[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

TRIA AT TEN YEARS: THE FUTURE
OF THE TERRORISM RISK
INSURANCE PROGRAM

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

HEARING

BEFORE THE

SUBCOMMITTEE ON
INSURANCE, HOUSING AND
COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

SEPTEMBER 11, 2012

__________

Printed for the use of the Committee on Financial Services

Serial No. 112-155

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
BILL POSEY, Florida AL GREEN, Texas
MICHAEL G. FITZPATRICK, EMANUEL CLEAVER, Missouri
Pennsylvania GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio GARY C. PETERS, Michigan
ROBERT HURT, Virginia JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire

James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Insurance, Housing and Community Opportunity

JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice LUIS V. GUTIERREZ, Illinois,
Chairman Ranking Member
GARY G. MILLER, California MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin BRAD SHERMAN, California
ROBERT J. DOLD, Illinois MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio

C O N T E N T S

----------
Page
Hearing held on:
September 11, 2012........................................... 1
Appendix:
September 11, 2012........................................... 45

WITNESSES
Tuesday, September 11, 2012

Bartlett, Hon. Steve, President and Chief Executive Officer, the
Financial Services Roundtable.................................. 25
Copeman, Darwin, President and Chief Executive Officer, Jewelers
Mutual Insurance Company, on behalf of the National Association
of Mutual Insurance Companies (NAMIC).......................... 27
Hartwig, Robert P., Ph.D., CPCU, President and Economist, the
Insurance Information Institute................................ 4
Jensen, Jon, President, Correll Insurance Group, on behalf of the
Independent Insurance Agents & Brokers of America (IIABA)...... 29
John, David C., Senior Research Fellow, The Heritage Foundation.. 6
Lanza, Michael H., Executive Vice President and General Counsel,
Selective Insurance Group, Inc., on behalf of the Property
Casualty Insurers Association of America (PCI)................. 30
Lewis, Christopher M., Senior Vice President and Chief Insurance
Risk Officer, The Hartford Financial Services Group (The
Hartford), on behalf of The Hartford and the American Insurance
Association (AIA).............................................. 32
Lundberg, Rolf, Jr., Senior Vice President, Congressional and
Public Affairs, U.S. Chamber of Commerce, on behalf of the
Coalition to Insure Against Terrorism (CIAT)................... 8
Michel-Kerjan, Erwann O., Managing Director, Center for Risk
Management and Decision Processes, The Wharton School of
Business, University of Pennsylvania........................... 10
Ochenkowski, Janice, Managing Director, Jones Lang LaSalle, on
behalf of the Risk and Insurance Management Society, Inc.
(RIMS)......................................................... 11
Ryan, Edward B., Senior Managing Director, Aon Benfield, on
behalf of the Reinsurance Association of America (RAA)......... 33
St. Peter, Linda, 2012 Commercial Committee Vice Chair, the
National Association of REALTORS.............................. 13

APPENDIX

Prepared statements:
King, Hon. Peter............................................. 46
Bartlett, Hon. Steve......................................... 47
Copeman, Darwin.............................................. 53
Hartwig, Robert P............................................ 61
Jensen, Jon.................................................. 78
John, David C................................................ 82
Lanza, Michael H............................................. 87
Lewis, Christopher M......................................... 92
Lundberg, Rolf, Jr........................................... 97
Michel-Kerjan, Erwann O...................................... 104
Ochenkowski, Janice.......................................... 116
Ryan, Edward B............................................... 127
St. Peter, Linda............................................. 131

TRIA AT TEN YEARS: THE FUTURE
OF THE TERRORISM RISK
INSURANCE PROGRAM

----------

Tuesday, September 11, 2012

U.S. House of Representatives,
Subcommittee on Insurance, Housing
and Community Opportunity,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:01 a.m., in
room 2128, Rayburn House Office Building, Hon. Judy Biggert
[chairwoman of the subcommittee] presiding.
Members present: Representatives Biggert, Hurt, Garrett,
McHenry, Dold, Stivers; Cleaver and Sherman.
Also present: Representatives Grimm; Maloney and Green.
Chairwoman Biggert. This hearing of the Subcommittee on
Insurance, Housing and Community Opportunity will come to
order. We are having a ceremony today in the Rotunda and on the
Capitol steps at 11 a.m., so we will have to adjourn for a
while.
Anyway, just keep that in mind, but good morning, everyone,
and welcome to today's hearing to examine the future of the
Terrorism Risk Insurance Program. It is no coincidence that we
are holding this hearing on the 11th anniversary of September
11th. The Terrorism Risk Insurance Act (TRIA) was established
in direct response to the events of that tragic day in 2001, so
it is appropriate to reflect on the simple fact that we, as a
Nation, continue to grapple with the monumental consequences
that 9/11 had on every facet of American life.
Our goal today and always is to ensure that no act of
terror or threat of violence can ever again interrupt the
lives, prosperity, or liberty of the American people. For this
subcommittee, this means talking a little bit about TRIA and
how best to insure American commerce and families against an
attack, which we pray will never happen again.
That said, it is just one small part of a bigger
conversation. Every day, American soldiers are fighting for our
freedoms, while firefighters and emergency personnel here at
home put their lives on the line for our safety, just as their
colleagues did on 9/11.
So before we get into the policy details on matters of
terrorism risk insurance, I would just like to take a moment to
honor those we lost on 9/11 and offer a simple ``thank you'' to
the people still fighting for our way of life.
While we examine ways to facilitate investment and job
growth in America, let us never forget the heroes who
sacrificed everything to give us an America worth investing in.
That is something to remember.
With that, I would like to announce that after the ranking
member and I deliver opening statements, we will hear from our
first panel of witnesses. We will then recess the hearing at
10:30 so that Members can attend the 9/11 Congressional
Remembrance Ceremony. At 11:45, we will resume this hearing.
As we all know, in the aftermath of September 11th, our
country was resilient. Even our financial services sector--
particularly the insurance industry--performed well. The record
reflects that insurance firms, including those directly
affected by the attacks, expedited claims processing and paid
and absorbed the loss of $40 billion in today's dollars.
The American people, businesses, and our economy emerged
from this disaster but also asked Congress to step in to fill a
temporary void in the market that threatened our economy. A new
and unique insurance risk, terrorism, had emerged.
For the private sector, this new risk was unpredictable,
uninsurable, and excluded from commercial policies. To prevent
further economic toil, Congress stepped in, enacting the
Terrorism Risk Insurance Act in 2002, which stabilized the
marketplace.
TRIA temporarily created a form of reinsurance, a public-
private partnership to make available terrorism risk insurance
until the private sector could model and price for this new
risk. To give the private sector more time Congress has
reauthorized TRIA twice. These congressional interventions were
the right thing to do and I supported them.
However, today, well in advance of the Terrorism Risk
Insurance Program's December 2014 expiration, our subcommittee
begins an important examination of the program, its impact over
the last decade, and its future. This hearing will assess
conditions in the insurance market and the private sector's
capacity to offer reinsurance and insurance coverage without a
Federal backstop for losses resulting from international and
domestic terrorism.
This hearing also will explore options for encouraging
greater private sector participation in the market for
terrorism risk insurance. I hope that this will be the first of
many hearings that our subcommittee will hold on TRIA. It is
critical to our families, workers, businesses, and economy that
Congress develops a long-term solution to risk--terrorism risk
insurance.
With that, let me just welcome our witnesses and thank you
for participating in today's discussion, and we look forward to
your testimony.
And I will now recognize the ranking member pro tem today,
Mrs. Maloney from New York.
Mrs. Maloney. Thank you very much. I am not even on this
subcommittee. I just came by because I thought it was
important, so I am sitting here as the ranking member for the
moment.
But I want to congratulate my colleague for calling this
important hearing and assembling such a well-informed panel. We
both had terrific conventions and it is very appropriate that
our first hearing is on such a critically important issue for
the future of our country.
As one who lived through 9/11, and lost 500 constituents on
that day, I know full well how united and determined our
country was. I have never seen this Congress more determined
and united and I have never seen the public and private sector,
the financial industry bounce back so quickly. We opened up our
markets within a week.
It was an incredible example of American determination,
will, and leadership, how we responded as a Nation to that
terrible attack that killed 3,000 innocent Americans who did
nothing more than what we are doing today. They woke up, went
to work, sat at their desks, and were murdered. It was such a
horrific crime that to this day, whenever I meet anyone
internationally, or nationally, the first thing they tell me
upon finding out I am from New York is what they were doing,
how they heard about this tragic attack on us.
This country responded in a multitude of ways to combat
terrorism. We totally reorganized our government, our
intelligence operations. But truly, the most important thing
for our economy, in my opinion, was the enactment of the
antiterrorism risk insurance.
In terms of New York and other large cities, no business
could get any insurance. There was a fear of terrorism. The
economy could not move forward.
I talked to businesses from New York who had to go to
Lloyd's of London. All building stopped in New York because
there was no insurance.
With bipartisan support in 2002, and then we reauthorized
it again in 2007, this tremendously important bill was put into
place and has been very successful and has been part of the
American dream, the American success story, and the American
recovery story. We remember the attack but too often we forget
that the response, the rescue, and the recovery were among the
most dramatic achievements in our country's history.
Since it is 9/11, I am going to share one story with you. I
was at the site the next day. We assembled at a school next to
the site. The workers were there, the mayor, the governor.
The reports were that 25,000 people had died in the towers.
That was their belief. And a decision was made that they would
announce that only 6,000 had died because the number 25,000 was
too much for the Nation to bear.
So they announced 6,000; we all know the story. Because of
the heroic efforts of volunteers--our police, our fire, our
public sector, our private sector--it was the most incredibly
successful rescue effort in the history of our country. All of
these people were rescued and pushed out of the building and
the number dropped every day instead of climbing every day.
The rebuilding started and one of the most important
building blocks was TRIA. I strongly support its
reauthorization. TRIA has absolutely no cost to the taxpayer
unless there is a terrorist attack. And if we have that
terrible event, if it happens--and we certainly hope it
doesn't--TRIA saves the government money by structuring what
would otherwise be hastily drafted emergency spending.
Of course, setting up a public-private partnership to
provide insurance coverage is more cost-effective than throwing
money at a disaster. This helps our insurance companies to
measure and estimate their risk and it does not kick in until
after $100 billion in cost.
I believe that this is a very, very important program. It
is part of the success of our economy, and our economic success
is our people's success.
So I look forward to the new ideas and I look forward to
the new insights. I want to thank you all for coming. There is
a New York meeting and a remembrance that is coming up, so I
cannot stay the whole time, but my staff is here.
I am so thrilled that you called this hearing, Chairwoman
Biggert. I think it is appropriate and sensitive that you
called it on this incredibly important day as we remember, and
we continue to build.
So I thank everyone for being here and being part of the
solution.
I yield back and will place more into the record. Thank
you.
Chairwoman Biggert. Thank you, Mrs. Maloney.
And with that, without objection, all Members' opening
statements will be made a part of the record, and we will have
any of those when we come back if they wish. Without objection,
it is so ordered.
And now, I will introduce the panel of witnesses: Dr.
Robert Hartwig, president, Insurance Information Institute; Mr.
David C. John, senior research fellow, the Heritage Foundation;
Mr. Rolf Lundberg, senior vice president, congressional and
public affairs, U.S. Chamber of Commerce and the Coalition to
Insure Against Terrorism; Dr. Erwann Michel-Kerjan, professor
and managing director, Risk Management and Decision Processing
Center, Wharton School of Business, University of Pennsylvania;
Ms. Janice Ochenkowski, managing director, Jones Lang LaSalle,
on behalf of the Risk and Insurance Management Society,
Incorporated; and Ms. Linda St. Peter, operations manager,
Prudential Connecticut Realty on behalf of the National
Association of REALTORS.
Welcome to you all. Without objection, your written
statements will be made a part of the record, and you will each
be recognized for a 5-minute summary of your testimony.
We will start with you, Dr. Hartwig. You are recognized for
5 minutes. And please be sure your microphone is on.

