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



 
                   THE FUTURE OF TERRORISM INSURANCE:
                  FOSTERING PRIVATE MARKET INNOVATION
                       TO LIMIT TAXPAYER EXPOSURE
=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 13, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-49




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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
                 Subcommittee on Housing and Insurance

                   RANDY NEUGEBAUER, Texas, Chairman

BLAINE LUETKEMEYER, Missouri, Vice   MICHAEL E. CAPUANO, Massachusetts, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             CAROLYN McCARTHY, New York
ROBERT HURT, Virginia                KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio                  JOYCE BEATTY, Ohio
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 13, 2013............................................     1
Appendix:
    November 13, 2013............................................    43

                               WITNESSES
                      Wednesday, November 13, 2013

Csiszar, Ernest N., Associate Fellow, R Street Institute.........    12
Driscoll, Kean, Chief Executive Officer, Validus Re..............    10
Hartwig, Robert P., President and Economist, the Insurance 
  Information Institute..........................................    15
McGovern, Sean, Director, Risk Management, and General Counsel, 
  Lloyd's of London..............................................     8
Seo, John S., Co-Founder and Managing Principal, Fermat Capital 
  Management, LLC................................................    14

                                APPENDIX

Prepared statements:
    Csiszar, Ernest N............................................    44
    Driscoll, Kean...............................................    59
    Hartwig, Robert P............................................    66
    McGovern, Sean...............................................    94
    Seo, John S..................................................   100

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Letter to the Treasury from the American Bankers Association, 
      dated September 16, 2013...................................   106
    Letter to Representatives Grimm and Maloney from the American 
      Bankers Association, dated March 19, 2013..................   110
    Letter to Representatives Neugebauer and Capuano from the 
      U.S. Chamber of Commerce, dated November 12, 2013..........   111
    Letter to Representatives Neugebauer and Capuano from the 
      Coalition to Insure Against Terrorism, dated November 13, 
      2013.......................................................   113
    Written statement of the Financial Services Roundtable.......   115
    Written statement of The Jewish Federations of North America.   121
    Letter to Representatives Neugebauer and Capuano from Liberty 
      Mutual Insurance, dated November 12, 2013..................   122
    Written statement of the National Association of Mutual 
      Insurance Companies........................................   124
    Written statement of the National Association of Professional 
      Surplus Lines Offices, Ltd.................................   129
    Written statement of the Property Casualty Insurers 
      Association of America.....................................   131
    Letter to Chairman Hensarling from Texas A&M University, 
      dated November 13, 2013....................................   135


                   THE FUTURE OF TERRORISM INSURANCE:
                  FOSTERING PRIVATE MARKET INNOVATION
                       TO LIMIT TAXPAYER EXPOSURE

                              ----------                              


                      Wednesday, November 13, 2013

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Royce, Capito, Garrett, Westmoreland, Duffy, Stivers, Ross; 
Capuano, Cleaver, Sherman, Himes, Sinema, and Beatty.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representatives Grimm, Maloney, and Green.
    Chairman Neugebauer. Good morning. The Subcommittee on 
Housing and Insurance will come to order. The title of today's 
hearing is, ``The Future of Terrorism Insurance: Fostering 
Private Market Innovation to Limit Taxpayer Exposure.''
    I am going to limit opening statements to 2 minutes per 
side, and I ask unanimous consent that members of the full 
Financial Services Committee who are not members of the Housing 
Subcommittee, and who have joined us today, will be entitled to 
participate in the hearing.
    I will begin now with the opening statements, and I will 
recognize myself for 5 minutes.
    This is our second in a series of hearings on TRIA, a very 
important subject. As I mentioned in the title of this hearing, 
today is really to focus on getting more private market 
participation in this process.
    In addition to the previous hearing that we have had, we 
have had numerous sessions, both at the staff level and the 
Member level, with market participants, people who have an 
interest in TRIA and the impact to both the users, the people 
who are insured for terrorism, and the people who provide that, 
the reinsurance market. We have tried to be as inclusive as we 
can of bringing people in to get their perspectives on this.
    As many of you know, TRIA was passed in 2002. It was meant 
to be temporary.
    And what we know in Washington is that there is really 
never any temporary policy. Temporary moves very quickly to 
permanent. And here we are over 10 years later and we still 
have this temporary policy on our books.
    The purpose of TRIA initially was to provide a transition 
period for the industry to kind of regroup after the terrible 
events of September 11th (9/11) where we saw the industry take 
a hit of, I think, over $40 billion.
    The transition really hasn't taken place as robustly as I 
think a lot of folks hoped and as I think was promised. And so 
what we are here to really to talk about today is how do we 
accelerate that transition period and how do we accelerate the 
private participation at a larger level.
    Now, there is some good news along the way. The markets 
have stabilized, and today the industry has more capital in 
reserves than ever before in spite of some fairly major big 
hits that the industry has taken over the last few years. We 
have had several events even larger than 9/11, yet today the 
industry is capitalized and the reinsurance market has a 
tremendous amount of capital on the sidelines.
    Risk modeling has advanced. One of the things we have heard 
from other people who came and gave testimony was that it is 
hard to model this risk for terrorism but, in fact, there has 
been some progress in that.
    And the price of the insurance, the coverage, has reduced 
by over 70 percent since those early days. So, there are some 
encouraging factors out there.
    But quite honestly, the innovation in TRIA hasn't kept pace 
with really the rest of the financial markets. One of the 
things that we enjoy in this world today is some of the most 
sophisticated financial products in the world. And we have 
provided opportunity to cover a number of different kinds of 
risk in a lot of different ways. Yet we haven't seen that same 
innovation, quite honestly, in TRIA.
    And so today, as we begin to have our discussion, I am 
looking forward to hearing from this panel. I told my staff 
earlier that I think we have put together an A panel today of 
some very smart people who have different perspectives.
    But I hope that our conversation will center around today 
that if we are to continue to provide terrorism insurance in 
this country, what are the ways that we can do it better, but 
at the same time, make sure that the taxpayers have a smaller 
footprint.
    One of the things we know about government, particularly 
the U.S. Government, is that we don't do an extremely good job 
of pricing risk.
    I don't think our government, the founders, ever meant for 
us to be in the insurance business. But we have found ourselves 
in that business in a number of ways, whether insuring 
mortgages or insuring people against flood.
    And when we look across-the-board at those programs, what 
we see today is that the FHA is not adequately capitalized. The 
flood insurance program is $30 billion underwater, and there is 
no pun intended in that statement.
    And so I hope to hear from our witnesses today of ways that 
we can move forward. And what I would say is that my guess is 
that this is our last pre-legislative hearing.
    And where we go from here, we will begin to then put some 
of the ideas that we have heard from market participants and 
from the two hearings that we have had and moving forward with 
something that we think is a positive direction.
    With that, I yield back my time, and I recognize Mrs. 
Beatty from Ohio for 2\1/2\ minutes.
    Mrs. Beatty. Thank you so much, Mr. Chairman.
    And let me just say to our witnesses today, thank you for 
being here.
    Certainly, as you know, today's hearing was scheduled 
specifically for the purpose of evaluating the ability of the 
private sector to sustain a robust terrorism risk insurance 
market in the absence of a Federal Government backstop.
    And I believe it is fair to say that the ability to 
purchase broadly available and reasonably priced terrorism risk 
insurance is a critical part of our modern American society, 
covering everything, as you know, from property damage to 
business interruptions to injury or loss of life liability to 
workers' compensation. And businesses' ability to secure 
terrorism risk coverage facilitates every facet of the modern 
American corporate climate.
    Without broadly available and reasonably priced terrorism 
risk insurance, commercial real estate markets would likely 
seize up and sports entertainment venues could lose their 
ability to operate.
    I am from a district where we have a large number of venues 
that fall into this category. Even the high-risk office 
buildings that create the iconic skylines from coast to coast 
would be vacant as companies could not justify housing 
employees in these terrorism magnets without workers' 
compensation coverage for liability stemming from an act of 
terror.
    The unpredictable frequency and severity of terrorist 
attacks prevents the use of normal risk-based pricing models 
used in other forms of insurance. In fact, from all the 
comments from industry participants, insurance and reinsurance 
industries are simply not ready to bear the entire burden of 
losses from one or more major terrorism events.
    And without the extension of the TRIA government backstop, 
all indicators suggest that there would be a large-scale 
withdrawal of this coverage from the market, which would bring 
us back to the untenable position in which we found ourselves 
in the months following September 11, 2001.
    So I look forward to hearing your testimony, and I thank 
you for being here today.
    I yield back.
    Chairman Neugebauer. I thank the gentlewoman.
    And now, I recognize the vice chairman of the subcommittee, 
Mr. Luetkemeyer, for 2 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Congress originally intended for the terrorism risk 
insurance program, or TRIA, to be a temporary one to stabilize 
the insurance sector after September 11, 2001. It was passed 
and then extended in order to allow time for the industry to 
evolve and create private market solutions.
    As the chairman has mentioned and I agree, I think it is 
fair to say that a complete transition to the private market 
has not been as rapid or as robust as we would have liked.
    Given what I have studied and heard, I believe there 
remains a real need for TRIA. But I also believe that we can 
identify ways to increase the amount of private sector capital 
in the program.
    My biggest hope in doing so is that we better protect 
taxpayers, continue to have a robust insurance marketplace, and 
provide a backstop for financial security for the private 
sector and investors. Today, we will more closely examine the 
current terrorism insurance marketplace and discuss some 
innovative ways to increase the role of the private sector in 
this field.
    I believe we can take steps to reform TRIA. And while I do 
support a continuation of an improved program, I do not believe 
it should be a permanent program.
    At the end of this debate, it is my hope that we will have 
a product that promotes increased stability and taxpayer 
protection alike, as well as begins a process of winding down 
the government's role.
    I look forward to a productive hearing, and I thank our 
witnesses for testifying.
    With that, Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from New York, Mrs. Maloney, is recognized 
for 2 minutes.
    Mrs. Maloney. I thank the ranking member and the chairman 
for calling this hearing and I thank all of my colleagues for 
being here.
    The title of this hearing is, ``Fostering Private Market 
Innovation to Limit Taxpayer Exposure.'' I would just like to 
point out that under the current TRIA program, the taxpayers' 
exposure is already extremely limited. Total industry losses 
have to exceed $100 million first, and then insurance companies 
have to pay a deductible equal to about $34 billion. And this 
is before any government money is used.
    Even then, the insurance company has to share a portion of 
the losses with the government. Under TRIA, if, God forbid, a 
terrorist attack caused $50 billion of losses, which is $10 
billion more than the terrible 9/11 attack, the government 
would only be on the hook for roughly $13.6 billion, according 
to the Government Accountability Office.
    TRIA is a rare example of a government program that does 
exactly what Congress intended it to do. It ensures that 
businesses have access to terrorism insurance while also 
limiting taxpayers' exposure. And it has done all of this 
without costing taxpayers one 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 it would leave our economy 
dangerously exposed in the event of a future terrorist attack.
    I want to thank all of my colleagues for their support in 
the rebuilding of our Nation after the 9/11 attack. And I 
especially want to thank one of our panelists today from 
Lloyd's of London, Sean McGovern, because after 9/11 all 
building stopped in major urban areas. No one could get 
insurance.
    The only place some people--and this was limited--could get 
insurance was from Lloyd's of London. So you couldn't build a 
shack until antiterrorism insurance was put in place, the TRIA 
program, which has not cost a dime.
    So I strongly support Mr. Grimm's bill to extend this vital 
program. It is important to our economy. It is important to our 
Nation.
    And I thank the chairman for having the hearing.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from New Jersey, Mr. Garrett, the 
chairman of our Capital Markets Subcommittee, is recognized for 
2\1/2\ minutes.
    Mr. Garrett. Two minutes is fine.
    First of all, I would like to thank the chairman for 
holding this hearing on potential ideas to encourage private 
capital and innovation, and at the same time, to protect the 
taxpayers from footing the bill for terrorism coverage.
    I would also like to thank all the witnesses here on the 
panel before us as well.
    It has been 11 years since TRIA was signed into law, as the 
chairman has already indicated, and it was intended to be a 
temporary program. And as most of you are aware, TRIA in its 
current form requires the share in the certified act of terror, 
as was indicated, $100 million if it exceeds that.
    And while the risk is shared between the private insurers 
and the taxpayers, the mandatory recoupment under TRIA does not 
apply to catastrophic losses over a set figure, around $27 
billion. Recall, then, that on September 11th, those attacks 
resulted in more than $41 billion of losses.
    So today we are here to discuss ideas to further work to 
protect the taxpayer from catastrophic losses. While we hope 
and pray that another September-11th-like event does not occur, 
we cannot, unfortunately, rule out future attacks on our 
homeland.
    And given this possibility, it is in the interest of the 
U.S. taxpayers for Congress to seek out innovative ways to 
harness the power of private markets and private capital to 
lessen taxpayer exposure.
    So it is my hope that this hearing will provide this 
committee with a better understanding of how we can encourage 
private sector capital in the terrorism risk insurance 
marketplace, and ways to ensure that taxpayers are, in essence 
or in reality, not left footing the bill.
    With that, I yield back.
    Chairman Neugebauer. Thank you.
    The gentleman from Connecticut, Mr. Himes, is recognized 
for 2 minutes.
    Mr. Himes. Thank you, Mr. Chairman. I am pleased to be here 
at the second hearing on this very important topic.
    And I would like to take a moment to welcome Mr. John Seo, 
whose company, Fermat Capital, is headquartered in my district, 
I believe in Westport, Connecticut.
    Mr. Seo, I look forward to hearing your testimony.
    And thank you, Mr. Chairman, for holding this hearing.
    I think most of us agree that the goal here is to find a 
well-balanced insurance structure that steps in where the 
private market fears to tread for as long as that holds true. 
To those who are perhaps completely ideologically allergic to 
the idea, there are two good reasons in principle to consider 
having a terrorism risk insurance program.
    The first is the very simple financial concept that risk 
should be managed and ultimately borne by the party that is in 
the best position to understand that risk. And unlike, perhaps, 
other kinds of risk, it is, of course, our intelligence 
agencies, our Federal Government that best understands how, 
when, where, and why a terrorist event may occur. And of 
course, we make the laws that work to mitigate the risk of a 
terrorist event.
    Secondly and far more practically, as we saw on 9/11, and 
as we saw in Hurricane Katrina, and as we saw in Hurricane 
Sandy, in the moment of a catastrophe the Federal Government 
does step in in a big way. I think it is a tribute to us as 
Americans that when Americans are suffering anywhere, we don't 
act stingy. We say, ``We will help you stand up again.''
    So as long as we are stepping in, in a big way in any 
event, we should do it in an organized and thoughtful way using 
an insurance structure that doesn't represent subsidy, that 
does not represent crowding out of private players, but 
represents an orderly way, a careful way of thinking about 
things that we don't want to think about.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Florida, Mr. Ross, is recognized for 2 
minutes.
    Mr. Ross. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    As a stalwart of physical conservatism, I agree that 
taxpayer-backed programs are often poorly designed and managed 
and end up adding too many dollars to our national debt.
    My time as chairman of the Florida House Insurance 
Committee years ago provided me with a deep understanding of 
the need to maximize private capital. And I think we all 
appreciate the embedded design flaws that led to our current 
predicament with regard to the National Flood Insurance 
Program.
    Ideologically, I agree that taxpayers should not be asked 
to foot the bill for those who choose to live or build in 
riskier areas. However, I also believe that we are a body of 
practicality.
    Practically speaking, I do not think it is feasible to move 
San Francisco away from the San Andreas Fault; neither could we 
move Florida away from flood zones to escape flood risk. 
Finally, we will not eliminate cities, take down iconic 
structures, or prohibit mass gatherings so as to reduce the 
risk of a terrorist event.
    There are realities of risk in our world for which we must 
find the best workable solutions. In the event of a terrorist 
attack, I am confident that the Federal Government will step in 
and provide relief to all victims, including those who are 
uninsured.
    I am a compassionate conservative. I don't think that 
relief is a bad thing. But I would hope that we would 
responsibly map out a plan for the deployment of private funds 
to minimize the number on the check that this Congress has to 
write.
    In this subcommittee, we promote responsible risk 
management, identify uncertainty as a cause of slower growth, 
and view broad market participation as an indicator of healthy 
market conditions. It seems to me that the terrorism risk 
insurance program at its root targets these principles.
    Now, could we do it better? Can we adjust the parameters to 
further engage private capital? Can we help expand the capacity 
of reinsurance and insurance-linked securities markets? It is 
certainly possible, and I certainly hope so.
    I thank the panel for being here, and I look forward to the 
testimony.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the ranking member of the full Financial Services 
Committee, the gentlewoman from California, is recognized for 2 
minutes.
    Ms. Waters. Thank you very much. I am pleased to 
participate in this hearing on the importance of the successful 
Terrorism Risk Insurance Act known as TRIA. For more than a 
decade TRIA has supported critical economic growth by ensuring 
access to terrorism coverage for our largest venues, 
businesses, and employers. And Democrats are strongly committed 
to renewing this program quickly and without controversy.
    The terrorist attacks of September 11, 2001, caused a 
tragic loss of life and significant disruption to our economy. 
In addition, insurance losses totaled an estimated $40 billion 
in today's dollars.
    Such losses made it financially impossible for many 
insurers and reinsurers to offer terrorism coverage. Most fled 
the market. Those that did offer coverage did so at a cost that 
was prohibitively high.
    In 2002, Congress enacted TRIA to address the problem. 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 at the highest levels.
    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 TRIA's 2014 expiration, leading 
Republicans oppose this measure, arguing that TRIA is hindering 
private sector participation and that private capital is 
available to cover terrorism risk.
    By continuing to drag out this noncontroversial 
reauthorization, they are putting up roadblocks that threaten 
the renewal and effectiveness of this important program. This 
hurts our economic growth.
    Industry itself has reported that private capital could 
cover no more than a fraction of the gap that would result from 
TRIA's expiration.
    Contributing to this problem is an inability to 
appropriately model and price the terrorism risk due to an 
absence of actuarial data. This is because of the extreme 
difficulty in predicting the frequency, location, and severity 
of loss associated with a potential terrorist attack. Attacks 
are random, infrequent, and details are largely classified.
    Additionally, Republican opponents of TRIA argue that the 
current structure leaves taxpayers exposed and that increasing 
private participation will limit this exposure. However, TRIA 
actually reduces taxpayer risk because it keeps most of the 
terrorism risk with the private sector.
    Without TRIA, many buildings, schools, and large venues 
would remain uninsured against terrorist attacks, meaning that 
the government likely will pick up 100 percent of the tab for 
catastrophic losses.
    But don't take my word for it. A wide array of TRIA's 
policyholders and beneficiaries have expressed support for the 
program, including shopping centers, hotels, and office 
buildings, to insurers and reinsurers, as well as market 
analysts, lenders, and developers. All these interests and more 
depend on the quick, clean, and long-term reauthorization of 
TRIA.
    For all these reasons, I believe we need to reauthorize 
TRIA as soon as possible. TRIA must remain in place to ensure a 
speedy recovery after an attack, to avoid market disruptions, 
and to protect schools, jobs, and businesses. We need to 
realize that now is not the time to be having a debate over 
alternatives to TRIA. The private market cannot and does not 
want to step into the void.
    I thank you again for holding this hearing. I continue to 
believe it is of the utmost importance that TRIA is 
reauthorized quickly, cleanly, and for the long term. Democrats 
support it. Insurers support it. Businesses and the U.S. 
Chamber of Commerce support it. There's no reason this should 
not have broad bipartisan support in Congress as well. I look 
forward to the witnesses' testimony and I yield back the 
balance of my time.
    Chairman Neugebauer. Now, the ranking member of the 
subcommittee, Mr. Capuano, is recognized for--
    Mr. Capuano. Thanks for having this hearing, Mr. Chairman. 
I yield back.
    Chairman Neugebauer. I appreciate that.
    And now, we will go to our witnesses.
    It is my pleasure to introduce: Mr. Sean McGovern, director 
of risk management and general counsel for Lloyd's of London; 
Mr. Kean Driscoll, chief executive officer of Validus 
Reinsurance, Limited; Mr. Ernest Csiszar, associate fellow, R 
Street Institute; Mr. John Seo, Co-Founder and Managing 
Principal, Fermat Capital Management, LLC; and Dr. Robert 
Hartwig, president and economist, the Insurance Information 
Institute.
    I thank all of you for being here. You will be each 
recognized for 5 minutes to summarize your testimony.
    And with that, I will begin with Mr. McGovern. You are 
recognized for 5 minutes.

