[Congressional Record Volume 147, Number 178 (Thursday, December 20, 2001)]
[Senate]
[Pages S13911-S13914]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                          TERRORISM INSURANCE

  Mr. DASCHLE. Mr. President, it was regrettable today that we were 
unable to gain unanimous consent to take up H.R. 3210, the House 
terrorism insurance bill, and amend it with a substitute offered by the 
Senator from Connecticut, Mr. Dodd. We made a good-faith effort to 
address a pressing need, but we found that some of our colleagues 
insisted on the consideration of amendments that would make it 
impossible to complete work on this issue in the short time this 
session of Congress had remaining.
  In the wake of September 11th, a number of insurance companies are 
declining to provide coverage from losses that would result from a 
terrorist attack. Those policies that are available are often priced so 
high that they are unaffordable. Senator Dodd's proposal would have 
given them the safety net they need to keep insuring against terrorist 
risks. In turn, that coverage would allow builders to keep building, 
businesses to keep growing, and, hopefully, prevent against further 
economic setbacks.
  Our amendment was the product of extensive bipartisan negotiations. 
It was developed with extensive consultation with a number of Senate 
Democrats and Republicans--including Senator Gramm--as well as the 
White House and the Treasury Department. I am especially appreciative 
of the enormous commitment of time and energy by the Senator from 
Connecticut, Mr. Dodd, the Chairman of the Banking Committee, Mr. 
Sarbanes, the Chairman of the Commerce Committee, Mr. Hollings, the 
senior Senator from New York, Mr. Schumer, the junior Senator from New 
Jersey, Mr. Corzine, and many others from both sides of the aisle.
  While we were unable to reach agreement on every point, the proposal 
incorporated line-by-line suggestions by our colleagues from both sides 
of the aisle and the Administration. It represented a compromise.
  It requires substantial payments by insurance companies before the 
federal government provides a backstop. The proposal would require the 
insurance industry to retain the responsibility to pay for up to $10 
billion in losses in the first year, and up to $15 billion in losses in 
the second year or around 7 percent and 10 percent of their annual 
premiums for each affected company. This legislation would ensure 
stability in the insurance market so that businesses can afford to 
purchase insurance.
  As this session of Congress drew to a close, and we were forced to 
operate in an environment that required unanimous consent agreements to 
do our business, I regret that we were unable to complete our work on 
this legislation.
  Accordingly, the Senate will keep a watchful eye on the insurance 
market in the coming weeks, and we will take the appropriate action to 
respond to any problems that arise from the failure to gain approval 
for the measure we sought to pass today.
  Mr. DODD. Mr. President, 3 months ago, our nation suffered 
devastating terrorist attacks. We are now confronted with one of the 
many aftereffects of the terrible events of September 11th on our 
nation. We are faced with the prospect that insurance protecting 
America's buildings, businesses, homes and workers from terrorist acts 
will no longer be available.
  It is generally accepted that roughly 70 percent of insurance 
contracts are scheduled to be renewed by year's end. Already, many 
insurers have announced their intention to withdraw terrorism coverage 
from new insurance policies.
  This is simply because primary insurers, who deal directly with 
policyholders, have been unable to, in the short term, purchase 
reinsurance from an unstable reinsurance market. Reinsurers are 
currently unwilling to write coverage in the face of future 
catastrophic losses equal in magnitude to those suffered at the World 
Trade Center.
  Without the ability to purchase reinsurance, primary insurers cannot 
actuarially price policies that incorporate the assumption of 
catastrophic terrorist losses.
  They are faced with two choices. They can seek permission from state

[[Page S13912]]

regulators to exclude terrorist acts from all of their policies. Or 
they can charge incredibly high premiums--rates are nearly certain to 
go up 500 to 1000 percent of what is presently required. No shareholder 
could be reasonably expected to allow their insurance company to 
underwrite the seemingly immeasurable exposure of a terrorist act 
without drastically raising rates.
  Without federal action, we risk either the possibility that our 
Nation's economy will remain defenseless from a terrorist attack or the 
possibility that insurance companies will charge unaffordable rates to 
every American insurance consumer.
  Several of us endeavored to draft legislation to provide a short-term 
remedy aimed to bring stability to the insurance market, to protect 
taxpayers, and to ensure that bank lending, construction, and other 
activities vital to our economic health would not be jeopardized.
