[Senate Hearing 113-328]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 113-328

 
 REAUTHORIZING TRIA: THE STATE OF THE TERRORISM RISK INSURANCE MARKET, 
                                PART II

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

                                HEARING

                               BEFORE THE

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

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                                   ON

 CONTINUING EXAMINATION OF THE NEED TO REAUTHORIZE THE TERRORISM RISK 
   INSURANCE PROGRAM, THE ROLE THAT THE CURRENT PROGRAM PLAYS IN THE 
    MARKET, AND THE PROGRAM'S FEATURES THAT ARE DESIGNED TO PROTECT 
                  WORKERS, COMMUNITIES, AND TAXPAYERS

                               __________

                           FEBRUARY 25, 2014

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs
                                
                                
                                
                                
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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, Policy Analyst and Legislative Assistant

                  Greg Dean, Republican Chief Counsel

             Mike Lee, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                       Taylor Reed, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
                                  
                            C O N T E N T S

                              ----------                              

                       TUESDAY, FEBRUARY 25, 2014

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     2
    Senator Kirk
        Prepared statement.......................................    28
    Senator Tom Coburn
        Prepared statement.......................................    29

                               WITNESSES

Christopher Murphy, a United States Senator from the State of 
  Connecticut....................................................     3
 W. Edward Walter, President, Chief Executive Officer and 
  Director, Host Hotels & Resorts, Inc., on behalf of the 
  Coalition to Insure Against Terrorism..........................     4
    Prepared statement...........................................    29
Carolyn Snow, Director, Risk Management, Humana Inc., on behalf 
  of Risk and Insurance Management Society, Inc..................     4
    Prepared statement...........................................    33
    Response to written questions of:
        Senator Coburn...........................................    55
Bill Henry, CEO, McQueary, Henry, Bowles and Troy, Inc., on 
  behalf of the Council of Insurance Agents & Brokers............     5
    Prepared statement...........................................    35
    Response to written questions of:
        Senator Coburn...........................................    57
Vincent T. Donnelly, President and CEO, PMA Insurance Group, on 
  behalf of the Property Casualty Insurers Association of America    41
    Prepared statement...........................................     6
    Response to written questions of:
        Senator Kirk.............................................    61
        Senator Coburn...........................................    62
Warren W. Heck, CEO and Chairman of the Board, Greater New York 
  Insurance Companies, on behalf of the National Association of 
  Mutual Insurance Companies.....................................     7
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Kirk.............................................    66
        Senator Coburn...........................................    67
Douglas G. Elliot, President, Commercial Markets, The Hartford 
  Financial Services Group, on behalf of the American Insurance 
  Association....................................................     9
    Prepared statement...........................................    50
    Responses to written questions of:
        Senator Kirk.............................................    70
        Senator Coburn...........................................    71

              Additional Material Supplied for the Record

Prepred statement of Richard Blumenthal, a United States Senator 
  from the State of Connecticut..................................    76
Prepared statement of the Independent Insurance Agents & Brokers 
  of America.....................................................    77
Prepared statement of Aon plc....................................    81
Prepared statement of the Financial Services Roundtable..........    89
Letter from the National Association of Insurance Commissioners..    95
Letter from the U.S. Chamber of Commerce.........................    97
Letter from NAIOP................................................    99
Letter from NAPSLO...............................................   101
Prepared statement of Kean Driscoll, Chief Executive Officer, 
  Validus Re.....................................................   103
Prepared statement of J. Eric Smith, President and Chief 
  Executive Officer, Swiss Re Americas...........................   110


 REAUTHORIZING TRIA: THE STATE OF THE TERRORISM RISK INSURANCE MARKET, 
                                PART II

                              ----------                              


                       TUESDAY, FEBRUARY 25, 2014

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I call this hearing to order.
    Today we hold our second hearing on reauthorizing TRIA and 
the state of the terrorism risk insurance market.
    Unfortunately, we have votes scheduled for 11:15.
    At our first hearing last fall, we heard testimony from 
experts who reminded the Committee of the history of this 
program the need for this program, the extensive layers of 
taxpayer protections in the program and the role the private 
market has been able to play because of the existence and 
structure of the program, not in spite of it.
    The Committee was also cautioned that any drastic changes 
to the program could negatively affect small insurance 
providers and their policyholders.
    As I noted at that hearing, the last time TRIA was 
reauthorized, Congress made very few changes and extended the 
program for 7 years. Another long extension will promote 
economic growth, providing certainty for commercial property 
development and job creation across the country.
    I look forward to hearing from our witnesses today and 
their views on the issues the Committee needs to consider 
carefully as we move forward to reauthorize the program.
    We also appreciate the important insight others, such as 
the Big ``I,'' the Financial Services Roundtable and the 
Reinsurance Association of America, have provided us through 
written statements and past testimony that we will enter into 
the record.
    There are also a number of our colleagues, on and off the 
Committee, on both sides of the aisle, who are leaders on this 
issue. I would like especially to thank Senators Reed, 
Menendez, Schumer, Tester, Warner, Murphy, Klobuchar and 
Franken on my side of the aisle and Senators Kirk, Heller and 
Blunt on Ranking Member Crapo's side.
    I look forward to continue working with Ranking Member 
Crapo and our colleagues to move forward with a bill to extend 
TRIA in short order.
    I turn to Ranking Member Crapo for his opening statement.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you, Mr. Chairman. I know we are short 
on time, so I will keep my remarks very briefly.
    We have had a lot of analysis of the TRIA program so far. 
We all know the issues that we are dealing with.
    And I am committed to working to help us reauthorize TRIA. 
We need to, and will, continue to promote private capital ahead 
of the Government backstop. While changes to the TRIA program 
levers are necessary, reauthorization gives us the chance to 
examine other changes that might make the program better.
    I am interested in the thoughts of our panel on how to 
adjusting certification might impact the TRIA program as well 
as any other areas of reform that the program could benefit 
from.
    Since the last hearing, Chairman Johnson and I and our 
staffs have continued to work toward developing a bipartisan 
approach to reauthorizing this program. We both agree that TRIA 
reauthorization is an important priority for the Committee. I 
welcome his continued partnership in developing an extension to 
the program.
    In order to limit the economic and physical impact of any 
future terrorist attack on the United States, we have got to 
get TRIA right. I am hopeful that today's hearing will help us 
move our discussions forward as we look forward to a markup.
    Chairman Johnson. Thank you, Senator Crapo.
    Due to votes later this morning, I will ask the other 
Members to withhold making opening statements if possible and, 
rather, submit them into the record.
    That being said, are there any other Members who would like 
to give very brief opening statements?
    [No response.]
    Senator Johnson. I would like to remind my colleagues that 
the record will be open for the next 7 days for additional 
statements and other materials.
    Before we begin, I would like to introduce our witnesses.
    Mr. Edward Walter is the President and CEO of Host Hotels 
and Resorts, testifying on behalf of the Coalition to Insure 
Against Terrorism.
    Ms. Carolyn Snow is the President of the Risk and Insurance 
Managements Society.
    Mr. Bill Henry is the CEO of McQueary, Henry, Bowles and 
Troy, testifying on behalf of the Council of Insurance Agents 
and Brokers.
    Mr. Vincent Donnelly is the President and CEO of PMA 
Insurance Group, testifying on behalf of the Property Casualty 
Insurers Association of America.
    Mr. Warren Heck is the CEO and Chairman of the Board of 
Greater New York Insurance Companies, testifying on behalf of 
the National Association of Mutual Insurance Companies.
    And we are pleased to have our colleague, Senator Murphy, 
introduce our last witness.

 STATEMENT OF CHRISTOPHER MURPHY, A UNITED STATES SENATOR FROM 
                    THE STATE OF CONNECTICUT

    Senator Murphy. Thank you very much, Mr. Chairman, and 
thank you, Ranking Member Crapo, for having me here today.
    I know the Senators representing all of the companies here 
on the panel are proud of their work.
    We are especially proud of one of our seminal companies, 
the Hartford. I am here to introduce Mr. Doug Elliot, who is 
the President of Commercial Markets with The Hartford Financial 
Services Group which is based, unsurprisingly, in Hartford, 
Connecticut.
    Mr. Elliot is responsible for The Hartford's small 
commercial middle market and specialty casualty business as 
well as group benefits. He has had a long history in 
Connecticut insurance as President of Hartford Steam Boiler as 
well as CEO of Travelers's general and commercial lines.
    I look forward to his testimony and the wealth of insight 
and experience that he is going to bring to today's 
proceedings.
    Mr. Chairman, I would just like to note that I believe that 
we here in Congress have begun, in a way, to tempt fate by 
waiting as long as we have to reauthorize TRIA. As we all know, 
TRIA's impending expiration at the year's end has meant that 
all current TRIA insurance policies now include springing 
clauses in the event that Congress fails to act.
    And, with limited time left in the legislative calendar, I 
cannot stress the need for haste any more forcefully. Pushing a 
matter like this into the lame duck session, which a lot of us 
fear may happen, could do real damage to the property markets.
    Lastly, I just want to underscore the fact that while 
insurers obviously have to administer and bear the risk of TRIA 
they are not the only face of TRIA policyholders. My State, 
like every other state, is replete with stadiums and hospitals 
and malls and other sources of commercial properties that 
utilize TRIA's unique public-private partnership. They are 
really the face of the effort to renew this new law.
    The real risk of not doing that goes to insurers but also 
to the millions of property owners who utilize terrorism risk 
insurance and also to the economic development that simply will 
not happen without this protection.
    So I thank, Mr. Chairman, you and the Committee for taking 
this issue so seriously.
    I would like to submit for the record a statement from my 
colleague, Senator Blumenthal, and I look forward to today's 
discussion.
    Chairman Johnson. Without objection.
    Chairman Johnson. Before we begin, I will ask the witnesses 
to try to keep their testimony to 2 minutes, and their full 
written testimony will be submitted to the record.
    Mr. Walter, please proceed.

   STATEMENT OF W. EDWARD WALTER, PRESIDENT, CHIEF EXECUTIVE 
OFFICER AND DIRECTOR, HOST HOTELS & RESORTS, INC., ON BEHALF OF 
           THE COALITION TO INSURE AGAINST TERRORISM

    Mr. Walter. Good morning, Chairman Johnson, Ranking Member 
Crapo and Members of the Committee.
    My name is Ed Walter, and I am the President and CEO of 
Host Hotels and Resorts. Host owns, or has interest in, hotel 
properties in 15 countries and 24 States and is one of the 
largest owners of hotels in the world.
    I am testifying today on behalf of the Coalition to Insure 
Against Terrorism, or CIAT. CIAT is a broad coalition of 
commercial insurance consumers formed after the September 11, 
2011 attacks, to ensure that American businesses could obtain 
adequate terrorism insurance.
    I urge Congress to act now to extend TRIA well before its 
expiration at year-end. Without adequate terrorism insurance, 
our economy, our jobs and our well-being become more vulnerable 
to terrorism. Maintaining a workable Federal terrorism 
insurance mechanism is vital for our Nation's economic 
security.
    My own company was deeply and personally affected by the 
terrorist acts of September 11th. Host lost the Marriott World 
Trade Center Hotel, which was destroyed by the collapse of the 
two World Trade Center Towers, and our Marriott New York 
Financial Center Hotel located two blocks away was also heavily 
damaged. More importantly, we suffered the loss of two hotel 
employees.
    For those of us that had commercial policies in place on 9/
11, the financial loss suffered as a result of the attack were 
covered by insurance, but all this changed after September 
11th. The uncertainty surrounding the future of terrorism 
insurance contributed significantly to a paralysis in the 
economy, particularly in the construction, tourism, business 
travel and real estate finance areas.
    We are concerned that if TRIA is not extended that we run 
multiple risks. We are concerned that we will see a slowing in 
construction; we will see a slowing in real estate finance; we 
will see a slowing in the creation of jobs. We run the risk of 
lender-instigated defaults because if companies cannot provide 
terrorism insurance they will be in violation of their loan 
covenants.
    So, finishing my remarks, I guess what I would just say is 
we have a program that shares risk equitably across all the 
players. The Government only steps in at the very end. It is a 
program that works. It is a program that encourages investment 
in the United States.
    We run a risk of short-circuiting what is already a 
relatively weak recovery if we do not renew this and renew this 
soon.
    Thank you.
    Chairman Johnson. Thank you.
    Ms. Snow, please proceed.

 STATEMENT OF CAROLYN SNOW, DIRECTOR, RISK MANAGEMENT, HUMANA 
 INC., ON BEHALF OF RISK AND INSURANCE MANAGEMENT SOCIETY, INC.

    Ms. Snow. Good morning, Chairman Johnson, Ranking Member 
Crapo and Members of the Committee.
    My name is Carolyn Snow, and I am Director of Risk 
Management for Humana, Inc. based on Louisville, Kentucky, and 
the President of Risk and Insurance Management Society, RIMS, 
on behalf of whom I am testifying today. We are a not-for-
profit largest group of risk management professionals, and we 
represent the commercial insurance consumer.
    Availability and affordability of coverage for acts of 
terrorism is not only an insurance issue; it is an economic 
one.
    Nine-eleven proved that the private market alone is not 
sufficient, and the creation of TRIA in 2002 brought stability 
to the market situation by providing a backstop for some of the 
risk that the Federal Government helped free up capacity in the 
private market.
    The availability of adequate coverage is directly linked to 
the existence of TRIA. If it were allowed to expire, carriers 
will look to reduce their exposure, particularly in high threat 
areas.
    Our members are already reporting on mandatory requirements 
of sunset clauses in policies that extend beyond December 31, 
2014. Some policyholders are being offered standalone policies 
for the policies extending beyond but with high deductibles and 
premiums that are nonrefundable should TRIA be reauthorized at 
a later date.
    The impact on worker's compensation is already being felt 
as some companies concentrated in major urban areas are seeing 
price increases of 5 to 10 percent in their premiums.
    We have heard comments that there may be sufficient capital 
in the private insurance market to provide terrorism insurance, 
but we question whether that capital would actually be used for 
terrorism coverage as the industry still does not have the 
capability to properly underwrite terrorism.
    There is no assurance that terrorism insurance would be 
made available to all entities that need it at affordable 
prices.
    We also recommend streamlining the certification process 
but consolidating the decisionmaking authority within one 
office, or department, and recommend a 60-day deadline with the 
possibility of one extension.
    We would also like to see a specific inclusion for nuclear, 
biological, chemical and radiological events.
    In conclusion, we feel very strongly that a public and 
private partnership provides the best alternative to addressing 
the long-term needs of availability and affordability of 
terrorism insurance.
    Further, we believe that having TRIA as a Federal backstop, 
not a bailout, will be better protection of the taxpayers' 
money.
    On behalf of RIMS, thank you for the opportunity to speak.
    Chairman Johnson. Thank you.
    Mr. Henry, please proceed.

STATEMENT OF BILL HENRY, CEO, McQUEARY, HENRY, BOWLES AND TROY, 
  INC., ON BEHALF OF THE COUNCIL OF INSURANCE AGENTS & BROKERS

    Mr. Henry. Mr. Chairman, Ranking Member Crapo and Committee 
Members, I am Bill Henry, CEO of MHBT, and I testify today on 
behalf of the Council of Insurance Agents and Brokers but, most 
importantly, on behalf of my customers.
    MHBT is one of the largest privately held insurance brokers 
in Texas with 5 offices and 315 employees.
    The Council represents all the major agents and brokers in 
the country and represents over 80 percent of the commercial 
placements of insurance in this country.
    Gentlemen, nobody is closer to this issue than agents and 
brokers. We are dealing with all the carriers every day, and we 
are dealing with the customers.
    I saw firsthand what happened after 9/11, and it was not 
pretty. It is not just a big-city issue. It is not just a 
property issue.
    Worker's compensation is a bigger issue. Under comp, you 
cannot exclude terrorism. So what basically happens is the 
insurance industry begins to underwrite more strictly and 
people with more than 50 employees end up with no coverage or 
in an assigned risk pool.
    I expect more of the same in the future if TRIA is not 
extended or if it is amended in a major way.
    I can tell you I am a capitalist through and through, but 
this is a societal issue. It is not just an insurance industry 
issue. The capital at stake already by our industry requires 
the CEO of an insurance company to risk 20 percent of their 
premium each year as a trigger, and in addition to that they 
get back 85 cents on the dollar if there is loss, and then 
after that they have to repay it.
    We need a vibrant insurance industry in this country. And 
if we kill the carriers with too much burden, then we end up 
with the small guys pulling out, the middle-size guys not 
wanting to play and redirecting their underwriting, and the 
larger guys charging higher prices.
    Thank you very much.
    Chairman Johnson. Thank you.
    Mr. Donnelly, please proceed.

   STATEMENT OF VINCENT T. DONNELLY, PRESIDENT AND CEO, PMA 
 INSURANCE GROUP, ON BEHALF OF THE PROPERTY CASUALTY INSURERS 
                     ASSOCIATION OF AMERICA

    Mr. Donnelly. Thank you, Chairman Johnson and Ranking 
Member Crapo, for inviting me to testify today.
    My name is Vincent Donnelly, and I am the President and CEO 
of the PMA Insurance Group. I am testifying on behalf of PMA 
and the Property Casualty Insurers Association of America, PCI.
    PMA specializes in the writing of worker's compensation 
insurance, providing wage replacement and medical and debt 
benefit to employees injured in the course of their employment.
    Reauthorization of TRIA is critical to our business and to 
our customers. The private insurance and reinsurance markets 
are not willing to accept every risk, particularly 
unpredictable and potentially catastrophic risks like 
terrorism. Having a terrorism risk insurance plan in place 
before the next attack happens protects our companies, our 
country's economic resiliency, at nearly no cost to the 
taxpayers.
    PMI and PCA strongly urge you to enact a long-term 
reauthorization of the current working version of TRIA.
    It is appropriate for Congress to ask whether the current 
plan is serving its intended purpose or whether additional 
reforms should be considered, but TRIA has done a superb job of 
bringing private capital that would not otherwise be available 
into the market to support terrorism risk. Government 
involvement occurs only at the most extreme levels.
    So PCI hopes that the Committee will recognize TRIA's 
enormous success in providing fiscally responsible terrorism 
risk coverage to protect our countries economy while greatly 
reducing the need for Government assistance after a 
catastrophic terrorist attack.
    Following 9/11, reinsurance coverage for terrorism became 
very difficult to obtain, especially for high-profile risk and 
risk in regions with high-valued accumulations with a potential 
for nuclear, biological, chemical and radiological attacks.
    If TRIA were not reauthorized, that would happen again. 
This would cause some insurance capital to flee critical 
markets, and it would result in availability and affordability 
problems for vulnerable businesses, and the scale of losses 
could impair worker's compensation insurers' ability to pay the 
claims of injured workers.
    Many of the reforms now being discussed to increase private 
sector participation would weaken the loss limits for insurers. 
That would reduce the willingness of private capital to invest 
in, or to cover, terrorism risk. Let me explain why, briefly.
    Every insurer limits its risk to an exposure it can 
responsibly manage and still fulfill its commitments to all 
policyholders. If TRIA is reauthorized with a higher trigger, 
deductible or co-share, insurers would be left with risk that 
exceeds levels that they could not retain and many could be 
driven out of markets. The current deductible already leaves 
many insurers with a large potential loss than they would ever 
voluntarily accept.
    The same is true with the co-insurance. The current trigger 
is greater than most of the surplus of many of the TRIA 
insurers.
    Small- and medium-size insurers make up 98 percent of the 
companies writing TRIA coverage, and they are the most 
vulnerable to being driven out of the markets by increases in 
the TRIA thresholds. If that happens, it would reduce insurance 
availability and greatly reduce competition for consumers.
    So, in conclusion, that is why PMA and PCI strongly support 
long-term authorization of TRIA in its current from.
    I thank you for the opportunity to testify and look forward 
to answering your questions.
    Chairman Johnson. Thank you.
    Mr. Heck, please proceed.

  STATEMENT OF WARREN W. HECK, CEO AND CHAIRMAN OF THE BOARD, 
GREATER NEW YORK INSURANCE COMPANIES, ON BEHALF OF THE NATIONAL 
           ASSOCIATION OF MUTUAL INSURANCE COMPANIES

    Mr. Heck. Thank you, Chairman Johnson, Ranking Member Crapo 
and Members of the Committee for this opportunity to speak to 
you today.
    My name is Warren Heck, and I am Chairman and CEO of 
Greater New York Mutual Insurance Companies, a mid-size but 
significant piece of the commercial multi-peril insurance 
market in New York, and we have been doing that for 100 years.
    I also serve as Chairman of the National Association of 
Mutual Insurance Companies' TRIA task force. NAMIC represents 
more than 1,400 property and casualty insurance companies, 
including small farm mutuals, State and regional insurance 
carriers and large national riders. NAMIC members write half of 
all personal property and casualty lines and about a third of 
the commercial business in the United States.
    Today, the terrorism insurance market is functioning 
extremely well. Coverage is available and affordable. A limited 
amount of reinsurance is available, and take-up rates average 
60 percent or more across the country. There are few, if any, 
demonstrable market failure problems.
    It is our firm belief, which has been tested by the market 
after 9/11, that in the absence of TRIA an adequate self-
sustaining private market for terrorism risk insurance will not 
develop because the unique nature of terrorism distinguishes it 
from natural catastrophes and makes it virtually impossible to 
properly underwrite.
    But as TRIA's successful history has demonstrated, the 
program allows a viable market to function, which will help 
insure resiliency before and after a terrorist event, all while 
protecting taxpayers.
    NAMIC remains committed to ensuring that the program 
adequately protects taxpayers and maximizes private sector 
capital in the market for terrorism insurance. We believe the 
current program does an excellent job on both counts.
    Because the markets are functioning efficiently, we would 
urge caution when considering changes. For example, raising the 
$100 million dollar trigger would do nothing to improve the 
program or reduce taxpayer exposure while, at the same time, 
putting pressure on smaller, regional and niche insurers whose 
deductible and even total exposure falls under a level set too 
low. Too high, excuse me.
    This type of change will cause market participants to exit 
just as they did in New York City after 9/11, thereby reducing 
available capacity and concentrating the risk with fewer 
insurance carriers. Any effective terrorism loss management 
plan depends upon participation by insurers of all sizes and 
structures.
    Rather than focus on changing parts of the program that 
seem to be working well, we would encourage the Committee to 
consider reforming the certification process to include some 
sort of a timeline and requirement for an affirmative 
determination. Our experience with the tragic Boston Marathon 
bombing demonstrates the need for such a change.
    In order to encourage private sector involvement in the 
terrorism insurance marketplace and, thereby, protect and 
promote our Nation's finances, security and economic strength, 
we should maintain a long-term well-functioning terrorism loss 
management plan. Fortunately, the current TRIA program has 
proven to be just such a plan.
    Thank you for the opportunity to speak here today, and I 
look forward to answering any questions you may have.
    Chairman Johnson. Thank you.
    Mr. Elliot, please proceed.

STATEMENT OF DOUGLAS G. ELLIOT, PRESIDENT, COMMERCIAL MARKETS, 
    THE HARTFORD FINANCIAL SERVICES GROUP, ON BEHALF OF THE 
                 AMERICAN INSURANCE ASSOCIATION