STATEMENT OF ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT AND
ECONOMIST, THE INSURANCE INFORMATION INSTITUTE

Mr. Hartwig. Madam Chairwoman and members of the
subcommittee, good morning. My name is Robert Hartwig and I am
president and economist at the Insurance Information Institute,
an international property/casualty insurance trade association
based in New York. Our members account for nearly 70 percent of
all property/casualty insurance premiums written in the United
States and financed the overwhelming majority of losses on 9/
11.
The terrorist attacks of September 11, 2001, produced
insured losses larger than any natural or man-made event in
history. Claims paid by insurers to their policyholders
eventually totaled some $40 billion.
The enormity of the loss combined with the possibility of
future attacks led insurers and reinsurers to exclude coverage
arising from virtually all commercial property insurance
policies. The economic consequences of such exclusions were
quick to manifest themselves.
Major commercial property construction projects around the
country, unable to secure coverage against the now very real
risk of terrorist attack, were in jeopardy of being tabled,
hurting job growth at a time of rapidly rising unemployment and
recession. Banks threatened to choke off credit because their
borrowers could not secure terrorism coverage. And even as
exclusions proliferated, prices soared.
It was not until 14 months later, when Congress approved
the Terrorism Risk Insurance Act in November of 2002, that
stability finally returned to the market and coverage for
terrorism attacks resumed. Ten years later, the war on terror
is far from over, but the Terrorism Risk Insurance Program, by
all objective measures, is an unqualified success. The program
not only succeeded in restoring stability to the country's
vital insurance markets but it continues to deliver
substantive, direct benefits to businesses, workers, consumers,
and the economy overall, all at no cost to the taxpayer.
Today, the vast majority of businesses in the market
purchase terrorism coverage. The coverage is affordable and
billions of dollars of private sector capital have been
attracted to the market.
Given these statistics, it is tempting to conclude that in
the 10 years since TRIA was first implemented, insurance
markets have fully adjusted to the post-9/11 environment, and
insurers have concluded that terrorism is a fully insurable
risk. The reality is quite different.
The fact of the matter is that terrorism risk today is
almost every bit as uninsurable as it was a decade ago. Recent
major successes in the war on terror, including the killing of
Osama bin Laden last year, do not alter this conclusion. This
is because the current stability in the terrorism insurance
market in the United States is due almost entirely to two
factors: there has been no successful attack on U.S. soil since
2001; and the Terrorism Risk Insurance Program remains in
place.
As you can see from Table 1 in my testimony, there has been
no shortage of attempted attacks on U.S. soil. Fortunately,
none have been successful. But without question, TRIA and its
successors are the principal reason for the continued stability
in the market today.
In 2004 and 2006, as program expirations loomed, terrorism
exclusions reappeared in the marketplace. With the current
program's expiration now a little more than 2 years away, it is
virtually certain that terrorism exclusions will reappear again
in 2013.
Simply put, acts of terror violate basic fundamental
principles associated with insurance. In short, it is
impossible for an insurer to reliably ascertain the likelihood
or frequency of attacks. Also, losses or severity are potential
unbounded, even exceeding the claims-paying ability of some
insurers, or in some cases, even of the entire insurance
industry.
Acts of terror are clearly also intentional in nature. As
such, it can be difficult or impossible for an insurer to
ascertain the premium to be charged and difficult to achieve
the necessary spread of risk to avoid exposing an insurer to an
unreasonable risk of insolvency.
In terms of factors that could influence greater private
sector participation in the terrorism insurance marketplace,
the committee might consider several alternatives, including a
long-term extension or permanence of the Terrorism Risk
Insurance Program--experience abroad suggests that both of
these are effective at creating a stable environment--and also
may revisit some early pooling proposals that the industry did
propose in the immediate aftermath of 9/11.
So in the 11 years since the tragedy of the September 11th
terrorist attack, much has been learned about the nature of
terrorism risk and its insurability. There is no question that
TRIA and its successors brought much-needed stability to the
marketplace. In the decade since, private sector insurers and
reinsurers in the Federal Government have successfully created
a structure that offers lasting stability, providing tangible
benefits for the American economy.
The looming expiration of the Terrorism Risk Insurance
Program at the end of 2014 brings to a head the question of
whether terrorism risk is now or ever will be a risk that can
be managed entirely within the private sector. The evidence,
both from the United States and from similar programs abroad,
is that market stability, in terms of both pricing and
availability of terrorism coverage as well as the ability to
maintain adequate and expanding levels of capacity over time,
are contingent on the continued existence of the Terrorism Risk
Insurance Program.
Thank you very much for the opportunity to testify. I would
be happy to answer your questions.
[The prepared statement of Dr. Hartwig can be found on page
61 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. John, you are recognized for 5 minutes.

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, THE
HERITAGE FOUNDATION

Mr. John. Thank you. Chairwoman Biggert and members of the
subcommittee, I appreciate the opportunity to testify this
morning. I am David John, a senior research fellow at The
Heritage Foundation.
The Terrorism Risk Insurance Act and its various successors
served a very real purpose in the days after 9/11, when
insurance companies and their customers feared the cost of
providing coverage for acts of terrorism would be prohibitive.
However, we have now reached the point where the private sector
is increasingly capable of providing that coverage at
appropriate prices without government support.
In fact, the continued existence of TRIA may keep the
industry from further progress. However, the industry will need
time to make the transition to a fully private terrorism
insurance program and it is greatly to the subcommittee's
credit that you are starting this discussion now rather than
waiting until 2014.
Before TRIA and after 9/11 property and casualty insurers
faced a serious dilemma. Many of their corporate policies
issued before the 9/11 attacks insured against terrorism
attacks in much the same way that they covered natural
disasters and more conventional accidents.
Then and now, insurance premiums on most types of loss were
based on sophisticated estimates of the likelihood that a
particular claim would have to be paid. Until 9/11, insurers
and the rest of us never expected the scale of damage inflicted
in those attacks. Thus, before 9/11, terrorism coverage often
carried a very low price and was often included without much
additional thought in more comprehensive coverage.
Then, the world changed. Insurers and the rest of us
discovered that these attacks were possible and could cause
catastrophic damage. At the time, none of us had any firm idea
whether the attacks were isolated incidents or not. As a
result, insurers were unable to price terrorism coverage
quickly and accurately and were unwilling to expose their
companies to claims that could run into the tens of billions of
dollars.
Then TRIA came along and that changed the situation. But as
we knew at the time, the wrong government response could
prevent the market from taking necessary actions to return
towards the private coverage of terrorism risks. Any program
that essentially transferred the risk from companies to the
government by promising that tax dollars would pay off most of
the losses would only make it more difficult for private
insurers to establish a real market price for terrorism
coverage.
While the problem in 2001 was real, it should have been
temporary. By now, normal insurance industry processes should
have been able to resolve it. The industry should have
developed ways to price terrorism insurance properly, which
included upper limits on corporate liability. And reinsurers
should have found ways to involve sophisticated investors who,
for a price, could face the type of losses that could occur.
Recent industry data indicates that there has been a great
deal of progress towards making insurance coverage more widely
available and affordable. While coverage varies according to
geographic area and industry, some industries show that over
three-quarters of larger firms have purchased some form of
terrorism coverage. In addition, the cost has been dropping.
TRIA was never intended to be a permanent program. As the
original bill stated, TRIA would provide temporary financial
compensation to insured parties, contributing to the
stabilization of the United States economy at the time of
national crisis while the financial services industry developed
systems, mechanisms, products, and programs necessary to create
viable financial services market for the terrorism risk
insurance. Returning this coverage to the private sector is an
important goal because there is no reason why taxpayers should
continue to have the ultimate financial responsibility for
paying insurance losses on private property.
There is no need to extend TRIA substantially beyond its
2014 expiration date. Some insurance industry people claim that
coverage will revert to same types of problems as before TRIA,
but this is not necessarily the case.
Insurer cooperation, increasing the event trigger, removing
coverage for acts of domestic terrorism, and various other
changes could start the process of enabling the insurance
industry to phase back to private coverage. That should be
followed by a full phase-out of TRIA so that the entire program
has ended no more than 2 years after the current 2014
expiration date.
If such additional time is necessary, Congress should also
increasingly indicate, at the time of passage in 2013 or 2014,
to the industry that further extensions should not come,
otherwise the industry is going to assume that this is a
permanent program and that they never need to take any
additional steps. And the insurance industry should expect to
offer coverage without any further taxpayer subsidies.
As I say, Congress should neither extend or expand TRIA
without a firm and short phase-out, and if Congress passes any
longer extension than I have proposed, whomever is in the White
House after January 20th should reject such legislation. It is
time now to end the temporary program and go back to the
private sector.
Thank you.
[The prepared statement of Mr. John can be found on page 82
of the appendix.]
Chairwoman Biggert. Thank you.
Mr. Lundberg, you are recognized for 5 minutes.

STATEMENT OF ROLF LUNDBERG, JR., SENIOR VICE PRESIDENT,
CONGRESSIONAL AND PUBLIC AFFAIRS, U.S. CHAMBER OF COMMERCE, ON
BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM (CIAT)

Mr. Lundberg. Thank you.
Good morning, Chairwoman Biggert, and members of the
subcommittee. I very much appreciate the opportunity to testify
this morning regarding the key issue of terrorism risk
insurance and its importance to the broad economy. My name is
Rolf Lundberg and I am senior vice president for congressional
and public affairs at the U.S. Chamber of Commerce.
I am appearing today on behalf of the Coalition to Insure
Against Terrorism, of which the U.S. Chamber is a founding
member. CIAT is a broad coalition of commercial insurance
consumers formed immediately after 9/11 to ensure that American
businesses could obtain comprehensive and affordable terrorism
insurance.
The diverse CIAT membership represents commercial real
estate, banking, energy, construction, hotel and hospitality,
entertainment, manufacturing, transportation, and major league
sports, as well as public sector buyers of insurance. CIAT is,
therefore, the true consumer voice on terrorism risk insurance,
as we are comprised of the principal policyholders of
commercial property and casualty lines of insurance in this
country.
I am pleased today to offer the policyholder perspective on
terrorism risk insurance, to highlight why the TRIA program
continues to be vital to our broad economy.
As we saw in the months following the 9/11 attacks, the
lack of terrorism risk insurance contributed to a paralysis of
the broad economy, especially in construction, tourism,
business travel, and real estate finance. Enactment of TRIA
changed that by making terrorism risk coverage widely available
to commercial policyholders and delivering it through a private
insurance mechanism that keeps private industry's skin in the
game through the insurer deductible and co-share layers. It
also protects taxpayers by providing for recoupment from the
commercial policyholders of any Federal share paid out in the
wake of a large-scale event.
While private insurance capacity apparently has grown
somewhat in the past decade, these years have also taught us
that a continuing Federal role in this unique risk remains
absolutely vital.
The terrorism peril is simply too intrinsically linked to
government policy and intelligence to be solely handled by the
private sector alone. TRIA needs to be reauthorized.
We therefore commend you, Chairwoman Biggert, and the
subcommittee, for your leadership on this issue and for
convening this important hearing.
On the front of the U.S. Chamber building is a 26-foot tall
banner that stretches across the building and it spells out one
word: ``Jobs.'' That banner has served as a reminder to us all
of what our focus must be.
The Chamber believes that stronger and faster economic
growth is the best way to successfully put Americans back to
work. We must not only affirmatively clear away impediments to
job creation but we must avoid taking steps that would create
more uncertainty and strangle businesses, stifling our
economy's ability to grow and also affect negatively job
creation.
America has strong demographics, abundant natural
resources, the world's most productive workers, and a long
history of picking ourselves up when we are down. We should not
inflict additional and unnecessary damage to our fragile
economy and possibly extinguish the prospect of economic
recovery and new jobs for Americans by failing to properly deal
with TRIA.
The terrorists who perpetrated that terrible attack on 9/11
sought to paralyze us and our economy with fear, but the best
of America shone through that day and in the weeks and months
that followed. It is incumbent to remember the lessons of 9/11,
and among those is the importance of maintaining safeguards to
ensure that such catastrophic events do not cause lasting harm
to our economy. As we saw in the months that followed 9/11,
managing the risk of terrorism is one of those imperatives.
In recognition of the critical post-9/11 situation,
Congress and the Bush Administration worked together in 2002 to
enact TRIA, which is a public-private risk-sharing mechanism to
deal with terrorism risk that has served our Nation and its
economy extraordinarily well for nearly 10 years.
We have no interest in seeing a return to the standard
terrorism exclusions that became the norm in the months
following 9/11. We saw that during the two reauthorizations in
2005 and 2007, and we believe that we should not return to
those kinds of exclusions in the upcoming renewals of terrorism
policies.
Let me just briefly talk about current market conditions.
Because of TRIA, today terrorism risk insurance, with one
exception--nuclear and biological, chemical, and radiological--
coverage is generally available for commercial policyholders.
It would not be available were it not for TRIA.
CIAT members have generally seen a decline in pricing for
terrorism insurance, which we attribute not just to the normal
ebb and flow of the insurance market but rather to the
continued availability of the TRIA mechanism, which has worked
extraordinarily well since its enactment.
The TRIA program has worked well and we encourage the
committee to examine it carefully and to extend it before its
expiration.
Thank you, Madam Chairwoman.
[The prepared statement of Mr. Lundberg can be found on
page 97 of the appendix.]
Chairwoman Biggert. Thank you.
Dr. Michel-Kerjan, you are recognized for 5 minutes.

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

Mr. Michel-Kerjan. Thank you, Chairwoman Biggert.
Let me open by saying that if our common goal is to make
the Nation more financially resilient to future terrorist
attacks and also to limit the spending of taxpayers' money,
then our debate should not be on whether to let TRIA expire.
Rather, it should be on how we work together to make TRIA more
effective. That is a very different question.
As it was designed to do, TRIA makes a supply of coverage
available and affordable. Terrorism insurance costs in the
United States have been going down continuously and are among
the least expensive in the world. In a recent study, I have
also shown that insurers are willing to provide more capacity
for terrorism than for other catastrophic risks because they
collect all the premiums but are responsible for only the
portion of losses.
On the demand side, take-up rates among firms increased
from just 20 to 27 percent in 2003 to 60 percent in--since
2006, a figure which, by the way, combined all type of
terrorism coverage, not just TRIA, from what U.S. companies can
get for the market. Still, this means that about 4 out of 10
large corporations don't have coverage against terrorism today.
Let's remember that on 9/11, the coverage was virtually 100
percent, which allowed for a quick economic recovery of the
country. I think we can do better on the take-up rate than
where we are today.
I will now turn to challenging the main argument that
ending TRIA will limit the financial exposure of the
government. I think, to put it simply, the logic is wrong. The
world without TRIA will actually mean not less but more
exposure for all of us as taxpayers.
Let's say we are in September 2016. TRIA expired in 2014;
15 years have passed since 2001. Attention to terrorism has
faded somewhat on the demand side. On the supply side, the only
insurers that offer the coverage are at a very high price to
account for the cost of capital needed to underwrite extreme
events. Many firms go unprotected
Terrorists inflict a large-scale attack with massive
economic losses. An injured firm called on Congress to rescue
them. Not only is it an election year--again, my scenario is we
are in 2016--but a trend toward increasing Federal disaster
relief and corporate bailouts in the past 10 years has created
new and fairly high expectation. I detail that aspect at more
length in my written testimony and refer you to figure one on
page seven, which is fairly striking.
The cost of government relief in the wake of that new
terrorist attack will likely be very expensive for taxpayers.
That is why I think a better option moving forward is to
redesign TRIA.
Some of the concepts developed by other OECD countries may
be relevant here. I discuss five of them in my written
testimony. Let me briefly mention three here.
Israel: Israel has 100 percent government coverage. In the
U.K., there had been a public-private risk-sharing arrangement
based on pooling with unlimited government debt issuance that
the pool can draw from. So contrary to what is often mentioned,
this is not a reinsurance program; this is an unlimited line of
credit from the British government. Germany, the largest
economy in Europe, also uses a public-private risk-sharing,
again based on pooling, but with limited reinsurance from the
government.
I would like to note here that in both cases--in the U.K.
and Germany--the government receives a premium to cover that
coverage. It is not free.
To summarize, this is not a question of TRIA or no TRIA.
This is about strengthening the current program to make the
Nation more resilient financially to future attacks, not less,
and to do that by making the American taxpayers less exposed,
not more. My colleagues at the Wharton Research Center and on
the OEC board that I have been honored to chair over the past 6
years look forward to working with you and the President on how
we do this.
Before I stop here, and on a more personal note, I want to
congratulate the subcommittee, and especially you,
Congresswoman Biggert, for you leadership in supporting and
renewing the National Flood Insurance Program that was signed
by the President in early July. I trust you will be as
successful in reforming TRIA. Thank you.
[The prepared statement of Dr. Michel-Kerjan can be found
on page 104 of the appendix.]
Chairwoman Biggert. Thank you, Doctor.
Ms. Ochenkowski, you are recognized for 5 minutes.

