[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE TERRORISM RISK INSURANCE ACT OF 2002
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 19, 2013
Printed for the use of the Committee on Financial Services
Serial No. 113-45
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma 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 STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
September 19, 2013........................................... 1
Appendix:
September 19, 2013........................................... 61
WITNESSES
Thursday, September 19, 2013
Abraham, Janice M., President and Chief Executive Officer, United
Educators Insurance............................................ 18
Beshar, Peter J., Executive Vice President and General Counsel,
Marsh & McLennan Companies..................................... 15
Capuano, Hon. Michael E., a Representative in Congress from the
Commonwealth of Massachusetts.................................. 11
Ellis, Steve, Vice President, Taxpayers for Common Sense......... 21
Grimm, Hon. Michael G., a Representative in Congress from the
State of New York.............................................. 8
King, Hon. Peter T., a Representative in Congress from the State
of New York.................................................... 12
Maloney, Hon. Carolyn B., a Representative in Congress from the
State of New York.............................................. 10
Smith, J. Eric, President and Chief Executive Officer, Swiss Re
Americas....................................................... 17
Woo, Gordon, Catastrophist, Risk Management Solutions Inc........ 20
APPENDIX
Prepared statements:
Capuano, Hon. Michael E...................................... 62
King, Hon. Peter............................................. 64
Moore, Hon. Gwen............................................. 70
Abraham, Janice M............................................ 72
Beshar, Peter J.............................................. 77
Ellis, Steve................................................. 121
Smith, J. Eric............................................... 126
Woo, Gordon.................................................. 142
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Written statement of the American Insurance Association (AIA) 164
Written statement of the Financial Services Roundtable....... 186
Written statement of the Property Casualty Insurers
Association of America (PCI)............................... 190
Washington Times article by Representative Bennie G. Thompson
entitled, ``Terrorism Insurance Still Necessary to Foster
Resilience,'' dated September 18, 2013..................... 208
Capuano, Hon. Michael E.:
Written statement of Accident Fund Holdings, Inc. (AFHI)..... 210
Written statement of the American Hotel & Lodging Association 212
Written statement of the American Public Transportation
Association (APTA)......................................... 213
Bloomberg Government Analysis entitled, ``Extending Terrorism
Insurance,'' dated July 17, 2013........................... 214
Written statement of the Building Owners and Managers
Association (BOMA) International........................... 220
Written statement of the CRE Finance Council................. 221
Written statement of Host Hotels & Resorts................... 222
Written statement of the International Association of
Amusement Parks and Attractions (IAAPA).................... 223
Written statement of the International Council of Shopping
Centers, Inc. (ICSC)....................................... 224
Insurance Journal article entitled, ``Private Market Will Dry
Up If Federal Terrorism Insurance Not Renewed: Aon''....... 225
Written statement of The Jewish Federations of North America. 227
Joint written statement of the National Association of Mutual
Insurance Companies, the Financial Services Roundtable, the
Property Casualty Insurance Association of America, the
American Insurance Association, the Independent Insurance
Agents and Brokers of America, and the Council of Insurance
Agents & Brokers........................................... 241
Written statement of the National Association of Insurance
Commissioners (NAIC)....................................... 242
Written statement of NAIOP, the Commercial Real Estate
Development Association.................................... 252
Written statement of the National Association of Mutual
Insurance Companies (NAMIC)................................ 254
Written statement of the National Association of Real Estate
Investment Trusts (NAREIT)............................... 264
Written statement of the National Conference of Insurance
Legislators (NCOIL)........................................ 266
Written statement of the National Conference of State
Legislatures (NCSL)........................................ 267
Written statement of the National Multi Housing Council
(NMHC) and the National Apartment Association (NAA)........ 269
Written statement of the Real Estate Roundtable.............. 271
Written statement of the U.S. Chamber of Commerce............ 273
Written statement of the U.S. Conference of Mayors........... 274
Capuano, Hon. Michael E., and King, Hon. Peter T.:
Written statement of the American Gaming Association (AGA)... 275
Joint written statement of Major League Baseball, the
National Football League, the National Basketball
Association, the National Hockey League, NASCAR, the
National Collegiate Athletic Association, and the United
States Olympic Committee................................... 277
Written statement of New Mexico Mutual....................... 279
Written statement of the National Association of REALTORS
(NAR)...................................................... 281
Written statement of the Real Estate Board of New York
(REBNY).................................................... 282
Written statement of the Workers Compensation Fund (WCF)..... 284
Green, Hon. Al:
Written statement of Hilton Worldwide........................ 286
Written statement of Marriott International, Inc............. 287
Maloney, Hon. Carolyn:
New York Post opinion piece entitled, ``Congress must move on
terror insurance,'' by Representatives Michael Grimm and
Carolyn Maloney, dated September 18, 2013.................. 289
Abraham, Janice M.:
Written responses to questions for the record submitted by
Representatives Royce and Sinema........................... 291
Additional information provided for the record in response to
questions posed by Chairman Hensarling and Representative
Pearce during the hearing.................................. 295
Beshar, Peter J.:
Written responses to questions for the record submitted by
Representatives Royce and Sinema........................... 297
Smith, J. Eric:
Written responses to questions for the record submitted by
Representative Royce....................................... 299
Woo, Gordon:
Written responses to questions for the record submitted by
Representative Royce....................................... 301
THE TERRORISM RISK INSURANCE
ACT OF 2002
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Thursday, September 19, 2013
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, King, Royce,
Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey,
Fitzpatrick, Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt,
Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, Ross,
Pittenger, Wagner, Barr, Cotton, Rothfus; Waters, Maloney,
Velazquez, Watt, Sherman, Meeks, Capuano, Hinojosa, Scott,
Green, Cleaver, Himes, Carney, Sewell, Foster, Kildee, Murphy,
Delaney, Sinema, and Heck.
Chairman Hensarling. The committee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time.
Today's hearing is on the Terrorism Risk Insurance Act of
2002. I now recognize myself for 5 minutes to give an opening
statement, but I wish to let all Members know that I will be a
little softer on the gavel today, since I know Members wish to
be heard on this subject.
Today, the Financial Services Committee meets to hold a
hearing on the Terrorism Risk Insurance Act of 2002. This is
the first full Financial Services Committee hearing on the
subject since 2005. It is an important hearing for a number of
reasons.
Number one, this is a program that is due to expire in 15
months, and there are many within our economy who rely on this
program and need to know the will of Congress. I also note that
roughly half of the members of our committee have never been in
Congress when this subject was debated, so I hope that there
will be multiple views presented today on the topic in this
hearing.