    Mr. Elliot. Good morning. Chairman Johnson, Ranking Member 
Crapo and Members of the Committee, thank you for the 
opportunity today to appear here.
    My name is Doug Elliot, and I am President of Commercial 
Markets at The Hartford. I am testifying today on behalf of the 
American Insurance Association.
    We strongly urge Congress to reauthorize TRIA before it 
expires at the end of this year. TRIA is designed to protect 
the economy from disruptions caused by catastrophic terrorism, 
and taxpayers are protected at every step under TRIA's 
recoupment mechanism.
    As we approach TRIA's expiration, we understand the focus 
on increasing private market capacity, but the industry's 
ability to take on more terrorism risk is constrained. We run 
the risk that, at some point, manipulating the program's levers 
will result in a tipping point that could cause individual 
insurers to curtail their aggregate exposure in an effort to 
maintain their respective companies' finances.
    If this occurs, it could cause a severe and immediate 
disruption to the economy, reduce the supply of affordable 
terrorism coverage and undercut the ability of businesses, both 
large and small, to rebound from future terrorist attacks.
    We look forward to working with the Committee, and I look 
forward to your questions this morning.
    Thank you.
    Chairman Johnson. Thank you all very much for your 
testimony.
    As we begin questions, I will ask the clerk to put 5 
minutes on the clock for each Member.
    As we look to move a reauthorization bill soon, I would 
like to ask the entire panel, should we make the extension for 
a long period like Congress did last time in 2007?
    Mr. Walter, let's begin with you and go down the table.
    Mr. Walter. Senator, I would think that a 7-year extension 
would probably be the minimum that we should consider, and it 
would be better if we were to consider a longer period of time.
    For those of us in the real estate industry, we are 
typically making investments where we are looking at 7 to 10 to 
15 or longer timeframes.
    When we invest in Europe and some other markets around the 
world, one of the issues we do not have to worry about is how 
this issue will be dealt with because they have permanent 
programs.
    In the United States, we have not necessarily had the 
benefit, certainly so far, of a permanent program. But having 
something that would be longer-term, that would allow us to 
know that for the period of financing or for the period of 
ownership that we might have in that particular investment, 
that this issue would be covered by the TRIA program would be 
advantageous. And I think it would encourage incremental real 
estate investment.
    Chairman Johnson. Thank you.
    Ms. Snow.
    Ms. Snow. On behalf of the RIMS members, we would like to 
see a permanent program. By the minimum, we would like to see a 
10-year extension.
    Chairman Johnson. Mr. Henry.
    Mr. Henry. Senator, basically, the independent agents and 
the Council agents would love to see this become permanent.
    It is an extremely uninsurable risk. It is not going to 
change over the next 5 or 10 years. We will still have the same 
problem at that time. So this is a permanent problem, and we 
would like to see a permanent solution.
    Thank you, sir.
    Chairman Johnson. Mr. Donnelly.
    Mr. Donnelly. Senator, I agree with the comments that my 
colleagues at the table have made already, that permanent 
certainly would be the optimal way.
    The fact that the risk--even 11 years, 12 years after 9/11, 
one of the things that has not changed is that this terrorism 
is not an insurable risk in a traditional way, in terms of 
being able to measure or calculate with any reasonable 
certainty what the probability of loss is or the size of loss 
and the fact that the loss is not random but is an intentional 
act.
    So the longer the better, and I would agree that somewhere 
in 7 to 10 years is sort of a minimum that would be appropriate 
for the industry as well as for the economy to maintain 
stability so that insurers, as they deploy capital, have a 
level of certainty to give to their customers.
    Chairman Johnson. Mr. Heck.
    Mr. Heck. I think a permanent program would be the best way 
to protect the taxpayers and the economy.
    Seven years ago, I recall that many people argued that TRIA 
should be temporary. However, since then, we have learned that 
terrorism is not going away anytime soon.
    However, so long as terrorism remains a threat to the 
United States, we need to continue TRIA to protect the country.
    Chairman Johnson. Mr. Elliot.
    Mr. Elliot. Mr. Chairman, I would also agree that we would 
look for a permanent solution. Other than that, I would suggest 
that 10 years would be a minimum requirement for us to start 
discussion.
    Chairman Johnson. Mr. Henry and Mr. Elliot, we have heard 
that if Congress were to drastically raise the threshold in the 
program there could be a negative impact in smaller insurance 
providers and policyholders.
    Mr. Henry, do you share this concern, and if so, why?
    Mr. Henry. I just simply think that a lot of the smaller 
insurance carriers are at risk even as we speak with the 
thresholds where they are. And, if you change the thresholds, 
then I think they are going to be even more restrictive on 
their underwriting and they will pull back from any possible 
threat if they possibly can, which ends up meaning a smaller 
market and higher prices.
    Chairman Johnson. Mr. Elliot, what do you think?
    Mr. Elliot. Mr. Chairman, the issue of the trigger is 
important to many of our member companies.
    As I sit here representing The Hartford, it is not the same 
issue. Our retention currently under today's program is $1.2 
billion, and the trigger is only $100 million. So it is really 
not the same issue for our company.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman.
    Mr. Donnelly, in your testimony, you mentioned the current 
interpretation with respect to nuclear, biological, chemical 
and radiological risks and that the TRIA backstop covers losses 
to the extent insurers provide the coverage. Are you 
comfortable with that interpretation?
    Mr. Donnelly. Well, I think that, Senator, certainly for 
worker's compensation, NBCR is covered because there is no 
exclusion with respect to any peril for comp. So I am 
comfortable that from a worker's compensation perspective that 
is clear.
    But I do think the language should be looked at, and I know 
that PCI has provided some language changes to clarify that, to 
make sure that it is clear how the TRIA would respond relative 
to how the NBCR or even cyber risk could come into play.
    Senator Crapo. Well, you just led into my next question, 
and that is let's talk about that. In the past several years, 
we have become more aware of the threat that cyber attacks 
present to our economy, and there is no question that a cyber 
attack could cause significant damage.
    And, on this question, I would like to have any of the 
other Members of the panel who would like to comment on it 
comment as well.
    What would be the impact of clarifying TRIA coverage of 
cyber events, and should only those events with property damage 
be covered?
    Mr. Donnelly, why don't you start out? But, I would like to 
hear the impressions of others.
    Mr. Donnelly. Senator, I think to the extent that the 
underlying policies for nonterrorism coverage of cyber risk, 
certainly, the terrorism then would be covered and TRIA should 
properly respond to that.
    But I do not think there should be a mandatory requirement 
for insurers for liability policies, for example, to cover 
cyber attacks. I mean, that is something that I think should be 
left up to the individual insured and insurer in terms of 
deciding what risk they exactly want to underwrite and what 
kind of coverage they want.
    Mr. Heck. May I respond?
    Senator Crapo. Mr. Heck.
    Mr. Heck. With respect to NBCR, the current property 
policies have a very good exclusion for NBCR. So, if NBCR is 
not covered under TRIA, it would not be covered.
    And NBCR, frankly, is uninsurable. So it is not something 
that I believe that we should try to alter.
    I certainly agree with regard to worker's comp, but it is 
already picked up by the program because it cannot be excluded 
under worker's comp.
    With respect to cyber, I think that is a different issue, 
and I think that under the same reasoning the cyber would be 
covered so long as it is covered in the underlying policy.
    So I really do not believe anything more needs to be done 
with either of those issues.
    Senator Crapo. Mr. Elliot.
    Mr. Elliot. Senator Crapo, just a few comments.
    The first thing I would say is the bill today provides 
Treasury the ability to go in and delineate, or more clearly 
articulate, some of the regulations, and I know they did that 
in 2004 for some of the NBCR coverages. So I would expect over 
time we may see that with cyber.
    I would share with you from a risk perspective. It clearly 
is an emerging area. We are studying it intently. The breadth 
of cyber spans things from our national grid to malware to 
credit losses, et cetera. And I think we are all learning as 
time goes on here, and we will learn more over the coming 
quarters.
    Senator Crapo. Thank you.
    Yes, Mr. Walter.
    Mr. Walter. Senator, the biggest benefit, or one of the 
largest benefits, that we see from TRIA is the fact that it 
provides a road map and solution for how to deal with a 
potential problem.
    The cyber area is one that is developing quickly. I do not 
think any of us fully understand exactly how those sorts of 
incidents would play out. But the reality is that including 
that in some fashion within TRIA would make sense to me because 
I think it also then provides a way to plan for a recovery in 
the event of a problem down the road.
    And I think we are far better off trying to anticipate some 
of those types of problems as opposed to dealing with them in 
the aftermath.
    Senator Crapo. Thank you.
    Anybody else?
    [No response.]
    Senator Crapo. All right. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman, and I want to 
thank all the participants for their testimony today.
    I will direct this at you, Mr. Elliot, but any of you feel 
free to respond. Could you elaborate on how this program puts 
private capital in front of Federal dollars?
    Mr. Elliot. Having been involved with the original design 
of the program 12 years ago and understanding what that 
marketplace was like, post-9/11, I think that the program today 
sets the foundation for private capital and private exposure to 
come into the insurance marketplace. And I think it has done 
largely what we had hoped it would do 12 years ago. We have 
made some adjustments over time, but I am very pleased that it 
has allowed companies, such as ourselves and our member 
companies, to provide an awful lot of exposure and insurance 
coverage to the economy.
    Senator Tester. OK. Anybody else want to respond to that?
    Go ahead.
    Mr. Heck. Yes, I would like to add to that that the whole 
design of the TRIA program was to improve capacity to write 
terrorism insurance, and I really think that it has been one of 
the most successful of the Government private-public programs 
in that all participants can participate so long as the 
triggers, the deductibles and the co-insurance levels do not 
increase too much.
    If they do go up, particularly the trigger, it will push 
out the small- and medium-size companies, and that will reduce 
the amount of capacity.
    So I truly hope that we can renew the program without 
changes.
    Senator Tester. OK. Go ahead.
    Mr. Donnelly. I echo Mr. Heck's comments in terms of 
stressing the importance that the current program allows a 
really cross-section of small, medium and large insurers to 
participate in this.
    If there, in fact, were changes to the trigger or the 
deductible or the co-insurance, that would have the effect, I 
believe, of reducing the amount of private capital that would 
be in it.
    Not only has--for two reasons I say that.
    One is for the fact that each company has to make their own 
capital decisions in terms of how much they are going to 
allocate for any particular risk. And so as the potential 
exposure would grow, companies, I believe--including my 
company, I think--would think about how much capital are we 
willing to risk for any one exposure.
    The second element is A.M. Best, which is the credit rating 
agency for all insurance companies, I think has already made 
comments--public comments--about that the absence of 
reauthorization in its form would have a significant impact on 
many small- and medium-size insurers in terms of looking at 
their ratings.
    And it is very, very important in the insurance industry 
that--what I think Mr. Henry could speak to, as representing 
the agents and brokers, is the financial ratings of an 
insurance company are very, very important to compete 
effectively.
    Senator Tester. OK. So I do not want to put words in your 
mouth, but what I heard you just say was that if the deductible 
was raised small companies would leave the market, which I 
agree with, who write nearly half the policies, and private 
capital would not come to the marketplace in as large of 
amounts. Is that correct?
    Mr. Donnelly. I believe that there would be less private 
capital.
    Senator Tester. So let's take that another step. Thus, if 
we were to do that, it would put the taxpayers more at risk.
    Mr. Donnelly. I think what it would do is create more of an 
availability issue and less choices for consumers.
    Senator Tester. OK. And we will go back to another question 
here that goes back to my original question. If we had no TRIA 
program, if the TRIA program was not there at all, could you 
explain what the risk to taxpayers would be then?
    Mr. Elliot?
    Mr. Elliot. In the absence of a TRIA program, a backstop, I 
think we would have a shortage of insurance available capacity 
for customers throughout the country, particularly those that 
have aggregate employee populations together and the worker's 
comp policy that does not exclude TRIA coverages. We would have 
to be very selective, guarding our own policyholder surplus and 
our ratings.
    Senator Tester. And then what would happen?
    Go ahead, Mr. Walter.
    Mr. Walter. I think the reality is if you did not have TRIA 
you would increase the exposure of the Federal Government to 
pay for those types of events.
    Senator Tester. Why?
    Mr. Walter. Right now, what you have is a program that is 
designed to first take money from the company that is the 
insured through the deductible and, second, essentially extract 
money from the insurance industry by requiring them to provide 
coverage, and only if you have gone through those two buckets 
does the Federal Government step in.
    In your situation, one exists; two does not, or does not in 
enough magnitude, to cover the loss or cover the losses to the 
extent they are covered today, which means that three has to 
step up. That means the Federal Government is paying more.
    Senator Tester. Thank you for that answer.
    Mr. Heck. May I add something?
    Senator Tester. I have only got 9 seconds, so you have got 
to be quick.
    Mr. Heck. OK. I think we already experienced a situation 
with no TRIA. We had that right after 9/11.
    And what happened? Construction came to a halt. Mortgagees 
would not lend. The economy was impacted significantly.
    I think without TRIA the premium for terrorism, the very 
little terrorism coverage available, can become unaffordable.
    Senator Tester. Good.
    Mr. Henry, go ahead. You had your hand up.
    Mr. Henry. Senator, I think the Federal Government would 
still be on the hook because the insurance carriers are going 
to deduct those losses over time.
    Senator Tester. Right.
    Mr. Henry. And TRIA or no TRIA, you are going to end up 
with a very dysfunctional system.
    Senator Tester. And I would just say that increasing the 
deductibles--I appreciate the answer Mr. Donnelly had on that 
because we want to get more private capital into the market, 
not extract it.
    I appreciate everything you have said.
    I was going to ask about the workmen's comp issue. Mr. 
Henry, you fleshed it out pretty good in your opening remarks. 
I very much appreciate it.
    We need to get on this as a Committee.
    Thank you.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    I do want to follow on a little bit with Senator Tester's 
comment. I think all of us want to make sure that we protect 
the taxpayers, and so when we look at a program like this, that 
is obviously what we have an eye toward.
    Mr. Heck, you hit at the issue that happened after 9/11, 
but I think we saw evidence of what happens when you do not 
have a program like this in place, and that is we, as a Federal 
Government, wrote a check for $20 billion that we did not 
recoup.
    I mean, that, to me, is the greatest example of how 
taxpayers are not protected if we do not have a program like 
this that is designed to recoup the money.
    Let me say this one more time. When we have a disaster, 
Congress responds. A lot of times it does not respond very 
prudently, I might add. A lot of money goes out the door 
without it being checked properly. All of us have debated that 
in recent disasters.
    What the TRIA program does is actually create a mechanism 
to keep us from ever having to do that again. Is that right?
    Mr. Heck. Absolutely.
    Senator Corker. So I do want to make that point that this 
is one of those cases where those of us who are free market 
folks and, at the same time, want to look at protecting 
taxpayers do have a mechanism in place that actually does that. 
OK.
    So I think on the other hand we probably want to look at 
some reforms, right?
    I mean, all of us want to make sure that we are looking at 
this in the right way.
    You guys are arguing for a permanent program.
    Let me just ask a couple of questions because I know the 
Ranking Member and Chairman are about to come up with a package 
soon.
    But right now, the Treasury Secretary has to call us for 
reimbursement if we have losses up to $27.5 billion, but 
everything above that is at his discretion.
    Does it make sense for us to put in there that it is 
mandatory above--it has to be mandatory for all losses. Is that 
something that is a sensible reform?
    Mr. Donnelly. Senator, I think that is a reasonable 
variable to look at in terms of whether increasing that or, as 
you suggested, permanency to no cap on it or all the way up to 
the $100 billion cap. I do think that is something that can be 
looked at as a tweaking, if you will, of the current program.
    And I would echo what you said--that this is a very good 
risk management plan that is in place today. As somebody that 
is 35 years in the business, we deal about risk with our 
customers, and you want to have the plan in place before the 
event happens.
    And I think that this particular plan that is in place 
today is a good one in terms of preparing for, God forbid, an 
event that may happen.
    Senator Corker. Yes, sir.
    Mr. Heck. I would like to suggest that no change is really 
needed. At the present----
    Senator Corker. I kind of gathered that is the company line 
today, but I do not think it is going to end up quite that way.
    Mr. Heck. I will give you a reason. You know, right now, 
the Government gets a recoupment at 133 percent for losses of 
$27.5 billion and below, and the Secretary of the Treasury can 
recoup up to 100 percent. And I think that would depend upon 
the state of the economy, whether it is a good idea to do it or 
not, but the fact is the Secretary has that availability and 
can do that right now.
    Why lock ourselves into something which we would be 
required to do, and it may not be a good idea at the time of 
the terrible event?
    Mr. Elliot. Senator Corker, just if I can add and agree 
with Mr. Heck, it is our estimation today that the industry 
deductible retention, if you will, is actually closer to $34 
billion than the 27.5 that was initially put in place. And that 
means that an event would have to exceed 34 for the Government 
even to be involved.
    So I think there is an awful lot of skin in the game from 
the insurers' side, and I do also agree that there is a 
terrific balance between a public-private partnership there.
    Senator Corker. Just briefly--and I want to make one 
statement, so just maybe one person answer.
    I know there is an 85-15 share, and I know that there have 
been comments about maybe changing that to 80-20.
    Whichever one of you thinks is the brilliant, if you would 
answer whether that change would be harmful or something that 
would actually be useful, I would appreciate it--maybe the man 
with two first names and that I understand more than anybody 
else on the Committee.
    Mr. Henry. The Texas twang is alive and well, Senator.
    Actually, from a customer standpoint, I would hate to see a 
tweak like that because after tax you are really probably not 
going to be putting any more money in the coffers of the 
Federal Government because, remember, the insurance companies 
are going to deduct the losses that they have.
    Right now, we have got a vibrant insurance market. Things 
are functioning well. Our customers are happy. The bankers are 
happy lending money. And I would hate to see it change.
    Senator Corker. Let me just close with this. I know that 
each of you have weighed in at our offices.
    I do want to say to the Chairman; thank you for having the 
hearing.
    Look, we know we are going to extend TRIA. So let's get on 
with it. I will say that we do a lot around here to hurt our 
economy. You know, we are kind of like the biggest problem for 
the economy right now--is Washington.
    This is something we know we are going to extend. We have 
got some major projects that we know are going to be delayed if 
we do not get on with this, and I think waiting until lame duck 
is irresponsible.
    I hope that we will figure out if there are going to be 
reforms. Let's discuss them. Let's make them happen.
    But, Mr. Chairman, again, thanks for having this hearing. I 
would say we know what we are going to do. You know, let's just 
get on with it. OK.
    Thank you.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, and I thank my colleague from 
Tennessee for those comments. I could not agree more.
    I want to thank you, Mr. Chairman, and Senator Crapo for 
being involved here.
    Now following the events of 9/11, the private sector, plain 
and simple, refused to offer sufficient coverage necessary to 
protect against the threat of terrorism. They could not account 
for the unpredictability or assess how great the losses were 
likely to be.
    Fortunately, the Government stepped and provided a limited 
backstop to the risk potential seen in a terrorist attack. The 
TRIA program provided the market with enough stability that 
companies were able, once again, to provide the necessary 
insurance coverage with the assurance that the Government would 
help absorb the initial blow in the face of the event but yet 
require that the Federal taxpayer would be able to recoup most, 
if not all, of the Federal assistance that was paid out.
    I was the author of the original bipartisan TRIA 
legislation. I watched its evolution closely over time.
    The TRIA program is one of the, if not the, best post-9/11 
pieces of legislation. It is the Government working with the 
private sector when neither could solve the problem on its own.
    And it has worked, most importantly. We now have a track 
record. Before this, when we first passed it, people were 
saying this and that and the other thing.
    One example, the redevelopment of the downtown of my city. 
Right after 9/11, people were saying, below Canal Street would 
become a ghost town; no one would want to locate there for fear 
of a repeat incident.
    Obviously, everyone across the country feared terrorism, 
but no people worse than downtown, which suffered so much.
    And so I believe it is very important we reauthorize the 
program and extend it as soon as we can for as long as 
possible. There is broad support for this program from Members 
of both sides of the aisle.
    I plan to continue working with you, Mr. Chairman, and 
Ranking Member Crapo, as well as several other Members of the 
Committee, to introduce bipartisan legislation to reauthorize 
TRIA in the coming months.
    And I would just say one other point. You can be a purist 
and say this is something the Federal Government should not be 
involved in, and that is what we believed in the 1890s.
    And then, when natural disasters occurred, there was a 
general consensus in this country that these were so large that 
they could not be handled by individuals or individual 
companies alone.
    Nine-eleven was the first time there was a man-made tragedy 
or man-created tragedy of that extent. And the same exact logic 
applies.
    So, yes, you can go back to a pure view; let the market 
just work it out. We have learned that when we do that in 
certain instances everyone is hurt.
    And so I would urge my colleagues not to be dogmatic on 
this issue but look at the practical reality of the situation 
and move forward on the bill.
    So the one question I would like to ask you all, first with 
Mr. Walter and then others who want to comment--if Congress 
were unable to pass or reauthorize legislation until November 
or December of this year, can you please talk about the 
economic impact on our economy and jobs, which we all agree is 
the number one issue that we face?
    Mr. Walter, why don't you start?
    Mr. Walter. Thank you, Senator.
    If we were to wait until the end of the year to reauthorize 
TRIA, I think the primary risk that we would run in the 
property area and the real estate sector is simply that new 
development and new financings would be held up as both lenders 
and borrowers strove to try to deal with what happens if you do 
not act.
    While it is great to have a confidence level that the 
program would ultimately be passed, it is not done until it is 
done, and lawyers and lenders and borrowers will all struggle 
to deal with the potential aftermath of what happens if it is 
not extended.
    Senator Schumer. At the very least, it would raise the cost 
of things, wouldn't it?
    Mr. Walter. So everything gets more expensive. And 
depending upon the scale of the proposed development or the 
scale of the proposed financing, whether it is in a rural area 
or in a city, the reality is that larger projects--this risk 
will be exaggerated, and those projects will slow down, waiting 
for you to act.
    Senator Schumer. OK, Ms. Snow.
    Ms. Snow. I think from an insured's point of view that it 
puts a lot of uncertainty into the programs, into the insurance 
programs. And, with sunset clauses on the coverage of TRIA, it 
creates higher premiums because those premiums--if you want to 
buy coverage beyond the extension of TRIA, those premiums are 
nonrefundable; those deductibles are high.
    So it creates a lot of uncertainty on behalf of the 
insurance buyers. It puts a lot of uncertainty on the market.
    Senator Schumer. My time is expired.
    I thank you, Mr. Chairman, and thank my colleagues.
    Chairman Johnson. Senator Coburn.
    Senator Coburn. I am fairly new to the banking industry but 
not new to following TRIA.
    Let me give you a quote out of the original TRIA 
legislation:

        Provide temporary financial compensation to insured parties, 
        contributing to the stabilization of the United States economy 
        in a time of national crisis, while the financial services 
        industry develops the systems, mechanisms, products and 
        programs necessary to create a viable financial services market 
        for private terrorism risk insurance.

