[Senate Hearing 110-907]
[From the U.S. Government Publishing Office]
S. Hrg. 110-907
EXAMINING THE TERRORISM RISK INSURANCE PROGRAM
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
ON
MAINTAINING AND IMPROVING THE NATION'S SECURITY AND PROSPERITY THROUGH
THE PUBLIC-PRIVATE PARTNERSHIP CREATED BY THE TERRORISM RISK INSURANCE
ACT OF 2002 THAT PROTECTS AMERICAN WORKERS, JOBS, BUSINESSES, AND
INFRASTRUCTURE FROM FUTURE ATTACKS
__________
WEDNESDAY, FEBRUARY 28, 2007
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho
SHERROD BROWN, Ohio JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania ELIZABETH DOLE, North Carolina
JON TESTER, Montana MEL MARTINEZ, Florida
Shawn Maher, Staff Director
William D. Duhnke, Republican Staff Director and Counsel
Alex Sternhell, Professional Staff
Julie Y. Chon, International Economic Policy Adviser
Mark Osterle, Republican Counsel
Andrew Olmem, Republican Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George Whittle, Editor
C O N T E N T S
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WEDNESDAY, FEBRUARY 28, 2007
Page
Opening statement of Chairman Dodd............................... 1
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
Senator Reed................................................. 5
Senator Enzi................................................. 6
Senator Brown................................................ 7
Senator Bennett.............................................. 8
Senator Martinez............................................. 9
Senator Carper............................................... 9
Senator Bunning.............................................. 10
Senator Menendez............................................. 11
Senator Schumer.............................................. 13
WITNESSES
Charles Clarke, Vice Chairman, The Travelers Companies, Inc., on
behalf of The American Insurance Association................... 14
Prepared Statement........................................... 42
Response to written questions of:
Senator Enzi............................................. 162
Senator Bunning.......................................... 166
Thomas Minkler, President, Clark-Mortenson Agency, Inc., on
behalf of the Independent Insurance Agents and Brokers of
America, Inc................................................... 16
Prepared Statement........................................... 47
Michael J. Peninger, President and Chief Executive Officer,
Assurant Employee Benefits, on behalf of the American Council
of Life Insurers............................................... 18
Prepared Statement........................................... 56
Response to written questions of:
Senator Shelby........................................... 170
Senator Enzi............................................. 173
James H. Veghte, Executive Vice President/Chief Executive Officer
of Reinsurance General Operations and Chief Executive Officer
of XL Reinsurance America, Inc., on behalf of the Reinsurance
Association of America......................................... 19
Prepared Statement........................................... 62
Response to written questions of:
Senator Enzi............................................. 173
Senator Bunning.......................................... 175
Michael McRaith, Director, Illinois State Division of Insurance,
on behalf of the National Association of Insurance
Commissioners.................................................. 21
Prepared Statement........................................... 72
Travis B. Plunkett, Legislative Director, Consumer Federation of
America........................................................ 23
Prepared Statement........................................... 84
Arthur M. Coppola, President and CEO, Macerich Company, on behalf
of the Coalition To Insure Against Terrorism................... 25
Prepared Statement........................................... 132
Janno Lieber, Senior Vice President, World Trade Center
Properties..................................................... 27
Prepared Statement........................................... 141
Don Bailey, CEO, Willis North America, on behalf of the Council
of Insurance Agents and Brokers................................ 29
Prepared Statement........................................... 149
Additional Material Supplied for the Record
Statement from the National Association of REALTORS............. 178
Hot Topics from the National Association of REALTORS............ 185
Statement from the Property Casualty Insurers Association of
America........................................................ 193
EXAMINING THE TERRORISM RISK INSURANCE PROGRAM
----------
WEDNESDAY, FEBRUARY 28, 2007
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:36 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Christopher J. Dodd (Chairman
of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order, if we can.
I thank all of you for being here with us this morning.
Earlier this year, upon assuming the chairmanship of this
Committee, I stated that the Committee would focus on two
overarching goals: maintaining and improving our Nation's
security and prosperity. The subject of today's hearing--
namely, a public-private partnership created by the Terrorism
Risk Insurance Act of 2002 to protect American workers, jobs,
businesses, and infrastructure from future terrorist attacks--
is, in my view, critical to both the security and prosperity of
our Nation.
This morning, the Committee will hear testimony from
policyholders, insurers, and regulators, those who have
firsthand knowledge of the challenges associated with buying,
selling, underwriting, and regulating terrorism risk insurance.
I would like to thank our witnesses--we have a long panel here
this morning--for being here. I would also like to thank them
for the testimony they are going to give this morning on this
legislation.
Many of my colleagues on this Committee have worked very,
very hard for a number of years on this issue. We have
collaborated on a bipartisan and bicameral basis to enact both
the Terrorism Risk Insurance Act, known as TRIA, in 2002 and an
extension of the TRIA program in 2005. And I would be remiss at
this moment if I did not thank my colleague from Alabama, who
has some strong views on the issue and has been tremendously
cooperative and helpful in trying to put together some
worthwhile legislation in this area.
In 2002, the Senate voted by an overwhelming margin of 86-
11 to pass TRIA. In 2005, the Banking Committee, under the
chairmanship of Senator Shelby, reported by a unanimous vote
legislation to extend TRIA for an additional 2 years. The bill
later was approved by the full Senate, also by a unanimous
vote.
I think it is important to take a moment to talk about the
importance of TRIA and why I believe we must act again to
establish a more permanent Federal initiative to provide
coverage from potential terrorist attacks. In the aftermath of
9/11, the market for terrorism risk insurance disappeared--
disappeared--and the American economy dealt with a great deal
of uncertainty. We repeatedly heard from businesses, large and
small, from labor unions, manufacturers, builders, and lenders,
from the nonprofits like universities and hospitals, and from
insurers about the need for the Federal Government to help
stabilize the market and ensure the availability of affordable
insurance against the risk of future terrorist attacks.
The critical U.S. industry sectors were in dire need of
terrorism insurance to obtain credit, loans, and investments
necessary for their normal business operations. Without
terrorism risk coverage, the economy faced instability and
dislocation, which is exactly what the terrorists hope to
accomplish in many ways. The policyholder community and
insurers together called for a response to the 9/11 attack on
our Nation and our Nation's economy. Congress listened and we
acted in 2002, creating the Terrorism Risk Insurance Act.
TRIA created a 3-year program, as many of you will recall.
The Terrorist Risk Insurance Program, located within the
Department of Treasury, established a Federal backstop against
catastrophic losses in the property and casualty insurance
marketplace. In December of 2005, a 2-year TRIA extension was
signed into law. The provisions of that bill will expire, as
many of you know, on December 31st of this year--hence, the
hearing today and the sense of urgency about moving rather
quickly here.
Under TRIA, the Federal Government shoulders a share of the
financial risk of future attacks. The burden sharing makes
sense, in my view. These attacks are against us as Americans
and our way of life. The attacks are aimed at the American
public and, therefore, require, in my view, a public role in
addressing this threat in light of the circumstances we face.
But TRIA also requires that the private sector bear a
significant financial responsibility and help to impose market
discipline in the claims and underwriting processes.
In the past 5 years, we have heard an overwhelming response
from policyholders across the country. TRIA has worked, and it
has worked very, very well. According to a recent study by the
Wharton Risk Management and Decision Processes Center at the
University of Pennsylvania, roughly 50 percent of commercial
enterprises through 2005 purchased terrorism insurance.
According to Marsh, Inc., and cited by the President's Working
Group on Financial Markets, take-up rates have increased from
23 percent at the beginning of 2003 to 64 percent at the end of
2005 while the price of terrorism insurance has actually
declined. The median cost of property terrorism insurance was
25 percent lower in 2005 than the 2004 rates. These trends
demonstrate, in my view, that TRIA has achieved its primary
goal: continued availability and affordability of insurance
against future attacks. What we have seen and what we may hear
and what many of our witnesses will explain today is that the
re-emergence of limited terrorism risk insurance would not have
happened without the enactment of TRIA. We will also hear that
the private sector does not have the capacity to provide
affordable terrorism risk insurance on its own without the
existence of a Federal backstop.
In a 2005 Treasury Department survey, nearly 50 percent of
insurers said that they do not plan to write terrorism
insurance after TRIA expires. So the question before us today
is: Do we do nothing to financially protect our country against
future attacks? Do we provide another short-term extension to
meet the current market needs? Or do we try to create a longer-
term solution for the security of our people and our economy? I
firmly believe that doing nothing is simply not an option and
one that cannot even be considered here.
The world has fundamentally changed since 9/11. Nearly all
of the data and the experts say that there is no reason to
think that private forces alone could and would provide against
this very unique risk. We have every reason to believe that the
Federal role for terrorism risk insurance coverage is needed
for the foreseeable future. Several industrialized countries
have already recognized this fact. The United Kingdom, France,
Germany, and others have created permanent Government programs
to manage terrorism risk. We know from the tragic attacks in
London, Madrid, India, and Indonesia--and elsewhere, I might
add--that terrorism has increased since 9/11. In a world of
more terrorism, we should be providing more security, not less.
Our Nation has truly been fortunate enough not to suffer
the tremendous loss of life or destruction of property that we
endured on September 11th of 2001. But by no means has the
political climate, either domestically or abroad, returned to a
sense of normalcy. We are engaged in a violent conflict in
Iraq, and we have seen desperate terrorist attacks abroad in
Europe and elsewhere. The threat of terrorism is not simply a
short-term threat. It has potential to be a long-term reality.
I think most of us recognize that.
As a result, I believe that we must act once again to
ensure that stability, availability, and affordability remain
in the market for terrorism risk insurance. But I do not
believe that we should continue to extend the program for
short-term periods, causing further uncertainty and confusion
in our economy. A more permanent Federal commitment, I think,
is not only something we should do but something we must do. I
am committed to finding a solution that will address the long-
term security needs of our people and our economy and ensure
that our Nation is best prepared to deal with future terrorist
threats. I believe that one of the most fundamental obligations
of our National Government is to provide security and
opportunity for our fellow citizens.
With the expiration of TRIA approaching later this year, it
is important to gather information about the current market for
terrorism risk insurance, to assess the impact that TRIA has
had in this marketplace, and to develop some ideas for creating
more permanent terrorism risk insurance. Today's witnesses
offer an extraordinary range of expertise and experience that I
think can be very useful to this Committee as it undertakes
this important effort, and I thank them again for their
attendance and participation.
More than 5 years after the tragic events of 9/11, we
continue to see a need to provide a Federal backstop to protect
our people, businesses, and critical infrastructure from these
attacks. We have heard repeated dire warnings that terrorism
will return to U.S. soil. We must be prepared against this
threat, and in my view, providing insurance against those
attacks allows our economy to function and is a critical part
of our national preparedness. And I believe that by working
together we can establish a more permanent solution.
So, again, I thank my colleagues for their work over the
years on this issue, many of whom on this Committee were very
involved as we went through this process now twice before. And,
again, my thanks particularly to Senator Shelby, who has been a
leader on this issue over the last number of years as he
chaired this Committee.
So, with that, let me turn to my colleague from Alabama for
any opening comments he has. I will then turn to my colleagues
for any comments they might want to make on the subject matter.
And I would ask them to be relatively brief, if they could, so
we can get to our witnesses and their statements this morning.
Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Chairman Dodd.
In November 2002, Congress passed the Terrorism Risk
Insurance Act, or TRIA, to address perceived failures in the
terrorism risk insurance market stemming from the September
11th terrorist attacks. The stated purpose of the legislation
was to establish a temporary Federal program that would ensure
the widespread availability and affordability of terrorism risk
insurance. This temporary program was intended to provide, and
I quote, ``a transitional period for the private markets to
stabilize, resume pricing of such insurance, and build capacity
to absorb any future losses.''
This year, the Committee will consider once again whether
to reauthorize the Terrorism Risk Insurance Program. The
reauthorization of a program typically involves a careful
review of the program's success at fulfilling its legislative
mandate. A review of the Terrorism Risk Insurance Program,
however, is particularly important due to the disincentives
that the program creates for the private sector to devise
solutions to terrorism risk. Because the program involves a
commitment by the Federal Government to pay for a large portion
of the losses incurred by a terrorist attack, the market has
significantly less incentive to create new ways to manage
terrorism risk.
To prevent such crowding out of private sector solutions, I
believe we need to ensure that the program is focused on
addressing the market failure described in its legislative
purpose. Considering the dramatic improvement in our Nation's
economy and insurance market since TRIA was enacted, it appears
that the program has made substantial progress in satisfying
its purpose. In its report to the Committee, the President's
Working Group on Financial Markets reported that the
availability and affordability of terrorism risk insurance has
improved since 9/11. It found that prices for terrorism
insurance have fallen and take-up rates have increased. In
light of the improved condition of our terrorism insurance
market, additional scrutiny of the scope of the Terrorism
Insurance Program appears warranted here.
Finally, as we begin our review of TRIA today, we should be
mindful of the inherent limitations of Government solutions to
complex and technical problems. We should recognize that it is
very unlikely that Congress can create an insurance program
better than market forces, given the opportunity to do so.
Congress might be able to devise a quick fix to a temporary
market failure, as we have done, but in the long run, the most
durable solution will in all probability come from our private
sector. The creativity of our financial markets and their
ability to innovate are factors that should be given great
weight in this debate. Although we are likely to hear testimony
today about the difficulties in insuring against terrorism
risk, it is important to remember that innovation springs from
necessity. While we need to appropriately address any market
failures in the insurance industry, we must also encourage at
the same time the facilitation and innovation beyond the
Government program as well.
I want to welcome all of our witnesses today, and, Chairman
Dodd, I appreciate you bringing this to our attention and
calling this hearing.
Chairman Dodd. Thank you very much, Senator Shelby.
Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Well, thank you very much, Mr. Chairman.
Thank you, gentlemen.
I, too, want to commend Chairman Dodd and former Chairman
Shelby for their leadership on this issue. Terrorism,
regretfully, is still with us. In fact, open-source reporting
suggests that Zawahiri and Bin Laden are somewhere in Pakistan
attempting to re-establish their network. So this threat has
not gone away. In fact, many people have suggested that it is
high probability that the United States will be attacked again.
So this is not an academic discussion today.
I think TRIA has worked very well. I think it should be
extended on a more permanent basis. I think also, too, there
are particular areas of concern that have to be addressed. One
is workmen's compensation. Typically, the incidents that we
have seen involve a concentrated attack on one facility
involving in some cases employees of just one company or
several companies. The workers' compensation insurers in those
cases have an unusual liability and exposure. In fact, in my
home State of Rhode Island, we have one agency, a quasi-
governmental agency, Beacon. There are 26 other States,
including New York, Utah, Colorado, Wyoming, Kentucky, Hawaii,
Ohio, Pennsylvania, Idaho, and Montana, that have a similar
arrangement. If there was such an incident in any one of these
States, it is quite possible that that insurer would fail
without reinsurance, and that failure would be now the burden
of the State or some other ad hoc arrangement. So I do think we
have to continue support this effort.
A final point I will make. We are concerned on this
Committee--and I think the Chairman is going to lead us in our
efforts--about the competitiveness of American financial
markets and other markets around the globe. TRIA is one of
those factors that provides a certain degree of certitude,
safety, predictability that gives our market strength vis-a-vis
other markets. I would hate to see a situation where we take
this away and create competitive incentives to move business
into other markets other than the United States.
For all these reasons, I think we have to press forward on
this reauthorization. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Reed.
Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. You and I got to
head up the Subcommittee under the direction of Chairman
Sarbanes and Ranking Member Gramm that did the original TRIA
bill.
Chairman Dodd. Right.
Senator Enzi. And I am glad that we are having this
hearing. I hope that the testimony today and in future hearings
on this subject will help us understand the state of the
insurance industry since the 9/11 attacks, and specifically
since the last reauthorization of the Terrorism Risk Insurance
Act.
Following the September 11th attacks, our insurance market
suffered losses of approximately $32 billion, an enormous
amount by any standard. The Committee responded by crafting
legislation to create a shared public-private partnership to
allow the markets to stabilize and make terrorism insurance
available again. This program was envisioned to be limited and
temporary; however, as I am sure some witnesses will testify
today, it has taken longer than expected for the markets to
recover, so now in 2007, this Committee is meeting to consider
another reauthorization of the TRIA program, or possibly to
make it permanent.
As this Committee moves forward on this topic, I have some
concerns that I will be focusing on. The first is taxpayer
liability. In 2001, I supported a bill, along with other
Members of this Committee, including Chairman Dodd, that would
have created a temporary program containing explicit
protections for the taxpayer in the case of terrorist attacks
and lawsuits resulting from an attack. The bipartisan bill
never came to a vote on the Senate floor. In fact, it never was
allowed by Majority Leader Daschle to actually be introduced.
Many of the taxpayer protections, including a ban on
punitive damages and the regulations of out-of-court
settlements, were later added. I believe these protections
against punitive damage payments and settlements are very
important to the American taxpayer, and I will be looking to
ensure that they remain intact should this Committee consider
reauthorization legislation in the future.
I also supported the 2005 TRIA reauthorization because it
represented a significant scaling back of the program, allowing
the private market to grow in its place. And studies have shown
that the insurance market has grown significantly in response.
The 2006 report on terrorism risk insurance conducted by the
President's Working Group on Financial Markets found that firms
have had more success modeling and managing terrorism risk.