I will admit that the timing of the hearing--I had
originally thought I would have this hearing in December, but
the gentleman from New York, Mr. Grimm, is very persistent;
there have been days where he was patiently persistent and days
where he was painfully persistent. And so, due to his
persistence, we are having this hearing today, and I certainly
know of no more vocal or outspoken advocate for the continuance
of this program than the gentleman from New York, Mr. Grimm.
Obviously, the other gentleman on my side of the aisle from
New York, Mr. King, has also been exceedingly vocal and active,
as have, on the Democratic side, the gentlelady from New York,
Mrs. Maloney, and the gentleman from Massachusetts, Mr.
Capuano, who have also coauthored legislation to continue the
program. Their voices are important, and we will hear from them
soon, as part of a Member panel.
Although I was not personally here in 2002, I know that the
original purpose of the TRIA bill, and the report that
accompanied the bill that came out of committee was to ``create
a temporary industry risk-spreading program for foreign acts of
terrorism and facilitate a transition to a viable market for
private terrorism risk insurance.''
Before I go on to what was debated as the purpose of the
bill, I think it is important to say what the bill did not
purport to do. I cannot find anything in bill text or
legislative history to suggest that anyone thought that the
passage of TRIA would somehow prevent future acts of terrorism.
It could not take away 9/11.
So to some extent, we are debating today who should bear
the cost of terrorism acts? Should it be insurance companies
and property owners, or taxpayers? I think we all acknowledge a
far more important debate is the prevention. Our committee has
some part of that jurisdiction; other committees down the hall
have a far greater part of it.
At the time, it was thought that originally the TRIA Act
would give the insurance industry time to recapitalize and
develop new models, that they could price for terrorism risk
and increase industry capacity. Three years later, in 2005,
Congress decided to make TRIA a little less temporary, and
extended it for 2 years.
Then, in 2007, Congress was back again to stretch the
boundaries of modern linguistics by extending TRIA
``temporarily'' for 7 additional years and expanding it to
cover any acts of terrorism, foreign or domestic.
So we all must recognize that in just 5 years, TRIA has
leapt in scope and quadrupled in length, neither of which I
think could be mistaken for facilitating a transition to a
viable market for private terrorism risk insurance.
I think this begs a number of questions that I hope will be
addressed in our second panel. What does constitute a temporary
program? And I am not sure how many of us actually have faith
in an ex ante recovery scheme of funds, so it begs the
question, if premiums are not gathered, is this truly an
insurance program? Is it an insurance program? Is it temporary?
I certainly don't want to get into any trouble with the
Consumer Financial Protection Bureau (CFPB) for misleading
advertising.
Has TRIA--have the 11 years allowed the insurance industry
to successfully model and to provide products for terrorism
coverage without taxpayer support? Or has TRIA prevented it?
And, in 2007, the Congressional Budget Office stated, ``In
the absence of a Federal mandate, insurers have a strong
incentive to offer terrorism coverage to their commercial
customers because to do otherwise risks their losing business
on other property and casualty lines.''
Hasn't the capacity in the stand-alone terrorism insurance
program increased significantly since 9/11? We all agree the
risks of terrorism are unique, but are they so unique as to be
uniquely uninsurable?
There have been times in our Nation's past where other
phenomena in American history were deemed unique--airline
crashes, oil spills, power outages, criminal riots, data
losses--and yet somehow the industry found the incentive and
the ability to model and assess this risk. How is this done?
How long did it take? Are some positing that all acts of
terrorism cannot be modeled, or is it merely those nuclear,
biological, and chemical acts that cannot be reserved against
or cannot be sufficiently modeled?
It probably comes as no surprise to anyone that if we posit
that private insurance companies are incapable of modeling this
risk, how can we be convinced that the Federal Government is
any better, as our National Flood Insurance Program is
underwater, pun intended? PBGC, $34 billion deficit.
And as we look at the national debt clock, which I know is
inconvenient to some, it principally turns because insurance
programs, be it the social insurance programs of Social
Security and Medicare, or others, the government has not done a
particularly good job. That, ladies and gentlemen, represents a
manmade disaster, and it will certainly color my opinion on
this matter. I have an open mind. It is not an empty mind, but
it remains a skeptical mind.
I now recognized the ranking member for 5 minutes.
Ms. Waters. Thank you, Mr. Chairman.
I would like to thank Chairman Hensarling for holding this
hearing, which is the first in a series focused on the
reauthorization of the Terrorism Risk Insurance Act, known as
TRIA.
For more than a decade, TRIA has been nothing short of a
qualified success, supporting critical economic growth by
ensuring access to terrorism coverage by our largest venues,
businesses and employers. The terrorist attacks of September
11, 2001, forever changed the way we live and do business. In
addition to the tragic loss of life and disruptions to our
financial system, insurance losses totaled an estimated $40
billion in today's dollars. The enormity of the losses made it
financially impossible for many insurers and re-insurers to
offer terrorism coverage.
Consequently, most fled the market, and State insurance
regulators allowed providers to exempt terrorism coverage from
their policies. Those that did offer coverage did so at a cost
that was prohibitively high. As a result, in 2002 Congress
stepped in, enacting TRIA. The program makes terrorism
insurance both available and affordable by requiring insurance
companies to offer coverage to commercial entities in exchange
for a Federal backstop, which is used to protect against only
those terrorism-related losses that exceed $100 million.
By requiring private insurers to offer terrorism coverage,
TRIA actually reduces taxpayer exposure, because it keeps most
of the terrorism risk with the private sector. Without
affordable terrorism insurance, many buildings, schools, and
venues would remain uninsured against terrorist attacks,
meaning that the government likely would pick up 100 percent of
the tab for catastrophic losses.
The success of the TRIA program has been remarkable and has
fostered continued economic and commercial real estate
development across the United States. TRIA is strongly
supported by a broad coalition of businesses and organizations
representing a wide array of industries including construction,
manufacturing, retail, transportation, real estate, sporting,
and entertainment. Entities from the National Football League
to the U.S. Chamber of Commerce to the National Association of
REALTORS have lauded the program's importance.
Support for TRIA is so strong and so widespread that it has
been reauthorized twice by the House, both times without
controversy and with overwhelming bipartisan support, but as we
approach its expiration in 2014, opposition to the quick, clean
and long-term renewal of this popular and noncontroversial
program remains a mystery to me.
While opponents argue that the program inhibits private-
sector participation, the private sector itself maintains that
without TRIA in place, insurers would fall into the same
practices that followed the attack of September 11th. This
would mean the exclusion of terrorism coverage that would
cushion the economic shock of a large terrorist attack or a
series of attacks, something that remains essential for
economic growth and job security.
