[Senate Report 110-215]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 461
110th Congress                                                   Report
                                 SENATE
 1st Session                                                    110-215

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



 
      TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2007

                                _______
                                

                November 1, 2007.--Ordered to be printed

                                _______
                                

  Mr. Dodd, from the Committee on Banking, Housing and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 2285]

    The Committee on Banking, Housing, and Urban Affairs, which 
considered an original bill to reauthorize the Federal 
terrorism risk insurance program, and for other purposes, 
having considered the same, reports favorably thereon and 
recommends that the bill do pass.

                              INTRODUCTION

    On October 17, 2007, the Senate Committee on Banking, 
Housing, and Urban Affairs considered the ``Terrorism Risk 
Insurance Program Reauthorization Act of 2007,'' a bill to 
reauthorize the Terrorism Risk Insurance Act through December 
31, 2014 and to make various enhancements to the Terrorism Risk 
Insurance Program. The Committee unanimously accepted a 
managers' amendment offered by Chairman Dodd and Senator 
Shelby. The Committee then voted 20-1 to report the bill to the 
full Senate for consideration. Senators voting in favor of the 
motion to report the bill were: Dodd, Johnson, Reed, Schumer, 
Bayh, Carper, Menendez, Akaka, Brown, Casey, Tester, Shelby, 
Bennett, Enzi, Hagel, Bunning, Crapo, Sununu, Dole, and 
Martinez. Senator Allard voted against the motion.

                       PURPOSE OF THE LEGISLATION

    The purpose of the ``Terrorism Risk Insurance Program 
Reauthorization Act of 2007'' is to reauthorize the Terrorism 
Risk Insurance Program.

                                HEARINGS

    The Banking Committee has held a number of hearings on 
terrorism insurance since the attacks of September 11, 2001.
    110th Congress. The Banking Committee held a hearing 
entitled ``Examining the Terrorism Risk Insurance Program'' on 
February 28, 2007. The following witnesses testified: Mr. 
Charles Clarke, Vice Chairman, The Travelers Companies, Inc., 
on behalf of the American Insurance Association; Mr. Thomas 
Minkler, President, Clark-Mortenson Agency, Inc., on behalf of 
the Independent Insurance Agents & Brokers of America; Mr. Mike 
Peninger, President and CEO, Assurant Employee Benefits, Inc., 
on behalf of the American Council of Life Insurers; Mr. Jaime 
Veghte, Chief Executive Officer, XL Reinsurance America, Inc., 
on behalf of the Reinsurance Association of America; Mr. Don 
Bailey, Chief Executive Officer, Willis North America, Inc., on 
behalf of the Council of Insurance Agents & Brokers; Mr. 
Michael McRaith, Director, Illinois State Division of 
Insurance, on behalf of the National Association of Insurance 
Commissioners; Mr. Arthur Coppola, President and CEO, The 
Macerich Company, on behalf of the Coalition to Insure Against 
Terrorism; Mr. Travis Plunkett, Legislative Director, Consumer 
Federation of America; and Mr. Janno Lieber, Senior Vice 
President, World Trade Center Properties.
    109th Congress. On April 14, 2005, the Banking Committee 
held a hearing entitled ``Oversight of the Terrorism Risk 
Insurance Program.'' The following witnesses testified: Dr. 
Douglas Holtz-Eakin, Director, Congressional Budget Office; 
Honorable Howard Mills, Superintendent, New York State 
Department of Insurance; Mr. Ernst Csiszar, President and Chief 
Executive Officer, Property Casualty Insurers Association of 
America; Mr. J. Robert Hunter, Director of Insurance, Consumer 
Federation of America; Mr. Brian Duperreault, Chairman, ACE 
Limited; Mr. Franklin Nutter, President, Reinsurance 
Association of America; and Mr. Robert J. Lowe, Chairman of the 
Board and CEO, Lowe Enterprises. On July 14, 2005, the 
Committee held a hearing entitled ``The Treasury Department's 
Report to Congress Regarding the Terrorism Risk Insurance Act 
of 2002'' at which the Honorable John W. Snow, Secretary, 
United States Treasury Department and the Honorable Ben S. 
Bernanke, Chairman, Council of Economic Advisers, testified.
    108th Congress. On May 18, 2004, the Banking Committee held 
a hearing on ``Oversight of the Terrorism Risk Insurance 
Program.'' The Committee heard testimony from: The Honorable 
Brian Roseboro, Under Secretary for Domestic Finance, 
Department of the Treasury; Mr. Richard Hillman, Director of 
Financial Markets and Community Investment, U.S. General 
Accounting Office; Mr. John Degnan, Vice Chairman, The Chubb 
Corporation; Mr. J. Robert Hunter, Director of Insurance, 
Consumer Federation of America; Mr. Christopher Nassetta, 
President and CEO, Host Marriott Corporation; Mr. Jacques E. 
Dubois, Chairman and CEO, Swiss Re America Holding Corporation; 
and Ms. Donna Lee Williams, Commissioner, Delaware Department 
of Insurance.
    107th Congress. On October 24 and 25, 2001, the Banking 
Committee held two hearings on terrorism insurance. At the 
first hearing, the Committee heard testimony from: the 
Honorable Bill Nelson, United States Senator (D-FL); the 
Honorable Paul O'Neill, Secretary, United States Treasury 
Department; the Honorable R. Glenn Hubbard, Chairman, Council 
of Economic Advisers; Ms. Kathleen Sebelius, President, 
National Association of Insurance Commissioners; Mr. Thomas 
McCool, U.S. General Accounting Office; Mr. J. Robert Hunter, 
Director of Insurance, Consumer Federation of America; and 
Professor Kenneth Froot, Harvard University School of Business. 
At the second hearing, the Committee heard testimony from: Mr. 
Robert E. Vagley, President, American Insurance Association; 
Mr. Ron Ferguson, CEO, General Re Corporation, representing the 
Reinsurance Association of America; Mr. John T. Sinnott, CEO, 
Marsh, Inc., representing the Council of Insurance Agents and 
Brokers; Mr. Thomas J. Donahue, President and CEO, U.S. Chamber 
of Commerce; Mr. L. M. Baker, Chairman, Wachovia Corporation, 
representing the Financial Services Roundtable; and Mr. Thomas 
A. Carr, President and CEO, CarrAmerica Realty Corporation, 
representing the National Association of Real Estate Investment 
Trusts.