Reinsurance capacity continues to grow, and insurance
companies' net worth is rising. That is positive progress as a
result of the 2005 reforms that increased event triggers and
deductibles for the insurance companies and excluded number of
eligible insurance lines. However, I am concerned that this
progress will slow down or stop if the TRIA program is not
allowed to continue along this projection.
In 2005, the Congressional Budget Office stated that if the
Government continued to subsidize terrorism insurance, it would
probably contribute to deferring the private sector's long-term
adjustment to the increase in risk. This is a significant
issue, especially if some are considering an expansion of the
program. We must allow the markets to continue to innovate and
price terrorism risk accurately. I do not think this can be
done with such a large Government presence in the marketplace.
In a free market, prices are accurate and competition leads to
innovation. I am worried that the continued presence of the
TRIA program would distort the market in both price and
competition. And as this Committee evaluates TRIA, I will be
looking for ways to allow the market to grow and strengthen
without large Government subsidies and without leaving the
taxpayer on the hook.
I thank you, Mr. Chairman.
Chairman Dodd. Thank you.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman and Senator Shelby.
I commend you for your leadership in scheduling today's hearing
on such an important topic. I appreciate the witnesses for
taking the time to come and share their perspectives on the
proper roles for the Federal Government and for the private
sector in responding to these terrorism risks.
I think these roles are dynamic ones. Each year we learn a
little more. Each year our economy and our Government adapt and
change in response to the challenges we face. I think this is
certainly true of the insurance market.
In the wake of September 11th, we were, of course, stunned
and uncertain as to what the future would hold. But the economy
as a whole soon regained its footing, even though the economy
since then and the recovery since then has benefited some
Americans a lot more than it has others.
We talk a lot today about risk. Many families in Ohio are
facing different kinds of risks--lost health care, lost jobs,
lost homes--and are struggling to make ends meet. While this
may not seem to be the topic of today's hearing, it should
always be relevant. I want to be absolutely sure that the
burden assigned to those people personally who are taking risks
in their lives every day, that the burden assigned to them as
taxpayers in my State and elsewhere is as small as possible.
The financial condition of the insurance industry, by
contrast, seems to have grown stronger by many measures over
the past few decades. While this country has experienced
substantial losses due to terrorism and hurricanes, the
headlines are not necessarily reflected in the bottom lines. At
the same time, the ability of financial markets to disperse
risk has become much more sophisticated over this period. This
is not necessarily an unmitigated good, but it is a reality
that we should bear in mind. We need to be careful that
whatever action we take to extend the Terrorism Risk Insurance
Program does not interfere with the assumption of more and more
risk by the private sector. I am not sure that the Federal
Government should be in the reinsurance business forever. I
think our goal should be to withdraw the Federal Government
from the market over time and permit private mechanisms to
assume the risks now borne by taxpayers.
I do not pretend to know at this point how long it might
take or the exact route we need to follow to get there, but I
think that needs to be our ultimate goal. I hope today's
witnesses can help us find answers.
Chairman Dodd. Thanks very much, Senator.
Senator Bennett.
STATEMENT OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman. I have been
honored to be a cosponsor with you of this legislation in the
past and will do what I can to help move it forward. The one
thing I think we should remember in this overall debate is that
insurance companies do not take risks. Insurance companies
manage risk. Insurance companies spread risk. Insurance
companies make risk affordable. But if there is a huge risk
that could eliminate the company, the company will not take it.
And the cost, potential cost, of a huge terrorist act is so
great that insurance companies will not take it.
Now, by putting a cap on the amount of risk that is
involved by virtue of the TRIA legislation that we passed, we
have allowed the market that can be quantified, can be spread,
can be made affordable to thrive. I am afraid if we take that
cap off so that the insurance companies are faced with the
entire risk, they will simply say, ``We cannot take it. It is
too damaging to our shareholders. We will not write policies
above a certain level.'' And if we do that, ironically, and
there is a terrorist attack, the taxpayers will pay for it.
What we have done with TRIA is create, in effect, a huge
deductible for the Federal Government, and we have said, OK,
whatever the level is set at--$80 billion, $100 billion,
wherever it might be--this amount the insurance companies
cover. Well, that amount we can handle. So if the price is
higher than that, we have created a deductible for the taxpayer
to say, well, we only have to pay whatever above that amount.
I was here during 9/11. Most of us were. We remember the
emotions that followed that. The attitude in the Congress was:
Whatever it takes, we will pay. Whatever it costs to rebuild
New York City, we will pay it. And there was no deductible.
So for those who say, ``Gee, we do not want to put the
taxpayer at risk,'' my attitude is we are doing the taxpayer a
major favor when we are creating a very large deductible and
thereby making sure the taxpayer does not have to pay the whole
bill if we do not have TRIA and we have all of the problems of
a future attack.
It is for those reasons, Mr. Chairman, that I have been
with you on this legislation in the past, and I will do what I
can to help move it forward now.
Chairman Dodd. I thank you very much, Senator Bennett. You
have been a great asset as we have--we have had clarity talking
about this issue and the importance of it.
Senator Martinez.
STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Thank you, Mr. Chairman. I, too,
appreciate this very timely hearing, and I have been a support
of terrorism insurance, understanding that, as has been pointed
out, the private markets cannot always adjust to a terrorism
event, as we saw on 9/11. And more recently, I also want us to
make sure that I allow the group to know my interest in another
problem that we have had. This past couple of days ago,
Governor Crist led a group of Southern Governors, the Southern
Governors Association, representing 15 States, Puerto Rico, and
the Virgin Islands, passing a resolution asking for the
creation of a national catastrophic fund relating to natural
disasters and other issues that have been difficult for the
private market to undertake. While that is a completely
separate issue and should not be merged into this discussion
today of this particular issue, which I know is so important
and I support its continuation, I did want to highlight this
issue for the Committee because it is so important to my home
State of Florida where truly a crisis in insurance is
unfolding, and one that is impacting not only everyday families
as they struggle to make ends meet, but really is having a
broader impact on business and the quality of life.
So I hope at some point in the future we can also address
this very, very serious issue facing the State of Florida.
Chairman Dodd. Senator Martinez, I think I have told you
and I have told your colleague, Senator Nelson, as Chair of
this Committee, that we will have a hearing on the subject
matter you raise here this morning. You are right. It is a
separate issue, but a very, very important one, and certainly
one that is deserving of this Committee's attention. So we are
planning to schedule a hearing to talk about that and the ideas
and suggestions coming out of the States that are most directly
affected by it. So we look forward to working with you and your
colleague as to a witness list and others so that we will have
a good, comprehensive hearing on the subject.
Senator Martinez. Well, thank you, Mr. Chairman. That is
terrific. I appreciate that very much. Senator Nelson and I are
working very closely together on this. He has expertise, having
been Commissioner of Insurance in our State, and so we will
look forward to working with you on a hearing.
Chairman Dodd. Thanks very much.
Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Thanks, Mr. Chairman. I will be very brief.
We have got a lot of witnesses here. I am anxious to hear from
them, as I am sure we all are.
Mr. Chairman, you and our Ranking Member, and certainly
Senator Bennett, have been very active on this front for a
number of years. I hope I serve long enough in the Senate that
we do not have to have this kind of program and that it is
something that we talked about in the old days that we just do
not need anymore. That would be a blessed event. But I thank
you, especially, Mr. Chairman, for your leadership.
I met earlier today with some of the Commissioners, the 9/
11 Commissioners--Lee Hamilton and others--to talk about the 9/
11 bill that is back on the floor today to sort of clean up and
finish up the implementing and trying to enact the last
recommendations of the 9/11 Commission that we did not take up
before. It is an important bill that enjoys strong bipartisan
support. While on the one hand we prepare to address the
calamity or catastrophe, should it occur, through TRIA, through
our insurance and reinsurance program, on the other hand, we
are working to make sure that we prevent those kinds of events.
And so the two really go hand in glove, and we appreciate your
advice today as we try to improve on the TRIA legislation that
I think expires later this year, while at the same time
literally over on the Senate floor we are working to try to
prevent these kinds of incidents.
Thank you.
Chairman Dodd. Thanks very much.
Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman. I am glad we are
discussing this issue early in the year rather than waiting
until the expiration of the 2005 extension of the Terrorism
Risk Insurance Program. While I do believe that at this point
in time Congress needs to take action to ensure continued
availability of terrorism insurance, I do not think we should
make the current program permanent. Congress first authorized
TRIA in 2002 because the private insurance market would not or
could not cover terrorism risk in that time of uncertainty.
Since 2002, our Nation is more secure and our private insurance
market is more developed. Congress must be careful not to
promote programs that may endanger further development of that
market. Any legislation we pass this year should encourage more
private insurance coverage for terrorism risk and reduce
taxpayer exposure.
Some of the witnesses today are going to ask for an
expansion of the Federal program. To them, I would like to ask
how industry can expand its own programs.
In the 2005 reauthorization, Congress asked for a report
from the President's Working Group on the Financial Markets.
Last September, that report was completed, and it made some
very interesting findings.
First, private insurance has developed for almost all kinds
of terrorism risk.
Second, further expansion of TRIA is not needed to keep
growing private markets.
I am disappointed that the President's Working Group is not
represented on today's panel, as I think the Committee needs to
hear from them before we do anything. Instead of granting a
blanket extension of TRIA, we should develop incentives to
create private reserves. That may require tax incentives, which
can complicate legislation, but we should not dismiss the
possibility.
Another viable idea is the creation of a private pool for
terrorism risk similar to what has been done in Britain. I
would remind my colleagues to look at what has happened with
flood insurance before we give up on the private marketplace.
The National Flood Insurance Program has cost the taxpayers
billions of dollars, has stalled innovation of products, and
has discouraged insurance companies from entering the market.
Our financial service companies have some of America's
brightest and most innovative people working for them. I have
full confidence that they will develop better ways to address
the terrorism problem if we give them the right tools.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Menendez.
STATEMENT OF SENATOR ROBERT MENENDEZ
Senator Menendez. Thank you, Mr. Chairman. I want to thank
you for holding what I think is an incredibly important hearing
today. I want to acknowledge, Mr. Chairman, your leadership on
this issue over the past few years and the work of so many
Members of the Committee. I appreciate Senator Shelby as well
in terms of moving forward on such a hearing.
You know, Mr. Chairman, prior to coming to the Senate, I
represented a district right across from Ground Zero. My State
lost 700 residents on September 11th. That is an immeasurable,
incalculable, priceless loss. But in addition to that priceless
loss, what would have happened not just to the region's
economy, but as a ripple effect, I would argue, to the national
economy is if Congress has not passed TRIA, and the
consequences that would have flowed from that would have even
been more enormous, would have been magnified. The terrorists
would have created much more damage than they did as it was.
So the reality is that for so many of our private sector
initiatives to have a robust economy, TRIA was incredibly
important. I am all for the private marketplace trying to come
up with its own products, but to be very honest with you, Mr.
Chairman, I just simply have not seen it. And I do not see it
on the immediate horizon.
And so the question becomes what do we continue to do to
ensure that economic security--which is how I view this. I do
not view this as private sector security. I see this as
economic security--that economic security is preserved. And so
when I look at some of our own interests in the region, which
are magnified, could be any place in the country for that fact,
but, for example, we have the mega part of the east coast, the
port of Newark and Elizabeth, the type of cranes, machinery,
and equipment there to try to find them insurance in the
marketplace, simply cannot happen. I know a lot of our
colleagues are big promoters of trade. You cannot have that
trade if you cannot get them in and out of ports, both for
exporting our products and importing them. That is only one of
many, many different dimensions.
And so, ultimately, I do think we need to clearly at least
extend TRIA and look at it to see how, in fact, we can continue
to provide economic security. That is what this is all about,
Mr. Chairman, and as someone who was actively promoting it
formerly in the House, I look forward to working with you to
promote it here in the Senate.
Chairman Dodd. Thank you, Senator, very, very much.
I would like to ask unanimous consent that the written
testimony from the PCIAA, the trade association which
represents small and medium-sized insurers, be included at the
record. I would have liked to have had them here this morning,
but, frankly, we just could not accommodate everyone at this
table. So I appreciate their willingness to have testimony
submitted. They are very important. We talk about the insurance
industry as though it is a monolith. There are smaller
insurers. I know Senator Enzi always reminds us on this
Committee of the small and mid-sized companies out there that
need to be represented at our tables, and I want to make sure
that their thoughts and views on this are going to be included.
And as we go forward, we will insist at later hearings, if we
have them, they will be a part of the discussion as well. So I
thank them very much for that.
Our first witness this morning is Charles Clarke, who is
testifying on behalf of the American Insurance Association and
is Vice Chairman of the Travelers Companies, based in my State
of Connecticut--Hartford, Connecticut. Mr. Clarke has been with
the company since 1958 and has held various management roles
for Travelers Insurance Group Holdings, including President and
Chairman and CEO, and I welcome you to the Committee. We are
very pleased to have you with us.
Thomas Minkler is the President of Clark-Mortenson Agency
and is testifying today on behalf of the Independent Insurance
Agents and Brokers of America. Mr. Minkler has over 28 years of
experience in the insurance industry, serves as Chairman of the
Independent Insurance Agents and Brokers of New Hampshire. He
has testified to the Banking Committee in the past, and we
welcome you back to the Committee.
Michael Peninger is testifying on behalf of the American
Council of Life Insurers and serves as President and CEO of
Assurant Employee Benefits Company, a position he has held
since 1999. He joined that company in 1985 as a corporate
actuary and has held various senior positions within the
company.
I am going to mispronounce this. I want you to pronounce
your last name, Jamie.
Mr. Veghte. Veghte.
Chairman Dodd. Veghte. Jamie Veghte is testifying on behalf
of the Reinsurance Association of America. He is the Chief
Executive Officer of XL Reinsurance America, Inc., based in
Stamford, Connecticut. Mr. Veghte was appointed CEO of the
company in 2004, Chief Executive of Reinsurance General
Operations in 2006, holds these positions concurrently.
Michael McRaith is the Director of the Division of
Insurance for the Illinois Department of Financial and
Professional Regulation. He is testifying today for the
National Association of Insurance Commissioners. Mr. McRaith
represents the State of Illinois with the NAIC and serves on
that organization's Property and Casualty Insurance Committee,
is on the Reinsurance Task Force, and we welcome you here
today. Thank you for being with us.
Travis Plunkett, an old friend we have had here many times,
is the Legislative Director for the Consumer Federation of
America. The Consumer Federation is a nonprofit association of
300 organizations and an advocacy, research, and service
organization, and a regular witness, I might add, before this
Committee.
Arthur Coppola is the President and CEO of the Macerich--is
that how you pronounce that?
Mr. Coppola. Macerich.
Chairman Dodd. The Macerich Company, and is here on behalf
of the Coalition to Insure Against Terrorism. He has over 30
years of experience in the shopping center industry, all of
which has been with his company. Mr. Coppola is a lawyer and a
CPA and Chair of the Board of Governors of the National
Association of Real Investment Trusts. We welcome you here
today as well.
John Lieber is the Senior Vice President of the World Trade
Center Properties and is responsible for managing the
organization's efforts to rebuild the World Trade Center site.
From 1994 to 1998, Mr. Lieber served with the U.S. Department
of Transportation, first as the Deputy Assistant Secretary for
Policy and later rising to Acting Assistant Secretary.
And, last, Don Bailey here, who is the Chief Executive
Officer of Willis North America, and he is testifying today on
behalf of the Council of Insurance Agents and Brokers. Mr.
Bailey joined Willis in March of 2003 to lead the firm's North
American Executive Risk practice and, prior to joining Willis,
served as senior vice president and chief underwriting officer
of the specialty risk lines for the Alliance Insurance
Corporation in Chicago.
That is a long list of witnesses. I see my colleague from
New York is here. Senator Schumer, do you want to make any
opening comments?
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman, and I apologize.
We had a JEC hearing, and I just got here.
I would just make three points, and obviously I have real
concern about this issue because it affects the city of New
York probably more than any other.
First, it is time for a permanent solution. We keep coming
back and back and back. It discombobulates the markets. It
leaves things hanging in doubt. Now is the time, if ever, to
really make this permanent, if we can, Mr. Chairman.
Second, I hope we will make an effort to include nuclear,
biological, chemical, and radiological coverage available. In
New York that is a worry. In larger cities that is a worry. And
if we are going to do this, we ought to do the whole thing.
And, finally, we ought to act swiftly. Right now contracts
are being signed. When people think that we might not extend
terrorism insurance or it would not affect them, it raises the
cost of building at worst--or at the least, and at worst it
prevents projects from not going forward in terms of jobs and
growth and everything else.
And so this is something, I know, Mr. Chairman, you have
worked long and hard on. We have worked together on this over
the years. It is sort of like squeezing a little bit of
toothpaste out of the tube. Every time you get a little bit, a
little bit, a little bit. I think now the time has changed.
With the change in the Congress, I think we are going to find
less of the ideological opposition to this program that seemed
to me to be based on sort of how many angels can dance on the
head of a pin instead of realities on the ground. And I hope we
can move it quickly.
Thanks, Mr. Chairman.
Mr. Clarke, welcome. Delighted to have you here.
By the way, all of your statements and supporting materials
will be included in the record. I want you to know that, and
that is true of my colleagues as well, any additional documents
or statements they want to be included. And I am going to have
a light on here, a clock on here. I am not so rigid about it,
but try and keep an eye on it so we can move through the
testimony and get to questions as well.
Thank you.