Mr. Chairman, I support reauthorizing TRIA, and I am
encouraged by the proposals on the table to do so, in addition
to the bill by Representative Capuano, which I have co-
sponsored. We have seen bipartisan legislation from
Representatives Maloney and Grimm, as well as a bill from
Representative Thompson. While each bill differs slightly in
form, it is of the utmost importance that TRIA is reauthorized
quickly, cleanly, and for the long term.
I thank you again for holding this hearing, and I look
forward to the testimony of my colleagues and the other
witnesses.
I yield back the remainder of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Neugebauer, the chairman of the Housing and
Insurance Subcommittee, for 3\1/2\ minutes.
Mr. Neugebauer. I thank you, Mr. Chairman, and thank you
for calling this important hearing. This, I think, is the first
of what probably will be a number of hearings. We have planned
some additional hearings in the subcommittee level, as well.
Last week, we remembered 9/11, which was an event that was
unwanted, unplanned for, and unexpected in this country. It
created quite a bit of economic havoc in our country, and as a
result of that, there was economic uncertainty, and so TRIA was
put in place to give some confidence to the marketplace so that
people could continue to insure buildings and lives in what can
be considered high-risk areas.
One of the things that I want to do when at some point in
time I leave Congress is I want a temporary government
contract, just like TRIA, one that lasts almost 11 years now.
And one of the things that, as I said, was the purpose of this
was to bring some stability to the marketplace.
And so, let's look at what has happened since 2002. The
insurance industry was able to absorb the shock. It was a
pretty big hit, but they absorbed it, and subsequent to that,
the industry has recapitalized almost twofold. The reinsurance
market is very much up and running, and there is a lot of
liquidity out there, a lot of capital, and a lot of interest in
taking on some of these risks.
The insurance for TRIA for terrorism has gone down. The
take-up rate is up. And so when you look back, if you ask
people what would need to happen for us to begin to transition
off of TRIA 11 years ago, they would have told you, well, the
industry needs just a little bit of time to get back on its
feet. And when you look at the industry today, it is back on
its feet.
We have talked to a number of market participants, and we
have talked to a number of people in the insurance business,
and they are ready to take on these risks. Because really what
is happening today--and it is a great business model if you are
in that business--is that basically, the American taxpayers are
furnishing free reinsurance for TRIA coverage in this country.
It seems to be, and we have reached a period in this
country--and it is unfortunate--where we now have the American
taxpayers backing everybody's mortgages, backing their
insurance, backing their flood insurance, and what we know is
the government is not really good at the insurance business. We
look at FHA, it is in the insurance business, but yet they are
undercapitalized.
And so, I think the debate needs to be not just about what
we do with TRIA, but in the future, can we have economies where
the American taxpayers don't have to take on risks that other
people don't want to take on?
I look forward to the discussion that we will have today. I
think it is an important discussion. And I thank the chairman
for calling this hearing. I appreciate my colleagues who are
going to testify in the first panel and I look forward to
hearing their testimony, as well as the testimony of the other
panel members. I think this is a good discussion beginning
point, and one that I think will have additional opportunities
in the future.
And with that, Mr. Chairman, I thank you.
Chairman Hensarling. The Chair now recognizes the gentleman
from Connecticut, Mr. Himes, for 2 minutes.
Mr. Himes. Thank you, Mr. Chairman. I appreciate you
calling this very important hearing, and I would like to thank
my colleagues for appearing on this panel on this very
important topic.
I will note that I am a co-sponsor of both Mr. Grimm's and
Mr. Capuano's bills. I will note we have a wonderful
opportunity here today, because Mr. Capuano finds himself on
the other side of the witness table for this hearing. And I
want to say that, Mr. Chairman, like it or not, the Terrorism
Risk Insurance Program has become a critical element of the
real estate industry in particular.
Some 60 percent of total U.S. commercial property--and that
is an $11 trillion market--is backed by TRIA reinsurance. The
National Multi Housing Council believes that about 85 percent
of the firms that they surveyed purchase terrorism coverage as
part of their property programs.
This is not just important to the industry; it is actually
a really important debate. Mr. Chairman, I agree with you. We
should be very, very cautious in how we proceed. We don't want
to repeat the experience that we all just lived through with
other insurance programs, in particular the GSEs. We want to be
careful that this ends up being a well-underwritten program
that does what it has always done, which is provide an
insurance backstop without any cost to the Federal Government,
and we do, I think, want to make sure that it is structured in
a way that if the private market eventually can provide this
insurance, it does so.
The logic, of course, for government intervention in this
market is that the insurance industry relies on a couple of
things that don't exist when you think about terrorism. The
events are utterly unpredictable. They are not subject to any
sort of actuarial analysis, and, of course, there is dramatic
asymmetric risk. The government--and I say this as a member of
the Intelligence Committee--knows a lot more than the market
does about the nature of this risk.
So, Mr. Chairman, I hope that we will do something at this
crossroads. We could do nothing, as we are wont to do. We could
pass a bill that goes nowhere because it is so extreme. After
the fashion of the day, we could pass TRIA reauthorization
which relies on a repeal of Obamacare.
And if we do one of these three things, we will earn our
low approval ratings, or we can make an important statement to
the American people that we are willing to govern in an
intelligent way, and, Mr. Chairman, I hope that is the path we
follow.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Illinois, Mr. Hultgren, for 1\1/2\ minutes.
Mr. Hultgren. Thank you, Mr. Chairman, and thank you, all
of you have done so much work on this.
From the hearing today, and in the committee's discussions
to come, I am not just interested in fully understanding the
necessity of the Terrorism Risk Insurance Program, but also if
it can be improved.
I can recognize that some Federal backstop may be required
if our Nation's worst fears are realized, but how can we
maximize taxpayer protection? How can we fully realize private
insurance capacity? Are there emerging threats being covered?
Terrorism continues to evolve, and so must our response.
Data centers and communication capacity are high-priority
targets today, higher than when terrorism risk insurance was
first conceived. Is TRIA meeting these challenges?
Today, I have more questions than answers, but I start with
this acknowledgement: Terrorist attacks that destroy individual
lives and private property were not ultimately directed at
those specific entities. The attack is meant to harm a much
wider audience and is directed at our Nation.
On 9/11, my friend from high school, Todd Beamer, was
killed in the Flight 93 crash. He was not the terrorist target
on that day, nor was United Airlines. We all were.
Like so many of my colleagues, I have not voted on TRIA
before, and I thank the chairman for the chance to explore this
issue, and I thank the witnesses for sharing their experience.
