[Senate Hearing 113-130]
[From the U.S. Government Publishing Office]








                                                        S. Hrg. 113-130


  REAUTHORIZING TRIA: THE STATE OF THE TERRORISM RISK INSURANCE MARKET

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

                                HEARING

                               before the

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

         REAUTHORIZING THE TERRORISM RISK INSURANCE ACT (TRIA)

                               __________

                           SEPTEMBER 25, 2013

                               __________

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






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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                  Laura Swanson, Deputy Staff Director

                   Glen Sears, Deputy Policy Director

                  Brett Hewitt, Legislative Assistant

                  Greg Dean, Republican Chief Counsel

             Mike Lee, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)










                            C O N T E N T S

                              ----------                              

                     WEDNESDAY, SEPTEMBER 25, 2013

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Heller...............................................     3
    Senator Menendez
        Prepared statement.......................................    23
    Senator Warner
        Prepared statement.......................................    23

                               WITNESSES

Peter J. Beshar, Executive Vice President and General Counsel, 
  Marsh & McLennan Companies.....................................     3
    Prepared statement...........................................    25
    Response to written questions of:
        Senator Kirk.............................................   141
Erwann O. Michel-Kerjan, Managing Director, Center for Risk 
  Management and Decision Processes Operations and Information 
  Management Department, The Wharton School, University of 
  Pennsylvania...................................................     5
    Prepared statement...........................................    68
    Response to written questions of:
        Senator Kirk.............................................   141
Robert P. Hartwig, Ph.D., CPCU, President & Economist, Insurance 
  Information Institute..........................................     7
    Prepared statement...........................................    82
    Response to written questions of:
        Senator Kirk.............................................   142

              Additional Material Supplied for the Record

Prepared statement of Benjamin M. Lawsky.........................   144
Letter from the American Hotel & Lodging Association.............   145
Letter from the U.S. Chamber of Congress.........................   146
Letter from the Real Estate Roundtable...........................   147
Letter from the Property Casualty Insurers Association of America 
  (PCI)..........................................................   149
Letter from the National Multi Housing Council and the National 
  Apartment Association..........................................   152
Letter from the National Conference of State Legislatures........   154
Letter from the National Conference of Insurance Legislators.....   156
Prepared statement of the National Association of Mutual 
  Insurance Companies............................................   157
Letter from the National Association of Insurance Commissioners 
  and the Center for Insurance Policy and Research...............   167
Letter from the Jewish Federations of North America..............   177
Letter from Accident Fund Holdings, Inc..........................   192
Letter from the American Bankers Association.....................   196

                                 (iii)

 
  REAUTHORIZING TRIA: THE STATE OF THE TERRORISM RISK INSURANCE MARKET

                              ----------                              


                     WEDNESDAY, SEPTEMBER 25, 2013

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m. in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    Two weeks ago, we observed the 12th anniversary of the 
tragic September 11 terrorist attacks on our country. In the 
aftermath of the tragedy and after suffering steep losses, 
insurance companies stopped offering terrorism insurance 
coverage as part of their commercial property policies. This 
had a destabilizing impact on various parts of our economy.
    Congress responded by creating the Terrorism Risk Insurance 
Program to provide a narrow and targeted Government backstop 
for this insurance coverage. The program proved helpful, 
creating certainty for many businesses, including developers, 
construction companies, commercial lenders, as well as private 
insurance markets.
    The program has since been reauthorized by Congress twice. 
The last time, Congress made very few changes and extended the 
program for 7 years. It is my hope that, once again, we will be 
able to find bipartisan consensus for the reauthorization of 
TRIA well before the program expires at the end of 2014.
    While a few may seek dramatic changes or even try to 
eliminate the program, we should remember that taxpayers have 
not lost any money on the program. The program's unique 
structure has fully protected taxpayers while promoting 
economic growth by preventing interruption in insurance 
coverage and providing certainty for commercial property 
developers working on stadiums, universities, malls, and other 
projects across the country.
    Today, we review the state of the terrorism risk insurance 
market and look forward to hearing from our witnesses about how 
the current program has functioned and the ongoing need for the 
same limited Government backstop we already have in TRIA.
    With that, I turn to Ranking Member Crapo for his opening 
statement.

            OPENING STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman.
    I welcome each of our witnesses today to this important 
hearing on the Federal Terrorism Risk Insurance Act.
    This program's initial passage was in large part due to the 
inability of businesses to acquire terrorism coverage in the 
aftermath of the attacks of September 11, 2001. Since then, the 
program has been reauthorized by Congress two more times, each 
time with changes that scaled back the exposure to the Federal 
Government and the taxpayers. With the current program set to 
expire at the end of 2014, it is appropriate for us to examine 
how well the program is working, how else we might increase 
private sector participation in the insurance and in the 
reinsurance markets.
    Terrorism risk, by its nature, is difficult to predict. The 
size, severity, and frequency of attacks are hard to model. 
They also may be highly correlated, making it challenging for 
private insurers to diversify their risk. One of the purposes 
of passing the original legislation was to give the market time 
to find innovative solutions to these problems. I am interested 
in hearing from the witnesses their perspectives on how the 
private market has evolved in the 12 years since the initial 
passage of TRIA.
    Getting terrorism risk insurance right is important in 
order to limit economic and physical impacts of any future 
terrorist attacks on the United States. A properly balanced 
Terrorism Risk Insurance Program can increase the Nation's 
resilience to terrorism. However, a program that is too heavily 
reliant on Federal support can deter the private market from 
coming up with cost effective solutions.
    One of the challenges associated with any Government 
insurance is getting the pricing right. In TRIA, there is no 
up-front charge to private insurers for the Government 
reinsurance and backstop, only post-event cost sharing. Does 
the current approach make the most sense for taxpayers?
    Mr. Beshar's written testimony mentions the business 
deductible, the aggregate loss threshold, and the business 
coinsurance as a few of the policy levers we can adjust that 
may help to better protect taxpayers from shouldering private 
sector losses. I look forward to the thoughts of the panel as 
to what impact these changes would have on the willingness of 
insurers to underwrite terrorism risk.
    I am also interested in hearing how well the reinsurance 
market is developing. Does the current program dampen the 
reinsurance market's incentives to innovate and find new ways 
of offering coverage?
    As I mentioned previously, each reauthorization has put 
more private capital in front of the Government backstop. 
Currently, the Federal Government would recoup any TRIA 
payments up to $27.5 billion. This industry retention level 
allows the taxpayer to recover TRIA payments through an 
industry-wide assessment on property casualty policies and was 
last changed in the 2005 reauthorization. Should that amount be 
increased?
    And, last, should we look at the approaches that other 
countries have developed to the challenges presented by 
terrorism risk? For example, most developed countries charge 
the insurance industry up front for reinsurance.
    As it has been 6 years since we last studied the issue in 
depth, we now need to examine this program in detail, and Mr. 
Chairman, I look forward to hearing the witnesses' testimony 
and their insights into these important policy issues.
    Chairman Johnson. Thank you, Senator Crapo.
    Are there any other Members who would like to give brief 
opening statements?
    Senator Heller. Mr. Chairman, if I may----
    Chairman Johnson. Yes.

                STATEMENT OF SENATOR DEAN HELLER

    Senator Heller. Thank you very much, and I will be brief. I 
just want to thank you and the Ranking Member for holding this, 
what I consider to be a very important hearing. I want to thank 
those that are here on the panel, also, for taking time with 
this discussion.
    I do not have to tell many here that terrorism is a 
nationwide threat and it can happen in any city on the East 
Coast, West Coast, but also in rural America. And, 
unfortunately, the threat for terrorism is very high in a city 
like Las Vegas. I like to tell people that there are two 
Statutes of Liberty in this country and one happens to be in 
Las Vegas. But, as you know, Nevada's economy is very, very 
heavily dependent on tourism and a terrorist attack, obviously, 
would be devastating, not just obviously for the city, but, 
obviously, the State as a whole.
    So, I look forward to working with you, Mr. Chairman, with 
the Ranking Member, and all my colleagues here on this 
Committee to see if we can put together some kind of a 
bipartisan agreement to reauthorize TRIA.
    Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    I would like to remind my colleagues that the record will 
be open for the next 7 days for additional statements and any 
other materials.
    Before we begin, I would like to introduce our witnesses 
that are here with us today.
    Mr. Peter Beshar is the Executive Vice President and 
General Counsel for the Marsh and McLennan Companies, which 
issued a report on TRIA earlier this year.
    Dr. Robert P. Hartwig is the President of the Insurance 
Information Institute and has written extensively on the issue 
we are discussing today.
    And, finally, Dr. Erwann Michel-Kerjan, who is a Professor 
and Managing Director of the Risk Management and Decision 
Processes Center at the Wharton School of Business at the 
University of Pennsylvania.
    Mr. Beshar, you may proceed.