STATEMENT OF JANICE OCHENKOWSKI, MANAGING DIRECTOR, JONES LANG
LaSALLE, ON BEHALF OF THE RISK AND INSURANCE MANAGEMENT
SOCIETY, INC. (RIMS)

Ms. Ochenkowski. Thank you, and good morning, Chairwoman
Biggert, and members of the subcommittee. I am Janice
Ochenkowski, the managing director responsible for global risk
management at Jones Lang LaSalle, a real estate and financial
services company headquartered in Chicago.
I am pleased to testify this morning on behalf of the Risk
and Insurance Management Society, known as RIMS, and I thank
the subcommittee for this important policy debate regarding the
reauthorization of the Terrorism Risk Insurance Act, especially
on this anniversary of 9/11.
RIMS is a not-for-profit organization dedicated to
advancing the practice of risk management for the benefit of
our nearly 4,000 members. Those members span all types of
organizations and they include corporations, universities,
hospitals, and public entities such as the City of San
Francisco, the Miami-Dade School District, and Orange County,
California. However, as diverse as RIMS members organizations
are, they share the common characteristic of wanting the
availability of terrorism insurance.
At Jones Lang LaSalle, we purchase insurance for properties
owned by our clients, which in the United States is just under
70 million square feet of real estate with an aggregate insured
value of just under $9 billion. All of them are commercial
properties. They span various investment types, such as
warehouses, but most are office buildings.
Since the enactment of TRIA, although there are some
limitations on specific high-risk locations, in general we are
able to buy the coverage we need at a premium that can be
absorbed by our tenants and our investors. TRIA has been a
success.
And if we consider the economic impact of the lack of
terrorism insurance, we have to consider that the inability to
acquire sufficient terrorism coverage could result in the
inability to secure financing for new schools, factories, and
construction projects. Without TRIA, many companies would not
be able to comply with loan requirements and the buying and
selling of real estate would be impacted, which also would
affect the general economy.
Public entities also face terrorism exposures. Public and
private transportation, schools, hospitals, and special and
sporting events all have terrorism coverage needs but they
don't have unlimited budgets to purchase it.
Because there is no historical data, insuring the terrorism
risk is not like other insurance. We are not able to predict
frequency or severity of a potential terrorist event because
the timing, the location, and the target can't be identified in
advance. Without some form of backup like TRIA, RIMS believes
that insurance companies will review their portfolios of
business and will refuse to insure risks in areas where the
exposure is greatest. Large and small businesses as well as
public entities would be affected by this.
As we evaluate the success of TRIA, we should look back to
congressional actions since 9/11. Following 9/11 and prior to
the passage of TRIA in 2002, the required limits of terrorism
insurance were not available. RIMS members had difficulty
purchasing the insurance needed for their operations as well as
to protect their employees through workers' compensation
programs.
Passage of TRIA in 2002 was followed by a demonstrable
increase in the number of insurers willing to write the
coverage. In 2006, prior to the passage of TRIPRA, 75 percent
of RIMS' members reported that terrorism coverage was
conditioned upon the extension of TRIA; 76 percent of our
members stated that their terrorism coverage limits would
decrease and 82 percent felt that premium would increase if
TRIA was not extended.
However, in 2010 our members indicated that capacity and
pricing was available. In July 2012, nearly 85 percent of our
members wanted Congress to reauthorize TRIPRA and said that
without another long-term extension, issues of affordability
and availability will resurface.
In our written testimony, we outline several policy
principles for the subcommittee's consideration. I will
highlight three of them.
First, a completely private market solution in the long
term is probably not feasible because of the difficulty in
predicting and pricing the risks. Insurers, as part of their
corporate governance, need to be able to assess what business
risks are and how they can be quantified and treated.
Second, a public-private partnership provides the best
alternative and the Federal Government will likely continue to
be involved in a reinsurance capacity at some level, with that
involvement decreasing over time.
Third, the solution needs to address insurance coverage for
nuclear, biological, chemical, and radiological events caused
by terrorism. Our Federal Government has stated that potential
acts of terrorism from these sources are likely, so including
them in the solution is reasonable.
That concludes our formal remarks, and RIMS appreciates the
opportunity to testify and thanks the subcommittee for
beginning this very important discussion. We stand ready to
serve as a resource as you begin your work.
Thank you.
[The prepared statement of Ms. Ochenkowski can be found on
page 116 of the appendix.]
Chairwoman Biggert. Thank you.
Ms. St. Peter, you are recognized for 5 minutes.

STATEMENT OF LINDA ST. PETER, 2012 COMMERCIAL COMMITTEE VICE
CHAIR, THE NATIONAL ASSOCIATION OF REALTORS (NAR)