  STATEMENT OF SEAN McGOVERN, DIRECTOR, RISK MANAGEMENT, AND 
               GENERAL COUNSEL, LLOYD'S OF LONDON

    Mr. McGovern. Thank you, Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee for the 
opportunity to testify this morning on behalf of Lloyd's of 
London.
    My name is Sean McGovern. I am responsible for risk 
management at Lloyd's and I am also general counsel.
    Over our 325-year history, Lloyd's has earned a reputation 
for having the capacity, the skill, and the appetite to 
underwrite the world's most difficult risks. This is 
particularly true in the United States, which is our largest 
market and where we are a major direct insurer and reinsurer.
    Our specialty is catastrophe coverage, and we have been 
there to support the U.S. economy since the conclusion of the 
Civil War, cementing our reputation with our response to the 
1906 San Francisco earthquake and, more recently, claims paid 
arising from Hurricanes Katrina, Rita, and Wilma in 2005.
    We know how to underwrite catastrophic risk and we have an 
appetite to take risk that others will not. It is our business.
    With that in mind, our views on terrorism risk and TRIA are 
informed by the following: First, Lloyd's paid more claims than 
any other insurer or reinsurer following the tragic events of 
September 11th--almost $8 billion.
    Second, Lloyd's led the development of the standalone 
terrorism risk market in the United States in the days 
following 9/11. And third, Lloyd's is generally wary of 
government intervention and believes in free markets and 
private market solutions wherever possible.
    With all that said, we support the renewal of TRIA. Like it 
or not, the coverage of terrorism risk is different and the 
United States is not the only country confronted with the 
challenge of ensuring that the national economy is protected in 
the event of the failure of counterterrorism measures.
    The U.K. has lived with the threat of domestic terrorism 
for many years, and while the structure of the government 
industry arrangement is different than TRIA, the U.K. program 
has an unlimited government backstop. And similar arrangements 
exist in major European economies.
    Terrorism risk is different because, as demonstrated by the 
tragic events in Boston, risk assessment is very difficult. 
Frequency and severity are very difficult to predict. Only the 
government has access to intelligence information but cannot 
share it.
    And although terrorism modeling exists, it has limitations. 
In particular, the supply of historic data is much more limited 
than for natural catastrophes.
    Now that is not to say that terrorism risk cannot be 
underwritten. We have an active and growing standalone 
terrorism risk market in Lloyd's, but it remains small.
    All of these factors act to substantially limit the 
appetite of the insurance and reinsurance industry to absorb 
this risk, particularly in major urban areas where the density 
and accumulation of asset values.
    TRIA has succeeded in giving the insurance industry the 
confidence to make terrorism coverage available. Without TRIA, 
the aggregation of risk will quickly lead to the industry to 
exclude coverage or withdraw capacity from key economic centers 
in the United States.
    While the industry is well-capitalized, it would be wrong 
to assume that more capital leads to a dramatic increase in the 
overall appetite to write U.S. terrorism risk insurance. 
Reinsurers need to manage risk aggregation and seek 
diversification.
    Now, we accept the need to assess whether or not TRIA 
should change, and it may well be that the balance between 
government and private market involvement could tilt more 
towards the private market. But any changes to TRIA to 
facilitate greater private market involvement should not 
sacrifice the stability that TRIA has already achieved.
    And how changes are made can be just as important as what 
changes are made. For example, sudden and dramatic increases in 
retentions or co-shares could prompt some insurers and 
reinsurers to concentrate their capacity elsewhere.
    By contrast, well-defined, incremental changes over the 
course of a long-term extension of the program may provide a 
transparent process of reductions in the risk borne by 
taxpayers.
    For the avoidance of doubts, we do not see this as a 
mechanism to transition to a complete removal of TRIA. We 
struggle with the notion that there is no Federal backstop.
    Whatever the future of TRIA, Lloyd's will remain committed 
to providing the fullest coverage we can to our American 
customers, just as we did immediately after 9/11. But our 
ability to do that will be limited by our need to manage our 
risk aggregation.
    The same issue will apply to others, and we have no 
confidence that the private sector alone is capable of 
providing the entirety of the coverage that would be needed if 
TRIA is not renewed.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. McGovern can be found on 
page 94 of the appendix.]
    Chairman Neugebauer. Thank you.
    And now, Mr. Driscoll, you are recognized for 5 minutes.