Thank you, Mr. Chairman. I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from Illinois, Mr. Foster, for 2 minutes.
Mr. Foster. Thank you, Mr. Chairman, for holding this
important hearing.
While it is important to periodically re-evaluate the
effectiveness of every Federal program, I am increasingly
concerned by indications that TRIA may only be extended for a
short time, or not at all. The importance of terrorism
insurance to our economy was in full view during the 14-month
period after the September 11th attacks.
In 2002, when terrorism insurance was largely unavailable,
a survey from the Real Estate Roundtable found that $15.5
billion in real estate projects in 17 States were stalled or
canceled because of the lack of available terrorism insurance
from the private market.
In the midst of what is now a solidifying, but still
fragile, economic recovery, congressional inaction on this
issue could threaten the stability of our markets and delay
progress in the real economy. Uncertainty alone may cause
insurance premiums to spike and become unavailable in some
markets.
We have seen various arguments of opponents of catastrophic
Federal backstops before. I believe that it is intellectually
dishonest to believe that the Federal Government would not and
should not step in following another large-scale terrorist
attack or, for that matter, a collapse in our Nation's housing
market.
There will always be a range of disasters for which only
the Federal Government has deep enough pockets to cover the
losses. In the case of terrorism risk insurance, we should
accept that reality and accurately price that risk.
After having spent over 20 years as a particle physicist,
modeling the probabilistic outcomes of very rare events, I
understand the difficulty in modeling a terrorist attack, given
our inability to predict the future, and attacks with very low
probabilities, a small dataset on which to project
probabilities in the future, and the fact that the
probabilities are both random and correlated.
But a failure to extend this program is unacceptable. Even
sending signals to the market that we may not act rationally
and decisively will raise the operational costs for businesses
and jeopardize jobs, not just in Chicago, New York, and San
Francisco, but across the banking, commercial, real estate, and
construction industries of this country.
Thank you, and I yield back.
Chairman Hensarling. The last colleague I will recognize
before I recognize four more colleagues is the gentleman from
Georgia, Mr. Scott, who is recognized for 2 minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
A couple of points. First of all, terrorism risk does not
resemble any other commercial risk. Unlike natural disasters,
in which insurers have had significant experience and data to
project the risk of damage, terrorism is highly difficult to
model projections of risk assessment.
The Terrorism Risk Insurance Program provides a good risk-
sharing model between insurers, policyholders, and the Federal
Government that provides insurance market stability and
security, particularly considering the unpredictability of the
tragic nature and uniqueness of terrorism.
It is very important to point out that TRIA has provided a
necessary service at nearly zero cost to the taxpayers.
Numerous and diverse industries from insurance to real estate
to travel and tourism have argued very hard for the necessity
of extending TRIA, and we must do that.
And so it is with great pleasure that I am pleased to sign
on with both Mr. Grimm and Mr. Capuano's bills and support
them. And I would urge the committee to do so, as well.
With that, I yield back the balance of my time.
Chairman Hensarling. The gentleman yields back.
Today, we will have two witness panels. Our first panel
will be composed of our colleagues who have authored and co-
authored this legislation. We certainly look forward to
grilling them like well-done hamburgers.
In all seriousness, without objection, we will dispense
with questioning of the witnesses on this panel. Clearly, our
colleagues need no introduction, so I will now yield to the
gentleman from New York, Mr. Grimm, for 5 minutes for your
statement.
STATEMENT OF THE HONORABLE MICHAEL G. GRIMM, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW YORK
Mr. Grimm. Mr. Chairman, thank you. I appreciate very much
your moving up this hearing, and I know I speak on behalf of
all of my colleagues at the table.
I also want to thank Ranking Member Waters and my fellow
colleagues on the Financial Services Committee for holding this
hearing to examine the Terrorism Risk Insurance Act of 2002,
which we all know as TRIA. And I want to thank you for
providing me this opportunity to testify today on this
important program.
As a 9/11 first responder, and a Member of Congress
representing New York City, I am keenly aware of the
devastation and destruction that a major terrorist attack can
cause. I can also report that 12 years after that terrible day,
we are finally seeing meaningful redevelopment of the World
Trade Center site come to fruition, redevelopment that
insurance proceeds helped make possible.
Prior to 9/11, insurance companies in the United States
routinely provided coverage for losses caused by acts of
terror. However, after the devastating losses suffered during
the largest terrorist attack in our Nation's history, insurance
carriers were forced to totally re-evaluate the risks
associated with insuring against acts of terror.
This caused the availability of terrorism insurance to all
but vanish. It created a situation in which many commercial
property developments were either stalled or canceled, as
developers and lenders were ultimately unwilling to move
forward without terrorism insurance coverage.
This lack of coverage was the driving force behind Congress
creating TRIA in 2002, and reauthorizing it in 2005 and 2007.
TRIA will expire at the end of 2014 unless Congress takes
action, and I would like to express to my colleagues today the
importance of continuing this vital program.
Many of the reasons, if not all of the reasons that caused
insurance to withdraw from the terrorism insurance market 12
years ago are still present today. The risks and possible costs
associated with terrorist attacks are still impossible for
insurance actuaries to model.
This is because, unlike natural disasters, which are random
events, terrorist acts are manmade, malicious events. Such
intentional acts do not easily fit into the standard principles
of insurable risk.
In addition, giving insurers the information needed to
better model such risks would put our national security in
severe jeopardy. It would require turning over top-secret
intelligence information on current terrorist threats and
plots.
While I understand there is a perception that TRIA is only
important to large cities, such as New York and Los Angeles, it
is not. Our energy infrastructure, amusement parks, resorts,
sports stadiums, universities, and major hospitals are some of
the many at-risk targets across the entire country.
For example, on any given autumn Saturday, there are
hundreds of football stadiums on college campuses filled with
fans, in some cases more than 100,000 people at any one time.
Such facilities are as vulnerable as skyscrapers in New York
City to a terrorist plot to kill and harm innocent Americans.
Additionally, I feel it is extremely important to note that
TRIA is not only vital to property insurance, it provides a key
backstop to workers' compensation insurance across the entire
country. State law prevents insurers from excluding risks, such
as terrorism, from workers' compensation policies.
Without TRIA, many workers' compensation insurers could be
left in financial ruin in the case of a large claim caused by a
terrorist act. This would not only harm those directly injured
in the attack, but everyone else who also relies on the
important safety net that workers' compensation insurance
provides.
To put this in perspective, workers' compensation was
liable for $750 million for Cantor Fitzgerald alone. This was
one financial company located in the Twin Towers on that
fateful day.