Ms. St. Peter. Good morning, Chairwoman Biggert, Ranking
Member Gutierrez, and members of the subcommittee. On behalf of
more than 1.1 million REALTORS, I want to thank you for
inviting me to testify about the future of the Terrorism Risk
Insurance Program, an issue of great importance to commercial
real estate.
My name is Linda St. Peter and I am the 2012 vice chair of
the NAR commercial committee. Currently, I am the operations
manager for Prudential Connecticut Realty in Wallingford,
Connecticut. I have specialized in commercial and investment
real estate brokerage since 1988.
I am pleased to testify on behalf of the National
Association of REALTORS and its commercial affiliates: the
CCIM Institute; the Institute of Real Estate Management;
REALTORS Land Institute; and the Society of Industrial and
Office REALTORS.
Although we have been safe at home since September 2001, we
continue to fight the threat of terrorism. Given the existing
global and economic realities, it is in the best interest of
America's economic security to ensure the maximum coverage for
our commercial real estate industry.
Immediately following the horrific 9/11 terrorist attacks,
terrorism insurance coverage was virtually nonexistent for
commercial property owners. Only when Congress enacted the
Terrorism Risk Insurance Act in 2002 did coverage for terrorist
attacks resume. The passage of TRIA made terrorism coverage
available and, over time, more affordable.
Today, there is a concern that the uncertain future of TRIA
may cause insurance prices to fluctuate. Further, this
uncertainty may prompt insurers to drop terrorism coverage if a
reauthorization of the program is not in place by the end of
2014.
This became evident in 2005 when private insurers became
more reluctant to offer terrorism coverage due to uncertainty
regarding the program's extension. Ultimately, the uncertainty
of insurance pricing impacts our net operating income and
property values. The potential unavailability of this coverage
at the end of 2014 will impact our financing agreements and
potentially hurt the fragile commercial real estate market.
Affordable and available terrorism insurance is a vital
component of most commercial real estate transactions. It is
estimated that 84 percent of outstanding commercial mortgage
balances require terrorism insurance. Thus, if TRIA were to
expire and insurers subsequently dropped terrorism coverage,
these loans would be in technical default.
While the commercial real estate finance market is starting
to show signs of life, any disruption in the availability of
terrorism insurance in this sector would have serious
consequences on its fragile road to recovery. Currently, we are
seeing improved access and lower premiums due in part to the
continued improvement in an insurer's ability to manage
terrorism risk and to model the measurement of an insurer's
aggregate loss exposure.
Despite improvements in the measurements, the frequency and
severity of terrorism attacks cannot be reliably assessed by
insurance companies. Insurers remain largely averse to exposing
themselves to potentially catastrophic terrorism losses and
continue to have limited availability to reinsurance. Thus,
without the Federal program for potential insurance losses
related to terrorism, we believe coverage availability could
decline significantly.
Furthermore, we believe an effective homeland security
strategy is central to our Nation's economic security. To
protect our economic assets, we believe the time has come for
Congress to enact a long-term solution for insuring against
terrorism. Ideally, we would envision a structure that would
finance all terrorism risks.
In conclusion, affordable and accessible terrorism
insurance is an integral part of the health of all commercial
real estate markets. The TRIA program has been successful
because it provides for the sharing of risk between government,
private insurers, and policyholders.
Ultimately, it is critical for the U.S. economy that
commercial policyholders be able to obtain coverage for
terrorism risk. Therefore, I strongly urge that TRIA be
extended beyond its 2014 authorization.
Thank you.
[The prepared statement of Ms. St. Peter can be found on
page 131 of the appendix.]
Chairwoman Biggert. Thank you so much.
As I previously announced, the subcommittee will recess and
reconvene promptly at 11:45. At that time, any Members wishing
to give opening statements may do so, and then following any
Member statements, panel one witnesses should plan to
participate in a question-and-answer period with Members, and
then we will go to the second panel.
The subcommittee stands in recess.
[recess].
Chairwoman Biggert. This committee will reconvene, and we
have an opening statement from Mr. Green from Texas.
You are recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
I especially thank you for this hearing. I think that it is
one that is quite timely and needed.
Madam Chairwoman, having just left the 11th observance of
the September 11th circumstance, the Congressional Remembrance
Ceremony, I think it is appropriate for me to take just a
moment and remind ourselves that we are the land of the free
because we are the home of the brave--not an original quote,
but one that is still a reminder to us that we should
appreciate the many persons who make it possible for us to have
all of these opportunities that we have in this great country,
who make liberty and justice for all real, government of the
people, by the people, for the people real, more than just an
ideal.
And I would just like to thank all of those first
responders who rushed in on that day 11 years ago, and all of
the persons who were not first responders but who stayed behind
to help people, just ordinary citizens who found themselves in
an extraordinary circumstance. I just want to be grateful. To
live in the United States of America is really a blessing and I
am grateful to those persons.
And I am also grateful to those who are in distant places
who risk their lives on a daily basis to protect the freedoms
that we cherish. They mean something to me and I want them to
know it. So for just this moment, I want to be grateful and
thankful to our first responders and those who serve in our
military, wherever they happen to be.
Now, this hearing addresses TRIA and I will be quite candid
with you, dear friends. My feelings on this topic are somewhat
ambivalent; my thoughts are ambivalent because on one hand I--
Mr. John, I appreciate what you said about developing a private
market. I really do.
But on the other hand, I have some degree of consternation
as to what happens if we back off and the market doesn't step
forward? How does that impact an economy that is fragile now--I
am not sure what the circumstance will be then, but I do have
some concern.
So hearing you today has been a benefit to me, and I will
have some questions in just a moment, but this is not an easy
question to answer. It really is not. I think that this
requires that we be exceedingly thoughtful because of the broad
implications associated with our actions. This is not something
to take lightly.
A lot hinges on how this program will work, and ultimately
the question seems to be ``to backstop or not to backstop?'' I
am sure that there are other ways to express it, but will the
Federal Government have a hand, whether hidden or openly
available to be seen, have a hand in this program?
Thus far, it seems to have functioned rather effectively.
Perhaps some tweaking is necessary, but it is not a program
that I am eager to abandon although, Mr. John--I hate to keep
singling you out and mentioning your name--I think you make a
good point about how will you ever know if there can be a
private market if you don't give the private market an
opportunity to become the market--to accept its responsibility
and do what it can to the extent that it will?
So my feelings are ambivalent. I want to hear more about
what you have to say, but I respect every one of you and the
positions that you have outlined.
Ms. St. Peter, what you said about the REALTORS was
important and I appreciate your positions, all of you, and I
look forward to having you answer some questions.
And I yield back the balance of the time, Madam Chairwoman.
Chairwoman Biggert. Thank you.
Are there any further opening statements?
Then, we will proceed with the questions and Members will
be recognized for questions for 5 minutes, and we will try and
keep to that time. And I will yield myself 5 minutes.
Obviously, I think what Mr. Green has just talked about is
the crux of the problem right now or what is going to happen
for the future, so I wanted to start with that. And obviously
TRIA, and what you have all said, it was created on the
assumption that it would be temporary until the private sector
develops models to assess and price for terrorism risk.
So part of the question is, why have the basic assumptions
that the creation of TRIA changed from a temporary nature to
show now something resembling a permanent government insurance
program? And have government or private sector entities
developed those models anticipated at the creation of TRIA?
And so, could someone explain why the models haven't been
developed and described, if they can be developed and--whoever
would like to start with that.
Dr. Hartwig?
Mr. Hartwig. I could start with that. You talked about TRIA
being a temporary solution 10 years ago, but unfortunately, the
war on terror, as it turns out, is not temporary and it is
going on today, and it is a constantly evolving threat. It
morphs over time, the nature of the threat, from when at one
time we were all haunted by the face of Osama bin Laden, okay?
Now he is dead but we know that there are plenty of other
problems even if you listen to the report--in my testimony, I
quote the State Department's most recent point on country
risk--on country risk, and they talk about even al Qaeda and
other entities as being an ongoing risk and threat to the
United States.
It is also the case that the nature of terrorism risk is
different in that we harden targets like the new World Trade
Center, but then terrorists move to softer targets. If you look
at the list of targets where there were attempted attacks in my
testimony, it is only by the grace of God that we escaped some
of those. And we might be having a very different hearing
today.
But, at the end of the day, we have a number of issues with
respect to being able to model terrorism risk and I hinted at
them. We have no sense of when or where or how these attacks
might occur.
This is very different from hurricanes. We know where they
occur, we know roughly what they do, we know when they occur.
We don't know anything, really, about that with respect to
terrorism.
And it is also the case that the tactics are changed by
terrorists over time. Whereas, we can design stronger buildings
and we know that is ultimately going to reduce losses from
hurricanes, we don't know that about terrorist attacks because
terrorists can change their strategies at any time.
It is very much the situation that the war on terror is, in
fact, a war. And war risk has always been excluded from all
policies basically worldwide, and that is the situation we find
ourselves in today.
Chairwoman Biggert. Thank you. I know with hurricanes and
tornadoes and everything, we know about the time, but we never
know about the extent of them or how dangerous they are going
to be, or whether it is going to be another Katrina, or whether
Isaac doesn't hit as hard.
Mr. Hartwig. Right. But we do have good models that tell us
what range they are likely to fall in, and all insurers model
these and make sure they have enough capital on hand to handle
this. And unfortunately, we are not able to do that with
terrorism.
Chairwoman Biggert. We have had the flood insurance bill
and, similar to the flood insurance, does the existence of TRIA
preclude any meaningful development of the private sector
terrorism insurance market? In the flood insurance bill, we are
having a study but want to phase in or have some of the
insurance companies take over the risk there when we have more
of the actuarial tables. Is this similar, is that something
that we could do with the terrorism factor?
Mr. Michel-Kerjan. Let me say I think that is exactly what
TRIA has done. When you look at how TRIA was designed
originally to--but that program being temporary, I think being
temporary gives you, Congress, and the White House the
flexibility to renew the program as things change around the
world or within the United States. I think that being a
temporary program is not necessarily a bad thing if it is not
to be renewed every 3 months, as we have seen with the--until
you took the leadership on that.
I think TRIA has evolved from heavily exposing the Federal
Government and the American taxpayers at the beginning of TRIA
to being less so today, and one route would be to continue that
increased take-up rate of the private sector. The question is
at what price, and that is really what this is about.
We talk a lot about capacity, what the private market can
do. The question I would like to raise is, what would be the
price of that coverage as we go up, and up, and up in terms of
coverage? So I don't think that being a temporary program is a
bad thing in itself.
We had the same discussion back in 2002 and 2003 about
whether it should be capped at $100 billion. Is $100 billion a
magic number? What about $90 billion? What about $150 billion?
Chairwoman Biggert. If I may, then, reinsurance assumes
some or all of the risk currently assumed by the Federal
Government and the taxpayers?
Mr. Michel-Kerjan. It is already happening, but maybe other
companies would like to--already happening for the deductible
that these insurance companies have today.
Chairwoman Biggert. Is there a percentage of what is being
done by reinsurance now? Do we know that?
Mr. Michel-Kerjan. Mr. Hartwig--
Chairwoman Biggert. Okay.
Mr. Hartwig. I don't know that offhand. I believe there is
a substantial share that is reinsured, and the share that is
reinsured is a decision that each individual insurer makes
based on many criteria according to how much exposure they
have, and how concentrated that exposure is. But reinsurance
plays an extremely important role in this, as it does in any
major catastrophic or potentially catastrophic event.
Chairwoman Biggert. Thank you. Maybe if you could get back
with--if there is a percentage or numbers there. Thank you.
Mr. Green, you are recognized for 5 minutes,
Mr. Green. Thank you very much, Madam Chairwoman.
So that the record will be very clear and I will gain some
degree of clarity, if you are for simply extending TRIA as is
would you kindly extend a hand into the air? I am sorry I have
to do it this way. It probably will make it a lot faster. Just
raise your hand if you are for extending it as is--TRIA--
persons on the panel.
Some of you are conferring. All right.
All right, so Mr. Lundberg, is that correct?
Mr. Lundberg. That is correct.
Mr. Green. Anyone else? Okay.
If you are for extending TRIA, but with some modifications,
give me your yea or nay. Okay. So that is Ms. St. Peter and Ms.
Ochenkowski. Okay. All right. So only two?
Okay. Mr. Hartwig and Dr. Michel-Kerjan? Okay. All right.
Now, if you are for eliminating TRIA and moving straight to
the private market--I knew your hand would go up, Mr. John.
Okay, Mr. John, you are there. Okay.
So, did I cover everybody with those questions? Is
everybody in one place or another now?
Mr. Hartwig, you said--actually, your comments led me to
conclude that you are concerned about risk assessment and the
inability to engage in intelligent risk assessment causes you
to conclude what, that we--
Mr. Hartwig. Right. The conclusion is that terrorism
fundamentally is not fully insurable in the private sector
because the risk cannot be fully assessed either in terms of
the likelihood of such events or the ultimate cost of such
events.
Mr. Green. And as a result, you would have a hybrid
system--a system that has the Federal Government as well as the
private market involved in the insurance process?
Mr. Hartwig. Right, that there is a role for the Federal
Government there, and after a 7-year extension such as we have
had, it is appropriate to take a look at that program and see
where it might be tweaked in hopes of improving that program.
But the experience here in the United States and abroad
suggests that these programs work best when there is a
sovereign or a--
Mr. Green. That is a great segue into my next question. How
are other industrialized countries managing this problem? Is
anyone aware?
Mr. Hartwig. Probably a number of us may be--I will just
take one shot and then maybe--
Mr. Green. Okay. If you can do it quickly, I have a couple
of questions--
Mr. Hartwig. In our testimony, I think these are documented
on the part of some of us, but maybe the most commonly cited
example is in the U.K., which established a pool, the Pool
Reinsurance Company, literally known as Pool Re. It is a mutual
insurance company. It was established in 1993 as a result of
the IRA, so it has been in operation, very smoothly been
operating for 20 years now.
It has since been expanded to incorporate all sorts of
terrorism risk. And that was actually the original model--
something like that was put forth in the wake of 9/11 right
here in Congress.
Mr. Green. Mr. John, I have to give you an opportunity to
offset, to the extent that you desire--how would you have the
model work, please?