STATEMENT OF CHARLES CLARKE, VICE CHAIRMAN, THE TRAVELERS
COMPANIES, INC., ON BEHALF OF THE AMERICAN INSURANCE
ASSOCIATION
Mr. Clarke. Good morning, Chairman Dodd.
Chairman Dodd. By the way, all of your statements and
supporting materials will be included in the record. I want you
to know that.
It is true of my colleagues, as well, any additional
documents or statements they want to be included.
I am going to have a light on here, a clock on here. I am
not so rigid about it, but try and keep an eye on it so we can
move through the testimony and get to questions, as well.
Thank you.
Mr. Clarke. Good morning, Chairman Dodd, ranking member
Shelby, and members of the committee.
As the Chairman said, my name is Chuck Clarke. I am Vice
Chairman of Travelers. I really am an underwriter with a big
title.
The red umbrella and I started together in the company
about 50 years ago and now, as you know, we are back together.
The Chairman predicted this a couple of years ago. Thank you.
Thank you for the opportunity to testify on behalf of the
American Insurance Association. I would like to express my
appreciation for the leadership shown by this committee, and
Chairman Dodd in particular, in recognizing the importance of
terrorism insurance to our national security and economy, and
for supporting enactment and extension of the TRIA program.
Since its enactment in 2002, TRIA has achieved most of its
goals. It has made terrorism insurance more available and the
cost has dropped for most policyholders. However, it has not
made protection from CNBR events readily available for most of
our customers and that is a challenge we still face together.
In the past, AIA has testified about the factors that make
terrorism an uninsurable risk. Rather than repeating that past
testimony, I would like to discuss some themes arising from the
President's Working Group report and offer some suggestions for
framing TRIA extension legislation.
The PWG report looks at the markets for CNBR terrorism
coverage and confirms the past, present and future actions from
any private market. The reasons are well understood by insurers
who are trying to grapple with this issue on a daily basis,
like myself.
First, the loss estimates are staggering, exceeding $700
billion in the case of a nuclear attack in New York City.
Second, insurers have almost no ability to spread CNBR risk
to reinsurers or the capital markets. Nobody wants it.
Third, CNBR losses just simply and unequivocally threaten
the solvency of insurance in the absence of a Federal program.
The PWG report also examines the markets for conventional
terrorism. Here, however, the practical realities that insurers
face are at odds with some of the economic theories set forth
in the report.
First, the report is correct in that improvements in
insurer modeling are helping insurers to estimate their
aggregate loss accumulations at specific locations. But that
does little to increase overall insurance capacity. The
modeling is in its infancy and does little to reduce concerns.
Second, TRIA has not reduced the demand for private
reinsurance. In fact, demand far outstrips supply.
Third, increases in policyholder's surplus augment
financial capacity but do not affect or offset the need for
TRIA. Removing the backstop or raising retentions would impair
solvency.
Recognizing that CNBR terrorism is uninsurable in the
private market, we believe that Congress should consider
recalibrating the current TRIA backstop to provide increased
Federal financial participation in the event of such an attack.
With regard to conventional terrorism, we believe that the
current backstop has worked and should remain in place. At the
current industry retention, which many of you know is $35
billion today, the TRIA backstop would be accessed only in the
event of a truly catastrophic conventional attack like a swarm
or other multiple venue attack, that would exceed the
dimensions of the 9/11 strike.
Experience has shown that the distinction between foreign
and domestic terrorism is artificial, impractical and
meaningless from an economic perspective.
Additionally, the State regulatory system poses significant
challenges in managing this risk. We believe that State
regulation of terrorism insurance, rates and forms that can
undermine the program's basic objectives should be preempted.
In summary, we continue to need your help in doing what we
just can't do by ourselves. Our business is based on dealing
with random accidents, not intentional catastrophic injury. We
are getting better at protecting ourselves from the potential
of conventional terrorism but it is simply impossible to deal
with a potential CNBR event without more of your help.
Unfortunately, one way or the other, you are the ultimate
underwriter for the event we hope never happens.
Finally, we strongly believe that the program should be
made permanent and we look forward to working with you to
address these important concepts.
Thank you.
Chairman Dodd. Thank you very, very much. It is very, very
helpful.
Mr. Minkler, thank you again for being with us.
STATEMENT OF THOMAS MINKLER, PRESIDENT, CLARK-MORTENSON AGENCY,
INC., ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS AND BROKERS
OF AMERICA, INC.
Mr. Minkler. Thank you and good morning, Chairman Dodd and
ranking member Shelby, and members of the committee.
My name is Tom Minkler and I am pleased to be here today on
behalf of the Independent Insurance Agents and Brokers of
America to present our association's perspective on terrorism
insurance.
I am the President of the Clark-Mortenson Agency,
headquartered in Keene, New Hampshire, a regional insurance
agency with eight locations and 55 employees in New Hampshire
and Vermont. I also serve as the Chairman of IIABA's Government
Affairs Committee.
I would like to begin by complimenting this committee and
Congress for passing TRIA in 2002 and extending it in 2005. The
Federal backstop created by these laws has worked well. It has
insured that terrorism insurance is available and more
affordable and has allowed businesses to continue operating and
growing at virtually no cost to the Federal Government.
On behalf of IIABA and our more than 300,000 agents,
brokers and their employees nationwide, I also want to applaud
you for holding today's hearings to examine the future of TRIA.
There is still no reason to believe that terrorism threat is on
the decline or that the private passenger insurance market
alone can adequately provide coverage. Therefore, we encourage
Congress to develop a long-term solution for terrorism
insurance that enables the private sector to serve consumers.
The original enactment of TRIA and its extension have been
successful in stabilizing the insurance marketplace and have
helped eliminate the market disruptions and uncertainties that
were witnessed in the immediate wake of September 11th. As a
result of the enactment of TRIA and its extension, our members
are currently able to offer consumers options with respect to
terrorism coverage.
Any analysis of long-term availability of terrorism
insurance must acknowledge the unique nature of terrorism risk.
Terrorist acts are nearly impossible to predict because they
are intentional acts committed by those who wish to attack our
country, our institutions, our livelihoods, and our sense of
security. Given the unique nature of terrorism risk, the
insurance market has proven unable to make meaningful
assessments and judgments about possible terrorist events.
Additionally, although potential terrorism losses have been
estimated in the hundreds of billions of dollars, the current
reinsurance capacity is only estimated at $6 billion to $8
billion. Despite the warnings of experts, a specific plan for
developing a private reinsurance mechanism to spread
catastrophic risk from terrorism has yet to emerge.
Specifically, IIABA believes that a private/public
partnership remains essential to the challenge of making
terrorism risk insurance available after the expiration of the
Act and at the end of the year. It would take decades for the
insurance industry to close the gap between the current
reinsurance capacity and potentially hundreds of billions of
dollars in losses from a terrorist attack. As a result, public
participation is necessary to encourage private markets to get
in and stay in the business of insuring terrorism risk.
Without some form of meaningful solution, terrorism
coverage will be extremely difficult if not impossible for most
to obtain after December 31st of this year. Such an outcome
would be especially troubling for small and mid-sized
businesses which are already challenged by the current
environment and are not in a position to self-insure.
While our members remain open to Federal intervention--
opposed to Federal intervention in the insurance market in
general, they nevertheless acknowledge the terrorism risk
insurance coverage currently available to the policyholders
they serve would not exist without TRIA. This is a clear case
of marketplace failure. And in those rare instances, limited
Federal involvement in a reinsurance capacity is warranted.
If TRIA is not extended, based on my experience from 2005,
I would fully expect my business customers to receive notices
of non-renewal for their terrorism insurance coverages
beginning in January 2008. Federal legislation is necessary to
ensure that policyholders continue to have access to such
coverage.
I would like to stress that the interest in and the need
for terrorism insurance backstop is not confined solely to
large urban areas or to large businesses. IIABA represents
agents and brokers selling coverages to consumers across the
country. Our collective experience shows that terrorism
insurance coverage is not just a big city or big business
problem. It is truly a national issue.
In fact, in the area that I do business in, which is
primarily New Hampshire and Vermont, at least 70 percent of the
business customers are purchasing terrorism insurance.
Briefly, I also wanted to say that IIABA also believes that
any long-term solution to protect the Nation's economy in the
face of substantial terrorism losses must address the potential
losses from nuclear, biological, chemical and radiological
events. Although NBCR losses are perhaps the most catastrophic
types of terrorist attacks, coverage for these types of losses
is currently excluded from most existing terrorism insurance
coverage.
The IIABA believes and always has supported the mandatory
availability of insurance coverage for both conventional and
NBCR losses, and we still do.
In conclusion, the IIABA applauds Congress for not ending
TRIA abruptly in 2005 and for passing a 2-year extension. IIABA
members, along with many in the insurer and policyholder
community, recognize that we must find a long-term solution to
our Nation's terrorism insurance problem and are committed to
this process.
We look forward to working with the Congress in this matter
that is crucial to our country's economy and security.
Thank you.
Chairman Dodd. Thank you very much.
Mr. Peninger.
STATEMENT OF MICHAEL J. PENINGER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ASSURANT EMPLOYEE BENEFITS, ON BEHALF OF THE AMERICAN
COUNCIL OF LIFE INSURERS
Mr. Peninger. Thank you, Chairman Dodd, ranking member
Shelby, and members of the committee.
My name is Mike Peninger and I am President and CEO of
Assurant Employee Benefits, an operating division of Assurant,
Inc., a premier provider of specialized insurance products,
including group life insurance.
I am here today on behalf of the ACLI. The ACLI is the
primary trade association of the life insurance industry,
representing 373 member companies that account for 93 percent
of the industry's total assets in the United States.
I would like to thank the committee for holding this
hearing on the Terrorism Risk Insurance Program. While much of
the ongoing discussion on extending TRIA has focused on
property and casualty insurance, it is also important to
discuss how this issue affects the life insurance industry,
particularly with regard to group life insurance. While we
certainly agree that there needs to be adequate terrorism
insurance coverage for buildings, we also believe that the
people who work or reside inside those buildings should be
adequately covered.
If Congress decides to extent TRIA, the ACLI and I
encourage you and your committee to add group life insurance as
a covered line, as the House did in the 109th Congress. The
NAIC has also adopted a resolution in support of group life
insurance.
Group life insurance is a critical component of standard
employee benefit packages. For millions of Americans,
especially lower income workers, it is the only life insurance
that their families have. In 2005, there were about 167 million
group certificate holders with an average coverage amount of
$49,500.
Due to the nature of the coverage, group life policies have
high concentrations of risk. Members of an insured group are
often gathered in single locations and they obviously live near
their workplaces. A single catastrophic event could cause many
or all of them to die at a single time.
For example, if a terrorist attack were to kill 20,000
insured individuals, group life insurers could collectively be
liable for almost $1 billion in death claims. If 1 million
people were to perish, potential claims would increase to
almost $50 billion.
While these death totals and claim amounts may sound
dramatic, unfortunately they are not inconceivable, especially
of a nuclear, biological, chemical or radiological attach were
to strike in a densely populated area such as New York,
Washington, or Chicago. The amount of loss that a particular
group insurer would incur would depend on many factors,
including the amount of catastrophic insurance it has.
While the life insurance industry as a whole would be able
to absorb tens of billions of dollars in death claims resulting
from a catastrophic attack, those insurers that receive an
unexpectedly high number of death claims could be forced into
insolvency. Such insolvencies would impact payments to
beneficiaries at their time of need. It could also affect the
payments of benefits to all the policyholders of the insolvent
companies, not just the life policy holders.
Group life policies are designed to provide simple,
affordable protection for average Americans. They are not
designed or priced to account for the immediate deaths of tens
of thousands of people from a terrorist attack.
Group life insurers could, in theory, protect themselves
from the terrorism risk either by excluding coverage for deaths
due to terrorism or by purchasing catastrophic reinsurance
protection. However, neither Assurant nor the ACLI are aware of
any States, except for Kansas and North Carolina under very
limited circumstances, that allow the use of terrorism
exclusions by life insurers. Nor do we believe that it is good
business or sound public policy to exclude coverage for deaths
due to a catastrophic event.
Since exclusion are therefore not a viable solution,
insurers must turn to reinsurance for protection.
Unfortunately, such coverage continues to be unavailable in
sufficient amounts. While such reinsurance has become slightly
more available since 9/11, it comes with higher deductibles,
various exclusions and most importantly, with overall coverage
limits that are substantially lower than were available prior
to 9/11.
Without adequate catastrophic reinsurance, many group life
insurers risk financial ruin from a significant terrorist
attack. We believe that catastrophic reinsurance would become
more available of group life were included in a TRIA extension.
This additional reinsurance capacity would significantly reduce
the risk of insolvency that many group insurers face in the
event of a large-scale attack.
If TRIA is extended again and group life is included, we
urge that separate recoupment mechanisms be created for P&C and
group life insurers. Recoupment of amounts paid by the Treasury
for losses relating to P&C insurance should be made from P&C
insurers. Similarly, recoupment for losses relating to group
life insurance should only be made by group life insurers.
We look forward to working with your committee and others
in Congress, at Treasury, and in the Administration to ensure
that group life remains available to the millions of Americans
who depend on it and that this vital protection is there when
it is needed most.
Thank you for allowing me the opportunity to express our
views on this very important matter.
Chairman Dodd. Thank you very much.
Mr. Veghte.
STATEMENT OF JAMES H. VEGHTE, EXECUTIVE VICE PRESIDENT/CHIEF
EXECUTIVE OFFICER OF REINSURANCE GENERAL OPERATIONS AND CHIEF
EXECUTIVE OFFICER OF XL REINSURANCE AMERICA, INC., ON BEHALF OF
THE REINSURANCE ASSOCIATION OF AMERICA
Mr. Veghte. Good morning, Chairman Dodd, ranking member
Shelby and distinguished members of this committee. My name is
Jamie Veghte and I am Chief Executive Officer of XL Reinsurance
America, Incorporated, headquartered in Stamford, Connecticut.
I will be testifying on behalf of the Reinsurance Association
of America.
I want to thank Chairman Dodd and many members of this
committee for the leadership shown on the terrorism insurance
issue. Your role has been critical to the adoption and
continuation of the successful TRIA program.
The reinsurance industry appreciates the hard work and
support you have provided on this most important issue. It is
important that the committee understand that XL Re and the RAA
strongly supported the adoption of the Terrorism Risk Insurance
Act in 2002 and its extension in 2005.
We believe the program has worked well to fill a vacuum in
reinsurance capacity for this risk and help bring stability to
the insurance marketplace and, indeed, the economy as a whole.
I would like to address two important questions
policymakers have posed as it relates to consideration of a
long-term program. One, has the TRIA program infringed on the
development of the private reinsurance market? And second, what
is the current status of the private reinsurance terrorism
market?
Since the terrorist attacks of 2001, the global reinsurance
industry has committed substantial resources and capital to
develop a better understanding of terrorism risk. Despite these
considerable efforts, the basic facts have not changed.
Terrorism poses great challenges as an insurance risk. Unlike
natural catastrophe exposures, where the reinsurance industry
has models and underwriting expertise, the U.S. insurance
reinsurance industry cannot adequately underwrite and model the
scale and frequency of potential future terrorist attacks.
Despite the addition of considerable capital in the
reinsurance market in recent years, over $32 billion since
Hurricane Katrina, little of that has been deployed to
terrorism risk. Accordingly, the insurance and reinsurance
industry cannot provide significant terrorism coverage for this
country without a long-term Federal role in terrorism
reinsurance.
The TRIA program has not infringed on the development of a
private reinsurance market. In fact, the opposite is true.
Primary insurers seek to buy private reinsurance to help them
reduce the large exposure they face for retention and loss-
sharing provisions under the program. The large retention
requirements under TRIA, estimated at $35 billion industry-
wide, has left plenty of room for the private reinsurance
market to provide capacity under the program. By establishing
definitive loss parameters, TRIA has provided the defined layer
for reinsurers to participate in sharing the retained risk
primary companies face.
Even with this large window to provide capacity, reinsurers
have been willing to put only limited capital at risk to manage
terror-related losses.
To the second question, overall the RAA estimates the
global terrorism reinsurance capacity written in the United
States for 2007 at about $6 billion to $8 billion with TRIA
certified stand-alone treaty reinsurance. Additionally, there
appears to be no appetite in the capital markets to provide
terrorism risk through catastrophe bonds or other financing
products.
It's also important to emphasize that there's very little
reinsurance appetite in nuclear, radiological, biological and
chemical risk. According to the RAA survey of reinsurance
underwriters and brokers, NRBC capacity is estimated to be 15
to 20 percent of the terrorism risk capacity I cited a minute
ago. When NRBC is available, pricing for coverage is at a
significant premium and coverage amounts restricted.
Some insurers have been able to add terrorism peril to
their worker's comp reinsurance program, but this coverage
would also typically exclude NRBC losses.
Due to the nature of the terrorism peril, the RAA believes
that the private market mechanisms are insufficient alone to
spread the risk of catastrophic terrorism loss. Since
reinsurance is not covered under the TRIA program, the RAA
chooses not to independently advocate suggested change or
solutions for a Federal program.
The RAA has a close working relationships with the direct
insurance community and will continue to support their efforts
for a long-term solution.
In conclusion, without some form of a long-term Federal
backstop, we would expect less coverage available at the
policyholder level, increased prices for terrorism coverage,
and more limited reinsurance capacity.
The RAA looks forward to working with the committee as it
considers legislation. Thank you very much for the high honor
of appearing before this committee.