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

    Mr. Beshar. Chairman Johnson and Members of the Committee, 
I am Peter Beshar and I am grateful for the opportunity to 
speak with you this morning about TRIA.
    Terrorism is a deeply personal issue for Marsh and 
McLennan. In the attacks on the World Trade Center, our company 
lost 295 employees and scores of other business associates. 
Marsh and McLennan also has a unique perspective on the 
terrorism insurance market. Through our market-leading brands, 
Marsh and Guy Carpenter, we provide analytics and broking 
services to all the participants in the terrorism market, the 
buyers and sellers of terrorism insurance and also key 
reinsurers.
    We consider TRIA to be a model private-public partnership. 
In the critical moments after 9/11, the TRIA facilitated 
critical stability into the insurance marketplace, and today, 
it continues to provide the backstop for a well functioning 
market. Accordingly, we strongly endorse its reauthorization.
    This morning, I would like to briefly cover four areas: 
First, the current state of the terrorism marketplace; second, 
the level of capital in the reinsurance industry; third, our 
recommendations for reforming TRIA; and finally, if TRIA is not 
renewed, two cautionary notes about the potential impact.
    Chairman, as you mentioned, Marsh released a sweeping 
survey this spring of over 2,500 of our clients in the 
terrorism insurance marketplace and there were two broad take-
aways from that survey. The first is that take-up rates are 
strong--over 55 percent--across the country. Senator Heller, as 
you said, in the West, rates are increasing, in the South, in 
the Midwest. So this is not simply a phenomenon in the 
Northeast.
    The second is that we surveyed industries across the 
country and the take-up rates are strong--over 70 percent--in 
the health care industry, amongst media companies, 
interestingly, amongst nonprofits and educational institutions, 
as well as real estate developers. So the interest in this 
coverage across the country and across industry is very strong.
    Second, the level of capital in the reinsurance industry 
has increased in the last 5 years. Our subsidiary Guy Carpenter 
released a report several months ago indicating that the amount 
of capital in the reinsurance industry is about $195 billion 
globally for all risks. That is up from about $160 billion 5 
years ago.
    Now, to be sure, not all of that capital is available to 
underwrite this risk of terrorism. Indeed, there are many 
capital providers who are not interested in underwriting this 
peril because of how difficult it is to model and for other 
reasons. Nonetheless, the level of capital in the reinsurance 
industry has gone up, and if these trends continue, it is our 
belief that there is capacity for the private sector to 
continue to expand and thereby reduce the position of the 
Federal Government and the taxpayer.
    So, against this backstop, we would like to offer three 
recommendations to reform TRIA.
    First, we recommend that Congress specifically clarify that 
if a coverage is provided for all forms of terrorism, including 
NBCR if there is coverage provided on the underlying policy for 
that risk.
    Second, a lot has happened since Congress last reauthorized 
TRIA. Cyber risk is clearly a new and more profound risk that 
we think needs to be grappled with, and Congress should analyze 
the best way of ensuring that in the event of a catastrophic 
cyber attack, that TRIA would respond to that.
    And, finally, we recommend that we establish--that Congress 
establish a timeline--we have suggested 90 days--for actually 
making the certification of whether a terrorist event has 
occurred and TRIA is, therefore, implicated.
    If TRIA is not renewed, just two cautionary notes. First, 
in the property and casualty market, the ``make available'' 
provision, we think, is critical for having induced property 
and casualty carriers to, in fact, underwrite this risk. And if 
TRIA were pulled back and that requirement were removed, we 
think it is highly likely that many property and casualty 
insurers would stop underwriting this risk.
    And, second, very briefly on workers' comp, this is an 
unusual area of insurance where the carriers are required to 
provide the coverage without regard to the cause of it, whether 
it is an accident, an act of war, or an act of terrorism, and 
we have already begun to see, because of the uncertainty on 
TRIA, carriers in the workers' comp marketplace have begun to 
pull back.
    So, just in sum, Mr. Chairman, we think this has been a 
tremendous program and it, in fact, has been a program that has 
served to protect taxpayers against the risk of a catastrophic 
loss. Thank you.
    Chairman Johnson. Thank you.
    Dr. Michel-Kerjan, please proceed.

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

    Mr. Michel-Kerjan. Thank you, Mr. Chairman.
    Let me open by saying that if our common goal is to make 
the Nation more financially resilient to future terrorist 
attacks and also to limit the spending of taxpayers' money, 
then our debate should not be on whether to let TRIA expire. 
Rather, it should be on how we work together to make TRIA more 
effective.
    Indeed, without TRIA, American taxpayers may actually end 
up paying much more than they would today after a terrorist 
attack, especially if insurance companies radically lower the 
capacity they provide under the current monetary requirements 
when TRIA expires. Indeed, denying Federal disaster relief for 
uninsured losses after such an attack at a time when our Nation 
would be under massive stress would be very hard to do for any 
Congress. There have been so many precedents in recent years 
with hundreds of billions of dollars spent in Federal relief 
for natural disaster and corporate bailouts alike.
    Still, I do not think a straight reauthorization would be 
possible, either, for the reasons this Committee stated 
earlier. So, one should probably continue to reduce Government 
exposure by increasing the private sector risk sharing, as the 
previous extension did. But this needs to be done in a way that 
does not disrupt the market.
    As a neutral party, our team at the Wharton School has 
released over 20 publications on terrorism insurance markets 
since 2001, more than any other organization. These studies can 
be used by Congress to make more informed decisions in the 
coming months.
    For instance, we have recently shown that insurance 
companies have provided much more capacity for terrorism risk 
than they have for other catastrophic risks because they 
collect all the premiums but are responsible for only a portion 
of the losses. This is what TRIA was designed to do.
    Terrorism insurance prices in the U.S. have been going down 
continuously, as Mr. Beshar mentioned. Let me also add here 
that these are among the least expensive terrorism insurance 
prices in the world.
    In other new analyses that I mentioned in the written 
testimony, we show that the demand for terrorism insurance for 
medium and large corporations is not only strong, but also very 
price inelastic, meaning low sensitivity to price. We found 
that increasing the premium by 10 percent would only decrease 
the quantity of terrorism insurance that these firms will buy 
by one or 2 percent. That means that if TRIA were to be 
modified and insurers' deductibles were slightly increased from 
the current 20 percent, most likely, we will not see any impact 
on the market. Similarly, there was no significant demand 
change when previous deductible levels had been increased.
    Still, about four out of ten large corporations do not have 
coverage against terrorism today. I think this is something we 
should be concerned about. Let us remember that on 9/11, the 
coverage was virtually 100 percent, which allowed for a quick 
economic recovery of our country.
    Also, and this is an important point, we know little about 
terrorism insurance penetration for small businesses, even 
though they are the most vulnerable to financial shocks. 
Congress may want to request a study on small businesses and 
TRIA.
    Before I conclude, let me also say that we must look at how 
other countries have approached terrorism insurance, because 
American corporations compete with foreign firms. These firms 
benefit from these other programs in their own countries. My 
written testimony looks at Australia, France, Germany, India, 
Israel, the U.K., and Spain. Note that several of these 
programs are permanent in nature. Those that are temporary have 
all been renewed in recent years.
    To summarize, TRIA has worked as intended and has sustained 
a robust terrorism insurance market, especially for large 
corporations across the country. If TRIA is to be modified to 
increase the portion of the risk covered by the private sector 
or for the Government to start charging for its backstop, I 
think there is room to do so under current market conditions, 
at least according to our studies. Of course, open issues 
remain for small businesses, NBCR, cyber risk, and the larger 
role that the reinsurance industry could play.
    In the end, it is how we best use the insurance 
infrastructure in partnership with the Government to assure 
effective and equitable solutions are in place that will make 
our economy terror-proof. This is why, to me, the debate about 
TRIA is not an insurance issue only. More fundamentally, it is 
as much a national security and economic competitiveness issue, 
too.
    On behalf of the Wharton School, we look forward to working 
closely with you in the coming months on how we do that 
together. Thank you, Mr. Chairman.
    Chairman Johnson. Thank you.
    Dr. Hartwig, you may proceed.