                  BACKGROUND AND NEED FOR LEGISLATION

    The ``Terrorism Risk Insurance Program Reauthorization Act 
of 2007'' reauthorizes the Terrorism Risk Insurance Act (TRIA) 
through December 31, 2014. TRIA was enacted in 2002 to respond 
to the dislocation in the terrorism insurance market caused by 
the attacks of September 11, 2001. Prior to the attacks, 
terrorism insurance had been widely available and affordable, 
as terrorism was perceived as a minimal risk. After the 
attacks, as the insurance industry re-evaluated the risk 
presented by terrorism, reinsurance for that risk virtually 
disappeared, and as a result primary writers began to exclude 
terrorism coverage from commercial property and casualty 
policies. Since lenders and investors typically require 
properties to have adequate insurance coverage, the inability 
to acquire terrorism insurance threatened to disrupt many 
commercial transactions, putting jobs at risk and potentially 
adversely affecting the national economy. Less than six months 
after the 9/11 attacks, the U.S. Government Accountability 
Office found examples of ``large projects canceling or 
experiencing delays * * * with a lack of terrorism coverage 
being cited as a principal contributing factor.'' See 
``Terrorism Insurance: Rising Uninsured Exposure to Attacks 
Heightens Potential Economic Vulnerabilities'', GAO-02-472T, 
February 27, 2002. The GAO concluded that if terrorism 
insurance were not available, ``another terrorist attack 
similar to that experienced on September 11th could have 
significant economic effects on the marketplace and the public 
at large.''
    To address these adverse economic effects, TRIA (P.L. 107-
297) was enacted on November 26, 2002. The purpose of TRIA was 
to establish a temporary Federal program to protect consumers 
by addressing market disruptions, to ensure the continued 
availability and affordability of terrorism insurance, and to 
allow for a transitional period for the private markets to 
stabilize, resume pricing of such insurance, and build capacity 
to absorb any future losses. TRIA established a program within 
the Department of the Treasury under which the Federal 
government shares the risk of loss from future terrorist 
attacks with the insurance industry. Insurers, through 
individual company deductibles and co-pays along with an 
industry-wide retention, would bear the initial cost of any 
attack, with Federal assistance becoming available for the most 
catastrophic losses. TRIA was originally set to expire on 
December 31, 2005. The Terrorism Risk Insurance Extension Act 
of 2005 (P.L. 109-144) extended TRIA, with some changes, for 
two years. TRIA now expires on December 31, 2007.
    The evidence demonstrates that TRIA has worked to stabilize 
the terrorism insurance marketplace and to make such insurance 
available and affordable once again. The President's Working 
Group on Financial Markets (PWG) was directed in the TRIA 
extension legislation to analyze the availability and 
affordability of insurance for terrorism risk. In that study, 
the PWG concluded that ``[t]he availability and affordability 
of terrorism risk insurance has improved since the terrorist 
attacks of September 11, 2001.'' Specifically, the PWG found 
that ``[t]he take-up rate--or the percentage of companies 
buying terrorism coverage--has reportedly increased from 27 
percent in 2003 to 58 percent in 2005, while the cost of 
coverage has generally fallen to roughly 3 to 5 percent of 
total property insurance costs.'' Rising take-up rates and 
falling prices prove that terrorism insurance has become more 
widely available and more affordable since TRIA was enacted in 
2002.
    Presented with this evidence, the Committee believes that 
another extension of TRIA is appropriate. While terrorism 
insurance is generally available and affordable in the private 
market today, the Committee heard testimony that the 
elimination of TRIA at this time could result in a significant 
retraction in the supply of terrorism insurance that could 
possibly disrupt commercial activity and have an adverse impact 
on American jobs and businesses. Witnesses at the Committee's 
hearing on February 28, 2007 testified that the private 
insurance industry alone cannot presently handle terrorism 
risk, and that terrorism insurance would disappear or be 
significantly diminished if TRIA were to expire. For example, 
Thomas Minkler testified on behalf of the Independent Insurance 
Agents and Brokers of America that ``the terrorism risk 
insurance coverage currently available to the policyholders * * 
* would not exist without TRIA * * * Federal legislation is 
necessary to ensure that policyholders continue to have access 
to such coverage.''
    According to Charles Clarke, testifying for the American 
Insurance Association, the current demand for private 
reinsurance ``far outstrips'' supply. This assessment was 
supported by Mr. Jaime Veghte, who testified on behalf of the 
Reinsurance Association of America (RAA) that ``[r]einsurers 
have been willing to put only limited capital at risk to manage 
terror-related losses.'' The RAA estimates that only $6-$8 
billion of reinsurance capacity is available in the United 
States for terrorism risk. It is the Committee's hope that a 
seven-year extension of TRIA will allow additional capacity to 
develop in the private market to cover terrorism risk. A seven-
year extension will also provide more certainty to businesses, 
lenders, and investors about the continued availability of 
terrorism insurance when they seek to develop long-term plans.
    In addition, the bill provides greater clarity regarding 
TRIA's $100 billion annual cap and deletes TRIA's requirement 
that the terrorist act triggering the TRIA program be committed 
``on behalf of any foreign person or foreign interest,'' 
thereby bringing domestic terrorism within the scope of the 
program. Charles Clarke, testifying on behalf of the American 
Insurance Association at the February 28th hearing, told the 
Committee that ``[e]xperience has shown that the distinction 
between foreign and domestic terrorism is artificial, 
impractical, and meaningless from an economic perspective.'' 
The Committee expects that the Treasury Department, in 
consultation with the National Association of Insurance 
Commissioners and other relevant parties, will ensure that 
prompt guidance is available to all stakeholders to facilitate 
an orderly incorporation of domestic acts of terrorism into 
rating plans, premiums, and insurance contracts.
    The bill requires on-going reporting by the President's 
Working Group on Financial Markets, and mandates two studies by 
the U.S. Government Accountability Office. One study will focus 
on nuclear, biological, chemical, and radiological (NBCR) 
terrorist events. Two recent studies, one by the GAO and one by 
the President's Working Group on Financial Markets, found that 
there is currently very little insurance available to cover the 
risk of a NBCR attack, and virtually no likelihood that a 
private market in this area will emerge in the near future. 
This issue is of particular concern to state workers 
compensation funds, which cannot exclude this coverage by law 
and are by their nature geographically concentrated. While many 
of the witnesses at the Committee's February 28th hearing 
expressed concern about the lack of NBCR terrorism insurance, 
serious questions remain about how best to address this issue. 
The bill requires the GAO to examine the NBCR issue and to make 
recommendations to Congress within one year of enactment on 
ways to expand insurance availability in this area.
    The other study responds to a concern expressed at the 
Committee's February 28th hearing that there are specific high-
risk areas of the United States in which insurers' capacity to 
write terrorism coverage is significantly limited. The bill 
instructs the GAO to identify any specific markets which are 
experiencing unique capacity constraints and to report back to 
the Congress within 180 days of enactment with recommendations 
on how to address those capacity constraints.
    While the Committee believes that the TRIA program is 
working well overall, the Committee believes that the Treasury 
Department should respond expeditiously to requests for 
determination of controlling influence under 31 CFR 50.8, as it 
is essential for all insurers participating in the program to 
have certainty about their obligations.