Compare this with the liability that could be created by a
terrorist act striking a large hospital or a university that
has thousands of employees on any site, on any given day. I
submit to you that with regard to workers' compensation
insurance, not only is the risk impossible to model
actuarially, but it is virtually unlimited.
It is important to note that workers' compensation insurers
are mandated by State law to provide coverage for acts of
terror. So, this is decidedly not a free market.
Finally, I would like to make clear that TRIA is not a
taxpayer bailout. It is not a bailout of the insurance
industry, but it is, in fact, the most taxpayer-friendly way to
deal with the long-term costs associated with a terrorist
attack.
TRIA, through a $100 million industry-wide co-payment, and
its 20 percent of written-premium, individual-carrier co-
payments, places significant private capital in front of any
taxpayer assistance. Additionally, TRIA's repayment mechanism
provides an important vehicle for compensating taxpayers over
time for assistance provided in the immediate aftermath of a
terrorist attack.
Again, I just want to thank all of my colleagues, and I
want to thank my chairman again. This is an extremely important
issue. And with that, I yield back.
Chairman Hensarling. The Chair now recognizes the
gentlelady from New York, Mrs. Maloney, for 5 minutes.
STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF NEW YORK
Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member
Waters, for calling this full Financial Services Committee
hearing. And I also would like to thank my colleagues who have
co-sponsored this bill. I hope others seriously consider co-
sponsoring it, and I thank my colleagues who authorized this
important program to begin with and reauthorized it.
I also would like to ask unanimous consent to place in the
record an article that my colleague, Mr. Grimm, and I co-
authored in the New York Post today entitled, ``Congress must
move on terror insurance.''
Chairman Hensarling. Without objection, it is so ordered.
Mrs. Maloney. And extending TRIA really should be a no-
brainer, because it works, it protects taxpayers, it creates
jobs, and it costs absolutely nothing. We all know that major
U.S. cities, like New York and Boston, remain top targets for
terrorists. Everyone also knows that a major terrorist attack
would be devastating, not just for our citizens in our country,
but for our overall economy. That is why reauthorizing TRIA is
essential to our country's continued economic well-being.
And the risk continues. Police Commissioner Kelly has
reported that there have been 13 different attempts since 9/11
to attack New York, which have been thwarted and stopped.
After 9/11, businesses across this country, and especially
in New York City, could not get terrorism insurance. This
crippled the construction, real estate, and tourism industries.
TRIA provided businesses and insurers with much needed
certainty by establishing a stable, long-term Federal support
system for terrorism insurance. This helped the economy bounce
back after 9/11 and ensured that terrorists could not wreak
havoc on our economy and our way of life.
After 9/11, all construction stopped. You couldn't even
build a hot dog stand. It completely stopped. They could not
get insurance anywhere in America. The only place they could
get insurance was Lloyd's of London was insuring some places in
America.
Over the long term, TRIA ensures that if, God forbid,
another terrorist attack does occur, we will be able to keep
our markets open, our cities vibrant, and our economy strong.
As we all know, it is rare for Congress to pass a bill that
ends up doing exactly what we intended it to do and at no cost
to the Federal Government or to the taxpayer.
Yet, that is precisely what TRIA has done. It has ensured
that businesses have access to terrorism risk insurance for
over a decade and has not cost taxpayers a single dime. Why
then would we even think about ending this program? Ending this
program would harm the fragile economic recovery in the short
term, and in the long term would leave our economy dangerously
exposed in the event of a future terrorist attack.
Opponents sometimes question why we need TRIA at all, but
it is important to remember that just because the Federal
backstop in TRIA has never been used does not mean that it is
unnecessary. On the contrary, as the terrorist attack at the
Boston Marathon demonstrated just this year, TRIA remains as
necessary as ever.
Opponents also argue that the private sector has the
capacity to step in and provide terrorist insurance even
without TRIA, but there is no evidence to support this.
To the contrary, we already know what will happen without a
Federal backstop for terrorism insurance because we experienced
it. During the 14-month period after 9/11, before Congress
enacted TRIA, private insurers refused to offer any coverage,
which resulted in stalled and stopped construction projects and
thousands of lost jobs.
This is why there is widespread support in the business
community for reauthorizing TRIA in its current form. Insurers,
developers, banks, and even the major sports leagues,
hospitals, and schools all believe that the presence of the
Federal backstop that TRIA provides is the only reason that
terrorism risk insurance is available at all.
This time, we can't just wait until the last minute to
reauthorize TRIA like we do with everything else. Months before
the last TRIA reauthorization was expiring, insurance companies
were already notifying regulators of plans to drop their
terrorism insurance, which started to stop and stall
development and jobs in our country.
That is why my colleague Mr. Grimm and I introduced a
bipartisan bill to extend the current TRIA program for another
5 years. Our bill currently has 76 co-sponsors on both sides of
the aisle. And with such broad bipartisan support, I very much
hope that the committee will schedule a markup without delay,
please, Mr. Chairman, and Ms. Ranking Member.
Thank you very much for this privilege to testify before
this important committee and before colleagues that I respect
so much. Thank you so much.
Chairman Hensarling. The Chair now recognizes the gentleman
from Massachusetts, Mr. Capuano, for 5 minutes.
STATEMENT OF THE HONORABLE MICHAEL E. CAPUANO, A REPRESENTATIVE
IN CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS
Mr. Capuano. Thank you, Mr. Chairman. And thank you for
having this hearing, and allowing me to testify as representing
what I consider to be 99 percent of America, which means those
of us who do not root for the Yankees.
Mr. Grimm. Objection.
[laughter]
Mr. Capuano. Mr. Chairman, let's be serious here.
Chairman Hensarling. So much for bipartisanship.
[laughter]
Mr. Capuano. Always trying, Mr. Chairman. Always trying.
Mr. Chairman, let's be serious. We are going to reauthorize
TRIA pretty much as it is. We may tinker around the edges,
changing some of the triggers, or the amount of time we do it,
but it is going to be done. And we all know this.
It is going to be done because of people like me. I don't
like TRIA, either; I just don't have a better idea. I haven't
heard anyone else suggest a better idea. The private market has
not come back in, and they won't come back in. If there are
better ideas, let's hear them.
To me, TRIA is a necessary item, because without it we will
have no construction, you have heard my colleagues testify, and
we all know that. Without some sort of terrorism insurance,
there would not be a new Dallas Cowboys Stadium today. There
would not be fans in the Dallas Cowboys Stadium next week. This
is a national issue. This is an issue that especially for me,
the most important thing we did the last time is we put in a
repayment mechanism.