  It is deeply regrettable that this legislation will not be considered 
by the Senate prior to the end of this session. It is particularly 
regrettable because the reason that this legislation was not considered 
had nothing to due with the core issue of terrorism insurance; it had 
to do with liability reform. Deep-seated differences on the issue 
created an impasse. That is most unfortunate.
  The legislation that Senator Sarbanes, Senator Schumer and I offered 
was a modest proposal. It is based on three principles that must be 
included in any bill on this subject matter.
  First, it makes the American taxpayer the insurer of last resort. The 
insurance industry maintains front-line responsibility to do what it 
does best: calculate risk, assess premiums, and pay claims to 
policyholders.
  Second, it promotes competition in the current insurance marketplace. 
Competition is the best way to ensure that the private market assumes 
the entire responsibility for insuring against the risk of terrorism, 
without any direct government role, as soon as possible. This bill is a 
temporary measure only, lasting for 24 months at most.
  Third, it ensures that all consumers and businesses can continue to 
purchase affordable coverage for terrorist acts. Without action, 
consumers may be unable to get insurance or the insurance available 
will be unaffordable.
  I intend to watch the markets and the economy closely in the coming 
days and I am prepared to revisit this issue early next year if the 
need arises.
  Mr. LIEBERMAN. Mr. President, I have one simple message regarding the 
terror insurance legislation. We need to act now, before we adjourn, 
and we need to get this right. I fear that if we don't act, or don't 
get this right, we will need to return early in January to address this 
problem. Unfortunately, it is now obvious that we won't enact this 
critical legislation. This is irresponsible.
  Let me say clearly, my colleague from Connecticut, Senator Dodd, 
should be commended for his valiant effort to secure an agreement. It 
is not his fault that this did not get done. He has had his eyes 
focused clearly on the goal line every day on this bill. He has been 
practical, energetic, tough, and patient. We are not able to act before 
we leave, but I want to congratulate Senator Dodd for his valiant 
effort.
  Let me explain why this issue is so important.
  As part of their property and casualty insurance, many businesses 
have insurance against the costs that arise if their business is 
interrupted.
  If we don't pass an effective terror insurance bill, the government 
will, in effect, cause massive interruption in the business community. 
We will create the interruption.
  We could have avoided this result by passing this legislation.
  Property and casualty insurance is not optional for most businesses.
  Not every business owner buys life insurance, but nearly every 
business buys property and casualty insurance, to protect its property, 
to protect it against being sued, and to protect its employees under 
the state workers compensation laws.
  Property and casualty insurance is required by investors and 
shareholders.
  It is required by banks that lend for construction and other 
projects. We all know that home mortgage companies require the 
homeowners to maintain homeowners property insurance, and it's the same 
with business lending.
  Maintaining property and casualty insurance is mandated as part of 
the fiduciary obligation to the business.
  And if property and casualty insurance for major causes of loss is 
not available, businesses face a difficult choice about going forward 
with construction projects, and other ventures.
  If no insurance is available, banks won't lend and the business 
activity that is depending on the loans will stop.
  The impact on the real estate, energy, construction, and 
transportation sectors will be severe.
  Insurance companies must be able to ``underwrite'' their policies. 
This means that they need to be able to assess their exposure or risk 
of a claim. They need to know if their exposure to claims is 
acceptable, excessive, or indeterminate.
  In the case of claims for damages caused by terrorist strikes, there 
is no way to assess their risk and no way to underwrite the policy. 
There are too many uncertainties.
  There is only one experience and the experience could not be more 
troubling.
  One thing that is certain, as it was not before September 11, is that 
losses from terrorist acts can cost tens of billions of dollars. In 
fact, under worst-case scenarios, losses could easily reach hundreds of 
billions of dollars.
  I recently introduced legislation focusing on the need to develop 
medicines to treat the victims of a bioterror attack. The Dark Winter 
exercise simulated a smallpox bioterror attack and it found that 15,000 
Americans could die and 80 million could die worldwide. This is why it 
is so important to develop medicines we can use to contain the 
infections and deaths. My point here is that we could well have claims 
much larger than we had with the World Trade Center attack.
  There are hundreds of insurers in any given market. It is a highly 
competitive industry.
  But when reinsurers are not renewing their contracts without 
terrorism exclusions, many if not most of these companies will not be 
able to provide terrorism coverage--at any cost.