Mr. John. We have a model, basically, that was developed--
Mr. Green. Could you get closer to your microphone or turn
it on? I am not sure which.
Mr. John. Sorry. We have a model that was developed with
negotiations with the Bush Administration as--after the 9/11
situation. The problem is that the model is flawed, and this
is, unfortunately, true with most Federal insurance programs or
reinsurance programs because it assumes that it will continue
precisely as is until a set date when hypothetically it ends.
And essentially what happens is that industry gets comfortable
with it and their customers get comfortable with it because
they know what the--
Mr. Green. What would you have us do? I have about 40
seconds left. What would you have us do?
Mr. John. What I would have us do basically is phase it
out, that essentially there were a series of measures that were
ironically put forth in the 2011 Obama budget, which is not
something I usually praise, that actually would set to
gradually end the government involvement and we will see
precisely how the industry develops and how they react to that.
I expect they won't be happy. I expect there will be a lot of
catastrophic talk about the disaster that will overtake their
customers and the like. I expect that--
Mr. Green. How will this talk--a lot of things have to do
with certainty in the minds of consumers as well as in the
marketplace. How will this uncertainty impact the economic
order, is the question?
Mr. John. Oh, I think any change is going to have some
impact on the economic order. However, if you give them a firm
glide path to end the program and phase it out, they will deal
with it.
Mr. Green. My time is up.
Thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you.
Mr. Hurt, you are recognized for 5 minutes.
Mr. Hurt. Thank you, Madam Chairwoman. Thank you for
holding this hearing on this important subject at this
auspicious time.
It occurs to me it is proper to agree with Mr. Green and I
know everyone on this dais agrees that obviously what we saw 11
years ago is something that we don't want repeated and we
certainly should always take the time to recognize those who
made that ultimate sacrifice and who lost their lives in that
terrible, tragic--on that occasion.
I think as we just left from the Capitol steps and I think
it was said more than once that we will not forget, I think
this is--this hearing is a reminder of--that we will not forget
in many ways. I don't think we as Americans should live in fear
and I think that we are committed to doing that, but I think
also there are very real impacts of what happened on September
11th and how we go about doing our business.
And so I appreciate each of the witnesses being here and
helping us try to figure out as Members of Congress how to go
forward in making sure that we protect ourselves and our
property as best we can.
I guess my first question would be for Mr. Lundberg. I
would be interested to know from your perspective, if the
program were to expire are you all able to--is the Chamber able
to give us some idea of what the immediate impact or the short-
term, long-term impact of just having--suddenly not having this
insurance available would be?
Mr. Lundberg. Sure. Congressman, I think we already have
experience with what the impact might be as an expiration date
approaches of the TRIA program. We saw it in 2005 and we saw it
again in 2007 where insurers began to inform policyholders that
their terrorism coverage would be withdrawn and that coverage
would no longer be available after the expiration of the TRIA
program.
So TRIA really has been, in our view, kind of a silent
pillar supporting the economy--the broad economy--and to pull
it out from under the economy would be a grave mistake. And we
just merely need to look back at our experience with two
reauthorizations already to know how the market and how
insurers react as that expiration date approaches.
Mr. Hurt. Great.
Dr. Hartwig, I was wondering if you could elaborate a
little bit on some of your testimony, and I apologize for
missing your initial testimony, but I was wondering, are there
figures that are widely accepted for what insurance companies
paid out as a consequence of September 11th and what the
government ultimately paid out as a consequence of September
11th for losses?
Mr. Hartwig. The private insurance sector, including
reinsurers, at the time paid $32.5 billion. In today's dollars,
that is exactly $40 billion.
Mr. Hurt. Okay.
Mr. Hartwig. That is $40 billion in private insurance
losses.
The Federal Government obviously declared disaster areas
and there was a lot of aid not just to the New York
metropolitan area but other areas as well. That did total, I
think, tens of billions of dollars, but in terms of direct aid
to businesses, that money was--essentially the vast majority of
it came from private insurers. The dollars that came to treat
workers who were killed--sorry, who were injured or the
families of those who were killed, that was all private sector
dollars that came in there.
And so it really was the case that the private insurance
industry was the economic first responder at ground zero and
helped literally--literally, when you go there today is
rebuilding those towers.
Mr. Hurt. Mr. John, could you elaborate a little bit more
on--I think in a perfect world, everybody would like to see the
taxpayer not bear any burden for something that is a proper
risk function in the private sector, but what stands between
having a policy--having the private marketplace offer this
insurance? You talked about his modeling that is not complete.
Is it realistic to think that is something that is going to
emerge?
Mr. John. Yes. I hear the stories of how every terrorism
risk is different. But the fact is that every hurricane is
somewhat different, also. If you look at the effect of
Hurricane Katrina on the property prices--the property
insurance prices all along the east coast in relatively low-
lying areas you see that in the years--couple of years
immediately succeeding that you see an adjustment where
companies raised rates, they dropped risks, and things along
that line.
Yes, we can start to model this sort of thing but the fact
is that the industry has no need to model it at this point. The
industry has a situation that it is very comfortable with and
it doesn't need to do anything else.
Mr. Hurt. I think my time has expired.
I thank you all.
Chairwoman Biggert. Thank you.
Mr. Stivers, you are recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I would like to
thank you for calling this important hearing on this
appropriate day to talk about terrorism risk insurance and the
future of the program, even though we have a couple of years
before we have to worry about expiration.
Mr. Hartwig already discussed how the exposure to terrorism
at 9/11 was about $40 billion to the private marketplace. At
what point would--if 9/11 had happened and TRIA had been in
place as it exists today, at what point would TRIA have kicked
in and how much would it have helped the private insurance
market?
Mr. Hartwig. The overall--and subject to check, I believe
the overall industry retention today is about $27 billion or
so, so it is--the vast majority of attacks that would occur
today would likely be covered in whole or at least the majority
by the private sector. And over time the industry's retentions
have been ratcheted up, I think precisely for that reason.
Mr. Stivers. So if 9/11 were to occur today, how much of
that $40 billion would the private sector pay?
Mr. Hartwig. The private sector would wind up paying
somewhere around 70 to 75 percent of that.
Mr. Stivers. Okay.
Mr. Hartwig. And then ultimately, of course, there are
recoupment mechanisms in place so that the Federal Government
does not wind up with any obligation.
Mr. Stivers. And the recoupment mechanism today is at 133
percent, no 100 percent. Is that correct, or--
Mr. Hartwig. I am not quite sure at the moment. I would
have to check.
Mr. Stivers. Okay.
I will move on to the next question, again for Mr. Hartwig,
and then I do want to move to Mr. John.
One of the key points you brought up, Mr. Hartwig, was that
the private sector in the reinsurance market doesn't have the
information they need to be able to price the risk. So, for
example, unlike a hurricane, where there are many predictive
models, all the information is public, many of the risks that
are associated with terrorism are not public information and
are hard to price because of that. Is that what you were saying
earlier?
Mr. Hartwig. Absolutely. Much of the information insurers
would need to actually price this risk, were it possible, is
classified. We do not have any access to information at the NSA
or the CIA or anyplace else like that so we don't have any
understanding other than what we can read and glean from the
ordinary press and public sources about what the likelihood of
an attack might be.
This is very different, whereas such things as hurricanes
and earthquakes and tornadoes are the subject of research
constantly. We learn more and more about it every year.
Mr. Stivers. Great. Thank you.
Mr. John, at the end of Mr. Hartwig's testimony he called
for a pooling proposal similar to what they do in Great
Britain. It is not similar to what you would like to see, the
whole program just expire. But is that better than the current
TRIA program, the way you see it, or is there no good answer
other than just letting it expire?
Mr. John. There is no great answer. Let's put it that way.
The pooling mechanism would probably be superior depending
on what was done to limit the taxpayer risk. That is going to
be the continued question here and the industry, as I say, is
going to continue to press for just a continuation of what they
have had in the past.
Mr. Stivers. And I do want to follow up with you, because I
share your concern, Mr. John, and I think the empirical
evidence shows that government does not price risk very well.
In this subcommittee, we have tried to shore up the flood
insurance program, which is one example of that. Fannie Mae and
Freddie Mac are a second example of that. FHA's pending
financial crisis--I won't call it a collapse--is a third
example of that. And today, the only reason TRIA hasn't been a
problem is there have been no claims under TRIA because we
haven't had a big incident to cause that.
So I am concerned with the issues you bring up but I am
intrigued, I will say, by Mr. Hartwig's pooling mechanism
because I do think that there needs to be some type of way to
price this risk, and it might be an example that can do it with
some reserves, and there would have to be some information-
sharing with this mutual insurance company. But it is an
intriguing proposal to me, I guess, I would like to say, and I
wanted--since you were kind of the hardest-core witness on the
panel, I figured I would ask you about it.
Mr. John. You have a couple of years, and that is one of
the beauties about starting this process early. You can examine
a wide variety of different situations and proposals and make a
decision accordingly.
Mr. Stivers. Thank you.
Does anybody else have any comments on the pooling
proposal? I have 19 seconds left.
Mr. Michel-Kerjan. I might say, I think it is important in
the case of Pool Re that it is not just a pooling proposal. The
pool has an open line of credit from the British government in
case of something that happens. The pool today has 4.7 billion
pounds of reserve, which is barely taxed by the British
government. There are a lot of details to be looked at, and
there are other countries with developing pools with and
without intervention from the Federal Government as well.
Mr. Stivers. Thank you. I yield back the nonexistent
balance of my time.
Chairwoman Biggert. The gentleman yields back.
The gentleman from California, Mr. Sherman, is recognized
for 5 minutes.
Mr. Sherman. Thank you.
First, a general comment about the whole idea of Federal
involvement in disaster insurance: I remember, I think it was
Midas Muffler that had the commercial, ``You can pay me now or
you can pay me later.''
Disasters are going to happen, and when they happen, Ayn
Rand is not going to be in control of the United States
Congress and we are going to appropriate money for the
uninsured losses of victims. This may not have been true in the
1800s; it may have not been true in ``The Fountainhead.'' But
it is true in today's America and it has been true since the
great floods along the Mississippi radically changed the view
of what the Federal Government should do in a disaster.
Those who believe that if we spend zero money promoting
disaster insurance now we can also have a zero special
appropriation when a disaster hits had better get themselves
time machines because that is the only way they are going to be
able to live in the 1800s.
So it is in our interest to make sure that uninsured losses
are as low as possible.
Ms. St. Peter, the commercial real estate industry is in
the midst of a really tough liquidity crisis, perhaps the worst
since the Great Depression. How would the limited availability
of affordable terrorism insurance impact the ability of
commercial tenants and property owners to access credit?
Ms. St. Peter. Thank you, Congressman, for that question.
As you mentioned, financing is still a challenge in our
fragile market. And I don't work in large towers, I work in
what I will call ``Industrial Way'' and ``Main Street,'' where
manufacturers are looking to finance 10,000- or 20,000-square
foot properties where 30, 40, or 50 people are employed. What
we are seeing now with the limited financing available, the
``yes'' may have a qualifier of about 45 contingencies, which
is sort of like a ``no,'' but it is a ``yes, but.'' If the
terrorism insurance were not available that could be a deal-
breaker. That could be a deal-breaker--
Mr. Sherman. So you find that banks are not willing,
lenders are not willing to loan to an industrial facility with
50 employees, not particularly in the news, not one of the
places that al Qaeda dreams of hitting, that even then the
lenders have on their list, ``Do you have terrorism
insurance?''
Ms. St. Peter. Yes, they do. And a host of a whole other
contingencies as well.
Mr. Sherman. Okay.
Now, some of my colleagues have raised the concern over the
Federal Government's costs in this area. I just want to confirm
with the panel: So far, TRIA has cost the taxpayers virtually
nothing? Is that true, Ms. St. Peter?
Ms. St. Peter. Not a red cent, save, of course, the
administrative fees.
Mr. Sherman. Does everybody else on the panel generally
agree?
Mr. John. I am just going to point out, it has never been
used so the--
Mr. Sherman. Yes.
Mr. John. --one of the ways of reducing costs is never to
use--
Mr. Sherman. Right. The most important thing we can do is
prevent another terrorist attack, and that is the work of other
committees in this Congress.
Ms. Ochenkowski. An additional comment to the question on
lenders, with respect to my own company, Jones Lang LaSalle, as
well as some of my colleagues in the risk management group, I
do know that in addition to the comment about lending, we also
have tenants who require that they have terrorism insurance
before they move into certain property, and absent having
evidence of terrorism insurance, they will choose to go to a
different property.
And in addition to tenants, there are also investors in
commercial real estate who look for confidence in the ability
to rebuild following an event, and if they can invest in a
country that has--because investments are global, if they can
invest in a country in which a concern about terrorism is not
going to impact their investment, they may take their money out
of America and put it into another area.
Mr. Sherman. Thank you.
I believe my time has expired.
Chairwoman Biggert. Thank you.
And this will conclude the questions and answers. The Chair
notes that some Members may have additional questions for this
panel, which they may wish to submit it writing. Without
objection, the hearing record will remain open for 30 days for
Members to submit written questions to these witnesses and to
place their responses in the record.
I would like to thank you all so much for your testimony.
You really gave us a lot of knowledge that we will be using in
the future. So with that, this panel is dismissed, and we will
bring up the second panel now. Thank you so much.
We will resume with the second panel: the Honorable Steve
Bartlett, president and chief executive officer, the Financial
Services Roundtable; Mr. Darwin Copeman, president and chief
executive officer, Jewelers Mutual Insurance Company, on behalf
of the National Association of Mutual Insurance Companies; Mr.
Jon A. Jensen, president, Correll Insurance Company, on behalf
of the Independent Insurance Agents and Brokers of America; Mr.
Michael H. Lanza, executive vice president and general counsel,
Selective Insurance Group, Incorporated, on behalf of the
Property Casualty Insurance Association of America; Christopher
M. Lewis, senior vice president and chief insurance risk
officer, The Hartford, on behalf of the American Insurance
Association; and Mr. Edward B. Ryan, senior managing director,
Aon Benfield, on behalf of the Reinsurance Association of
America.
I would like to welcome all of you here today. This is
probably the easiest panel I have had in a long time as far as
how to pronounce your names, so I thank you for that, and I
thank you all for being here.
And we will start with Mr. Bartlett. You are recognized for
5 minutes.