                      SECTION-BY-SECTION ANALYSIS

Section 1. Short title; table of contents

    This section provides a short title and table of contents.

Section 2. Definition of act of terrorism

    This section adds domestic terrorism (i.e. terrorism which 
is not committed on behalf of a foreign person or a foreign 
interest) to the Terrorism Risk Insurance Program.

Section 3. Reauthorization of the program

    This section extends the Terrorism Risk Insurance Program 
for seven years, through December 31, 2014.

Section 4. Annual liability cap

    This section provides greater clarity regarding the $100 
billion Program cap.
    Section 4(a) clarifies the limits of insurer responsibility 
under the Program and strikes a reference to future acts of 
Congress.
    Section 4(b) requires Treasury to notify Congress within 15 
days of an act of terrorism if insured losses are expected to 
exceed $100 billion and strikes a reference to future acts of 
Congress.
    Section 4(c) requires Treasury to submit a report and issue 
regulations regarding the allocation of pro rata payments for 
insured losses should such losses exceed $100 billion.
    Section 4(d) requires insurers to disclose the existence of 
the $100 billion cap to policyholders.

Section 5. Enhanced reports to Congress

    Section 5(a) requires the GAO to study availability and 
affordability of insurance for nuclear, biological, chemical, 
and radiological terrorist events and report to Congress within 
1 year with recommendations for expanding the availability and 
affordability of such insurance.
    Section 5(b) requires the GAO to determine whether there 
are specific markets in the United States that are experiencing 
unique capacity constraints on the amount of available 
terrorism insurance and to report to Congress within 180 days 
with recommendations for addressing any such constraints.
    Section 5(c) continues the requirement for the President's 
Working Group on Financial Markets to study the long-term 
availability and affordability of terrorism insurance, with 
reports required in 2010 and 2013.

                 CHANGES IN EXISTING LAW (CORDON RULE)

    On October 17, 2007, the Committee unanimously approved a 
motion by Chairman Dodd to waive the Cordon Rule. Thus, in the 
opinion of the Committee, it is necessary to dispense with the 
requirements of section 12 of Rule XXVI of the Standing Rules 
of the Senate in order to expedite the business of the Senate.