   STATEMENT OF ROBERT P. HARTWIG, Ph.D., CPCU, PRESIDENT & 
           ECONOMIST, INSURANCE INFORMATION INSTITUTE

    Mr. Hartwig. Thank you, Mr. Chairman. Thank you, Senator 
Johnson, Ranking Member Crapo, and Members of the Committee. I 
appreciate the opportunity to have been asked before 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. The sheer 
enormity of that loss, combined with the possibility of future 
attacks, led insurers to exclude coverage arising from acts of 
terrorism from virtually all property and liability policies in 
the commercial sector. Only when TRIA was enacted by TRIA in 
late 2002 did stability finally return to the market and 
coverage for terrorist attacks resumed.
    Eleven years later, the war on terror is far from over, as 
the recent Boston Marathon bombings attest. But TRIA is, by all 
objective measures, 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 little 
or no cost to taxpayers. The unambiguous success of TRIA 
demonstrates that the Act has become an indispensable component 
of the country's national security infrastructure.
    In the absence of TRIA, the country is unnecessarily 
vulnerable and exposed to economic instability and recession. 
With TRIA's expiration now a little more than a year away, it 
is virtually certain that terrorism exclusions will soon appear 
in the market, and it is estimated that 70 to 80 percent of the 
commercial property market will be impacted by these 
exclusions. In the event TRIA were allowed to expire, higher 
prices and reduced availability for terrorism insurance could, 
within 3 years of expiration, reduce real GDP by an estimated 
$69 billion and remove 290,000 jobs from the economy.
    Clearly, retaining TRIA is a vital component of the 
country's comprehensive national security plan. It is both 
reasonable and it is prudent. It is also eminently affordable. 
Indeed, the cost to the American taxpayer has been effectively 
zero.
    Today, all but the very largest and least likely terrorist 
attacks would be financed entirely within the private insurance 
sector. Even in the event of a truly catastrophic attack, TRIA 
provides the Government with the ability to fully recoup any 
and all Federal monies outlaid. As a point of fact, from the 
date of TRIA's enactment in November of 2002 through today, a 
span of nearly 11 years, the Federal Government and, therefore, 
taxpayers, have paid nothing, apart from negligible 
administrative expenses, under the program.
    The recent Boston Marathon bombings prove to be an 
illustrative point. All of the 207 property casualty claims 
filed in the wake of that event were handled by private 
insurers who have made payments to policyholders totaling 
approximately $1.2 million. Not one taxpayer dollar was used to 
pay any of these claims.
    TRIA's structure actually provides at least eight distinct 
layers of taxpayer protection, as displayed schematically in my 
Exhibit 4, the Pyramid of Taxpayer Protection.
    First is the definition of a terrorist attack itself. It is 
a very detailed definition and every letter of that definition 
must be met.
    Beyond that, there is a $5 million monetary threshold 
within the certification. Unless that $5 million threshold is 
crossed, there will be no certification.
    Above that, there is a $100 million triggering event. This 
means that Federal funds will be paid out only in the event 
that a terrorist attack produces total insured losses above 
this threshold.
    Then, if we go beyond that, each individual insurer is 
required to retain losses equal to 20 percent of the premiums 
earned in lines subject to TRIA.
    Beyond that, for losses in excess of that 20 percent 
insurer threshold, each insurer must retain 15 percent of each 
dollar beyond that.
    And then there is an overall industry threshold of $27.5 
billion. Now, for dollars laid out within that $27.5 billion 
industry threshold, these will--there is a mandatory recoupment 
mechanism and, in fact, 133 percent of the amount must be 
collected. And for any amounts above the $27.5 billion 
threshold, it is at the discretion of the Treasury to collect 
such funds.
    Now, sitting on top of the whole program is a $100 billion 
hard cap, meaning that beyond that amount, the Federal 
Government has no responsibility for further losses.
    I might also add, there has been an ever-narrowing number 
of lines covered by TRIA over the years. Back in 2002, 
approximately 44 percent of the industry's premiums were in 
TRIA-covered lines. Today, it is approximately 35 percent.
    The TRIA also has the effect of reducing taxpayer-funded 
post-attack disaster aid costs. The fact of the matter is, is 
if more businesses are covered by TRIA and more workers are 
covered by TRIA, which they will be as long as TRIA is 
reauthorized, then that means the demands for post-event 
disaster aid will be lessened.
    So, in summary, there is no question that TRIA has brought 
much-needed stability and capacity to the market and that it 
has done so within a fiscally responsible framework. But it is 
important to emphasize that the majority of the coverage and 
the capacity in the market today exists only because of TRIA. 
TRIA's expiration would unquestionably lead to a reduction in 
capacity with adverse consequences for the broader economy. A 
larger-scale terrorist attack in the absence of TRIA would 
effectively take us back to the chaos of the immediate post-9/
11 environment.
    Thank you for the opportunity to address the Committee 
today. I would be happy to respond to your questions.
    Chairman Johnson. Thank you very much for your testimony.
    As we begin questions, I will ask the Clerk to put 5 
minutes on the clock for each Member.
    Dr. Hartwig, some argue that the private sector has 
developed more capacity to handle terrorism insurance coverage. 
However, I have seen no research that indicates this unique 
market can sustain itself without a Government role. Do you 
believe a Government backstop is still needed, similar to what 
we currently have in TRIA?
    Mr. Hartwig. There is no question, sir, that a Government 
backstop is needed to maintain the capacity that is in the 
market today. As I mentioned at the end of my testimony, as I 
summarized, all the numbers that you have heard today from each 
of the witnesses with respect to the amount of capacity that 
exists in the market exists only because of the existence of 
the Terrorism Risk Insurance Program itself.
    Should that program sunset at the end of 2014, it is 
absolutely certainly the case that the amount of capacity both 
among primary insurers and reinsurers becomes significantly 
constricted. There would still be no interest on the part of 
capital markets. And, God forbid we were to have an actual 
large-scale terrorist attack in the absence of the program. We 
would be back to square one, basically be back at September 12, 
2001.
    Chairman Johnson. Mr. Beshar, what do you think?
    Mr. Beshar. I share Mr. Hartwig's view, Chairman Johnson, 
that the backstop of TRIA is critical to creating the capacity. 
I am one of the people who has flagged the fact that the level 
of capacity has increased in the reinsurance market, but that 
is predicated on the existence of TRIA. And if you take TRIA 
away, the strong likelihood is that those property and casualty 
writers who have the capacity would nonetheless pull back from 
this peril.
    Chairman Johnson. Dr. Michel-Kerjan, you have said that, in 
the past, that a world without TRIA might not necessarily be 
one with less risk to the Federal Government and the American 
taxpayers. Can you explain why taxpayers may face more risk and 
more cost without the program?
    Mr. Michel-Kerjan. Sure, Mr. Chairman. Well, I think there 
are two elements, as we have discussed before. Right now, with 
TRIA, anything that will cost $27.5 billion of injury losses, 
which will be, by all account, a massive terrorist attack on 
U.S. soil, will be covered by the private sector for 
recoupment.
    Without TRIA, two things will happen. TRIA not only 
provides a backstop, but also obliges the insurance companies 
to actually offer that coverage to all their clients. They do 
not have to take it, but it is a mandatory requirement. Most 
likely, if you take out that mandatory requirement, many 
insurance companies are just going to stop offering that 
coverage. Proxies are going to increase, especially in the 
high-risk areas, or what are perceived as high-risk areas--
Boston, Washington, New York, Los Angeles, and a few other 
cities, obviously. The demand for coverage will decrease and 
the proportion of insured losses will be much higher.
    If you do not mind looking at page seven of my written 
testimony, I mention two things here. The number of 
Presidential Disaster Declarations is skyrocketing in this 
country over the past ten, 15 years. We are asking the 
taxpayers to pay more and more money. That is true for natural 
disasters and that was true, clearly, during the financial 
crisis.
    To give you one example, 88 percent--88 percent--of the 
cost of Hurricane Sandy was paid by all of us as American 
taxpayers. I think we can do better. So if you look at the 
natural disaster as an example, I think, as I mentioned, it 
would be very hard for any Congress to deny that relief. As a 
result, uninsured losses will be much higher. That is why I say 
that a world without TRIA will actually lead to more exposure 
to the taxpayers, sir.
    Chairman Johnson. Dr. Hartwig, would you walk us through 
the major protections the current program provides taxpayers.
    Mr. Hartwig. Certainly. I referred to an exhibit in my 
testimony, Exhibit 4, although that may be mislabeled as 
Exhibit 3 for the second time, titled ``The Pyramid of Taxpayer 
Protection.'' Basically, I just created this schematic so that 
it would make it easy to understand that there are at least 
eight levels of protection for the taxpayer.
    And as I mentioned, the very definition of a terrorist 
attack itself is very detailed and every word of that 
definition must be met. In addition, the attack must produce at 
least $5 million in losses before it can be certified.
    You have a $100 million threshold before any Federal 
dollars can be involved whatsoever. Each insurer must then 
retain 20 percent of loss based on its premiums written in 
TRIA-subject lines. That can be a very, very large amount of 
money, hundreds of millions of dollars.
    And then, above that, insurers keep skin in the game in 
every last claim because they are paying 15 percent on every 
dollar above their individual retention. And then, beyond that, 
the Government overall, there is a $27.5 billion requirement 
for the industry overall retention.
    That is a large sum of money. So we are starting to get 
into the sorts of events that rival that of 9/11 itself. If you 
were to rerun 9/11 today, OK, at the time, $32.5 billion 
insured loss, pretty much that loss would fall very close to 
entirely within the private insurance sector itself.
    So, for the larger scale losses, the Government has both a 
mandatory recoupment obligation for some losses and it has the 
option to recoup every other dollar that it lays out for the 
truly extraordinarily large losses. And, again, beyond the--an 
event beyond $100 billion, hard cap, no Government involvement 
at that point.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    The current market for terrorism insurance has changed 
significantly since the program's first creation, and the Marsh 
report shows that the take-up rates for terrorism insurance 
rose from 27 percent in 2003 all the way up to over 60 percent 
in 2012.
    Mr. Beshar, your testimony mentions that your company still 
believes that the insurance market could increase private 
coverage, thereby reducing taxpayer exposure, and I agree with 
that assessment. How has the market for terrorism insurance 
changed and what new sources of funding are available? How can 
we bring in more private capital?
    Mr. Beshar. Sure, Senator Crapo. I think there are two 
aspects of that. There is the traditional insurance and 
reinsurance market, and then there is the world of alternative 
capital.
    On the traditional market, by clarifying aspects like NBCR 
and perhaps cyber, I think what will happen is, incrementally 
and gradually, the private market will be able to expand, and 
that is what you have already seen over the past 12 years and I 
think that trend will continue.
    In the alternative market, which is funds coming in from 
third-party investors, from hedge funds, even from some pension 
plans, there are some very intriguing new developments around 
catastrophe bonds, for example, where countries are now issuing 
catastrophe bonds to try to protect against specific perils. So 
the Government of Mexico, for example, has issued a catastrophe 
bond against earthquake risk. The Government of Turkey has done 
the same thing to try to mitigate against earthquake risk. And 
you could envision over the coming years that as people get 
more comfortable with this risk, that there are some 
alternative capital providers who may be willing to take it on.
    Senator Crapo. Thank you.
    And at the insurance company level, two of the most 
important figures in the TRIA program are the company 
deductible and the level of coinsurance. The current deductible 
is set at 20 percent of its annual direct earned premiums and 
the level of coinsurance is 15 percent.
    Again, Mr. Beshar, you mention potentially increasing the 
20 percent level incrementally and possibly bumping up the 
coinsurance level. Without citing a specific number, is there 
room to increase both of these levels?
    Mr. Beshar. I think the key question, again, is that 
capacity has expanded because of the existence of the backstop. 
So that is why we are strongly in favor of the reauthorization 
of the program and it is that backstop that is so fundamental. 
That said, assuming that the trends that have occurred over the 
past several years continue, and there are not large-scale 
capacities that reduce the capacity that exists, we do think 
that there is the ability to expand.
    One of the things that the Congress will want to be mindful 
of is that there are smaller insurers and mutual insurers that 
are situated differently than the larger insurers, and you want 
to be sensitive and able to keep them in the marketplace.
    Senator Crapo. Thank you. And, Mr. Kerjan, this question 
relates to prefunding of the insurance. The United States is 
not the only country that has developed a public-private 
partnership to deal with the risk of losses associated with 
terrorism, and many of these programs require insurers to pay 
up front for the reinsurance. You, for one, have looked into 
whether insurers take on greater terrorism risk than they 
otherwise would because they collect all of the premiums under 
TRIA but are only responsible for a part of the losses. What 
impacts would we see if we were to move to a system that 
involves some kind of a level of prefunding?
    Mr. Michel-Kerjan. Thank you, Senator Crapo. There are two 
ways to answer the question. The first one is, if we want more 
capacity to be provided to the market, the current system has 
worked pretty well. If we start charging for that Federal 
backstop, then we cannot have that ex post recoupment; the 
Federal Government is basically covering some of the losses, in 
return for collecting premiums over time. That is the way the 
German system, the French system, the Spanish system, and 
others work.
    In the British case, the British Government offers an open 
line of credit to the Pool Re, which pays for it. If there is 
another terrorist attack in the U.K., the first five billion 
pounds will be covered by the private sector through Pool Re, 
but above that five billion, the British Government is going to 
open that unlimited line of credit. And the British Government 
currently receives 10 percent of the premium to provide that 
line of credit.
    So, at the end of the day, it is a matter of what we want 
to do. Do we want ex ante financing or ex post financing, and 
if so, how much do we want the Federal Government to charge for 
that coverage and what would be a fair premium?
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    I would ask that a statement that I have be included in the 
record.
    Chairman Johnson. Without objection.
    Chairman Johnson. Thank you, Mr. Chairman.
    And I want to thank the witnesses. This is something that I 
have been a strong advocate of, because, really, after 
September 11, we had a disruption in the marketplace, one that 
was not taken care of by the private marketplace, and, 
basically, TRIA created market functionality again. And while 
we would love to see the private sector market fully take care 
of this, I do not think that, personally, from my perspective, 
