cost of the TRIA programs, notional cost 
is actually just a tiny fraction of that. Also, I would like to 
make the point that if there were to be a catastrophic 
terrorist attack involving a good number of operatives, almost 
certainly, this would be a consequence of some degree of 
negligence on the part of the security agencies.
    If I just mention what happened in Britain recently, there 
is a case of a soldier being killed on the streets of London, 
and people wanted to sue MI5 over it.
    Okay, so if I can just make the point, which is that as far 
as the taxpayer is concerned, the value of TRIA is that without 
it: (A) you wouldn't have much private participation in the 
market, but also the potential liability of the Federal 
Government in the event of a massive attack would dwarf the 
backstop in TRIA.
    Mr. Barr. Let me quickly move on to a point that Mr. Beshar 
made earlier. In your testimony, your original testimony, you 
indicated that there is more capital in reinsurance now than 
before. Does this suggest that there is cause for reform to 
increase the thresholds?
    And for everyone on the panel, or for Mr. Beshar, Mr. 
Smith, and Ms. Abraham, if there are to be changes, obviously 
there are some skeptics or advocates for reforming TRIA. If 
this committee were to reform TRIA, what level of changes in 
the thresholds would be appropriate, and would not be 
disruptive to the marketplace?
    Mr. Beshar. Clearly, there is additional capital and 
capacity in the insurance marketplace. The key question, 
Congressman Barr, is how much of that capital would actually be 
interested in writing terrorism risk? And that is a very hard 
thing to try to estimate.
    You have heard from Mr. Smith that it is not much, that 
essentially what is being underwritten right now is essentially 
the appetite that exists in the market. And so, I think that is 
a process that has to be analyzed further.
    Mr. Barr. Ms. Abraham, really quick, I am running out of 
time, but obviously a terrorist attack against one American is 
a terrorist attack against everyone. You talk about rural 
stadiums. And I come from a relatively rural district, the 
University of Kentucky is in my district. But in terms of--
    Ms. Abraham. And we insure it.
    Mr. Barr. I am sure you do. And thank you for that. But in 
terms of shifting risk, what would you have to say about rural 
taxpayers bearing risk for large urban areas, which have a 
higher actuarial potential of bearing the--
    Chairman Hensarling. A very brief answer, please.
    Ms. Abraham. Some of that is done in the underwriting 
process. There is a credit and debit process. And 
vulnerabilities, location, preparedness, that is already 
factored into our underwriting process. So not every--the 
University of Kentucky does not pay the same price as the 
University of Nebraska. They are different based on their 
planning, and their location. So, it is different, and is 
factored into the pricing already.
    Chairman Hensarling. The time of the gentleman has expired.
    I would ask for unanimous consent that letters from the 
Financial Services Roundtable and the American Insurance 
Association be entered into the record. Without objection, it 
is so ordered.
    I would like to thank our witnesses again for their 
endurance, their patience, and their testimony today.
    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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 1:15 p.m., the hearing was adjourned.]











                            A P P E N D I X



                           September 19, 2013





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