Chairman Dodd. Thank you very much, Mr. Veghte.
Mr.--is it McRaith? Did I pronounce that correctly?
Mr. McRaith. Yes, you did, McRaith.
Chairman Dodd. Thank you.
STATEMENT OF MICHAEL McRAITH, DIRECTOR, ILLINOIS STATE DIVISION
OF INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF
INSURANCE COMMISSIONERS
Mr. McRaith. Chairman Dodd, ranking member Shelby, members
of the committee, thank you for inviting me to testify today. I
am Michael McRaith, Director of Insurance for the State of
Illinois, and I speak to you today on behalf of the National
Association of Insurance Commissioners.
My Chicago office is in a landmark building visited by
thousands of tourists above the main switching station for
hundreds of thousands of daily subway commuters, including
those taking the El to O'Hare and Midway Airports. Within a
mile are five of the Nation's 10 largest buildings, 10 tallest
buildings, the world's premier commodities trading centers, and
Lake Michigan, one of the Great Lakes that comprise 84 percent
of all North American fresh water.
TRIA and its extension ensure the affordability and
availability of terrorism insurance. The current program should
not expire without renewal of an appropriate Federal backstop.
While some advocate for you to deregulate the insurance
industry through a so-called ``Federal charter'', this Federal
backstop illustrates when Federal support for a State-regulated
private insurance market provides real value for consumers,
your constituents.
The extension quickly approaches its expiration date but
the NAIC remains convinced that a Federal backstop is an
essential platform for our national economy. The U.S. economy
remains vulnerable to terrorist attack and requires this
backstop, in the absence of which terrorism insurance will
become unavailable and unaffordable, thereafter causing the
market disruptions and economic uncertainty seen in 9/11's
aftermath.
By requiring insurers, through the make available
mechanism, to offer terrorism coverage, the Federal backstop
has been successful in bringing marketplace confidence and
stability. The President's Working Group reported, as has been
stated already, that the terrorism insurance market has grown
to a take-up rate of over 60 percent.
Important urban markets demand terrorism insurance. And in
the absence of private market innovation, available and
affordable terrorism insurance depends upon a Federal backstop.
Insurers need to understand frequency, severity and loss costs
in order to price and offer insurance. Terrorist events cannot
be predicted, either in approximate time, location, or level of
tragic consequence. This reality, coupled with the geographic
concentration of risk, makes terrorism extremely difficult to
insure.
A Federal backstop obviously cannot impact frequency but it
does cap severity, giving insurers the knowledge to price and
offer the coverage and not risk insolvency. 9/11, one of the
most costly insured events ever, was carried out by a handful
of men. We cannot choose to be naive and ignore the potential
for even greater financial loss with another event.
Actuaries predict that a nuclear, biological, chemical or
radiological event in Manhattan could result in as much as $778
billion in insured losses. Total capital and surplus available
in the entire property and casualty market is roughly $427
billion, half of which is available for commercial lines and a
fraction of which is available to any one company.
The private market lacks the wherewithal to survive the
catastrophic risk of terrorism and to simultaneously cover all
other losses without a Federal backstop. As Congress and this
committee evaluate alternatives, we stress the following
priorities: the duration of any program should allow for
sustained stability that reflects the commercial insurance
cycle.
Second, any program should avoid the fictional distinction
between domestic and foreign acts of terrorism.
Third, any program should include coverage for group life
insurance due to the concentration of risk and prospective
insolvency.
Four, any program should consider inclusion of NBCR events
at a level that leverages the private market strength against
the challenge of insuring those events.
And finally, if you consider a shift to total private
market responsibility, we do recommend amendment to the tax
code to require companies to reserve for catastrophic events on
a tax-deferred basis.
We ask that you act to ensure this essential partnership
between the Federal Government and the private market is set
before the expiration of the current program.
The NAIC stands with this committee and with Congress in
your effort to develop and support that partnership. I pledge
the NAIC's support for the constructive process that you begin
today.
Thank you for your attention.
Chairman Dodd. Excellent testimony, Mr. McRaith. Thank you
very, very much.
Mr. Plunkett, welcome again.
STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER
FEDERATION OF AMERICA
Mr. Plunkett. Thank you, Chairman Dodd, Senator Shelby,
members of the committee. My name is Travis Plunkett. I am the
Legislative Director of the Consumer Federation of America.
On behalf of myself and our Director of Insurance, Bob
Hunter, I appreciate the invitation to appear before you today
to examine the temporary Terrorism Risk Insurance Act.
In the wake of the horrific terrorist attacks of September
11th, CFA supported the creation of a broad Federal insurance
backstop. We changed our views, however, to support much
narrower Federal assistance when it became clear that during
the year before TRIA was enacted, that the lack of Federal
backup had not caused the crippling coverage gaps and economic
disruption feared by many and predicted by the insurance
industry.
In fact, as I listen to the arguments of insurers for the
expansion and permanent extension of a temporary program more
than 5 years after September 11th, I am struck by how little
real acknowledgment there is of the truly dramatic improvements
that have occurred in the insurance marketplace since the
attacks.
In fact, there is very strong evidence that insurers no
longer need TRIA subsidies to provide adequate terrorism
capacity in all but the most extreme cases. NBCR coverage has
been mentioned here, and we agree. That is an extreme case.
The property and casualty industry's three most profitable
years in history were 2004, 2005 and 2006, with profits in
excess of $157 billion, despite significant hurricane losses.
Retained earnings or surplus for the industry stood at just
over $600 billion at the end of last year. The very significant
$12.2 billion in after tax losses experienced by insurers after
September 11th amounts to about 2 percent of this unprecedented
surplus.
As the Department of Treasury has reported, terrorism risk
insurance is now much more available and affordable than after
September 11th even though, as we have heard, insurer
retentions have increased substantially and Federal assistance
has declined. In fact, policyholders have enjoyed deep premium
cuts in recent years in all insurance lines, which frees up
money for businesses to pay for terror coverage.
As you have heard, the take-up rate has increased
substantially.
The evidence is very clear that the TRIA program, as
currently structured, is standing in the way of the development
of a more vibrant private market for terrorism coverage. The
Department of Treasury, for instance, has reported that
although the amount of reinsurance available for terrorism has
increased since September 11th, federally subsidized
reinsurance has depressed the demand for private reinsurance.
Insurers who have consistently come to Congress and said that
they cannot offer more terror coverage because of a dearth of
reinsurance capacity need to acknowledge that it is the TRIA
program itself that has helped to keep demands, and thus
capacity, low.
We have several recommendations for adapting the TRIA
program, not ending it but adapting it, to these new market
realities. First, convert TRIA to a program that covers truly
catastrophic terrorism events. As you have heard, there is very
little coverage for chemical, nuclear, biological and radiation
events, or for that matter for truly large-scale attacks of
over $100 billion. In our written testimony, we lay out a
detailed plan to cover all losses of between $100 billion and
$200 billion, including those resulting form CNBR attacks.
Covering losses of over $100 billion--excuse me. Covering
losses of under $100 billion is clearly within the financial
grasp of property casualty insurers, who would be able to write
off approximately $35 billion of the $100 billion in losses and
who, as you have already heard, are responsible for over $30
billion in retentions under the current program.
Second, if TRIA is renewed, we urge you to end the practice
of providing free reinsurance to an industry that can afford to
pay for it. We estimate the taxpayers will have provided a
subsidy for this reinsurance of at least $3.7 billion by the
end of the year. As the Congressional Budget Office has noted,
requiring insurers to pay premiums for this coverage, premiums
that are slightly higher than are actuarially estimated, will
encourage private insurers to quickly compete by offering lower
rates. It will also encourage loss mitigation.
Third, we strongly urge you not to expand the lines of
insurance covered by the programs, especially to group life.
There is no meaningful evidence that justifies expanding TRIA
to cover group life insurance, which is why the Treasury
Department has twice rejected this idea. Treasury pointed out
that group life coverage has been and is expected to continue
to be widely available at rates that have been declining,
despite the lack of TRIA coverage. This is because the market
is so competitive.
In fact, we urge you to carefully consider reducing the
lines of insurance covered by TRIA, for which there would
likely be relatively few terror losses or low aggregate risk
exposure. Candidates for such a reduction would include
fidelity, boiler and machinery lines, and general liability.
Finally, if you do decide to renew TRIA, we strongly
recommend that you keep the program temporary. Extending the
program permanently or for more than 5 years would freeze the
program in time, inhibiting the further ability of the private
market to expand and making it very difficult, if not
impossible, for Congress to adjust the program as market
conditions change. We think this would be a significant error.
If we have learned anything about terrorism insurance since
September 11th, it is that developments in the marketplace that
were once thought to be highly unlikely can occur with
startling speed. For example, very few people would have
thought, in the wake of the significant terrorism losses
incurred on September 11th, that the property casualty
insurance industry would develop into a financial tiger, with
record profits and surpluses and an enormous financial capacity
to handle terrorism losses.
Thank you very much.
Chairman Dodd. Thank you very much.
Mr. Coppola.
STATEMENT OF ARTHUR M. COPPOLA, PRESIDENT AND CEO, MACERICH
COMPANY, ON BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM
Mr. Coppola. Good morning, Chairman Dodd, ranking member
Senator Shelby, and members of the committee. Thank you very
much for allowing me to testify today.
My name is Arthur Coppola and I am President and CEO of the
Macerich Company, one of the Nation's largest retail real
estate investment trusts. We own and operate major retail
centers in many of your home States, including Tysons Corner
here locally.
I also serve as the Chair of the National Association of
Real Estate Investment Trusts, NAREIT. I am on the board of the
Real Estate Roundtable, as well as a member of the
International Council of Shopping Centers.
Today I am here to testify on behalf of CIAT, the Coalition
to Insure Against Terrorism. The diverse CIAT membership
represents virtually ever sector of the U.S. economy. CIAT is
the true consumer voice on terrorism risk insurance, as we are
comprised of the principal policyholders of commercial property
and casualty lines in the United States. It is from this
perspective that we offer our testimony today.
We are gratified that you have so clearly made this issue a
priority by scheduling this hearing as one of the committee's
first items of business in the year. We hope that this hearing
will be followed promptly with an introduction and passage of a
bill that will ensure the modernization and the seamless
continuation of the terrorism insurance program.
There is no question that TRIA accomplished one of its main
objectives, which was to stabilize the U.S. economy following
9/11. TRIA and its extension in 2005 TRIA and its extension in
2005 were part of a series of measures that Congress passed to
protect the U.S. economy from terrorism threats and continues
today to be an integral part of our homeland security strategy.
For example, the U.S. airlines today are directly insured
by the Department of Transportation for both terrorism and war
risk. The Federal Government, through the Overseas Private
Investment Corporation, OPIC, also directly insures U.S.
investors overseas for both terrorism and political risk
outside the U.S.
It would ironic and senseless of TRIA, which is the only
similar protection of the domestic economy, and which unlike
the DOT and OPIC programs is not a directly liability to the
Federal Government, were allowed to expire or even linger in
limbo throughout the remainder of this year.
Terrorism is the major threat facing our Nation today. We
hear about it on a daily basis from the Administration, our
national security team, and from almost every corner of Capitol
Hill.
The market conditions that necessitated TRIA and then its
extension have not gone away. Primary insurers remain largely
averse to exposing themselves to potentially catastrophic
terrorism losses without adequate reinsurance and the private
reinsurance market provides only a fraction of the capacity
needed.
At least 14 other major industrial nations have recognized
that the private markets are unable to effectively manage
terrorism risk and have adopted permanent national programs.
The U.S. market is no different. Terrorism risk is a national
problem that requires a Federal solution.
We believe that the Federal role should focus on what the
private markets have been unwilling or unable to do, enabling
policyholders to purchase insurance for the most catastrophic
conventional terrorism risks and ensuring adequate capacity in
high-risk urban areas, and providing meaningful insurance for
nuclear, biological, chemical and radiological NBCR risks.
The CIAT proposal seeks to minimize over time the role of
the Federal Government for conventional terrorism, but also to
ensure that NBCR risks will be covered and that the Federal
Government will have an insurance mechanism in place so that
the Nation can more easily recover from a truly catastrophic
attack, whether by conventional or unconventional terrorism.
For risk of conventional terrorism attacks, the CIAT
proposal would leave in place the TRIA backstop with the
insurer deductibles, industry retention, and program trigger,
all maintained at no higher than their 2007 levels. This
ensures that policyholders will continue to have access to
coverage through the make available provision.
CIAT also suggests the committee consideration of a
privately funded terrorism risk trust fund that would be
maintained by the Treasury and used to help cover a portion of
the Federal share of insured losses under the TRIA program. We
believe that over time this trust fund will accumulate enough
capital through pre-event surcharges and assessments that the
likelihood of taxpayer exposure to terrorism risk will be
limited to only the most extreme events.
NBCR terrorism risk is a different matter, however. Even if
the Federal backstop exposure to conventional terrorism can be
reduced over time to all but the most catastrophic attacks, the
challenges are different for NBCR, according to all of the
expert actuarial estimates. The GAO, the Treasury Department,
and the President's Working Group, have all recognized that the
market simply cannot price the risks associated with NBCR
perils.
Accordingly, our proposal addresses this by adding NBCR
perils to the make available requirement under TRIA and calling
for lower insurer deductibles and copays with respect to NBCR
risks. The proposal would also remove the annual $100 billion
program cap to clarify that insurers are not liable for truly
catastrophic attack, whether NBCR or conventional.
CIAT urges removal of the distinction between foreign and
domestic terrorism in the statute's definition of acts of
terrorism. As the London bombing demonstrated all too well,
there can be serious difficulties in distinguishing between
foreign and domestic terrorism, and the distinction makes no
difference to the victims.
Finally, in order to enhance the stability of our financial
markets, the modernized program will be made permanent or will
at least be in place until Congress declares that terrorism is
no longer a risk.
In all, we believe that the CIAT modernization principles
for TRIA are fair and we urge the committee and Congress to
incorporate these features into the legislation it adopts this
year.
I thank you very much for the opportunity to testify at
this very important hearing.
Chairman Dodd. Thank you very much.
Mr. Lieber.
STATEMENT OF JANNO LIEBER, SENIOR VICE PRESIDENT, WORLD TRADE
CENTER PROPERTIES
Mr. Lieber. Good morning. Chairman Dodd, Senator Shelby,
members of the committee, I am Janno Lieber, Senior Vice
President of Silverstein Properties where I have responsibility
for overseeing the World Trade Center redevelopment.
I want to thank you for the opportunity to participate in
this important hearing.
As most of you know, the Silverstein organization leased
the commercial office portions of the World Trade Center just 6
weeks before 9/11. Today, after several years of planning and
extensive public dialog, all parties, including the State of
New York, the State of New Jersey, the city of New York, the
Port Authority, are united in the vision of what will be built
at the World Trade Center, four world class skyscrapers
designed by renowned architects, new mass transit facilities, a
performing arts center, and most important, the 9/11 memorial
to commemorate those lost on those terrible day.
In order to accomplish this, of course, we need to do some
very extensive financing which will require us to obtain
terrorism insurance. The most important thing that Congress can
do to assure the availability of terrorism insurance for
projects in high-risk, high-density areas like lower Manhattan
is to have a permanent TRIA program.
A long-term program is necessitated by the interplay
between insurance, financing, contracting, and design in these
kinds of large-scale projects. Large scale developments can
take a very long time from start to finish: three to 5 years
for design, planning, and approvals, several years of
construction, then several years of lease-up following.
TRIA needs to be tailored to match the timelines that the
construction industry, lenders and insurers are looking at when
they make their decisions about whether to go forward with
these kinds of projects. The failure to do so will impede new
construction. And a short-term renewal just will not solve the
problem.
Further, we do need, if the standard that you set, Mr.
Chairman, in your remarks, the certainty of the ability to
obtain insurance is to be met, we need to know that the Federal
backstop is going to be there. Because lenders are making their
decisions, in part, looking at what their risk is of the
circumstances of insurance changing.
Often today, most large loans are securitized in order to
create bonds that are purchased by institutional investors.
Lenders often do not hold the loans that they originate, but
sell off a portion of the loans for regulatory or liquidity
reasons.
In order to receive investment grade ratings from rating
agencies, which are required to get investors to purchase the
bonds, the underlying collateral has to be secured. The lack of
access to terrorism coverage may impact on a project's ability
to obtain those kinds of investment grade ratings, and that is
especially true of projects in these types of concentrated,
high-risk areas like lower Manhattan.
Another point that I wanted to take up with you briefly
today is that--and this is the species of the point that
Senator Bennett made in his opening remark--is that the risk/
reward is--although TRIA has been a success across the board,
clearly the risk/reward is not working for every area. And
lower Manhattan and certain high-risk areas are in that
category. A major challenge faced by projects in these kinds of
areas is the shortage of capacity which is prevailing today.
The World Trade Center rebuilding is going to cost
something in the range of $13 billion to $15 billion in total.
But according to leading insurance consultants and brokers in
New York City, who we have consulted extensively, even with the
current TRIA program in place, as is, there is a shortfall.
There is currently less than $750 million total worth of
coverage available to the entire lower Manhattan market.
And I should add, there is really no viable alternative to
private insurance at all. In other words, even with TRIA, we
are not meeting the test that, Chairman, you and Senator Shelby
said in your opening remarks, which is availability,
affordability and stability for these kinds of areas.