that is still not possible in the world in which we live in.
    So I want to ask two specific lines of questioning. One is, 
terrorism is different from other risks in that it involves 
intentional human actions that target population centers, 
infrastructure, economic assets, and it is also harder to 
predict, in part not only because of the reality that we do not 
know when individuals will necessarily pursue those intentions, 
but even to the extent that we are preparing for it, for the 
possibilities, there is an understandable interest in keeping 
information about risks and vulnerabilities confidential in 
order to reduce the chances of an attack and the potential to 
inflict damage.
    So, my question for our witnesses is, how do the 
differences between terrorism and other risks affect private 
market capacity to insure against terrorism risk, and to the 
extent that these differences translate to higher costs or 
reduced availability of insurance against terrorism risk, what 
are some of the broader consequences for our economy and our 
society? I welcome anyone's answers. We can go down the line.
    Mr. Hartwig. I think we might all comment.
    Senator Menendez. All right. So, go down the line.
    Mr. Beshar. Senator Menendez, I will start, perhaps 
focusing on workers' compensation cover, what would be the 
potential impact. It is an unusual line of cover in that 
employers like Marsh and McLennan are required to obtain the 
cover to protect their employees and carriers are required to 
provide the coverage without regard to what the cause of the 
loss is, whether it is an act of war, an act of terror, arson, 
whatever is the risk.
    And what we are seeing potentially in the marketplace is 
that workers' compensation carriers are beginning to pull back, 
those who provide coverage to large amounts of individuals 
concentrated in areas in New Jersey, in the metropolitan New 
York area, Chicago, L.A., Washington. And so the TRIA backstop 
is critical to inducing those workers' compensation carriers 
to, in fact, provide that cover. And if it is not there, if it 
becomes much more expensive to get workers' compensation 
coverage, we are concerned that that has a negative drag on 
economic growth and job creation.
    Mr. Hartwig. If I could add on to what Mr. Beshar said, 
workers' comp is really just sort of the beginning of the issue 
here. When it comes to terrorism risk, insurers face a unique 
form of aggregation problem here. Typically, when we think 
about a large-scale natural disaster like a hurricane, for 
example, you are talking about mainly your damage associated 
with wind. It is a property type of damage, business 
interruption loss. But you do not have large-scale loss of life 
such as you had in 9/11.
    So, with respect to terrorism, particularly in the absence 
of a Terrorism Risk Insurance Program, you have insurers 
modeling in a way that they do not normally have to model for a 
major catastrophic loss. They are looking not only at the 
possibility of extraordinarily large property damage and 
business interruption losses, but they are looking at 
potentially multi-billion-dollar losses with respect to 
workers' compensation. So you have got this layer--it is 
basically many more layers than you would have for more 
traditional losses.
    That makes the modeling much more difficult, and what it 
also does is, in effect, requires an insurer to take, say, a 
map of the areas in which it operates, ascertain literally how 
many dollars it has in risk, not just in terms of insured 
structures but insured lives with respect to workers' comp 
exposure and other types of coverage, and it cannot exceed a 
certain amount in each one of those areas. So it makes it much 
more difficult to model and makes the whole insurance program 
that it must orchestrate much more difficult.
    Senator Menendez. Well, let me go through another line, if 
I may, and I am happy to entertain your answer, as well, but I 
just want to, in the time that I have left.
    Mr. Beshar, in your 2013 Terrorism Risk Insurance Report, 
you predict that without a Federal backstop, the cost of 
terrorism insurance would rise for areas with concentrations of 
people or economic assets, infrastructure such as 
transportation, pipelines, and other elements. I think of my 
region that Senator Schumer and I share, just as one example. 
In a two-mile stretch, just a simple two-mile stretch of my 
State, we have the largest container port on the East Coast, 
the megaport of the East Coast; we have one of the largest and 
busiest airports in the country at Newark International; we 
have rail lines, Amtrak, New Jersey Transit, and others, and 
PATH, that carry hundreds of thousands of people back and forth 
each day to work; and critical industrial infrastructure and 
the most dangerous two miles in America because of the Chemical 
Coastline.
    So, while that is a regional reality, the consequences, 
though, of such an attack are broader to the national economy, 
would not that be a fair comment?
    Mr. Hartwig. Absolutely, Senator Menendez.
    Senator Menendez. Yes. OK.
    Mr. Michel-Kerjan. Let me just add, I think that the 
discussion has been mainly about insurance. Ultimately 
terrorism is a national security issue, and as any government 
around the world, the question is, how do we create a mechanism 
that will help the country bounce back after a disaster? And 
insurance is one way to do it, an effective way to do it.
    So let us not see terrorism as something that insurance 
companies have to cover. They do not have to cover it. We made 
that a mandatory offer. We, the country. That has been a 
national decision. I think that is the most effective way to 
actually cover the risk and all the claims. We have other 
programs in this country that do not necessarily rely on the 
private insurance sector which I think we should learn from, 
some failures, as well, so----
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
let me echo the comments of the Professor.
    Risk insurance is a national security issue as well as a 
banking issue, and I have the privilege of serving on the Armed 
Services Committee as well as this Committee and we have seen 
that there are still significant threats. In fact, tragically 
this week in Kenya, it was a commercial property that was 
attacked, and not only was there great loss of life, but 
destruction of the property.
    So the issue, as it was after 9/11, remains today. How do 
we maintain a viable commercial real estate sector in our 
economy given this persistent threat of terrorism and given the 
role of the Federal Government in preempting it, preventing it, 
and if it happens, to be able to help absorb the risk? So I 
think it is absolutely essential that we have to extend the 
reinsurance program going forward.
    We have to keep markets open. We have to also, I think, 
keep, in fact, to continue our growth, to remove impediments to 
potential investment, particularly in large commercial 
projects. Without Terrorism Risk Insurance, there is an 
impediment. There is a certain calculated cost that the 
developer has to bear if it is not there. And I think the way 
it is designed, with the first losses going to the private 
sector and only in extreme cases the Federal sector stepping up 
or the national sector, makes some sense.
    But let me just begin with a question and ask all of you, 
beginning with Mr. Beshar, there is a presumption here if we 
take away this legislation, the private capital markets have a 
viable alternative to TRIA. Is that the case, in your view, Mr. 
Beshar?
    Mr. Beshar. We do not believe so, Senator Reed. We think it 
is that backstop that has created the market and created the 
capacity. And so if you take that backstop away, we think the 
market capacity will shrink quite significantly.
    And to your point about kind of where the potential targets 
are, one of the things that was most striking to us about the 
Marsh report was that the take-up rates are really across the 
country and across industry, including Rhode Island, that there 
is a perception that if you are hosting a sporting event, for 
example, you know, the NFL and the NBA, the NHL, everybody 
recognizes that there is a risk that is not concentrated just 
in the large urban areas of the United States.
    Senator Reed. That is a very good point.
    Professor, your comments.
    Mr. Michel-Kerjan. No, I think I would agree with Mr. 
Beshar. I think we have reached a point where almost everybody 
agreed that it has been a great program. I think that our 
discussion today has been more about how we transform that 
program incrementally, so that we increase the market's 
capacity to absorb more risk.
    Let me also say that a lot of the discussion has been about 
where the market is today, where it could be in the next few 
years. All of that is important, but I think the big question 
is what will happen to the market in the aftermath of a 
terrorist attack, a large terrorist attack, whether it is 
outside the U.S., as we have seen in 2005 in London, or 
elsewhere. I think having that Federal backstop reassures the 
insurance industry that, for catastrophic risk, none of them 
will go under, and I think that is a very important statement 
to make and an important aspect to keep in mind.
    We know from natural disasters that the market tends to be 
highly volatile after a big natural disaster. I believe with 
that Federal backstop, actually, that market will remain pretty 
stable after an attack, which I think is a win-win situation we 
are all looking for.
    Senator Reed. Thank you.
    Mr. Hartwig, you have a comment.
    Mr. Hartwig. Thank you. And just quickly, and to echo what 
some of my fellow witnesses have said, absolutely. There is no 
question that is what has happened in the 11 years since TRIA 
has been in place. And while this was not by the original 
design, we have found that TRIA is an essential part of this 
country's national security plan, and I think I have heard you 
mention that, sir. And so in the absence of TRIA, we wind up 
creating a gaping hole in that plan.
    And as we just heard Professor Michel-Kerjan say, that if 
we wind up in a situation where TRIA has expired and we have a 
large-scale terrorist attack or even something along the lines 
of what we saw in Nairobi, Kenya, which could be easily 
copycatted here in the United States, perhaps not just at one 
location but in several locations simultaneously, you wind up, 
I think, with a large-scale loss of confidence in the market.
    Now, when we look at every other segment of the financial 
services industry, there are contingency plans for dealing with 
catastrophes of every sort. When it comes to a terrorism loss, 
this is part of our national security plan. It is part of what 
is absolutely integral to businesses all across the country 
today, and not just Rhode Island, but from coast to coast.
    Senator Reed. Well, thank you very much.
    Just a final thought, and that is as we go forward, there 
is another dimension to terror attacks that really was not so 
obvious in 9/11, and that is cyber security. I do not know, and 
I think we have to think carefully about how we would 
incorporate or would we incorporate aspects of that in any type 
of legislation, but that is just food for additional thought.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman and Ranking Member 
Crapo.
    I want to start with a question that Senator Crapo talked 
about and that is potentially raising the deductible, and I am 
sure there probably will be some proposals to do exactly that. 
Could all of you or at least a couple of you talk about the 
impact of raising the deductible on some of the small or mid-
sized and even some of the large insurance companies who are 
currently underwriting terrorism insurance? You can go ahead.
    Mr. Beshar. Bob, do you want to start?
    Mr. Hartwig. Sure. I will start, and I think it is 
appropriate, Senator, to sort of divide the discussion up 
between some of the larger companies and some of the smaller 
companies.
    Senator Tester. Yes.
    Mr. Hartwig. Just in practice, the way that an insurance 
company operates is that we are a very conservative industry. 
We do not operate on the edge. We do not operate to the very 
last dime of capital in our books. That is why this industry is 
absolutely rock solid after a decade of record catastrophe 
losses, and, quite frankly, we have every intention of staying 
that way and TRIA is absolutely essential to that.
    So, I know that there will be a discussion about raising 
retentions and deductibles and so forth, but raising 
deductibles and retentions in and of themselves does not create 
capacity, OK. What creates capacity, as insurers learn more 
about this market or external events influence the relative 
riskiness of operating this space at any level of dollars at 
risk.
    So, to the extent that we do not have a major terrorist 
attack, that helps to increase confidence. To the extent that 
there are advances in modeling terrorism risk, that helps 
reduce uncertainty and create confidence.
    Has there been some growth----
    Senator Tester. I have got you. I want to know what the 
impacts on small and mid-sized companies are if we increase the 
deductible.
    Mr. Hartwig. On small--are you referring to----
    Senator Tester. Small, mid-sized, and large reinsurers. I 
want to know what the impact is going to be on them, positive, 
negative--I understand about growth and increasing capacity.
    Mr. Hartwig. Right.
    Senator Tester. But that is not my question.
    Mr. Hartwig. Right. With respect to smaller insurers, it 
would likely be a negative----
    Senator Tester. OK.
    Mr. Hartwig.----because they are not----
    Senator Tester. How about mid-sized folks?
    Mr. Hartwig. They may have a little more room, but in the 
United States, when we are talking about mid-size companies, we 
are talking about regional, super-regional companies----
    Senator Tester. Right.
    Mr. Hartwig. I think it is still an issue. Larger companies 
have a little bit more opportunity there. On the reinsurance 
side, it is a little less clear.
    Senator Tester. Thank you very much.
    So, if we did that, and I do not want to put words in your 
mouth, it would potentially reduce competition in that 
marketplace, if the small companies were to go by the wayside?
    Mr. Hartwig. I do not think that you wind up increasing 
competition, let me put it that way.
    Senator Tester. OK. All right. Sounds good.
    I was curious to know--and this is for Mr. Beshar--can you 
speak specifically about the role TRIA would play in rural 
areas, where we do not have the big stadiums, you do not have 
the big casinos, kind of what do we need to be looking out for 
in rural America and how TRIA would impact them.
    Mr. Beshar. Absolutely, Senator. So, again, in terms of 
what we took away from the report, we were struck at how broad-
scale the take-up rates are across the regions and across the 
industries.
    Senator Tester. Yes.
    Mr. Beshar. To be sure, we were polling our clients. Our 
clients tend to be larger companies and mid-size companies, as 
the Professor identified. And so part of the objective is not 
just to be protective of smaller companies, for example, to 
create more capacity. Pricing comes down as there is more 
capacity, and then smaller companies, like those, perhaps, that 
were impacted by the bombing in Boston, are able to get access 
to cover. And similarly, I think, smaller rural areas would 
then follow along with that, where coverage becomes more viable 
and more relevant to them.
    Senator Tester. OK. I think in your testimony, Dr. Michel-
Kerjan, you talked about a lack of knowledge about--and I do 
not want to put words in your mouth--about the penetration in 
small businesses. Is there anything that we can do about that 
to find out----
    Mr. Michel-Kerjan. Sure, and I think that is an important 
question. We know a lot about large corporations, thanks to 
Marsh and McLennan and AON, to some extent, but that is about 
it. We know almost nothing on small businesses.
    Mr. Beshar. Really, just Marsh and McLennan there. Yes.
    [Laughter.]
    Mr. Michel-Kerjan. That is about it. Let us be serious. We 
do not know much about other markets. So, yes, I mean, we could 
think about the GAO being asked by Congress to actually do a 
market study on small businesses across the country. There 
could be surveys realized. Today, beyond that, we know almost 
nothing. We hear that some small businesses buy it. Other 
businesses actually get it for free.
    Senator Tester. Yes.
    Mr. Michel-Kerjan. We do not know anything.
    Senator Tester. OK. My last question is for Dr. Hartwig. 
Mr. Beshar brought up the fact that cyber should be a part of 
TRIA. I looked at the definition. It looks to be able to 