STATEMENT OF KEAN DRISCOLL, CHIEF EXECUTIVE OFFICER, VALIDUS RE

    Mr. Driscoll. Good morning. My name is Kean Driscoll and I 
am the chief executive officer of Validus Re. I am pleased to 
appear before you today to provide my company's perspective on 
possible changes to the terrorism risk insurance program that 
would incent more private market involvement.
    I commend Chairman Neugebauer for holding this important 
hearing and I welcome the opportunity to address the 
Subcommittee on Housing and Insurance. Validus Group is a 
leader in the global insurance and reinsurance markets, 
operating principally through Talbot Syndicate 1183 at Lloyd's 
of London and Validus Re.
    Talbot has written direct and facultative terrorism at 
Lloyd's for more than 12 years, and is now the largest writer 
of that business by income.
    Validus Re is one of the largest standalone property 
terrorism treaty coverage providers in the world, with an 
estimated 10 percent market share, and it evaluates business 
opportunities on approximately 90 percent of all direct and 
facultative terrorism business written throughout the world.
    Since 2001, insurers and reinsurers have worked hard to 
develop a better understanding of conventional terrorism risk. 
Reinsurers have created task forces, consulted military and 
intelligence experts, hired specialty risk modeling firms, 
invested in research and development, and implemented new 
underwriting standards, all with the intention of offering 
private market solutions for the transfer of conventional 
terrorism risk.
    Conventional terrorism can be modeled, priced, and managed 
on a portfolio basis. The probability or frequency of an event 
can be estimated, albeit with less certainty than with risk 
classes of a more robust historical record.
    However, the insurance and reinsurance industries have 
pioneered risk transfer solutions for many other classes of 
business that suffer the same shortcomings. To supplement the 
lack of a rich data set on frequency, we use open source 
intelligence that helps us estimate both the intent and 
capability of terror threat agents.
    The question is not whether conventional terrorism risk can 
be priced, but rather the precision of the parameters in a 
pricing model. We can and do currently price conventional 
terrorism risk and estimate that approximately $7 billion to $8 
billion of reinsurance coverage is purchased annually on a 
standalone basis for conventional U.S. terrorism. This excludes 
coverage that is included as part of general, property, 
casualty, workers' compensation, and other specialty-lines 
coverages.
    We believe presently there is adequate reinsurance capacity 
to cover the insurance industry's current $27.5 billion 
retention under TRIA. And if the industry retention for 
conventional terrorism grew over time, so too would the 
capacity of the reinsurance industry for conventional terrorism 
risk.
    TRIA is valuable to the insurance industry in underwriting 
conventional terrorism risk, but it takes a one-size-fits-all 
approach that could be modified to encourage more private 
market insurance and reinsurance participation.
    If the committee is inclined to make changes to the 
program, Validus encourages you to tailor the program in 
accordance with the following comments: The program should 
continue to cover catastrophic terrorism loss scenarios related 
to nuclear, biological, chemical, and radiological attacks. The 
broader industry cannot effectively address these perils, as 
the breadth of potential events is either unknowable or could 
potentially bankrupt the industry.
    Cyber terrorism, a peril distinct from cyber liability, 
should be clearly covered by the program. The scope, duration, 
potential damage, and economic loss from this risk are also 
unknowable, and therefore, uninsurable. The program should 
clarify the process for certifying a terrorism event, including 
a defined time for making the certification.
    Validus has the ability and willingness to assume more 
conventional terrorism risk exposure and I believe the 
reinsurance industry also has the ability and willingness to 
meaningfully expand its capacity for conventional terrorism 
risk.
    To reflect the fact that the industry's appetite for 
writing conventional terrorism risk has grown since the last 
extension, the program could be modified in a variety of ways, 
including gradually increasing the insurance industry retention 
and size of a qualifying terrorism loss under the program. This 
reduces the likelihood of having to fund a loss through 
taxpayer funds and it avoids short-term price and capacity 
dislocation in the broader industry.
    An expansion of the co-participation would better align the 
insurance industry with the program. The insurance industry is 
a critical facilitator of effective risk management in 
virtually every industry, and every facet of life.
    Risky behavior or highly exposed assets typically result in 
a higher premium charge. Policyholders can reduce higher 
premiums through effective risk mitigation techniques.
    Currently, the program impedes the ability of the insurance 
industry to properly price its products. By shifting the risk 
of conventional terror attack from the policyholder to the 
taxpayer, the improper allocation of risk premium facilitates 
unintended outcomes.
    We see this phenomenon playing out in the flood market, as 
the heavily subsidized National Flood Insurance Program has 
produced significant deficits. Congress should encourage a 
greater private sector risk-bearing role and appropriate risk 
pricing.
    Insureds and insurers will then have an incentive to 
mitigate risk and price it appropriately and Congress can focus 
on generally becoming a reinsurer of last resort for 
conventional terrorism risk.
    Finally, special consideration should be made for smaller 
insurers as well as for the insurance industry generally with 
respect to workers' comp exposure accumulations in metropolitan 
areas, both of which could be disproportionately impacted in 
the near term by any of the changes to the program.
    Thank you for the opportunity to testify, and we look 
forward to continuing the dialogue as the renewal process 
continues.
    [The prepared statement of Mr. Driscoll can be found on 
page 59 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Csiszar, you are now recognized for 5 minutes.

  STATEMENT OF ERNEST N. CSISZAR, ASSOCIATE FELLOW, R STREET 
                           INSTITUTE

    Mr. Csiszar. Thank you. Mr. Chairman, and members of the 
subcommittee, I appreciate the opportunity to appear before you 
today. And let me add that while officially I am here on behalf 
of the R Institute, which is an institute committed to free 
markets, to which I am also fully committed, I am also a former 
insurance commissioner, a former president of the NAIC, and I 
sit on the board of a workers' compensation company that sells 
this stuff, and I sit on the board of a company that buys a lot 
of terrorism insurance.
    I have a lot more interest in this than just good policy. I 
have some practical reasons for being here as well.
    Having said that, I want to address two issues, really. 
One, how can we make reinsurance more attractive? Because 
reinsurance is really the key here. Without reinsurance, there 
is no insurance.
    And the second point that I want to address is, can we make 
the insurance-linked security market--and I am sure my friend 
here will pick up on that as well to comment on it--more 
attractive?
    So to begin with, I think, Mr. Chairman, in your statement 
you came out and said there had been a lot of change--
improvement in the insurance-reinsurance market. The point 
really is that the capital--when I look back 10 years ago, 
capital was around $250 billion, $280 billion. Today, that 
capital is over $500 billion. It is hard to pinpoint an exact 
number because a lot of insurance companies also sell 
reinsurance.
    The capital, in particular, has grown between 1 and 5 
percent every year consistently since--actually, since the 
financial crisis. More money has come in because it is such a--
the yield environment in other areas is so low.
    So companies are looking for higher returns and the 
reinsurance industry has naturally benefited from that to the 
point where I would say when I recall Hurricane Hugo in my own 
State of South Carolina, which was a disaster, and Hurricane 
Andrew, as I recall, created severe disruptions in the market.
    Now I look at it and I say, look, here we have had 
Hurricane Sandy, slightly less than $20 billion, and it has 
barely caused a blip. If anything, reinsurance rates have gone 
down.
    I look at wildfires in California and Nevada and Utah, all 
through the entire West, storms in the Northeast, hurricanes. 
The industry, as a natural course, almost ritualistically every 
year pays out $15 billion, $20 billion to $25 billion in 
catastrophe.
    So my approach to this entire issue was can the private 
market, in effect, take over at a much higher stage than that 
$100 million? And while I am in favor of renewing TRIA for an 
extended period of time--5 years, 10 years, whatever it may 
be--I also think that I would suggest that we can take steps to 
make it more private-market friendly.
    First of all, my suggestion would be that you take a very 
close look at that $100 million trigger, that it could--when 
you look at, again, what the industry has been able to cover in 
the billions--$20 billion, $15 billion, $25 billion--that 
trigger can be set much higher than what it currently is.
    I would caution that we are not quite sure here whether the 
money that has come into this industry is really what I would 
call hot money--quick in, quick out. I would caution that there 
are still some modeling problems with this. I would caution 
that the data isn't the best in the world.
    So I would suggest that if you were to take that kind of 
approach, it can be staggered. All of this is severable. You 
can do it in pieces and parts. But take a close look at that 
trigger.
    The second thing I would suggest is there is room for 
increasing both the horizontal kind of deductible as well as 
that vertical kind of cost-sharing arrangement. Increase it by 
10, 15 percent or so to leave the industry with more skin in 
the game. And also, it would reflect the fact that there is 
much more capacity in the industry.
    And then third, I would suggest you take a close look at 
charging for this. You charge for flood insurance, albeit the 
charges that you have are inadequate. Nonetheless, people pay 
for flood insurance.
    As far as the insurance-linked securities market is 
concerned, I would suggest you take a very close look at the 
accounting environment and at the tax environment.
    I would love to bring this industry back onshore. It is 
down 90 percent in the Cayman Islands in terms of these special 
purpose vehicles. Bring it back onshore, allow some tax flow so 
that there is no double taxation, perhaps look at how it is 
reserved, and certainly look at the accounting issue where 
there is an enormous difference between how these insurance-
linked securities are treated for creditor insurance versus 
true insurance.
    Again, I thank you for the opportunity and, of course, I am 
open to questions whenever this committee is ready. Thank you 
very much.
    [The prepared statement of Mr. Csiszar can be found on page 
44 of the appendix.]
    Chairman Neugebauer. Thank you.
    Dr. Seo?

 STATEMENT OF JOHN S. SEO, CO-FOUNDER AND MANAGING PRINCIPAL, 
                 FERMAT CAPITAL MANAGEMENT, LLC

    Mr. Seo. Thank you, Mr. Chairman. Good morning.
    My name is John Seo. I am a co-founder and managing 
principal, along with my brother, Nelson Seo, of Fermat Capital 
Management, which is believed to be the largest investment 
manager of catastrophe bonds, or so-called cat bonds, 
worldwide.
    Hurricane Andrew in 1992 and the Northridge Earthquake in 
1994 caused many insurers to realize that they were sitting on 
top of a risk of ruin they didn't realize they had before. It 
was judged that the capital market, with its much bigger 
capital base, could safely remove this risk of ruin from 
insurers and so the cat bond market was invented in the mid to 
late 1990s.
    To investors, cat bonds operate just like corporate bonds, 
depending on your point of view. Corporate bonds are 
effectively cat bonds that happen to cover credit risk and cat 
bonds are just corporate bonds that cover insurance risk.
    Over the years, the reinsurance equivalent of cat bonds, 
collateralized reinsurance, as paralleled the development of 
the cat bond market virtually dollar for dollar. Together, cat 
bonds and collateralized reinsurance are called insurance-
linked securities or just ILS. Today, I will speak to the ILS 
market as it relates to terrorism insurance.
    The ILS market currently stands at $45 billion. Risk 
coverage has gone beyond hurricane and earthquake to include 
such things as tornado, hail, wildfire, disease, flood, and of 
course, terrorism.
    The ILS investor base is distinctly global in nature and 
enjoys significant participation from all investor categories.
    Innovation remains a hallmark of ILS markets. For example, 
a flood bond covering the New York Metropolitan Transportation 
Authority was issued this year in July.
    It is generally accepted that we are at the beginning of a 
burgeoning market for flood bonds. Only a few years ago, most 
market observers would have considered such a thing as nearly 
impossible.
    Regarding terrorism specifically, the cat bond side of the 
ILS market covers only $1.4 billion in terrorism risk. If we 
extrapolate that to the other half of the ILS market we can 
reasonably estimate that capital markets cover roughly $3 
billion of terrorism risk today in total.
    At current rates of growth, the ILS market is expected to 
be in the range of $150 billion to $200 billion by 2020. By 
mere extrapolation from our current condition, this would put 
ILS terrorism capacity at $9 billion to $12 billion by the end 
of this decade.
    Now, I know some market observers have questioned whether 
or not capital markets are fundamentally cut out for terrorism 
risk. In particular, a common misunderstanding is that 
investors strictly avoid ILS investments that cover events 
which may also cause temporary drops in the stock market.
    I say plainly, this is not true. If it were, we would have 
no earthquake bonds.
    I explain all of this in excruciating detail in my written 
testimony so let me summarize my view on this matter as 
follows: ILS investors care mainly about fair compensation for 
the risk and everything else is secondary to that.
    I now end my testimony by briefly touching on two ways to 
increase capital markets efficiency for terrorism risk. Cat 
bond coverage for terrorism risk is typically bundled with life 
and health risks. Of course, that is not surprising, but 
additional bundling could increase efficiency of coverage, for 
example, bundling terrorism, life, and earthquake risk in one 
transaction.
    The main intuition here is simple: Risk bundling reduces 
frictional cost.
    Finally, coverage for terrorism risk in the cat bond market 
currently includes NBCR. There is no doubt in my mind that NBCR 
coverage is holding back market capacity.
    If NBCR were more commonly excluded from coverage, capital 
markets' capacity for terrorism risk would increase 
significantly from current levels.
    Thank for this opportunity to testify before the 
Subcommittee on Housing and Insurance today. I look forward to 
answering any questions you may have.
    [The prepared statement of Dr. Seo can be found on page 100 
of the appendix.]
    Chairman Neugebauer. Dr. Hartwig, you are recognized for 5 
minutes.