We strongly believe that a TRIA extension ought to address
the capacity problems in high-risk, high-density areas and
other types of areas where there is a maximum aggregation of
risk and of value. Today you are hearing from Mr. Coppola of
the CIAT Coalition, and others testifying about addressing the
problem in the current program with respect to the foreign
versus domestic distinction, and the NBCR issue. These general
fixes to TRIA are badly needed in order to free up capacity for
terrorism insurance.
However, even if these changes are made, there will still
be questions about whether they will be sufficient to attract
more capacity to high-risk areas like lower Manhattan.
Therefore, we are suggesting that consideration be given to
some additional actions, for example perhaps adjusting
retentions or the current $100 million TRIA program trigger. We
are not wedded to any particular solution but we ask the
creativity and leadership of the committee in helping us in
other areas like lower Manhattan to address the capacity
shortfall.
Finally, there is one other step that Congress can take to
free up terrorism insurance for these kinds of areas, and that
is to clarify the scope of TRIA coverage to make it absolutely
clear that the TRIA backstop applies to all proximate
consequences of the terrorist attack, including a fire or
collapse following the attack. There is currently some
uncertainty in the marketplace about that, and it causes
terrorism risk to bleed into other insurances. And therefore,
you absorb capacity that otherwise should be made available in
areas like lower Manhattan.
So I thank you for the opportunity to appear before you
today. The TRIA program has been a success. It ought to be made
permanent.
I just want to emphasize again that even with the fantastic
program you have put in place, it would not be possible at the
present time to adequately insure even one of the office
buildings that are being built at the World Trade Center, let
alone everything that his happening in lower Manhattan. So we
would like to work with you to address that dysfunction in the
market.
Thank you.
Chairman Dodd. Thank you very, very much.
I want to congratulate you and others who have worked very,
very hard over the last number of years in putting this project
together. We have all watched it, obviously, Bob Menendez
obviously very directly, and Chuck Schumer obviously very
involved in this. It has not been easy. But you have done a
good job so I commend you. The Silverstein Group deserves a lot
of credit for doing that.
Mr. Lieber. Thank you so much, Mr. Chairman.
Chairman Dodd. Mr. Bailey.
STATEMENT OF DON BAILEY, CEO, WILLIS NORTH AMERICA, ON BEHALF
OF THE COUNCIL OF INSURANCE AGENTS AND BROKERS
Mr. Bailey. Good morning, Chairman Dodd and ranking member
Shelby. My name is Don Bailey. I am the CEO of Willis North
America, a unit of Willis Group, a global insurance broker.
It is a distinct pleasure and honor for me to join you this
morning.
Willis works with corporations, public entities and
institutions around the world on all matters of commercial
insurance, reinsurance, risk management, financial and human
resource consulting.
In addition to representing Willis today, I am also
speaking this morning on behalf of the Council of Insurance
Agents and Brokers. The Council represents the Nation's leading
commercial property and casualty insurance agencies and
brokerage firms.
With our North American headquarters located in lower
Manhattan, not far from where the World Trade Center used to
stand, we experienced firsthand the devastation wrought on New
York City by the events of September 11th, 2001. Since that
time, we in the United States have been fortunate that we have
not experienced another terrorist attack on our soil. However,
if you look to London, Madrid and other locations around the
world, I think we can all agree that terrorism is a permanent
problem for which we need a permanent solution.
Regrettably, the question of another terrorist attack here
in the U.S. is a matter of when and not if. We thank the
committee for convening this hearing to explore the long-term
solutions to terrorism risk insurance.
Prior to September 11th, terrorism insurance was readily
available. It was offered as an add-on to many policies at a
very modest price because the threat of loss was perceived to
be low. Clearly, after September 11, the paradigm shifted quite
significantly and terrorism insurance was almost entirely
unavailable. And the small amount that was available was
prohibitively expensive.
Planes did not take off. Many constructionsites, as was
just detailed, in what were now perceived to be high-risk
zones, fell silent. And commerce in many cities came to a
complete halt.
Congress, realizing the dire need, acted quickly by passing
TRIA and subsequently the extension to provide available and
affordable terrorism capacity for U.S.-based risk. The program
has also allowed the private market to progressively increase
its role in covering terrorism risks.
The Federal funds provided by the TRIA backstop have never
been tapped. Not one taxpayer dollar has been spent on claims.
But the program has been an unqualified success in stabilizing
the insurance markets and allowing insurers to provide much-
needed terrorism coverage at affordable prices.
Policyholders, the business 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.
For many commercial policyholders, obtaining terrorism
coverage means more than just piece of mind. It is essential to
doing business. It may be required, sometimes by State laws and
regulations, and often by contract, to obtain a mortgage, for
financing of new construction, for the expansion of business or
for a new entrepreneurial venture.
Some suggest that the private market can handle these
losses. Consider: estimates indicate that there is only about
$6 billion to $8 billion in global terrorism reinsurance
capacity available. But terrorism losses from a single attack
could reach $100 billion. Industry numbers indicate that there
is a $1 billion to $2 billion in capacity available for
nuclear, biological, chemical and radiological coverage. Yet
the American Academy of Actuaries modeled the impact of a
medium-sized nuclear, biological, chemical or radiological
attack on New York City and put the losses at $450 billion.
Clearly, there is simply not enough February 28, 2007
capacity in the private market to cover losses due to
terrorism. And the limits of such an attack are bound only by
the imagination of terrorists whose thought processes are
beyond the scope of models and calculations.
Some contend that dealing with the risk of terrorism
insurance is a matter for the industry to handle on its own.
Collect the premiums, assume the risk of potential losses as
they do with other categories of risk. But consider that a
terrorist attack is not perpetrated against a company or a
building. The terrorists who flew planes into the World Trade
Center and the Pentagon, and the plane that crashed in the
Pennsylvania field, were attacking our country.
Could you imagine a scenario where the Federal Government
knew an attack was going to happen and did not take the steps
to either prevent it or to at least prepare for the aftermath?
I suggest that not developing a long-term terrorism risk
insurance program would be just that.
The objectives of TRIA are clear: harness private industry
capacity to directly contribute to terrorism-related losses,
deliver Federal assistance in a fair and efficient manner, and
repay the Government for any outlays.
Because of TRIA, the terrorism insurance market has been
largely stabilized, terrorism coverage has been steadily
expanding, and the price of coverage has become more
affordable. Now is decidedly not the time for the Federal
Government to withdraw its involvement in the terrorism
insurance market. The terrorism threats facing our country
remain significant, unpredictable, our reinsurance industry
still lacks sufficient capacity to address terrorism risks on
its own, and the primary insurers are still not willing to
expose themselves to enormous terrorism risks without charging
prohibitively high prices.
Allowing TRIA to expire at this time will certainly
cripple, if not completely paralyze, a significant portion of
our economy. We must all work to keep that from happening. TRIA
is not about protecting the balance sheet of insurers and
brokers. It is about protecting commercial policyholders and
creating and sustaining a national economy that encourages
investment and development.
This is a matter that far transcends the insurance
industry. It is a matter of our national economic security.
I thank the committee for your time this morning.
Chairman Dodd. Let me thank all of you again. This is, I
know, a real crowd. Senator Bunning, while walking out, said he
thought this may be a record number of witnesses this Committee
has had at one panel here at any given time. And I thank you
for your patience and for being a part of this.
I am going to put a clock on ourselves for about 7 minutes
here with Senator Shelby, myself, and my colleagues who are
still here, and I am going to open up the record as well for
the next several days for questions from members who were here
or who did not make it here this morning but have an interest
in the subject matter as well and ask you to respond to those
questions in a timely fashion, if you would.
Let me just say at the outset to all of you here, I speak
for myself at this point here. I wish we were not here talking
about this, quite candidly. I mean, I would love to think the
idea would be that actually a market would develop these
products. There is no appetite that I know of from my
colleagues for coming up with a program here to deal with this.
There may be some, but I do not know of anyone who would opt
for this option. The ideal option is, of course, to have the
market produce a product that was available, affordable, that
did not require any Federal intervention here at all. That is
the ideal situation. It is what has happened in most areas. But
I think all of you, one way or the other, including Mr.
Plunkett and others, have pointed out that we are dealing with
some very unique situations and growing problems.
I was looking at the numbers here. We have had actually -
yes, here it is. The terrorist attacks worldwide have increased
fourfold in the last year alone. We have a tendency--because we
have been fortunate in this country not to be affected by it,
there is sort of a distanced approach to this thing. But from
2004 to 2005, more than 14,500 people, noncombatants, have died
as a result of terrorist attacks worldwide. According to the
National Counterterrorism Center, 2005 was the first year in
which the number of terrorist attacks worldwide exceeded
10,000--the number of attacks, 10,000. So the problem is
growing, and obviously a lot of means are being taken to try
and minimize this. And it is a major challenge for all of us to
deal with this.
But it is very, very important that people understand that
some--one of you said it. I think each one of you said here
that this is not a question of if but when. That is the reality
here. None of us want to say that, but the reality is we know,
given the nature of our country, the openness of our society in
many ways, that it is going to happen. And to say otherwise is
to be terribly naive about this. So we need to do everything
possible, obviously--in fact, we are debating today, I think,
on the floor of the U.S. Senate measures we can take. Many of
us here have fought very hard for the first responder records
over the last 2 years to do everything possible, to the transit
security issue, which this Committee dealt with here a few
weeks ago and marked up a bill unanimously here to deal with
investing more given the London and Madrid experiences.
So we have a lot of things we have to do here to deal with
this issue--this is one of them here--in terms of how we
minimize the kind of impacts economically to our country.
Again, I remember Senator Bennett and I working on the Y2K
issue a number of years ago in anticipation of the problem of
the computer glitches that occurred. We did not have any major
problems, but I remember Alan Greenspan testifying before this
Committee that, as a result of our work, a lot of efforts were
made by the private sector to upgrade their information
technology systems; and as a result, while we did not have
major glitches here, we took steps to hedge against the
possibility of having major disruptions occur economically.
So the purpose of these hearings is to look at an option
here. And I am not overly enthusiastic about some absolutely
permanent program here. I want one long enough here that gives
us a chance to take a look at this and to make sure we are not
back here every 2 years. I cannot come back here and Dick
Shelby and I year after year coming back and trying to rewrite
a bill again and getting 533 other Members of Congress and the
administration to go along with this. It just does not make a
lot of sense for us to do it. Clearly, this is a problem that
we had hoped after 2002 would begin to emerge, that the ideal
situation was that a market would begin to develop here and
that the need for any extension--I remember making the case I
did not think we would have to come back. Of course, we did in
2005.
So we are here for those reasons, and I have just a couple
of questions I want to raise with you about--and I will ask Mr.
Coppola and Mr. Lieber, although the rest of you jump in if you
want, if you feel compelled to talk about these things. I think
it may have been Jack Reed, maybe Chuck Schumer, who raised the
issue here earlier. We are hearing a lot of reports about
global competitiveness in financial services, and one of the
concerns is, of course, what is going on in the London markets
and so forth.
One of the worries I have here is that if we--given the
fact that the U.K. and Germany and France and others have come
up with their own ideas on how to have a permanent program to
hedge against terrorist attacks from an economic standpoint and
the fact that we have not done that yet here, is there any
danger in your mind that some of these projects we are talking
about here could end up going offshore where there is a more
reliable system in place to deal with these risks as they
emerge? Is that a legitimate concern for the Committee to raise
here with this issue?
Mr. Lieber. Well, thinking about how this works in New
York, if we cannot build the real estate that will hold onto
the first-class jobs that you are talking about, the high-
value-added securities industry type jobs, because they want
new--they need first-class new real estate. If we cannot build
that, those very large projects, those very complex projects of
the kind I was referring to, and in these densely populated
areas, they will be built elsewhere. It is a fair question that
you have raised, Senator Dodd, about where they will be built.
Whether they would be built abroad I think is a very fair
question in light of some of the other dynamics that you have
identified in the market encouraging those types of companies
to relocate operations abroad.
Mr. Coppola. Certainly in the area of global financial
services, that is definitely a possibility. Separate from the
terrorism issue, it has already happened in places like Canary
Wharf, where many of the global firms have decided to locate.
And were they to have the opportunity or the desire to do that
here in the U.S. and should developers not be able to build
because of a lack of proper insurance, then clearly they will
land in other countries if need be.
Chairman Dodd. So you believe that is a legitimate issue.
Mr. Coppola. It could be, yes.
Chairman Dodd. And you have alluded, Mr. Lieber--all of us
have noted here over the last 5 or 6 years some 300,000
manufacturing jobs in this country have disappeared. I would
point out a million of those in the defense production areas.
But, clearly, as you start talking about it, this becomes a
ripple effect and people begin to look elsewhere. Then,
obviously, the effects on manufacturing jobs and construction
jobs would also be certainly a casualty of this process.
Mr. Coppola. Yes. You know, 6 years ago seems like a long
time ago, but we cannot forget that in the 14 months following
9/11, it is estimated $15 billion of new construction was put
on hold or canceled and some 300,000 construction jobs were
displaced. While in most cities in any corner that we look, we
see construction cranes today and so we may feel complacent, if
terrorism insurance were not to be made available, those
construction cranes would begin to disappear, and there is no
question about that.
Chairman Dodd. Does anyone else want to comment on this at
all, this specific question?
Mr. Plunkett. Senator, I would just add that the Treasury
Department's 2005 report is one area--this question of
construction is one area of where the broader Treasury view of
the market would disagree with what you just heard. There was
considerable concern at the time that TRIA was initially
enacted that construction would be affected. I remember the
President talking about let's put the hard hats back to work.
But in looking at the marketplace retroactively and in talking
about the effect of the lack of terrorism coverage on
construction, Treasury concluded that there was not a
significant impact.
So I think it is important to keep in mind that Treasury,
at least, has done broad reviews of the entire marketplace and
is in a better position than any of us in most cases to draw
conclusions about these questions.
Chairman Dodd. I am glad to see the Consumer Federation of
America embracing the Treasury these days here.
[Laughter.]
It has been a strong advocate of the TRIA program, of
course, over the years.
Yes, Mr. Coppola
Mr. Coppola. If I might just add one thing, I cannot speak
for Treasury, but I can speak for myself. And we had a $300
million expansion of a major retail center in New York City, in
Queens, that was scheduled to break ground in early 2002. And
we waited for TRIA to ultimately get put into place because we
knew that we would not be able to obtain the proper
construction and permanent financing. And had it not been put
into place, we would not have started that job, and we would
not have completed that major $300 million expansion.
So speaking from my own personal experience, I can assure
you it is a big factor.
Chairman Dodd. Thank you.
Did you want to say something?
Mr. McRaith. One other angle to the question about
construction, Mr. Chairman, is that every construction project
requires workers' compensation insurance. There are no
exclusions from workers' compensation insurance. To the extent
that one insurer has to be more invested in one project than
another, workers' compensation will not be available--insurance
will not be available for another project.
Chairman Dodd. That is a good point. This is Mr. McRaith,
by the way, for the record--I appreciate that--for the
Insurance Commissioners.
Senator Shelby.
Senator Shelby. It was kind of interesting, the question
Senator Dodd asked and the one several of you picked up on. But
I personally believe that maybe Sarbanes-Oxley is running some
jobs to London, but I am not sure that it is a lack of building
in New York or elsewhere is. I agree with Mr. Plunkett on that.
Mr. Plunkett, I also believe that if Treasury and Consumer
Federation of America are together, Treasury must be doing
something.
Mr. Plunkett. They sure are, Senator.
Senator Shelby. I think that is a good sign.
Mr. Plunkett, I want to ask you three quick questions.
First, is group life widely available in the private
market?
Mr. Plunkett. Yes, sir.
Senator Shelby. Second, is group life presently offered at
affordable rates, falling rates?
Mr. Plunkett. It is, yes. And there was----
Senator Shelby. Third, can life insurers obtain reinsurance
for group life?
Mr. Plunkett. Well, the Treasury report says that
reinsurance capacity is growing. It also said, Senator, that
life insurers have fallen behind their property casualty
colleagues in modeling risk, that they are not as aggressively
improving their risk modeling as property casualty insurers.
Senator Shelby. Mr. Clarke, since the passage of TRIA, the
insurer deductible has increased from 7 percent to 20 percent.
During that same period, take-up rates for terrorism insurance
have risen substantially, according to the President's Working
Group. These facts suggest that increasing the insurer
deductible had little impact on the willingness of insurers to
underwrite terrorism insurance because they had the big risk on
behalf of the Government.
Accordingly, should the insurer deductible be increased
further in order to create additional room for the private
market to grow? And if the purpose of TRIA is to provide a
backstop for only those risks insurance companies are unable to
handle, shouldn't the insurer deductible be as high as possible
as long as the market worked?
Mr. Clarke. It is interesting. Some of the reason why the
rates have come down as the deductible has gone up--we have
personally in Travelers a $2.2 billion deductible. What happens
as we retain risk within the deductible, we are not in the
business of selling terror insurance. We are in the business of
protecting ourselves against it. So if we write the whole----
Senator Shelby. You are managing risk, are you not? That is
what you are into.
Mr. Clarke. We manage risk.
Senator Shelby. You insure it, but you do this by managing
it the best you can based on your experience and your model.
Mr. Clarke. Well, we manage the whole account, the whole
risk, and if terrorism is in there, we then protect ourselves
by whatever model we have. But we basically charge almost
nothing for terrorism. In fact, if somebody--I would give back
the last 5 years at a multiple if someone would relieve us of
this responsibility.
Senator Shelby. Say again explicitly why do you charge very
little, if anything, for the terrorist risk?