  At the business decision level, each individual insurance company 
considering whether to issue policies that cover terrorism must assess 
the costs that might result if the terrorists succeed in massive and 
horrific attacks, perhaps in many areas at which the insurance company 
may insure various businesses.
  Because no one knows where the terrorists might strike, insurers must 
ask questions like:
  How much insured property value are we covering in a given location?
  How many workers are we covering under workers' compensation laws, 
keeping in mind that workers' compensation death claims vary by state 
but are as high as $1 to 2 million dollars per claim in some 
jurisdictions, including here in the District.
  What would we lose on business interruption claims if damage in a 
metropolitan area causes a large number of businesses to be shut down 
by the civil authorities?
  What about multiple attacks in different locations?--keeping in mind 
the coordinated events on September 11.
  Unfortunately, at the individual insurer level, capital is finite, 
and the companies that insure commercial businesses have already taken 
a major hit due to the September 11 losses, as well as having lost 
their reinsurance for terrorist acts.
  Even a hypothetical good-sized company, one that would be in the top 
half dozen or so commercial insurers in the U.S., with perhaps 5 
percent of the commercial lines market and capital of $7 or $8 billion, 
would have to ask, do we want to roll the dice on our very survival by 
writing terrorism coverage?
  Because that is what they would be doing absent this legislation, 
particularly if they incurred a disproportionate share of the losses.
  For example, if one or more events caused even $100 billion in 
insured losses, not that much more than the WTC, and they were lucky 
enough to have only 3-5 percent of the losses, they'd be severely 
crippled but might survive. But if their share of the losses was 8-9 
percent, they'd be out of business.
  That is not a risk that an insurance company can reasonably take. If 
we do

[[Page S13913]]

not pass this legislation, therefore, insurers will be forced to take 
whatever steps they consider necessary to ensure they do not drive 
themselves into bankruptcy.
  Make no mistake about it. The insurance industry can protect itself 
by reducing its exposure to terrorism going forward.
  There is nothing we can do in the Congress, within the limits of our 
Constitution, to require insurance companies to write policies.
  They don't have to write policies.
  If they don't write policies, the companies may not be as profitable 
in the short run, but they will at least be protecting themselves 
against insolvency, as any business has to do.
  State regulators are already considering terrorism exclusions, as 
they must do, consistent with their responsibilities to oversee the 
solvency of the insurance industry.
  And absent exclusions, in states where they might not be approved for 
one reason or another, the insurers will have no choice but to limit 
their business.
  If insurance companies are permitted to write policies with no 
coverage for claims connected to terrorism, then businesses will have 
to decide if they will self-insure against these losses. Many of them 
will conclude that they cannot accept this exposure.
  It is clear, therefore, that when we fail to pass this legislation, 
it will be both the insurance industry and everyone they insure that 
loses. Insurance companies can protect themselves by not writing 
policies, or writing only policies without any coverage for acts of 
terror. But companies that need insurance coverage may have even 
harsher options.
  What will be the effect on individual businesses and ultimately the 
economic recovery if we do not pass this legislation?
  At the individual company level, if a business in what appears to be 
a potential target area can only buy insurance with a terrorism 
exclusion, the owners would have to consider whether they want to 
commit new capital or even sell their current equity interests.
  Banks would have to ask whether they could make new loans or perhaps 
even default existing loans and mortgages, based on their 
determinations that insurance without coverage for terrorism was 
unsatisfactory.
  If insurers could not exclude terrorism and were forced to reduce 
their writing generally, the problem could be even worse, at least in 
whatever areas or for whatever types of business were considered most 
at risk.
  Companies would find that they could not get coverage for their 
properties or their liability exposure or their workers' compensation 
liabilities, because insurers were no longer able to provide it.
  This is why the real estate industry and a cross section of the 
business community have been pushing for this legislation.
  So, the issue is how we enable insurance companies to determine that 
the risk of terrorist claims is a risk that they can assume.
  That is what this legislation is all about, defining the risk so that 
insurers can assess and put a price on it.
  This legislation is about facilitating insurance companies' ability 
to continue to write property and casualty insurance policies.
  It is about providing business owners with the opportunity to buy 
insurance against terror claims and doing so in the private market to 
the extent that is possible.
  This is, of course, not the first time we have faced this kind of an 
issue. The Federal Government has a history of partnering with the 
insurance industry to provide coverages for risks that are too big, too 
uninsurable, for the industry alone.