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

    Mr. Hartwig. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. My name is Robert 
Hartwig and I am president and economist for the Insurance 
Information Institute, an international property-casualty 
insurance trade association.
    I appreciate the opportunity to have been asked by the 
committee to provide testimony on TRIA and the market for 
terrorism insurance in the United States.
    The terrorist attacks of September 11, 2001, produced 
insured losses larger than any natural or manmade event in 
history. Claims paid by insurers to their policyholders 
eventually totaled $42 billion in today's terms.
    Exclusions proliferated, prices soared, and very little 
private sector capacity for terrorism entered the market as the 
general consensus emerged that terrorism risk is fundamentally 
not insurable.
    Only when TRIA was enacted by Congress in late 2002 did 
stability finally return to the market and coverage for 
terrorist attacks resume.
    Eleven years later, the war on terror is far from over, as 
April's Boston Marathon bombings attest. But TRIA by all 
objective measures is now an unqualified success.
    The program not only succeeded in restoring stability to 
the country's vital insurance and reinsurance markets, but it 
has done so at effectively no cost to taxpayers.
    Indeed, TRIA as currently structured provides at least 
eight levels of protection to taxpayers while fostering 
competition among insurers of all sizes. And I document those 
in my written testimony.
    The unambiguous success of TRIA demonstrates that the Act 
has become an indispensable component of the country's national 
security infrastructure. Under TRIA, private insurance, not 
government aid, is the principal funding and delivering 
mechanism that will drive rebuilding efforts and economic 
recovery after any future attack.
    One hundred percent of the losses up to $100 billion will 
be financed directly by private insurers or can be recouped in 
full through assessments on the private sector. In the event 
TRIA is allowed to expire or its structure significantly 
altered, the preponderance of the burden for funding post-
attack recovery efforts could well shift to the Federal 
taxpayer.
    While there is no question that private insurers and 
reinsurers would continue to offer limited amounts of terrorism 
coverage, there is also no question that in the absence of 
TRIA, private insurance and reinsurance market capacity, for 
several reasons, will be diminished relative to what is 
currently available and purchased today.
    Primary insurers, for example, may be forced to scale back 
their sale of terrorism insurance due to rating agency and 
regulatory pressure. Already, the leading insurance rating 
agency, A.M. Best Company, has subjected insurers to stress 
tests involving simulated terrorist attack scenarios.
    Those insurers that failed the stress test are required to 
present an action plan detailing the steps that they will take 
to ``reduce concentration of exposure to terrorism risk, should 
TRIA protection change materially.''
    In the event the insurer's action plan is deemed to be 
insufficient, ``the rating unit will face negative rating 
pressure.''
    A.M. Best concerns run deeper still, adding that while 
private reinsurance is currently available in the market, 
future availability and affordability of this coverage is 
``uncertain in the event TRIA is not renewed or if the program 
changes significantly.''
    The same stress test analysis shows that smaller insurers 
would be disproportionately impacted by major changes in TRIA. 
Preserving a TRIA structure that encourages market 
participation among insurers of all sizes is critical.
    More than 90 percent of small- and medium-sized insurers 
write TRIA coverage today. An Insurance Information Institute 
analysis of market shares indicates that insurers with less 
than $1 billion in surplus provided nearly a quarter of the 
U.S. TRIA capacity in 2012.
    One corollary to this finding is that many insurers, 
particularly small- and medium-sized insurers, are already at 
or near their maximum exposure to terrorism risk. This means 
that changes to the program that would increase their exposure 
would not motivate them to write more coverage.
    Indeed, the opposite is likely to happen. The bottom line 
is that any dramatic changes to the program are likely to be 
highly disruptive to a large share of the market, potentially 
reducing competition.
    Expiration of TRIA or a major restructuring of its key 
provision threatens to turn the market, in effect, into Swiss 
cheese. By that, I mean a market that on its surface may give 
the appearance of being solid but which, in reality, is riddled 
with holes.
    These holes are coverage gaps and shortfalls that could 
leave millions of American businesses and workers as well as 
taxpayers needlessly vulnerable. These holes and gaps will 
impact every industry in every region of the country, and the 
Federal Government will be called upon to fill these gaps in 
the event of future attacks.
    In conclusion, a purely objective assessment of TRIA in its 
current form is very encouraging from a cost-benefit 
perspective. TRIA has brought much needed stability and 
capacity to the market, benefiting the entire U.S. economy, and 
it has done so within a fiscally responsible framework.
    The program has no major structural defects. Moreover, 
there is no evidence that the existence of TRIA crowds out 
capacity or stifles innovation in traditional or ILS markets. 
In the 11 years since TRIA was enacted, private sector capacity 
has gradually expanded in the market not in spite of TRIA but 
because of it.
    Thank you for the opportunity to testify before the 
committee today. I would be happy to respond to your questions.
    [The statement of Dr. Hartwig can be found on page 66 of 
the appendix.]
    Chairman Neugebauer. I thank the gentleman, and I thank the 
panel.
    And we will now go to a question-and-answer period. Each 
Member will be recognized for 5 minutes.
    And I will recognize myself for 5 minutes.
    Mr. Driscoll, since 9/11 the global insurance and 
reinsurance industry has shown remarkable resilience. They have 
taken, I think--for example, in 5 of the last 11 years since 9/
11, insurers and reinsurers have absorbed catastrophic losses 
greater than $47 billion.
    Despite these losses, the industry capital has hit near-
record highs and the reinsurance capital particularly is over 
$500 billion. With these strong capital positions in both the 
insurance industry and the reinsurance, coupled with the 
modeling efforts that have moved forward on terrorism 
insurance, it appears to me that the industry is ripe to have 
more private sector participation. Would you agree with that?
    Mr. Driscoll. Absolutely. We have grown the capital base of 
our industry over 300 percent since 2001. We responded to 
Hurricanes Katrina, Rita, and Wilma in 2005, the four storms 
that impacted Florida in 2004 to the financial crisis in 2008, 
and to over $100 billion in natural cat losses in 2011 on a 
global basis. And our industry collective balance sheet has 
never been stronger.
    Further to that, I think the willingness and ability to 
both price and manage conventional terrorism risk is at an all-
time high. So, I absolutely agree with your comments.
    Chairman Neugebauer. Thank you.
    Mr. Csiszar, insured losses from the 9/11 attacks in 
today's dollars I think is estimated to be over $40 billion. 
The industry was able to absorb that, with some difficulty.
    So 12 years removed from that, we have not seen any 
attacks. But there have been major efforts in modeling 
terrorism.
    You mentioned in your testimony that the current $100 
million trigger is probably too low, and that there is capacity 
in the industry to take on more of that risk. And so would the 
fact that the industry has, over the last few years, absorbed 
fairly major events in the $25 billion, $30 billion, $40 
billion range, what would be your suggestion as an appropriate 
trigger if we were to change that?
    Mr. Csiszar. I look at two things, Mr. Chairman. First of 
all, if you were to withdraw the entire backstop you are 
looking at creating a crater of 20 percent, basically. That is 
huge. They can't handle that.
    So what could we put in place to make it palatable? One 
thing I looked at, for instance, was we have these ILS, they 
are called, industry loss warranties. And these are in the 
private markets.
    What is the trigger in the private market? In the private 
market, ironically, the most typical trigger for an ILW, 
industry loss warranty, is $20 billion. Now, you can purchase 
$10 billion or $15 billion, but it is a lot more expensive to 
purchase that.
    So my thought, in looking at what the industry loses on an 
annual basis, as I said earlier, almost ritualistically paid 
out in catastrophes, is somewhere between $15 billion and $25 
billion. Then, you have this industry loss warranty trigger at 
$20 billion. Somewhere in that range is what I would suggest.
    Chairman Neugebauer. Thank you.
    Mr. McGovern, recently some insurers have expressed their 
willingness to underwrite terrorism risk for commercial 
property even if the current program were to expire. For 
example, John Doyle, AIG CEO of Global Commercial Insurance, 
said he could see a market emerging fairly quickly for property 
risk absent a backstop.
    The CEO global corporate at Zurich also said his company 
would continue to offer property coverage to his clients 
without a backstop. Mr. Greenberg, CEO of CBR, has also made 
similar comments.
    Since Lloyd's is one of the industry's leaders in providing 
standalone terrorism insurance, at a minimum do you feel that 
the current program is too generous for property coverage?
    Mr. McGovern. Lloyd's is a major leader in the standalone 
market but I think we need to keep the level of capacity in 
perspective. We calculate that our standalone terrorism market 
in premium terms at Lloyd's for U.S. risks amounts to $460 
million of premium for U.S. standalone terrorism.
    Put that in the context of our overall premium income from 
the United States at $12 billion. I think that tells you 
something about the capacity of the market to allocate capacity 
to major U.S. terrorism risks.
    I think the other point that--and it is clear that capacity 
is growing. I think what we worry about is the aggregation of 
risk in key urban centers where asset values mean the ability 
of the industry to absorb major exposures is always going to be 
somewhat limited.
    Chairman Neugebauer. My time has expired.
    And now the gentlewoman from California, the ranking member 
of the full Financial Services Committee, Ms. Waters, is 
recognized for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Neugebauer.
    And I would like to thank all of our panelists who are here 
today.
    Of course, we all think about TRIA in relationship to 9/11. 
And as it was said by perhaps more than one of the panelists 
today, there is nothing to compare with what took place on 9/
11--the destruction, the loss of life and property, et cetera.
    And so I am somewhat baffled by any resistance to making 
sure that we have the kind of coverage that TRIA would provide 
in the event of another terrorist attack. Those of us who--I 
guess all of us are concerned about terrorism. All of us are 
concerned about the ability for our country to not only 
prohibit these kinds of acts but about restoration in the event 
of such catastrophe.
    Now, we have a lot of information. I am told that 
reinsurance is a vital component of terrorism insurance 
coverage; in the aftermath of September 11th, the reinsurance 
industry 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 insurance capacity?
    And I guess I would like to start with Mr. Sean McGovern, 
the director of risk management and general counsel at Lloyd's 
of London. Would you respond to that?
    Mr. McGovern. Thank you for the question. It is clear that 
the reinsurance market overall has grown, the global market has 
grown, the North American reinsurance market has grown. And 
indeed, the reinsurance market for terrorism risk has grown.
    And the estimates I have heard is that the terrorism 
reinsurance market in the United States is about $6 billion to 
$10 billion. Compare that to the industry retentions, which are 
currently estimated to be about $35 billion. There is clearly 
somewhat of a gap there.
    Now, it is clear that the reinsurance market could grow 
further. I think the challenge we all have is that clearly, 
thankfully, we have not had an event for many, many years. And 
that inevitably has an impact on availability and price.
    It is true to say that when events occur, people take 
different view of risk and people price risk differently. And 
that inevitably has an impact on capacity and price.
    Ms. Waters. So what you are telling me in essence is that 
if an event such as 9/11 occurred today, that the reinsurance 
market, even with its growth, would not be able to handle it. 
Is that correct?
    Mr. McGovern. No. That is not what I am saying. I am saying 
that actually the reinsurance industry could handle that 
because of TRIA. The TRIA program actually gives the insurance 
and the reinsurance industry the confidence to offer and make 
available coverage.
    Ms. Waters. Thank you very much.
    Mr. Hartwig, you gave very powerful testimony. And I 
learned something about the stress tests that you described.
    Could you tell us how those stress tests are being carried 
out? Who is being identified as the companies that have 
capacity, stress tests? And how is it going?
    Mr. Hartwig. Right. So it is the best known of the rating 
agencies, insurance rating agencies, A.M. Best, which has 
carried out these tests. They have looked at nearly 900 so-
called rating units, and they have looked at several hundred 
that have significant terrorism exposure.
    And the test that they basically run them through at this 
point is actually a very, very modest test, something like a 5- 
to 6-ton truck bomb, okay? That doesn't even come close to 
approaching a 9/11-type event.
    And so what they have found is that in the absence of TRIA 
or a major restructuring of TRIA that would require insurers to 
take on much more risk, they found that some insurers are, in 
effect, overexposed today under that scenario in the absence of 
TRIA or a TRIA that is significantly restructured.
    Obviously, the larger the event that you would have, you 
would expect to see more of this experience. So each and every 
one of these insurers are going to be required to put together 
a plan, and if that plan is inadequate they potentially face 
downgrade action.
    That raises their cost of capital, could cause the cost of 
their reinsurance to rise, and many customers may not do 
business with them, and those kinds of scenarios.
    So it is an environment in which it is possible where, 
under these stress tests, the available capacity winds up being 
reduced in the marketplace, reducing competition.
    The point I wanted to make there is that small insurers may 
be small, but small- and medium-sized insurers as a group 