    That is what we set up.
    In listening today, my question is, is there a doubt that 
there will ever be, in your minds, a private terrorism risk 
insurance without a TRIA program? Will market forces actually 
ever work for this system?
    Mr. Henry. Senator Coburn, I believe at the time everybody 
was in a state of shock, and maybe that is what we thought.
    But I can tell you, having dealt with this ever since 9/11, 
in my mind, there will never be a permanent solution because it 
is a permanent problem that really is not subject to insurance 
in the technical definition of insurance. You do not have 
predictable losses. You do not have empirical data on which to 
base a premium.
    In our industry right now, it is highly competitive and not 
just in the United States but in the world, and people are 
always looking for new products. If there was a substantial 
amount of availability, there would be a market for it. But 
what market there is, I can tell you, is at a premium.
    I sit on the board of a mutual insurance company, a 
successful mutual called Signal Mutual. They insure stevedores, 
shipbuilders, ship repairs for the Navy, all the maritime 
employments.
    After 9/11, we were bare. We had to assume the risk.
    After TRIA was passed, we were able to buy up to our 
deductibles with a certain deductible ourselves.
    These are all the national defense firms. These are the 
people that load and unload ships coming into our ports and 
harbors. And, if TRIA goes away or if we cannot get sufficient 
capacity, the price for this coverage will go up or it will go 
away completely.
    The way a mutual works is all the members, which for Signal 
are the major maritime employers in the country, will get a 
price rise. And they will not keep that internally. That price 
increase will go to the consumers.
    If the market was there, I think we would have found it, 
but I do not believe we are going to see it in our lifetime.
    Senator Coburn. Mr. Donnelly.
    Mr. Donnelly. Senator, my response to your question is I 
hope so, but I echo Mr. Henry's comment that one of the things 
that has not changed in 11-12 years--and I do not see in the 
foreseeable future--is the insurability, the definition of 
insurability, the ability to really predict with any reasonable 
certainty of what outcomes are going to be.
    And I also would submit, though, that there is a lot of 
private capital that is at risk in the market today, and the 
capital--keep in mind that the capital that an insurance 
company has is there to pay for all the risk that it has--the 
average automobile accidents, the fires, the slips and falls, 
the worker's comp injuries and all of those.
    So there is a finite amount of capital that the industry 
for any event, no less something like terrorism--which again, 
by definition, is not one that one is able to predict with any 
degree of certainty, the frequency or the severity of loss.
    And the fact is the events are not random. They are, in 
fact, intentional.
    And I would add the comment that my own view is that one of 
the other reasons that the Federal Government, I think, needs 
to play a role in this whole risk management plan is at the end 
of the day the Federal Government is the risk manager here.
    We work with--our insurers are mainly a worker's comp 
company, and we work with our insureds to try to help prevent 
accidents from happening and do all the things you can possibly 
do.
    At the end of the day, I think the Government here has a 
responsibility as the risk manager and, therefore, certainly 
long-term, needs to be part of this plan.
    Senator Coburn. Well, let me challenge you a little bit on 
that. The Federal Government is the people of this country, and 
they are going to pay the risk.
    So the question is whether we pay it through the Government 
or pay it through increased premiums. One way or another, the 
loss is going to get covered, correct?
    One way or the other, it is going to get covered. It is 
going to have an impact on the economy.
    So the question it comes back to is, why can we not develop 
private terrorism risk insurance?
    There are a lot of things that are insured. You can go to 
Las Vegas and insure anything. All right?
    The question is, is the premium affordable as you measure 
that?
    And my question is, what has the industry done to develop 
forward, to try to get us to a point where we can do that?
    Mr. Elliot?
    Mr. Elliot. Senator, just a few thoughts.
    There is no question; in 12 years as an industry, I think 
all our companies do a much better job today modeling events, 
and we also do a much better job at looking at aggregate 
exposures.
    What we are just as challenged with today is understanding 
in pricing and underwriting terrorism, and I think we have not 
been able to move that ball along.
    And all of us talk about the possibilities that may happen 
in this country, particularly around NBCR and the magnitude of 
those losses. I do not see the private market providing that 
type of capacity, not only in the near term but in the long 
term.
    Mr. Heck. May I add something to that?
    It is true that we had hoped that a market would develop.
    The problem--the big problem with underwriting terrorism--
there are a number of problems. But it is a deliberate act. So 
it is all or nothing.
    The capacity which has developed is allocated based upon 
the exposure, and what is considered a very high-risk area has 
very little capacity.
    So it really does not seem possible that a market could 
ever develop to fully satisfy the need for terrorism.
    It seems to me that the TRIA method, the TRIA mechanism, is 
the best one because it does spread the risk. If there is a 
serious event, it can all be paid back to the Government. It is 
spread over time. It seems very workable. It seems like a very 
good idea, and it has worked very well.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman, and to you and 
the Ranking Member for having this hearing that I think it is 
incredibly important.
    You know, I look at the question of that it is unusual to 
have any Federal backstop unless we have a public interest or a 
breakdown in the private market where a Government role is 
needed to restore functionality. And, in the case of terrorism 
risk insurance, I think in my view, we have both.
    If terrorists attack the country, the United States has a 
national interest in minimizing the economic harm they inflict.
    And, in terms of market functionality, unless private 
actors, which seem to me inherently limited in the things they 
can do to evaluate and reduce their risk--for example, should 
insurance companies start their own intelligence agencies to 
improve their predictive models or commercial real estate 
owners conduct counter-terrorism operations to lower their 
premiums?
    Now that may be a bit extreme, but the point is that there 
are certain elements to make determination of risk in the 
marketplace that are particularly difficult when it comes to 
the potential act of terrorism.
    So one just for the record, whoever wishes to answer it--
what makes terrorism different from other risks that, 
therefore, should elicit a Federal backstop?
    Mr. Elliot?
    Mr. Elliot. Senator, let me start. I would say at the core 
of that question is the fact that terrorism is an intentional 
act, and that is different than anything else we underwrite or 
insure or price as an industry and as a company, and that makes 
this incredibly challenging.
    Mr. Donnelly. I can say a couple of other things.
    One is, fortunately, we do not have a long history to know 
how many events. So, when you think about models, you try to 
look at the frequency of events as well as the severity. And I 
think the wide range of possibilities of what destruction can 
be makes models just blow up in terms of the possibilities for 
that.
    The other thing--and it is sort of back to what Mr. Elliot 
said about intentional. One of the things when I think about 
hurricanes or things like that is there is risk mitigation 
techniques you can do in terms of building codes and all sort 
of things like that, that try to minimize the damage.
    The terrorists, they think, are constantly trying to figure 
out how to get around the risk mitigation techniques that are 
used by the Government or by business and so forth.
    So there is a uniqueness to that, that we have a man-made 
event where somebody is trying to constantly reinvent how to 
create a particular attack which is different than what we have 
seen in natural catastrophes and so forth.
    Senator Menendez. Mr. Henry?
    Mr. Henry. In my mind, it is similar to a war risk. The 
industry has no control over that and cannot know the severity.
    Keep in mind I think some people think that the industry 
has unlimited capital, but the fact is the insurance industry 
in the United States probably has $600 billion in capital. It 
would be easy to see $100 billion loss and maybe even a 
trillion dollar loss if it were a direct hit on New York City.
    Keep in mind the World Center Trade Center was a very 
specific target, and in today's dollars, we are looking at $42 
billion on that.
    Thank you, sir.
    Senator Menendez. In another context of this, what would be 
the consequences of letting TRIA expire for communities in this 
country that build or operate critical infrastructure such as 
rail lines, power plants, highways, airports, pipelines?
    If these investments become more costly, doesn't that have 
a nationally adverse impact?
    If you look at the region that Senator Schumer and I are 
privileged to share, we have a two-mile stretch that contains 
the largest container port, the mega-port of the East Coast, 
one of the busiest set of airports in the country, rail lines 
that carry hundreds of thousands of people back and forth to 
work every day, critical industrial infrastructure, not to 
mention high population densities.
    But that is not unique to us. There are other regions in 
the country that emulate that in their own way.
    What would be the consequences of having no Federal 
backstop in terms of insurance to regions like that in our 
country, that are drivers and a great part of our economy?
    Mr. Walter?
    Mr. Walter. Senator, I think the most natural result from 
that, especially if it is in the public sector, is probably 
what happens is that there will be no insurance to deal with 
those problems when they occur, and so either the State or the 
Federal Government will end up being the insurer because the 
private sector does not have the capacity to step in without a 
TRIA backstop.
    And, consequently, that means that it will not be there for 
those different sorts of infrastructure situations. And so, 
when the problem occurs, the Federal Government or the State 
government will really become the insurer.
    Senator Menendez. And, in the absence--final question. In 
the absence of insurance, then doesn't any future 
infrastructure development of that size and magnitude become 
far more costly and, as such, become a question as to whether 
or not it gets built, which then becomes a question of economic 
opportunity for the future?
    Is that a fair statement? Does anybody disagree with it?
    Mr. Henry. And who is going to write the insurance on the 
workers that are doing that rebuilding?
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Heller.
    Senator Heller. Thank you, Mr. Chairman and to the Ranking 
Member, for holding a second hearing here on TRIA. I certainly 
do appreciate that.
    I also want to thank you for responding to a letter that 
Senator Kirk and I sent to you back in December about moving 
this process and this issue forward. Thank you very much for 
that.
    I want to thank all our guests and those that are here with 
us today, having the expert panel with us, to discuss these 
issues.
    And I want to also make the point that I am willing to work 
with anybody and everybody on this Committee so that we can 
move this process forward.
    I want to talk about something. I know I walked in a little 
bit late, and maybe these questions were already asked, but 
that is what happens actually when you are at the bottom of the 
totem pole, here at the end.
    So I want to talk about cyber terrorism for just a minute.
    I want to start with a quote from former Homeland Security 
Secretary Napolitano when she stated that at some point, the 
United States will ``face a major cyber event that will have a 
serious effect on our lives, our economy and the everyday 
functioning of our society.''
    So, with that issue and give this dire prediction, what are 
some of the outstanding questions, and--Ms. Snow, I would like 
to ask you--what are some of the outstanding issues that remain 
regarding whether TRIA that can be used if a cyber attack does 
occur?
    Ms. Snow. Well, as one of the Members of the panel 
mentioned earlier, it depends on if there is coverage and the 
underlying coverage. For those accounts that have cyber 
insurance, then the terrorism would track along with that.
    Senator Heller. Is it being covered or not being covered--
cyber attacks--at this point?
    Ms. Snow. If it is under--if you have cyber insurance, it 
would be covered.
    Senator Heller. It is a specific insurance policy.
    Ms. Snow. Yes.
    Senator Heller. In that coverage?
    Ms. Snow. Yes.
    Senator Heller. Mr. Elliot?
    Mr. Elliot. It is a specific grant of coverage, and we 
offer it to some of our clients and customers, and not all.
    Senator Heller. OK, OK. I want to move to Mr. Walter here 
for just a minute.
    You and I have similar interests in that in the State of 
Nevada we have 35 major hotels, some with as many as 15,000 
occupants at any given time. Thirty-nine million guests from 
every State come to Las Vegas every year. I think we have an 
additional 700,000 annually that come from foreign--as foreign 
visitors.
    So I think a terrorist attack on this country, especially 
in Las Vegas, would have serious consequences, not just Las 
Vegas but any resort hotel--Orlando, Los Angeles, New York. You 
name it.
    So how important is it, though, to the hotel and travel 
industry for TRIA to be renewed?
    Mr. Walter. It continues to be incredibly important to our 
industry for TRIA to be renewed.
    We are already taking every precaution we can in our 
hotels, in casinos and in our industry to try to protect the 
buildings that we have but, more importantly, the employees 
that work at those buildings and also the guests that are 
there. We are taking all the steps that we can to try to 
prevent a terrorist attack short of forming our own CIA to try 
to gather intelligence or our own military group to try to 
conduct counter-terrorist operations, which obviously make no 
sense for the industry to do.
    Ultimately, TRIA provides a solution for us as an industry 
in the event the unthinkable happens again. And, if something 
happens in Las Vegas or in any other locales that you 
identified, the reality is that assuming we have purchased 
terrorism insurance, which I am sure most of us are doing, the 
reality is we have a solution for how to deal with all the 
issues that arise from that problem and rebuild and allow the 
Nation and that city to continue to move forward.
    Senator Heller. If TRIA were to be renewed later rather 
than sooner, what impact would that have on the growth of the 
industry?
    Mr. Walter. Well, I think the reality is all major projects 
would slow considerably until it was clear what was going to 
happen with TRIA because especially in the construction area, 
the construction lenders, after they get comfortable with the 
project, their first worry is how they are going to be repaid. 
That means who is the permanent lender that is going to step in 
and repay them.
    And, if they are not clear on how that permanent lender is 
going to deal with TRIA, or with terrorism insurance--and right 
now, all the lending community, as we meet with our various 
lenders, they have all indicated that they are all expecting us 
to maintain terrorism insurance irrespective of whether TRIA is 
renewed.
    So, if the lenders want it, the program does not exist and 
the construction lender cannot see how it is going to be 
provided, I think most construction lenders are going to stop 
lending. And so that slows construction and development.
    Senator Heller. Ms. Snow.
    Ms. Snow. I would like to add it is not just the big 
businesses that will be impacted but the small businesses that 
depend on those other businesses. So I think the impact on the 
economy would have a very wide-ranging effect because of all 
the small businesses that would also be impacted.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Thank you and the 
Ranking Member for holding this hearing.
    And, echoing what Senator Heller said, when you are down at 
the end of the dais, sometimes a lot of your questions have 
already been re-asked.
    So I am going to join with all of my colleagues, or most of 
my colleagues at least, in urging that we move sooner on this 
legislation rather than later. I think it has been clear that 
across the panel there was no indication that anybody from the 
private sector has suggested that there is a credible private 
sector-only solution here.
    I think it is unusual that some of our friends in the House 
are talking about solutions that would have no Government 
backstop at all. But it seems to me that because it is so hard 
to price for a black swan-type event, which is what the 
terrorism event would entail, that even if there was, 
theoretically, the ability to create a private insurance-only 
market the pricing would be so high that it would be a 
malallocation of resources, not only in terms of the insurance 
industry but in terms of the ability for infrastructure and 
economic redevelopment to take place.
    Is there any disagreement with that basic premise?
    [Shaking head negatively.]
    Senator Warner. And then, secondarily, I think that--and as 
Senator Corker pointed out--in the moments of crisis, the 
American people are going to expect us from the Congress to 
react, and chances are, at the end of the day, the public is 
going to be on the hook anyway.
    So why not take a program that has developed?
    And I might ask, Mr. Heck, for you to reaffirm the fact 
that it should not be tweaked at all.
    Whether we tweak or not a bit but make sure that we get 
this done sooner than later, I guess, is point one.
    Point two would be echoing what Senator Heller and, I 
think, what Senator Crapo raised on cyber. I think this is, 
again, a huge new area.
    I believe, unlike where there are already established norms 
around building codes and other areas that say we set a 
standard already and, consequently, the risk is kind of borne 
across the whole industry of buildings, in cyber, it does argue 
again for the fact of how we get this right without undue 
Government interference, finding that sweet spot, but that in 
the cyber space you may have cyber attacks that would not be 
economy-wide but might be industry-focused.
    And there will be a responsibility to make sure that those 
within industry who are free riders--if you have got a dozen 
entities in a particular industry who are doing the right thing 
on cyber protection, but as we may see with certain data 
breaches already going on right now, that there could be weak 
links.
    Again, this argues to the point of how we set some 
standards that are robust enough and whether it is insurance-
set or governmental public-private-set is an area that I think 
we are going to have to come back and revisit.
    Last point is--and I will get a question in before my time 
expires--Senator Schumer asked a little bit about what happens 
if we wait too long. Senator Corker made the point that we 
should not wait until lame duck to do this. Again, I would 
support both of those colleagues' comments; the sooner the 
better, right after GSE, not before GSE.
    But are we already seeing--with the expiration of TRIA at 
the end of this year, are we already seeing in new starts or in 
leasing, uncertainty, because of that due date coming along 
and, candidly, Congress's not very good record, not this 
Committee, but Congress's not very good record of hitting 
timelines?
    Anybody on the panel?
    Ms. Snow. I will answer that on behalf of the insureds. 
Yes, some of our insurers are already seeing what are called 
sunset clauses, where the coverage may actually expire with 
TRIA, or they are offered standalone policies where they can 
buy the coverage beyond, but the premiums are very high and the 
deductibles are very high.
    So, yes, there is already an impact in the market and an 
impact on worker's compensation pricing.
    Mr. Donnelly. I would echo those comments, Senator, in that 
I think many insurers are putting endorsements on policies to 
protect themselves if, in fact, significant condition changes, 
i.e., that TRIA expires and is not reauthorized.
    Mr. Henry. And, Senator, what you are already seeing in 
addition to these, but we are not really seeing up front, is 
the carriers are re-underwriting concentrations of exposures. 
They are not telling us about that, but I promise you they are 
doing it.
    Senator Warner. Is that also translating down to slower 
economic activity, I guess, not only in----
    Mr. Henry. No question. And, if I am a lender and I have 
got a billion dollar project in Vegas that I am getting ready 
to fund and I get a builder's risk that has a sunset clause or 
says no TRIA-no coverage, I am not sure I am going to make that 
loan.
    Chairman Johnson. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    I think it is clear from all that we have talked about and 
all we know that TRIA has served an important function in this 
market. It has given us certainty when we would not have had 
it. It has given us commercial development. It has not cost the 
taxpayers a dime.
    I hope that we are going to move forward on TRIA soon, but 
I do have a question about it and a question about whether 
there should be a change in how it is done.
    And that is in other forms of insurance you pay a fee up 
front. Under TRIA, the Government does not get any fee up front 
for providing this insurance. Instead, if there is a loss, the 
premise is that the Government will recoup on the back end 
after the terrorism event has occurred.
    And everyone in this hearing has been talking about the 
enormous pressure there will be on the Government to absorb the 
losses by the taxpayers generally.
    So I am a little concerned that that same pressure is going 
to be there because of TRIA. Nothing is going to change because 
of that.
    So the question I have is, what kind of market impact would 
it have if we collected a modest fee on the front end for TRIA?
    And I thought maybe I would start with you on that, Mr. 
Elliot.
    Mr. Elliot. Absolutely. Thank you, Senator.
    Let me share just experiences in the marketplace over the 
last couple of years to give you a sense of my answer.
    Number one, I would say that we would have to establish 
prices for that exposure.
    Senator Warren. Yes.
    Mr. Elliot. And experience has suggested to us that as you 
raise prices, particularly that middle market customer, they 
are electing not to purchase. We see take-up rates in the small 
customer segment much higher than we do in the middle market. 
And so I would be concerned that the take-up rates go down in 
the middle, and in effect, we are going to have a looming issue 
that will come back to this Government in a different form on a 
different day if we are not careful about how we institute 
that.
    Senator Warren. So let me just make sure I am understanding 
what you are saying, Mr. Elliot. What you are saying is, in 
effect, prices would go up if we actually paid anything at all 
for that insurance, which tells me right now you are not 
pricing for the risk that the American taxpayer is absorbing.
    So you are not setting any money aside for this right now. 
That is, if an event of terrorism occurs, you are expecting the 
U.S. Government to absorb all these losses and then turn to 
you, and you have not set a dollar aside for being able to 
absorb any of those losses down the line?
    Mr. Elliot. We are pricing for our retention, just as you 
describe, and----
    Senator Warren. But you are not pricing for the fact that 
under TRIA the U.S. Government is supposed to come back and 
collect for you.
    Mr. Elliot. That is correct. That is correct.
    Senator Warren. So, in other words, this is just a giveaway 
program from the U.S. Government that you are not pricing for 
now?
    Mr. Elliot. I think the backstop, the program itself, has 
been a fundamental opportunity to allow us to engage and offer 
coverage.
    Again, our net retentions in this business are $34 billion 
across the industry, and I think it has been a very successful 
public-private relationship.
    Senator Warren. But no retention to cover the part that the 
American taxpayer, as a matter of law, is supposed to come back 
to you and you are supposed to pay for, not the American 
taxpayer.
    Mr. Elliot. Right, that would be a forward recoupment in 
the sense of this program at the moment.
    Mr. Donnelly. And, Senator, I would echo Mr. Elliot's 
comments in that the post-funding, if you will, is, I think, a 
much more efficient way for us to fund this.
    If we were to collect something today, we would be making 
an estimate of what that is.
    I mean, we are talking about something that is way out in 
the tail, back to--and the fact is there is a very defined 
mechanism, whether it has to be tweaked or not, which was asked 
earlier. In terms of where the recoupment, there is a very 
defined mechanism in place.
    Certainly, is there a liquidity issue in terms of how the 
money would move? I would say yes to that, but there is a 
mechanism in place to make sure that the taxpayer is paid back.
    Senator Warren. Well--but let me just make sure I am 
understanding that. I understand that it would be difficult to 
price this. But, is there anyone who believes that the price is 
zero?
    [No response.]
    Senator Warren. I am hearing you say no.
    No one believes that the price is zero, and yet, that is 
exactly what you are paying for it right now. You are paying 
zero.
    Mr. Donnelly. I guess, Senator--I guess I would say again I 
believe it is a much more efficient way in that if, God forbid, 
there is an event that happens and it becomes a dollar amount 
that has to be recouped, there is a defined mechanism in place 
to go about collecting that over some period of time, up to 
$27.5 billion.
    Senator Warren. I appreciate--I am afraid I am going to be 
out of time here, but I really do have to say on this; this 
whole thing is premised on the fact that the U.S. Government 
will be called on to backstop if there is an event of 
terrorism. That is the reason we put TRIA in place.
    But we put TRIA in place to say we are going to get some 
sharing on those costs, and yet, it seems to me the same 
pressure is going to be in place on the U.S. Government to 
absorb these losses if there is no mechanism in place to have 
at least offset some of those costs ahead of time or if you are 
not setting any money aside to absorb those losses on down the 
line.
    So I do not see how the pressure changes this, and it just 
raises for me some serious questions about TRIA.
    Chairman Johnson. Thank you again to all of our witnesses 
for being here with us today.
    I will continue working with Ranking Member Crapo and my 
colleagues on the Committee to move a bill to extend TRIA as 
soon as possible.
    This hearing is adjourned.
    [Whereupon, at 11:23 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow]:
                PREPARED STATEMENT OF SENATOR MARK KIRK
    I want to thank the Chairman and Ranking Member for having this 
hearing today. There are a number of us on this Committee who represent 
States that have experienced terrorism attempts and/or have cities that 
are key terrorism targets. Since 9/11, there have been no fewer than 
seven failed terrorist attempts and one actual attack--occurring in 
Chicago as well as rural areas of Illinois. That being said, terrorism 
is not a west coast or east coast issue. Terrorism attempts have been 
plotted throughout the country with no fewer than 29 States and the 
District of Columbia having terrorism plots uncovered since 9/11. 
Further, the entire country feels the economic impacts and upheaval 
when a terrorist event occurs. Immediately after the 9/11 attacks the 
Dow dropped more than 600 points, worsening the 2001 recession and the 
Federal Reserve added $100 billion in liquidity per day during the 
three days after attack to help avert a financial crisis.
    Terrorism is also not just an insurance industry issue. TRIA helps 
protect U.S. consumers and taxpayers, including 5.8 million Illinois 
workers and a multitude of high value commercial properties including 
Chicago's Willis Tower, O'Hare Airport, the Soldier Stadium, several 
Illinois bridges, and five major U.S. military installations just to 
name a few.
    Terrorism risk is extremely unique in that it is a national 
security issue that can cost tens of billions of dollars, if not much 
more; is extremely difficult, if not impossible to model; and has long-
term economic and security impacts for our country. In the wake of 9/
11, I think our Government responded exceedingly well by creating a 
public-private partnership to ensure the private market can respond and 
can functionally absorb a vast majority of losses due to a terrorist 
event. These efforts shield the taxpayer from substantial costs while 
also providing for a system that enables private market to retain a 
significant portion of terrorism risk.
    Prior to 9/11, coverage for losses from terrorism was typically 
included in general insurance policies--however, throughout 2002, 
coverage for losses from terrorist attacks was not available. Fearing a 
larger economic impact from the lack of insurance, Congress passed the 
Terrorism Risk Insurance Act (TRIA) requiring insurers to offer 
terrorism coverage and created a 3-year program with shared loss risk 
between the Government and private insurers in the event of a terrorist 
attack. TRIA was extended via the Terrorism Risk Insurance Extension 
Act (TRIEA) of 2005 and again by the Terrorism Risk Insurance Program 
Reauthorization Act (TRIPRA) of 2007, and is set to expire on December 
31, 2014. Each reauthorization made improvements and reforms to 
continue to make the program its best and to ultimately protect the 
taxpayer.
    However it is important that we act now to make our reforms and 
reauthorize TRIA to ensure stability in this important market place. 
Uncertainty surrounding the reauthorization of TRIA is already 
affecting insurers' ability to offer future policies. Industry experts 
agree that removing this federal backstop would result in a vacuum for 
terrorism risk insurance, even though the 60 percent take-up rate shows 
robust demand. Modeling and predicting terrorism events is simply too 
difficult, especially given insurers' limited access to necessarily 
classified national security information. As we saw in the wake of 9/
11, without terrorism risk insurance, investors and developers are 
unwilling to finance construction projects, stalling economic 
development nationwide.
    TRIA protects taxpayers by requiring the insurance industry to 
share and recoup losses covered by the Federal Government in all but 
the largest terrorist attacks. Should this program lapse and coverage 
be unavailable, the Government, and therefore the taxpayers, would face 
pressure to cover uninsured losses completely.
    The TRIA insurance program is very different from many other 
Government insurance programs--namely because it is a public-private 
partnership that does not require the Federal Government to assess or 
underwrite risks. Another difference is that this risk is difficult, if 
not impossible, to effectively model and brings into question the 
Government's role in national security and possible ``acts of war''. 
Because of these unique complexities and national security issues, the 
only effective and most fiscally responsible way to address this risk 
was through a public-private partnership. Additionally, unlike other 
Government-backed insurance programs, the private industry is on the 
hook for first losses, exposure to the Federal Government is limited, 
and any costs incurred by the Federal Government are to be recouped by 
industry within a specific timeframe ultimately leaving no cost to the 
taxpayer.
    Fortunately, our country has not had to utilize the TRIA program 
after enacting this legislation in the wake of 9/11, since by design it 
was created to only kick-in only for large-scale events. While this 
will mark the third time that TRIA legislation has been reauthorized 
and while I believe that the current program is functioning in the 
market place the way it was intended, I also believe it is prudent to 
identify areas for continued improvement. I look forward to exploring 
ways that the taxpayer can be further shielded from significant losses 
from a terrorist event while at the same time ensuring that the private 
market does not retreat from this critical market space.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR TOM COBURN
    When the Terrorism Risk Insurance Act (TRIA) was originally 
authorized in 2002, Congress found that the Federal Government should 
``provide temporary financial compensation to insured parties. while 
the financial services industry develops the systems, mechanisms, 
products, and programs necessary to create a viable financial services 
market for private terrorism risk insurance.'' Twelve years later, the 
Committee is discussing the extension of the federal backstop for a 
fourth time without any consideration for the program's original intent 
to temporarily bridge the gap between post-9/11 economic distress and a 
permanent private sector solution. While I appreciate that the Chairmen 
and Ranking Member will consider taxpayer protection reforms as part of 
a reauthorization, I am concerned that the Committee is escaping the 
fundamental question of whether or not TRIA is a permanent federal 
program. If so, does the framework of the temporary transition program 
remain appropriate for a permanent taxpayer provided backstop? If not, 
how can Congress create a wind down of TRIA that will facilitate 
private sector solutions?
    Unfortunately, the existence of TRIA and Congress' willingness to 
extend the program without indicating a clear endpoint eliminates the 
incentive for industry to develop private market mechanisms for 
terrorism risk coverage. The current setup where all of the gains are 
privatized while some of the losses are socialized is not an 
environment that fosters innovative solutions and accurate pricing. For 
example, despite their ability and willingness to expand terrorism risk 
capacity, private reinsurers cannot possibly compete with the free 
reinsurance provided by the American taxpayers. The unwillingness to 
even discuss a wind down of TRIA and potential perpetuates the 
disincentives to innovate beyond the current TRIA framework.
    Based on the witnesses' prepared testimonies, it appears the 
industry does not believe there is a plausible private sector solution 
available and that the absence of a private solution justifies a 
permanent federal backstop for terrorism risk coverage. If there is no 
way to maintain a stable terrorism risk insurance market without a 
federal backstop, then insurance companies should pay for the taxpayer 
provided service with upfront premiums. The tenets of a temporary 
solution from 12 years ago are no longer appropriate for this long-term 
permanent program.
    Instead of reforming around the edges, it is time for Congress to 
decide whether or not TRIA is a permanent program. If so, it is time to 
scrap the generous framework that was created when TRIA was thought to 
be a temporary patch in 2002 and ensure that taxpayers are compensated 
for the coverage they provide with upfront premiums. If not, Congress 
should declare a clear transition away from the public backstop to 
allow private capital, competitive pricing and innovative solutions to 
fill the space.
                                 ______
                                 
                 PREPARED STATEMENT OF W. EDWARD WALTER
            President, Chief Executive Officer and Director
                      Host Hotels & Resorts, Inc.
         on behalf of the Coalition to Insure Against Terrorism
                           February 25, 2014
    Good morning Chairman Johnson, Ranking Member Crapo and Members of 
the Committee. My name is Ed Walter, and I am the President and CEO of 
Host Hotels & Resorts. Host owns or has interests in more than 140 
hotel properties in 15 countries, 24 States and the District of 
Columbia and is one of the largest owners of hotels in the world. I am 
a member of the Executive Board, and just recently concluded my tenure 
as the Chair of the National Association of Real Estate Investment 
Trusts, the worldwide voice for REITs and publicly traded real estate 
companies with an interest in the U.S. real estate and capital markets. 
I also serve on the Board of Directors of The Real Estate Roundtable.
    Today though, I am testifying on behalf of the Coalition to Insure 
Against Terrorism, or CIAT. CIAT is a broad coalition of commercial 
insurance consumers, formed after the September 11, 2001 attacks to 
ensure that American businesses could obtain comprehensive terrorism 
insurance. The diverse CIAT membership covers virtually every sector of 
the private economy as well as public sector buyers of insurance. For 
example, the U.S. Chamber of Commerce, the National Association of 
Manufacturers, and the National Retail Federation are members. So are, 
to name a few sectors, transportation interests (e.g., the Association 
of American Railroads, the General Aviation Manufacturers Association, 
and the Taxicab, Limousine and Paratransit Association), utilities 
(e.g., American Gas Association, American Public Power Association, 
Edison Electric Institute, and National Rural Electric Cooperative 
Association), finance (e.g., American Bankers Association, America's 
Community Bankers, Mortgage Bankers Association of America), real 
estate (American Resort Development Association, National Association 
of REALTORS', Building Owners and Manufacturers 
International, International Council of Shopping Centers, and National 
Association of Industrial and Office Properties) and sports (e.g., the 
Baseball Commissioner, NCAA, NBA, NFL, and NHL). Simply put, CIAT is 
the true consumer voice on terrorism risk insurance, as we are 
comprised of the principal policyholders of commercial property and 
casualty lines of insurance in the United States.
    I am here to strongly urge that Congress renew the Terrorism Risk 
Insurance Act, or TRIA, as soon as possible, and certainly prior to its 
currently scheduled expiration at year end. Without adequate terrorism 
insurance coverage, our economy, our jobs and our well-being become 
more vulnerable to terrorism. Maintaining a workable Federal terrorism 
insurance mechanism is vital for our Nation's economic security. The 
clear record of this Committee's previous hearing last September amply 
demonstrated that.
    My own company was deeply and personally affected by the terrorist 
acts of September 11. Host lost our Marriott World Trade Center Hotel, 
which was destroyed by the collapses of the two World Trade Center 
towers, and our Marriott New York Financial Center Hotel located two 
blocks away was also heavily damaged. Much more importantly, we 
suffered the loss of two hotel employees.
Economic Impact of 9/11 and the Enactment of TRIA
     As you know, the September 11th terrorist attacks cost insurers 
about $36 billion. For those of us who had commercial insurance 
policies, the financial losses suffered as a result of the attack were 
covered by the insurance policies in force at the time. All of this 
changed after September 11. The potential for extraordinary terrorism-
related damages and a heightened awareness of the magnitude of future 
risk caused a downward spiral in the insurance market. First, 
reinsurers left the market, and then many primary insurance carriers 
effectively stopped providing coverage of terrorism-related losses. 
After the September 11th attacks, Host's property insurance costs 
nearly tripled, while the amount of coverage declined by 70 percent.
    The uncertainty surrounding the future of terrorism insurance 
contributed significantly to a paralysis in the economy, particularly 
in construction, tourism, business travel and real estate finance. 
According to a study by the Real Estate Roundtable, in the 14 months 
between the 2001 attacks and the enactment of TRIA, over $15 billion in 
real estate-related transactions in 17 States were stalled or canceled 
because of a lack of terrorism risk insurance. Perhaps more troubling, 
the White House Council of Economic Advisors found there was an 
immediate and direct loss of 300,000 jobs in that same period from 
deferred construction. With the entire private sector exposed, the 
Federal Government took action by enacting TRIA, in November 2002. TRIA 
provided a limited Government risk-sharing mechanism, while requiring 
private commercial insurers to offer terrorism coverage for certain 
acts, and requiring insurers and policyholders to participate in the 
costs of any eventual claims through both upfront retentions and a 
post-event recoupment mechanism.
    Risk-sharing partnerships are the standard among developed nations 
for the management of terrorism risk. At least 14 other nations, 
including most of the major OECD economies, have permanent terrorism 
insurance laws in place because they too recognize that private 
insurers and reinsurers alone cannot be responsible for underwriting 
terrorism insurance.\1\ A critical consideration for any future 
investment will be whether terrorism insurance is available in that 
country.
---------------------------------------------------------------------------
    \1\ See U.S. Gov. Accountability Office, Catastrophe Risk: U.S. and 
European Approaches to Insure Natural Catastrophe and Terrorism Risks, 
39 (2005); Airmic Technical, Terrorism Insurance Review, 5 (2013), 
available at http://www.willis.com/Documents/Publications/Services/
Political_Risk/Terrorism_2013_FINAL_web.pdf.
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The Continuing Economic Need for TRIA
    In addition to having stabilized our economy following 9/11, TRIA 
continues to support our economy by providing a plan to survive a 
future terrorist event without losing stability or continuity. It 
requires the insurance industry to bear a significant amount of any 
claims and also provides a mechanism for the Government to recoup from 
policy holders the cost of governmental outlays. The continuing need 
for TRIA is apparent: when TRIA was previously set to expire, private 
insurers routinely wrote exclusions into policies that would void 
terrorism coverage in the event TRIA was not renewed. A 2005 poll by 
Marsh & McLennan of 50 commercial property insurers found that 68 
percent of insurers would have excluded terrorism coverage after 
December 31, 2005 if TRIA was not extended. Similarly, a 2013 study by 
Aon found that if TRIA is terminated, there would be an 85 percent 
reduction in insurance capacity for property risks.\2\ Because the 
standalone market would not be able to fill the void, the economic 
impact of TRIA's expiration would be significant. The issuance of 
similar ``sunset'' clauses that would exclude terrorism risk coverage 
after year end are again likely to result from a failure to quickly 
extend TRIA well beyond 2014.
---------------------------------------------------------------------------
    \2\ Response to U.S. Treasury and President's Working Group: 
Terrorism (Re)Insurance, Aon, September 2013, at 9, available at http:/
/www.aon.com/attachments/risk-services/2013-Aon-Response-to-Presidents-
Working-Group.pdf.
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    TRIA protects both the capital and property markets from 
considerable disruption. Most existing loans require that borrowers 
maintain terrorism insurance as part of their overall insurance 
program. In fact, in 2005, as the expiration of the original Act 
approached, Host began receiving letters from lenders notifying us that 
they would require us to obtain terrorism insurance even if TRIA was 
not renewed. If, as anticipated, the standalone market proves 
inadequate to satisfy demand created by the nonrenewal of TRIA, 
companies would face widespread technical loan defaults throughout 
various industries.
    In the current climate, banks and other capital providers have 
indicated they will not provide new financing without terrorism 
insurance. As a result, even today, borrowers are being forced to 
confront the question of what options will exist after year-end 2014. 
The lack of clarity around this issue will likely slow the pace of new 
financing, especially in the case of properties that are perceived to 
be at a higher risk of terrorist attacks such as high profile buildings 
and real estate generally located in key gateway urban markets.
    This problem would be even more troublesome in the case of new 
construction projects, which are already properly viewed as presenting 
additional risk to a lender. Construction lenders could back away from 
lending for these projects because of a concern that takeout financing 
would be difficult to arrange if terrorism risks cannot be offset by 
insurance. It is important to add that these uncertainties create 
delays, which only serve to slow the momentum of our already tepid 
recovery.
Risk Mitigation: A Priority for Policyholders
    It is important to note that policyholders retain the incentive to 
mitigate risk under TRIA. Building owners and businesses across the 
Nation have spent hundreds of millions of dollars on enhanced security 
measures and risk management since 9/11. In fact, reducing real 
estate's vulnerability to terrorism and other threats--through 
information sharing, risk mitigation, and building security emergency 
response planning--continues to figure prominently in the prudent 
management of commercial real estate. Such efforts include a full range 
of counterterrorism and target hardening techniques to reduce the 
vulnerability of real estate as part of the Nation's critical 
infrastructure and key resources.
    Mitigating against the risk of terrorism today is a focus for all 
building owners and, whether a Federal terrorism insurance plan does or 
does not exist, it will continue to be an important aspect of managing 
any facility where people gather to work, shop, play or simply enjoy 
recreational opportunities.
The Future of TRIA
    Some critics argue there is no longer a need for TRIA, stating that 
the private insurers and reinsurers should have found ways to manage 
the risk of terrorism and offer the commercial sector coverage for it. 
But we have seen no credible evidence that the private market alone can 
satisfy the economy's demand for terrorism insurance, now or in the 
immediate future. Indeed, from our perspective as policyholders, no one 
has provided us any evidence or made an effective case that there will 
be any real market for terrorism insurance at all should TRIA be 
allowed to expire at year end.
    There is, however, plenty of evidence to the contrary. The April 
2013 report issued by Marsh states this outright when it says, ``In the 
absence of the TRIA backstop, the needs of policyholders are not 
expected to be met with regards to terrorism insurance.'' Similarly, 
the September 2013 report by Aon states ``If TRIA were to expire in 
2014 the vast majority of the existing insurance market for terrorism 
risk would disappear.'' Additionally, last September, this Committee 
heard from an array of major insurance brokers, academics and policy 
analysts expressing belief that private risk markets cannot provide 
sufficient capacity without TRIA or something very much like it.
    Other critics have expressed concern that TRIA only benefits major 
metropolitan cities, like New York, Chicago and San Francisco. But 
terrorism is not just a big city problem. The 1995 Oklahoma City 
bombing made this clear. According to an April 2010 Heritage Foundation 
report, at least 30 terrorist attacks have been thwarted in the United 
States since September 11. Among these, terrorists have targeted a 
shopping mall in Columbus, Ohio, gas pipelines in Wyoming, a Federal 
building in Springfield, Illinois and a Christmas tree lighting 
ceremony in Portland, Oregon. Anywhere that people gather--sporting 
events, schools and universities, hospitals, shopping centers, a 
utility or a place of worship--is a potential target for terrorism.
    We believe one of the strengths of TRIA is the manner in which it 
utilizes the private insurance marketplace to manage terrorism risk--
indeed, all exposure under TRIA starts with private insurance contracts 
and, due to both significant retentions and the recoupment mechanism, 
the ultimate risk-bearers under TRIA are the policyholders and the 
private insurers. We are always willing, however, to consider ways to 
further limit taxpayer exposure under the program, which we know is 
your focus as well.
    Overall, we support the current structure of TRIA and are wary of 
major structural changes since the impact of such changes on the 
continued availability of terrorism insurance in the marketplace is 
speculative. We are open to modifications so long as they do not have 
the effect of restricting the availability of terrorism insurance. We 
understand that reinsurance capacity for even the existing retention 
levels under TRIA is limited.\3\ This fact alone demonstrates that TRIA 
is not ``crowding out'' the private sector.
---------------------------------------------------------------------------
    \3\ According to Eric Smith of Swiss Re, ``Based on the most recent 
estimate, the total amount of reinsurance capacity available for 
terrorism in the United States is approximately $6-10b--well below the 
$27.5b insurance marketplace aggregate retention under TRIA and the 
$34-35b cumulative insurer loss retentions.'' The Terrorism Risk 
Insurance Act of 2002; Hearing Before the H. Comm. on Financial 
Services, 113th Cong. (2013) (statement of J. Eric Smith, President & 
CEO, Swiss Re Americas, at 4).
---------------------------------------------------------------------------
    It is important to point out that the policyholder community bears 
significant burdens or exposure under TRIA's design, in addition to 
their normal policy deductibles or self-insurance retentions. First, 
TRIA caps the total liability of the private insurance industry and the 
Federal Government at $100 billion, so that if a major attack or series 
of attacks produced total insured losses above that figure, commercial 
policyholders with claims would suffer a proportionate ``haircut'' of 
their compensable coverage even as they were direct sufferers from an 
attack. Second, under TRIA any Federal share of compensation is to be 
recouped in subsequent years through retrospective assessments imposed 
on all commercial policies in covered lines, so policyholders 
essentially make the taxpayers whole. TRIA is no handout to anyone.
Conclusion
    The ongoing risk of terrorism remains acutely apparent to my 
company: The thwarted 2010 Times Square bombing attempt happened 
directly in front of our Marriott Marquis, and the Boston Marathon 
bombings took place just two blocks from our Boston Marriott Copley 
Place and Sheraton Boston hotels. Because terrorist events follow no 
pattern, the location and magnitude of losses cannot be reasonably 
predicted through modeling software as is currently done for hurricane 
and earthquake risks. Consequently, industry experts have suggested 
that in the aftermath of another large terrorism event, without TRIA, 
we would likely face the same situation we confronted after 9/11, with 
insurance capacity limited, if available at all.
    That leads to perhaps the strongest argument for extending TRIA: 
it's working and at virtually no cost to the taxpayer. After the 
enactment of TRIA, costs stabilized. And today, commercial insurance 
consumers have access to comprehensive terrorism insurance, directly as 
a result of the extension of TRIA. Enacting the Terrorism Risk 
Insurance Act was the right thing to do in 2002. And Congress did the 
right thing when it extended and amended TRIA in December 2005 and 
again in December 2007. TRIA remains the best method to address the 
cost and uncertainty of terrorism--Congress should once again extend 
TRIA. Thank you for the opportunity to address the Committee--we 
applaud your concern regarding this very important issue.
                                 ______
                                 