Mr. Clarke. I cannot get----
Senator Shelby. It is because the Government backs up the
big risk. Is that correct?
Mr. Clarke. No. It is my retention----
Senator Shelby. It is?
Mr. Clarke. It is my $2 billion.
Senator Shelby. Well, what about the Government's risk?
That is what you want out there. That is what has worked. That
is what has caused the--that is why this program has worked, I
believe.
Mr. Clarke. If you would like us to pay more or pay for the
reinsurance, it will just detract from what we will take.
Senator Shelby. Well, I am not interested in wanting you to
do anything except I want the insurance market to work.
Mr. Plunkett, would you please comment on the importance of
keeping TRIA a truly temporary program as opposed to making it
permanent?
Mr. Plunkett. Senator Shelby, I think the main issue here
is what I raised in my testimony, that adjustments to the
program would be very difficult politically to make as the
market changes. We are not calling for a 2-year extension or a
3-year extension, but we think 4 or 5 years would give the
program some continuity, but give you adequate time to also
make changes, if necessary.
Senator Shelby. Thank you.
Mr. Peninger, in its report to this Committee last year,
the President's Working Group found that, despite not being
covered by TRIA, group life insurance was available in the
private market and that prices for group life have generally
declined since September 11, 2001. Mr. Plunkett just echoed
these findings on the availability and the affordability of
group life.
In the absence of any evidence of market failure in the
group life market, it appears that your proposal to have group
life covered by TRIA is another example of an insurance company
seeking to reap the profits of insurance while transferring the
losses ultimately to the taxpayer.
Would you comment on that?
Mr. Peninger. I can make a few comments, Senator.
First, I guess I do not believe that--our experience at
Assurant--and that is what I can speak most credibly to--is
that catastrophe reinsurance is not, in fact, available. We
have scoured the market every year since 9/11. We have been
unable to get catastrophe protection in anywhere near the
limits that we had prior to 9/11. So I think to say it is
available in the market is in our experience false.
I would also say that we cannot use exclusions to protect
ourselves against deaths due to terrorist events. And if you
say we should just exit the business, I would say that it is
very difficult to exit one of the most highly desired benefits
markets in a coverage that for millions of Americans it is
their only means of protection.
So I think right now, we are in a situation where in the
event of a major catastrophe, group insurers will potentially
fail, and you will have to deal with chaos after the fact.
Senator Shelby. Mr. Clarke, in your testimony you indicated
that TRIA has achieved its goals by making terrorism risk
insurance widely available and help stabilize the market for
terrorism risk insurance. Based on your testimony, is it fair
to conclude that you believe that both the program's insurer
deductible and insurance marketplace aggregate retention amount
are set appropriately? The system seems to be working under
this.
Mr. Clarke. For everything except NBCR.
Senator Shelby. Except what?
Mr. Clarke. The nuclear----
Senator Shelby. OK.
Mr. Chairman, thank you.
Chairman Dodd. Thank you.
Senator Menendez.
Senator Shelby. Mr. Chairman, could I ask, I have several
more questions that I would like to submit for the record in
the interest of time.
Chairman Dodd. The record will remain open.
Senator Shelby. Thank you very much.
Chairman Dodd. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. I am going to
have to preside, so I just want to get one question out there,
the core of the differences. I am normally with Mr. Plunkett
and not the Treasury Department, so I find it interesting
today, I am not with him today.
But I want to ask you all to--or those of you--some of you
to comment on the core of what I understand his statement is,
which is that the TRIA program as currently structured is
standing in the way of development of a more vibrant private
market for terrorism coverage that would have the capacity to
handle all but the most catastrophic attacks; and, second, that
you have heard the Treasury Department referred to here several
times has, in essence, said that federally subsidized
reinsurance has depressed the demand for private reinsurance.
What is wrong about that statement? Is there something
underpinning it that is missing?
Mr. Veghte. As a reinsurer, if I may comment, it has not
depressed demand for reinsurance. We----
Chairman Dodd. Could you speak up, Mr. Veghte? It is a
little hard----
Mr. Veghte. We are often asked to provide private
reinsurance for terrorism. The difficulty in underwriting it as
opposed to, say, a natural catastrophe, the analytics, the
predictability of severity and frequency just simply does not
allow us to provide the same leverage off of our balance sheet.
Providing capacity for a risk such as terrorism--which is
virtually impossible to model from a frequency perspective. We
are making some progress on the severity side, but it is a much
different dynamic to underwrite.
Senator Menendez. So it is the frequency versus severity?
Mr. Veghte. It is both. It is both.
Senator Menendez. Both.
Mr. Veghte. But, clearly, if terrorism exposure was sort of
blended into natural catastrophe reinsurance, nat-cat
reinsurance for States such as Florida would actually be
constricted because the reinsurance industry would have to
reduce their limits because of the uncertainty of the terrorism
risk embedded in the private reinsurance market.
Senator Menendez. Mr. Plunkett, what do you say about the
GAO's report last year that said the risks from nuclear,
radiological, biological, and chemical threats are distinctly
different from those hazards that are predictable, measurable
in dollar terms, random, and unlikely to result in catastrophic
losses for an insurer. Given those challenges, the GAO found
that, ``Any purely market-driven expansion of coverage for
these specialized terrorism risks is highly unlikely to be seen
in the foreseeable future.''
Mr. Plunkett. Senator, we agree with the GAO, and others
have made the same observation. That is why we proposed a
higher-level program that would cover nuclear, biological,
chemical, and radiation attacks. And we think it is one of the
parts of the market that is not yet working.
Senator Menendez. And if that were to be the coverage, then
what would be the problem for those of you who are involved in
the insurance, if that were to be the coverage? For those of
you who are insurers, what would then be the issue? If you were
to concentrate it, as Mr. Plunkett suggests, would that still
meet the market's challenges?
Mr. Veghte. I would suggest there would still be a major
amount of uncertainty as to the precise exposure to non-NBCR
and, therefore, still make underwriting the risk very
difficult, and potentially contract capacity in the non-
terrorism exposures.
Senator Menendez. One last question. Mr. Lieber, even as we
talk about having reauthorization of a Federal program, aren't
there some challenges on the private existing insurers today? I
have been following the problems of the former World Trade
Center insurers, and aren't there those who seek to walk away
even from the existing insurance?
Mr. Lieber. Yes, and this is--you are right--a separate
issue. We have to obtain financing to rebuild, and the TRIA
program and Federal terrorism insurance are essential to that.
Separately, we do have to resolve the outstanding claims with
the insurance companies who provided coverage on the World
Trade Center, and after two jury verdicts affirmed by the U.S.
Court of Appeals, some of them are still unwilling to make good
on that.
So while we are thrilled to be at the same table on the
same side of an issue with our friends in the insurance
industry on TRIA, obviously, to make sure the World Trade
Center is rebuilt, we are going to have to resolve those
disputes as well and make sure we collect them from our friends
in the insurance industry.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator Menendez.
Let me just raise a couple more questions, if I can here. I
want to come back to the group life issue that was raised by
Senator Shelby and others here as well. Let me ask you, Mr.
McRaith, to comment on this as an Insurance Commissioner and
looking at these questions. How do you answer the criticism
that since most, if not all, group life policies currently
cover terrorism losses, that seemingly the capacity already
exists to cover those losses?
Mr. McRaith. As insurance regulators, Mr. Chairman, our
priority concern is that the promises made to the consumers are
kept. The primary obligation we have to fulfill that
responsibility is to ensure that--to examine and regulate
companies for solvency.
If, for example, one company in a group life policy had
1,000 participants in one location, they would normally expect
three to four people to die during the course of a year. When
that same company has--that site is the location or the target
of a terrorist attack, you can lose 1,000 people,
hypothetically, in one event on 1 day. And at the same time,
all the other policyholders of that company around the country
are still dying at their normal rates. Solvency is the issue,
and that is why we encourage consideration of group life in the
renewal or extension of the current TRIA.
Mr. Peninger. Senator, could I add to that?
Chairman Dodd. Certainly.
Mr. Peninger. My company in the early 1990's happened to
insure Cantor Fitzgerald. We did not have them insured at the
time of the attack, but that company cost their insurer $700
million due to 9/11, at which they had full catastrophe
reinsurance protection. That would not be available for them
today, so I think that speaks to the solvency risk.
Mr. Plunkett. Senator, I would like to say that our
Insurance Director, Bob Hunter, recommended to the NAIC shortly
after 9/11 that the NAIC push group life insurers in the
direction of cross-insurance. When you have these highly
concentrated risks in distinct geographic areas, he recommended
that group life insurers use cross-insurance mechanisms similar
to what are sometimes used in the property casualty area to
cross-insure each other, a building in San Francisco cross-
insuring with a building in New York, so to speak, to deal with
the unique aspect of aggregate risk that we are talking about
here. To the best of our knowledge, not much has been done here
by group life insurers.
Chairman Dodd. What is your reaction to that, Mr. Peninger?
Mr. Peninger. There has been some talk about that. It is a
very complicated problem. I will not say it is impossible, but
I think you have to have mechanisms for ranking the risk of
various areas. There are just lots of factors that would go
into that. It sounds great in theory. I think the devil is
definitely in the details on that.
Chairman Dodd. Do you agree with that, Mr. McRaith?
Mr. McRaith. Absolutely, Mr. Chairman. We certainly respect
the opinions of the Consumer Federation, and they often make
valuable points. That is not one, however, that is valuable
beyond a hypothetical discussion.
Chairman Dodd. Yes. Let me come back to a question. Senator
Bunning raised this in his opening comments, and Senator
Menendez talked about it. It is the capacity issue, and I am
trying to project ahead in questions that my colleagues will
have and others will have about this. It is maybe not a
sophisticated question in your minds, but one that I can see
them raising all the time. You know, this is a very talented
and creative industry, the insurance industry, and it has been
able to model in all sorts of areas to be able to assess risk
and to make judgments about it, and in a very sophisticated
economy.
Now, obviously, I think all of us understand with terrorist
attacks we are dealing with a unique feature here, but let me
raise this. A study conducted by the Treasury Department in
2005 found that 50 percent of the insurers surveyed would cease
providing terrorism risk insurance if TRIA expired. They would
cease it, 50 percent said that they would.
The Marsh report found--I am quoting them here--``If TRIA
is not renewed or if there is no permanent solution in place,
the stand-alone insurance market is unlikely to have sufficient
capacity to meet demand.''
I have basic questions, and I will ask who may be the most
competent to address it. How much capacity is currently
available in the private sector? And how has that capacity
changed over the last few years? And what are the factors
limiting--and this is the question--the private sector from
expanding that capacity?
First of all, does someone have the answer to that first
question on how much----
Mr. McRaith. Our estimates, Mr. Chairman, are that the
entire property casualty industry has a capacity of about $427
billion. Approximately one-half of that is for commercial
lines.
Chairman Dodd. You mentioned this earlier.
Mr. McRaith. Right. And each company is some fraction of
that.
Chairman Dodd. OK. Well, give me some of the factors,
again, this limiting capacity issue here, and the response to
the question of why can't the industry begin to address and
deal with this question of capacity.
Mr. Bailey. Mr. Chairman, maybe I can jump in on a little
bit of this. The whole concept--and I have listened to some of
it--of a private solution is a complicated one for a lot of
reasons. Our industry has not done, frankly, a lot of mundane
things well. Mastering just the art of getting an accurate
policy issued is not something that we would put in the to-do
list at this point.
The extraordinary at that it would require, the effort that
it would require for all of these parties to come together to
create a private solution that was effective in every aspect is
just impractical. It would be a big bet for us to say let's
shut down TRIA and hope that everybody will come together, the
private sector, and come up with a reasonable solution. And
given what is at risk, it is just not a bet we should make.
Mr. Plunkett. Mr. Chairman, couldn't Congress facilitate
such a private solution? We recommend as part of our higher-
level TRIA proposal that, under the NAIC's direction, Congress
facilitate the construction of a private pool at lower levels
of losses, under $100 billion. That is an approach, if done
fairly, that could involve a public-private partnership with
Congress merely facilitating, allowing, encouraging, and
mandating that NAIC do it under certain specific conditions.
Chairman Dodd. It is a thought. Well, listen, thank you all
very much. We are going to try and move on this. And I am
pleased to see even--and I thank you, Mr. Plunkett, as well
here--that the need for some continuations here may differ on--
and obviously you do on the length and some of the areas we
cover, but my sense is here that there is a general consensus
we cannot let this--the option of doing nothing is really not
acceptable. I think, Mr. Plunkett, you would agree with that. I
am trying to get your attention, Mr. Plunkett.
Mr. Plunkett. Oh. Excuse me. Pardon me.
Chairman Dodd. Doing nothing is not an option.
Mr. Plunkett. We agree.
Chairman Dodd. All right. And so what we need to try to
pull together is--if we cannot--what I do not want to have
happen is us to get into next fall, late fall, with this clock
ticking on us here. So I am going to try and urge my colleagues
here on the Committee to come up with some proposals on this
and then move the process so we get some clarity on this, and
earlier, rather than waiting later, when I think the clock can
become a tremendous disadvantage with people who just want to
be obstructionist for the sake of being obstructionist.
Senator Reed has, I know, indicated--I don't want to try
and speak for him here, but a strong interest in the subject
matter as well, and I am very appreciative of his concerned
about this. So we will be trying to move as quickly as we can
here, but listening to people and trying to package something
together.
I want to say how grateful I am to Senator Shelby. He and I
differ on this issue to some degree, but he has been very
cooperative in the past in trying to work on something here
that will allow us to build a consensus here that will work.
So I am grateful to him for his cooperation, and I am
thankful to my colleagues here who showed up today as
expressing their interest in the subject matter. It is very
important, and I am very grateful to all of you who bring a
wealth of knowledge to this, and understanding. It has been
very helpful to hear your testimony here this morning.
This Committee will stand adjourned.
[Whereupon, at 12:40 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
FROM CHARLES CLARKE
Q.1. Access and affordability of terrorism risk insurance has
improved since 2001, and since TRIA's reauthorization in 2005.
This has happened even as the TRIA program has been scaled back
significantly. Do you forecast this trend continuing under
current market conditions?
A.1. While the data show that access and affordability for
terrorism insurance have improved since TRIA was enacted in
late 2002, and that the federal legislation has had a
stabilizing effect on the market, this was not the case during
the period following September 11, 2001, and the passage of
TRIA. Equally important, without a federal program that
continues to fulfill these goals, there are predictions that
market conditions would return to those that commercial
insurance consumers saw post-September 11 and pre-TRIA. For
example, according to the American Academy of Actuaries,
``without a federal backstop, there will be a long-term, rather
than just an immediate negative effect where there will be
higher prices, decreased availability, and lower take-up
rates.''
On the other hand, with federal legislation in place, we
have seen the types of market improvement that you describe.
The most recent (July 2006) ``Marketwatch'' report by Marsh
indicates that the percentage of companies buying terrorism
insurance covering property risks has increased consistently
since TRIA was enacted, reaching nearly 60 percent as of mid-
2006. The Council of Insurance Agents and Brokers' most recent
``Market Survey'' (covering the fourth quarter 2006) indicates
that terrorism premium rates are stable for most policyholders.
These market data are an indication that TRIA and the TRIA
Extension Act are working effectively to achieve the goal of a
stable insurance market despite the ongoing difficulties of
managing terrorism risk.
Although the TRIA Extension Act requires private insurers
to assume a significant amount of terrorism risk through per
company retentions, quota shares, and the removal of several
commercial lines from the program, the presence of the federal
backstop puts a box around the volatility associated with
terrorism risk and therefore facilitates both the availability
and affordability of coverage.
Many insurers--particularly those with large, diversified
client portfolios--manage their terrorism accumulations to a
level that is significantly less than their very substantial
retentions. This may be why scaling back the program, as was
done in the TRIA Extension Act, did not change the market
dynamic significantly.
Removing the backstop or further increasing retentions,
however, could have a more adverse impact, and undermine the
legislative goal of stability achieved under TRIA and its
successor. The current TRIA retention levels are already so
high that they preclude meaningful backstop protection for some
insurers, while for others, the program functions as more of a
solvency protection mechanism than an underwriting tool.
However, if retentions are raised further or the program is
scaled back to the extent that it ceases to perform even this
vital solvency role, regulators and rating agencies may step in
to limit exposure levels. As noted, this could lead to market
conditions akin to those we saw between September 11, 2001, and
the statute's enactment in November 2002, and the long-term
negative effects described by the American Academy of
Actuaries.
Q.1.a. Is the goal of the insurance industry to operate in a
market without a TRIA program? Should it be their goal?
A.1.a. The insurance industry's goal is to manage terrorism
insurance as efficiently and effectively as possible, given
myriad factors that make this an uninsurable risk, particularly
for chemical, nuclear, biological, and radiological (CNBR)
attacks. Right now, and for the foreseeable future, there is no
way to change the characteristics of terrorism risk to ``make''
it insurable and much of the information necessary to assess
the frequency of acts of terrorism understandably lies solely
in the hands of the federal government. Therefore, the
government is a necessary partner in managing our Nation's
exposure to terrorism.
Nonetheless, the industry is doing everything it possibly
can in the private market to enhance its understanding of this
risk and to assess the probability and severity of another
attack or series of attacks on U.S. soil. Improvements to
computer-based modeling are an example of what private insurers
are doing to assess and manage their exposure both at
individual locations and for aggregates of exposures. However,
the models do not quantify the likelihood of a terrorist attack
or provide insurers with any additional capacity to insure
terrorism risk. In fact, by helping insurers to allocate
capacity more efficiently, they actually may reduce the amount
of coverage provided by individual insurers in perceived high-
risk or high-density locations in the absence of federal
involvement in the management of this risk, or as the federal
program becomes only a solvency protection mechanism.