provide a quarter of the TRIA capacity in the market today.
    Chairman Neugebauer. The time of the gentlelady has 
expired.
    Ms. Waters. Thank you very much.
    Chairman Neugebauer. The vice chairman of the subcommittee, 
Mr. Luetkemeyer, the gentleman from Missouri, is recognized for 
5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. McGovern, as someone who is from another country who 
insures risks around the world, you indicated that there are 
other countries that have terrorism insurance coverage for 
their properties in those countries and you participate in 
those.
    Can you explain or give us an idea of some of the backstops 
that other governments have? And are there any governments that 
do not provide this backstop, so that the businesses within 
those countries are totally insured by the private sector or 
take the risk themselves?
    Mr. McGovern. There are a variety of programs around the 
world. Some countries don't have programs. But in the major 
European economies like the U.K., France, and Germany, for 
example, there are programs that have existed for some 
considerable time.
    Perhaps focus on the U.K. The U.K. program is a pooling 
program with the industry, so there is an industry pool. The 
backstop that the government provides is unlimited for all 
types of terrorism cover. The industry pays a premium for that 
coverage.
    Pool Re, which is the company that operates the pool, is 
sitting on 5 billion pounds worth of assets. So it can be made 
to work, to have a mechanism whereby the industry pays for the 
government backstop. Arrangements in other countries are 
different.
    Mr. Luetkemeyer. Okay. You indicated that you apparently 
had insured or provided terrorism risk insurance here in this 
country before 9/11. Is that correct?
    Mr. McGovern. Terrorism insurance was generally just folded 
into all risk policies, so it wasn't--
    Mr. Luetkemeyer. Okay. My question is, if you were here 
before 9/11, how did you model it?
    Mr. McGovern. Interestingly, before 9/11 no one really 
modeled terrorism risk in the United States. We modeled 
terrorism risk in the U.K.
    Mr. Luetkemeyer. So it was just a throw-in coverage at that 
point.
    Mr. McGovern. It was not excluded from the policy.
    Mr. Luetkemeyer. Since then you do model, I take it?
    Mr. McGovern. We do model, and there have been developments 
in modeling terrorism risk. But those models are limited by the 
quality of real event information.
    Mr. Luetkemeyer. Okay. One of the things that has been 
discussed a couple different times already--and Mr. Hartwig 
brought it up--is the problem with if we change the structure 
of our system right now we may squeeze out some of the small or 
midsize guys.
    Mr. Driscoll's testimony indicates that there continues to 
be an influx of cash into this industry, into the reinsurance 
industry, so that there is capacity to take on more risk.
    Mr. Driscoll, how do you respond to Mr. Hartwig's comment 
about the risk to the small or midsize folks? Are they growing 
enough to accept some more additional risk themselves, to be a 
continued participant if we make changes? Or do you think that 
if we make some significant changes they may be out in the 
cold, they won't be able to participate in this?
    Mr. Driscoll. Yes. The smaller insurance companies are a 
critically vital, important component of the overall industry, 
but a very important part of our portfolio.
    And we are sensitive, I think, to the needs of smaller 
insurance companies. They tend to be much more reliant on 
purchasing reinsurance protection for really any perils, 
whether it be natural catastrophes or terrorism.
    So from our perspective as a reinsurance capacity provider, 
we are raising our hands saying we are willing to support the 
smaller segments of the insurance industry.
    The challenge that the smaller insurance companies have is 
the inability to effectively recoup terrorism rate. And this is 
really a function of the fact that TRIA is a subsidized 
program. It inhibits the natural process of charging an 
appropriate risk premium.
    At the State level, a lot of these companies are inhibited 
with how much terrorism premium they are able to recoup. So 
there is a natural mechanism by modifying TRIA and opening up 
the amount of risk that the private industry is willing to take 
that should feed through into the ability for insurance 
companies, particularly smaller ones, to charge more premium 
and thus be able to purchase more reinsurance. So there is 
really a natural environment that exists.
    Mr. Luetkemeyer. One last question before I run out of time 
here along the same line. It would seem to me that as you sort 
of transition away from the government backstop, larger--a much 
more large--a larger portion being taken over by the private 
sector, is there--do you think the reaction by the private 
sector would be to be able to cap themselves with their own 
risk?
    In other words, if you are a small company, you would only 
take a certain portion. You wouldn't have an unlimited backstop 
on the upper end. You would only take on so much risk and then 
you would partner with somebody else to be able to take on a 
large risk? Or is that a viable option?
    Mr. Driscoll. Yes. I think that it is a viable option. A 
central tenet of any well-run and well-managed insurance 
company is to balance the amount of risk you take against your 
capital base. So that process occurs every day.
    And there are financial mechanisms, particularly within the 
reinsurance industry, that will help facilitate the capital 
construct of smaller insurance companies, whether it be 
proportional or excess protections.
    Mr. Luetkemeyer. Thank you.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Missouri, Mr. Cleaver, is recognized for 
5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    I am going to be a little parochial in presenting my 
questions. I am from Missouri, and you have a problem if you 
live in Missouri because if you come to Kansas, people say they 
land--``I have just landed here in Kansas.''
    And of course if you land in Kansas, you die, because there 
is no airport. Some sports person just wrote a deal last week 
about the 9-0 Chiefs saying, ``We are going to play descendants 
of Dorothy.'' And of course, I don't think a woman in Missouri 
is named Dorothy.
    But one of the things that we have to deal with is we 
have--the Missouri River is the longest river in North America. 
It is the longest tributary in the United States.
    Well, 54 bridges, all of which are insured by TRIA, or that 
is a part of the insurance. Most people when they think about 
terrorism, they are thinking of New York, the East Coast, Los 
Angeles, or maybe Chicago.
    But we have serious targets, or what we think would be 
targets. So this is not, for me, just a committee exercise. It 
is very real. Our power and light company is insured through 
TRIA.
    I guess one of the questions I am interested in--maybe just 
hearing any of you--and I try to avoid volatile words, but how 
many of you believe that TRIA is corporate welfare? Is there 
anybody who believes that?
    Mr. Driscoll. I will answer that question. I wouldn't use 
the phrase ``corporate welfare,'' but there is an unnatural 
element to TRIA in the sense that it is free and you are trying 
to transfer risk for free. And so in that respect it creates 
unintended consequences that in some cases are beneficial, but 
more often than not are problematic.
    Mr. Cleaver. Anyone else?
    Mr. Hartwig?
    Mr. Hartwig. Again, as has been alluded to a number of 
times, I think, on this panel and on the committee, I think 
that we have to look at the unique nature of terrorism risk, 
that ultimately the bearer of that risk should be the entity 
that possesses the greatest information associated with that 
risk.
    And that is certainly not anybody at this table. In fact, 
that is the Federal Government.
    And so when you are in a position like that, I think we 
have to rethink the particular issue here, that it is 
absolutely appropriate, in a circumstance such as this, that 
some of the risk be shared in a public-private sector manner.
    Mr. Cleaver. Does TRIA replace what would be significant 
government exposure, Mr. Seo?
    Mr. Seo. I'm sorry. Would you repeat the question. Does it 
replace--
    Mr. Cleaver. Yes.
    Mr. Seo. --what would be--
    Mr. Cleaver. Significant exposure by the Federal 
Government.
    Mr. Seo. I see.
    Mr. Cleaver. By the taxpayers.
    Mr. Seo. Right. Potentially, it does. There is a delicate 
balance in the industry around a risk like this.
    So I think there is some credence to the notion that by 
taking on the risk in a controlled manner through TRIA, the 
government is potentially reducing its long-term liability.
    And actually to answer your question about the welfare, I 
think initially not, but of course, the question is when does 
it cross over and become that way? And that is an over-time 
issue, not necessarily by-design issue.
    Mr. Cleaver. Yes.
    Mr. Hartwig. Sir?
    Could I--just very quickly, it absolutely--TRIA does 
insulate the taxpayer, again, to the tune of many, many tens of 
billions of dollars. But you are also, in effect, you are 
buying the delivery mechanism.
    The reality is that the Federal Government has no effective 
means for delivering the benefits in the absence of a TRIA-like 
structure where it utilizes or piggybacks, in effect, on 
insurers.
    In the absence of a TRIA situation, you wind up with a 
post-Sandy, FEMA-type scenario where people are still waiting 
for their Federal Government aid.
    Mr. Cleaver. Yes.
    Mr. McGovern, what do you think would happen to the 
uninsured losses if there is a terrorist event? Who do you 
think will be approached to deal with uninsured losses?
    Mr. McGovern. The insurance industry will deal with the 
insured losses as it has always done--
    Mr. Cleaver. No, but the uninsured?
    Mr. McGovern. The uninsured losses?
    Mr. Cleaver. Yes.
    Mr. McGovern. That is a matter for Congress and the Federal 
Government.
    Mr. Cleaver. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Now, the gentleman from New Jersey, Mr. Garrett, is 
recognized for 5 minutes.
    Mr. Garrett. Again, thank you, Mr. Chairman, for holding 
this hearing. I just have a couple of questions.
    Mr. McGovern, I will start with you, I guess. The CEO of 
one of the world's larger terrorism insurers was recently asked 
about the modelability of conventional terrorism risk, and that 
CEO stated that the insurance industry ``doesn't service itself 
well by claiming that terrorism risk can't be modeled 
effectively,'' and ``The argument that the industry cannot 
underwrite conventional terrorism was a classic example of 
driving business out of the market and into the government 
solutions.''
    Would you like to comment? Do you disagree with the 
statement of I guess one of your competitors out there?
    Mr. McGovern. It is true to say that terrorism risk 
modeling does exist. But, as I said in my testimony, it is in 
its infancy. At the end of the day, models are just models. 
They should inform your decision; they shouldn't drive your 
decision.
    Models are at their most reliable when they have lots of 
real-life world events inputted, which is why catastrophe risk 
modeling is so much more advanced than terrorism risk modeling, 
because we have had a lot of natural catastrophe events, which 
makes models more reliable.
    Mr. Garrett. Okay.
    Mr. McGovern. Terrorism risk models are there, but I think 
people have a cautious approach to value of those risk models--
    Mr. Garrett. How long have you been doing it in Europe, 
modeling it?
    Mr. McGovern. I wouldn't want to put a year on it, but 
clearly--
    Mr. Garrett. Ballpark, like 5 years, 6 years?
    Mr. McGovern. Probably 20 years.
    Mr. Garrett. Yes, because it goes back quite a ways, I 
thought. Yes.
    Mr. McGovern. Yes.
    Mr. Garrett. How many years is an appropriate amount of 
time to say we actually have a model there?
    Mr. McGovern. Thankfully, the frequency of these events is 
very low--
    Mr. Garrett. Right.
    Mr. McGovern. And that has an impact on the validity of 
models.
    Mr. Garrett. Right.
    Dr. Hartwig, you said there are no major structural defects 
in the law right now. Let's look at Boston. Can you or anybody 
else tell me, was Boston a terrorist attack event? Has that 
decision been made yet?
    Mr. Hartwig. As defined under TRIA, there has been no 
certification associated with that. In my testimony, and I 
think in the testimony of others, I think that there has been a 
call for a clarification of the certification process.
    Mr. Garrett. That is a pretty big major structural--if we 
don't--after an event which, if you recall, was--
    Mr. Hartwig. I think it is generally agreed that there 
needs to be some tightening of that certification process, and 
I and others have called for that.
    Mr. Garrett. Okay.
    Mr. Driscoll, in order to not establish, but to grow the 
market into these areas, if we were to modify TRIA as it stands 
right now--raise the caps, do some other structural changes, 
what have you--is there an appropriate length of time that we 
should do so in legislation?
    In other words, you have two ends of any spectrum, right? 
One is to say, ``We are going to do this--the next TRIA bill is 
only going to be for 12 months, so the next one is going to be 
a permanent temporary program.''
    So what would the industry be looking at in order to be 
responsive?
    Mr. Driscoll. I can only speak for Validus Re rather than 
the industry, but--
    Mr. Garrett. Okay.
    Mr. Driscoll. --from our perspective, the changes to the 
program that we think would be most beneficial should be 
largely nuanced.
    One, there is a permanence that could be considered in 
context of nuclear, chemical, biological, and radiological. 
From our perspective, we feel strongly that those are 
uninsurable risks, not in the determination of frequency, but 
the severity and potential to bankrupt the industry. And so, a 
government backstop with respect to that element or that type 
of terrorism is vitally important.
    With respect to conventional, the industry capital base is 
growing. It continues to grow. We are highly confident in its 
permanence and reliability.
    We would expect that any changes to avoid dislocation in 
the market, whether it to be to workers' comp insurers or 
smaller insurers or the largest insurers, should be done 
gradually over time.
    And so whether that is 2 years or 5 years, there ought to 
be a glide path that would help the industry capital flow in, 
and respond to the additional demand.
    Mr. Garrett. Okay.
    And I guess I will just make a comment on a question--that 
is to a question on the other side. At the end of the day, 
anything that we do here is not eliminating the risk. Is that 
correct?
    Mr. Driscoll. Absolutely.
    Mr. Garrett. And so all we are really doing is deciding who 
pays, whether it is the person who--the individual, the entity 
who has the beneficial use of the asset--
    Mr. Driscoll. Yes.
    Mr. Garrett. --whether that person pays for the fact or the 