                      REGULATORY IMPACT STATEMENT

    In accordance with section 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill. The 
bill requires insurers participating in the Terrorism Risk 
Insurance Program to make coverage for domestic terrorism 
available and to disclose the existence of the $100 billion 
annual cap to their policyholders. According to industry 
estimates, there are approximately 2051 insurers participating 
in the Program. The inclusion of domestic terrorism and the 
disclosure of the cap should have little immediate economic 
impact on participating insurers, which will be able to collect 
premiums for any additional risk they are assuming. The bill 
should have little additional impact upon the privacy of 
particular individuals.
    The bill also requires the Treasury Department to issue a 
rule regarding the allocation of payments for insured losses 
when aggregate insured losses exceed the $100 billion annual 
cap. The regulation issued by Treasury will contain its own 
regulatory and paperwork estimate, as required by applicable 
law. Because TRIA already requires Treasury to determine the 
pro rata share of payments to be made by insurers in such 
cases, the provision of this bill requiring Treasury to issue a 
regulation on that topic is not a substantive change and does 
not affect TRIA's impact on participating insurers.

                          COST OF LEGISLATION

    Section 11(b) of rule XXVI of the Standing Rules of the 
Senate, and Section 402 of the Congressional Budget Act of 
1974, require that each Committee Report on a bill contain a 
statement estimating the cost of the proposed legislation. The 
Congressional Budget Office has provided the following cost 
estimate and estimate of costs of private-sector mandates.
                                                  October 29, 2007.
Hon. Christopher J. Dodd,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Terrorism Risk 
Insurance Revision and Extension Act of 2007.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susan Willie.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

S. 2285--Terrorism Risk Insurance Program Reauthorization Act of 2007

    Summary: This legislation would extend the Terrorism Risk 
Insurance Act (TRIA) for seven years--through calendar year 
2014. The bill also would require insurers to make coverage 
available to property and casualty policyholders for losses 
resulting from domestic terrorism.
    Enacted in 2002, TRIA requires insurance firms that sell 
commercial property and casualty insurance to offer clients 
insurance coverage for damages caused by foreign terrorist 
attacks. Under TRIA, the federal government would help insurers 
cover losses in the event of a terrorist attack under certain 
conditions and would also impose assessments on the insurance 
industry to recover all or a portion of the federal payments. 
The program is set to expire at the end of calendar year 2007.
    There is no reliable way to predict precisely how much 
insured damage terrorists might cause, if any, in any specific 
year. Rather, CBO's estimate of the cost of financial 
assistance provided under the bill represents an expected value 
of payments from the program--a weighted average that reflects 
industry experts' opinions of various outcomes ranging from 
zero damages up to very large damages resulting from possible 
future terrorist attacks. The expected value can be thought of 
as the amount of an insurance premium that would be necessary 
to just offset the government's losses from providing this 
insurance, although firms do not pay any premium for the 
federal assistance offered by TRIA.
    On this basis, CBO estimates that enacting the bill would 
increase direct spending by $3.1 billion over the 2008-2012 
period and by $6.6 billion over the 2008-2017 period. An 
additional $1.1 billion would be spent after 2017.
    Under the legislation, the Department of the Treasury would 
be directed to recoup some or all of the costs of providing 
financial assistance through taxes imposed on insurance firms 
(surcharges). Over many years, CBO expects that an increase in 
spending for financial assistance would be largely offset (on a 
cash basis) by a corresponding increase in governmental 
receipts (i.e., revenues) depending on the amount of insured 
losses. We assume, however, that the Secretary of the Treasury 
would not impose any surcharges until two years after federal 
assistance is provided and that those amounts would be 
collected over many years. Thus, CBO estimates that enacting 
the recoupment provision in the bill would increase 
governmental receipts by about $100 million over the 2008-2012 
period and by $1.5 billion over the 2008-2017 period, net of 
income and payroll tax offsets.
    Considering both the direct spending and revenue impacts of 
the bill, CBO estimates that enacting the bill would increase 
budget deficits or decrease surpluses by $200 million in 2008, 
$3.0 billion over the 2008-2012 period, and $5.1 billion over 
the 2008-2017 period. Pursuant to section 203 of S. Con. Res. 
21, the Concurrent Resolution on the Budget for fiscal year 
2008, CBO estimates that enacting the bill would not result in 
a deficit increase of more than $5 billion in any of the four 
10-year periods following 2017.
    Enacting the bill could affect potential future spending 
for disaster relief, which is subject to appropriation, or 
potential future changes in revenues resulting from tax 
legislation that might be enacted in the aftermath of an 
attack. Any potential savings from this effect would depend on 
future discretionary spending decisions or future tax 
legislation, and thus would not be available--for scorekeeping 
purposes--to offset the estimated direct spending cost of 
extending TRIA in this legislation.
    The bill would extend and impose intergovernmental and 
private-sector mandates as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO estimates that the aggregate costs of 
complying with those mandates would not exceed the annual 
thresholds established by UMRA ($66 million for 
intergovernmental mandates and $131 million for private-sector 
mandates in 2007, adjusted annually for inflation).
    Estimated Cost to the Federal Government: The estimated 
budgetary impact of the Terrorism Risk Insurance Program 
Reauthorization Act of 2007 is shown in the following table. 
The costs of this legislation fall within budget function 370 
(commerce and housing credits).