God forbid there is a need to use TRIA, but we now have it
so that taxpayers will not lose a penny. They will put in the
money upfront and get paid back over time. And, again, if
others have better ideas, people like me want to hear them.
This doesn't fit with my general philosophy, but, again, to me,
it is necessary for the American economy to keep moving
forward.
And as far as bipartisanship goes, I do want to point out
there were 32 members of this committee who were in Congress
the last time we reauthorized TRIA. All but two of the members
on this committee voted for it. But with my luck, one of those
two happens to be the chairman of the committee today.
[laughter]
A minor point of consternation, but something we have to
live with.
Mr. Chairman, thank you for having this hearing. And with
trueness in my heart, I look forward to your grilling,
insightful questions.
[The prepared statement of Representative Capuano can be
found on page 62 of the appendix.]
Chairman Hensarling. Well, in the spirit of bipartisan
friendship, I would just suggest to the Member that in the
future, if he wishes to get the chairman's attention, Kyle
Field at Texas A&M University is more persuasive than the
Cowboys Stadium.
[laughter]
The Chair now recognizes the gentleman from New York, Mr.
King, for 5 minutes.
STATEMENT OF THE HONORABLE PETER T. KING, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW YORK
Mr. King. Thank you, Mr. Chairman.
And thank you, Ranking Member Waters. It is truly a
privilege to follow Mr. Capuano.
Very seriously, most of the points have been made. I would
ask unanimous consent to have my full statement inserted in the
record. And I will just--
Chairman Hensarling. Without objection, it is so ordered.
Mr. King. There are several points I want to make at the
outset, though. First, comments have been made that this was
intended to be a temporary measure, and it is still around 12
years later. The reality is this was passed in the aftermath of
9/11, and we didn't fully realize at the time that the
international terrorist threat would not be a temporary threat.
The fact is, 12 years later--I say this as a member of the
Intelligence Committee and former chairman of the Homeland
Security Committee--in many ways, the terrorist threats are as
great if not greater than they were on 9/11. So the threat is
still there, and that is why to me it is so essential that this
program be continued and not be just looked upon as a temporary
program.
Second, as has been said, TRIA has no debt. This is not
like the Federal Flood Insurance Program. It has no debt. The
Federal Government has never paid out one dime in claims. And I
think it is important out there--because somehow there is this
impression that this is a handout or people are making money
off of this. The fact is, not one penny has been paid out in
the 12 years.
Now, I think this is perhaps the most successful example of
a public-private partnership, and it is provided economic
certainty and stability to businesses across the country. It
has brought private insurers back into the business of
protecting against terrorism following the devastating effects
of 9/11.
My district lost 150 friends, neighbors, and constituents.
Thousands and thousands of constituents have worked in the area
of the World Trade Center and continue to work there today. So,
Mr. Grimm, Mrs. Maloney, and I certainly are very personally
involved in this. Mr. Capuano, having gone through the Boston
Marathon attack, knows the trauma that affects an area when a
terrorist attack such as this occurs.
But as also been said, this is not just a New York or a
Boston issue. TRIA has allowed, as Mr. Capuano mentioned with
the Dallas Cowboys, the fact is the Super Bowl, the Olympics,
amusement parks, universities, we can go on, Las Vegas,
favorite major league sports teams in all sports, TRIA has had
a hand in allowing all these events to come to pass.
So at this time, I would like to ask unanimous consent to
enter into the record letters in support of TRIA's extension
from Major League Baseball, the NFL, the NHL, the NBA, NASCAR,
the NCAA, the U.S. Olympic Committee, the U.S. Chamber of
Commerce, the National Association of REALTORS, the Real
Estate Board of New York, the American Gaming Association, New
Mexico Mutual, and the Utah Workers Compensation Fund.
In other words--
Chairman Hensarling. Without objection, it is so ordered.
Mr. King. Thank you. Thank you, Mr. Chairman. In a post-9/
11 world, we need the TRIA program more than ever. And also,
this is a unique issue, because as we saw with 9/11, nothing
the City of New York could have done, nothing the State of New
York could have done could have prevented those attacks.
It is the responsibility of the Federal Government to
ensure the security of its citizens. A terrorist attack occurs
when there is a breakdown in our national security system. If
that happens, the Federal Government bears the responsibility
to assist the victims of such an attack, which is akin to an
act of war.
We cannot expect the private market to ensure against
failures in U.S. counterterrorism without the government taking
on some responsibility for the failure. Americans are relying
on us to keep them safe.
Now, an attack--again, as I said before, not one dime has
been paid out. As we go forward, an attack needs to cost over
$100 million in claims, and an additional 20 percent insured
deductibles before government cost-sharing even kicks in. And
then, TRIA makes sure taxpayers are fully repaid, as Mr.
Capuano pointed out, by assessing fees on the insurance
industry to recoup any payouts.
So this is a program which has not cost us anything, and
which has allowed billions of dollars in real estate
development to go forward. We are talking about thousands and
thousands of jobs. And I just see no rationale in this not
being extended.
I strongly support a clean extension of the TRIA program.
Mr. Capuano and I have one piece of legislation. I am proud to
be a co-sponsor of the Grimm-Maloney legislation, and they have
worked extensively hard on this.
But let's not just, as we somehow rely on buzzwords, to put
ourselves in a situation where we are hampering the economic
future of this country. This is something--yes, as Mike said,
if there are any improvements, let's make them. No one wants to
see one penny or one dollar be spent unnecessarily.
But until someone comes up with that, let's not stop one of
the most effective programs we have ever had and which really
goes to the heart of the main threat, one of the main threats,
certainly the most life-threatening danger we face today, and
that is a terrorist attack.
So, let's go forward. Again, if there are ways that this
can be done in a more efficient way, more effective way, let us
know. But until then, I strongly urge an extension of the
program.
I yield back the balance of my time.
[The prepared statement of Representative King can be found
on page 64 of the appendix.]
Chairman Hensarling. I thank my colleagues for their
clarity and passion and leadership on this issue. You are now
dismissed to assume your usual seats.
We will take a moment to allow our second panel of
witnesses to be seated at this time.
We will now turn to our second panel. I will introduce our
witnesses. First, Peter Beshar is the executive vice president
and general counsel to the Marsh & McLennan Companies. He
previously was a litigation partner in a large law firm, and
served as assistant attorney general in New York.
Eric Smith is the president and CEO of Swiss Re Americas, a
position he has held since 2011. He leads the company's
property, casualty, and life and health reinsurance businesses
in North and Central America.