                   PREPARED STATEMENT OF CAROLYN SNOW
                 Director, Risk Management, Humana Inc.
      on behalf of the Risk and Insurance Management Society, Inc.
                           February 25, 2014
    Good morning, Chairman Johnson, Ranking Member Crapo, and Members 
of the Committee. My name is Carolyn Snow. I am the director of risk 
management for Humana Inc., based in Louisville, Kentucky, and the 
current president of the Risk and Insurance Management Society (RIMS), 
on whose behalf I am testifying today. I want to thank the Committee 
for allowing me the opportunity to speak on this critical policy debate 
surrounding the reauthorization of the Terrorism Risk Insurance Act 
(TRIA).
    RIMS is a not-for-profit organization dedicated to advancing the 
theory and practice of risk management for the benefit of our member 
organizations. We are the largest organization of risk management 
professionals, representing over 11,000 members worldwide from more 
than 3,500 entities. Our membership includes public and private 
entities, both large and small, and spans the economic spectrum from 
the high-tech sector, real estate, finance, healthcare, energy, 
transportation, education, and defense.
    Effective risk management is the identification of potential risks 
to an organization and the methods to effectively mitigate those risks. 
Insurance coverage is a necessary component to risk mitigation, 
particularly for potentially catastrophic losses, which would include 
terrorism. Since its inception, TRIA has allowed our member 
organizations to obtain adequate terrorism coverage at affordable 
rates. Prior to that, after 9/11 our members were unable to obtain such 
coverage, which jeopardized many contracts that contained covenants to 
carry terrorism insurance. For this reason it is vital that the program 
be extended well beyond its current expiration date of December 31, 
2014.
    We believe that the availability and affordability of adequate 
insurance coverage for acts of terrorism is not only an insurance 
issue, but an economic one. 9/11 proved that the private insurance 
market alone is unlikely to provide adequate and affordable coverage. 
In February of 2002, as insurers reassessed their terrorism exposures 
post-9/11, the Government Accountability Office stated that the 
``resulting economic drag'' from difficulties in obtaining adequate 
terrorism coverage could ``slow economic recovery and growth.'' In 
September of 2002, Moody's Investors Services downgraded the rating on 
$4.5 billion in loans on commercial properties due to lack of terrorism 
coverage while a survey by the Real Estate Roundtable found that 
``$15.5 billion of real estate projects in 17 States were stalled or 
canceled because of a continuing scarcity of terrorism insurance.''
    The creation of TRIA in 2002 brought stability to this highly 
volatile situation. By providing a backstop, and assuming some of the 
market terrorism risk as a reinsurer, the Federal Government has freed 
up capacity in the private market that would not otherwise exist. This 
capacity can then be made available to the consumer at affordable 
prices, which we have seen in the current marketplace.
    A 2013 survey conducted of RIMS membership found that sufficient 
capacity exists in the current market. Ninety-two percent of 
respondents to the survey answered that they have had no trouble 
obtaining adequate terrorism coverage over the past 18 months, up from 
84 percent in a similar 2010 survey.
    This availability of adequate coverage is directly linked to the 
existence of TRIA. If TRIA is allowed to expire, uncertainty will 
reenter the marketplace which will have a negative impact on the 
affordability and availability of terrorism coverage. If the private 
market is forced to assume 100 percent of terrorism risks, then 
carriers will look to reduce their exposure, particularly in high-
threat areas such as the Northeast and the West Coast. As a result, 
pricing for this more limited coverage will greatly increase and some 
carriers may actually exit the market.
    The same 2013 RIMS survey, mentioned earlier, found that 69 percent 
of respondents expect that their terrorism limits would decrease or 
that coverage would not be offered at all, should TRIA be allowed to 
expire. Without adequate coverage, many of these organizations may be 
forced to self-insure; however, in the event of major attack, most 
would be unable to absorb the losses. Those that could absorb the 
losses would do so at the expense of other business growth initiatives, 
which would have a negative impact on our economy.
    Expiration of TRIA would also have a negative impact on captive 
insurance companies. Many of our larger member organizations utilize 
captives to insure for potential losses from terrorist events. Under 
TRIA, captives are eligible for TRIA participation, which provides them 
with the security of a Government backstop. Without TRIA, many captives 
will be susceptible to failure in the event of a catastrophic loss. 
This might also result in a domino-effect of failure in other lines of 
coverage unrelated to terrorist event, but which are also insured 
through the captive. Few businesses would be able to absorb the 
resulting uninsured losses.
    Another area that will feel the negative impact of TRIA's 
expiration is in commercial lending. Since the 9/11 attacks, most 
commercial lenders have required terrorism insurance to be purchased to 
secure commercial construction and mortgage loans. Immediately 
following 9/11, it was difficult, if not impossible, for commercial 
policyholders to obtain the coverage necessary to secure or maintain 
financing. According to testimony before Congress on September 11, 2012 
by the Coalition to Insurance Against Terrorism, over $15 billion in 
real estate transactions were ``stalled or even canceled'' due to a 
lack of terrorism coverage in the 14 months following 9/11. Further, 
CIAT cited a White House Council of Economic Advisors statistic 
confirming the loss of 300,000 jobs from deferred construction 
investment.
    In 2005, as TRIA approached expiration, many insurers began placing 
sunset provisions into their policies to address a lack of coverage 
should TRIA have been allowed to expire. Our members are already 
reporting a similar circumstance for policies that extend beyond 
December 31 of this year. Some policyholders are being offered stand-
alone policies for the period extending beyond 2014, but with 
deductibles or premiums that are nonrefundable should TRIA be 
reauthorized at a later date. This situation creates a great deal of 
uncertainty in the financial and construction markets that we expect 
will only get worse the closer we get to TRIA's December 31 expiration.
    The impact on workers compensation coverage is already being felt 
as some companies with workforces concentrated in major urban areas are 
seeing workers comp price increases of 5 percent to 10 percent as 
insurers look to limit their terrorism exposure, should TRIA be allowed 
to expire. In the 2013 survey of our membership, 20 percent of 
respondents anticipated having trouble obtaining coverage if TRIA is 
not reauthorized. A January 5, 2014 article in Business Insurance 
stated that experts have projected that middle-market firms can expect 
workers comp premium increases of 5 percent-10 percent, while national 
employers with large deductibles or retentions can expect 2 percent-4 
percent increases. This increased pricing could force organizations to 
take on high-deductible programs or to self-insure, which again, places 
the organization's business future at stake.
    As the Committee continues to review and study the issue of TRIA 
reauthorization, we would like to make our recommendations for areas of 
improvement. The devastating Boston Marathon bombing raised questions 
about how the certification process is currently handled under TRIA. To 
date, no formal declaration has been made as to whether the event will 
or will not be certified as an ``act of terror'' under the program. 
Insurers and policyholders remain unsure as to which claims will or 
will not be paid and/or covered by terrorism insurance. If the event is 
certified then those policyholders who chose not to obtain coverage may 
be unable to recoup their losses; however, if the event is not 
certified, then those who elected to obtain terrorism coverage may find 
difficulty in having their claims paid.
    Under the current program, a terrorist act must be certified by the 
Secretary of the Treasury in concurrence with the Attorney General and 
Secretary of State. We recommend streamlining this process by 
consolidating this decisionmaking authority within one office or 
department. We also recommend a 60-day deadline, with the possibility 
for one extension, from the date of the attack, for a determination to 
be made. This would allow policyholders and carriers to know exactly 
when to expect a determination and for the claims process to begin. We 
also believe that the definition for an ``act of terror'' should be 
reviewed to ensure that there is a clear definition of what will or 
will not be considered a terrorist event.
    Another area of improvement relates to coverage for nuclear, 
biological, radiological, and chemical (NBCR) events. The current 
program neither explicitly includes or excludes NBCR events, which has 
prompted many insurers to exclude NBCR events from terrorism policies 
based on long-standing standard exclusions for nuclear and pollution 
risks. As a result, consumers are generally unable to obtain adequate 
NBCR coverage. Based on our membership survey, only 23 percent of 
respondents currently have NBCR coverage and 58 percent of those 
without coverage are unable to obtain coverage because it is not 
offered, or is simply unaffordable. However, 83 percent of those 
respondents believe NBCR coverage should be made available. For that 
reason, we support an explicit inclusion of NBCR coverage, under the 
program's make available provision, in a long-term extension of the 
program. NBCR events have a high probability of resulting in 
catastrophic losses for organizations affected by such an attack. 
Without coverage these organizations are at risk of going under should 
such an attack occur. In such an event, it is likely that the Federal 
Government will step in to provide assistance to these organizations, 
but without the TRIA style public/private loss sharing mechanism in 
place. By making NBCR fully covered under TRIA, both sides will know 
their responsibilities to consumers should such an event occur.
    In conclusion, we feel very strongly that a public/private 
partnership provides the best alternative to addressing the long-term 
needs of availability and affordability of terrorism insurance. Such a 
program ensures an orderly and efficient response to acts of terror, 
which minimizes market disruptions and ensures benefits are available 
to all victims. Further, we believe that having TRIA in place, should 
an attack occur, will help avoid the wasteful Government spending that 
so often accompanies an unplanned, haphazard response to such an event.
    I, and RIMS, appreciate this opportunity to testify and thank the 
Committee for continuing this very important discussion in advance of 
TRIA's expiration. We are committed to serving as a resource as your 
work continues on the program's potential reauthorization. Should you 
require additional information or have any questions regarding RIMS 
policy positions, please do not hesitate to contact Nathan Bacchus, 
RIMS Sr. Government Affairs Manager, at [email protected].
                                 ______
                                 
                    PREPARED STATEMENT OF BILL HENRY
              CEO, McQueary, Henry, Bowles and Troy, Inc.
         on behalf of the Council of Insurance Agents & Brokers
                           February 25, 2014
    Chairman Johnson and Members of the Committee, thank you for the 
opportunity to testify today regarding the terrorism risk insurance 
program. My name is Bill Henry. I am the CEO of McQueary, Henry, Bowles 
and Troy, Inc. (MHBT), of Dallas, Texas. My testimony today is on 
behalf of my firm, as well as the member firms of the Council of 
Insurance Agents and Brokers (The Council).
    MHBT is one of the largest insurance agencies in Texas. With 
origins dating back to 1925, we have 315 employees in five cities 
across the State. The Council represents the Nation's leading, most 
productive and most profitable commercial property and casualty 
insurance agencies and brokerage firms. Council members specialize in a 
wide range of insurance products and risk management services for 
business, industry, Government, and the public. Operating both 
nationally and internationally, with nearly one in five members with 
presence outside the United States, Council members conduct business in 
more than 5,000 locations, employ well over 250,000 people, and 
annually place approximately 85 percent--well over $200 billion--of all 
U.S. insurance products and services protecting business, industry, 
Government and the public at-large, and they administer billions of 
dollars in employee benefits. Since 1913, The Council has worked in the 
best interests of its members, securing innovative solutions and 
creating new market opportunities at home and abroad.
    MHBT and the members of The Council believe that terrorism risk 
protection is an issue of utmost importance and a critical element in 
our Nation's efforts to be prepared for threats of terrorism and the 
aftermath of terrorist attacks. The Members of this Committee have been 
leaders in this effort and we commend you for all of your hard work, 
including the adoption of the Terrorism Risk Insurance Act (TRIA) in 
2002 and the extensions of the Terrorism Risk Insurance Program (the 
Program) under the Terrorism Risk Insurance Extension Act of 2005 
(TRIEA) and the Terrorism Risk Insurance Program Reauthorization Act of 
2007 (TRIPRA).
    As we near the December 31, 2014, sunset of TRIA's reauthorization, 
we are already seeing market reaction to the possibility that the 
Program might not be extended. Commercial policies usually run for 
twelve months or more, and policies being placed today that run past 
December 31 of this year contain exclusions for terrorism risk if the 
Program is not extended. I anticipate that this will cause problems for 
long-term construction projects, workers compensation, and other 
coverages as the end of the year draws closer.
    Although we understand and appreciate the need for a careful and 
deliberative process, the facts make clear that the Program has been a 
success in stabilizing the terrorism risk insurance market, enabling 
insurers to provide affordable terrorism insurance to policyholders 
across the country. Moreover, we know the effect that the absence of 
the Federal backstop has on the marketplace. Therefore, we urge you to 
take quick action to reauthorize the Program to avoid any negative 
repercussions resulting from the lack of affordable coverage.
TRIA Has Stabilized the Terrorism Risk Insurance Market, Preventing 
        Economic Destabilization, and Providing an Orderly Structure 
        for Covering Terror Risks
    It has been more than a decade since thousands of our fellow 
citizens, our friends, colleagues and family members, were killed in 
the September 11, 2001, terrorist attacks. For many Council members, 
the loss was personal, and our industry lost many good people that 
terrible day.
    One of the most important of the many steps that Congress has taken 
to protect Americans from the effects of terror attacks was the 
enactment of TRIA in 2002, and extension of the Program in 2005 and 
2007. Passage of TRIA was critical for individual businesses and for 
the economy as a whole. Although the spotlight was on the insurance 
industry's capacity to withstand further terror attacks and to cover 
terror risks going forward, the national risk was--and is--much 
broader. Because insurance provides individuals and businesses with the 
ability to take risks essential to the functioning of our economy, 
constraining that ability would be economically devastating. The impact 
of the loss of insurance coverage on the economy and jobs would be 
significant in the best of economic times. Its effects would only be 
exacerbated today, as we continue the sluggish recovery from the Great 
Recession.
    TRIA has prevented the economic devastation--the loss of economic 
activity and the loss of jobs--that would have occurred in its absence. 
Indeed, not only have Federal funds provided by the TRIA ``backstop'' 
never been tapped and not one taxpayer dollar spent, the program has 
proved to be an unqualified success in stabilizing the insurance 
markets, allowing insurers to provide much-needed terrorism coverage to 
consumers at prices they are able to afford. TRIA is not about 
protecting the balance sheets of insurers and brokers--it is about 
protecting commercial policyholders and creating and sustaining a 
national economy that encourages investment and development--and 
American jobs.
    When TRIA was originally adopted in 2002, many of us assumed that 
the private sector would be able to create a market for terror 
insurance coverage and the Federal program would be a stop-gap measure 
to ensure stability while that market developed. Since that time, 
however, it has become clear that the private sector--insurance and 
reinsurance companies, the capital markets and rating agencies--has a 
very limited ability to insure and rate terrorism risks that are only 
questionably quantifiable, totally unpredictable and, essentially, 
impossible to underwrite. This is further exacerbated with respect to 
coverage of nuclear, biological, and radiological risks (NBCR), for 
which coverage is essentially nonexistent even with TRIA in place.
    Given these realities, the members of The Council believe a long-
term solution to the terrorism insurance crisis is essential and that 
the Federal Government will continue to have an important role to play 
in terrorism risk coverage for the foreseeable future. The insurance 
market needs some level of stability and predictability. The prospect 
of TRIA's demise--or the uncertainty that would come with periodic 
renewal or extension of the program every few years--is not viable for 
the long-term. Failure to implement a long-term or, ideally, a 
permanent fix before TRIA expires at the end of the year will not only 
vastly decrease risk transfer options, it will expose the U.S. economy 
to potentially devastating uninsured economic loss in the event of 
another catastrophic terrorism attack.
    The issue before Congress, then, is not whether the Government will 
be the insurer of last resort in the event of a terrorist attack, but 
rather whether the Government will work with the insurance industry to 
thoughtfully and deliberately develop a plan before an attack to 
maximize private sector coverage of the massive damages that will 
result from a terror strike, as opposed to reacting in crisis mode 
after an attack occurs. We know the Federal Government will step in to 
provide assistance after a terrorist attack, particularly if there is 
insufficient private sector relief available. We are all on the hook as 
taxpayers when tragedy strikes our fellow citizens. TRIA, however, 
brings the private insurance market into the equation with the 
financial support and organizational expertise the industry has to 
offer: direct contribution through upfront premium payments, relief 
delivery through established claims processes, and a repayment 
mechanism through policyholder surcharges after the event. Thus, it is 
not a question of whether the Federal Government will pay, but rather 
whether the Federal Government will work with the insurance industry to 
ensure that the preparation and response to a terrorist attack is 
handled in the most efficient and cost-effective way possible. Better 
TRIA than FEMA.
Insurance Brokers Support TRIA Because Terrorism Coverage is Critical 
        for Commercial Policyholders
    The role of insurance agents and brokers (producers) in general, 
and Council members in particular, is to help our clients manage risks 
and secure the insurance coverage they need to protect them from the 
risk of loss. We primarily serve the needs of commercial insureds, who 
are the major policyholders of terrorism risk insurance. As the 
insurance experts closest to insurance consumers and the insurance 
marketplace, we understand our clients' needs and the needs and 
appetite of the market, and thus bring a unique perspective to the 
discussion of terrorism insurance coverage. Commercial insureds need 
terrorism coverage not just for peace of mind, but for their 
businesses. Indeed, in many cases, purchase of terrorism coverage is 
mandatory--it is required to obtain a mortgage or financing for new 
construction, the expansion of a business or a new entrepreneurial 
venture, sometimes by State laws and regulations, and often by 
contract. For example, most States prohibit excluding terrorism 
coverage from statutorily required workers compensation coverage, and 
many States prevent exclusion of fire caused by a terrorism event from 
standard fire policies. This affects our clients because if insurers 
cannot provide such required coverage, they will simply pull out of the 
market, resulting in less capacity and higher prices for commercial 
policyholders.
    The most important issue for the broker community, therefore, is 
maintaining consumer access to coverage at a price the business 
consumer can afford. In order to get this access, we need insurers who 
are able and willing to provide the coverage. It is clear that they 
cannot and will not be able to provide terror coverage without a 
Federal backstop or some other mechanism to cap their exposure.
    Let me give you an example: In addition to running MHBT, I serve on 
the board of Signal Mutual, a mutual insurer that provides workers 
compensation coverage under the U.S. Longshoreman & Harbor Workers Act. 
The first members joined Signal in January 1985. (Mutual insurers are 
not-for-profits whose members are the owners and policyholders of the 
company.) The first year, we had 5 members contributing $3,000,000 
premium. In 2014, we anticipate 240 members in all U.S. ports and 
nearly all maritime employments and close to $200,000,000 premium.
    Signal policies cover workers in over 800 locations along the water 
for workplace injury. Many of our members are Navy contractors building 
and repairing vessels. Others are stevedores loading and unloading all 
the exports from of our country and imports to our country from all 
over the world.
    Without TRIA, Signal would not be able to provide the workers 
compensation coverage these people need--and that the law requires. 
Signal buys reinsurance above $5,000,000 per occurrence to protect 
members for normal losses, as well as for our liability up to the 
attachments of TRIA for standard terror risk coverage and for nuclear, 
biological and chemical terror risks. After September 11, we were one 
of the first to step up and buy reinsurance for our terrorism 
exposures, despite the huge price increases we faced due to the lack of 
capacity in the reinsurance markets to cover terror risk. But we had no 
choice because terrorism losses cannot be excluded under USL&H 
coverage. Like 2001-2002, reinsurance capacity remains very limited. 
Without TRIA, I fear that it would dry up--and the limited amount of 
availability that remains would be prohibitively expensive.
    If this happens--if TRIA goes away--the increased costs will be 
felt in the prices of everything that enters or leaves the country 
through our ports and in the cost of Navy contracts, as well. This is 
not about Signal maintaining a huge surplus, or keeping its investors 
happy and secure. This is about individual businesses, crucial 
businesses to our economy and our defense, that will be forced to foot 
the bill--if they can afford it--if the Federal Government makes the 
mistake of ending the structural support for the terrorism risk 
insurance market that TRIA provides. (Additional information regarding 
Signal Mutual and its workers compensation and terrorism risk focus is 
attached.)
    With or without TRIA, Council members will continue to help our 
clients mitigate their risks with all the best means available. But 
insurance is an important component in a comprehensive risk management 
program, and the availability and affordability of terror coverage is a 
critical issue for our clients and the U.S. economy. We supported 
enactment of TRIA in 2002 and its extension in 2005 and 2007, and do so 
again today because of our clients' need for terror coverage, the lack 
of capacity in the private market, and the high cost of the small 
amount of coverage that was available absent TRIA. For the same 
reasons, and because TRIA successfully brought stability to the private 
market for terrorism risk insurance, the Council believes the creation 
of a long-term or permanent solution to the terrorism insurance 
affordability and availability crisis is essential. There is no more 
important policy issue for Council members.
TRIA Has Been Successful in Providing Capacity and Affordability to the 
        Terrorism Risk Insurance Market
    Since its inception in 2002, TRIA has been incredibly successful in 
providing the commercial property and casualty market, and insurance 
buyers, with increased terrorism capacity and significantly decreased 
prices without costing taxpayers one dollar. In addition to providing 
readily available and affordable terrorism capacity for U.S.-based 
risks, the program has also allowed the private market to progressively 
increase its role in coverage terrorism risks through retained 
terrorism exposures under TRIA.
    Coverage that is both available and affordable is directly due to 
the existence of the Federal backstop. Since TRIA's enactment, as the 
availability of terrorism coverage has grown and premium prices have 
dropped, take-up rates for terrorism coverage have steadily increased. 
A brief history of the terrorism insurance marketplace since September 
11 illustrates TRIA's success:

    Prior to September 11, 2001, terrorism risk was considered 
        minimal and coverage for terrorism was generally included at no 
        additional cost in most property and casualty policies.

    After September 11 and prior to the enactment of TRIA, 
        terrorism insurance became almost entirely unavailable, and the 
        small amount that was available was prohibitively expensive. 
        The lack of coverage for terrorism risk at a time when the 
        perceived risk was enormous resulted in uncertainties whose 
        effects rippled far beyond the insurance industry. Even in 
        Dallas and elsewhere in Texas, we had difficulty getting 
        insurance companies to insure workers compensation (for which 
        terrorism risk exclusions are not allowed) for employers with 
        over 50 employees, for example. This pressure eased with 
        enactment of TRIA.

    In the months after enactment of TRIA, the initial pricing 
        for terror coverage was high and the take-up was low.

    Since that time, the purchase of terrorism insurance has 
        been steadily increasing. In 2003, the first full year of the 
        Program, 27 percent of commercial insureds obtained insurance 
        to cover property terrorism risks. That number jumped to 49 
        percent in 2004 and increased steadily thereafter, remaining in 
        the low 60 percent range since 2009.

    The initial increase in take-up rates and the strong, 
        stable take-up rates in the past 5 years reflects the demand by 
        America's business community for terrorism coverage at 
        commercially viable prices. Statistics show that the average 
        premium rates for terrorism coverage dropped 25 percent between 
        2004 and 2005, and another 25 percent between 2005 and 2006 
        thanks to TRIA's ``make available'' requirements. These price 
        decreases, and the corresponding increase in take-up rates, 
        provided much-needed stability to the market. Affordable 
        terrorism coverage has allowed numerous business transactions 
        that would otherwise have been stalled to go forward, without 
        threatening the solvency of the parties involved or their 
        insurers. Policyholders--the businesses of our economy--have 
        not had to deal with extremely high--and volatile--terrorism 
        insurance costs and have been able to budget for their business 
        plans. And it has not cost the Government anything.