  Current examples are the flood, crop, and nuclear liability programs, 
and in the past we've seen partnerships on vaccine liability and riot 
reinsurance. From an insurability standpoint, it is beyond dispute that 
these risks are far more insurable than terrorism, yet we continue to 
struggle on this bill.
  First, the existing programs cover fortuitous or accidental events, 
unlike terrorism, in which the risk is manmade, with the perpetrators 
measuring success by how much damage they can cause and how many people 
they can kill. Second, the dollar exposures are far less under the 
existing programs. Average annual losses on these programs, flood, 
crop, and nuclear liability, are probably only about $5 billion 
combined, a full order of magnitude lower than the losses on September 
11 alone.
  Some might debate whether we should have passed the existing 
programs, or whether they are operated efficiently. But there should be 
no debate about the need for a terrorism program, and we have 
structured this one the right way, with retentions and loss sharing by 
the industry so the incentives are there for efficient operations.
  This legislative effort has failed in part because there are some who 
would use this legislation as an opportunity to enact wide-ranging 
reform of the tort claims system. While I have supported tort reform in 
the past, it is clear that these reforms are not possible now. If these 
reforms are attached to the bill, as was the case in the House-passed 
bill and as proposed in the Senate, the bill will die. This is what has 
happened.
  This legislative effort has failed in part because there are some who 
would use this legislation as an opportunity to use this legislation as 
an excuse to enact a wide-ranging and unprecedented venture in Federal 
regulation of the insurance industry. Some would, for example, seek to 
impose Federal Government price controls on the property and casualty 
insurance policies.
  If such controls are added to this bill, it is clear that the bill 
will die. Price controls are obviously unacceptable to many in the 
Senate and clearly unacceptable to the other body.
  A vote for price controls is a vote to collapse the property and 
casualty insurance market.
  Price controls in this sector would distort markets, create 
incentives to vacate the marketplace, and stifle competition.
  We do know that the cost of property and casualty insurance will 
rise.
  The current rates do not contemplate claims for acts of terror. Like 
it or not, there will have to be price increases to cover the risk of 
terrorism. The World Trade Center attack was the biggest manmade 
casualty loss in history. It was the biggest by a multiple of 40 or 50.
  The previous biggest manmade loss was the LA riots, which cost less 
than a billion dollars. The current estimates are that WTC will cost 
$40 to $50 billion or more.
  The WTC losses exceeded the insurance industry's total losses for 
commercial property & liability coverage, general liability, and 
workers' compensation combined for the entire 2000 year.
  Insurance companies cannot now cover this loss, and restore reserves, 
without price increases.
  Insurance industry is one of the most competitive industries in the 
U.S.
  If rates are rising too high, companies will be falling all over 
themselves to enter or re-enter the market.
  But so far, all signs point in the opposite direction, with insurers 
and reinsurers running as fast as they can from this--hardly an 
indication that they're gouging and planning on realizing egregious 
profits.
  There's a state regulatory system in place that can clamp down on 
rates if insurers overreach--and the bill leaves the state regulators 
with the full authority to disapprove rates that are excessive.
  I can't think of a better way to do the opposite of what we want to 
do, to prevent the return of a terrorism insurance marketplace, than to 
impose price controls.
  It is clear that the price of terror insurance will be less because 
of the Federal guarantee. If insurance companies were forced to write 
terror insurance without this guarantee, they would have to set a 
worst-case-scenario price. They would have to protect the company from 
insolvency. It is clear that these rates would make the insurance 
unaffordable.
  Again, however, the problem is that companies would not be able to 
set a price because of the indeterminate nature of the risk.
  This legislative effort has failed in part because there are some who 
would use this legislation as an opportunity to require the insurance 
companies to repay the government for its expenditures. This is the 
case in the House-passed bill.
  While requiring payment is intuitively attractive, the financial 
assistance and payback mechanism in their

[[Page S13914]]

bill would discourage the return of a healthy private marketplace.
  One of our most important objectives is to encourage the return to 
the marketplace of insurers and reinsurers. The problem with the House 
bill's financial assistance and payback approach is that it mutualizes 
the losses within the program itself, reducing incentives for private 
innovation in the development of pooling and reinsurance mechanisms. If 
we're going to sunset this program, we can't provide for mutualization 
of losses throughout its duration and then expect that there will be a 
healthy reinsurance market to the day after it terminates.