privilege or the right of having that asset, or whether it is 
the American taxpayer who is actually footing the bill.
    That is ultimately what we are deciding. Who pays? The 
person who benefits or the taxpayer?
    Mr. Driscoll. Absolutely. The strength of our industry is 
the capital construct that helps facilitate fund inflows after 
disruptive events to help rebuild our infrastructure and get 
our citizens back on their feet.
    Mr. Garrett. Thanks a lot. I appreciate it.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Arizona, Ms. Sinema, is recognized for 
5 minutes.
    Ms. Sinema. Thank you, Mr. Chairman.
    My question is directed to any of the gentlemen who are on 
the panel. And thank you all so much for being here today.
    My district in Arizona is home to the largest public 
university in the country, Arizona State University. There is 
significant concern at home that with a possible elimination of 
TRIA coverage or without the opportunity to get TRIA coverage 
that ASU may not be able to afford terrorism coverage on its 
own.
    I am wondering if any of you could expand on the impact 
that the expiration or adjustment of TRIA would have on our 
Nation's public universities such as mine.
    Mr. McGovern. I can't comment specifically on universities, 
but I think if we felt--if Lloyd's felt that TRIA was crowding 
out the private market, our testimony would be different today.
    Second, and as I have said before and as other panelists 
have said, capacity is in the market because TRIA exists. 
Without TRIA, I think there would be uncertainty for 
policyholders around the country as to whether or not they 
would be able to get adequate coverage for terrorism risk.
    Mr. Hartwig. And if I could add on specifically to your 
question about universities, when you think about the diversity 
of the exposures of property, liability, workers' compensation, 
exposures that exist on a campus like ASU, you are talking 
about scientific facilities, you are talking about sports 
stadiums, you are talking about dormitories with thousands of 
students, classrooms with thousands of students. You are 
talking about many other types of--you are talking about 
infrastructure associated with the university.
    You are talking about a type of risk that can only be 
insured today really because of the existence of TRIA, just to 
echo what Mr. McGovern said. It is a very diverse risk and I 
think one that is particularly dependent on TRIA.
    Ms. Sinema. Thank you, Mr. Chairman.
    And, Dr. Hartwig, a follow-up question: I remember in the 
immediate aftermath of September 11th, the commercial property 
and casualty insurance market for terrorism coverage basically 
evaporated. And then again in 2005 and 2007, when expiration of 
the program was looming in Congress, a majority of insurance 
companies in our country moved to file conditional exclusions, 
indicating that they wouldn't be interested in offering 
terrorism coverage absent TRIA.
    Has anything changed in the market since 2007 that would 
give this panel or this body cause for optimism that the 
private market is willing to accept significantly more 
terrorism risk than we have seen in the past?
    Mr. Hartwig. Incrementally, over the last 6 or 7 years, we 
have seen some capacity come into the market, and, as I said, 
incrementally. And as I said in my testimony, the reason that 
capacity came in is not in spite of TRIA; it is because of it.
    It is also because of the fact that we have not had a major 
successful terrorist attack on U.S. soil. Again, if we had had 
one--and there have been dozens of attempts on U.S. soil, 
thankfully, all but one of which has been thwarted--I think we 
would be having a very different conversation here today.
    So at the end of the day, it is likely that these 
conditional exclusions are going to come back into the market 
as we move into 2014 and markets begin to look ahead to the 01/
01/2015 period, a period in which TRIA might not be in place 
without a reauthorization.
    Ms. Sinema. Thank you.
    And Mr. Chairman and panel, one final question.
    Dr. Hartwig, you briefly mentioned the issue of workers' 
compensation insurance. Businesses in Arizona are required to 
purchase workers' compensation insurance. They don't have the 
option to exclude coverage for acts of terrorism in the context 
of workers' comp. So for those that provide workers' comp 
coverage, it is mandatory to include this terrorism coverage.
    What would be the impact of this body not reauthorizing 
TRIA or significantly changing the structure of TRIA to 
individuals who are purchasing workers' compensation for their 
employees?
    Mr. Hartwig. Basically, every employer in America has to 
buy workers' compensation coverage. It is required by law in 
all 50 States, not just in Arizona. And it is also the case 
that under law, insurers cannot exclude terrorism coverage 
under a workers' compensation policy.
    So I think we have heard several times on the panel already 
that is a particular area of concern that really if there is a 
bottleneck in terms of capacity, it exists in a number of 
places, but it is particularly explicit or particularly strong 
in the area of workers' compensation.
    Ms. Sinema. Thank you, Mr. Chairman.
    And thank you, Dr. Hartwig.
    Mr. Chairman, this is a growing concern for employers in my 
district so thank you for allowing me the opportunity to speak.
    Mr. Driscoll. Mr. Chairman, may I have a moment just to 
respond to one of the earlier questions, with respect to post-
event and the industry response?
    I think it is important to understand that the perception 
around transnational terrorism risk prior to 2011 within the 
insurance industry was that it was not a major risk. And so I 
think it is reasonable post-event for there to be a natural 
reassessment of risk. We see that with any unique event that 
occurs in our industry.
    Since that time, the market has responded with significant 
additional capacity and additional capital for terrorism risk.
    Ms. Sinema. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Ross, is recognized 
for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    As I mentioned in my opening statement, I very much believe 
in market-based solutions for risk problems, and I see TRIA as 
being a necessary evil at the time that we created it. Based on 
the testimony today, I understand the significance of 
maintaining TRIA in place, but I also understand that it is 
very important that we have to make a transition.
    And hearing from the panel today that we have a significant 
amount of private capital and capacity in the private markets 
out there is very encouraging. Now, how do we make that 
transition to provide more incentives and less impediments, is 
an issue that we have to face.
    Dr. Seo, one of the things that has intrigued me ever since 
I read your article several years ago about the Nation's casino 
has been the use of ILSs. These cat bonds--we have used them in 
Florida for our Florida Hurricane Catastrophe Fund--seem to be 
an opportunity for diversification and growth, in terms of 
market share, that may offer us an opportunity to make 
available more capacity in the private sector.
    You mention in your testimony that if terrorism risk were 
bundled with natural catastrophe risk, such as hurricane and 
earthquake, the efficiency of ILS coverage for terrorism risk 
could potentially be improved. Would you elaborate how this 
would benefit all types of coverage, not only terrorism, but 
maybe also natural catastrophe coverage?
    Mr. Seo. In this case, actually, the benefit was to the 
terrorism risk.
    Mr. Ross. Right.
    Mr. Seo. And I would say that the impact on the natural 
catastrophe coverage is relatively neutral.
    Mr. Ross. But it wouldn't--would you consider there would 
be an increase or a decrease, or would it just remain stable?
    Mr. Seo. Overall efficiency in the system would be 
increased for sure--
    Mr. Ross. Good.
    Mr. Seo. --by doing this type of bundling arrangement. See, 
that is the difficulty when you isolate risk too much on a 
standalone basis--any risk--it becomes very expensive to cover.
    Mr. Ross. So you combine the risks?
    Mr. Seo. Correct.
    Mr. Ross. Let me ask you this question: Could we--and I 
hate to digress on this, but I have to ask this question 
because the NFIP is an issue that we have to face, but could 
the use of these insurance-linked securities assist us in 
diluting and reducing the amount of premiums in the flood 
insurance program?
    Mr. Seo. Yes, absolutely.
    Mr. Ross. Good.
    Mr. Driscoll, one of the things that I am concerned about 
is not only incentives, but impediments to private capital. And 
I am sure you are familiar with the Obama-Neal reinsurance tax 
that is out there, which concerns me greatly.
    Do you feel that this tax would limit the capacity or the 
capability of insurers and reinsurers to take on more risk from 
terrorism or flooding and thus be counterproductive to our 
long-term plan to try to bring back or at least create a 
private market and reduce the size of government involvement?
    Mr. Driscoll. Yes. Whether it is flooding, terrorism, or 
any other natural peril, reinsurers need to be able to pool 
risk to gain diversification. And any limits on affiliated 
reinsurance would impede global risk-pooling--
    Mr. Ross. Significantly.
    Mr. Driscoll. --and that, in essence, fragments group 
capital and would impede market development, and I think 
ultimately it increases consumer price.
    Mr. Ross. Dr. Hartwig, it has been talked about, in fact by 
Mr. Csiszar, with regard to workers' compensation insurance. 
Look, it is as strict liability statute. It requires that every 
employer provide it. We understand that it is backed 
predominantly by reinsurance and reinsurance instruments.
    And I think that the impact financially doesn't come 
initially from the occurrence of an event as to the 
availability and affordability of workers' comp insurance. It 
has to do with whether there is a market that allows for 
affordable and available workers' compensation insurance.
    So I guess my question is--and I will go to you, Dr. 
Hartwig--TRIA expires December in 2014. If it expires, what 
impact would there be on the workers' compensation market for 
availability and affordability of insurance?
    Mr. Hartwig. For workers' compensation, I think there would 
be a pretty swift and a pretty significant impact. It would 
begin well before the end of next year, as again, we are 
looking forward into 2015. But some carriers might even 
position themselves ahead of time.
    Under the expectation of a lack of TRIA protection 
beginning in 2015 you would expect insurers, because of this 
aggregation issue that they have with respect to workers' comp 
risk, property risk, liability risk, and everything that they 
are exposed to, they would need to pare that back in some way.
    They are also very concerned about workers' comp because 
the potential liability under a workers' comp claim is 
effectively unlimited. A building has a certain value; for a 
human life, someone who may be a quadriplegic, it is unbounded.
    Mr. Ross. Quickly, Mr. Driscoll, I have 10 seconds--you 
talked about risk mitigation. I think risk management is 
absolutely important. What do you consider to be risk 
mitigation in terrorism insurance?
    Mr. Driscoll. I think, very quickly in context of property, 
because it is a huge topic--
    Mr. Ross. Structural.
    Mr. Driscoll. Structurally, I think there are boundaries 
that could be put in place. There are security measures that 
are put in place. There are a variety of factors.
    All of these things are methods to not only improve the 
risk but to actually reduce the premium associated with the 
terrorism surcharge.
    Mr. Ross. Thank you.
    My time has expired. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5 
minutes.
    Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking 
Member Capuano.
    And again, to all of our panelists, let me just repeat what 
I said in my opening remarks, and thank you for being here and 
for your testimony.
    As you can probably imagine, it is just amazing for me to 
be a freshman serving here in Congress and to be able to go 
back and say to my constituents that I have had the opportunity 
to address such scholarly individuals as you.
    It is also equally amazing to be sitting here and talking 
about all of the issues with TRIA that we are talking about 
today in this wonderful America that we live in. It is very 
difficult for me to even believe that I would be sitting in a 
hearing where people would be against TRIA, against anything 
that would be protecting us and insuring us from terrorism.
    I want to start by also thanking you, because I used to 
represent one of the largest single campus universities in the 
United States and worked there as a senior vice president. So 
when you think about not only universities but K-12 
institutions, I want my constituents to see that we are putting 
a face on what we are doing. And I appreciated your answers and 
responses to that as well as to the workers' compensation 
question that my colleague asked of you.
    Let me switch and ask you, as we think about policy price 
sensitivities and government support, has anyone examined the 
price sensitivities of changes in the trigger value, deductible 
amount, or co-sharing percentages?
    And I can start with you, Mr. McGovern.
    Mr. McGovern. We haven't done any of that analysis. And 
that clearly is the balancing act that Congress is going to 
need to grapple with as it looks at whether it wants to make 
changes to the TRIA program.
    On the one hand, how do you make changes to the program to 
introduce more private capacity into the market without, on the 
other hand, reducing take-up rates in the market or increasing 
price? Take-up rates generally seem to be around 60 percent 
nationwide. That is regarded as a success.
    If you are changing the program in the name of increasing 
taxpayer protection, if those changes result in higher prices 
and lower take-up rates, I would just ask you whether you have 
achieved what you set out to achieve in making those changes.
    Mrs. Beatty. Any other comments on that?
    Mr. Csiszar. If I could add to that, again, if I look at 
all the natural catastrophes, and if I look at an event like 
Hurricane Sandy, in the aftermath of every event, reinsurance 
prices actually drop, because new capacity comes into the 
industry in the expectation of making a greater profit. And the 
next thing you know, they are all going after market share and 
the profitability that they expected evaporates rather quickly 
and prices drop.
    Mrs. Beatty. Let me also ask you, what sort of contingency 
planning has any of your industries undertaken to ensure 
continuity of coverages for businesses that have secured 
terrorism risk coverage in the event that there, God forbid, 
would be a terrorist attack which results in damages that are 
in excess of the $100 billion cap?
    Mr. McGovern. As I mentioned in my testimony, I think 
Lloyd's has a reputation for continuing to provide coverage 
when other people don't. And certainly that was the case after 