Janice Abraham is the president and CEO of United Educators
Insurance, a position she has held since 1998, where she is
responsible for developing and executing business strategy and
operational plans for the risk management and insurance
company.
Dr. Gordon Woo is a catastrophist for Risk Management
Solutions, a Silicon Valley firm specializing in catastrophic
risk modeling.
Last but not least, Mr. Steve Ellis is vice president of
Taxpayers for Common Sense, and is no stranger to the
congressional witness table, having testified on numerous
topics such as flood insurance and congressional earmarks.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. Without objection, each of
your written statements will be made a part of the record.
Mr. Beshar, you are now recognized for 5 minutes.
STATEMENT OF PETER J. BESHAR, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, MARSH & McLENNAN COMPANIES
Mr. Beshar. Chairman Hensarling, Ranking Member Waters, and
all the members of the committee, thank you for the opportunity
to be here.
Terrorism is a deeply personal issue for our company, Marsh
& McLennan. On that fateful day, 9/11, our company lost 295
employees and scores of business associates.
We also feel that we have a unique vantage point on the
terrorism insurance market. Through our company, Marsh &
McLennan, and our subsidiary, Guy Carpenter, we provide
analytics and brokering services to really all of the players
in the insurance marketplace, the buyers of terrorism
insurance, the sellers, and also key reinsurers.
We consider TRIA to be a model example of a public-private
partnership. It provided crucial stability into the insurance
marketplace at a vital time, and today it is instrumental in
allowing the marketplace to function effectively. So, we
strongly encourage its reauthorization and its modernization
moving forward.
This morning, I would like to briefly cover four areas: the
current state of the terrorism insurance market; the aggregate
levels of capital in the industry; our recommendations for
reforming TRIA; and lastly, a couple of cautionary notes in the
event that a different decision is made.
This spring, our company, Marsh, released a sweeping survey
of 2,500 clients across the country on the subject of terrorism
insurance. And there were two big takeaways from the report.
First, buyers across the country want this coverage. In the
South, in the Midwest, and interestingly, in the West, the
take-up rates are increasing faster than anywhere else, so this
is not simply a phenomenon in the Northeast.
And second, the take-up rates are really across all
industries. We tracked 17 industries--real estate, health care
services, nonprofits--really, at every level, the take-up rates
have been consistent or increasing. So, policyholders want this
protection.
Meanwhile, on the level of capital in the reinsurance
industry, our subsidiary, Guy Carpenter, recently released a
report indicating that the level of capital in the reinsurance
industry has increased over the last 5 years to approximately
$195 billion, up from about $160 billion 5 years ago.
Now, to be clear, not all of this capital is available for
terrorism coverage in the United States. These numbers are the
aggregate numbers for the reinsurance industry across the
world.
Nonetheless, there is more capital in the reinsurance
industry today than there was 5 years ago, and were these
trends to continue, we believe that there is space for the
private insurance industry to take up more and to thereby
reduce the position of the Federal Government.
Against this backdrop, Mr. Chairman, we offer three
specific recommendations.
First, we recommend that Congress specifically clarify that
coverage is available under TRIA for all forms of terror,
including NBCR, if the underlying policy makes those provisions
available.
Second, TRIA should be modernized to reflect the fact that
new terrorist risks have emerged, even since the last time that
Congress reauthorized it in 2007. I think the most acute
example is cyber terrorism, and we ask that Congress reflect on
that and analyze how best to include cyber terrorism in a
reauthorized TRIA.
And third, the certification process. There is a clearly
laid-out process, but it doesn't have a timeline associated
with it. And as the bombings in Boston have revealed, in the
absence of a timeline, there is ambiguity that is brought into
the marketplace and for policyholders.
So, a range of additional changes have been recommended
from abolishing the program in its entirety to scaling back the
deductible, and expanding the co-pay. We will leave that to
you, Congress, to grapple with, but we would offer just a
couple of thoughts about potential market disruption that can
occur as you analyze those issues.
First, a critical component of TRIA is the make-available
component. We take it for granted, but up until that point,
unless that make-available is there, there is no guarantee
whatsoever that property and casualty carriers will, in fact,
make terrorism coverage available.
And our research suggests that, indeed, if TRIA is not
there, there are many P&C carriers who will, in fact, choose
not to underwrite the peril.
Similarly, on workers' compensation coverage, where
carriers have to pay their claims without regard to fault,
absent a Federal backstop, a number of carriers will likely
decline to provide coverage.
So, in sum, we believe TRIA is the backbone to a healthy
terrorism insurance market, and in our judgment, its existence
actually serves to protect taxpayers from absorbing virtually
all the loss associated with a significant terrorism event.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Beshar can be found on page
77 of the appendix.]
Chairman Hensarling. Mr. Smith, you are now recognized for
5 minutes.
STATEMENT OF J. ERIC SMITH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, SWISS RE AMERICAS
Mr. Smith. Chairman Hensarling, Ranking Member Waters, and
members of the committee, good morning. My name is Eric Smith,
and I am the president and CEO of Swiss Re Americas, a U.S.-
based corporation with thousands of employees in 30 offices
around the United States. We began doing business here in 1893,
and we have helped people rebuild their lives and businesses
after every major catastrophe since the San Francisco
earthquake of 1906.
Thank you for allowing me to appear before the committee
today to discuss the Terrorism Risk Insurance Act. TRIA
protects the American economy and provides certainty in the
insurance marketplace.
Swiss Re supports this important partnership between the
government and the private sector as a means of managing the
terrorism risk that our country faces. We urge you to
reauthorize the program.
Swiss Re offers insurance and reinsurance coverage for
terrorism risk in the United States. We believe this gives us a
unique perspective on two critical issues: first, why the risk
of terrorism continues to be uninsurable; and second, how
traditional and nontraditional reinsurance markets view the
risk of terrorism.
We are celebrating our 150th anniversary as an enterprise,
and the risk of terrorism and natural catastrophes has existed
since our company began operations. Today, insurance for
natural catastrophes is much more available and affordable than
it is for terrorism.
Why is this the case? Because even though natural
catastrophes like hurricanes and tornadoes can be just as
devastating as acts of terrorism, we can model them with
accuracy. Terrorism risk can't be modelled. Terrorism risk
remains largely uninsurable today because terrorists are
unpredictable.
Terrorists actively work against being detected so they can
inflict as much damage as possible. The same isn't true for
hurricanes or other natural catastrophes. And until we have a
means of modeling the human element of terrorism risk, we don't
believe the risk can be underwritten or priced with accuracy.