encompass that. I wanted to know your opinion.
    Mr. Hartwig. Yes. I would concur, and that under most 
instances of a cyber attack, that would perhaps, for instance, 
cause an explosion at a power plant or some such thing, that 
type of loss would be covered so long as it met the definition 
of a terrorist attack. So, in most cases, yes.
    Senator Tester. OK. Thank you all very much for your 
testimony. Thank you for your time.
    Chairman Johnson. Senator Manchin.
    Senator Manchin. Thank you very much.
    I just have a couple questions. Unlike other instances of 
Government-offered insurance, I have been told that TRIA has 
cost taxpayers next to nothing as far as since the Treasury 
covers 133 percent of its payments from insurers in the years 
following initial loss. On the other hand, TRIA has helped 
commercial real estate developers to receive financing for 
construction projects. I also understand that has helped them 
immensely.
    And my question would be, would TRIA cost taxpayers money 
in the future by your predictions, and what would happen to 
small community-based developers if TRIA was no longer 
available? I know you have touched on different things of it, 
but this is a pretty important aspect for the economy, right?
    Mr. Hartwig. Right, and we may all have some comments on 
this, but certainly, there is no question that in the absence 
of TRIA, it would cost the economy----
    Senator Manchin. There is nothing else on the marketplace.
    Mr. Hartwig. For terror coverage, no, other than 
internalizing the loss and assuming the loss on your own. No. 
There is nothing else out there.
    Senator Manchin. There are no insurance companies that--if 
this goes away, there are no insurance companies or the 
insurance industry willing to step to the plate.
    Mr. Hartwig. There would be a reduced amount of capacity, a 
drastically reduced amount of capacity in the marketplace.
    Senator Manchin. Doctor?
    Mr. Michel-Kerjan. No, I think there will still be some 
coverage. The question is, at what price?
    Senator Manchin. We are going to have, and I think that 
both the Chairman and Ranking Member will say on the floor, 
with our full membership, some people will say, why should 
Government be involved? Does Government even need to be 
involved? And that is what we always--there is a place for 
Government, especially when it can shore up a market and 
improve the economy, the economic situation, without costing 
the taxpayers, and this is one, it seems to me, makes sense. 
But if I am missing something, please tell me.
    Mr. Beshar. Senator Manchin, we agree powerfully with what 
you have said, that this has been a model program and that when 
Congress has reauthorized it in 2005 and 2007, they have made 
it better. They have modernized it. The recoupment----
    Senator Manchin. Not been a burden on the taxpayers in any 
way, shape, or form that you can see?
    Mr. Beshar. That is correct.
    Senator Manchin. We have not found any of that. If that is 
the case, if there is a profit to be made, why would the 
private sector not--I am being the devil's advocate--why would 
you not let the private sector take it over? Why would the 
Government have to be involved, if it has been such a good 
program?
    Mr. Michel-Kerjan. Well, let me say that right now, it is 
not just a Federal program. The first $27 billion would be paid 
by the private sector, and that is important to keep in mind. 
And for any event to cause $27 billion of injury losses will 
have to be a massive terrorist attack. So, it is not just a 
free fare program starting at zero dollars. That kicks in at 
$27 billion, which is very significant.
    Senator Manchin. OK.
    Mr. Hartwig. And if I might add to that, in the absence of 
TRIA and we have a large-scale terrorist attack, the Government 
is going to be called to act. There are going to be----
    Senator Manchin. Whether there is insurance or not----
    Mr. Hartwig. Right. Exactly.
    Senator Manchin.----the Government is going to step to the 
plate.
    Mr. Hartwig. In the absence of insurance, I can guarantee 
you the Governors from the affected States will be here and 
will be asking for very, very large sums of money from the 
Federal Government.
    Senator Manchin. So, any naysayers against this program----
    Mr. Hartwig. Right.
    Senator Manchin.----we are basically, you are going to pay 
me now or pay me later.
    Mr. Hartwig. That is exactly the point, Senator, that one 
way or another, you could work with the private sector, who 
will internalize most of these losses under the vast majority 
of scenarios, including the very large events that are nearly 
$30 billion, or nearly the entire burden could be placed on the 
Federal Government after the fact, and the Federal Government 
has, I might also add, has no means for effectively managing 
these types of claims. These claims will be managed in the 
private sector in an efficient manner----
    Senator Manchin. Let me just say this----
    Mr. Hartwig.----not only financed, but managed.
    Senator Manchin. They give us a little bit of time here, so 
I have got to be quick.
    The thing that would be--if we have a massive hit and a 
massive loss, under TRIA, still, the Government will be paid 
back eventually, correct?
    Mr. Hartwig. Paid back and then some.
    Senator Manchin. A hundred-and-thirty-three. Right. If it 
goes away and the market does not pick it up and we have a 
massive hit, then it is basically out of the taxpayers' pocket 
and no reimbursement whatsoever.
    Mr. Hartwig. Correct.
    Senator Manchin. OK. Next of all, how long should this 
reauthorization be and should we include the Secretary of 
Homeland Security in the terrorism certification process? 
Should they be involved in that? And how long should this one 
be that we are working on right now?
    Mr. Beshar. Personally, I think it is a very sound idea to 
have the Secretary of Homeland Security as a participant, 
together with the Secretary of the Treasury, the Secretary of 
State, and the Attorney General. Our view is that Congress has 
improved this program over time, and so you are trying to 
strike that balance between consistency and----
    Senator Manchin. It has changed every time we have done it, 
so----
    Mr. Beshar.----so we advocate----
    Senator Manchin.----we have not found the sweet spot yet.
    Mr. Beshar. Indeed. We advocate a 10-year reauthorization.
    Senator Manchin. Ten year?
    Mr. Beshar. Yes.
    Senator Manchin. Do all of you agree?
    Mr. Hartwig. Certainly, a long-term renewal is what----
    Senator Manchin. Well, that does not work well here. Give 
us a number, because----
    [Laughter.]
    Mr. Hartwig. Can I start with permanent? Is that--permanent 
would----
    Senator Manchin. Permanent is probably a more appropriate 
way to go, then you go down to a 10-year minimum?
    Mr. Hartwig. Right.
    Senator Manchin. Is that where you would be? You all think 
10 years should be the minimum we consider, right, so we do 
not----
    [Witnesses nodding heads.]
    Senator Manchin. OK. Thank you. It is very interesting.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you. Thank you, Mr. Chairman, 
Ranking Member, witnesses, for holding this hearing. It is very 
important, obviously, to the country and particularly to New 
York and very important to me, so I appreciate doing this way 
in advance, because we have got to make progress on this issue, 
even though the program does not expire until the end of 2014.
    As we all know, policies get written much more quickly than 
that, and if we wait until the last minute, there will be 
billions of dollars of real estate that does not go in the 
ground because people are uncertain whether they can get 
terrorism insurance or they are uncertain whether they can get 
a mortgage, so they are uncertain whether to plan a building, 
et cetera.
    So, the sooner we do this, the better, and we are reminded 
by events near and far--the Boston Marathon bombings, brutal 
attacks at the Westgate Mall in Nairobi--the threat of 
terrorism is ever with us. The idea that, well, 5 years after 
9/11, we could forget about terrorism, everyone knows that is 
not true. Well, it goes hand-in-hand. We cannot forget about 
terrorism insurance, either, because the specter of terrorism 
can hurt economic growth and economic growth is what we want.
    We know, for instance, the Kenyan mall massacre reminds us 
that Government buildings and skyscrapers in Manhattan or Los 
Angeles or Chicago are not the only potential targets. There 
are shopping malls and sports stadiums and factories and 
airports all over the country, all of which can be impacted if 
terrorism insurance is not available.
    So, as a New Yorker, the rebuilding of downtown in the 
years following 9/11 has been nothing short of a miracle. It is 
a more vibrant neighborhood now than it was before 9/11, and in 
part, that is because of the TRIA program. And all those jobs 
that were created, homes that were created, wealth that was 
created, in part, is because of TRIA. So, I hope we will work 
with you, Mr. Chairman, and Ranking Member Crapo to extend the 
program as quickly as we can.
    So, here are my questions. First, Mr. Beshar, in your 
testimony and in Marsh's report, you indicate that the average 
take-up rate for terrorism insurance is at least 53 percent in 
every region of the country, and, of course, much higher in 
certain regions. Take-up rates for several major industries--
media, telecom, education, transportation--range from 66 
percent to over 80 percent. How does that compare to most other 
types of insurance and what does this tell you?
    Mr. Beshar. I think we have been surprised, Senator 
Schumer, at how strong the interest in this cover has been. We 
assumed, perhaps like you, that it would be much more 
concentrated in the Northeast, but in fact, the rates in the 
West, as Senator Heller mentioned previously, have been very 
strong. Take-up rates for institutions like nonprofits and 
educational foundations have been much stronger than we would 
have anticipated. So, really, across the board, there is 
profound interest in this cover.
    You mentioned real estate developers. Many mortgage--many 
lenders require as part of providing a mortgage that there is 
terrorism cover that the developer has obtained, and if TRIA is 
not available, the pricing for that cover, if it is available, 
will go up significantly.
    Senator Schumer. Thank you.
    OK. You are all insurance and risk management experts to 
one degree or another, and if you had been asked last week to 
evaluate the risk of an attack on the Westgate Mall in Nairobi, 
would you have been able to evaluate it? And a related 
question. Is not one of the difficulties in making such 
determinations that the necessary information is difficult, in 
some cases impossible, for the private sector to obtain because 
it is classified national security information that we would 
not want out there for the world to see? Whoever would like to 
take it. Dr. Hartwig.
    Mr. Hartwig. Yes, sir. As a fellow New Yorker, I share with 
you the sentiments about the city. Every day on my way to work, 
I go past the Ground Zero site and I am reminded every day 
about the benefits of TRIA, believe me, in a very firsthand 
way, as Mr. Beshar's company is, as well.
    But to answer your question directly, the likelihood of 
something like in the Westgate Mall in Nairobi, Kenya, 
happening here, 10 years ago, basically, I said it was a matter 
of when, not if, it would happen. Thank God, it has not 
happened, something of that magnitude. But we have had the 
Boston Marathon attack this year.
    It is also incorrect to say that the Boston Marathon is the 
only event, in some sense, that has occurred. We have been very 
lucky with interdiction, thank goodness, to the resources at 
the Federal level and at the State and in the city of New York 
itself. But there have been several plots. The only reason they 
did not actually happen was because of the ineptitude of the 
attacker himself, individuals such as the Underwear Bomber, for 
example, the Shoe Bomber, or an individual trying to blow up a 
bomb in Times Square.
    So, the reality is that I still think it is a matter of 
when, not if, for a Westgate Mall-type incident here in the 
United States, and absolutely, it is very, very difficult to 
obtain information, certainly if you are an insurer, and it is 
even difficult for the country's national security agencies to 
obtain this information. It is far more difficult for insurers 
to obtain this sort of information, which is inherently why it 
is difficult to model these sorts of events.
    Senator Schumer. Right. OK.
    Let me ask one final question, and this, again, can go to 
any of the witnesses who wishes, and it is my last one, with 
your permission, Mr. Chair. With many types of insurance, there 
are things the insured can do to reduce the risk of loss. Flood 
insurance, raise the level of your house or build a dune or a 
structure in front of your house. In the case of terrorism, 
what can commercial real estate developers or owners of malls 
or sports stadiums do to mitigate the potential risk of 
terrorist attack, and is it not one of the challenges here that 
terrorists will actively seek to overcome whatever defenses 
that you have planned? Do you want to take that, Dr. Kerjan?
    Mr. Michel-Kerjan. Let me take it. You summarized this very 
well, what we are facing here. Whether it is flood or 
earthquake, we know what the engineering solution should be. 
Many people do not do it, but that is another issue.
    With terrorism, well, to take 9/11, it would have been very 
hard for any commercial entities in the World Trade Center 
Towers to do anything to prevent a commercial aircraft crash 
against the building.
    So, to your question, I think the answer is near to zero in 
terms of what can we do to prevent these attacks as a 
commercial entity. You can have more cameras. You can have more 
physical protection, and in New York afterwards, you see that 
happening. That is part of a broader national security response 
to the threat of terrorism. But I think there are only a few 
things that a commercial entity can do, and if you move from 
New York to other parts of the country, and maybe at the lower 
level of revenue, many of these companies do not have the means 
to actually invest in protective measures, and even if they do, 
well-organized, informed terrorist organizations will just 
select the other target which is less protected. So it is a 
dynamic uncertainty, and I think that is very peculiar to 
terrorism threats.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Johnson. Thank you, again, for all of our 
witnesses for being here with us today.
    I look forward to working with all of my colleagues on the 
Committee to move a bill to extend the Terrorism Risk Insurance 
Act as soon as we can.
    This hearing is adjourned.
    [Whereupon, at 11:12 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Good morning, I call this hearing to order.
    Two weeks ago, we observed the 12th anniversary of the tragic 
September 11th terrorist attacks on our country. In the aftermath of 
the tragedy and after suffering steep losses, insurance companies 
stopped offering terrorism coverage as part of their commercial 
property policies. This had a destabilizing impact on various parts of 
our economy.
    Congress responded by creating the Terrorism Risk Insurance Program 
to provide a narrow and targeted Government backstop for this insurance 
coverage. The program proved helpful, creating certainty for many 
businesses, including developers, construction companies, commercial 
lenders, as well as private insurance markets.
    The program has since been reauthorized by Congress twice. The last 
time, Congress made very few changes and extended the program for 7 
years. It is my hope that once again we will be able to find bipartisan 
consensus for the reauthorization of TRIA well before the program 
expires at the end of 2014.
    While a few may seek dramatic changes or even try to eliminate the 
program, we should remember that taxpayers have not lost any money on 
the program. The program's unique structure has fully protected 
taxpayers while promoting economic growth by preventing interruptions 
in insurance coverage and providing certainty for commercial property 
developers working on stadiums, universities, malls and other projects 
across the country.
    Today, we review the state of the terrorism risk insurance market, 
and I look forward to hearing from our witnesses about how the current 
program has functioned and the ongoing need for the same limited 
Government backstop we already have in TRIA.
    With that, I turn to Ranking Member Crapo for his opening 
statement.
                                 ______
                                 
             PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ
    Thank you, Mr. Chairman, for holding this hearing today on the 
critical issue of terrorism risk insurance. Although TRIA does not 
expire until next year, it is important for this Committee to start 
working on reauthorization now, to give greater certainty to the market 
as insurance policies start coming up for renewal.
    Congress first enacted the Terrorism Risk Insurance Act in 2002, 
when, after the terrorist attacks of September 11, 2001, we saw a total 
breakdown in the market for insurance against terrorism risk. Many 
insurers stopped offering coverage entirely or made it available only 
at very high costs. Businesses, as a result, faced the prospect of 
dramatically higher costs or an inability to get financing to invest, 
create jobs, and build new facilities. Congress responded by enacting 
TRIA, which provides a limited Federal reinsurance backstop that 
restored market functionality, and since then we have twice extended 
the program.
    In my State of New Jersey, we are acutely aware of the challenges 
that TRIA addresses. The very things that make us strong economically 
and enrich our lives culturally also make us most vulnerable. In just a 
two-mile stretch of my State, we have the largest container port on the 
East Coast, one of the busiest airports in the country, rail lines that 
carry hundreds of thousands of people back and forth to work every day, 
and critical industrial infrastructure. Not to mention high population 
density, important cultural centers and landmarks, and major highways.
    New Jersey is an example, but the problem is national, and affects 
economic and cultural centers and infrastructure in every State. So I 
am pleased that the Committee is starting the work of reauthorization 
and I look forward to hearing from our witnesses today.
                                 ______
                                 