    Statistics also show that terrorism risk is not limited to 
        urban, coastal areas and is not limited to particular 
        industries. Industry reports indicate that the take-up rates 
        are high across the country and across industries, and 
        policyholders are generally willing to purchase terrorism 
        coverage when it is available at an affordable price. For 
        companies with a higher perceived risk, whether due to size, 
        location, industry or other factors, the take-up rates are even 
        higher. According to industry reports, take-up rates are 
        highest in the Northeast and South, followed by the Midwest and 
        West. Within specific industrial sectors, the largest 
        percentage of insureds buying terrorism insurance are in media, 
        education, financial services, health care, tech/telecom, real 
        estate, and transportation. Even companies in the sectors with 
        comparatively low take-up rates--energy and manufacturing, for 
        example--each had take-up rates exceeding 40 percent in 2012. 
        These relatively high rates show not only demand, but that we 
        are making progress toward the public policy goal of 
        encouraging coverage in affected areas and industries. By 
        comparison, in California--where the likelihood of a major 
        earthquake can be better modeled, understood and underwritten--
        price and complexity have capped take up rates of earthquake 
        insurance at only 11 percent.
TRIA is Still Needed to Ensure Terrorism Risk Insurance Coverage is 
        Available at Affordable Prices
    Despite TRIA's success in stabilizing the terrorism insurance 
market, the basic facts that prompted the enactment of TRIA in the 
first place have not changed and still require Federal involvement in 
providing terrorism insurance. This conclusion will be obvious if we 
consider the following facts:

    First, the threat of terrorism remains unabated and 
        unpredictable. Although we have been fortunate enough to not 
        have had another terrorist attack on American soil (last year's 
        Boston Marathon bombing was never certified as a terrorist act, 
        although some thought it should have been), we know the threats 
        are out there and they are real, so we need to be prepared. And 
        although we think of cities like New York and Washington as the 
        primary targets, I am convinced that at some point, terrorists 
        will try to hit ``softer'' but meaningful targets in Middle 
        America, too.

    Second, without Federal involvement, reinsurers would be 
        unable to quantify the risk and would have to effectively 
        withdraw from the terrorism reinsurance market. This conclusion 
        was true when TRIA was first enacted, and remains true today. 
        The private reinsurance industry paid about two-thirds of the 
        roughly $33 billion insured losses related to 9/11 claims. 
        After September 11 and prior to TRIA, the reinsurance industry 
        withdrew from the terrorism reinsurance market due to the huge 
        and unpredictable terrorism risk. Today, global reinsurance 
        capacity remains nowhere near the level needed to adequately 
        insure our economy against terrorism risk without the TRIA 
        backstop. Terrorism loses in an attack on a major metropolitan 
        area like Chicago, Los Angeles or Dallas, could be in the 
        hundreds of billions of dollars. Without the TRIA backstop, 
        private reinsurers would be unable to take on this risk. 
        Indeed, even with TRIA backstop now, reinsurers are not meeting 
        the capacity demand of primary insurers for their deductible 
        and coinsurance layers.

    Finally, without the TRIA backstop or adequate reinsurance 
        coverage from reinsurers, primary insurers are reluctant to 
        expose themselves to potentially unlimited terrorism risks. We 
        saw this quite clearly before TRIA was enacted after September 
        11, and during the months prior to its reauthorization in 2005 
        and 2007. At that time, primary insurers were including 
        ``springing exclusions'' in policies that would have voided 
        terrorism coverage beginning on the date of TRIA's expiration. 
        With the possible expiration of TRIA at the end of this year, 
        we are seeing the same thing: primary insurers are again 
        forcing policyholders purchasing coverage that runs past the 
        end of 2014 to accept those springing exclusions in their 
        insurance policies. It is obvious that if TRIA were allowed to 
        expire after 2014, a large percentage of those policyholders 
        who have no choice but to accept those springing exclusions 
        would see their terrorism risks uninsured--and their business 
        plans disrupted or even put to a halt as a result.
Conclusion
    Insurance coverage is essential to the smooth running of our 
economy and to American jobs. Since September 11, 2001, terrorism risk 
coverage has been an unavoidable element of comprehensive insurance 
coverage for commercial enterprises across the country. Since TRIA was 
first enacted in 2002, the terrorism insurance market has stabilized, 
terrorism insurance coverage has been steadily expanding, and the price 
of coverage has become more affordable. Thankfully, this has occurred 
in the absence of any certified terror attacks, and without the outlay 
of any taxpayer money.
    The success of TRIA does not mean the Program is not needed. As we 
know, terrorism threats facing our country remain significant and 
unpredictable, the private reinsurance industry still lacks sufficient 
capacity to address terrorism risks on its own, and primary insurers 
are still not willing to expose themselves to enormous terrorism risks 
without charging prohibitively high premiums--unaffordable by the 
prospective insureds who need the coverage. Thus, allowing TRIA to 
expire at this time would be a grave mistake, resulting in 
destabilization of the terrorism risk insurance market, and significant 
harm to the overall economy. We urge you to work toward swift passage 
of an extension of the Program and we are prepared to assist you in any 
way that we can.
    Thank you for your consideration of our views.
                                 ______
                                 
Attachment

Signal Mutual
    Signal Mutual may be the truest form of capitalism and free 
enterprise at work! As a mutual, Signal is made up of employers 
directly sharing risk with other employers--because the insurance 
industry does not want to assume the risk. Back in the mid 1980s, 
workers comp was extremely hard to underwrite for insurance companies 
due to market timing and losses. Federal workers compensation (under 
the United States Longshoreman & Harbor Workers Act) was the toughest 
of all. Most workers comp is mandated by State law, but USL&H, for 
maritime employers nationwide, is regulated by the Department of Labor. 
The benefits are much higher than the State benefits and the losses are 
much higher and more severe due to the nature of the work . . . loading 
and unloading ships with heavy & dangerous equipment, building and 
repairing ships, ports, and any kind of maritime employment around 
water.
    In 1985, all the insurance companies writing USL&H either ceased 
offering the coverage or their prices went up considerably. Much of the 
maritime business was forced to self-insure (for the larger employers), 
go in an assigned risk pool at exorbitant rates, or go out of business. 
At McQueary & Henry, Inc., we had customers, but no insurance company 
to write their USL&H. In our search for coverage for customers, we met 
a London-based company Charles Taylor. Charles Taylor was a manager for 
Maritime Mutual Insurance companies for marine protection and indemnity 
(liability for ships) for over 100 years. In the early 1980's, Charles 
Taylor formed a group self-insured vehicle named Signal Mutual, 
approved by the Department of Labor. Charles Taylor had been promised a 
lot of business from various sources through Signal, but it did not 
develop, so for the first several years, Signal was shelved.
    Through a mutual industry friend, we at McQueary & Henry met the 
people from Charles Taylor and we agreed to begin underwriting USL&H 
workers compensation for our customers. Due to severely deteriorating 
market conditions, we were forced to move quicker than we thought and 
the first members joined Signal in January 1985. The first year had 5 
members contributing $3,000,000 premium. In 2014, we anticipate 240 
members in all U.S. ports and nearly all maritime employments, and 
close to $200,000,000 premium. Employees in over 800 locations along 
the water are covered for workplace injury.
    Unlike ``for profit'' insurance companies like Hartford, Travelers, 
AIG, Chubb, etc., Signal is a true mutual and not for profit (although 
we are licensed as a U.S. taxpayer, the norm is to underwrite USL&H 
workers compensation at cost to the members). There are no 
stockholders--the mutual is owned by the employer members. The members 
are business people in privately held companies and public companies. 
Each member is assigned a rate each year based on occupation and loss 
history over the past 5 years. Everyone pays premium based on their 
rate and their individual payroll and at years end, the expenses and 
the losses are totaled and if Signal runs at a deficit, each member is 
assessed their percentage of that deficit. Each member secures their 
payments of premium and assessments with a letter of credit or other 
acceptable means approved by the DOL. In addition, as a true assessable 
mutual, the collective balance sheets of each member are at risk if 
they loss is too large.
    Signal buys reinsurance above $5,000,000 per occurrence to protect 
the members for normal losses, for our liability up to the attachments 
of TRIA for regular terror events and for nuclear, biological and 
chemical terror risks. After 9/11, we were one of the first to step up 
and buy reinsurance for our terrorism exposures and paid a huge price 
increase. There is no choice as terrorism losses cannot be excluded 
under USL&H. The capacity was very limited and it continues to be. 
There is some availability currently, but no one knows what the 
capacity of the insurance market is for terror attack related exposures 
if TRIA goes away.
    As Signal, our members/customers are among the most ``at risk'' and 
the most sensitive to the overall economy of the USA. First of all, our 
U.S. ports are a prime target for terrorism. Many of our members are 
Navy contractors building and repairing vessels. Many of our members 
are also stevedores loading and unloading all the imports and exports 
of our country from all over the world. If TRIA goes away and our costs 
escalate considerably, which they most certainly will (assuming 
reinsurance for terrorism will be available), these cost will translate 
into the price of everything that enters or leaves the country and also 
to the Navy contracts.
    Unlike a normal insurance company, this is not about a huge surplus 
for Signal and its investors. This is about individual businesses--
crucial businesses to our economy and our defense--which will be 
writing checks to recover if we have a terrorism event. They will also 
be writing much larger checks for expenses it the price or availability 
of terrorism reinsurance goes up considerably--if they can afford it.

Respectfully,

Bill Henry
                                 ______
                                 
               PREPARED STATEMENT OF VINCENT T. DONNELLY
                 President and CEO, PMA Insurance Group
   on behalf of the Property Casualty Insurers Association of America
                           February 25, 2014
    Thank you M. Chairman and Ranking Member for inviting me to testify 
today.
    My name is Vincent Donnelly and I am the President and CEO of The 
PMA Insurance Group (PMA). I am testifying on behalf of PMA and the 
Property Casualty Insurers Association of America (PCI), which is 
composed of more than 1,000 member companies, representing the broadest 
cross section of insurers of any national trade association. PCI 
members write more than $195 billion in annual premium and 39 percent 
of the Nation's home, auto and business insurance, epitomizing the 
diversity and strength of the U.S. and global insurance markets.
    Since our inception over 90 years ago, PMA has specialized in the 
writing of workers compensation insurance across the country. Workers 
compensation insurance provides wage replacement and medical benefits 
to employees injured in the course of employment--protecting both 
employers and employees from harm. Representative PMA policyholders 
include contractors, manufacturers, health care providers, nursing 
homes, retailers, schools and universities.
    Reauthorization of TRIA is critical to our business and our 
customers. The private insurance markets are not willing to accept 
every risk--particularly unpredictable and potentially catastrophic 
risks like terrorism--and a failure by Congress to reauthorize TRIA or 
a significant increase in TRIA's thresholds will force PMA and a 
significant amount of private capital out of high risk markets. Having 
a terrorism risk insurance plan in place before the next attack 
protects our country's economic resiliency and security at nearly no 
cost to the taxpayers. PMA and PCI strongly urge your support for the 
current version of TRIA.
    The Terrorism Risk Insurance Act (TRIA) was enacted in 2002 because 
our Nation's economic recovery from the tragic events of September 11, 
2001 was being impeded by a lack of available terrorism insurance. 9-11 
was one of the largest insured losses in history, and faced with such 
unpredictable and unlimited risk, insurers and reinsurers began to 
exclude terrorism coverage where allowed, or avoid insuring certain 
high risk consumers or locations with high concentrations of risk 
altogether.
    TRIA is a bipartisan success story where, in response to the attack 
against our Nation, Democrats and Republicans came together to enact, 
and subsequently twice reauthorize by overwhelming votes, a private-
sector focused program that has helped the marketplace function 
exceptionally well, with terrorism insurance coverage widely available 
and affordable. The Congress wisely chose to put a terrorism protection 
plan in place that would limit terrorism insurance losses and thereby 
encourage private investment to return by converting a potentially 
unlimited catastrophic exposure into a more manageable, still 
unpredictable but finite exposure that insurers can underwrite. 
Consumers were also given a guarantee that insurers would ``make 
available'' terrorism protection in their policies on the same terms 
and conditions as the underlying coverage. Construction projects that 
had stalled got back on track and new projects got started. Employers, 
even in big cities or near critical infrastructure, were again assured 
of workers compensation availability.
    As Congress revisits TRIA, it is appropriate to inquire whether the 
program is working as intended or whether additional reforms should be 
considered. PCI's mission is to promote and protect the viability of a 
competitive private insurance market for the benefit of consumers and 
insurers, and our members generally support Government reforms that 
maximize commercial participation and taxpayer protection. That is why 
our members support the current terrorism insurance program so 
strongly--it has done a superb job of bringing in private capital that 
would otherwise not be made available, with Government involvement only 
at the most extreme and uninsurable levels. This has been reflected in 
the terrorism insurance marketplace, where availability and 
affordability has greatly improved since 9-11, leveling off over the 
last several years suggesting that supply and demand are currently 
extremely well balanced. PCI hopes that the Committee will recognize 
the enormous success of TRIA in providing terrorism risk coverage in a 
fiscally responsible manner that protects our country's infrastructure 
while greatly reducing the need for Government assistance after a 
catastrophic terrorist attack.
TRIA is Fiscally Responsible
    TRIA does an excellent job of keeping commercial insurers 
participating in the terrorism insurance market, thus protecting 
taxpayers from economic loss due to terrorism. Unlike many other 
Government insurance programs, under TRIA, private sector insurers are 
on the hook for all but the most catastrophic terrorism losses. 
Commercial insurers pay losses within the trigger and through their 
very high annual TRIA deductibles and co-pays, keeping the Government 
at a super-reinsurance level--essentially only for catastrophic loss 
limits that the private market is unwilling to insure on its own. The 
Federal Government currently spends an average of $12.1 billion 
annually on disaster assistance where private sector insurance coverage 
does not exist. Keeping the private sector largely responsible for 
future terrorism losses instead of the Government after a national 
security interdiction failure protects the taxpayers and Congress alike 
from the political pressure to parachute disaster assistance for 
innocent victims after a tragic terrorism event.
    The marketplace pays for these loss limits through a post-event 
surcharge (a ``terrorism loss risk-spreading premium'') if TRIA is 
triggered. This post-event payment structure is common for State 
insurance guaranty funds and several Government residual markets, and 
is particularly appropriate for protecting against extreme but rare and 
unpredictable catastrophic risks where accumulating and segregating the 
necessary capital in advance would be inefficient. Under TRIA, in the 
event the Federal backstop is triggered, Treasury has the opportunity 
to recoup Government payments from the marketplace, in the form of a 
post-event surcharge on all property-casualty insurance policies 
providing coverage in TRIA-covered lines. The recoupment is currently 
mandatory when the marketplace aggregate insured losses are $27.5 
billion or less (with terrorism loss risk-spreading premiums of 133 
percent of Government assistance within that amount) but is 
discretionary when losses are above that amount. Taken together, these 
features make TRIA an extraordinarily fiscally responsible program.
Impact on Workers Compensation
    Workers compensation provides statutory benefits, including 
lifetime medical benefits, rehabilitation services, wage replacement 
payments, and extensive survivors' benefits to spouses and dependent 
children. These ``long tail'' benefits can run for years or decades. 
Medical benefits are unlimited and can total in the millions of dollars 
for a single catastrophic injury. Under State law, coverage for 
injuries resulting from acts of terrorism cannot be excluded from 
workers compensation policies, including the terrible injuries that 
would occur from a nuclear, biological, chemical, or radiological 
(NBCR) attack. As the marketplace experienced in the year following the 
terrorist attack of 9-11, without TRIA, adequate reinsurance coverage 
for terrorism can be very difficult to obtain, especially for high 
profile risks, regions with high value accumulations or NBCR attacks. 
Without adequate reinsurance, many insurers could be forced to exit 
portions of the market, capacity could be strained potentially causing 
price spikes, and the immense scale of potential unlimited terrorism 
losses for workers compensation insurers could impair the ability to 
pay the claims of injured workers. While reinsurance is somewhat more 
available at the moment than it was immediately after 9-11, that won't 
always be the case. In the future, particularly following the next 
global catastrophe, and without a terrorism insurance plan in place, 
there will always be gaps in coverage. The rating agency A.M. Best last 
year identified several insurers for potential downgrades if TRIA were 
not renewed, mostly workers compensation carriers. The resulting 
restriction of high quality capital for America's businesses would be a 
significant impediment to economic recovery and jobs growth.
The Importance of Retaining TRIA's Current Loss Limits
    Many of the reforms proposed to increase private sector 
participation and reduce taxpayer exposure under TRIA have been 
rejected in the past by Congress because they would weaken the loss 
limits for insurers and thereby reduce the willingness of private 
capital to invest in or cover terrorism risks. In particular, the key 
thresholds of TRIA that turn terrorism into a more manageable risk for 
insurers to underwrite are the deductible, co-share and trigger. Every 
insurer limits its risk to a probable maximum loss exposure that it can 
responsibly manage and still fulfill its commitments to policyholders. 
If TRIA is reauthorized with excessively high thresholds--deductibles, 
co-shares, or triggers, then the retained risks for insurers, would 
exceed the probable maximum losses they can retain and they would be 
driven out of the market. Congress would thus reduce insurance 
availability.
    Deductibles: A high TRIA deductible means a greater proportion of 
the terrorism loss is paid out of an insurer's surplus, putting more of 
its capital at risk. An insurer's deductible is 20 percent of its prior 
year earned premiums from TRIA covered lines of insurance. No Federal 
payments are extended under TRIA unless both the program trigger and an 
insurer's deductible have been exceeded, and even then only for a 
portion of the insurer's certified losses exceeding its deductible.
    The current 20 percent TRIA deductible is greater than 10 percent 
of company surplus for 40 percent of all TRIA insurers (333 companies). 
Those companies are vulnerable to A.M. Best downgrades and precarious 
company stability due to the negative impact to their surplus at a 20 
percent TRIA deductible. Very few companies of any kind would 
voluntarily put such a large portion of their capital at risk to a 
single threat, but insurers are required to do so under the current 
TRIA law. Increasing the deductible further would drive many insurers 
out of the market; they simply would be unable to responsibly 
underwrite at current capital levels with that sort of unavoidably 
large terrorism risk on their books. Many business consumers are only 
able to purchase insurance coverage from a carrier with at least a 
certain rating; capacity would be particularly constricted for these 
companies. The effect would be anti-competitive, leaving fewer insurers 
providing less terrorism capacity at a higher price than is presently 
available, where coverage would be available. This is counter to TRIA's 
goal of bringing stability to the market and ensuring that adequate 
capacity exists to meet the market's need.
    Co-Shares: The impact on surplus is only made worse by the 
insurer's TRIA retention (coinsurance share) of an additional 15 
percent of losses above its deductible. While an insurer at least knows 
what its maximum deductible would be in a catastrophic event, the co-
share is limited only by the $100 billion annual program cap. Since 
workers compensation by law requires unlimited coverage for insured 
risks, a 15 percent co-share of a $100 billion loss would threaten the 
solvency of almost every insurer. For example, a medium sized insurer 
with $1 billion in annual earned premiums might underwrite to a 
probable maximum loss of $100 million; but if the terrorists go after 
that insurer's policyholders causing $100 billion+ of insured losses, 
the insurer would pay a $200 million deductible and a nearly $15 
billion co-pay. While insurers conduct extensive modeling to diversify 
and mitigate their risks, terrorism attacks are not random and the 15 
percent co-pay in TRIA already potentially dwarfs the solvency of most 
insurers, undermining the certainty that the program otherwise 
provides. Increasing this number further would create a severe 
disincentive to providing future coverage.
Particular Harm to Small- and Medium-Sized Insurers of Weakening 
        Changes to TRIA
    Weakening TRIA's loss limits would be particularly 
counterproductive because it would make it more difficult, and in some 
cases impossible, for small- and medium-sized insurers to write 
property casualty insurance in TRIA covered lines, thereby constricting 
available capacity and affordability. Ninety-eight percent of companies 
writing TRIA lines of insurance are small or medium-sized. These 
insurers write over 47 percent of the TRIA-covered premium in the 
Nation, including many specialty lines and niche businesses that might 
otherwise find little coverage availability.
    Because of their smaller capital base, smaller insurers are less 
able to absorb large losses. For example, a company with $5 billion in 
surplus is better able to withstand a loss of $50 million than a 
company with $100 million in surplus. Larger companies can also more 
readily access capital markets. A 10-percent or greater surplus hit to 
a small or medium-sized company may very well be a company-closing 
event, or more likely risk a downgrade by credit rating agencies below 
the level required to retain many commercial accounts. In underserved 
niche markets, fewer players translate into availability issues and 
higher rates. Indeed, the rating agency A.M. Best has issued a briefing 
paper suggesting that, even at the current 20 percent deductible, a 
number of small to mid-sized companies may be subject to ratings 
downgrades. The only way many of them could avoid such downgrades is to 
exit some TRIA-covered lines entirely, since the TRIA ``make 
available'' requirement prevents them from being able to limit their 
terrorism exposure in any other way.
    The impact on surplus is only made worse by the insurer's TRIA 
retention (coinsurance share) of an additional 15 percent of losses 
above its deductible. Because smaller companies have less capital to 
draw on than other writers, coinsurance places a greater burden on 
smaller insurers. Again, all insurers must take care not to exceed 
their probable maximum loss limits, but increasing the TRIA co-share 
would cause them to reach those limits sooner. To avoid that, some will 
be compelled to exit markets or lines of business, which reduces 
competition and compromises TRIA's ability to achieve its intended 
purpose.
    Triggers. The level of the trigger determines whether and when the 
Government's obligations arise. The current $100 million trigger means 
that no insurer will be reimbursed unless the total industry TRIA 
losses exceed $100 million. Because the trigger is not indexed to an 
individual insurer's size, a higher trigger makes much less likely that 
smaller and mid-sized insurers will realize the benefits of the program 
that allow them to remain to continue writing coverages the marketplace 
and the economy need. In 2012, roughly two-thirds (67 percent) of all 
TRIA writers had surplus less than the current $100 million program 
trigger, all of which are small or medium-sized companies. For a large 
percentage of insurers, the $100 million trigger already exceeds their 
20 percent deductible. Severe increases in TRIA's trigger would 
discriminate against smaller and mid-size insurers, forcing them to 
exit risks or markets altogether where adequate reinsurance is neither 
available nor affordable.
    When the greatest possible number of strong, viable competitors 
serve the market insurance consumers have more choices, prices are more 
competitive, and product innovation is enhanced. If TRIA is 
discontinued, or reauthorized with excessive thresholds, it will become 
an unviable program for small and mid-sized insurers. Overall 
availability and affordability will be greatly reduced--not only for 
terrorism coverage but also for other commercial lines of insurance as 
well. This clearly would be bad for consumers and would undermine 
TRIA's intended purpose.
Potential Technical Changes
    PCI and its members strongly support reauthorization of TRIA in its 
current form. It is one example of an extremely effective and cost-
efficient disaster preparedness plan. However, if Congress decides to 
make changes to TRIA, PCI would suggest certain technical 
clarifications.
    Consumers rely on insurers to pay insured claims in a timely 
manner. Insurers in turn rely on TRIA's certification process to 
determine whether a terrorist attack is considered an act of terrorism, 
and thus whether terrorism coverage applies. The Boston Marathon attack 
exposed flaws in the TRIA certification process. State laws generally 
require timely payment of claims. However, there is no Federal 
requirement that the Treasury Secretary make a determination to certify 
an act of terrorism within any particular time period. In many cases, 
businesses would not know if their losses were covered until a 
certification decision was made (if ever), and insurers would have to 
make claim payment decisions without knowing whether an event will 
qualify as a certified event. Consumers and insurers are thus both 
disadvantaged by the uncertainty, increasing the likelihood of 
litigation and forcing insurers to either make inappropriate claims 
payments or potentially violate State unfair claims practices laws and/
or State bad faith laws. TRIA currently provides unreviewable and 
nondelegable discretion by the Treasury Secretary to certify a 
terrorist event for TRIA purposes, in consultation with the Attorney 
General and the Secretary of State. Finalizing liability and business 
interruption claims could take months, and one of the three Government 
officials required for certification could be unavailable for a time, 
pushing the timing of the Government certification process far past the 
needs of consumers and insurers.
    There may be value in statutory clarification of the program's 
treatment of nuclear, chemical, biological and radiological (NBCR) 
risks and cyber risks. Treasury's current interpretation is that the 
Federal backstop covers these losses to the extent insurers provide the 
coverage, but TRIA's requirement to make coverage available applies 
only to the extent that NBCR and cyber coverage for losses arising from 
nonterrorism causes are covered in the underlying policy. PCI believes 
that is the correct interpretation but it may be appropriate to 
consider whether and how to make this clear in the statute.
    There have also been suggestions to clarify the statutory ambiguity 
as to whether multiple events occurring in the same year, such as the 
four different plane attacks on 9-11, none of which independently meets 
the trigger, can be aggregated to trigger the program collectively. 
Treasury appears to read the current statute as meaning that the 
program is not triggered unless a single act of terrorism results in 
losses that exceed the $100 million trigger. However, this reading 
would render the current $5 million event certification threshold 
meaningless. Other observers, including the Congressional Research 
Service (CRS), read the statute as permitting aggregation of loss 
events in a program year that exceed $5 million. PCI believes that 
Congress did not make a mistake in retaining the $5 million threshold 
and the better interpretation is that aggregation is permitted. 
Multiple copycat terrorist bombings in a year, even if each is just 
under $100 million in losses, is clearly the type of exposure that can 
rattle the marketplace in ways that TRIA was successfully designed to 
prevent. However clarification of this issue would create more 
underwriting certainty, benefiting both consumers and insurers.
    PCI will be pleased to work with the Committee on ways to address 
these technical, but important issues.
The American People Support TRIA
    Last year, PCI surveyed voters and conducted focus groups to learn 
what voters think about how their Government protects them from the 
effects of terrorist attacks. Among the key findings were:

    A majority of voters, 72 percent, agree that responsibility 
        for the costs from injuries to workers and property damages 
        from a terrorist attack should be a combination of the Federal 
        Government and private insurance companies.

    A majority of voters agree that it is important for 
        America's economy to have a plan in place before an attack to 
        ensure large projects can be built in a timely, cost effective 
        manner.

    90 percent of the participants agree that the Federal 
        Government should be at least in part responsible for 
        protecting against losses from terrorist attacks against the 
        United States.

    A majority of voters, 64 percent agree that it is difficult 
        for insurance companies to provide affordable terrorism 
        insurance because of the randomness and difficulty in 
        predicting the likelihood or magnitude of terrorist attacks.

    A rural-urban divide does not exist; 68 percent of voters 
        understand the national economic implications of a terrorist 
        attack.

    67.6 percent of voters favor continuing the Terrorism Risk 
        Insurance program.