                             ESTIMATED BUDGETARY IMPACT OF THE TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       By fiscal year, in billions of dollars--
                                                             -------------------------------------------------------------------------------------------
                                                               2008   2009   2010   2011   2012   2013   2014   2015   2016   2017  2008-2012  2008-2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               CHANGES IN DIRECT SPENDING

Estimated Budget Authority..................................    0.2    0.5    0.7    0.8    0.9    1.0    1.0    0.8    0.5    0.2       3.1        6.6
Estimated Outlays...........................................    0.2    0.5    0.7    0.8    0.9    1.0    1.0    0.8    0.5    0.2       3.1        6.6

                                                                   CHANGES IN REVENUES

Estimated Revenues..........................................      0      0      *      *    0.1    0.1    0.2    0.3    0.4    0.4       0.1        1.5

                                                                       NET IMPACT

Estimated Change in the Deficit or Surplus a................   -0.2   -0.5   -0.7   -0.8   -0.8   -0.9   -0.8   -0.5   -0.1    0.2      -3.0      -5.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
aNegative numbers indicate an increase in the deficit or a decrease in the surplus.

Note: * = less than $50 million.

    Basis of estimate: For this estimate, CBO assumes that the 
legislation will be enacted before the end of calendar year 
2007. We estimate that enacting the bill would increase direct 
spending by $6.6 billion and would increase governmental 
revenues by $1.5 billion over the 2008-2017 period. While this 
estimate reflects CBO's best judgment on the basis of available 
information, the cost of this federal program is a function of 
inherently unpredictable future terrorist attacks. As such, 
actual costs are likely to vary significantly from the 
estimated amounts. Such costs could be either higher or lower 
than the expected value estimates provided for each year.

Terrorism Risk Insurance Act under current law

    Enacted in 2002 and reauthorized in 2005, the Terrorism 
Risk Insurance Act provides financial assistance to commercial 
property and casualty insurers for losses above certain 
thresholds caused by terrorist attacks by individuals acting on 
behalf of foreign interests. For such assistance to be 
provided, the Secretary of the Treasury must certify that a 
terrorist attack has occurred in the United States or other 
specified locations. TRIA is currently set to expire on 
December 31, 2007.
    TRIA does not require commercial property and casualty 
insurance policies to cover losses from terrorist attacks 
committed by a domestic interest or those involving nuclear, 
biological, chemical, or radioactive materials. If an insurer 
and a policyholder choose to include losses from terrorist 
attacks involving nuclear, biological, chemical, or 
radiological (NBCR) materials in a policy, TRIA would cover a 
portion of the losses resulting from those risks.
    For the Secretary of the Treasury to certify a terrorist 
attack, insured damages resulting from the attack must exceed 
$5 million. Financial assistance becomes available to insurers 
suffering losses from a certified attack once the industry's 
aggregate insured losses from that attack exceed $100 million 
(in 2007). Once that $100 million threshold is exceeded, 
participating insurance companies that suffer losses are 
responsible for paying claims up to a deductible amount based 
on the premiums they collected for covered lines in the 
calendar year preceding a certified attack. In 2007, the 
deductible is 20 percent of such premiums.
    After meeting their individual deductibles for damage 
claims, insurers and the federal government would each pay a 
portion of the loss above the deductible (the federal 
government would pay 85 percent of insured losses in 2007; 
individual insurers, 15 percent) up to total losses of $100 
billion. The law does not address how losses above the $100 
billion cap would be handled.
    The Secretary of the Treasury is authorized to recover 
payments made by the federal government through taxes in the 
form of surcharges paid by the insurance industry and 
purchasers of commercial property and casualty insurance. The 
Secretary is required to recoup federal payments to the extent 
that the total amount paid by the insurance industry, including 
the deductible, is less than the industry ``retention amount'' 
specified in law, which represents the total liability of the 
property and casualty insurance industry in the event of a 
certified attack. In 2007, that amount is $27.5 billion.

Modifications to TRIA under the bill

    The legislation would extend TRIA for seven years, through 
December 31, 2014. The bill also would eliminate the 
distinction between foreign and domestic terrorist attacks. 
TRIA would now cover attacks by either foreign or domestic 
interests.
    As under current law, an insurer suffering losses as a 
result of an attack would pay claims up to a specified 
deductible. The bill would maintain the same deductible limits 
as in current law, 20 percent of the premiums collected by each 
property and casualty insurer in the calendar year preceding an 
attack.
    Likewise, the bill would continue the payment-sharing 
process that exists under current law. Insurers and the federal 
government would each pay a portion of the loss over the 
deductible. The federal government's portion would remain 85 
percent of insured losses up to the $100 billion limit for each 
year of the seven-year extension of the program.