Additionally, the high degree of state regulatory
restrictions and the resulting lack of free market is a further
impediment to insurers' ability to operate without a federal
backstop. These price and product controls impede insurers'
ability to price terrorism adequately and therefore restrict
the supply of insurance that they are able to make available,
consistent with sound financial management, a situation that
would be exacerbated were TRIA to expire.
Thus, if Congress's goal is to stabilize and, hopefully,
improve the availability and affordability of terrorism
insurance, then a meaningful federal program must be continued.
We also strongly support preemption of state rate and form
regulation.
Q.1.b. What is your reaction to the CBO statement that a long
term program would contribute to marketplace distortions?
A.1.b. We disagree strongly with the Congressional Budget
Office's (``CBO's'') statement, taken from a January 2005
Report (``Federal Terrorism Reinsurance: An Update''), that a
long term program would contribute to marketplace distortions.
The industry retention under the TRIA Extension Act, estimated
at $35 billion in 2007, allows private reinsurers ample
opportunity to play a significant role in taking on and
managing terrorism risk. Yet, since CBO made those statements,
there have been only incremental increases in the amount of
private sector terrorism reinsurance capacity. According to Mr.
Veghte's testimony at the hearing, there is currently about $6-
8 billion in private sector terrorism reinsurance capacity,
about the same as a year ago.
Reinsurers view this risk much the same way that primary
insurers do. As a result, they are reluctant to take on more
risk than is prudent. The one important distinction between
primary insurers and reinsurers is that reinsurers do not
operate under government price controls and are able to charge
free-market, competitive rates for reinsurance. The current
regulatory differences between the primary and reinsurance
markets mean that the premiums that reinsurers require from
primary insurers often exceed the amount of terrorism premium
that primary insurers are able to obtain from policyholders,
due to these state rate regulatory restrictions and the
policyholders' interest in purchasing coverage required to be
made available under TRIA. According to the PWG, a little less
than $1 billion in primary terrorism insurance premiums is
collected annually. Virtually all of this is being used to fund
the $6-8 billion private reinsurance layer, and many carriers
are self-insuring their retentions by exposing more of their
capital to risk. TRIA is not distorting the market; rather, it
is allowing it to function in a manner that addresses
fundamental economic realities facing insurers and
policyholders.
Q.2. Accurate risk modeling is key to increasing the
availability of insurance. Mr. Veghte discusses risk modeling
in his testimony. Like other catastrophic events, terrorist
attacks are unexpected, unpredictable, and carry a large
potential for destruction. What makes terrorism risk impossible
to model where other catastrophic events can be modeled with a
certain degree of accuracy?
A.2. While both natural catastrophes and terrorism are capable
of causing extreme loss, they are fundamentally different from
an insurability perspective. For terrorism, private sector
reinsurance or other risk-sharing capital remains woefully
inadequate and shows no signs of robust growth in the near
future. This is a strong indicator that the capital markets
have reached the same conclusions about the private
insurability of terrorism risk. Moreover, there is no reliable
method for determining the likelihood of a terrorist attack
(event frequency) within the United States, a critical
component in determining the insurability of a risk. This is
complicated by the fact that terrorism is a deliberate act
committed by individuals bent on doing the worst possible harm.
Additionally, the interdependence of terrorism risk also limits
the potential effectiveness of mitigation. Finally, for
national security reasons, vital information necessary to
assess the terrorism threat is strictly classified and
unavailable to insurers as they attempt to manage this risk.
Unlike natural catastrophe models, which take both
frequency and severity into account, current terrorism models
in use are deterministic, not probabilistic--i.e., they
quantify the impact of representative terrorist attack
scenarios but do not assess the likelihood of an attack.
However, both the frequency and severity of attacks are
important considerations with respect to the underwriting and
pricing of terrorism coverage. As long as the frequency of such
events remains unpredictable, the models will be of limited
assistance to insurers as they grapple with the dimensions of
terrorism risk.
Q.3. According to the President's Working Group study, about
forty percent of all policyholders do not purchase terrorism
insurance. A contributing factor to this may be the belief by
some that the federal government will step in if another attack
occurs. Do you think government subsidies to the insurance
industry contribute to this perception?
A.3. TRIA does not provide a subsidy to the insurance industry.
It is a federal program intended to stabilize terrorism risk
insurance markets, that provides a benefit to policyholders and
enables the U.S. economy to operate and grow in the face of
potential terrorist attacks in this country. Pursuant to the
National Association of Insurance Commissioners Model
Disclosure form (which has been accepted by the U.S. Treasury),
insurers are required to warrant that the premiums paid by
policyholders do not include any charges for the portion of
losses covered by the TRIA backstop.
According to research by the Center for Terrorism Risk
Management Policy at RAND, the structure of the current program
helps to keep premiums more affordable for policyholders and
therefore encourages a higher take-up rate. Moreover, RAND
believes that, ``if TRIA is allowed to sunset, given the likely
increase in prices [paid by policyholders], and assuming no
change in the perception of risk by those who are insured, it
is likely that take-up rates will fall.'' Thus, rather than
depressing take-up rates, we believe that the federal backstop
in TRIA helps to keep rates affordable and encourages the
purchase of insurance.
Prior to Hurricane Katrina, most post-disaster response and
recovery grants provided by the federal government went to pay
for products and services that traditionally are not covered by
private insurance, such as government infrastructure repairs
and small business loan programs. Hurricane Katrina changed
that equation by expanding the categories of federal assistance
to some areas that traditionally have been covered exclusively
by insurance. Changing expectations about the role of post-
event government assistance, rather than TRIA's support for the
insurance marketplace, may change the willingness of
policyholders to purchase insurance in the future. To
understand this better, we encourage a thorough analysis of how
federal aid following a natural or man-made catastrophe should
be distributed in the future, particularly as it relates to
losses that typically are covered by private insurance.
Q.3.a. Would increased purchases of terrorism insurance
increase availability of policies in the marketplace?
A.3.a. TRIA requires that insurers make terrorism insurance
available for all TRIA-covered lines, on the same terms and
conditions that they make non-terrorism insurance available.
Thus, to increase property insurance take-up rates, it is not a
matter of more insurers making the coverage available, but of
more policyholders choosing to purchase it. For workers'
compensation, state laws in every jurisdiction not only require
insurers to make insurance available, but also mandate its
purchase as part of comprehensive workers' compensation
policies that cover all workplace accidents and injuries. As a
result, for workers' compensation, the take-up rate is
effectively 100%, so there is no need to increase take-up
rates.
As I noted previously, the percentage of companies buying
terrorism insurance covering property risks has increased
consistently since TRIA was enacted, suggesting both increased
demand and more acceptable pricing. The 60 percent take-up rate
actually compares favorably to other voluntary purchases of
catastrophic risk insurance, particularly flood insurance and
earthquake insurance.
Looking ahead, supply is dependent on underwriters'
perception of risk and it will remain very limited for certain
target exposures and concentrations of risk. Increased ability
of insurers to provide coverage beneath the TRIA retentions
will only occur with the improvement in terms and conditions of
reinsurance available to the industry.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM CHARLES
CLARKE
Q.1. Has industry proposed a long-term private sector solution
or is the federal program the only long-term solution? If the
federal backstop is the long-term solution, then what
modifications does industry propose?
A.1. TRIA is a public/private partnership which requires
insurers to retain significant losses before the federal
backstop is triggered. Based on the current year's retention
levels (20 percent of premiums covered lines), it is likely
that an event would have to exceed the magnitude of the
September 11, 2001 attack on the World Trade Center--more than
$30 billion--before the backstop comes into play. Additionally,
there are mechanisms in TRIA which provide for a post-event
policyholder surcharge through which Treasury can recoup
federal dollars that are expended. Through the per-company
retentions and policyholder surcharges, both insurers and
insureds make a significant private sector commitment to
managing terrorism risk.
We continue to believe, however, that a federal backstop,
particularly for CNBR risk, will remain necessary for the
foreseeable future. As I outlined in my testimony, the
characteristics that make terrorism an uninsurable risk remain
as strong today as they were immediately following September
11, 2001. While TRIA and its extension do not change this basic
dynamic, they put a box around the volatility associated with
terrorism risk and, therefore, facilitate both coverage
availability and affordability.
For the past six and a half years, we have been working
diligently with Congress, the Administration, capital markets
experts, the policyholder community, and others to examine
alternatives to TRIA. We continue to believe it is the most
operationally effective and fiscally efficient structure for
balancing market needs and solvency concerns. While well-
intentioned, the ``pool'' proposals that we have analyzed could
undermine sound underwriting and are unlikely to provide
significant new capital for the spreading of this risk.
We believe that the most important change that could be
made to TRIA is to provide financial certainty for insurers and
increased federal financial participation in the event of a
CNBR attack. Our greatest concern relates to the current $100
billion program cap, which would be wholly insufficient in the
event of a nuclear strike on a U.S. city. We also support
recalibrating insurer participation in a manner that is
consistent with the potential financial and operational
consequences of a CNBR attack. In my testimony, I outlined
several other suggested program changes applicable to
conventional terrorism risk, but we believe that appropriately
addressing CNBR risk is the highest priority in terms of
proposed modifications to the current program.
Q.2. What effect would tax-deductible reserves for future
terrorism losses have on an insurer's balance sheet? What
effect does it have on the ability to provide coverage?
A.2. Under current federal tax laws, GAAP, and state insurance
regulatory accounting standards (known as SAP), insurers are
not permitted to establish reserves for events which have not
yet occurred. This results in considerable volatility of losses
and earnings, depending on catastrophe loss experience (natural
catastrophes as well as terrorism) in a particular year.
To address this issue fully (i.e., from both a tax and an
accounting perspective), it would be necessary to amend the
Internal Revenue Code, GAAP, and SAP. Insurers then could
establish tax-deductible terrorism/catastrophe reserves, and
reflect them on their accounting statements.
These changes might reduce volatility initially as a
reserve buildup would allow for payment of some or all claims
with potentially little impact on an insurer's capital;
however, the reserve fund would have to be built up again over
time and those costs would have to be factored into perspective
costs and could create volatility post event. There are
differences of opinion in the financial community as to whether
this would put companies in better position to manage
catastrophe risk. There are, for example, concerns that a
catastrophe reserve would decrease insurers' surplus (because
the money is taken from surplus and put into a reserve), thus
``trapping'' capital that may be needed for other purposes, as
well as potentially reducing the capital that would otherwise
be used to underwrite risks. There is also a timing issue.
Certainly, in the case of a CNBR terrorist attack, it would
take many, many years for insurers to build reserves sufficient
to pay losses that could total hundreds of billions of dollars.
As this is occurring, money that otherwise would be paid in
taxes is allocated to the tax-deductible reserve, leading to a
federal revenue loss that might actually exceed the budgetary
impacts of the TRIA program.
Additionally, absent a federal backstop, tax-deductible
pre-event reserves are not likely to aid availability in a
material way because insurers must continue to manage their
terrorism risk based on exposure models and overall exposure
levels. They cannot take on more risk than is prudent in the
short-term because of the possibility that a tax-deductible
reserve will grow in the future. Moreover, rates are not likely
to decline, and in fact could increase, because the money that
is being set aside in the reserve to pay for future events is
not available to pay non-terrorism losses in the current year,
but both must be funded.
Q.3. If it does not become mandatory for insurers to offer CNBR
coverage, how would insurers adjust or allocate a loss in the
event of a terrorist attack involving both a conventional and
unconventional weapon? In the case of, say, a dirty bomb it
causes a large amount of physical damage to the building, but
only a small amount of radioactive or chemical clean-up. Would
insurers look to exclude the entire loss?
A.3. Absent the specific facts as they apply to each
policyholder, it is not possible to comment on how insurers
would adjust or allocate a loss in the event of a terrorist
attack involving both a conventional and unconventional weapon.
However, your question underscores one of the problems that
could arise from the current statutory framework, which
recognizes that the current TRIA backstop is not robust enough
to alleviate the solvency threat posed by unconventional
weapons and therefore allows insurers to utilize CNBR
exclusions to the extent permitted by state law. For workers'
compensation, there would be coverage for both conventional and
CNBR terrorism losses, with no distinctions.
Q.4. If industry could understand the long term probabilities
of terrorism occurrences, how could the industry price the risk
in a reasonable way that would spread the cost over time? In
other words, if the private industry could learn to model and
price the risk should insureds be able to expect little to no
charge in advance of an event, and enormous charges after,
dwindling over time? Is that desirable?
A.4. As a general proposition, insurers use terrorism models to
estimate the amount of insured loss from a static event so that
they can manage their respective accumulations of risk; this is
known as a deterministic model. This technique allows insurers
to spread their allocations of capacity geographically so that
the insurers' responsibility to compensate for physical damage
and human loss is expected to fall within its risk tolerance.
It does not, however, allow them to factor in the likelihood of
a future terrorist attack, which requires probabilistic
modeling. Probabilistic modeling for terrorism is in its
infancy, and it is likely to take years, if not decades, for it
to advance to the point where insurers have any confidence in
the predictions.
Even if credible probabilistic models were available, one
should not confuse the ability to quantify terrorism risk with
the ability to insure it. Models do not provide insurers with
any additional capacity to insure terrorism risk and in fact
may result in reducing the amount of coverage provided by
individual insurers in perceived high-risk or high-density
locations. While developing this improved understanding of the
terrorism loss potential is important to protect solvency, it
does not further TRIA's goals of improving availability and
affordability of terrorism insurance.
State rate regulatory requirements generally prohibit
insurers from retrospectively recouping past losses in their
rating base (i.e., rates are based on projected future costs,
not recovery of past losses). Even if state regulations
permitted such charges, they probably could not be sustained in
the market, because new entrants who are not burdened by the
losses in question could undercut insurers who need to recoup
past losses. Thus, private insurers do not have the legal or
practical ability to charge ``little or no'' premium in advance
of an event, and larger amounts after the fact, as suggested by
your question. TRIA, however, provides such a framework for the
federal government to recoup monies its pays for insured losses
through a post-event policyholder surcharge (capped at 3% of
premium annually). The federal backstop results in lower
premiums in the absence of a terrorist attack and the
policyholder surcharges result in higher post-event costs to
allow for recoupment to the Treasury.
Q.5. Granting that TRIA provides insurers some certainty about
Federal support and their own retention of risk, whether we
have TRIA in place or not, is it not true that a severe
terrorist event will end up in the lap of the Federal
Government to fund, after the fact, since insurers' equity is
insufficient?
A.5. TRIA provides certainty not only to insurers but also to
policyholders, the Treasury, and the economy at large. For
insurers, the per-company retention has increased each year
since TRIA was enacted (7% in 2003; 10% in 2004; 15% in 2005;
17.5% in 2006; 20% in 2007) and is unlikely to be breached in
any but the most extreme terrorist attacks. Nonetheless, the
backstop does provide stability to the marketplace and solvency
protection in the event of a large scale terrorist attack. TRIA
also provides policyholders who purchase terrorism coverage
with the certainty of knowing that they have an economic safety
net in place to cover workers' compensation, property loss, and
liability claims.
The policyholder surcharge mechanism in TRIA provides
fiscal certainty for taxpayers through recoupments to Treasury.
The program imposes mandatory policyholder surcharges for
aggregate loss levels to the extent those losses are paid by
the federal government up to $27.5 billion, and allows
policyholder surcharges at Treasury's discretion above that
level, up to the $100 billion annual program cap.
Greater certainty in each of the aforementioned areas
provides short- and long-term benefits to the economy. This
certainty would be severely compromised in the absence of TRIA,
however. Insurers would face the risk of ruin in the event of a
catastrophic terrorist attack. As noted above, this could
result in higher costs and reduced availability of terrorism
insurance coverage, leading to more uninsured losses in the
event of a large-scale attack and adversely affecting not only
the policyholders who are the targets of the terrorists, but
also the broader economy. The federal government may step in to
pay these losses, but without TRIA's policyholder surcharge
mechanism, there is little likelihood that these federal
expenditures will be recouped.
Thus, while TRIA is perceived to be providing a federal
benefit to the insurance system, it is altogether possible that
federal payments would be higher if the program is allowed to
expire than if a backstop remains in place.
Q.6. Would it not be preferable for all parties to provide for
some advance funding of this risk (possibly in combination with
other risks to lower the burden of any one on the taxpayers and
the society), so the cost could be spread over time, so the
uncertainty concerning the consequences be diminished and so
that the government would receive some income for its
inevitable support?
A.6. As noted above, insurers do not charge any premium to
policyholders for the protection provided by the federal
backstop, with the understanding that policyholders will be
assessed for post-event surcharges if a terrorist attack
triggers federal payments under the program to the levels
specified in the legislation. Should TRIA become ``pre-funded''
in some fashion, terrorism insurance rates are likely to
increase to finance the layer of risk that currently is funded
through the post-event policyholder surcharge, potentially
resulting in a drop in take-up rates and less protection for
the economy. We believe that an appropriate balance between the
per-company retentions, which provide advance funding through
the private insurance system, and policyholder surcharges,
which provide after-the-fact recoupment to Treasury, provides
greater overall economic efficiency than would a program that
requires more advance funding of the loss layer that currently
is post-event funded, and therefore higher insurance rates.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY FROM MICHAEL J.