STATEMENT OF THE HONORABLE STEVE BARTLETT, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, THE FINANCIAL SERVICES ROUNDTABLE

Mr. Bartlett. Thank you, Chairwoman Biggert, Congressman
Green, Congressman Hurt, and other members of the subcommittee.
Let me confess to you, I don't relish my role today, and I
suspect the other witnesses don't either--the role to be the
bearer of bad news. It had been my hope, and I think the hope
of most of those in the industry that today we would be able to
come to you and say there is no longer a need for TRIA, but in
fact, there is an enhanced need for TRIA today moving forward.
The nature, the severity, and the predictability, or lack of
predictability, of a terrorist attack in fact ensures that a
continued Federal backstop for insurance--paid for by the
industry but a Federal backstop--continues to be essential.
The threat of terrorist attacks is just as real today as it
was 10 years ago. There still exists that essential need--it is
not an option--of a public-private partnership, a backstop, if
you will, to protect against catastrophic losses arising from a
terrorist attack. And let me stop at this point, and I will
repeat this again and again. That backstop would be paid for,
the cost would be borne by the private sector. Most of the
costs would be--in the event of an attack would be borne up
front by the private sector, and should there be a need for
additional funds, you would be using the backstop.
TRIA sets in place a vehicle to recoup those losses. So the
fundamental of TRIA is that it sets in place an ability to
recoup the losses. Without the Terrorism Risk Insurance Act
reauthorized, there would be no mechanism for recoupment.
So in at least a considered opinion of the entire
industry--lending, insurance, business, operations, real
estate--TRIA should be renewed by this committee in this
Congress sooner rather than lately. I don't come to that
conclusion lightly. I looked for other answers but did not find
them.
Roundtable member companies, as you know, consist of
finance, lending, insurance, and investing in the economy, so
we come at it from all places. There is no government money
involved in TRIA except in the event of a catastrophic loss
that cannot be contained within the private sector, which is
quite large. And even then, there would be no government
losses; all the government losses would be recouped.
So the two parts: One is, what does TRIA mean for the
economy ongoing in the absence of an event? TRIA is designed to
mitigate the negative economic impact from stalled or stopped
real estate development and activities of ongoing operations
that did occur following 9/11 and then began to occur in the
run-up to the reauthorization of TRIA subsequent to that.
So in fact, after 9/11 we saw fairly quickly $15 billion in
real estate-related transactions delayed or cancelled and
300,000 jobs lost, and it was getting bigger and faster and
worse by the day. TRIA includes a make-available provision,
which means that insurers must offer terrorism insurance to
commercial clients. With that coverage available then banks
looking to lend and investors looking to deploy their capital
can do so while also protecting their investments from the
threat of an attack.
Without that Federal backstop, insurers' limited ability to
manage terrorism risk would become unstable and they would
withdraw from the market. That is not supposition or hyperbole.
That is exactly what would happen.
Even in the case of operations that are currently in place
with an existing loan would be as they did begin to shut down,
because if you have a loan in place and you lose your insurance
you are in default on the loan and really bad things start to
happen in the market.
Now, in the event of an attack--I am going to the other--so
either no attack or in the event of an attack--in the event of
an attack TRIA, at its heart, establishes a mechanism for the
private sector to absorb most of the loss, and anything that
the private sector does not absorb would be repaid to the
government by a mechanism put in place by mutual assessment on
all policyholders.
Some would contend erroneously that TRIA exposes U.S.
taxpayers to losses. The opposite is true. Without TRIA,
taxpayers would be subject to those losses but they would be
uncontained and there wouldn't be a legal ability to recoup
those losses.
The initial losses--nothing triggers it until $100 million.
The initial losses of each company pays their entire loss up to
20 percent of its direct written premium. In most cases, that
is about $1 billion. And then losses above that 20 percent
deductible would trigger a 15 percent copay or co-insurance.
So if government funds are used it would be a loan and TRIA
provides for a recoupment of the loan.
Thank you, Madam Chairwoman.
[The prepared statement of Mr. Bartlett can be found on
page 47 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Copeman, you are recognized for 5 minutes.

STATEMENT OF DARWIN COPEMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, JEWELERS MUTUAL INSURANCE COMPANY, ON BEHALF OF THE
NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC)