              PREPARED STATEMENT OF SENATOR MARK R. WARNER
    The Terrorism Risk Insurance Act expires at the end of 2014. As 
someone who is passionate about infrastructure investment and 
rebuilding our economy, I care deeply about the reauthorization of this 
program.
    Some of our colleagues in the House would like to let TRIA expire. 
They view the program as an ``inappropriate'' Government subsidy. Never 
mind the facts, which are that not one dime of taxpayer money has been 
lost through this program since its inception.
    Next, they assert that the insurance industry can adequately cover 
losses from terrorism. This ignores a stark reality demonstrated by the 
insurance industry in the aftermath of 9/11, which immediately refused 
to write new policies covering terrorist acts. Such a situation is not 
surprising--unlike for natural disasters, where the industry is aided 
by meteorological data and historical analysis, it is impossible to 
predict terrorism. Insurance companies certainly do not have access to 
information our intelligence agencies possess.
    Some critics see TRIA as a subsidy for New York City. 
Unfortunately, as the events of last April's Boston marathon tragically 
demonstrated, terrorism can strike anywhere in our Nation. An 
expiration of TRIA will leave landmarks in every State of the country 
vulnerable. Each senator represents major commercial real estate 
developments, sports arenas, entertainment plazas, and college campuses 
that are potential targets. It would be a disaster to leave our States' 
facilities without coverage.
    Without reauthorization the country risks a freeze in commercial 
real estate development, as insurers will be unable to appropriately 
price risk and may thus exit the market. It will also impede our 
Nation's nascent economic recovery by creating uncertainty.
    Commercial leases and construction projects depend on having 
appropriate insurance coverage. To avoid additional uncertainty, I 
believe we should reauthorize TRIA on a long-term basis.
    I thank Chairman Johnson and Ranking Member Crapo for holding this 
critical hearing, and I look forward to working with them both to move 
legislation expeditiously.


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 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARK KIRK FROM PETER 
                           J. BESHAR

Q.1. Members of the property and casualty (P&C) insurance 
industry range widely in size and scope. Some of the largest 
insurers note the $100 million minimum could be increased as 
one means of increasing private capital standing in front of 
the Government. They make similar remarks about the deductible. 
The concern raised about this prospect, however, is that it 
would preclude many of the smaller insurance providers from 
offering terrorism risk insurance. Is there a way to ensure 
that smaller insurance companies are able to continue to offer 
terrorism insurance while also increasing either the $100 
million threshold or increasing deductibles?

A.1. Did not respond by publication deadline.

Q.2. Are there ways to fine-tune the TRIA program to better 
serve the marketplace and help with pricing? Particularly, 
would it be appropriate to apply different risk profiles to the 
different covered lines under the program? Do all cover covered 
lines present the same potential exposure and are all the 
currently covered lines necessary for such a backstop?

A.2. Did not respond by publication deadline.

Q.3. I understand the complexity and the differences between 
trying to price terrorism risk compared with most other kinds 
of risks. Litigation, medical considerations, and employer 
issues can stretch out for years, and can be quite costly to 
the parties involved--a great example of this being worker's 
compensation policies, which are covered in a terrorism event 
and often dwarf other claims, such as those for infrastructure. 
Would differentiating and requiring insurance companies to 
cover specific lines of risks or to allow for different 
deductibles for different product lines seem feasible? Why or 
why not? Could the program that differentiates between risk 
profiles allow a lower deductible for higher risk profiles and 
higher deductibles for more manageable risk?

A.3. Did not respond by publication deadline.

Q.4. Is there increased capacity of reinsurers in the 
marketplace and if so, why is the increased capacity of 
reinsurers not being used for terrorism risk? What has your 
research shown with regard to the reinsurance market? What 
about a risk transfer mechanism to the capital markets (i.e., 
such as terrorism bonds?).

A.4. Did not respond by publication deadline.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARK KIRK FROM ERWANN 
                        O. MICHEL-KERJAN

Q.1. Across most other Federal insurance programs we see the 
Government's inability to correctly price risk. In most 
circumstances of insurance, I would much prefer to see the 
private market model, price, and assume risk. Can you explain 
why the private market has been unable to effectively model and 
price terrorism risk since the September 11th terrorist 
attacks?

A.1. Did not respond by publication deadline.

Q.2. In the wake of September 11th, the Federal Government took 
considerable measures to better understand and prevent 
terrorist attacks. I know that private industry has also worked 
to better understand the risks associated with terrorism and 
how to measure and price that risk. What advances has the 
private market made in its ability to price this risk? What is 
the state of the capital markets for terrorism risk?

A.2. Did not respond by publication deadline.

Q.3. Are there ways to fine-tune the TRIA program to better 
serve the marketplace and help with pricing? Particularly, 
would it be appropriate to apply different risk profiles to the 
different covered lines under the program? Do all cover covered 
lines present the same potential exposure and are all the 
currently covered lines necessary for such a backstop?

A.3. Did not respond by publication deadline.

Q.4. I understand the complexity and the differences between 
trying to price terrorism risk compared with most other kinds 
of risks. Litigation, medical considerations, and employer 
issues can stretch out for years, and can be quite costly to 
the parties involved--a great example of this being worker's 
compensation policies, which are covered in a terrorism event 
and often dwarf other claims, such as those for infrastructure. 
Would differentiating and requiring insurance companies to 
cover specific lines of risks or to allow for different 
deductibles for different product lines seem feasible? Why or 
why not? Could the program that differentiates between risk 
profiles allow a lower deductible for higher risk profiles and 
higher deductibles for more manageable risk?