PENINGER
Q.1.a. In your testimony, you state that if group life
insurance is added as a covered line under TRIA, a separate
recoupment mechanism should be created for group life insurers
because they take on different types of risks than P&C
insurers. Please explain why the risk covered by TRIA--the risk
of loss from an act of terrorism--is not the same for both
group life and P&C insurers?
A.1.a. The business of group life insurance is very different
than that of P&C insurance. P&C policies are generally priced
to take into account the immediate and complete destruction of
each property from various events, including fires, tornadoes,
earthquakes and hurricanes. Terrorism risk simply adds to the
probability of total loss (although at an indeterminable rate).
Group life policies, on the other hand, are priced according to
actuarially-sound mortality and morbidity tables that
accurately estimate the independent death rates of individuals
over various periods of time. These tables, and the resulting
policy premiums, do not, and cannot, take into account
unpredictable man-made terrorist attacks that can kill a
significant number of insured individuals all at once. In this
case, the probability of death is not just increased by the
terrorism risk (once again, at an indeterminable rate), but
magnified by the concentration risk prevalent by having groups
of people all located in one place.
In addition, unlike most P&C carriers, most (if not all)
group life insurers do not exclude nuclear, biological,
chemical and radiological terrorist events from coverage. As a
result, life insurers are more susceptible to financial
distress than P&C insurers if a major NBCR attack were to
occur.
Q.1.b. Please explain why the taxpayer should not have the
right to recoup payouts under TRIA from all of the
beneficiaries of the program? If an insurer receives the
profits associated with writing a line of insurance covered by
TRIA, why would they not also have to pay for the costs of the
government backstop provided by TRIA? If TRIA is an insurance
program, should not beneficiaries have to pay for the cost of
the insurance even if a beneficiary does not receive any
payments under the program?
A.1.b. We agree that the beneficiaries of the TRIA program
should pay for the cost of the program. The proposal for
separate recoupment provisions does nothing to prevent that
from occurring. It simply allocates the recoupment in
proportion to the benefits received from the program. Because
group life and P&C insurance are very different from each other
in terms of risks that are assumed, premiums that are charged
and duration of coverage, we believe it would be inappropriate
and inadvisable to commingle the recoupment of funds that were
remitted for group life and/or P&C claims. Separate recoupment
provisions should be included in any TRIA extension in order to
properly and equitably match the repayment of taxpayer funds
(via ``terrorism loss risk-spreading premiums'') with those
major lines of insurance that triggered the disbursement of
such funds.
Group life insurers should not have to reimburse the
Treasury for financial assistance that relates to P&C losses,
and vice versa. Otherwise, in the event of a terrorist attack
that causes mostly P&C losses in terms of dollars, life
insurers would have to pay the Treasury billions of dollars for
P&C losses that are completely unrelated to their line of
business and for which they derived no benefit from. Group life
insurers would not derive any benefit under TRIA (e.g., amount
of deductibles, recoupment) by P&C insurance being covered in
the program, just as P&C insurers would not derive any benefit
by group life insurance being added to the program.
Our recommended approach is similar to how our nation's
insurance guaranty association system works. All states but one
(Wisconsin) have separate guaranty associations for P&C and the
life/health insurers. This system is designed so only life/
health insurers are responsible for contributing toward the
unpaid claims of another life or health insurer, while only P&C
insurers are responsible for contributing toward the unpaid
claims of another P&C insurer. The TRIA program should be
designed similarly.
Q.2.a. In your written testimony, you argue that group life
insurance should be covered by TRIA because competitive
pressures will force companies to write group life insurance.
You state that ``unless the entire industry took the same
approach, any group life insurer that tried to prudently manage
its risk exposure by excluding terrorism coverage would be
placed at a severe competitive disadvantage in the
marketplace.'' As a general proposition, do you believe that
life insurance companies have the discipline necessary to abide
by their own underwriting standards and not to sell insurance
that exposes them to risks they can not effectively manage?
A.2.a. It is not a matter of discipline, but instead, a matter
of economic necessity and good public policy that group
insurers offer group life insurance to its policyholders at
affordable rates. Since group life is generally offered to
employers or associations as part of a package of other
insurance benefits (e.g., medical, dental, disability,
accidental death and dismemberment), an insurer would be
significantly jeopardizing its ability to obtain any group
insurance business if it decided not to include group life in
its benefits packages (since its competitors are including
group life in their packages).
While it is true that each and every insurer could decide
not to offer group life (which would eliminate the competitive
disadvantage of not offering it), group insurers believe that
its policyholders and their employees and members (for whom
group life is often their only form of life insurance) are
better protected if group life is included in these benefit
packages, despite the additional risk and potential financial
loss if a major terrorist attack were to kill an extraordinary
large number of certificate holders.
Insurers attempt to minimize their own risks of loss by
purchasing appropriate amounts of reinsurance. Immediately
after September 11, 2001, group life insurers were generally
unable to obtain catastrophic reinsurance, especially for
terrorist events. While such reinsurance has generally become
more available, it is often limited (e.g., it usually comes
with higher premiums, deductibles, various exclusions and lower
coverage limits).
Q.2.b. If so, does not the fact that life insurers are
presently offering group life at affordable rates, as the
President's Working Group on Financial Markets has reported,
demonstrate that there is no need to include group life
insurance as a line covered under TRIA?
A.2.b. No. The fact that group life remains affordable is a
function of competitive pressure as described above. To be able
to sell employee or group benefit packages in today's
competitive market, insurers must not only offer group life
insurance, but they must also price it low enough to remain
competitive enough to obtain the underlying contracts.
The life insurance industry is highly regulated in order to
make sure that it has sufficient reserves and surpluses to
withstand expected, as well as unexpected, death claims.
Notwithstanding, a group insurer's reserves and surplus
accounts are not designed or expected to withstand a terrorist
attack that kills a disproportionately large number of its
insured. In addition, most carriers have limited amounts of
catastrophic reinsurance that could be used to pay such claims.
Furthermore, if a multi-line insurer's reserves and surplus are
completely depleted by group life claims, there would not be
any other funds available to support other lines of insurance
(e.g., health, disability).
If one or several insurers are unable to meet some or most
of its obligations after a small or medium-sized terrorist
attack, state life and health guaranty associations are in
place to assure that such obligations are indeed met (up to
state-set limits). However, in the case of a major, cataclysmic
terrorist attack (e.g., NBCR event), several (or many)
insurers, including medium to large-size carriers, may become
insolvent, and the guaranty association system may not have the
capacity to fund unpaid claims. It is this potential system
collapse that concerns the group life industry and is why it
urges that group life be included in any TRIA extension.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
FROM MICHAEL J. PENINGER
Q.1. Studies have shown that terrorism risk insurance in group
life policies remains available, and that prices have even
declined, despite the fact that group life insurance is not
part of the TRIA program. What is the rationale for including
group life given these facts?
A.1. As mentioned above, group life insurance remains available
and affordable largely due to market competition, and will
probably remain so regardless of whether group life is included
in the TRIA program. What will change if group life is included
in TRIA is the insurance industry's increased ability to
withstand a major terrorist event (since the reinsurance market
for group life will be rejuvenated, just like it was for
workers' compensation when it was included in TRIA). TRIA would
provide the necessary backstop for the group life industry, its
policyholders and certificate holders--it would prevent many
insurers from becoming insolvent after such an attack and
provide the assurance that death claims will be paid.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
FROM JAMES H. VEGHTE
Q.1. Accurate risk modeling is key to increasing the
availability of insurance. Mr. Veghte discusses risk modeling
in his testimony. Like other catastrophic events, terrorist
attacks are unexpected, unpredictable, and carry a large
potential for destruction. What makes terrorism risk impossible
to model where other catastrophic events can be modeled with a
certain degree of accuracy?
A.1. In an attempt to better understand terrorism risk,
reinsurance companies have created task forces, consulted
military and intelligence experts, hired specialty risk
modeling firms, invested in research and development, and
developed new underwriting standards with the intention of
trying to determine if a private market could develop to absorb
this risk. Despite these efforts, a key struggle in the
development of a private market is that terrorism is not
conventional. It has characteristics, particularly with regard
to frequency, severity, and correlation, unlike any other peril
or risk.
Terrorists act willfully and unpredictably to cause fear
and inflict maximum harm and damages and confound those who
study terrorism. They can learn from their prior attacks and
attempt to defeat loss prevention and mitigation methods. In
addition, the insurance industry does not have access to all
potentially relevant information because the government keeps
it confidential due to national security interests.
The potential severity of terrorism losses, particularly
nuclear, radiological, biological and chemical (NRBC), is
enormous. The extreme loss scenarios would cause losses that
far outstrip insurer financial resources and therefore are
uninsurable.
Unlike natural disaster risk, reinsurers achieve virtually
no spread of risk or diversification with terrorism coverage.
Natural disasters such as hurricanes in Japan and Florida and
earthquakes in the far west are not correlated. This means that
premiums can be collected from each risk knowing that one loss
will not lead to another. With terrorism risk there is an
aggregation of losses arising from multiple clients and
multiple insurance products implicated in the same occurrence.
Thus, terrorism risk in Europe and North America may lead to
closely related loss events. Such high correlation thus
minimizes any benefit of risk spreading geographically.
At the same time, a terrorist attack can lead to major
disruptions in the financial markets, where reinsurers may be
liquidating assets to pay claims, while the asset values
themselves may be under market pressure due to investors'
concerns over the terrorist risk.
For these reasons, it has been impossible to effectively
model terrorism.
Q.2. The President's Working Group study noted that TRIA
appears to negatively affect the emergence of private
reinsurance capacity. How do you respond to this?
A.2. In fact, the opposite is true. By establishing definitive
loss parameters, TRIA has provided a defined layer for
reinsurers to participate in sharing the retained risk of loss
that primary companies face under the federal terrorism
program. The limited emergence of a private reinsurance market
is explained by the factors in question 1.
Q.3. You estimate that reinsurance capacity is currently
between $6 billion and $8 billion. This is an increase from
2005, when the capacity was estimated by RAA to be between $4
billion and $6 billion, correct?
A.3. This is correct.
Q.3.a. This growth also corresponds with a significant scaling
back of the TRIA program from the 2005 reauthorization. Do you
project this growth to continue?
A.3.a. Favorable loss experience and surplus growth may
moderately increase the supply of private terrorism reinsurance
but not to the extent that it would fill current capacity needs
of the primary industry to meet its retentions under TRIEA. It
would be difficult to expand participation in the current
environment. First, there is only so much capital that
companies are willing to dedicate to a TRIA-type program due to
the nature of terrorism risk. Second, because of the 2005
hurricane season, rating agencies and catastrophe modelers
began requiring companies to maintain more capital/surplus to
write the same amount of business as before the 2005
hurricanes. The private reinsurance market does not provide
coverage in the layers retained by the government under the
program.
Q.3.b. Do you envision a marketplace without TRIA?
A.3.b. Although progress has been made in modeling terrorism
loss scenarios, forecasts of the frequency and the severity of
terrorism losses are extremely problematic. Absent a lessening
of the risk of terrorism, the RAA does not see a time in the
foreseeable future when the frequency or severity of terrorism
risk can be successfully modeled and underwritten such that
reinsurers will be able to provide enough capacity to replace
TRIEA coverage. Reinsurers can provide only limited capacity
for terrorism because the magnitude of these potential losses
would otherwise put these companies at risk of insolvency.
Reinsurers' capital is necessary to support many other
outstanding underwriting commitments made by reinsurers,
including natural disasters, workers' compensation, and other
casualty coverages.
The insurance industry's retention under TRIEA is
approximately $36 billion now, but the reinsurance market is
only $6 to $8 billion. Since this gap has not been closed even
with TRIEA, it does not make sense to significantly alter TRIEA
at this time.
There is even less reinsurance appetite for NRBC risk,
which is even more difficult to model and underwrite.
Q.4. Mr. McRaith, you stated in your testimony that any
successor program should be of, ``sufficient time and means for
the private sector to build the appropriate capacity.'' Mr.
Veghte, you noted that RAA does not see an industry without a
TRIA program. Do you disagree here?
A.4. We seem to agree that the industry currently is unable to
provide enough capacity to replace TRIEA coverage and will not
be able to do so for the foreseeable future. Mr. McGraith notes
that TRIEA coverage must continue until the private sector can
build the appropriate capacity, but does not address how the
private sector could do that, how long it would take or if, in
fact, it would necessarily occur. Thus, we do not appear to be
in serious disagreement at this time.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING FROM JAMES H.
VEGHTE
Q.1. Has industry proposed a long-term private sector solution
or is the federal program the only long-term solution? If the
federal backstop is the long-term solution, then what
modifications does industry propose?
A.1. Due to the nature of the terrorism peril, the RAA believes
that private market mechanisms alone are insufficient at this
time to spread the risk of catastrophic terrorism loss in a
meaningful way. Instead, a continued public-private partnership
is critical to address terrorism risk. Without some form of a
federal role we would expect less coverage available at the
policyholder level, rising prices for terrorism cover and even
more limited private reinsurance capacity.
With regard to modifications to TRIEA, because reinsurance
is not covered under the program, we generally would defer to
the primary industry as to modifications that would be
necessary for a long-term program.
Q.2.a. What effect would tax-deductible reserves for future
terrorism losses have on an insurer's balance sheet? What
effect does it have on the ability to provide coverage?
A.2.a. The effect on insurers and reinsurers would be
different. For insurers, the ability to set aside terrorism
reserves for events that have not yet occurred and the
attendant investment securities and related investment income
would increase the surplus of the insurance industry. This is
because insurers could record a tax deductible reserve for
losses that have not been incurred or paid, thus reducing
current taxes that must be paid. These funds would be invested
and would grow and earn investment income until a qualifying
terrorism event occurred. The qualifying terrorism event (if
and when it occurs) would cause these reserves to be released
and the investments disposed to pay terrorism claims.
Tax deductible reserves for terrorism would be used as an
alternative to traditional reinsurance by insurers. Instead of
transferring terrorism risk, tax deductible reserves would
likely encourage insurers to retain it. That does not
necessarily mean, however, that insurers' appetite to assume
that risk would increase.
Q.2.b. What effect does it have on the ability to provide
coverage?
A.2.b. The effect on capacity may be different for insurers and
reinsurers. In theory, if insurers have a larger pool of assets
and surplus they would be able, all other things equal, to
write more insurance business. There are several important
caveats to this. First, the additional surplus and assets in
the terrorism reserve are supposed to be earmarked to pay
terrorism claims, so it is questionable whether this excess
surplus would be allowed to be counted to support additional
writings. The rating agencies, state insurance regulators or
even the federal legislation may limit or prohibit this.
Second, if insurers are allowed to use the additional surplus
to support additional writings, there is no guarantee that the
insurers will write additional terrorism insurance. The
concentration of terrorism exposures may be too high or there
may be alternative lines that are more profitable or prudent to
write. Finally, whether or not the additional terrorism
reserves are used to support other writings, other capital
considerations would have to be considered such as when the
price of coverage in the market is too low based on the
insurer's assessment of risk, etc.
For reinsurers, the effect of tax deductible catastrophe
reserves on capacity is clearer. A government tax incentive for
insurers will discourage participation in the private
reinsurance market. Risk transfer will suffer as insurers
retain risk.
Q.3. If it does not become mandatory for insurers to offer NRBC
coverage, how would insurers adjust or allocate a loss in the
event of a terrorist attack involving both a conventional and
unconventional weapon? In the case of, say, a dirty bomb it
causes a large amount of physical damage to the building, but
only a small amount of radioactive or chemical clean-up. Would
insurers look to exclude the entire loss?
A.3. Each reinsurance company would makes its decisions based
on the relevant law and contract language.
Q.4. If industry could understand the long-term probabilities
of terrorism occurrences, how could the industry price the risk
in a reasonable way that would spread the cost over time? In
other words, if the private industry could learn to model and
price the risk should insureds be able to expect little to no
charge in advance of an event, and enormous charges after,
dwindling over time? Is that desirable?
A.4. Insurers do not, and generally cannot by law, price
coverage to recover past losses. Prices are based on estimates
of future events. Improvements in modeling will obviously
assist in pricing.
Q.5. Granting that TRIA provides insurers some certainty about
Federal support and their own retention of risk, whether we
have TRIA in place or not, is it not true that a severe
terrorist event will end up in the lap of the Federal
Government to fund, after the fact, since insurers' equity is
insufficient?
A.5. It is true that without insurance, the Federal Government
likely would decide to pay for the vast majority of recovery
after a terrorist event. Through a public-private partnership
developed in advance of such an event, the Government creates a
viable market wherein the insurance industry can participate up
to a certain cap, which allows insurers to maintain solvency in
the event of an attack. This ultimately reduces the cost to the
Federal Government in the event of an attack because the
insurance industry is sharing in the costs.
Q.6. Would it not be preferable for all parties to provide for
some advance funding of this risk (possibly in combination with
other risks to lower the burden of any one on the taxpayers and
the society), so the cost could be spread over time, so the
uncertainty concerning the consequences be diminished and so
that the government would receive some income for its
inevitable support?
A.6. Current insurance coverage is pre-funded to the extent
insureds buy policies covering acts of terrorism. TRIEA
provides for post-event funding for any government contribution
by requiring insurance companies to pay back the federal
government for the reinsurance through post-event assessments
on insurance companies. The RAA supports this provision.
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