  Even if we did not adopt the other body's first dollar mutualization 
concept, our objective of building a healthy marketplace, real work 
practicality considerations, and public policy all argue for not 
requiring industry payback.
  First, a payback requirement would be contrary to our objective of 
developing a healthy marketplace. A payback requirement would, from day 
one, raise the specter that in the event of substantial terrorism 
losses, insurers would not only have to pay their share of the losses 
but would also have to go to their regulators for substantial rate 
increases to repay the government--with no guarantees that such rate 
increases would be allowed. That is not the way to facilitate a healthy 
marketplace.
  Second, from a practical standpoint, let's also recognize that under 
our bill any government payments would not really go to insurers, that 
any repayments would not really come from insurers, and that it is the 
public in either event that will bear the cost of this program.
  The government payments are all keyed to amounts paid to claimants, 
and any repayments would or at least should be funded by policyholders, 
either indirectly through subsequent rate increases or directly through 
policyholder surcharges.
  Therefore, as long as an insurer's rates for terrorism coverage are 
based only on its deductible and quota share, government payments would 
not give a windfall to the insurers. That is of course how rates should 
be determined, since the state insurance commissioners will have the 
authority to disapprove excessive or unfairly discriminatory rates.
  It is of course the public that will also bear the cost of this 
program whether or not we require insurers to pay back the government. 
The costs of any such repayments would ultimately be paid by commercial 
businesses, which would in turn pass the costs back to the customers, 
employees, and shareholders, which is to say back to the public.
  Finally, from a public policy standpoint, I would refer you to the 
very simple fact that it is losses caused by terrorist attacks on our 
country that we are talking about here. It is the responsibility of the 
government to protect the people against attacks from without and 
within, and to the extent that terrorists succeed in causing losses 
that exceed our bill's insurance industry retentions, it is because the 
government has failed in this most fundamental responsibility. Of all 
the various programs through which the government and the insurance 
partner together to provide coverage for risks thought to be 
uninsurable, this one stands out as presenting the best case for a 
taxpayer role.
  In terms of price, we know that every cent of any funds the Federal 
government contributes to pay claims will go to the insured, not to the 
insurance companies.
  There is no Federal payment to any insurance company that does not go 
through to the victims.
  This makes it very hard to understand the arguments some have made in 
the other body about the insurance companies repaying the amounts that 
the Federal government might contribute.
  If the government contributions are passed through to the victims, 
what is the benefit to the insurance companies that needs to be paid?
  Do the companies then increase their rates to cover the cost of the 
repayment?
  If repayment is required, it would have to come, directly or 
indirectly, from the victims, not the insurance companies.
  There are some who would seek to add provisions to the legislation 
focused on ``cherry-picking,'' that is seeking to reduce the risk of 
the portfolio of clients and load it with lower risk clients.
  Insurance, like other financial services, is a very competitive 
business--and there are a variety of opportunities for large and small 
businesses to get coverage, with hundreds of insurers operating in any 
given market.
  For the largest businesses, which are probably most at risk due to 
the staggering workers' compensation exposures they present, in 
addition to traditional insurers, there are sophisticated offshore, 
excess and non-admitted markets they can tap into, as well as other 
risk-spreading devices.
  For the smaller companies, if coverage isn't available from standard 
private market insurers, most states have legislatively mandated market 
plans to provide workers' compensation and property insurance.
  The insurance industry also has a long history of working together to 
form pools and reinsurance arrangements so risks that are too difficult 
for one company can be handled as they've done for aircraft, including 
those that were hijacked on September 11.
  They can do this if we pass this bill to provide them the financial 
backstop they need.
  The fact is that we do not have the expertise to step into this 
complex arena and set the controls to determine how coverage should be 
provided and to whom.
  Since insurance regulation began, it's been the states that have done 
the job, and until such time as we're ready to change that and enact a 
federal regulatory scheme, we should be very careful about our 
involvement.
  At the state level, insurance departments in each state are much 
closer to their markets, and they have the expertise and the leverage 
to assess the availability of insurance and to take appropriate steps 
if there are problems.
  I am very disappointed in the failure to enact this legislation. I 
have supported my Connecticut colleague, Senator Dodd, and will 
continue to work with him to enact this legislation as soon as possible 
in January. That we have failed to act in this session and may well see 
unfortunate consequences.

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