Direct spending

    By extending financial assistance to certain commercial 
insurers for future acts of terrorism against insured private 
property, enacting the bill would expose the federal government 
to potentially large liabilities for seven more years (2008 
through 2014). For any particular year, the amount of insured 
damage caused by terrorists could range from zero to many 
billions of dollars. CBO's estimate of the cost of this program 
reflects how much, on average, the government could be expected 
to pay to insurers and recover from the industry over the 2008-
2017 period.
    The following sections describe our method for estimating 
the expected value of financial assistance under the bill and 
explain how we convert that cost to annual estimates of 
spending.
    Estimating the Expected Cost of Federal Assistance. For 
this estimate, CBO discussed the concepts involved in 
estimating insured losses with industry actuaries and reviewed 
models used by firms to set premiums for the terrorism 
component of property and casualty insurance and group life 
insurance that they offer. State insurance regulators generally 
require such premiums to be grounded in a widely accepted model 
of expected losses from covered events. After the terrorist 
attacks on September 11, 2001, the insurance industry began 
efforts to set premiums for insurance coverage for terrorist 
events using such models.
    Although estimating losses associated with terrorist events 
is difficult because of the lack of meaningful historical data, 
the insurance industry has experience setting premiums for 
catastrophic events--namely, natural disasters. Setting 
premiums for hurricanes and earthquakes, for example, involves 
determining areas that could sustain damage, the value of the 
losses that could result from various types of events with 
different levels of severity, and the frequency of such events.
    Similarly, estimating premiums for losses resulting from 
terrorist attacks involves judgments regarding potential 
targets and the frequency of such attacks. Because there is a 
very limited history of terrorist attacks in the United States, 
many of the parameters needed by the insurance industry to set 
premiums are based on expert opinion regarding terrorist 
activities and capabilities rather than on historical data.
    Estimating potential insured losses. Based on discussions 
with insurers and information provided by the insurance 
industry, CBO estimates that the expected or average annual 
loss subject to TRIA coverage under the bill would be about 
$2.3 billion (in 2007 dollars). This estimate incorporates 
industry expectations of the probabilities of terrorist 
attacks, encompassing the possibility of attacks that result in 
enormous loss of life and property damage, as well as a 
significant likelihood that no such attacks would occur in any 
given year. This estimate also reflects our expectation that 
some portion of losses from terrorism would not be covered by 
TRIA because some policyholders would choose not to purchase 
insurance coverage for terrorism risks.
    Our estimate of expected annual losses covered by TRIA 
under the bill includes around $150 million for the inclusion 
of coverage for domestic terrorism.
    The estimate includes about $800 million in expected annual 
losses resulting from terrorist attacks involving NBCR 
materials. Under current law, insurers are not required to 
offer this coverage, although if an insurer and a policyholder 
voluntarily agree to include this coverage in a policy, TRIA 
would cover some of those losses. While the bill would not 
require insurance policies to include coverage for losses 
resulting from attacks using NBCR materials, information 
provided by the industry indicates that a small amount of 
coverage is currently in place for such losses. Thus, under the 
bill, the government's exposure to losses resulting from 
terrorist attacks involving NBCR materials would likewise be 
small as compared with losses resulting from attacks using 
conventional materials, except in the workers' compensation 
insurance line, where no exclusions are allowed.
    CBO's estimate assumes that, in most years, losses from 
terrorist attacks covered by TRIA would cost significantly less 
than $2.3 billion. We expect that there is a significant chance 
that no terrorist attacks that would be covered by TRIA would 
occur in a given year. Since enactment of TRIA, no covered 
events have occurred; it is unclear whether no such attacks 
were planned or attempted, or whether some were prevented by 
law enforcement and other security measures. Although the risk 
of a terrorist attack with many lives lost and substantial 
property damage still remains, based on industry models, CBO 
assumes for this estimate that attacks causing losses similar 
in scale to those sustained on September 11, 2001, in New York 
City are likely to occur very rarely.\1\
---------------------------------------------------------------------------
    \1\Industry losses on September 11, 2001, are estimated to be about 
$36 billion (in 2006 dollars), including about $30 billion in losses in 
New York City that would have qualified for coverage under TRIA had the 
law been in effect on that date.
---------------------------------------------------------------------------
    Determining the federal share of insured losses. Federal 
payments under TRIA would be lower than expected losses from 
terrorist attacks because TRIA places limits on eligibility for 
federal assistance and requires that insurers pay a share of 
covered losses. CBO took account of those requirements to 
calculate federal spending for any given amount of insured 
losses from future terrorist attacks.
    First, because federal payments under TRIA would be capped 
at $100 billion per event, we excluded costs for potential 
losses above that level. The bill would maintain the minimum 
losses set under current law that would trigger federal 
payments under TRIA at $100 million.
    Second, we accounted for the share of losses that would be 
paid by affected insurers in the event of a covered attack. 
Before the federal government would make any payments under 
TRIA, an insurer incurring losses would first pay claims up to 
a deductible amount. The bill would maintain the current-law 
deductible of 20 percent of certain premiums collected by 
property and casualty insurers in the calendar year preceding 
an attack.
    The total amount of claims paid by insurers below the 
deductible amount could range from a few million dollars to 
several billion dollars, depending on how many insurers provide 
coverage for losses resulting from a particular terrorist 
attack. In addition, the value of each individual insurer's 
deductibles would vary greatly across the industry. For this 
estimate, CBO considered a range of possibilities regarding the 
share of federal assistance, based on industry data regarding 
estimated insurers' deductibles under the bill. The range 
encompasses the possibility that an attack would affect only a 
few insurers with relatively small deductibles or several 
insurers with relatively large deductibles. CBO expects that 
insured losses below a few hundred million dollars would most 
likely be covered by insurers' deductibles, and therefore, 
would not result in a significant increase in federal spending.
    Finally, once affected insurers have paid claims up to 
their deductibles, the federal government would share a portion 
of the losses above the deductible with each insurer.
    Under this legislation, the federal government's share of 
claims above the deductible would be 85 percent of total losses 
up to the $100 billion limit covered by the program.
    After taking into account maximum limits, deductibles, and 
the insurers' share of payments above the deductible, CBO 
estimates that enacting the bill would increase direct spending 
by about $7.7 billion over the full life of the program before 
taking into account any revenues from surcharges on 
policyholders. Actual spending would be spread out over many 
years, and most such costs would eventually be recovered 
through surcharges imposed on policyholders.
    Taken another way, if the Secretary of the Treasury were 
authorized to collect premiums for the program, CBO estimates 
that the Secretary would need to charge, on average, about $1.1 
billion per year to fully compensate the government for the 
projected average annual losses due to terrorist attacks that 
would be covered under the bill. The bill, however, would not 
authorize any charges prior to a certified attack. Similarly, 
the bill does not contain an explicit requirement for the 
Secretary to recoup interest that would accrue on amounts 
outstanding.
    Timing of Federal Spending. To estimate federal spending 
for this program on a cash basis, CBO used information from 
insurance experts on historical rates of payment for property 
and casualty claims following catastrophic events. Based on 
such information, CBO estimates that outlays under the bill 
would total about $3.1 billion over the 2008-2012 period, an 
additional $3.5 billion over the 2013-2017 period, and about 
$1.1 billion after 2017. In general, following a catastrophic 
loss, it takes many years to complete insurance payments 
because of disputes over the value of covered losses by 
property and business owners. For this estimate, we assumed 
that financial assistance to insurers would be paid over 
several years, with most of the spending occurring within the 
first five years following an insurable event.