Mr. Copeman. Good afternoon, Chairwoman Biggert, and
members of the subcommittee. Thank you for the opportunity to
speak with you today.
As mentioned earlier, my name is Darwin Copeman and I am
president and chief executive officer of Jewelers Mutual
Insurance Company, a small company licensed in all 50 States,
and the only insurance company in the United States that
specializes exclusively in protecting the jewelry industry. The
majority of our policyholders are one-to three-location
enterprises. Our company participates in the TRIA program and
understands firsthand its importance.
I serve on the board of directors of the National
Association of Mutual Insurance Companies. NAMIC represents
more than 1,400 property and casualty insurance companies,
including small farm mutuals, State and regional insurance
carriers, and large national writers. NAMIC members write about
one-third of the commercial business in the United States.
The subcommittee has our appreciation for its attention to
the Terrorism Risk Insurance Act and for discussing its vital
role in helping protect our country and our economy as we
continue to consider how best to handle the terrorist threat.
It is our firm belief that the presence of the TRIA program
has provided the stability and predictability needed to allow
insurers to actively participate in the market for terrorism
risk coverage. Without the TRIA program, coverage for terrorism
will become very difficult to find and the result when the next
terrorist attack occurs will be more, not less Federal exposure
as the government will be under extreme pressure to pay for all
losses.
Before the events of September 11th, the abstract
possibility of a major terrorist attack on the United States
was known but largely dismissed and was included in most all-
risk commercial policies. After the tragedy in 2001, every
American's understanding of the nature of terrorism risk
forever changed.
Insurers also realized this new risk threatened the
solvency of their businesses. Accordingly, the terrorism
coverage market greatly contracted, particularly in high-risk
urban areas. This had a punishing effect on the U.S. economy.
It was estimated at the time to have delayed and canceled $15.5
billion in real estate transactions and to have cost 300,000
construction workers their jobs.
The significant lack of coverage prompted Congress to pass
the Terrorism Risk Insurance Act in 2002 to create a viable
market for terrorism coverage, which allowed lenders to provide
the necessary capital to resume building in high-risk areas.
TRIA set a ceiling on potential insured losses and reduced the
fear that a worst-case terrorist event could render an insurer
insolvent.
At the time it was thought that a truly private market for
terrorism would develop after insurers had time to build
capacity and study the risk. However, it soon became apparent
that the program is indispensible to protect our national
economic security.
The nature of the terrorist threat presents significant
complications for the insurance industry. The lack of relevant
event data usually used in disaster modeling makes it
impossible to meaningfully calculate the likelihood, the
nature, or the extent of a potential event, particularly in an
age of mass casualty terror. This makes adequate pricing and
reserving virtually impossible.
The interconnected nature of our local, national, and
global systems complicates both underwriting terrorism risk and
mitigating against it. The vulnerability of one organization is
not simply dependent on its own security decisions but also on
the choices and actions of other organizations and agents
beyond its knowledge or control.
For example, a company might spend a significant amount of
money to secure a facility, while a neighboring company does
not, and is then used as a staging area for an attack.
The only truly effective mitigation tools, if there are
any, reside within the government's national security
apparatus, and these are understandably kept secret.
Finally and most importantly is the human element. In other
words, terrorist events are not random events. The presence of
human volition drastically reduces the value of preventative
measures. A hurricane cannot study wind damage mitigation
efforts and then think up new ways to get around them; but
humans intent on committing acts of terrorism can and do find
ways to circumvent security measures.
Over the last 10 years, the private insurance industry has
increased its capacity to handle risk from terrorism events.
However, we must recognize that the marketplace, as it stands
today, has developed with TRIA in place. We should not hastily
conclude that because the private sector can handle a portion
of the risk, it could handle all of it. In fact, we know that
it can't.
Without a Federal program that provides a clearly defined
cap on the potential risk to an insurer, the supply of
terrorism risk insurance would be drastically curtailed, just
as it was in the aftermath of 9/11, and in the end the
government would bear the ultimate risk of uninsured losses.
The presence of a well-managed partnership between the
government and private insurers serves to ultimately reduce,
not increase Federal liability for terrorism losses.
In conclusion, in order to encourage private sector
involvement in the terrorism insurance marketplace and thereby
protect and promote our Nation's finances, security, and
economic strength, we must maintain a long-term Terrorism Risk
Insurance Program. While there is room for debate about the
proper scope of government involvement, there should be no
question that the Federal Government should continue to
collaborate with the private insurance industry to allow
Americans to recover and rebuild if such an attack should ever
occur.
As we move forward, NAMIC stands ready to work with
Congress on this vital issue. Again, thank you for the
opportunity to speak here today, and I look forward to
answering any questions you may have.
[The prepared statement of Mr. Copeman can be found on page
53 of the appendix.]
Chairwoman Biggert. Thank you.
Mr. Jensen, you are recognized for 5 minutes.

STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON
BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA
(IIABA)

Mr. Jensen. Good afternoon, Chairwoman Biggert, and members
of the subcommittee. My name is Jon Jensen and I thank you for
inviting me to testify today on behalf of the Independent
Insurance Agents and Brokers of America, also known as the Big
``I.''
I began my insurance career over 35 years ago and now serve
as president of Correll Insurance Group, a South Carolina-based
insurance agency with 12 offices and 132 associates.
Independent agents sell nearly 80 percent of all commercial
lines policies in the country, which affords our membership a
one-of-a-kind perspective to speak to the topic of terrorism
insurance and businesses' needs for such coverage.
The first point I would like to make is that the need for
terrorism insurance is not limited to simply urban areas. My
agencies operate in primarily rural and suburban areas and I
have many clients with a need for this coverage.
For example, I have two colleges, a large public hospital
system, and more than 300 emergency service organizations such
as volunteer fire departments, municipal fire departments,
rescue squads, and first responders who opt to purchase
terrorism insurance. Serving the needs of these and other
clients is a top priority for me, and the Terrorism Risk
Insurance Program has helped ensure that they have their
necessary coverage.
With the scheduled expiration of the program quickly
approaching at the end of 2014, I applaud the committee for
holding this hearing now to examine the program and how it is
serving businesses throughout the country. Even though the
program expires on December 31, 2014, because of the forward-
looking nature of insurance contracts, the real deadline for
congressional action is December 2013.
The enactment of TRIA in November of 2002 was a key element
of our government's response to the heinous acts of 9/11. The
attacks quickly produced severe disruptions in the insurance
marketplace and in our national economy. The underwriting and
pricing of these unique exposures proved nearly impossible due
to the inability of carriers to measure the likelihood and the
magnitude of future terrorist attacks and many insurers were
forced to stop providing terrorism coverage to commercial
policyholders as a result.
The inability of businesses to secure adequate terrorism
coverage also had negative effects across broad sectors of the
national economy, particularly in commercial real estate. The
original enactment of TRIA, and its extension in 2005 and again
in 2007, successfully stabilized the insurance marketplace and
helped eliminate the market disruptions that followed the
September 11th attacks.
In addition, Congress wisely structured the program so as
to involve the private sector as much as possible and created a
successful and limited public-private partnership for
commercial property and casualty insurance that is operated at
virtually no cost to taxpayers. Should the worst happen and a
need for the backstop arise, TRIA also has numerous cost-
sharing provisions that limit the exposure of the Federal
Government and ensure skin in the game for the private sector.
These include provisions such as a program trigger as well as
deductibles, copays, and minimum loss retention amounts for the
private sector.
The bottom line is that many of the factors and marketplace
realities that caused Congress to originally enact and
reauthorize TRIA largely remain in place today. Despite the
significant progress that has been made in protecting our
country from terrorists, the threat of terrorism remains with
us daily.
Such risk can still not be assessed by traditional methods.
In many instances, insurers simply do not have access to the
data and information to perform proper underwriting as much of
the information does not exist, is available only to
governmental entities, and they fiercely guard it for
understandable security and law enforcement reasons.
We believe that it will be extremely difficult or even
impossible in some instances for many businesses to obtain
adequate and affordable terrorism insurance coverage if the
program is allowed to expire with no public policy solution in
its place. Although our Nation has thankfully been spared from
further terrorist attacks in recent years, the threat of an
attack is as great as ever and our country must take the steps
necessary to protect itself and its economy from a similar
future event.
The Big ``I'' believes that the TRIA backstop has worked
well and that some form of limited Federal involvement is still
needed to maintain a stabilized and viable market for terrorism
insurance. Again, we applaud the committee for its foresight to
review TRIA now, and we look forward to working with you as
Congress considers solutions to address the unique nature of
the risk presented by terrorist attacks.
[The prepared statement of Mr. Jensen can be found on page
78 of the appendix.]
Chairwoman Biggert. Thank you so much.
Mr. Lanza, you are recognized for 5 minutes.

STATEMENT OF MICHAEL H. LANZA, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, SELECTIVE INSURANCE GROUP, INC., ON BEHALF OF
THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

Mr. Lanza. Thank you.
Good afternoon. I am Michael Lanza, executive vice
president and general counsel of Selective Insurance Group.
Selective is America's 49th largest property/casualty insurance
group. Today, I am testifying for the Property Casualty
Insurers Association of America, our national trade
association. PCI members write about 40 percent of America's
home, auto, and business insurance. Today marks the 11th
anniversary of the terrorist event that killed thousands and
created significant economic loss and disruption.
With investment markets freezing, this committee responded
swiftly to President Bush's call and passed the Terrorism Risk
Insurance Act, or TRIA, in just 2 months. The House approved
TRIA in 2002 and renewed it in 2005 and 2007. All three votes
passed by wide margins under different Majorities, reflecting
TRIA's bipartisan support.
Since 9/11, terrorist attempts have continued. Fortunately,
our national security apparatus detects and thwarts most of
these. TRIA is part of our economic national security defense.
It provides a low-cost, fiscally prudent economic safety net
if, God forbid, another attack is successful.
Absent TRIA's extension, and as State law permits, insurers
in 2013 will begin to send notices excluding terrorism coverage
or not renew policies on major underlying risks.
PCI and Selective strongly believe in the private insurance
market. We also believe the private market can cover fully
insurable risks.
TRIA protects American taxpayers in two important ways by
intruding into the private insurance markets. First, by keeping
the private sector largely responsible, it avoids the kind of
Federal bailout that occurred after 9/11 when victim protection
funds had to be established. Second, because terrorism, like
crime or acts of war, is not fully insurable, TRIA creates a
private market for terrorism insurance coverage. In short, it
makes private capital ultimately responsible for all but the
most catastrophic terrorist attack.
To be fully insurable, a risk potential loss and loss
severity must be predictable. With freely available information
and experience, insurers can estimate roughly how many car
accidents, house fires, or industrial accidents will occur and
what their costs will be. Similarly, with free access to
weather pattern science and over 100 years of weather history,
insurers can model storm paths and predict weather losses.
We can't do that for terrorism. The experience--notably
what happened 11 years ago--is very limited. More importantly,
the information needed to underwrite is not freely accessible.
Properly, thin information is classified and in the hands of
our government national security experts.
National security is the Federal Government's primary
responsibility. That is why there is a myriad of agencies
focused on anticipating and preventing terrorist acts and
assessing their likelihood against major economic centers and
other public and private symbols of our country. These agencies
also track the pool of potential terrorists that fluctuates
with changes in U.S. domestic and foreign policies.
Insurers and their policyholders cannot and should not
replicate these efforts. Companies such as Selective, which
writes primarily in 22 States east of the Mississippi,
certainly don't have the necessary resources, and Selective's
small business clients, who pay an average of $10,000 for 3
commercial policies and elect to pay for TRIA coverage 86
percent of the time, certainly don't either.
That is why we need TRIA. TRIA enables the private
insurance market to provide terrorism coverage without having
the information it does for other risks.
By providing insurance for terrorist events TRIA also does
three other things. First, TRIA permits business capital to
remain unrestricted and available for economic investment
before and after a terrorist event. Second, because State
workers compensation laws mandate terrorist coverage, TRIA
facilitates reinsurance and keeps worker comp rates lower. And
third, TRIA protects taxpayers. According to CBO, TRIA's net
cost to taxpayers through 2017 is roughly zero.
We would appreciate your support for the extension of TRIA.
Thank you very much.
[The prepared statement of Mr. Lanza can be found on page
87 of the appendix.]
Chairwoman Biggert. Thank you.
Mr. Lewis, you are recognized for 5 minutes.

STATEMENT OF CHRISTOPHER M. LEWIS, SENIOR VICE PRESIDENT AND
CHIEF INSURANCE RISK OFFICER, THE HARTFORD FINANCIAL SERVICES
GROUP (THE HARTFORD), ON BEHALF OF THE HARTFORD AND THE
AMERICAN INSURANCE ASSOCIATION (AIA)

Mr. Lewis. Thank you.
Chairwoman Biggert, Congressman Green, and members of the
subcommittee, thank you for the opportunity to appear before
you today to discuss terrorism risk insurance. My name is
Christopher Lewis and I am the chief insurance risk officer for
The Hartford. In the interest of time, I would respectfully
request that my written testimony be submitted into the
official record, and I will just briefly highlight a couple of
key points for the committee.
First, over the past 11 years, the capabilities, tactics,
preferred targets, weapons of choice, and even the main
protagonists in the war on terrorism have dynamically changed
and evolved. We are fortunate that the United States has not
experienced another major attack on our soil and sincerely
grateful for the tremendous efforts of our security forces to
interdict and defend our country from these attacks.
Unfortunately, what has not changed over the past decade is
the fundamental fact that the risk of terrorism remains an
uninsurable risk. Insurers still have no credible basis for
quantifying the likelihood of a terrorist attack and a limited
ability to understand the potential impacts of an attack if
carried out using nuclear, biological, chemical, or
radiological weapons. The private sector simply does not have
the information to assess this risk.
Further, the benefit of private sector mitigation is
somewhat limited, as hardening security at one location only
shifts terrorist selection of target or access point to a
different location. And unfortunately, the capacity of the
reinsurance through capital markets to finance the peril of
terrorism remains de minimis. Why? Because reinsurers face the
same insurability challenges that primary insurance companies
face.
Second, TRIA and its successors have worked and serve as a
critical component of our national economic security. By
helping to finance and limit private insurers' exposure to the
largest catastrophic terrorism events--events with projected
losses greater than any historical commercial insurance loss on
record for any peril--TRIA enables insurance companies to offer
terrorism coverage to commercial policyholders.
In the event of a future attack, private insurance payments
will immediately flow to affected businesses that have
purchased coverage and to their employees--payments that will
provide stability and minimize economic disruptions not only to
the people and businesses that suffer the attack directly, but
to all Americans, keeping the wheels of commerce moving.
Finally, TRIA is not a giveaway to insurers but an
effective means of pooling terrorism risk over time. The
program preserves significant industry skin in the game.
Federal assistance occurs only in the case of an extremely
large-scale terrorism loss. For a large, wide-area terrorist
event, insurers would need to absorb an estimated $25 billion
to $30 billion in insured losses before Federal payments are
even triggered.
And in the unlikely event that government funds are needed,
they are ultimately recaptured and returned to the U.S.
Treasury through a recoupment mechanism established in the
legislation. As a result, any program costs are greatly
mitigated.
Bottom line, TRIA has brought stability to the private
market for terrorism insurance and it is a critical component
of our national economic security. The program has been a
success. From a risk management perspective, letting the
program expire is simply not a risk that our country should
take.
Thank you.
[The prepared statement of Mr. Lewis can be found on page
92 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Lewis.
And Mr. Ryan, you are recognized for 5 minutes.