    The study showed unmistakably that Americans want their Government 
to have a risk management program in place to protect the U.S. economy 
against the effects of a catastrophic terrorist attack and that both 
the commercial insurance industry and the Government have important 
roles to play in such a plan.
Conclusion
    It is essential for America's economy to have a terrorism risk 
insurance plan in place to ensure large projects can be built in a 
timely, cost effective manner after an attack occurs which would help 
keep the economy stable and provide jobs. Having a terrorism risk 
insurance plan in place helps thwart the devastating economic impacts 
of a terrorist attack and protects our national security. TRIA is a 
fiscally responsible program that has cost the taxpayers almost nothing 
in its 11-year existence, while protecting economic resiliency. It also 
reduces the need for additional Government catastrophic response 
programs that can be far more costly after the fact. PCI strongly 
supports reauthorization of the current TRIA program with thresholds 
that will continue to encourage insurers of all sizes to provide 
private sector capital to compete and ensure availability of terrorism 
coverage. PCI also supports efforts to clarify TRIA's application and 
coverage, particularly with respect to improving the terrorism event 
certification process.
                                 ______
                                 
                  PREPARED STATEMENT OF WARREN W. HECK
  CEO and Chairman of the Board, Greater New York Insurance Companies
  on behalf of the National Association of Mutual Insurance Companies
                           February 25, 2014
Introduction
    The National Association of Mutual Insurance Companies (NAMIC) is 
pleased to provide testimony on the Terrorism Risk Insurance Act (TRIA) 
and the private market for terrorism insurance.
    NAMIC is the largest and most diverse property/casualty trade 
association in the country, with 1,400 regional and local mutual 
insurance member companies on main streets across America joining many 
of the country's largest national insurers who also call NAMIC their 
home. Member companies serve more than 135 million auto, home and 
business policyholders, writing in excess of $196 billion in annual 
premiums that account for 50 percent of the automobile/ homeowners 
market and 31 percent of the business insurance market. More than 
200,000 people are employed by NAMIC member companies.
    It is our firm belief that in the absence of a terrorism loss 
management plan such as TRIA, no self-sustaining private market for 
terrorism risk coverage is likely to develop. However, the existence of 
TRIA allows a viable private market to function for a difficult peril 
which involves strategic human behavior and represents a dynamic threat 
that is intentional, responsive to countermeasures, and purposefully 
unpredictable.
    Any discussion of the private market for terrorism insurance must 
start from the understanding that the TRIA program was a well-designed 
mechanism to encourage the private sector to put its capital at risk 
for losses that result from what amount to acts of war--which have 
always been considered uninsurable events with either an implicit or 
explicit expectation that financial responsibility resided with the 
governments involved. Having learned the lessons of 9/11, most insurers 
are not likely to offer terrorism coverage in a fully private market.
    In fact, it is the unique structure of the program's recoupment 
mechanism that takes losses that could render a single company 
insolvent and spreads them throughout the private sector and over time. 
This mechanism allows for a large and temporal transfer of risk that 
would not occur in a fully private market, but in the end does utilize 
private capital and protects taxpayers.
    NAMIC remains committed to ensuring that the program be designed to 
adequately protect taxpayers and maximize private sector capital in the 
market for terrorism insurance. That said, in considering changes to 
the present system, we would caution against adopting solutions in 
search of problems. In fact, alterations that increase the exposure to 
individual companies could have the unintended consequence of reducing 
overall capital in this market. Through TRIA, the private sector 
already has a tremendous amount of capital involved in the terrorism 
risk insurance market and under current law every penny the Federal 
Government pays out may be recovered.
TRIA Structure Designed for Individual Company Participation
    Discussions surrounding the private terrorism risk insurance market 
tend to focus on aggregate numbers--i.e., how much market capacity 
exists, industry exposures, etc. However, the design of the TRIA 
program focuses on something entirely different and, in our view, more 
appropriate: the individual company. The program is structured this way 
to take into account the unique risk posed by terrorism and the fact 
that losses are not likely to be spread evenly among a large number of 
insurers even in a catastrophic event.
    The current program requires all insurers selling covered lines to 
offer terrorism coverage, compelling many insurers that had previously 
exited that market to return and dramatically reducing the amount of 
potentially uninsured losses in the event of an attack. In return, the 
Federal mechanism for risk-sharing provides more definitive loss 
parameters for each company; specifically, the individual company 
retention (20 percent of the prior year's direct earned premium for 
covered commercial lines) and the co-pay (15 percent of all losses 
above the individual company retention). By placing a ceiling on 
individual company terrorism exposure, insurers have the benefit of 
knowing their maximum possible losses, allowing them to make coverage 
available and price accordingly.
    It is important to note that simply because an individual company's 
losses are capped, this does not mean that the private sector 
participation ends there and the Federal taxpayer pays for the rest. 
Rather, TRIA works through its recoupment mechanism to take those 
losses and spread them back throughout the private sector and over 
time. In this way, TRIA acts as a shock-absorber for the U.S. economy 
to reduce the financial impact of a jarring terrorism event.
    By law the Federal Government must recoup the difference between 
insurers' total costs and the industry aggregate retention of $27.5 
billion (assuming the total cost of the event with Government payments 
is $27.5 billion or higher) over time through surcharges on every 
policy covered by TRIA. Since 2007, the Government must actually 
recover 133 percent of this mandatory recoupment. In the event the 
insurers' total costs exceed $27.5 billion, the Government can still 
recoup whatever money it pays out, but this is at the discretion of the 
Treasury Secretary. The recoupment is done through an assessment on 
every TRIA-covered, commercial line policy sold in the United States 
over time. The initial outlays of the Federal Government, which are so 
important to maintaining an individual company's solvency, are in fact 
borne by private sector insurers and their commercial policyholders 
(and paid back with interest for the mandatory recoupments). Taxpayers 
are completely protected under TRIA.
    The structure of the program is important--it is why questions of 
overall industry capacity can distract from the serious concerns about 
terrorism risk that remain for individual insurance companies. Even in 
a catastrophic event, the losses are not likely to be spread evenly 
among a large number of insurers. This is especially so in the case of 
terrorism because perpetrators have the ability to precisely target 
particular properties or assets. Hence, a single terrorism event could 
affect insurance companies with similar books of business in very 
different ways: one company might suffer no losses from the event, 
while another company could suffer losses sufficient to threaten its 
very existence. The TRIA program--through the mechanism of initial 
Federal outlays recovered through recoupment--allows this ``bet the 
company'' risk to be spread throughout the private sector and over time 
in a manner that cannot be duplicated by the private sector alone.
Altering the Program
    Most insurers would likely not offer terrorism coverage in the 
absence of a Federal risk-sharing mechanism like TRIA. Recent research 
by Aon shows that more than 85 percent of insurers will no longer 
insure terror risk if the Federal program went away.\1\ Additionally, 
State insurance regulators indicate that they have not seen evidence 
suggesting that the insurance marketplace is capable or willing to 
voluntarily take on a substantial portion of the risk of providing 
coverage for acts of terrorism in the absence of the program. It was 
only with a program in place that put some structure around an ill-
defined catastrophic risk that the private sector was able and willing 
to participate at current levels. We cannot hastily conclude that 
because the private sector can handle a portion of the risk, it could 
raise enough capital to handle all of it. Similarly, assuming that a 
substantial diminution of the Federal Government's role will 
necessarily result in private market innovation that has heretofore 
failed to materialize is unwise. Although individual market players may 
indicate willingness to take on greater exposure in the abstract, the 
private market has consistently demonstrated an unwillingness to accept 
a significantly larger portion of this potentially devastating risk, in 
particular when it comes to offering affordable limits to protect the 
solvency of the workers' compensation insurers.
---------------------------------------------------------------------------
    \1\ ``Response to U.S. Treasury and President's Working Group: 
Terrorism (Re)Insurance, AON, September 2013, page 9. http://
www.aon.com/attachments/risk-services/2013-Aon-Response-to-Presidents-
Working-Group.pdf.
---------------------------------------------------------------------------
    One reason to doubt that reinsurers would provide additional 
terrorism coverage where and when primary insurers needed it is that 
reinsurance capacity would likely be severely constrained following a 
large-scale natural catastrophe, such as a major hurricane striking the 
Gulf or Atlantic coasts. The U.S. commercial insurance market would be 
right back to where it was following 9/11 with limited availability and 
no guarantee that the capacity and willingness to take on terrorism 
exposure would return.
    Additionally, in seeking to accomplish the goal of increasing 
private sector participation in the terrorism insurance market, it is 
important to recognize the presence of other risks that need to be 
insured in our dynamic economy. That capacity cannot be exposed beyond 
a reasonable level without failing in its primary purpose--supporting 
the economy by protecting against nonterrorism related losses and 
events. In the event of a major attack, substantially depleted reserves 
and surpluses, and insolvencies could mean that policyholders of 
noncovered lines could go unprotected. A company that engages in 
business that endangers its ability to pay claims on existing or future 
policies is violating its duties to its policyholders.
    An important example of this issue is the workers' compensation 
market. Workers compensation writers are not permitted to exclude any 
peril from their coverages and are particularly susceptible to having 
highly concentrated losses in the event of a major terrorist attack. In 
the absence of a private/public, risk-sharing mechanism workers' 
compensation carriers will retreat from having highly concentrated 
losses in the event of a major attack. There would almost certainly be 
a simultaneous and significant increase in the cost of these policies 
and decrease in their availability for employers based in the major 
metropolitan areas and industries involved with, or adjacent to, 
symbols of America which are currently covered by private carriers. The 
only way a workers compensation writer could eliminate its terrorism 
exposure in high-risk markets would be to completely withdraw from 
those markets. In the absence of the TRIA program, or an increase in 
the deductibles and/or co-pays, we would expect to see a shift from the 
private workers' compensation writers to the insurer of last resort--
usually a State fund or residual market pool, causing ripple effects 
throughout the business community.
Trigger Level
    Finally, NAMIC would caution policymakers not to assume that they 
can guarantee increased private sector participation through statutory 
changes. Increasing the nominal amount of private sector involvement in 
the current TRIA structure does not automatically translate into an 
increase in private sector capital in the marketplace. As with 
increased company retentions, altering trigger levels may cause market 
participants--particularly small- and medium-sized companies--to exit, 
thereby reducing total private capital. An effective terrorism loss 
management plan depends on participation by insurers of all sizes and 
structures.
    The rationale given by those who favor raising the event trigger 
and/or the company deductibles and co-payments is that such 
modifications would increase the share of terrorism risk borne by the 
private insurance market while reducing the Government's exposure. In 
fact such measures would result in a smaller private insurance market, 
which would further expose the Federal Government to greater costs in 
the form of post-disaster assistance to terrorism victims that were 
left uninsured or underinsured due to the decrease in coverage 
availability and affordability brought about by ill-considered 
revisions to the program.
    Consideration of just one proposed change in particular is 
illustrative of this dynamic. It has been suggested that raising the 
event ``trigger level'' will further the goal of taxpayer protection. 
As a practical matter, however, a higher trigger would do nothing to 
reduce taxpayer exposure in the event of an attack.
    Consider the below comparison between two trigger levels $100 
million and $1 billion. Because of the recoupment provision under the 
law, the Federal Government is required to recover 133 percent of any 
money it spends for losses below $27.5 billion, and is permitted to 
recover 100 percent above that level at the discretion of the Treasury 
Secretary. Consider a $500 million loss scenario under the two trigger 
levels:


    While raising the trigger level would in some circumstances reduce 
initial Government outlays, we can see that, ultimately, the cost to 
the taxpayer is not reduced. Nor would raising the trigger level 
necessarily impact initial Government outlays, because the individual 
company deductibles and co-payments of the insurers involved could 
exceed the event trigger by orders of magnitude. Consider the same 
scenario with a single impacted company with an individual retention 
level of $1 billion:


    Here, the trigger level has no impact. Where it does have a very 
significant impact is in cases involving smaller or regional insurers. 
Consider the same scenario for a single company with a retention level 
of $100 million.


    A $500 million loss could easily render such a company insolvent. 
Potential exposure like this would cause these companies to take a long 
look at their underwriting and risk concentrations.
    Indeed, the only impact of raising the trigger would be on smaller, 
regional, and niche insurers whose deductible--and even total 
exposure--falls under a level set too high. This situation would create 
a ``bet-the-company'' risk for these companies and would likely force 
them to constrain coverage or leave certain markets entirely. Because 
it is not at all clear that remaining companies could or would provide 
this missing coverage, the probable effect of a higher trigger would be 
to reduce the amount of total private capital allocated to terrorism 
risk.
    In short, raising the trigger does nothing to reduce taxpayer 
exposure while simultaneously having the potential to drive private 
capital from the market.
Certification of Terrorist Attack
    Treasury has taken steps to streamline and facilitate 
certification; however, it is complex and difficult process requiring 
extensive investigation and correlation of information from multiple 
sources. Delays in certification raise issues for insurers, who are 
required by State law and regulation to make prompt payment of claims. 
NAMIC believes that Congress should facilitate expeditious information 
exchange between various national and international agencies to provide 
Treasury with information in a timely manner.
    Congress could also provide a certification protocol with 
appropriate timelines to ensure that all parties understand the 
process, their duties and obligations, and the applicable timeframes. 
Also, requiring an affirmative determination on certification could 
help to strengthen the predictability of the process.
    An efficient and effective certification will benefit the 
taxpayers, insurers and their insureds.
Conclusion
    Private insurance companies, including mutual companies, are 
return-seeking operations. Therefore, if they believe there is an 
opportunity to earn an economic return and it is possible to do so in 
accordance with an overall successful business model, then they will. 
In other words, if there was money to be made in insuring against 
terrorism risk, coverage would be offered without Government 
intervention. If such were the case, the companies would be arguing for 
less--not more--Government intervention to increase their earning 
potential. The fact that they are uniformly not doing so and in fact 
suggesting that without the TRIA program private coverage would not 
expand and instead contract, is telling.
    Under the current TRIA program the private sector is heavily 
involved in absorbing the losses from a terrorist attack against the 
United States. Ultimately, it is responsible for covering all the 
losses at the discretion of the Treasury Secretary.This private sector 
involvement addresses the needs of victims and limits the need for 
Government intervention--thus taxpayer exposure--post attack. In 
contemplating altering the current program, it is important to identify 
the specific problems that need to be addressed.
    In the end, the purpose of the program is not to protect insurers, 
but to make sure that the economy can recover in as orderly a fashion 
as possible from a terrorist event. In order to encourage private 
sector involvement in the terrorism insurance marketplace--and thereby 
protect and promote our Nation's finances, security, and economic 
strength--we should maintain a long-term, well-functioning terrorism 
loss management plan. Fortunately, the current TRIA program has proven 
to be just such a plan.
                                 ______
                                 
                PREPARED STATEMENT OF DOUGLAS G. ELLIOT
  President, Commercial Markets, The Hartford Financial Services Group
            on behalf of the American Insurance Association
                           February 25, 2014
    Chairman Johnson, Ranking Member Crapo, and Members of the 
Committee, thank you for the opportunity to appear before you today on 
behalf of The Hartford Financial Services Group (The Hartford) and our 
property-casualty insurance trade association, the American Insurance 
Association (AIA), to discuss the important issue of terrorism risk 
insurance. My name is Doug Elliot and I am President of Commercial 
Markets for The Hartford. Founded over 200 years ago, The Hartford is 
one of our Nation's oldest insurance companies, among the largest 
commercial property-casualty insurers, and an insurance partner to over 
one million small businesses across the United States.
    As president of The Hartford's commercial property-casualty lines 
business, I am responsible for the company's small commercial, middle 
market and specialty casualty businesses, as well as group benefits. In 
this capacity, I believe that I can offer an important perspective on 
the unique challenges of insuring terrorism risk, the market-
stabilizing effect of TRIA, and the adverse consequences should 
Congress fail to maintain the program for the foreseeable future.
    Most importantly, as we approach TRIA's expiration at the end of 
this year, the industry understands and welcomes a healthy 
reexamination of its merits. TRIA has been a successful and important 
economic tool. It establishes the right public-private balance of 
responsibilities and loss-sharing for the United States, promoting 
national security and an orderly economic recovery in the wake of 
catastrophic terrorism. While we do not support any changes to TRIA's 
public-private partnership, we would be happy to work with lawmakers to 
evaluate the feasibility of changes or modifications designed to 
improve the overall efficacy of the Act. But in this process, we 
propose that any potential modifications to the program should be 
assessed in light of the balance the Act currently achieves. A number 
of proposals that have been discussed could--in the name of increasing 
private market capacity for terrorism risk--actually lead the industry 
to a tipping point beyond which individual insurers would need to make 
difficult decisions to safeguard a company's financial condition 
instead of maintaining the current level of exposure to catastrophic 
terrorism risk. This could result in upsetting the public-private 
partnership and undermining important sectors of the economy that 
depend on the availability of terrorism risk insurance, such as 
construction, real estate, manufacturing, infrastructure and small 
business generally.
The Insurance Industry's Response to September 11, 2001
    It has been more than 12 years since the tragic attack of September 
11, 2001. That event forced all Americans to confront directly the 
previously unforeseen realities associated with a catastrophic 
terrorist attack on U.S. soil--quite literally, to face a new form of 
war. Despite the unanticipated nature of the event, The Hartford and 
other insurers responded to September 11 claims in an unwavering manner 
and without a single dollar of Federal assistance.
    However, the devastating economic consequences of the attack forced 
insurers and other businesses to re-examine the nature of terrorism-
related risks, as well as to review how such risks were being spread 
and managed.
    In addition to the incalculable cost of almost 3,000 lives, in 
today's dollars, claims paid by insurers to their policyholders from 
September 11 eventually totaled some $32.5 billion dollars--$42.1 
billion in 2012 dollars.\1\ The Hartford's share of this loss was 
approximately 3 percent to 3.5 percent, as we helped our policyholders 
recover from the tragic loss. Of course, a large portion of the insured 
industry loss was effectively reinsured, and the reinsurance industry 
honored its obligations.
---------------------------------------------------------------------------
    \1\ Source: Insurance Information Institute, 2012 dollars excluding 
Victims Compensation Fund.
---------------------------------------------------------------------------
    Unfortunately, in the aftermath of the attack, the reinsurance 
markets withdrew new capacity and the reinsurance market for terrorism 
evaporated. Without the ability to spread and diversify these risks 
globally through reinsurance and with no ability to price the risk of 
terrorism, insurance companies were unable to provide adequate 
terrorism coverage to commercial policyholders. The effects of this 
chain of events trickled down to lenders and the construction industry, 
putting a significant drag on the economy. To support the economy and 
allow private markets to stabilize, Congress stepped forward in 
bipartisan collaboration and passed TRIA. TRIA provides a Federal 
backstop to insurance companies for large certified terrorism events 
above a $100 million loss, while requiring insurers to ``make 
available'' (offer) terrorism insurance to commercial policyholders for 
such coverage as workers' compensation, business interruption and 
property insurance.
    Under the current program, insurers are required to pay insured 
terrorism losses equal to 20 percent of their entire premium for 
covered commercial property-casualty lines of business before the 
Government steps in to pay its share of loss. Even then, TRIA requires 
each insurer to pay 15 cents on every dollar of loss above its 
deductible. TRIA requires the private sector to absorb at least $27.5 
billion in insured terrorism losses before taxpayers are exposed, and 
then provides a recoupment mechanism to permit the recovery of Federal 
dollars that are expended up to the program's annual $100 billion cap.
    By virtue of this post-event, public-private ``shared loss'' 
mechanism that preserves significant industry ``skin in the game'' and 
only accesses Federal dollars for catastrophic terrorism losses, TRIA 
has effectively established a solvency safety net. This safety net 
provides the certainty and stability necessary for individual insurers 
to understand and manage their potential exposure to losses 
attributable to terrorism attacks, while providing a cap on the 
potential loss to capital from such an attack. Put another way, far 
from ``crowding out'' private market capacity, TRIA's structure creates 
the environment in which a private terrorism insurance market can exist 
and function.
    In the event of a future terrorist attack, TRIA ensures that 
private insurance payments flow to those affected businesses that have 
purchased coverage, as well as to their employees, which in turn helps 
businesses and the economy recover. These payments will be crucial to 
minimizing the economic, psychological, and social fallout from an 
attack. The industry responded effectively to the tragic events in 
Boston and has the capacity to address single site conventional attacks 
in the future if they happen. At the same time, if an attack is so 
massive that it triggers the Federal protection established by TRIA, as 
noted, Government payments can ultimately be recaptured through a 
recoupment mechanism that was established in the legislation. This 
greatly mitigates any taxpayer costs of this Federal program.
    It is important to emphasize that taxpayers are protected at every 
step under TRIA. First, they benefit from the economic security that 
insurance coverage provides before an attack. Second, after an attack 
occurs, the immediate flow of claims payments from insurers provides 
stability and minimizes economic disruption to those who suffer from 
the attack directly, as well as to all Americans. And finally, in the 
event of a catastrophic terrorist attack that triggers the Government 
program, any dispersed Federal funds can ultimately be repaid through 
TRIA's recoupment mechanism. Thus, TRIA is both a sensible and 
indispensable component of national economic security.
The Unique Challenges of Insuring Terrorism Risk
    A public-private solution is necessary for the risk of terrorism 
because it is fundamentally different from other exposures. Private 
insurance markets are founded on the ability to compile relevant data 
to (a) measure the likelihood and potential severity of loss to a 
policyholder for any specific peril and then (b) effectively pool the 
loss experience across many policyholders exposed to relatively 
homogeneous, random and independent risks. Quite the opposite, 
terrorism involves an intentional act carried out at the direction of 
individual actors and groups with the explicit intention of maximizing 
overall loss of life and property, as well as economic disruption 
across as many insureds as feasible. Quite simply, a terrorist attack 
is not a fortuitous event. Furthermore, terrorism exposure lacks a 
broad-based spread of risk. Terrorists can pick the target, change the 
target to bypass security and loss mitigation, and coordinate an attack 
on multiple targets in diverse locations. The adage--``where there's a 
will, there's a way''--is particularly appropriate for terrorism risk 
and effectively neutralizes private mitigation efforts.
    Equally important, much of the information regarding terrorist 
plans and potential targets comes from national security data that is 
appropriately of limited availability to the public. Insurers therefore 
lack any sound informational basis for assessing the likelihood or 
probability of a major terrorist attack. While insurers can price 
insurance when the nature of the risk is estimable but highly 
uncertain, ex ante (before the event) insurance mechanisms fail when 
there is no credible basis for assessing the likelihood of an event.
    The potential magnitude or severity of large scale terrorist 
attacks, particularly those that involve the use of unconventional 
weapons involving nuclear, biological, chemical, and radiological 
(NBCR) agents, is largely unknown given the fortunate dearth of prior 
experience. While insurers have managed loss aggregations for most 
``conventional'' attack modes under TRIA, the industry has limited 
information on managing exposures to wide-area loss event scenarios 
that would be the hallmark of NBCR attacks.
    The challenges associated with wide-area NBCR terrorism are also 
manifest in the newest form of unconventional terrorist threat--cyber-
terrorism. Under a cyber attack, the origin of the attack can be from 
any single location where there is a computer and access to the 
Internet. However, the ultimate victims of the attack can be numbered 
in the thousands or millions, can be widespread geographically, and can 
be located in any area of the United States. In this setting, 
traditional insurance company means of exposure management are 
challenged.
    Given the concentration of insured lives and property values in 
business centers and the unique nature of cyber-terrorism, the risk of 
wide-area terrorism attacks poses a real solvency threat to insurers--a 
threat that can easily eclipse that of natural disasters given the 
stated intention of a terrorist to maximize economic damage and 
disruption.
Limited Risk Management Tools are Available
    Even with the existence of TRIA, insurers' ability to manage 
terrorism risk is limited. From a coverage perspective, while TRIA 
requires a mandatory ``offer'' as a condition for participation, State 
laws actually mandate coverage for terrorism for certain lines of 
insurance. For example, in the 49 States that require workers' 
compensation insurance, insurers may be obligated to cover on-the-job 
injuries without exclusion, whatever the cause. Further, a number of 
States (including those with significant business centers) mandate that 
insurers cover terrorism-created fire losses, even if a policyholder 
does not purchase terrorism coverage. As a result, while an insurer may 
exclude NBCR terrorism coverage in some States, losses caused by the 
fire following an explosion from one of these perils may be covered.
    In addition, as noted above, the industry's lack of credible 
methods for assessing the likelihood of an attack limits our ability to 
determine an actuarially fair premium. As noted by the most recent 2010 
report on terrorism risk insurance market conditions from the 
President's Working Group on Financial Markets (PWG Report), ``despite 
the reported improvements in modeling to measure an insurer's aggregate 
loss exposure, the industry remains uncertain about the reliability of 
probabilistic models to predict frequency and severity of terrorist 
attacks.''\2\
---------------------------------------------------------------------------
    \2\ Report of the President's Working Group on Financial Markets, 
``Market Conditions for Terrorism Risk Insurance 2010,'' at p. 18.
---------------------------------------------------------------------------
    Further, reinsurance capacity for terrorism losses is minimal. 
Unlike primary commercial lines insurers, reinsurers are not subject to 
the ``make available'' clause in TRIA, and their appetite for this risk 
reflects what type of private market might exist absent TRIA. Citing 
many of the same issues identified above for primary insurance 
companies, reinsurance companies offer extremely limited capacity for 
terrorism risk and generally do not offer coverage for terrorist 
attacks committed with NBCR weapons. According to the 2010 PWG report, 
reinsurance capacity available for terrorism risk remains in the $6 
billion to $10 billion range,\3\ an amount that is well below the 
estimated industry-wide retention figure under TRIA and well below the 
mandatory recoupment amount of $27.5 billion in insured terrorism 
losses.
---------------------------------------------------------------------------
    \3\ Id. at 19.
---------------------------------------------------------------------------
    To provide some perspective, The Hartford's 2014 retention under 
the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is 
approximately $1.2 billion in company losses. With respect to property, 
terrorism reinsurance of any material amount within this retention is 
effectively nonexistent. In contrast, for natural catastrophe losses, 
The Hartford's principal corporate catastrophe treaty provides just 
under $800 million in reinsurance protection in excess of a $350 
million deductible. The Hartford has an additional $135 million in 
hurricane reinsurance protection financed through nontraditional 
reinsurance markets (e.g., catastrophe bonds). I wish that the 
reinsurance markets were willing to provide the same capacity for 
terrorism within our TRIA retention as is available for natural 
catastrophes. But, as a company that recently conducted a comprehensive 
request for proposal process, I can tell you that the reinsurance 
capacity is simply not available. The 2010 PWG report is interesting in 
that it indicates that the total amount of reinsurance capacity is up 
slightly from prior studies. The small increase in reinsurance 
capacity, undoubtedly available to smaller companies, actually 
demonstrates the value of the TRIA program to ``crowd in'' additional 
reinsurance capacity--that is, it provides reinsurers some assurance 
that the reinsured companies can manage through a large scale event and 
remain viable trading partners after a loss.
    Given these challenges, how do insurance companies manage the risk 
of terrorism today? The main tool available to manage the risk of 
terrorism is to limit exposure concentrations in potential ``high 
target areas.'' If terrorism exposure concentrations get too high 
relative to surplus, an insurance company could nonrenew entire 
commercial policies to reduce the terrorism exposure--often creating 
hardships for the underlying policyholders. These exposure 
concentrations are especially difficult for certain lines of business 
like workers' compensation and property insurance, including ``fire 
following'' coverage in certain States where exclusions for NBCR 
attacks are not recognized. Over the past 11 years, with the benefit of 
TRIA, the insurance industry has successfully managed these 
concentrations of exposure within the TRIA retentions. Policies shed by 
one company have generally been absorbed by a competitor.
    Without TRIA, however, individual insurers would face large 
uncapped exposure and would face difficult choices about how to manage 
down exposures relative to capital, including facing decisions on 
whether or not to nonrenew large portions of their commercial 
policyholder portfolios, especially given the fact that they cannot 
exclude the peril of terrorism from workers' compensation coverage and 
property insurance including the ``fire following'' coverage in a 
number of States. In fact, a recent report from Marsh outlined steps 
that insurers are taking to limit their workers' compensation insurance 
exposure in light of the continued uncertainty of the future of TRIA. 
Marsh notes, ``Because insurers cannot exclude terrorism related losses 
and employers are required to buy it, the options available to buyers 
have been reduced and rate increases have accelerated.''\4\ For the 
record, we do not believe that this outcome would be in the best 
interests of our policyholders or the overall economy.
---------------------------------------------------------------------------
    \4\ Market Risk Management Research Briefing, ``Pending TRIPRA 
Expiration Impacts Workers' Compensation Industry'', at p. 1 (Jan. 
2014).
---------------------------------------------------------------------------
Proposals to Modify TRIA and Alternative Private Market Solutions
    As this Committee knows, the expiration of TRIA at the end of this 
year presents an opportunity to reexamine the program's merits and the 
feasibility of modifications designed to improve its efficacy. Almost a 
dozen years into TRIA, there should be no doubt that the program has 
brought stability to the private market and has enabled insurers to 
provide capacity despite the unique characteristics of this risk. TRIA 
has been shown thus far to be a successful partnership among the 
Federal Government, insurers, and policyholders to protect the economy 
in the event of an attack. Thanks to TRIA and its successors, The 
Hartford has been able to manage our terrorism exposure within 
acceptable limits while supporting our policyholders' need for 
terrorism coverage.
    Nonetheless, there continue to be calls to modify the level of 
Federal participation as a means of increasing terrorism insurance 
capacity. Indeed, some have questioned the need for a continued Federal 
role in backstopping the terrorism insurance market--preferring to prod 
the markets to develop a purely private solution. The premise of this 
line of argument is that a market solution, even if second best, is 
still more desirable than a solution that involves Federal Government 
participation. As a general approach on many public policy issues, we 
support this view. Unfortunately, as we have stressed, terrorism risk 
is the exception to the market-oriented approach. The existence of the 
public-private shared loss program enables the market to function.
    Eliminating TRIA, or altering it in ways that make the Federal role 
meaningless, will not lead to an expansive private market. Instead, it 
would very likely lead to a model for terrorism where many businesses 
retain the risk of terrorism and the Federal Government loses the 
robust and stable private terrorism insurance market that TRIA has 
enabled. While it may be true that the first two extensions of TRIA 
increased insurer retentions and the industry adapted, any further 
increases incorrectly aimed at growing private market capacity for this 
risk may take us over the precipice, and result in a decrease in 
insurers' ability to offer terrorism coverage.
    As we have outlined, the industry's ability to take on more 
terrorism risk is constrained by our limited ability to manage 
terrorism risk, the availability reinsurance, regulatory rate and 
policy form restrictions, and the need to protect company solvency. 
From The Hartford's perspective--one that is shared by AIA--
manipulating TRIA's levers will not increase the supply of reinsurance 
nor will it allow us to exceed our risk concentration limits and rather 
may only serve to put more of our capital and, therefore, our solvency 
at risk. Indeed, at least one rating agency has stipulated that 
companies could experience ratings pressure if their net exposure to 
terrorism exceeds 20 percent of capital and surplus. Total surplus, of 
course, covers all extraordinary events that may be covered under our 
policies, from hurricanes, earthquakes, and storms to fires and other 
accidents that are in excess of reserves. It is not just used to cover 
terrorism loss.
    Note that today, for most large commercial insurance companies, 
retentions under TRIA already average 8 percent to 12 percent of total 
surplus. Approaching that 20 percent surplus number identified by the 
rating agencies may be the tipping point that causes insurers to 
curtail our aggregate exposure to risks of all types, not just 
terrorism, which could cause a severe and immediate disruption to the 
economy, reduce the supply of affordable terrorism coverage, and 
potentially diminish the Nation's prospects for an orderly economic 
recovery in the wake of a catastrophic terrorism event. If we reach 
that tipping point caused by well-intentioned, but misguided efforts to 
further increase private market capacity for this risk, the net result 
could be that terrorism risk could be redistributed to business owners, 
borrowers, lenders, employees, and--very likely--the Federal Government 
itself through post-disaster relief aid.
Conclusion
    Since its enactment in 2002, TRIA has been a success. Terrorism 
insurance is available and affordable throughout the United States, 
eliminating economic uncertainty and keeping our economy moving as the 
long recovery finally gathers momentum. TRIA works because it is an 
effective partnership between the private sector and the Federal 
Government--maximizing private market risk bearing and infrastructure 
while leveraging the Government's pooling capabilities for noninsurable 
risks that align with our national defense policy. Moreover, TRIA has 
been administered at minimal cost to taxpayers. TRIA is serving as a 
key element in maintaining an orderly economic recovery should there be 
another catastrophic terrorist attack on U.S. soil--prepositioning 
resources to respond to an attack and thereby thwarting a principal 
objective of terrorism. At the same time, both AIA and The Hartford 
recognize that any legislation presents opportunities for improvement, 
especially against a backdrop of continuous change, and we stand ready 
to work with the Congress and the Administration to evaluate any 
potential changes to the legislation and their potential impact on the 
effective balance achieved by TRIA.