Revenues

    Enacting this legislation would affect federal receipts by 
authorizing the Secretary of the Treasury to impose taxes in 
the form of surcharges on policyholders to recover the amount 
of federal payments made under the program, with certain 
limitations. CBO estimates that this provision would increase 
revenues by about $100 million over the 2008-2012 period and 
$1.5 billion over the 2008-2017 period. Surcharges could 
continue for many years beyond 2017.
    Surcharges. If a terrorist attack were to require the 
government to provide financial assistance, the bill would 
require the Secretary of the Treasury to recoup some or all of 
that cost through taxes paid by the insurance industry and 
purchasers of commercial property and casualty and group life 
insurance. The Secretary would be required to recover the 
difference between the total amount paid by the insurance 
industry for deductibles and the industry's share of payments 
over the deductible and the industry retention amount (the 
maximum aggregate loss to be paid by the insurance industry), 
which would be set at $27.5 billion annually over the seven-
year term of TRIA coverage under the bill.
    The Secretary would have discretion in determining whether 
to recover the full amount of financial assistance provided 
under the program. Should the Secretary determine that amounts 
above the industry retention amount cannot be recovered, the 
Congress would be notified of that determination and provided 
with an analysis of the effect on taxpayers, the economy, and 
the burdens on small- and medium-sized businesses. For this 
estimate, CBO assumes that the Secretary would not seek to 
recover financial assistance provided above the industry 
retention amount and would not collect interest on outstanding 
amounts.
    Under TRIA, the recoupment of financial assistance would be 
accomplished by assessing each insurer based on its portion of 
aggregate property and casualty premiums. Surcharges would 
apply to insurance sold following a terrorist attack that 
necessitated federal assistance; each property and casualty 
insurance company's surcharge would be limited to 3 percent of 
its aggregate premiums. The bill would direct the Secretary to 
impose surcharges for as long as necessary to recover the 
financial assistance provided by the federal government (at 
least up to the industry retention amount). Thus, the 
government could collect surcharges for many years, depending 
on the amount of financial assistance. CBO estimates that 
surcharges resulting from a seven-year extension of TRIA would 
total $6.6 billion--but that recovery would extend well past 
2017.
    Timing and Tax Offset. The bill would allow the Secretary 
to reduce annual charges after considering the effect on 
taxpayers, the economy, or burdens on small- and medium-sized 
businesses. Therefore, if annual losses were very high, we 
expect that the Secretary would limit annual collections by 
spreading them over many years. CBO assumes that the Secretary 
would not impose surcharges until two years after federal 
assistance is provided and that it would take more than 10 
years to recover the costs of any financial assistance provided 
under the program. Thus, we estimate that surcharges would 
total $2.0 billion over the next 10 years and that an 
additional $4.6 billion would be collected after 2017.
    Those gross collections would be partially offset by a loss 
of receipts from income and payroll taxes. Consistent with 
standard procedures for estimating the revenue impact of 
indirect business taxes, CBO reduced the gross revenue impact 
of the insurance surcharges by 25 percent to reflect offsetting 
effects on income and payroll tax receipts. On balance, CBO 
estimates that enacting the bill would increase revenues by a 
total of $1.5 billion over the next 10 years and that an 
additional $3.5 billion will be collected after 2017, net of 
income and payroll tax offsets.