STATEMENT OF EDWARD B. RYAN, SENIOR MANAGING DIRECTOR, AON
BENFIELD, ON BEHALF OF THE REINSURANCE ASSOCIATION OF AMERICA
(RAA)

Mr. Ryan. Thank you, Chairwoman Biggert, and members of the
subcommittee. I am Edward Ryan, senior managing director at Aon
Benfield, the world's leading reinsurance intermediary and
full-service capital advisor with more than 80 offices in 50
countries around the world. I thank you for the opportunity to
testify on behalf of the Reinsurance Association of America on
the reinsurance perspective of this hearing entitled, ``TRIA at
Ten Years: The Future of the Terrorism Risk Insurance
Program.''
As we mark the 11th anniversary of the attacks on the
United States, we remember all the victims of 9/11. Aon
Benfield and the 1,100 of us who worked in the World Trade
Center continue to mourn the 176 colleagues and friends whom we
lost that day.
We know the commercial insurance market and know that
reinsurance availability is a key component of our economy. We
therefore urge Congress to act to extend the Terrorism Risk
Insurance Act.
Aon and the RAA supported the adoption of the Terrorism
Risk Insurance Act in 2002, its reauthorization in 2005, and
the 2007 Extension Act. The response to 9/11 by the insurance
industry was to pay tens of billions of dollars in claims but
also to exclude terrorism losses going forward.
TRIA created an essential Federal backstop that enabled the
primary insurance industry to provide terrorism insurance to
our Nation's businesses. The program has enhanced the private
market for such coverage and has had a stabilizing influence on
the economy. Under TRIA, the availability of terrorism risk
insurance has increased.
There is a role for private reinsurance under the program.
In an event certified by the Secretary of the Treasury as a
terrorist attack, TRIA provides reinsurance-like protection for
primary commercial insurance loss. The program provides
coverage for 85 percent of the eligible loss up to an industry
loss of $100 billion. Coverage is subject to an individual
company retention of 20 percent of the prior year's direct
earned premium on covered lines.
These company retentions and the 15 percent copay above
that mean that insurers retain a significant portion of the
loss before TRIA funding is triggered. Private reinsurance
provides the vehicle for insurers to manage that retained loss.
Since 2001, insurers, modelers, and reinsurers have worked
to develop a better understanding of terrorism risk. Companies
have consulted military and intelligence experts and hired
specialty risk modeling firms. Despite these efforts, terrorism
risk poses great challenges as an insurable risk.
The main hurdle in assessing and underwriting terrorism
risk is that the frequency of loss is neither predictable nor
random. Terrorists continually attempt to defeat loss
prevention and mitigation strategies. In addition, the
insurance industry does not have access to all the existing
information about terrorism targets and potential attacks for
obvious national security reasons.
Despite these issues, reinsurers have but capital at risk
to manage terrorism losses. Reinsurers offer coverage for
foreign acts of terrorism--that is, acts committed by non-U.S.
agents--in stand-alone terrorism contracts rather than in all-
peril catastrophe contracts. The amount of such stand-alone
terrorism treaty reinsurance capacity available in the private
market is estimated to be between $6 billion and $8 billion, a
figure largely unchanged in recent years.
The bulk of the terrorism reinsurance currently comes via
existing reinsurance programs. Coverage for personal illnesss,
which is not subject to the program, coverage for workers
compensation, as well as for acts of terrorism committed by
U.S. agents is generally available in existing catastrophe
programs. Insurers with exposures in rural or suburban areas
have generally secured terrorism coverage within existing
reinsurance programs with limitations on the size of subject
risks or events.
Regarding NBCR--nuclear, biological, chemical, and
radiological exposures--there is little reinsurance appetite
for this risk. When it is available, pricing for NBCR coverage
comes at a significant premium and capacity is significantly
less than that available for conventional terrorism.
For the foreseeable future and based on current demand,
there is adequate supply of reinsurance capacity for coverage
around the structure provided by the Federal program. However,
were the program to terminate in 2014, we expect insurers to
curtail the provision of terrorism insurance.
U.S. businesses would be more exposed to the financial
consequences from terrorist activities. To the extent that this
additional risk forces businesses to seek insurance, insurers
would offer meaningful but not unlimited insurance products.
The private reinsurance marketplace would work productively
with insurers to provide reinsurance coverage for terrorism but
the capacity would be severely constricted.
TRIA has served an important role to our Nation's economy.
As TRIA expires in 2014, we urge this committee and the
Congress to reauthorize the program in 2013 to eliminate any
uncertainty around reauthorization and to meet the needs of
insurers and insureds whose contracts will expire throughout
the year. We commit the full resources of the Aon Corporation
as well as the Reinsurance Association of America to work with
the committee to achieve this goal.
Thank you.
[The prepared statement of Mr. Ryan can be found on page
127 of the appendix.]
Chairwoman Biggert. Thank you, Mr. Ryan.
And I note that without objection, the written statements
of all the witnesses will be made a part of the record. And we
will now turn to the question-and-answer period.
I will recognize Members for 5 minutes each to ask
questions, and I will first yield 5 minutes to myself.
Mr. Bartlett, on page four of your testimony you state that
TRIA puts in place an orderly system to make sure that the
private sector absorbs most if not all of the losses. If the
private sector would already absorb such losses, why could it
not be put in place an orderly system of its own and continue
to absorb the losses absent a government backstop?
Mr. Bartlett. Terrorism risk is nearly impossible to model.
You cannot predict frequency, location, or severity. It is an
asymmetrical risk, so the upside from the premiums cannot begin
to compensate for the potential downside of covering the
losses.
In addition to that, the core of TRIA is a make-available
provision, so that all coverage would have to make that
available. Without a make-available provision, what we found
out when we didn't have TRIA was the insurers would be forced
to avoid the risk and they would limit their product offerings.
They would limit the coverage.
So TRIA ensures that coverage is offered. It makes sure
that the private sector absorbs most of the initial losses. And
if there are any additional losses, then the private sector is
required to recoup the losses and repay the government. So it
protects all three.
Chairwoman Biggert. Thank you.
And then, Mr. Copeman, you say on page three of your
testimony--or in the context of discussing the actuarial data
insurers need to underwrite and price for terrorism risk, you
state that much of the relevant data that might be used by an
insurance company is appropriately kept secret by the Federal
Government for national security reasons. What kind of
actuarial data that is inaccessible to insurance is--that they
need to underwrite and price for terrorism risk?
Mr. Copeman. Thank you. The primary information that would
need to be available for our actuaries as well as those who
develop the models is really the incidence or potential
incidence of terrorism that may have occurred that we are not
made aware of--those that have been stopped rather than those
that actually occurred.
So again, building a model requires a great deal of data
points, and the only data point that we have, for all intents
and purposes, to develop these models is really two: the
Oklahoma City issue, which was a domestic violence level of
terrorism; as well as the New York incident. With two data
points, it is inadequate information for us to be able to model
that kind of data--that information.
Chairwoman Biggert. Okay. Thank you.
Mr. Jensen, you mentioned that terrorism coverage will once
again become extremely difficult or impossible for many
businesses to obtain if the program is allowed to expire and no
policy solution is in place. Beyond TRIA, what other kinds of
policy solutions do you envision?
Mr. Jensen. Thank you, Madam Chairwoman. I am not sure what
will be there. What we hear from our company partners, of
course, is that coverage may be limited and very--a broad
spectrum. It concerns us and it concerns me on behalf of my
clients that without TRIA in place, they truly won't have
options available to them from the private insurance carriers.
And our concern, of course, is to make sure that their
insurance portfolio and the products that we provide them do
provide them all the coverage that they need.
Chairwoman Biggert. Okay. Thank you.
Mr. Lanza, you state that absent its extension, insurance
policies will begin in 2013 to exclude terrorism coverage, or
to the extent permitted under State law not be renewed for
major underlying risk. This is supposed to be a temporary
program, but it appears that the industry is unanimously asking
for a permanent extension of the program?
Mr. Lanza. We are asking for an extension to match the
risks of terrorism.
Chairwoman Biggert. Okay. At what point could the private
sector assume the risk?
Mr. Lanza. I think that has been touched on. The issue is
related to what information is available about what kind of
risks are taking place against the country. In addition to
that, you have a correlation issue, which is, for example, we
can know that a hurricane in Florida is not correlated with an
earthquake in California. In terrorist attacks, we have shown
that they are correlated. In addition to that you have a
concentration problem, which makes the severity or the amount
of the loss very complicated to predict.
Chairwoman Biggert. Thank you.
My time has expired.
The gentleman from Missouri, Mr. Cleaver, is recognized for
5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman.
I hope this question is not ideological, and if it is, I
apologize. I am more interested in learning than ideology.
Why couldn't the private sector handle this program
completely on its own? Why is it absolutely necessary? I am
assuming that all six of you believe that it is necessary for
the government to play the backstop role. But is it necessary?
Is it absolutely essential? Can't we do it without the
government involvement?
Mr. Bartlett. Congressman, Steve Bartlett. I wish that it
could be done without any government involvement at all. This
program at least establishes it so there is no government money
involved that would be recouped. But without a backstop it is
unpredictable--the risks are unpredictable and they are
uninsurable because they are so large. And the frequency and
the location are totally unpredictable and the size is
uninsurable. There is simply not enough money in the overall
market to provide the--in the private market to provide the
initial backstop, but it could be recouped over time and this
law provides that it would be.
Mr. Cleaver. Mr. Lewis?
Mr. Lewis. Yes, thank you. I think it is also important to
keep in mind what a private market solution could be. Given the
insurability issues that we have mentioned with respect to
terrorism insurance--we can't predict the frequency, we don't
understand the severity, these are non-random acts, terrorists
are out to inflict maximum damage by picking the soft points.
As insurance companies in the private sector trying to just
intermediate that risk for our policyholders, if we can't price
it and we can't manage it like a traditional risk and we need
to be there to make sure that we can meet the payment
obligations of our clients when they have a claim we can't put
too much risk against our surplus.
So the private market solution is really to start
restricting coverage and reducing exposure so a private market
solution in this context may be a non-insured coverage and more
of it goes back to companies which have to self-insure or goes
into residual markets. The best example of unregulated markets
you can look at are the reinsurance markets and the capacity
there, as we mentioned earlier, is de minimis.
So I think a private market solution here, given the nature
of terrorism, is really less of an insurance peril. TRIA
actually gives you an orderly process for a Federal loss-
sharing program with the private sector so that, in fact, there
is a response mechanism already in place should, heaven forbid,
we ever have a future terrorism event.
Mr. Copeman. Congressman, if I could give an example, too,
as the smallest company sitting at this table, we insure
jewelry. And for anyone who has been to the diamond district in
Lower Manhattan, 47th and 5th Avenue is one of the greatest
concentrations of jewelers in the country.
Given the TRIA program that is in place today, our exposure
between the deductible and the co-participation is 16 percent
of our policyholder surplus. That is $150 million of surplus;
16 percent of that would go away.
The only way we can participate and provide our customers
coverage in that location is because TRIA is in effect and we
are able to purchase private reinsurance as well as rely on the
Federal Government to be the backstop.
Mr. Cleaver. Ideologically, the biggest discussion in
Washington, no matter how it comes across, is really a
discussion about the role of government. And you can't answer
that question. For me it is, when is the government intruding?
What is the difference, then, between flood insurance and
terrorism insurance, particularly as it relates to pricing?
Everything that you said, Mr. Lewis, about TRIA is also true
about floods. They are unpredictable; we don't know the scope
when they hit. You could say the exact same thing.
Mr. Lewis. Let me follow up. With respect to natural
catastrophes--and it applies to floods, it applies to
hurricanes and earthquakes--we actually have hundreds if not
thousands of years of data to look at frequency and severity of
these events. Now, they could be highly uncertain and it could
be a challenge, but with respect to terrorism we have no basis,
no understanding of frequency for a terrorist event.
The second thing is that fortunately, floods happen largely
in floodplains or just outside floodplains. The floods don't
actually seek out the weakest spot, like a terrorist would.
These are actually non-random acts trying to find that soft
spot and actors who really have a political agenda trying to
strike at the soft belly of the country.
So there is a difference, and I appreciate the challenges
on the flood program and natural catastrophe, but we do draw
the distinction with terrorism.
Mr. Cleaver. I was the mayor of Kansas City from 1991 to
1999. We had two 500-year floods.
Thank you, Madam Chairwoman.
Chairwoman Biggert. Thank you.
The gentleman from Virginia, our vice chair, Mr. Hurt, is
recognized for 5 minutes.
Mr. Hurt. Thank you, Madam Chairwoman.
Mr. Bartlett, I had a couple of mechanical questions. We
have talked a little bit about the fact that--and you have
stated in your testimony that the losses would ultimately be
paid back to the government. I guess the first question is,
under the current TRIA program--and forgive me for not knowing
this--there are no premiums that are paid up front into the
program, like with flood insurance, are there?
Mr. Bartlett. There are premiums but they are paid as part
of your regular commercial insurance, and they are used to pay
the deductible that an insurance company would pay--the 20
percent deductible, which is a large number, and also the co-
insurance. It is only in the event that you surpass that, then
the government would pay the backstop, so it is included in the
premium--
Mr. Hurt. How does the recoupment work and what are the
circumstances in which it would not be paid back?
Mr. Bartlett. My understanding is that it would be paid
back. As I understand it, the Secretary of the Treasury would
certify it is a terrorist attack, certify that it meets the
threshold, it is above the $100 million, and that the
deductibles have been exceeded, and then would, as I understand
it--at that time would have the pre-established authority to
assess commercial policyholders universally until the
government is repaid. That is my--
Mr. Hurt. It could take years--so $100 million--industry
loss of $100 million, we just heard testimony that the--is the
threshold, and then--and then my understanding is that above
that, and we just heard testimony that the 9/11 attacks cost
the insurance industry approximately $40 billion in current
dollars--$100 million to $40 billion is--so it does get
confusing to me real fast.
$100 million is the trigger, so it is not--unless the total
losses are $100 million. And then after that every company
would pay their own policies up to 20 percent, or roughly $1
billion for a large company. And only after that would the
government come in.
So one would suppose, with a large attack, that private
money would front the first--and this is rough justice--the
first, say, $20 billion or $30 billion, and only after that the
government would step in as a backstop. Anything the government
pays as the backstop would then be recouped by a tax on all
policyholders.
And it could take years?
Mr. Bartlett. It would be whatever the Secretary of the
Treasury decided it would take, frankly.
Mr. Hurt. Okay.
I was intrigued by Mr. Lewis' testimony. I guess the first
question I would ask is what do we know now that we didn't know
10 years ago when we enacted this program as a temporary
program? What is it that we know now that we didn't know then?
I would imagine that we now know a whole lot more.
Mr. Lewis. Yes. It is a challenge, and I think you heard
some of the sentiment earlier that we had hoped 10 years ago
that we would know a lot more now that would enable a better
management of the science, but the terrorists' tactics and
weapons continue to evolve. What we do know more now is when we
look at some of the more conventional attack modes--truck
bombs, car bombings, you see some of these overseas--the
potential impact of those may help us model losses from a
severity perspective.
We have done a lot of work to try to manage aggregations.
As you have seen, the industry, even though it has very high
retention, so a ground-up loss is, per company, $100 billion-
plus is a lot. And we bear that risk ourselves and we try to
manage that.
So we have been able to develop the tools to manage within
the current retentions, but when you start getting to events
larger--
Mr. Hurt. So how do you do that?
Mr. Lewis. What we basically do is we limit our exposure--
the potential ground-up loss has to be no more than a certain
amount of capital. I will go back to the comment to make sure
we can't put the rest of our policy--
Mr. Hurt. But what do you say to the insured in terms of
how they manage risk? Because obviously you--I would think that
an insurance company can require as a condition of a policy
that the insured take certain actions to minimize losses. So,
can it?
Mr. Lewis. That is a good question. When we are talking
about our exposure, it is typically not one policy. At The
Hartford, for example, we provide a lot of insurance to small
businesses. So it is aggregations of policies. It is not
limiting the amount of coverage on any one policy; it is making
sure you don't write too many policies in one area.
There has been a kind of a redistribution of policies in
general, and in the industry we have reached a balance. If TRIA
goes away, companies are going to be faced with the decision
about how do we bring the overall exposure down, and that is
the problem that you are hearing in terms of people dropping
coverage.
Mr. Hurt. Last question really quickly--I have 5 seconds--I
would assume, though, that while we have not had a massive
attack like we had on September 11th, I would think that you
could still--there are a lot of terrorist attacks that take
place all across the world. You all could use those in trying
to figure out modeling, can't you?
Mr. Lewis. The issue is frequency--not really, because
those are different locations, different tactics, and then when
you start getting into attacks with the potential for nuclear,
biological, chemical, and radiological weapons, there is no
precedent. And we have heard that terrorists say that their
intention is to try to deploy those weapons. We have no basis
to try to price for them.
Mr. Hurt. Thank you.
Chairwoman Biggert. Thank you.
Mr. Green, you are recognized for 5 minutes.
Mr. Green. Thank you again, Madam Chairwoman.
Mr. Cleaver has covered this, but I would like to make sure
I have it for the record. Are you, indeed, all of the opinion
that TRIA should be extended? If someone differs, will you
kindly speak up just so that I will have a record that reflects
that you are all in agreement?
If you are in agreement and you believe that it should be
tweaked to some extent, would you kindly extend a hand into the
air, because I would like to know what your opinion is about
tweaking? What would you have us do to make it better than it
is? Anyone?
Am I to assume that you all think it is fine as it is and
that--let's just sort of stay the course, is that what I am
hearing?
Mr. Lanza. I think it is we understand what TRIA does and
so we understand that. We are covered for an uninsurable risk
and we understand what TRIA does for us, and that is why we
like it.
Mr. Ryan. Representative Green, if I could offer--
Mr. Green. Yes, sir?
Mr. Ryan. The insurance and reinsurance industry has had 10
years to grow accustomed to the current backstop and the
program and the way the insurance industry responds to that. It
is not too hard to envision a situation that was better for the
insurance industry. I think any tweaking would reduce the
benefit of the Federal program and introduce some uncertainty
into the insurance industry and be to the detriment of insureds
and insurers.
Mr. Green. Mr. Bartlett, I read your testimony and I am
appreciative of what you said on pages three and four. You sort
of explain how the system works. Thank you very much for the
way you have codified this and explained it.
The 3 percent is especially important because it helps us
to recoup after, God forbid, some devastating incident occurs.
But I do want to ask this, Mr. Bartlett: Are we putting the
insurance companies in a position wherein they can make a bad
bet but they won't ever suffer the ultimate loss--meaning
companies now that they don't assess risk properly, they can
possibly go out of business. Will the companies--are they--are
we putting them in a position now such that they are insured,
or are we insuring them to the extent that they will always be
in business?
Mr. Bartlett. It is actually quite the reverse. TRIA, as it
was finally authorized in the last round, was quite--was--at
least proposes to be quite expensive to insurance companies
should there be a terrorist event, as it should be. But I have
to say, it is--had you asked if there were any tweaks that we
should make--if you had asked me 5 years ago, I might have
hesitantly put up my hand and said it is too expensive.
But it is a very expensive program--the 3 percent
surcharge, the 20 percent deductible, the 15 percent copay, in
fact, put the burden where it should be, and that is squarely
on the private sector, both insurers, but also developers,
property owners, and lenders. So there is full and adequate and
very overwhelming incentive to mitigate against terrorism risk,
to ensure properly, and to--and there is a large amount of
payment that insurance companies would pay if it were to.
Would companies go out of business if a terrorist attack
happened? Perhaps. This is a--if a terrorist attack happens it
would be very expensive for the insurance industry, and it
should be, because they are in the insurance business. But it
would be achievable for the overall economy, and that, of
course, is the goal.
Mr. Copeman. Congressman, as a small mutual insurance
company--and I emphasize mutual because we exist for our
policyholder; we have no stockholders; we have no one who
invests in us--we certainly take very seriously the fact that
we put, as I mentioned earlier in this particular example in
New York, 16 percent of our policyholders' surplus on the line
just for the risk of terrorism. There is still fire, there are
still other catastrophic losses that can take place and we have
to align our capital against those particular exposures.
So as a small company, TRIA makes a huge difference in
whether or not we are able to make a marketplace for our mutual
insurance company policyholders.
Mr. Green. Thank you.
Mr. Lanza, I believe you indicated that we should do this
by 2013. Was that you who made the comment that we should
extend it by 2013?
Mr. Lanza. No. The issue is that in 2013, as we go about
renewing policies or issuing quotes on new policies, we will be
advising insureds that the TRIA would be subject to sunset, and
that would have issues for us and our ability to provide
terrorism coverage.
Mr. Green. So is your request that we do whatever we are
going to do by 2013--the end of 2013--
Mr. Lanza. By the end of 2013.
Mr. Green. --just so that--to help the market to build in
the necessary risk factors and take the uncertainty out of it.
Is that what you are saying?
Mr. Lanza. Correct.
Mr. Green. Okay.
Mr. Ryan. Congressman Green, I might have been the person
who made that reference. I think it is vitally important for
the reinsurance industry, too, to know where they stand in
terms of what reinsurance they will be required to give for
terrorism.
Mr. Green. Thank you, Madam Chairwoman.
And I would like to thank all of you for appearing. I truly
don't want to see anybody go out of business. My questions have
more to do with how much we do to--
Chairwoman Biggert. The gentleman's time has expired.
Mr. Green. Thank you, Madam Chairwoman.
Chairwoman Biggert. Mr. Sherman, you are recognized for 5
minutes.
Mr. Sherman. Propitious time.
Mr. Lanza, without TRIA would the private sector offer more
terrorism coverage or less, and how would that affect the
availability of commercial insurance overall?
Mr. Lanza. Without TRIA, there would be no terrorism
coverage, and so availability would be limited. And for the
reasons we spoke of earlier, there is no way to underwrite the
risk, and that is why we won't be able to extend the coverage
without TRIA.
Mr. Sherman. I assure you, there is simply no way to
predict that risk. You could put the whole Foreign Affairs
Committee together and try to guess what the risk is and none
of us would be able to do it.
Mr. Ryan. Congressman Sherman, may I interject? Sorry.
Mr. Sherman. Yes.
Mr. Ryan. Aon Corporation, in advance of the last two
pending terminations of the TRIA legislation, surveyed
insurance carriers, and we determined that we would lose about
80 percent of the insurance capacity that was currently devoted
to terrorism were TRIA to lapse.
Mr. Sherman. And while it is getting more difficult to
predict the weather and hurricanes, that is easy compared to
predicting a major terrorist attack.
What are the take-up rates of your company, Mr. Lanza, and
for the industry as a whole?
Mr. Lanza. We are slightly above the industry average,
which is around 64 percent. We are at about 86 percent for the
commercial lines that are not mandatory, so that is not
workers' comp. Workers' comp is 100 percent.
Mr. Sherman. So you are saying 86 percent of your customers
choose to buy terrorism insurance?
Mr. Lanza. Correct.
Mr. Sherman. And so terrorism insurance isn't just for La
Guardia, LAX, and the Empire State Building, who I assume are
not your clients. It is for medium-sized businesses from cities
that terrorists have heard of and some they don't know about or
they haven't focused on.
Mr. Lanza. Correct. Terrorism doesn't have any boundaries.
We primarily write for small businesses that have an
average of 3 commercial policies and about $10,000 in total
premium, and they elect 86 percent of the time when they have
the choice to have TRIA. And we distribute--
Mr. Sherman. Mr. Lewis, did you have a comment on that?
Mr. Lewis. I think you raise an important point. After 9/
11, one of the great lessons that we learned is a lot of
attention was paid on the large buildings and the large
companies. Horrible losses, but they shifted production to
other areas.
We also are a large provider of small business insurance
and the critical thing was there are a lot of small businesses
in Lower Manhattan that were just down because they closed down
Lower Manhattan. If the claim checks did not keep coming to
keep them in business then those would have all been out of
business--
Mr. Sherman. So even if you are not in an iconic location,
you could be half a mile away and be affected.
Mr. Lewis. Absolutely.
Mr. Sherman. But even--for Mr. Lanza's 86 percent, I am
sure the vast majority of his clients are not within walking
distance of one of the 500 most notable sites in America. But
they want and need the terrorism insurance.
Do you find that your clients are taking--are getting the
terrorism insurance because they need to do it in order to
satisfy their creditors, or they simply think they want to do
it for their own business, or is it a combination?
Mr. Lanza. I believe it is a combination. Also, we
distribute exclusively through independent agents, such as Mr.
Jensen, who do a lot of consulting with the clients.
Mr. Jensen. Mr. Sherman, if I may?
Mr. Sherman. Yes.
Mr. Jensen. As I testified before, most of my clients and
my agencies are in smaller rural and suburban communities. An
awful lot of my clients do purchase coverage because they still
have the need even though we are not in one of these highly
visible properties.
As a note, I insure an awful lot of volunteer fire
departments, as an example. These are folks who need to have
claims payments quickly if something were to arise. They are
also, as our Nation is, and they are the ones that respond to
the bad things and they are running to the circumstances rather
than away from them, and they may very well respond to a larger
city to help in other communities, so it is very important for
those communities as well.
Mr. Ryan. Congressman Sherman, if I may, in addition to
some of the other studies we have done, we have analyzed the
take-up rate by segment of the economy, and I would like to
introduce with my written testimony, if I have not already,
some--
Mr. Sherman. I would ask unanimous consent to allow this
document into the record.
Chairwoman Biggert. Without objection, it is so ordered.
Mr. Sherman. I think the testimony has been very
interesting today. I know my time has expired, and I think a
lot of us have learned that terrorism insurance is something
that the vast majority of medium-sized businesses need and
want, and that these are risks that cannot be priced by the
private sector.
I yield back.
Chairwoman Biggert. Thank you.
Let me--just some food for thought, maybe, from Mr. Ryan
for the reinsurance, and maybe some of you, but just thinking
about this, in science and some other areas of the government
there are public-private partnerships and classified
information is shared. It does cause concern about
intelligence, but could such a partnership be developed to
model for terrorism risk, and then pricing for reinsurance and
then ultimately for insurance?
So maybe if you could think about this, Mr. Ryan, and get
back to us. I don't know that you want to answer right now.
And any of you--
Mr. Ryan. Actually, could I make one comment along those
lines?
Chairwoman Biggert. Sure.
Mr. Ryan. There has been a lot of concern expressed
regarding the severity of terrorist attacks, and while that is
certainly true, there is a lot of science that has been shared
regarding the impact, physically, of terrorist attacks, but
fundamentally it is the frequency issue, and I think everyone
on this panel has said and most of the people on the previous
panel, unless there is some hard science behind the frequency
of it I don't know that that will be addressed.
But certainly in terms of the severity issue, I think we
have a head start on that portion of it, yes.
Chairwoman Biggert. All right. Thank you.
I ask unanimous consent to insert the following material
into the record: a September 11, 2012, statement by Congressman
Peter King from New York.
Without objection, it is so ordered.
With that, I would like to thank the panel for a really
good discussion. The Chair notes that some Members may have
additional questions for this panel, which they may wish to
submit in writing. Without objection, the hearing record will
remain open for 30 days for Members to submit written questions
to these witnesses, and to place their responses in the record.
Again, I would like to thank all of you. You have been a
wonderful panel. And we will be having some more hearings, too.
So thank you so much for being here, and with that, this
hearing is adjourned.
[Whereupon, at 1:24 p.m., the subcommittee was adjourned.]

A P P E N D I X

September 11, 2012

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