9/11, as was noted by Congresswoman Maloney.
    Lloyd's takes its commitments to its policyholders 
extremely seriously, and whether it is after a natural 
catastrophe event or after a terrorism event, we will continue 
to provide as much capacity as we are able to. But as I said in 
my testimony, we always have to be very mindful of how we are 
managing our aggregate exposures.
    Mrs. Beatty. And lastly, as we approach the 2014 date, as 
we look at reauthorization, we have proposals before us with a 
5-year reauthorization and a 10-year reauthorization. Do you 
have any opinions on that, assuming you would be favorable to a 
5- or 10-year reauthorization?
    Mr. McGovern. Lloyd's is in favor of a long-term extension 
to TRIA. Whether or not Congress wishes to make any changes to 
the TRIA program, our belief is that those should be made in 
the context of maintaining the stability that the TRIA program 
has already provided, so basically keeping the structure of 
TRIA as is.
    If there are going to be changes, bearing in mind the 
balancing act that I mentioned earlier, those should be small, 
incremental changes over a long period of time, which would 
allow the industry to adapt.
    Mr. Hartwig. And if I could echo that, again, I think what 
makes the most sense from an economic stability standpoint, 
from a stability standpoint within the insurance business in 
general, is a long-term extension. And I should add that when 
we look abroad at many of the terrorism insurance programs that 
are abroad, these are long-term permanent programs in effect. 
They are permanent.
    Mrs. Beatty. Thank you. That sounds like a 10-year 
extension to me.
    Chairman Neugebauer. I thank the gentlewoman.
    And now the gentleman from Wisconsin, Mr. Duffy, is 
recognized for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    I appreciate the panel appearing today. I just want to be 
clear on a couple of facts. In the private market policyholders 
actually pay a premium for the coverage that they receive. Is 
that correct? Does anybody disagree with that?
    And the way that the current TRIA legislation works is that 
the taxpayer does not collect a premium for the coverage that 
they provide. Is that also correct? Do we all agree with that?
    Does that provide a competitive advantage when you look at 
the private market getting involved in terrorism insurance, Mr. 
Csiszar?
    Mr. Csiszar. Clearly, it is a subsidy.
    Mr. Duffy. Thank you. I would agree.
    Mr. Csiszar. And to the extent that it is a subsidy, I 
think my friend, Mr. Driscoll, put it well before. The price 
signals disappear. This is is not a natural market, whereas if 
you were to charge a price--and I would suggest we don't make 
the same mistake as we did with the flood insurance, which we 
underpriced, which made things worse, actually, in a way--but 
there is certainly that if you can have an actuarially sound 
premium and that would send the appropriate price signals to 
the market, not just in terms of capacity but also mitigation 
efforts.
    Mr. Duffy. Does anybody disagree with that on the panel?
    Mr. Driscoll. I am a little dubious about the ability of 
the Federal Government to set a well-established and sound 
actuarial price, and I say that with the utmost passion--utmost 
respect. I think the private market can effectively do that, 
but I am concerned about--
    Mr. Duffy. But if people--
    Mr. Driscoll. I am concerned that if you establish a 
premium rate within TRIA, it truly does become a permanent 
vehicle.
    Mr. Duffy. And I share that concern as well, but to think 
that we provide reinsurance and don't collect a premium, 
though, I don't--I share your concern, too, about the 
government being able to price that.
    Mr. Driscoll. There is a post-event recoupment mechanism, 
so there should be, it is never net neutral, but it is designed 
to be net neutral in terms of the impact on the taxpayer. But 
it is--again, it is--there are challenges there.
    Mr. Duffy. I agree. My concern is that no market works like 
that, though, that we are going to try to recoup the cost at 
some later point from people who may be in the space or not be 
in the space. It doesn't make a lot of sense for me when I try 
to protect the taxpayer, but I do get the recoupment.
    Mr. McGovern, would you like to respond?
    Mr. McGovern. I was just going to add that our experience 
in the U.K. with Pool Re, where the industry does pay for the 
government backstop, that is not an actuarial-based pricing; it 
is a pricing based off your relevant premium. So it is not 
actuarially sound as a pricing mechanism. It effectively 
amounts to a tax, and clearly what you have is then you create 
an infrastructure and bureaucracy around the management of the 
collection and distribution of those funds.
    Mr. Duffy. But it is actually--it is not a tax because they 
are providing a product, right? You are actually getting a 
product, which is reinsurance for terrorism. So the tax 
argument doesn't really work, does it?
    Mr. McGovern. It creates a fund. That is the first fund 
available for losses outside of people's limits.
    Mr. Duffy. But one would argue that you tax to then 
redistribute. You are actually paying a fee for a service, 
which is reinsurance, correct?
    Mr. McGovern. Yes, that is right.
    Mr. Duffy. And so I want to make sure that--I don't think 
the argument that this is a tax holds water.
    Mr. Csiszar as well, is it your testimony that you believe 
that the $100 million trigger is too low and it could actually 
go up to $20 billion? Is that your testimony?
    Mr. Csiszar. Yes.
    Mr. Duffy. Okay. Does anyone disagree that the $100 million 
trigger is too low, or does everyone--does the panel think--Mr. 
Hartwig, do you think the $100 million trigger is about right?
    Mr. Hartwig. I think the programs work very well with the 
current $100 million trigger, and when we look at the fact that 
the industry overall is retaining somewhere in the $35 billion 
range in aggregate, we can see that, in fact, within that 
space, there has been plenty of participation by private 
insurers, by private reinsurers, and there is the ability to 
expand.
    As we have already heard, there is only maybe $7 billion, 
$8 billion, $9 billion dollars of private reinsurance cover for 
the terrorism market in place today. So there is plenty of gap, 
there is plenty of room in here to expand.
    Mr. Driscoll. Just to clarify, on that $7 billion, $8 
billion dollars, that is standalone terrorism treaty 
reinsurance sold in the United States. There are many, many 
billions of dollars of other terrorism limit sold in the 
reinsurance market that is bundled together with property and/
or casualty. So the market is substantially bigger than--I just 
want to be crystal clear on that.
    Mr. Duffy. Mr. Driscoll, do you agree that we could 
increase the $100 million trigger?
    Mr. Driscoll. I think with respect to conventional 
terrorism--with nuclear, chemical, biological, and 
radiological, it is a different dynamic. It is a different type 
of peril.
    But I think with conventional terrorism, the single risk 
market right now has been estimated by third parties as $2 
billion to $2.5 billion. That is one single location. These are 
large commercial locations, typically in metropolitan areas.
    I think if you view the $100 million trigger in the context 
of a single risk, undoubtedly the market has much more capacity 
for that. So yes, I would agree.
    Mr. Duffy. My time has expired. I yield back.
    I would have liked to have gotten to you, Mr. Csiszar.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from California, Mr. Sherman, is recognized 
for 5 minutes.
    Mr. Sherman. I understand the desire to try to protect the 
taxpayer and the Treasury, but as we have seen with flood 
insurance, but even more here with terrorism insurance, if the 
event occurs Congress is going to pass the supplemental 
appropriations bill. We can come into this room and be as 
stingy as Ayn Rand might inspire us to be, but if there is an 
actual terrorist instance and we are on the Floor, we will be 
as generous as Monty Hall.
    There is no way to protect the Treasury, especially when we 
are in here. If a hurricane hits, it is not the fault of the 
Federal Government. And I realize there are environmentalists 
and climate change and whatever, but certainly the hurricanes 
that have hit so far. If a terrorist attack occurs on U.S. 
soil, that will be regarded as a failure of American 
antiterrorism policy directed by the Federal Government.
    So I think our effort here is to develop a system by which 
the Federal Government will either get premiums in advance or a 
recruitment process, encourage people to have insurance, and 
know that we will be providing aid to those who suffer 
uninsured losses from a terrorist act.
    Now, Dr. Hartwig, there have been some who maintain that 
there have been major improvements in the capital sector's 
ability to model and price for terrorism risk. Are you aware of 
such improvements?
    Mr. Royce and I just got out of the Foreign Affairs 
Committee. I don't think there is anyone involved in foreign 
policy who could give you an actuarially reasonable estimate of 
what the risk is of a major terrorist act here in the United 
States. Do you have any--could anybody in your world know how 
to do this?
    Mr. Hartwig. I think nobody at this table has accurately 
predicted a terrorist attack before it happened, and I don't 
think we are about to. And we have heard several times that our 
ability to model terrorism is very crude and in early stages 
relative to natural disaster risks such as hurricanes, where we 
have thousands and thousands of actual data points to run in 
the system. We have absolutely nothing close to that when it 
comes to terrorism.
    Mr. Sherman. And the very fact that we have different rates 
in different areas--I represent a desert; flood insurance is 
cheap or unnecessary in most areas. Earthquake insurance is 
more expensive in Los Angeles than it is in Kansas. That is 
because you actually know what might happen.
    I can't tell you that the Rose Bowl has less or more risk 
of a terrorist attack than some stadium in another part of the 
country.
    Mr. Csiszar, you said that yield may drive or is driving 
capital flows into the private reinsurance market. We are 
seeing yields on bonds and other safer instruments going up. 
Wouldn't that leave the need for government to continue to act 
in this capacity, at least for several more years as we see 
yields on more traditional investments growing?
    Mr. Csiszar. This sector, I think it is fair to say, 
attracts investors that have a taste for higher risk. And I 
don't think that doesn't change. That risk premium keeps moving 
up with the yield on Treasuries and so on. You will always have 
that spread.
    So my sense of it is that it is probably more permanent 
capital, but on the other hand, the jury is still out because 
this is a phenomenon that we have only seen in the last 3 or 4 
or 5 years since the financial crisis.
    Mr. Sherman. Okay, but it is--the additional advantage this 
market has due to the low risks--low yields prevailing in the 
economy will probably evaporate before Congress acts on the 
legislation that we are considering.
    Mr. Csiszar. It depends on what the Federal Reserve does, I 
guess.
    Mr. Sherman. We will have another hearing on that.
    Let's see--my time has virtually expired. I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And Mr. Royce from California is recognized for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    As chairman of the House Foreign Affairs Committee, it is 
clear to me that the threat of global terrorism has not 
dissipated since 2001. So the question before us today is not 
whether terrorism insurance is needed for commercial 
policyholders; the question is what role the Federal Government 
should play, and will play going forward in the marketplace.
    And I was going to ask Mr. Driscoll, in your opening 
statement you state that there is adequate reinsurance capacity 
to cover the insurance industry's current $27.5 billion 
retention under TRIA, and that capacity could grow over time.
    How do we gauge this capacity? What sources and numbers 
should we be looking to as policymakers? How do we maximize the 
capital stock there, the private capital stock?
    And then I was going to ask Mr. McGovern for his comments 
on this as well. If this committee does adopt a policy of 
changing the industry retention level, what numbers should we 
look to? Should it be flexible? Should it be based on market 
conditions?
    And so let's hear from you gentlemen, if I could.
    Mr. Driscoll. Sure. I think it is probably helpful to think 
about that $27.5 billion in the context of a few other figures.
    The notional limit purchased on a global basis for natural 
catastrophe is over $300 billion currently. The capital base of 
the industry is close to half a trillion dollars.
    Terrorism within the United States on a standalone basis, 
as I noted earlier, is $7 billion to $8 billion, but a number 
substantially larger than that if you include terrorism that is 
purchased on a bundled basis with other traditional insurance 
coverages.
    And so I think that the best way to source that 
information, the best way to collect a view on industry capital 
is probably work with trade bodies like the Reinsurance 
Association of America (RAA) or Avier, which represents Bermuda 
insurance and reinsurance carriers, and clearly working with 
Lloyd's of London, which is not only one of the largest global 
writers of insurance terrorism but also reinsurance terrorism.
    Mr. Royce. Let's hear what Lloyd's of London has to say 
about it.
    Mr. McGovern. Congressman, it is very difficult to predict, 
and you are probably sensing that there are some differences of 
opinion about what we think the reinsurance industry could cope 
with. And I think the problem is that I think the reinsurance 
industry is very well-capitalized, unquestionably, but that 
doesn't necessarily lead to a very dramatic increase in the 
reinsurer's ability to provide reinsurance capacity, 
particularly in major urban areas with large accumulations of 
asset values, when the decisions about the deployment of 
reinsurance capacity will come down to an assessment about how 
individual reinsurers are managing their aggregate exposures.
    So it is a complex issue. It is not my place to sort of 
throw out numbers without understanding what the implications 
would be.
    Because as I have said before, the balancing act for 
Congress in looking at TRIA renewal is if step changes are made 
with the intention of increasing private market participation, 
but that doesn't--that leads to a reduction in take-up rates 
among commercial policyholders, which are currently pretty 
good, then actually you have reduced the amount of the 
insurance capital at risk rather than increased it.
    Mr. Royce. Let me ask another question, and it goes back to 
something we did in 2005 in the House. It never made it into 
final law, but in our version of TRIA reauthorization at that 
time there was a mechanism allowing direct writers to establish 
TRIA capital reserve funds, and these funds gave the option to 