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM CAROLYN 
                              SNOW

Q.1.a. The original authorization stated that TRIA would 
``provide temporary financial compensation to insured parties, 
contributing to the stabilization of the United States economy 
in a time of national crisis, while the financial services 
industry develops the systems, mechanisms, products, and 
programs necessary to create a viable financial services market 
for private terrorism risk insurance.''
    What steps, if any, has the private sector taken to create 
a viable private terrorism risk insurance market?

A.1.a. Private insurance carriers are constantly looking for 
new and innovative products to offer their customers in order 
to get an edge on their competitors. We believe that if there 
were a private market solution, then it would have been found; 
unfortunately, terrorism risk continues to have the following 
characteristics that make it nearly impossible to underwrite: 
terrorism risks are not accidental, but are the result of human 
behavior; terrorism risk thankfully lacks the historical data 
and experiences that make modeling possible for other risks; 
and predicting the severity of losses is difficult as the 
potential range of losses varies wildly.
    It also remains true that terrorist attacks often have 
underlying political motives that are the result of 
governmental policies, and that successfully carried out attack 
is the result of a homeland security or intelligence failure. 
Therefore, we feel that the Government will always have some 
responsibility in the recovery from such an event.

Q.1.b. What incentives does the property/casualty insurance 
industry have under TRIA to try to create a private terrorism 
risk insurance market?

A.1.b. As stated in our previous answer, we believe that 
private carriers are always looking for new products that would 
give them a competitive advantage over their competitors. We 
believe that if it were possible to provide a fully private 
market solution, then the industry would have found it by this 
point. It's also important to note that the private industry 
has a significant stake in the terrorism insurance market as 
TRIA currently stands. The industry is responsible for the 
first $100 million and share of all losses once the TRIA 
trigger is reached. They are then responsible for reimbursing 
the Government, with interest, following a major terrorist 
attack.

Q.1.c. Do you believe that private reinsurance companies can 
fairly compete against the Federal TRIA program?

A.1.c. The private markets are not competing with the Federal 
Government because there is no adequate market for terrorism 
insurance. While there have been signals that the reinsurance 
market has excess capital ready to be used, there is no 
guarantee that this capital would be used for terrorism risk 
should TRIA be allowed to expire. Even if this capital were 
initially used in the terrorism market, it is likely that it 
would quickly dry up following a major terrorist attack and we 
would find ourselves back in the same situation we found 
ourselves in immediately following 9/11.

Q.2. Do you believe TRIA should be a permanent public-private 
risk-sharing mechanism?

A.2. We do believe that TRIA should be a permanent public-
private risk-sharing mechanism. Terrorism risks continue to be 
extremely difficult, if not impossible, to model for, and we do 
not expect that to change in the future. TRIA has proven to be 
effective at ensuring adequate capital is in the marketplace at 
rates affordable to commercial insurance consumers. We believe 
that a program should always be in place that will provide and 
efficient and orderly response to any future attack, and the 
TRIA program does just that, all while costing the Government 
nothing. Such a program is essential to the economic health of 
the United States.

Q.3. Beyond the triggering threshold and deductible, TRIA 
provides for a taxpayer provided backstop for terrorism 
coverage. What is the value of this backstop for insurance 
companies (if a nominal figure cannot be determined, please 
indicate if it more than zero)?

A.3. As the organization representing commercial consumers, it 
is difficult for us to comment on the exact value of the TRIA 
backstop to insurance companies; however, the backstop has 
certainly allowed companies to free up capital to be used for 
terrorism insurance. As we saw immediately following 9/11, this 
capital would be unavailable at affordable rates without the 
TRIA backstop in place. We also want to reiterate that the TRIA 
program has cost the Government nothing to this point, and if 
the program is triggered, the Government is able to recoup its 
losses from the private industry.
    The benefit to our members, commercial insurance consumers, 
is in the adequate availability of terrorism coverage that our 
members can afford. A 2013 survey of our membership found that 
69 percent of respondents believe their terrorism coverage 
limits would decrease, or that coverage would not be offered at 
all, should TRIA be allowed to expire.

Q.4. Should the American taxpayers be compensated for the risk 
through TRIA with front-end premiums?

A.4. Companies are required to reserve terrorism premiums in 
the same manner as they do other insurance premiums however the 
way the program is currently designed the American taxpayers 
have not incurred any costs. To require the companies to pay a 
portion of these reserves to the Government would, in our 
opinion, have a further negative impact on the market and 
create yet another Government fund to be managed.
    TRIA is unique from other Government insurance programs, 
such as the National Flood Insurance Protection (check me on 
correct name) in that there is a requirement for repayment from 
the insurance companies. Other programs do not require 
repayment and in event of terrorist act without the TRIA 
backstop the American taxpayers would foot the costs.

Q.5. TRIA is intended to protect the insurance industry from 
insolvency in the case of catastrophic losses due to a 
terrorism event. Currently, TRIA is triggered after $100 
million in aggregate industry losses in a single year.
    Would you consider $100 million in industry-wide losses a 
catastrophic loss that threatens the solvency of the insurance 
industry? If not, what would that amount be?

A.5. While the industry as a whole may be able to absorb a $100 
million loss, individual companies may not be able to absorb 
their respective losses depending on the size of the company 
and the concentration of risks in the area affected by the 
terrorist event. A small- or medium-size company would be able 
to absorb far fewer losses and a catastrophic $100 million plus 
event may very well render those companies insolvent, or very 
close to it. It's also important to note that the industry's 
losses are not capped at $100 million. They are still 
responsible for a 20 percent deductible above that amount and 
then 15 percent of all losses even above that. The loss from a 
terrorist event could be much higher than $100 million.

Q.6. The reinsurance industry has roughly $510 billion in total 
capital available and the amount is projected to increase.
    How much additional capacity does the private reinsurance 
industry have to take terrorism risk away from the taxpayers? 
What is the average pricing for private reinsurance coverage?

A.6. The 2010 President's Working Group on TRIA found that the 
reinsurance market had only $6 to $10 billion available for 
terrorism risk. This is well below the required industry 
retention under TRIA and significantly below the mandatory 
recoupment amount of $27.5 billion. While the reinsurance 
industry has more capital available generally, we have serious 
doubts that this capital will be used toward terrorism risk 
should TRIA expire. We saw reinsurance capacity dry up 
immediately following 9/11 and would have serious concerns that 
a similar situation would occur in the event of another large-
scale attack. The reinsurance sector also continues to face the 
same limits on modeling and managing terrorism risks that the 
rest of the industry faces.

Q.7. What are the aggregate annual premiums collected by the 
insurance industry each year for terrorism risk coverage?

A.7. While we do not have data on the aggregate premiums, a 
2013 report by Marsh, a large insurance broker, found that 2012 
premiums rates ranged from a median rate of $48 per million of 
total insured value (TIV), for companies with TIV less than 
$100 million, to a median rate of $19 per million of TIV for 
larger companies. Rates ranged from 3 percent to 5 percent of 
overall property premiums depending on factors such as company 
size, location, and industry sector.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM BILL HENRY

Q.1.a. The original authorization stated that TRIA would 
``provide temporary financial compensation to insured parties, 
contributing to the stabilization of the United States economy 
in a time of national crisis, while the financial services 
industry develops the systems, mechanisms, products, and 
programs necessary to create a viable financial services market 
for private terrorism risk insurance.''

    What steps, if any, has the private sector taken to create 
a viable private terrorism risk insurance market?

A.1.a. There is no viable private terrorism risk insurance 
market without TRIA. Terrorism risk is uninsurable because it 
is only questionably quantifiable, totally unpredictable, and, 
therefore, essentially impossible to underwrite. To the extent 
a private market exists today, it is because the private market 
is writing coverage within the predictable parameters set by 
TRIA. Without the Federal backstop, the private coverage 
available--if there was any--would be extremely limited and 
prohibitively expensive.
    We know this because that is what happened in the period 
after 9/11 before TRIA was enacted, and during the months of 
uncertainty before TRIA was reenacted in 2005 and 2007. For 
example, even in Dallas, and elsewhere in Texas, we had 
difficulty after 9/11 getting insurance companies to insure 
workers compensation (for which terrorism exclusions are not 
allowed) for employers with over 50 employees. This pressure 
eased with enactment of TRIA. Indeed, since the enactment of 
TRIA, we have seen prices for terrorism risk coverage decline, 
and take-up rates increase across the country and across 
industries. For companies with a higher perceived risk, whether 
due to size, location, industry or other factors, the take up 
rates exceed the average. This shows that there is demand for 
coverage--and if the insurance industry was able to underwrite 
it, they would do so.

Q.1.b. What incentives does the property/casualty insurance 
industry have under TRIA to try to create a private terrorism 
risk insurance market?

A.1.b. The insurance industry has the same incentives to try to 
create a private terrorism risk insurance market as it does to 
create a market for any other type of risk: that is, if there 
is an insurable risk for which a viable insurance program can 
be created, the insurance industry can make money by 
underwriting those risks. The only difference under TRIA is 
that terrorism risk is not predictable or quantifiable, so it 
is not insurable like other risks are. The Federal backstop, 
therefore, is necessary for insurers to define the limits of 
their exposure so that they can price the coverage correctly so 
that, if a covered event occurs, they have the reserves to pay 
the claims.
    This is a critical point: insurers cannot cover unlimited 
or undefined risks because they cannot price for it. If they 
underprice coverage and a terrorism event occurs, insurers will 
not have the reserves to pay the claims. If they charge too 
much for coverage, consumers will not be able to afford 
coverage and won't buy it--leaving them exposed to terrorism 
risk and reliant on the Government for assistance if a 
terrorist attack occurs.
    The issue before Congress, then, is not whether a private 
terrorism risk market will develop--it won't in any meaningful 
way. Rather, the issue is whether the Government will work with 
the insurance industry to thoughtfully and deliberately develop 
a plan before a terrorist attack to maximize private sector 
participation in addressing the massive damages that will 
result from a terror strike, as opposed to Government reacting 
alone in crisis mode after an attack occurs.
    We know the Federal Government will step in to provide 
assistance after a terrorist attack, particularly if there is 
insufficient private sector relief available. It is our 
obligation to our fellow citizens when tragedy strikes. We do 
not shirk from that duty, and we are all on the hook as 
taxpayers when the Government steps in to help. In the absence 
of a viable, stand-alone private market, the public-private 
partnership represented by TRIA has incredible value. TRIA 
brings the private insurance market into the equation with the 
financial support and organizational expertise the industry has 
to offer: direct contribution through upfront premium payments, 
relief delivery through established claims processes, and a 
repayment mechanism through policyholder surcharges after the 
event. Thus, it is not a question of whether the Federal 
Government will pay, but rather whether the Federal Government 
will work with the insurance industry to ensure that the 
preparation and response to a terrorist attack is handled in 
the most efficient and cost-effective way possible. Better TRIA 
than FEMA.

Q.1.c. Do you believe that private reinsurance companies can 
fairly compete against the Federal TRIA program?

A.1.c. I do not believe that reinsurers have the capacity to 
provide the coverage needed to reinsure all the potential 
terrorism risk out there. So I do not believe it is a matter of 
competition, fair or otherwise. To me, it is simply a realistic 
view of the risk and the capacity and ability of the private 
sector--insurers and reinsurers--to cover that risk. It has 
been my experience that the private sector cannot cover 
terrorism risk without TRIA, and that, with TRIA, the 
marketplace works, both at the insurance and reinsurance 
levels.

Q.2. Do you believe TRIA should be a permanent public-private 
risk-sharing mechanism?

A.2. Yes, TRIA should be made a permanent public-private risk-
sharing sharing mechanism. Terrorism is not an insurable risk. 
If it were--if private insurers and reinsurers were willing and 
able to cover all terrorism risks--then a private market would 
have developed. Such a market has not and will not develop 
without the Federal backstop.

Q.3. Beyond the triggering threshold and deductible, TRIA 
provides for a taxpayer provided backstop for terrorism 
coverage. What is the value of this backstop for insurance 
companies (if a nominal figure cannot be determined, please 
indicate if it more than zero)?

A.3. The value of the backstop is not for insurance companies 
that write TRIA coverage, but for the economy as a whole. 
Without the TRIA backstop, terrorism coverage would dry up 
because insurers would not be willing to expose themselves to 
potentially unlimited terrorism risks, and there is not enough 
capacity in the private market (including reinsurance) to cover 
a risk that is unpredictable. So the existence of TRIA actually 
brings insurers into the terrorism risk coverage marketplace 
when they otherwise would have avoided the market altogether. 
This not only brings the insurance sector's underwriting 
capacity (limited though it is) to the terrorism risk space, it 
also brings in the organizational expertise the industry has to 
offer: direct contribution through upfront premium payments, 
relief delivery through established claims processes, and a 
repayment mechanism through policyholder surcharges after the 
event. Thus, it is not a question of whether the Federal 
Government will pay, but rather whether the Federal Government 
will workwith the insurance industry to ensure that the 
preparation and response to a terrorist attack is handled in 
the most efficient and cost-effective way possible.

Q.4. Should the American taxpayers be compensated for the risk 
through TRIA with front-end premiums?

A.4. Front-end premium payments do not make sense. The risk is 
to the economy and the American taxpayer, and they are the 
ultimate beneficiaries of TRIA. Without TRIA, terrorism 
coverage would dry up, and, with it, all the benefits the 
insurance sector brings. Imposing front-end premiums would only 
discourage insurers from participating in the marketplace. 
Moreover, there is a repayment mechanism in place under TRIA in 
the post-event assessments that are to be imposed under the 
program. This is akin to the way the State insurance guaranty 
programs currently operate. The insurance industry has operated 
under the State guaranty programs for years and it has proved 
to be a workable solution. We see no need to operate 
differently under TRIA.

Q.5. TRIA is intended to protect the insurance industry from 
insolvency in the case of catastrophic losses due to a 
terrorism event. Currently, TRIA is triggered after $100 
million in aggregate industry losses in a single year.
    Would you consider $100 million in industry-wide losses a 
catastrophic loss that threatens the solvency of the insurance 
industry? If not, what would that amount be?

A.5. I do not have an opinion as to the exact number for the 
trigger. The carriers would be in a better position than I to 
make such a recommendation. Having said that, I note that, 
depending on the concentration of the loss, a $100 million loss 
could threaten the solvency of many smaller insurers that 
provide terrorism risk coverage, and the goal should be to 
encourage as many insurers as possible to participate in the 
marketplace to provide as much private sector ``skin in the 
game'' as possible.

Q.6. You mentioned during the hearing that insurance is a 
competitive industry, and if there was a private market 
solution for terrorism risk coverage it would have presented 
itself already.
    Do you believe a Federal taxpayer backstop for terrorism 
risk coverage with no upfront cost is competitive environment 
that can facilitate innovative privatemarket solutions?

A.6. Insurance is a competitive industry--but terrorism risk is 
not an insurable risk in the same way that other risks, like 
car crashes or house fires, are. Therefore, without TRIA to set 
the limits of insurers' exposure, there would be very little--
if any--terrorism coverage available in the private market, and 
the coverage that was available would be prohibitively 
expensive and effectively unavailable to most, if not all, 
consumers.
    Although the specific numbers could be tweaked--the 
trigger, the retention amount, etc.--the basic structure of 
TRIA has worked: a strong private market has developed to cover 
the risks that would otherwise be uninsurable. And there is 
plenty of room--and potential incentive--within the parameters 
of the program for insurers to provide coverage and develop 
innovative private market solutions if any such solutions 
exist.
                                ------                                


 RESPONSE TO WRITTEN QUESTION OF SENATOR KIRK FROM VINCENT T. 
                            DONNELLY

Q.1. Mr. Donnelly, you also discussed the rating agencies in 
your writing statement--anything to add?

A.1. Financial ratings are critical to the viability of 
commercial insurers, and are a key tool used by commercial 
policyholders to assess the quality of the coverage they are 
buying. Thus, any deterioration in an insurer's financial 
ratings can have very negative consequences and, in some cases, 
could force some small- and medium-sized insurers out of the 
market and even larger insurers to withdraw capacity from key 
economic areas to protect their solvency.
    I noted in my testimony that numerous insurers are in great 
danger of having their financial ratings downgraded if TRIA is 
not reauthorized or if it is reauthorized with large increases 
in the deductibles, co-shares, or the trigger. I called the 
Committee's attention to a recent report from A.M. Best 
suggesting that, even at the current 20 percent deductible, a 
number of small- to medium-sized companies may be subject to 
ratings downgrades.
    Subsequent to the hearing, Standard & Poor's (S&P) 
published a report which reached a similar conclusion. S&P 
concluded that if some of the potential threshold changes to 
TRIA are made, ``small insurers with less capital and more 
terrorism exposure could be subject to negative rating 
actions.''
    As I indicated in response to a question from Senator 
Coburn, small- and medium-sized insurers represent almost 98 
percent of all insurers writing TRIA coverage and almost half 
of all TRIA-related premiums. They are a critical source of 
terrorism coverage as well as insurance meeting all of other 
needs of businesses large and small in the country. Their 
presence in the market keeps it healthy and competitive. If 
TRIA deductibles, co-shares, or the trigger are significantly 
increased, the predictions of both A.M. Best and S&P regarding 
ratings downgrades are very likely to come true for a 
significant number of insurers. The only way many of these 
companies could avoid such downgrades would be to exit TRIA-
covered lines entirely. This would have a negative effect on 
availability of many lines of insurance, including terrorism, 
and would be anticompetitive.
    Finally, while insurers have so far been able to absorb and 
manage the new demands that previous reauthorization bills have 
placed on them, the ratings agencies warnings this year are 
more pointed and alarming than ever before. There is an outer 
limit on how much terrorism risk commercial insurers can accept 
before they have to make tough decisions about exiting lines 
and markets to protect their solvency. The alarming predictions 
of both A.M. Best and S&P strongly suggest that the industry, 
and small- to mid-sized insurers in particular, are nearing the 
outer edge of their ability to absorb terrorism risk. While it 
is appropriate for Congress to consider ways to continue to 
protect taxpayers, the rating agencies' warnings suggest 
Congress must also take extreme care not to push the industry 
past its tipping point.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM VINCENT T. 
                            DONNELLY

Q.1.a. The original authorization stated that TRIA would 
``provide temporary financial compensation to insured parties, 
contributing to the stabilization of the United States economy 
in a time of national crisis, while the financial services 
industry develops the systems, mechanisms, products, and 
programs necessary to create a viable financial services market 
for private terrorism risk insurance.''
    What steps, if any, has the private sector taken to create 
a viable private terrorism risk insurance market?

A.1.a. TRIA mandates that private insurers make terrorism 
coverage available to all businesses purchasing insurance on 
the same terms and conditions for those lines protected by 
TRIA's loss limits. Under TRIA, the private sector shoulders 
the risk for all but the most catastrophic events, including a 
$27.5 billion aggregated industry retention.
    TRIA was enacted because private insurers were unable to 
model terrorism risks in the aftermath of 9-11. At the time, it 
was hoped that modeling would improve to the point where it 
would be possible for the private sector to take all terrorism 
risks, eliminating the need for a Federal program. While some 
progress has been made, that goal has simply not yet been 
achieved. It is possible to model the potential severity of a 
delineated attack. However, it is not possible to model the 
likelihood or frequency of future terrorist attacks or of 
coordinated attacks on multiple locations or the magnitude of a 
large scale terrorist attack involving nuclear, biological, 
chemical, and radiological (NBCR) weapons. There is 
insufficient historical loss data upon which to base such 
models and terrorism risk prevention and mitigation largely 
arises from Federal Government national security activities. 
Also, unlike hurricanes and most other catastrophic risks, 
terrorism is not random; in fact, terrorists can target their 
actions to maximize losses against certain victims and 
circumvent mitigation measures.
    Not every risk is insurable in the private marketplace. 
TRIA continues to exist because there is a natural limit to how 
much terrorism risk the private market is willing and able to 
accept. Without TRIA's limits on terrorism loss exposure, 
terrorism risk would be very similar to war risk, which private 
insurance generally excludes (except where coverage is mandated 
under State law).
    Other major countries which have a significant terrorism 
risk have developed some sort of Government program to deal 
with the problem. TRIA is better than most other programs 
because it is more fiscally responsible. But without TRIA, as 
seen in 2005 and 2007 as the program neared expiration, the 
private market excluded terrorism coverage altogether for a 
majority of commercial policies.

A.1.b. What incentives does the property/casualty insurance 
industry have under TRIA to try to create a private terrorism 
risk insurance market?
    TRIA has already succeeded in creating a private terrorism 
insurance market where it had all but disappeared in the 
aftermath of 9-11. The private marketplace now has a $27.5 
billion aggregated industry retention. The amount insurers have 
to absorb within their 20 percent TRIA deductible has already 
increased from $25.7 billion to $35.6 billion since the program 
was created--a nearly 40 percent increase. If TRIA is 
reauthorized with higher deductibles, then the retained risk 
for small- and mid-sized insurers as well as certain large 
insurers would exceed their maximum acceptable loss limits, 
effectively forcing them out of the market.
    In addition to the deductible, each insurer must also pay 
15 percent of all losses over the 20 percent TRIA deductible. 
This co-share imposes an additional catastrophic exposure on 
top of the 20 percent deductible. Increasing the 15 percent co-
share could destabilize the terrorism insurance marketplace by 
increasing capital costs, which could cause a decrease in 
private sector capital allocations to terrorism coverage.
    Significant changes to TRIA that detrimentally impact 
insurance companies could also result in rating agency 
consequences, because no insurer can risk a single event wiping 
out its capital base potentially creating market disruptions 
for policyholders. Thus, while an extensive private insurance 
market has now been created under TRIA, the risk exposures are 
far beyond what most of the private sector would offer without 
the program in place. These concerns are highlighted by the 
A.M. Best Briefing ``As Expiration of TRIPRA Approaches, Rating 
Pressure Increases,'' April 1, 2013.

Q.1.c. Do you believe that private reinsurance companies can 
fairly compete against the Federal TRIA program?
    The vast majority of private reinsurers say that they do 
not compete against the TRIA program. Although commercial 
reinsurers have opposed virtually every other proposal for 
Government-reinsurance programs (e.g., natural catastrophe 
programs), they support TRIA. The Reinsurance Association of 
America (RAA) is on record in support of reauthorizing TRIA. A 
small number of reinsurers have suggested that they may be 
willing to take on a bit of the terrorism risk now covered by 
the program. But it is important to recognize that they are 
interested only in a relatively small layer of coverage--they 
do not propose to come anywhere close to filling the gap that 
would be created if TRIA were not reauthorized or even if the 
thresholds were increased substantially. In addition, much of 
the needed reinsurance capital may not be available in high 
risk aggregated regions or for nuclear, biological, chemical, 
radiological (NBCR) risks. And the willingness of reinsurers to 
assume an additional layer of risk today may reverse in the 
future if market conditions change, for example by the 
occurrence of a major catastrophe depleting global reinsurance 
capital or an improvement in alternative investment 
opportunities.

Q.2. Do you believe TRIA should be a permanent public-private 
risk-sharing mechanism?

A.2. When TRIA was first enacted, it was envisioned as a 
temporary program that would fill a gap until such time as the 
private industry developed the ability to model and price 
terrorism risk without the protection of a Federal program to 
limit private insurer liability. While there have been 
improvements in terrorism risk modeling since 9-11, it remains 
the case that modeling cannot accurately predict the frequency 
or likelihood of future terrorism attacks. Unlike natural 
disasters, for which there is substantial historical data, 
terrorist attacks have fortunately been relatively rare, 
resulting in a paucity of historical loss data to use in 
modeling. This is why every other country in the world that has 
established a terrorism program has made it permanent. While we 
can hope for a day when a Federal terrorism risk management 
program will not be necessary, that day has not arrived. The 
inescapable conclusion is that as long as terrorism attacks 
threaten our country, we must protect America's economic 
vitality both before and after a terrorist attack. TRIA has 
been very successful and continues to make terrorism coverage 
widely available. It is essential that the program be 
maintained to protect the U.S. economy.

Q.3. Beyond the triggering threshold and deductible, TRIA 
provides for a taxpayer provided backstop for terrorism 
coverage. What is the value of this backstop for insurance 
companies (if a nominal figure cannot be determined, please 
indicate if it more than zero)?