A.4. Did not respond by publication deadline.

Q.5. Is there increased capacity of reinsurers in the 
marketplace and if so, why is the increased capacity of 
reinsurers not being used for terrorism risk? What has your 
research shown with regard to the reinsurance market? What 
about a risk transfer mechanism to the capital markets (i.e., 
such as terrorism bonds?).

A.5. Did not respond by publication deadline.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR MARK KIRK FROM ROBERT 
                           P. HARTWIG

Q.1. In the wake of September 11th, the Federal Government took 
considerable measures to better understand and prevent 
terrorist attacks. I know that private industry has also worked 
to better understand the risks associated with terrorism and 
how to measure and price that risk. What advances has the 
private market made in its ability to price this risk? What is 
the state of the capital markets for terrorism risk?

A.1. Did not respond by publication deadline.

Q.2. Members of the property and casualty (P&C) insurance 
industry range widely in size and scope. Some of the largest 
insurers note the $100 million minimum could be increased as 
one means of increasing private capital standing in front of 
the Government. They make similar remarks about the deductible. 
The concern raised about this prospect, however, is that it 
would preclude many of the smaller insurance providers from 
offering terrorism risk insurance. Is there a way to ensure 
that smaller insurance companies are able to continue to offer 
terrorism insurance while also increasing either the $100 
million threshold or increasing deductibles?

A.2. Did not respond by publication deadline.

Q.3. Are there ways to fine-tune the TRIA program to better 
serve the marketplace and help with pricing? Particularly, 
would it be appropriate to apply different risk profiles to the 
different covered lines under the program? Do all cover covered 
lines present the same potential exposure and are all the 
currently covered lines necessary for such a backstop?

A.3. Did not respond by publication deadline.

Q.4. I understand the complexity and the differences between 
trying to price terrorism risk compared with most other kinds 
of risks. Litigation, medical considerations, and employer 
issues can stretch out for years, and can be quite costly to 
the parties involved--a great example of this being worker's 
compensation policies, which are covered in a terrorism event 
and often dwarf other claims, such as those for infrastructure. 
Would differentiating and requiring insurance companies to 
cover specific lines of risks or to allow for different 
deductibles for different product lines seem feasible? Why or 
why not? Could the program that differentiates between risk 
profiles allow a lower deductible for higher risk profiles and 
higher deductibles for more manageable risk?

A.4. Did not respond by publication deadline.

Q.5. Is there increased capacity of reinsurers in the 
marketplace and if so, why is the increased capacity of 
reinsurers not being used for terrorism risk? What has your 
research shown with regard to the reinsurance market? What 
about a risk transfer mechanism to the capital markets (i.e., 
such as terrorism bonds?).

A.5. Did not respond by publication deadline.

              Additional Material Supplied for the Record

                PREPARED STATEMENT OF BENJAMIN M. LAWSKY
          Superintendent of Financial Services, New York State
                           September 25, 2013
    I would like to thank Chairman Johnson, Ranking Member Crapo, and 
Senator Schumer for the opportunity to submit comments on the 
importance of reauthorizing the Terrorism Risk Insurance Act (TRIA). I 
would also like--in particular--to recognize Senator Schumer for his 
leadership on this issue, which is so vital to his constituents in New 
York.
    Reauthorizing TRIA is critical to the health our Nation's economy. 
If Congress fails to act, it would cause significant disruptions in the 
insurance market and for the broader business community. In addition, 
it could jeopardize a number of important construction projects and the 
jobs that come with them--not only in New York, but across the country.
    As the Superintendent of Financial Services at the New York State 
Department of Financial Services, I can attest to the fact that we in 
New York are unfortunately all too well acquainted with the risk of 
terrorism. Not only did our State endure the horror of 9/11, but we 
also experienced the truck bomb that in 1993 exploded at the World 
Trade Center and, more recently, saw the foiling of a 2010 plot to 
explode a bomb in Times Square. Of course, as the 1,776-foot-tall 
Freedom Tower and all the rebuilding around it shows, New Yorkers are 
incredibly resilient and enterprising.
    That post-9/11 rebuilding is still in progress 12 years later, 
though, demonstrates how exceedingly costly, complicated, and time-
consuming it can be to recover from acts of terrorism. And given that 
the possibility of terrorist acts in this country will always remain a 
reality, builders of large and iconic structures depend on terrorism 
insurance. TRIA ensures the availability and relative affordability of 
terrorism insurance coverage.
    No one can forecast the frequency or severity of terrorist attacks 
from past experience. This fact means that it is actuarially infeasible 
to price accurately for terrorism coverage. For that reason, the United 
States and 22 other countries have implemented some form of public-
private partnership for insuring against terrorism risk.
    Because an insurer under New York law cannot exclude coverage for 
the risk of terrorism from a commercial property/casualty policy, the 
only way for an insurer to moderate its terrorism risk, absent TRIA, is 
to decline to insure property altogether. If Congress fails to 
reauthorize TRIA, insurance capacity in the market would dry up, which 
would be devastating to businesses with higher levels of terrorism 
risk, such as commercial construction companies.
    The consequences of a constricted market for commercial property/
casualty insurance would be grave. Businesses that could not find or 
afford sufficient coverage would have to self-insure against property 
damage and liability, and banks would refuse to make construction loans 
to builders that carried insufficient levels of property/casualty 
insurance. Rebuilding from the destruction of 9/11 and, more recently, 
from Superstorm Sandy, would grind to a halt for those without 
coverage.
    TRIA's impacts are not limited to property risk alone. Because 
workers compensation coverage by law cannot be capped, an insurer 
writing such risk without the kind of protection afforded by TRIA faces 
unquantifiable liability if a business with a significant number of 
employees were to suffer significant injuries and/or loss of life. In 
fact, the uncertainty about whether TRIA will be reauthorized already 
is affecting the appetite of insurers to write workers compensation 
insurance beyond December 31, 2014, the date by which TRIA currently is 
set to expire.
    Simply put, TRIA provides a critical backstop that encourages 
insurance companies to underwrite terrorism risk responsibly, and makes 
it possible for carriers to offer terrorism coverage that is relatively 
affordable for businesses. And unlike other Federal disaster assistance 
programs like the National Flood Insurance Program, Federal support 
under TRIA only kicks in once a certified act of terrorism has caused 
insurers, in the aggregate, to pay losses in excess of a threshold 
amount and to pay additional losses to the extent of a deductible 
equaling a percentage of their premiums written. The TRIA program then 
covers a percentage of losses (insurers cover the remainder), and only 
then up to a capped amount. This sophisticated structure is a prudent 
public-private solution that brings certainty to the marketplace for a 
difficult-to-quantify risk.
    To help ensure that the insurance marketplace operates in an 
efficient and affordable fashion, we urge Congress not only to 
reauthorize TRIA, but to make it permanent. Doing so will avoid the 
market upheaval that occurred in the past when TRIA's prior expiration 
dates approached, and provide the certainty that insurers and 
businesses need in this post-9/11 world.
                                 ______
                                 
                       American Hotel & Lodging Association
                           Washington, DC 20005, September 24, 2013
Hon. Tim Johnson
Chairman
Senate Committee on Banking, Housing, and Urban Affairs
Washington, DC.

Hon. Michael Crapo
Ranking Member
Senate Committee on Banking, Housing, and Urban Affairs
Washington, DC.

Dear Chairman Johnson and Ranking Member Crapo:

    The American Hotel & Lodging Association applauds the leadership of 
the Senate Banking Committee in holding hearings to consider the 
Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA). 
The lodging industry calls on Congress to act quickly to continue this 
important private/public partnership.
    AH&LA is a 100-year-old association of State and city partner 
lodging associations throughout the United States with some 10,000 
property members nationwide. We represent more than 4.9 million guest 
rooms and over 1.8 million employees in the United States. AH&LA's 
membership ranges from the smallest independent properties to the 
largest convention hotels.
    Without TRIPRA, the lodging industry will face substantial 
difficulty in obtaining terrorism risk coverage which is often required 
for securing loans for development projects. The Terrorism Risk 
Insurance Act (TRIA) was enacted in the months following the September 
11, 2001 attacks and provides a Federal plan for economic continuity 
and recovery in the event of another severe terrorist attack against 
the United States. TRIPRA ensures a market exists for businesses to 
secure terrorist risk coverage often required under the terms of bank 
loans. Importantly, TRIPRA protects American taxpayers as the program 
mandates that ``first dollar losses'' be paid by insurers and policy 
holders and is only triggered in the event of a major event and after 
individual insurer loss thresholds are met. In addition, the program 
has operated virtually cost-free to the taxpayer since being enacted.
    The lodging industry has seen no evidence that the terrorism risk 
market is prepared to provide coverage without the private/public 
partnership TRIPRA provides. TRIPRA has allowed for terrorism coverage 
prices to stabilize and adequate coverage to be secured with minimal 
risk to taxpayers. Our members will soon begin to see renewal notices 
with exclusion clauses if TRIPRA is not renewed by Congress.
    AH&LA applauds your efforts to extend this vital program and calls 
on Congress to act quickly.
    Thank you for your consideration of our views.

        Sincerely,

                                         Katherine G. Luga,
                                                  President and CEO

Cc: Members of Senate Banking, Housing, and Urban Affairs Committee


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