set aside premiums collected under TRIA to help ensure that 
taxpayers are repaid for government outlays in the event of an 
attack. Insurer obligations under the program, including 
deductibles and including the co-share requirements, could also 
be met with these funds.
    And I would ask Mr. Hartwig and Mr. Csiszar, do you support 
looking at similar reserve mechanisms as we look towards TRIA 
reauthorization?
    Mr. Hartwig. If you are talking about reserving in advance 
types of situations, and I think maybe that is what you are 
discussing there, I think that there has historically been an 
issue with that, and the issue with that is these typically 
wouldn't be recognized for tax purposes. And so, these become 
extraordinarily expensive.
    Mr. Royce. We had believed at the time that we had worked 
out something with the Ways and Means Committee that would 
guarantee that we had avoided that pitfall, but--
    Mr. Hartwig. That is the principal objection I have heard 
in the past, so I am not sure it is mine to render a final 
opinion on that. I certainly would defer to the advocacy trades 
in the organization who would be in contact with their members 
on that.
    Mr. Csiszar. Congressman, I didn't mention it in my verbal 
summary, but in my written testimony it is pretty clear that I 
would support that kind of a reserve mechanism.
    The reality of it is that European companies--the U.K., 
France, Italy, Germany, Spain, you name it, the OECD, European 
OECD countries--do, in fact, have what they call equalization 
reserves. And not just for terrorism, but for catastrophes in 
general.
    Mr. Royce. I think we should rename them, Mr. Chairman.
    Thank you, Mr. Csiszar. I appreciate it.
    My time has expired. Thank you, sir.
    Chairman Neugebauer. I thank the gentleman.
    The ranking member of the subcommittee, Mr. Capuano, is 
recognized for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    I want to thank the members of the panel for being here 
again for another TRIA hearing.
    I just want to be clear: There is no one on this panel who 
actually believes that if, God forbid, there was another 
significant terrorist attack in a downtown metropolitan area or 
in a cornfield in the middle of the Breadbasket that the 
American people should not respond to that immediately and do 
whatever it took to deal with the issues. Does anybody here 
think that we should not respond?
    I knew the answer is no. I presume the answer is no. But if 
you have the coverage to say we shouldn't, please do.
    So that being the case, oh, go ahead?
    Mr. Seo. I'm sorry. I am not sure what you mean by respond. 
Respond--
    Mr. Capuano. Respond to whatever it took to deal with the 
issue, with or without TRIA or anything else. Do you think that 
the U.S. Government, the people of America, should allow their 
fellow citizens to suffer a nuclear or biological attack 
without action?
    I didn't think so. So now, all we are talking about is when 
do we step in. We are not talking about whether we will.
    There is nothing that anybody here has suggested nor has 
suggested to me ever that the American people shouldn't step in 
at some point. The question is when? What is the degree? That 
is the argument from day one.
    And here is the question--the question that I thought Mrs. 
Beatty asked very clearly that did not get a response. It is my 
understanding that when any business--not just insurance--when 
they have a larger risk of loss, that is a major factor in 
determining the cost of the item.
    When risk of loss goes up, cost goes up. That is natural. 
Commercial enterprise. That is the way it should be.
    So therefore, Mr. McGovern, if I told you your company now 
would be exposed to something more than $100 million, now you 
are going to be potentially exposed to $500 million, pick a 
number, would that not play a factor in your determining rates 
to be charged?
    Mr. McGovern. It certainly would. The risk profile changes 
and the costs associated--
    Mr. Capuano. Mr. Driscoll, would you take that into 
consideration in determining rates?
    Mr. Driscoll. We manage risk concurrent with the size of 
our capital base, so yes. I think the--
    Mr. Capuano. So risk doesn't matter? Potential loss doesn't 
matter?
    Mr. Driscoll. --size of the industry, loss potential is 
important.
    Mr. Capuano. No, no, I am asking for your company. Your 
company--
    Mr. Driscoll. We take as much risk on as we think is 
prudent with respect to managing for our shareholders and--
    Mr. Capuano. And risk doesn't play a factor in determining 
rates?
    Mr. Driscoll. No, risk, absolutely does. That is what I--
    Mr. Capuano. So it does?
    Mr. Driscoll. Yes.
    Mr. Capuano. So if your risk is exposed to a higher number, 
your rates will go up. It is natural. I don't think it is a 
complicated question.
    Mr. Driscoll. Sure, yes.
    Mr. Capuano. So if we change these triggers, it is 
unequivocal, it is indebatable that rates will go up. Now, how 
much? Nobody seems to know or seem to care, but they go up.
    When rates go up, what happens when things get more 
expensive? People don't buy it. Therefore the take-up rate goes 
down.
    That 62 percent or whatever it is we are hitting now goes 
down. Does anyone here think that the take-up rate should go 
down?
    See, here we are again. We have a system with all of its 
problems. And again, I have said from day one--I was here every 
time we have had a TRIA hearing--I don't like the program. I 
would like to come up with a better program. But it seems to be 
working.
    We have a great take-up rate that the industry told us a 
long time ago that 60 percent take-up rate is reasonable. It is 
normal. It is the target. We are there. I don't get any 
complaints from people buying the insurance that it is too 
expensive.
    Mr. Duffy. Would the gentleman yield?
    Mr. Capuano. No, not at the moment.
    Mr. Duffy. Okay.
    Mr. Capuano. I didn't interrupt you, so but what you have--
go right ahead.
    Mr. Duffy. I was going to ask you, are we talking about 
TRIA or Obamacare? I am--
    Mr. Capuano. That is exactly why I didn't yield.
    Mr. Driscoll. Congressman, can I--
    Mr. Capuano. I have just spent an hour-and-a-half listening 
to your nonsense, and you can't listen for 5 minutes to mine.
    Mr. Driscoll. Congressman, can I just with respect to the 
evolution of TRIA, to your point on rates, I think we would all 
agree that since 2001, the average per unit cost for terrorism 
has gone down pretty consistently, whether it be metropolitan 
or rural areas. We have seen an expansion of the private 
market--
    Mr. Capuano. My time is limited. This is not a new issue to 
me.
    I just look at a program that is working, that I am not 
getting any complaints about except by a few idealistic ivory 
tower types, but I am not getting complaints about from anybody 
in the business, and I am being asked to fix something that 
doesn't seem to be broken. It seems to be working.
    And that kind of concerns me, particularly when I am also 
told that--we are told we are interested in small businesses 
coming in, yet I am also told--tell me if I am wrong--that 67 
percent of the companies writing TRIA insurance right now are 
valued at less than $100 million. If we change that trigger, we 
would probably push a whole bunch of them out.
    How is that good for competition and pricing? Now, I am not 
opposed--I am not sitting here philosophically telling you TRIA 
is wonderful. I am actually agreeing, it is not.
    But unless I hear a specific proposal with specific 
consequences from those proposals so they have some idea what 
we are doing, it is awfully difficult to argue that we should 
mess with something that is working, that has worked reasonably 
well, that no one is complaining about.
    And so therefore, if you have concerns about the program, I 
share them, but I think you have an obligation to give us 
specific proposals with specific consequences of those 
proposals as you see them. And then, we can have a discussion.
    Other than that, this is a very nice and interesting 
philosophical discussion that doesn't amount to a hill of beans 
when everything is said and done because I still need things 
built, I still need people employed, and I still use up more of 
my time than I should.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman Neugebauer. I thank the gentlemen.
    And now the gentleman from Ohio, Mr. Stivers, is recognized 
for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
having this hearing.
    The benefit of going last is all the stupid questions have 
already been asked, and if you are smart, you know what to stay 
away from. I want to try to use my time as a summary.
    You all agree that TRIA should be authorized, correct? 
Could we just go down the line?
    Mr. McGovern. Agreed.
    Mr. Driscoll. Yes. We are proposing modifications, but 
overall agreed.
    Mr. Stivers. Yes. I understand.
    Mr. Csiszar. Yes.
    Mr. Seo. Yes.
    Mr. Stivers. All right, so the panel all agreed that TRIA 
should be reauthorized.
    And, Dr. Hartwig, I want to focus--I want to correct the 
record on something. A few of our committee members have said 
something that is incorrect in this hearing and your testimony 
helped bear it out, but is recoupment limited to only $27.5 
billion under TRIA or can it go up?
    Mr. Hartwig. No. The $27.5 billion is basically the 
industry's retention. Above that, there are a couple of 
recoupment mechanisms. One is mandatory--
    Mr. Stivers. The Treasury Secretary can allow recoupment to 
go above that amount, correct? Yes or no? That is all I need. 
Thank you.
    Mr. Hartwig. Yes. Exactly, yes, to the top.
    Mr. Stivers. Thank you so much.
    So let's talk about some changes you all agree on, I 
believe, from listening to your testimony. You all agree that 
we need a certification timeline, correct? Is there anybody who 
disagrees with that?
    Okay. And I have heard most of you say, and I think there 
is--Mr. Csiszar is maybe a holdout, that changes in the program 
on an incremental basis, on a threshold trigger, on an 
aggregate retention, and a copay of excess retention, as long 
as it is incremental, I think four of the five of you agree 
with that. Let's--hold on, let's make sure that that is 
correct. Is that correct?
    Mr. Csiszar. Make it five out of five--
    Mr. Stivers. Okay, five out of five agree that incremental 
changes--but $20 billion is a little bit more than incremental, 
sir.
    Okay. So you all agree, five out of five, that some 
incremental changes make some sense, and I think that is really 
important to note.
    And I want to take off on something that Mr. Capuano just 
asked. I want to think through some of the risks as we make 
changes. I happen to represent a district that has grange 
insurance, motorists' insurance, State auto insurance, some 
small P&C and workers' comp carriers that, if the changes are 
too big, too quick, the result will be that those smaller 
companies will exit the marketplace, and it will actually 
concentrate the risk in fewer companies, and will there or will 
there not be fewer private dollars at risk in the marketplace 
because it will be concentrated in fewer companies?
    Would everybody agree with that statement? Would anybody 
disagree with that statement? Let me--nobody disagreed. Okay.
    So I think that it is really important that we pay 
attention and only make incremental changes so as not to push 
the small insurers out of the marketplace. And, I think that 
you all agreed that there is more private capital in the 
marketplace now that is competing for market share and actually 
resulting in lower prices for P&C and workers' comp with regard 
to the terrorism risk out there. As long as we make those 
incremental changes, is it true to say that the private capital 
and the increase of private capital will be deployed in a way 
as to continue to decrease the prices for ultimate customers 
over the time period?
    Isn't that where the private capital will deploy, Mr. 
Hartwig? Do you want to--
    Mr. Hartwig. Assuming no major event or sequence of events.
    Mr. Stivers. Correct. Right. Okay. Well, we also haven't 
had a major event since 2001.
    Mr. Hartwig. I think it is easy to underplay the importance 
of that.
    Mr. Stivers. Yes. And that is why we are here in a time in 
2013 when the program has actually never been used, so--and I 
do want to just engage in a conversation with Mr. Csiszar, 
because you have--I think you are the--are you the only one on 
the panel who wants to charge an up-front premium?
    Because I actually think that the current mechanism works 
pretty well. There is a recoupment on the back end and I 
believe it will happen. I believe it is set in such a way that 
it can happen. We can change and play with the numbers in a 
way, but I am frankly worried because the Federal Government 
has such a horrendous record, whether it is FHA, flood 
insurance--any time the Federal Government actually tries to 
price risk, it is a horrendous disaster, and I guess I am just 
curious why you would want to do that in this case?
    Mr. Csiszar. Better to have something than nothing--
    Mr. Stivers. Okay. I understand, better to have something 
than nothing. However, the recoupment at 133 percent is 
something, and it is a mechanism that I believe will work. It 
is currently guaranteed on the first $27.5 billion, but I think 
there is a way to change some of those things in an incremental 
way over time.
    In fact, every time we have reauthorized TRIA, we have 
messed around or moved around the aggregate retention, the 
copay for excessive reserves, and also the trigger. So it is 
logical to see that we can move those things, but I think in an 
incremental way.
    So, thank you for your testimony. I think you have given us 
great perspective on the fact that we need to reauthorize TRIA 
and we need to do it pretty soon because there are people who 
are writing policies starting in January that actually will go 
past the expiration date, and so that creates some real 
uncertainty in the marketplace.
    Again, thank you for your testimony. I'm sorry I have gone 
over my time, but I look forward to working constructively with 
Republicans and Democrats to get TRIA reauthorized. Thank you 
all.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And I would like to thank each of our witnesses today. I 
think we have had a productive session today.
    I thank my colleagues for participating in a very 
productive dialogue. As I said at the beginning, I think it is 
important now that the committee have a swift and deliberative 
process here to bring some certainty to the market.
    While this program expires in 13 months, many of these 
policies will begin to be written here right after the first of 
the year, and so it is my intention to move forward in a way to 
bring as much certainty to the marketplace as we can.
    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 is now adjourned.
    [Whereupon, at 12:06 p.m., the hearing was adjourned.]
                            A P P E N D I X



                           November 13, 2013
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