A.3. TRIA's primary value is not for insurers. It is for 
policyholders--the businesses that drive our Nation's economy. 
In the absence of TRIA and Government coverage mandates, 
insurers would be free to write only those terrorism risks they 
are comfortable writing and to avoid the rest. But TRIA 
requires insurers to make terrorism coverage available in order 
to ensure that the Nation's economic engine remains strong both 
before and after a terrorist attack. Coverage for injuries 
resulting from acts of terrorism including NBCR cannot be 
excluded under workers compensation policies in any State. In 
addition, a number of States mandate that insurers cover 
terrorism-created fire losses, even if a policyholder does not 
purchase terrorism coverage. Insurers support TRIA because it 
allows us to provide coverage to our policyholders and it 
serves a critical economic and national security function.
    The question appears to be based on an assumption that 
insurers realize monetary benefit from TRIA. But in fact, TRIA 
has negative impact on most insurers, given that it requires 
insurers to accept risk they would otherwise choose not to 
accept and to retain much of the risk of loss on that business. 
In return for that, TRIA provides only partial loss limits 
above a significant insurer retention. Insurers do not profit 
from the backstop--they merely get partial reimbursement for 
losses arising from risks the Government required them to write 
and which they would in many cases have avoided otherwise. 
While many insurers do charge a premium for terrorism coverage, 
the difficulties in modeling make it impossible to know with 
any certainty whether the premium is adequate to cover even the 
insurer's share of potential losses. Such rates are also 
subject to review in many cases by State insurance regulators 
who often limit the rates insurers can charge. Insurance is a 
highly competitive industry with very low market concentration, 
giving companies little pricing power to charge in excess of a 
normal return on capital.

Q.4. Should the American taxpayers be compensated for the risk 
through TRIA with front-end premiums?

A.4. American taxpayers are greatly benefited by the economic 
benefits and resiliency that TRIA provides. They are further 
protected through TRIA by having the private insurance market 
bear the burden of all the most catastrophic terrorism risks, 
which insurers might otherwise exclude (as demonstrated by the 
widespread use of conditional terrorism exclusions on a 
majority of commercial policies issued in the TRIA transition 
years of 2005 and 2007 when extension of the program was 
uncertain). Having a mandate that private insurers offer 
terrorism coverage, and imposing a post-funded recoupment 
system commonly used in the States and for some Federal 
programs to fund any Government outlays through the marketplace 
protects the taxpayers. A pre-event charge or tax was 
considered in 2002 and each subsequent reauthorization, but was 
rejected by both Democratic and Republican majorities for a 
number of reasons:

   LPre-funding would be a tax on business and would 
        hit urban areas the hardest since they are perceived to 
        be at higher risk for terrorism.

   LNational security is primarily a Federal 
        responsibility--businesses that would pay the tax are 
        not able to mitigate their risk in the same way they 
        could for weather or ``more typical'' workers 
        compensation exposures.

   LPre-funding would not protect taxpayers with 
        certainty since terrorism is inherently unpredictable:

     LIf too little is collected, taxpayers may not be 
        fully protected.

     LIf too much is collected, the Government is 
        taking money out of the economy for a risk that might 
        not occur for 10, 20 or 100 years.

   LPre-funding ties up capital inefficiently, 
        potentially for a very long time.

     LThis depletes capital from the economy.

     LPost-funding is cheaper (no lost interest or lost 
        opportunity costs) and still charged to those 
        benefiting from the program.

     LIf a pre-funded pool of money is collected in 
        advance, there is a great danger that the money will 
        not be preserved to protect taxpayers and be vulnerable 
        to be used for other purposes.

Q.5. TRIA is intended to protect the insurance industry from 
insolvency in the case of catastrophic losses due to a 
terrorism event. Currently, TRIA is triggered after $100 
million in aggregate industry losses in a single year.
    Would you consider $100 million in industry-wide losses a 
catastrophic loss that threatens the solvency of the insurance 
industry? If not, what would that amount be?

A.5. A $100 million event would not threaten the solvency of 
the insurance industry on an aggregate basis, but then a 
terrorist attack would not hit the entire industry on an 
aggregate basis. Individual insurers would suffer individual 
losses, and small- to mid-sized insurers, in particular, could 
suffer life-threatening losses from a $100 million event that 
resulted in losses for the particular policyholders they 
insure. Small- and medium-sized insurers represent almost 98 
percent of all insurers writing TRIA coverage and almost half 
of all TRIA-related premiums. They are a critical source of 
terrorism coverage as well as other lines of insurance meeting 
all of the needs of American businesses, large and small. Their 
presence in the market keeps it healthy and competitive. An 
excessive trigger would make it impossible for many such 
companies to continue to write terrorism and other business 
coverages, which would lead to less availability of coverage 
and less competition. That would be antithetical to TRIA's 
stated purposes. It was for that reason that the $100 million 
trigger was established. It is for that reason that it should 
be retained.
    Attached is a brief paper provided by the Property Casualty 
Insurers Association providing greater detail on the role 
small- and medium-sized insurers play in the market and in the 
debate over TRIA reauthorization.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM WARREN W. 
                              HECK

Q.1. The Federal Government is typically not very good at 
underwriting risk for insurance programs, such as the National 
Flood insurance program, which is currently $24 billion in 
debt. Can you explain how this insurance program is very 
different from other insurance programs? What, if anything, 
would need to be done differently to ensure TRIA does not end 
up being another unsustainable Federal insurance program?

A.1. By design, the Terrorism Risk Insurance Program is 
fundamentally different than any other Federal insurance 
program. The National Flood Insurance Program for example, is 
one that has the Government participating directly in insurance 
markets, underwriting the Nation's risk of flood losses. By 
contrast, TRIA stands behind the privately functioning market 
and only gets involved in the event of a catastrophic attack. 
In an event, the insurance company is responsible for losses up 
to a specified amount, based on its deductible and co-pay under 
the law. Hence, for smaller, more manageable events insurance 
companies pick up the full tab. Any additional losses are then 
initially paid by the Federal Government and then spread back 
throughout the private sector through the recoupment process. 
Any and all losses can be recovered under current law, the only 
question being what portion is required to be recovered and 
what portion is at the discretion of the Treasury Secretary. In 
this way, the TRIA program acts as a liquidity mechanism that 
transfers potentially ruinous losses not to the Federal 
Government, but through the Federal Government and back to the 
private sector.
    The TRIA Program allows a robust private market to operate; 
and it does this at virtually no cost to the taxpayer in the 
absence of an attack. In fact, under TRIA insurance companies 
are required to make terrorism coverage available to all 
commercial insureds (although insureds may reject the coverage 
if they wish). Couple that with the fact that in an event, the 
Federal Government can recoup every penny of taxpayer money 
spent, and it is clear that the design of the TRIA Program 
prevents it from becoming another unsustainable insurance 
program.

Q.2. If the program is altered to nominally increase private 
sector participation by raising deductibles or the trigger 
level, but in reality caused some companies to flee markets and 
certain lines of business as we've been told would happen, 
wouldn't this reduce overall capacity instead of increasing it?

A.2. Yes, competition among insurance companies and overall 
capacity would likely be reduced. Under TRIA currently, an 
insurance company is already required to put over one-fifth of 
the value of their entire commercial book of business at risk 
for a single peril that could take the form of a single event. 
There is neither the appetite nor the ability for companies to 
jeopardize their ability to protect their policyholders by 
taking on more risk. Increases in the event trigger, company 
deductibles or insurer co-payments would almost certainly drive 
insurers--particularly medium and small insurers--out of the 
market, reducing competition and further constraining 
availability of terrorism risk coverage. Critics of the TRIA 
program mistakenly assume that any capacity lost due to the 
exit from the market of small- and mid-sized insurers would be 
replaced by large insurers that are able to attract and hold 
larger amounts of capital. This is not the case and a statutory 
increase in the insurer share of the losses could have the 
perverse effect of driving participants out of the market, 
resulting in a net outflow of capital that would otherwise be 
allocated to terrorism risk, thus actually increasing taxpayer 
exposure. Last, but equally important, is that increases to the 
trigger would have little to no effect on the fiscal purse over 
the long-term, but would create significant economic 
disruptions.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM WARREN W. 
                              HECK

Q.1.a. The original authorization stated that TRIA would 
``provide temporary financial compensation to insured parties, 
contributing to the stabilization of the United States economy 
in a time of national crisis, while the financial services 
industry develops the systems, mechanisms, products, and 
programs necessary to create a viable financial services market 
for private terrorism risk insurance.''
    What steps, if any, has the private sector taken to create 
a viable private terrorism risk insurance market?

A.1.a. The private insurance market for terrorism risk is 
viable today for all but the most extreme and costly terrorist 
events. According to the Congressional Research Service, in 
2011 the aggregate of all primary insurer deductibles under 
TRIA totaled approximately $34 billion, with private 
reinsurance capacity ranging between $6 billion and $8 billion. 
The willingness of private insurers to collectively allocate 
$34 billion of their own capital for terrorism losses can be 
attributed to the fact that the TRIA program allows each 
insurer to predict the amount of its maximum terrorism-related 
loss. Without TRIA, and given the potential magnitude of a 
major terrorism event, insurers' potential losses would be so 
great that few, if any, insurers would be willing and able to 
provide coverage.
    The language you cite from the original TRIA authorization 
reflects the optimism of policymakers and some insurance 
analysts in 2002 that the terrorism threat could eventually be 
managed entirely by the private sector. Given what we have 
learned about the nature of terrorism risk since that time, it 
is clear today that TRIA or a similar program will probably 
always be needed to ensure that the private sector market for 
terrorism insurance remains as viable as it is today. The 
private insurance market is simply incapable of exclusively 
taking on the terrorism exposure because acts of terrorism are 
deliberate and not amenable to statistical predictability or 
valid underwriting evaluation.

Q.1.b. What incentives does the property/casualty insurance 
industry have under TRIA to try to create a private terrorism 
risk insurance market?

A.1.b. The industry's primary incentive is underwriting profit. 
Insurers earn underwriting profit by increasing the amount of 
premium they collect relative to the amount they pay in claims. 
If the industry believed that it could generate more profit by 
increasing its exposure to terrorism risk, it would do so, and 
it would not be asking Congress to reauthorize the TRIA 
program.

Q.1.c. Do you believe that private reinsurance companies can 
fairly compete against the Federal TRIA program?

A.1.c. Private reinsurance companies are able to supply only 
enough capacity to provide coverage for the exposure that 
primary insurance have through their company deductibles and 
co-payments under TRIA. The additional layer of coverage 
provided by TRIA is not available in the private reinsurance 
market. Because private reinsurers and the TRIA program provide 
separate layers of coverage, they do not compete with each 
other.

Q.2. Do you believe TRIA should be a permanent public-private 
risk-sharing mechanism?

A.2. Yes. See answer to 1.a.

Q.3. Beyond the triggering threshold and deductible, TRIA 
provides for a taxpayer provided backstop for terrorism 
coverage. What is the value of this backstop for insurance 
companies (if a nominal figure cannot be determined, please 
indicate if it more than zero)?

A.3. Because the Federal Government has the authority to recoup 
from insurers and their policyholders any funds disbursed from 
the TRIA ``backstop,'' the nominal value of the backstop to 
insurers is zero.

Q.4. Should the American taxpayers be compensated for the risk 
through TRIA with front-end premiums?

A.4. Not if the goal is to ensure that taxpayers will be fully 
compensated for whatever losses the Government incurs under 
TRIA. The back-end recoupment mechanism allows the Government 
to compensate taxpayers for the entire amount of claims paid 
through the TRIA backstop. An upfront premium, on the other 
hand, would compensate taxpayers only for the risk of loss due 
to terrorism. Depending on the timing of a major terrorist 
event in relation to the period during which premiums were 
collected, it is possible that the Government's losses would 
greatly exceed the amount of premium the Government received, 
perhaps by several billion dollars. The payment of front-end 
premiums would have the effect of placing the Federal 
Government into the private insurance market in much the same 
way as NFIP has done.

Q.5. TRIA is intended to protect the insurance industry from 
insolvency in the case of catastrophic losses due to a 
terrorism event. Currently, TRIA is triggered after $100 
million in aggregate industry losses in a single year.
    Would you consider $100 million in industry-wide losses a 
catastrophic loss that threatens the solvency of the insurance 
industry? If not, what would that amount be?

A.5. A $100 million loss would not threaten the solvency of the 
entire insurance industry, but that is irrelevant because the 
losses that result from a terrorist event would not be spread 
``industry wide.'' Instead, the losses are likely to be 
concentrated among a few companies, or perhaps even a single 
company, whose commercial policyholder had the misfortune of 
being selected for a catastrophic terrorist attack. Raising the 
$100 million trigger to some higher level would mean that each 
company would have to be able to absorb losses equal to the 
amount of the new trigger amount.
    For example, if the trigger was raised to, say, $500 
million, each insurer would have to be prepared to pay for 
losses amounting to $500 million plus the sum of its 20 percent 
deductible and its 15 percent co-payment for any losses above 
$500 million. This would greatly increase the exposure of 
small- and medium-size insurers, many of whom would respond by 
declining to offer terrorism coverage, which in turn would have 
the effect of reducing the aggregate amount of private sector 
capital allocated to terrorism risk.
    For example, if the trigger was raised to $500 million and 
buildings my company insured had the misfortune of being a 
target, a loss up to $499 would be borne completely by my 
company without TRIA. If we were unable to purchase stand-alone 
reinsurance, this would render my company insolvent. Even in a 
less extreme example of an industry loss of $450 million with a 
loss to my company of $150 million would be devastating and 
would weaken the company by significantly reducing its $405 
million of surplus.
    In the case of a target insurance company that had $1 
billion in surplus, a loss of $499 million would wipe out half 
of its surplus and would be a devastating loss to the company, 
likely impacting its financial rating and ability to protect 
its other policyholders. I would add that of the approximate 
2,600 p/c insurance companies operating in the United States 
only about 118 of them have $1 billion or more of surplus. 
Increasing the trigger beyond $100 million would greatly 
increase the exposure of the majority of small- and medium-size 
insurers, many of whom would be forced to respond by declining 
to offer terrorism coverage, which in turn would have the 
effect of reducing the aggregate amount of private sector 
capital allocated to terrorism risk.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR KIRK FROM DOUGLAS G. 
                             ELLIOT

Q.1. For any event to be deemed a ``terrorist'' event, the 
Secretary of Treasury, Secretary of State and the Attorney 
General must certify the event as an ``act of terrorism'' under 
TRIA (as amended). While TRIA (as amended), states that ``[t]he 
Secretary shall provide an initial notice to Congress not later 
than 15 days after the date of an act of terrorism, stating 
whether the Secretary estimates that in aggregate insured 
losses will exceed $100 million''. That being said, there is no 
specific deadline for the Government to certify an event as an 
``act of terror'' which can often prolong and often complicate 
matters for insurers paying claims. Can you explain some of the 
issues that can arise when insurers are trying to pay on 
policies when there is question as to if the event is counted 
as an ``act of terror''?

A.1. Many insurance policies track the TRIA definition of ``a 
certified act of terrorism.'' Without timely certification by 
the Treasury Department, there can be uncertainty regarding 
coverage or lack of coverage both under the policy and under 
TRIA. This uncertainty can lead to a delay in the resolution of 
claims for policyholders and insurers, who are obligated under 
State law to make timely decisions on claims. To that end, the 
American Insurance Association (AIA), recommends dropping the 
$5m trigger that is currently necessary for Treasury Department 
certification, and establishing a statutory timeline for the 
certification process that requires a preliminary certification 
determination within 15 days of an event (or within 15 days of 
a petition for preliminary certification submitted by an 
insurer) and a final determination within 60 days, which can be 
extended by the Secretary of Treasury (with notice) if the 
investigation into the act remains outstanding.

Q.2. In addition to the certification timeline, we also want to 
look to see if the recoupment period in the current TRIA 
statute could be strengthened--either by making it mandatory 
and giving a specific timeline for repayment. Should there be 
some flexibility on this timeline--perhaps allowing the 
Secretary of Treasury to adhere to a recoupment timeline unless 
he can provide an explanation to Congress in writing rationale 
why recoupment for a specific TRIA event needs to be extended 
beyond the timeline, possibly providing a proposed timeline for 
recoupment?

A.2. Under TRIA, the Treasury is required to collect surcharges 
needed to recover 133 percent of the mandatory recoupment 
amount, being the Government's share of the first $27.5B of 
insured losses (the marketplace aggregate retention). If this 
amount is not sufficient to fully cover the Government's share, 
Treasury has discretionary authority to impose further 
surcharges on policyholders. Congress wisely decided to 
postpone the decision whether to impose higher surcharges on 
policyholders to a time when the Treasury and Congress can 
prudently assess the impact of such action on a wounded economy 
in the immediate wake of a potentially catastrophic event. 
Increasing the marketplace aggregate retention (i.e., the 
mandatory recoupment amount) by a modest amount, however, may 
be a reasonable step.
    As to the recoupment period, currently TRIA provides that 
if an act of terrorism occurs between January 1, 2012, and 
December 31 2014, the Secretary is required to collect 
surcharges needed to recover the recoupment amount by September 
30, 2017. The recoupment period is supposed to start on January 
1 following the act of terrorism. Therefore, for an act 
occurring in 2012 the recoupment period would be 4 years and 9 
months, as compared to an act occurring in 2014, which would be 
2 years and 9 months. A better rule would simply require 
recoupment within X years following the act of terrorism. Given 
the 3 percent cap on the surcharge, a 4-year period makes sense 
to allow for full collection of the recoupment amount. We agree 
that the Secretary should be able to extend this time period 
with the consent of Congress.

Q.3. There was a recent study in which A.M. Best said 19 
percent of insurance units with terrorism risk exposure failed 
a stress test simulating a conventional weapons attack of a 5-6 
ton truck bomb. Mr. Elliot, can you talk about the rating 
agency thresholds as a constraining factor for insurers?

A.3. The rating agencies have started to increase their focus 
on insurance company terrorism risk management and an 
individual company's terrorism exposure relative to surplus. As 
an example, at least one rating agency (A.M. Best) has been 
evaluating company exposure excluding the benefit of TRIA and 
has stipulated that companies could experience ratings pressure 
if (a) the net exposure to terrorism exceeds 20 percent of 
capital and surplus, or (b) aggregate exposures of risks in 
specific geographic areas are notably high, or (c) specific 
location concentrations can adversely impact capital. From a 
business and risk management perspective, where TRIA's levers 
are altered to increase the share of insured losses borne by 
insurance companies--whether that occurs by increasing insurer 
deductibles or co-shares--insurers will need to manage that 
increased financial exposure in a way that does not put 
financial solvency at risk. That may result in individual 
insurer decisions to reduce capacity or make other difficult 
business decisions to maintain the company or enterprise in 
sound financial condition.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR COBURN FROM DOUGLAS G. 
                             ELLIOT

Q.1.a. The original authorization stated that TRIA would 
``provide temporary financial compensation to insured parties, 
contributing to the stabilization of the United States economy 
in a time of national crisis, while the financial services 
industry develops the systems, mechanisms, products, and 
programs necessary to create a viable financial services market 
for private terrorism risk insurance.''
    What steps, if any, has the private sector taken to create 
a viable private terrorism risk insurance market?

Q.1.b. What incentives does the property/casualty insurance 
industry have under TRIA to try to create a private terrorism 
risk insurance market?

A.1.a.-b. Combining responses to questions (a) and (b), the 
Government's high-level participation in TRIA actually provides 
incentive for insurers to provide terrorism risk insurance 
coverage and allows a private market to exist by providing the 
certainty that the Government will backstop catastrophic 
insured losses from terrorism. Without TRIA, individual 
insurers would face difficult choices about how to manage their 
exposures and would have to ration their capacity in order to 
maintain their respective companies in sound financial 
condition. The assumption that a viable market would develop 
for terrorism risk was based on an unrealistic view that 
terrorism was like other insurable perils, such as wind and 
flood. Terrorism is not a similar insurable peril for many 
reasons:

    It is difficult to underwrite the risk. Since acts of 
terrorism are intentional and the timing, nature, and mode of 
attack are solely in the hands of the terrorist, insurers 
cannot assess the frequency of an attack and have very little 
experience to draw upon. This is especially true for wide-area 
catastrophic attacks such as nuclear, biological, chemical, and 
radiological attacks.
    Insurers are unable to spread risk effectively through 
reinsurance. A 2013 Marsh reinsurance study shows that capacity 
for terrorism losses is minimal (only $6-10 billion of 
reinsurance for terrorism losses is available across the 
industry and virtually no reinsurance capacity for nuclear, 
biological, chemical, and radiological or ``NBCR'' losses) 
because reinsurance companies are no more able to underwrite 
the risk than primary carriers.
    Furthermore, the market for terrorism coverage is not a 
``true'' free market in which institutions can choose to sit on 
the sidelines. State laws mandate coverage for terrorism for 
certain lines of insurance (workers' compensation and standard 
``fire following'' policies). Because the insurer does not have 
any policy tools to help manage terrorism exposure, they must 
determine how to allocate their capacity. In some situations, 
an insurer's decisions on the level of acceptable terrorism 
exposure affect decisions to renew policyholders. Far from 
``crowding out'' private market capacity, TRIA's public-private 
partnership has provided stability and certainty, and allowed 
commercial insurers to become more comfortable with 
individually managing terrorism exposures without compromising 
financial solvency.

Q.1.c. Do you believe that private reinsurance companies can 
fairly compete against the Federal TRIA program?

A.1.c. I don't believe reinsurance companies are truly 
competing against the Government. In fact, The Hartford does 
buy private reinsurance, and we'd like to purchase more. But, 
unfortunately, the traditional reinsurance markets are unable 
to meet our needs, particularly for wide-area events like a 
nuclear, biological, chemical, or radiological attack. 
Similarly, the capital markets have not demonstrated that they 
are able or willing to take on terrorism risk in a meaningful 
way. Today, there is nothing inhibiting the ability of the 
reinsurance or capital markets from providing coverage to The 
Hartford within the TRIA retention other than the uninsurable 
nature of the risk.
    In terms of the reinsurance market for terrorism risk, the 
same insurability challenges that limit a primary insurance 
company's ability to underwrite terrorism risk constrain the 
amount of risk that reinsurers are willing to underwrite. And 
reinsurers are not compelled by Federal legislation or 
regulation to underwrite terrorism risk in the United States, 
nor are they constrained by State rate and policy form 
regulation. The result: reinsurance capacity for the risk of 
terrorism is extremely limited at $6-10 billion. Moreover, the 
terrorism reinsurance capacity that is available generally 
excludes losses caused by NBCR weapons and typically includes 
additional limitations in major metropolitan areas.
    To put the $6-10 billion of reinsurance capacity in 
context, we estimate that the total amount of reinsurance 
capacity available for natural catastrophe risks in the United 
States is in the range of $90-120 billion. Given that the 
aggregate level of individual insurance company retentions is 
estimated to exceed $34 billion, today's terrorism reinsurance 
capacity is insufficient to satisfy even a portion of 
individual company reinsurance demand within existing TRIA 
retentions. As noted in recent testimony, the reinsurance that 
is available for terrorism is for conventional terrorism only.
    At the same time, the fact that reinsurance capacity, 
however small, has grown from $4-6 billion to $6-10 billion 
since 2007 is encouraging for the market on two fronts. First, 
the increase in reinsurance capacity demonstrates that TRIA is 
not crowding out private reinsurance markets, but may in fact 
provide the stability for the marketplace that allows the 
program to ``crowd-in'' reinsurance capacity. Second, while the 
capacity does not offer an alternative to TRIA, the growth in 
reinsurance would be beneficial in improving the risk pooling 
opportunities for conventional terrorism risks within existing 
TRIA retentions.

Q.2. Do you believe TRIA should be a permanent public-private 
risk-sharing mechanism?

A.2. Unfortunately, insurers are no better able to quantify the 
likelihood of a terrorist attack than they were 12 years ago 
and the capacity of the reinsurance or capital markets to 
finance the peril of terrorism remains de minimus--and 
virtually non-existent for NBCR acts of terror.
    As discussed in the prior answer, terrorism is not an 
insurable peril by its very nature. Terrorism involves 
intentional acts carried out at the direction of individual 
actors, with the explicit intention of maximizing loss. While 
there have been improvements in modeling, there is no reliable 
way to predict the adaptive nature of a terrorist.
    Given the nature of terrorism risk and what we know (or 
don't know) about it, there may never be enough capacity in the 
private market alone and there will always be a unique need for 
Government participation. After all, it is the fact that the 
Government will share in terrorism losses at a catastrophic 
level that has allowed the private terrorism risk insurance 
market to function. In order to understand the potential for 
increasing private market capacity, one need look no further 
than the gap between aggregate insurer retentions under TRIA--
at more than $30 billion--and the estimated $6--10 billion of 
available private terrorism reinsurance.

Q.3. Beyond the triggering threshold and deductible, TRIA 
provides for a taxpayer provided backstop for terrorism 
coverage. What is the value of this backstop for insurance 
companies (if a nominal figure cannot be determined, please 
indicate if it is more than zero)?

A.3. The value of the backstop cannot be quantified. 
Nonetheless, it may be helpful to view the value of TRIA (to 
insurers, insurance consumers, the public, and the broader U.S. 
economy) from the perspective of the negative consequences that 
might be expected should TRIA expire at the end of 2014. First, 
the Federal Government would lose the private market buffer of 
insured losses under TRIA. Coupled with the likely reduction or 
rationing of insurance capacity by individual insurers, this 
has the potential to turn Federal disaster assistance into a 
more viable source of economic stability after a terrorism 
event. It would likely be subject to the Federal appropriations 
process and, thus, distributed more slowly. And, unlike under 
TRIA, the Federal funds expended would not be recouped. Second, 
we could expect to see a delay or reduction in the number of 
construction projects, where commercial development and 
financing depends on the availability of adequate terrorism 
risk insurance. Third, businesses seeking terrorism risk 
insurance coverage are likely to see fewer policy options 
available, and, where coverage is available, it is likely to 
reflect the true cost of the risk absent the Federal high-level 
backstop.

Q.4. Should the American taxpayers be compensated for the risk 
through TRIA with front-end premiums?

A.4. To be clear the current program requires that American 
taxpayers be compensated. Under the current program, they are 
compensated on a post-event basis. That said, TRIA is designed 
to protect the American economy by maximizing the amount of 
risk that can be kept safely within the insurance industry. The 
program provides solvency protection for the industry by 
serving as a safety net to prevent widespread insurer failures, 
volatility in capacity, and pricing swings. TRIA is not 
intended to serve as a ``working layer'' of coverage for 
normally insurable levels of loss; it is a catastrophic 
terrorism backstop that adds otherwise unavailable capacity.
    TRIA includes a post-event recoupment feature which 
(combined with high individual insurer retentions) ensures that 
the Federal Government only participates in catastrophic loss 
scenarios.
    If the program were shifted to a pre-funded premium basis, 
the up-front costs of terrorism coverage for America's 
businesses and local governments increase by definition. Basic 
economic principles hold that increases in the upfront cost of 
terrorism insurance will drive down policyholder take-up rates, 
reduce available capacity and diminish the other economic 
benefits that flow from the current TRIA structure. Further, 
the post-event burden on the Federal Government will increase 
with the decrease in insurance coverage, at the same time 
slowing the growth of important sectors of the economy that 
depend on the availability of terrorism risk insurance, such as 
construction, real estate, manufacturing, infrastructure and 
small business generally.

Q.5. TRIA is intended to protect the insurance industry from 
insolvency in the case of catastrophic losses due to a 
terrorism event. Currently, TRIA is triggered after $100 
million in aggregate industry losses in a single year.
    Would you consider $100 million in industry-wide losses a 
catastrophic loss that threatens the solvency of the insurance 
industry? If not, what would that amount be?

A.5. No. $100M in industry-wide losses would not threaten the 
solvency of the property-casualty industry. However, it is 
important to remember that $100 million in industry losses only 
triggers the Terrorism Risk Insurance Program, not the Federal 
Government's share of the losses. As discussed, the combination 
of high individual insurer retentions (deductibles and co-
shares) and the mandatory recoupment in TRIA ensures that the 
Federal Government will only participate in catastrophic loss 
scenarios. In addition, raising the program trigger would 
likely decrease terrorism-insurance capacity. Speaking for The 
Hartford, our program deductible is approximately $1.2 billion, 
so an increase in the trigger below that amount would not 
substantially impact the capacity we can offer in the market. 
The same is obviously not true for smaller insurers, whose 
deductibles are closer to the existing trigger. But saying that 
raising the trigger would not negatively impact our capacity is 
not the same as saying it would incent more private market 
participation.

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