Spending subject to appropriation

    Enacting the bill could affect potential future spending 
for disaster relief, which is subject to appropriation, or 
potential future changes in revenues. Historically, the federal 
government has provided assistance to disaster victims after 
large-scale events, generally in supplemental or regular 
appropriation acts (and occasionally through tax benefits). In 
the past, such assistance has often been provided to local 
governments, individuals, and businesses suffering losses.
    By providing insurance coverage against damage due to 
terrorist attacks, the terrorism insurance program could 
diminish the need for federal disaster payments in future 
appropriation acts (as well as possible tax relief). Any 
potential savings from this effect, however, would depend on 
future discretionary spending decisions or future tax 
legislation, under both current law and under the bill, and 
thus would not be available--for scorekeeping purposes--to 
offset the estimated direct spending cost of extending TRIA in 
this legislation.
    Estimated long-term deficit impact: After 2017, the 
legislation would decrease future deficits by about $2.4 
billion as the government recovers the financial assistance 
provided under TRIA through the recoupment process provided in 
the bill. Pursuant to section 203 of S. Con. Res. 21, the 
Concurrent Resolution on the Budget for Fiscal Year 2008, CBO 
estimates that enacting the bill would not result in a deficit 
increase of more than $5 billion in any of the four 10- year 
periods following 2017.
    Intergovernmental and private-sector impact: The bill would 
extend and expand mandates contained in the Terrorism Risk 
Insurance Act. Those mandates would:
           Require that certain insurers offer 
        terrorism insurance, including insurance for acts of 
        domestic terrorism;
           Require that certain insurers and their 
        policyholders repay the federal government for the cost 
        of assistance (in the form of assessments and 
        surcharges); and
           Preempt state laws regulating insurance.
    CBO estimates that the aggregate costs of complying with 
those mandates would not exceed the annual thresholds 
established by UMRA ($66 million for intergovernmental mandates 
and $131 million for private-sector mandates in 2007, adjusted 
annually for inflation).

Requirement to offer insurance

    Current law requires that through calendar year 2007, 
certain insurance companies offer terrorism insurance as part 
of a property and casualty insurance policy. The bill would 
extend that requirement to offer terrorism insurance through 
calendar year 2014. The bill would require insurers to make 
coverage available to property and casualty insurance 
policyholders for losses resulting from domestic terrorism. 
According to industry representatives, the direct cost for 
insurance companies to continue making terrorism insurance 
available under property and casualty insurance policies would 
be minimal. The bill would require only that firms offer 
terrorism insurance, including insurance for acts of domestic 
terrorism; they would set their own premium rates and 
policyholders could choose whether or not to purchase such 
insurance. Insurers who offer such terrorism insurance would 
receive federal payments that would help finance claims 
payments in the event of a certified attack that met deductible 
requirements.

Repayment of assistance

    The bill would require the Secretary to recoup the costs of 
financial assistance provided to certain insurers through 
assessments paid by the insurance industry and surcharges paid 
by purchasers of commercial property and casualty insurance. 
This requirement to repay the federal government for financial 
assistance received--an exercise of the federal government's 
sovereign power--would be both an intergovernmental and a 
private-sector mandate under UMRA because both state and local 
governments and private entities are providers and purchasers 
of insurance.
    Specifically, the bill would require commercial property 
and casualty insurers, as well as self-insured risk pools, to 
pay back through assessments the financial assistance provided 
by the federal government. Taken individually, some insurers 
might benefit from the financial assistance, while others might 
face only the cost of the assessment. CBO cannot predict how 
these costs and benefits would be distributed among private and 
public insurers. However, for that group as a whole, the cost 
of the assessment would be no greater than the financial 
assistance received, so the net cost of this mandate would be 
zero.
    In addition, the bill would require purchasers of 
commercial property and casualty insurance to repay, in the 
form of a surcharge, federal assistance provided to certain 
insurers. CBO estimates that the expected value of the 
surcharges on policyholders would total about $200 million over 
the next five years. The surcharge would be a mandate on both 
private-sector purchasers and state and local governments (in 
their capacity as purchasers of insurance). Some purchasers 
would receive a direct benefit under the bill, while other 
purchasers would not.

Preemption of State law

    The bill also would preempt some state laws that regulate 
insurance. Based on information from state insurance 
regulators, CBO estimates that the cost to states of extending 
those preemptions would be minimal.
    Previous CBO estimate: On September 6, 2007, CBO 
transmitted an estimate for H.R. 2761, the Terrorism Risk 
Insurance Reauthorization and Extension Act of 2007, as ordered 
reported by the House Committee on Financial Services on August 
1, 2007. H.R. 2761 would extend TRIA for 15 years, require 
insurers to offer coverage for losses resulting from terrorist 
attacks using NBCR materials, and include group life insurance 
to the lines of insurance covered under the program. CBO 
estimates that enacting H.R. 2761 would increase direct 
spending by $3.7 billion over the 2008-2012 period and $10.4 
billion over the 2008-2017 period. Further, CBO estimates that 
enacting H.R. 2761 would increase federal revenues by $100 
million over the 2008-2012 period and $2.0 billion over the 
2008-2017 period, net of income and payroll tax offsets.
    Estimate prepared by: Federal Costs: Susan Willie; Impact 
on State, Local, and Tribal Governments: Elizabeth Cove; Impact 
on the Private Sector: Paige Piper/Bach.
    Estimate approved by: Peter H. Fontaine, Assistant Director 
for Budget Analysis.

                                  
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