Because Swiss Re is the leading global reinsurance company
in the United States, I would like to comment on the U.S.
market capacity and the potential for growth in terrorism
reinsurance.
Reinsurers face the same basic challenges as primary
insurers in underwriting and pricing coverage for terrorism
risk. And this uncertainty affects our business appetite for
taking on the risk.
The fact is, we earmark very limited capital to terrorism
reinsurance, and the capacity we do offer goes to support our
clients in their TRIA mandates. The reason Swiss Re offers
capacity for terrorism risk in the United States is because
TRIA is in place.
Reinsurance capacity for terrorism risk in the United
States is generally limited to conventional terrorism losses.
There is virtually no capacity available for unconventional
terrorism losses from nuclear, biological, chemical, or
radiological attacks. And even for conventional terrorism,
reinsurance capacity is limited in large metro areas because of
the risk concentration challenges.
There have been recent reports about capital flowing into
the reinsurance market from hedge funds and large pension funds
and some have made the assumption that this capital will be
deployed for terrorism risk. Our experience does not lead us to
believe that this will be the case. Investors have not shown an
appetite for terrorism risk, whether the investment is made in
insurance-linked securities or in a more traditional manner.
There are two reasons for this: first, the unknowable
characteristics of the underlying risk; and second, the
correlation of risk. Pension funds and hedge funds are usually
heavily involved in financial markets. After a terrorist act
causing large-scale destruction, they would face the prospect
of losses from their reinsurance investments and possible
losses from a downturn in financial markets. This contrasts
with investments geared solely toward natural catastrophe
risks, where market downturns are less likely after an event.
Such dual uncertainty is not attractive to investors. This
brings me back to the central problem with terrorism risk.
Until it can be reliably modeled by insurers and reinsurers in
the financial markets, U.S. businesses will face challenges
getting the commercial insurance coverage they need to protect
their operations and meet financing requirements. And without
TRIA, U.S. taxpayers would be at greater risk.
We have worked hard at building the TRIA public-private
partnership. We are very thankful that the program hasn't been
tested. It is the elusive nature of terrorism that underscores
the continuing need for the partnership. TRIA has proven
effective in balancing the challenges of terrorism risk,
national security, and economic stability. It provides an
important foundation for orderly economic recovery following a
catastrophic terrorist attack on U.S. soil.
Mr. Chairman, thank you for allowing me to appear today. I
look forward to answering your questions.
[The prepared statement of Mr. Smith can be found on page
126 of the appendix.]
Chairman Hensarling. Ms. Abraham, you are now recognized
for 5 minutes.
STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, UNITED EDUCATORS INSURANCE
Ms. Abraham. Thank you.
Mr. Chairman, Ranking Member Waters, and members of the
committee, thank you for this opportunity to testify today. I
am Janice Abraham, president and CEO of United Educators,
speaking today on the concerns of schools, colleges, and
universities.
United Educators is an A-rated risk retention group, a
liability insurance company owned by more than 1,200 schools,
colleges, and universities throughout this country. Our goal is
singular and focused on this issue, to help schools and
colleges recover as quickly as possible after a terrorist
event, if a terrorist event occurs.
Although United Educators insures institutions in Boston,
Los Angeles, and throughout the country, we are mindful that
the terrorists found Oklahoma City as a target. And close to
92,000 fans will gather in Lincoln, Nebraska, to watch a
football game this fall. This is not a rural or urban issue;
this is an issue about having a plan to recover in the event of
a natural catastrophe.
Our policyholders fit the profile of potential targets.
They are icons of America, with open campuses and cultural
landmarks, a high concentration of people, and a strong role in
their community as economic engines.
Schools are potential targets for their Saturday afternoon
football games, and their research labs, not just the labs at
major research universities, are targets, especially of
terrorists who would seek to harm the Nation's national
security apparatus. And schools are targets when they host
major speeches or Presidential debates.
United Educators views TRIA as a national terrorism risk
management plan that enables our schools to manage their risks
responsibly through a four-way collaboration.
First, the policyholders, the schools through their
insurance deductibles have the first level of risk. They are
also obligated to have well-documented and tested crisis
response plans that ensure the security of research labs and
safe evacuation plans for large gatherings.
Second, United Educators, as the primary insurer,
underwrites this terrorism risk considering the schools
location, its vulnerabilities, and its crisis response and
recovery plans. We take on considerable risk of loss ourselves
as a company; 100 percent of our general liability insureds
hold the terrorism insurance endorsement now, 100 percent.
Third, U.E.'s reinsurers support our high limits of
coverage, particularly in the case of multiple catastrophic
events, such as a coordinated terrorist event across the
country. Our reinsurers have advised us that this broad
coverage will disappear if the Federal program is not renewed.
So that leaves the Federal Government, a fourth and
critical collaborator, by capping the liability and providing
stable and predictable limits on terrorism insurance allows
insurers and reinsurers to offer the sufficient capacity, even
for multiple events.
If the Federal Government steps away from its current role
in terrorism risk management, I think two things will happen.
Number one, the policyholders will not be adequately
protected. U.E. could not responsibly provide coverage knowing
that our balance sheet could be hit by coordinated terrorist
attacks on multiple campuses. This would leave colleges and
schools with few options, and none of them are good. They may
be unable to purchase terrorism coverage, relying on government
aid and private gifts to slowly recover after a catastrophic
event, or they may obtain some form of limited coverage with
exclusions and uncompetitive rates and pass this cost on to
students through tuition.
Second, insurance companies' insurance capacity would be
reduced and market competition would suffer. Like United
Educators, small and midsized insurers--and that is the
majority of companies and the insurance companies in this
country--many of which are mutual companies--would not be able
to provide this coverage. This would result in less capacity to
support terrorism risk and a much less competitive insurance
market. If caps on catastrophic terrorism losses expire, only
the large insurers will be left to offer coverage, and they may
have limited appetite to fill this gap.
The U.S. insurance industry thrives through diversity and
competitiveness, and it may be counterintuitive, but capping
the limits on private sector liability for catastrophic
terrorism losses encourages more competition and more options
for policyholders.
No one here wants, after a catastrophic terrorist event,
for the government to hand out recovery money based on
political pressures. What we want is an orderly recovery, and
TRIA supports this.
Thank you, again, Mr. Chairman. I would be pleased to
answer any questions.
[The prepared statement of Ms. Abraham can be found on page
72 of the appendix.]
Chairman Hensarling. Dr. Woo, you are now recognized for 5
minutes.
STATEMENT OF GORDON WOO, CATASTROPHIST, RISK MANAGEMENT
SOLUTIONS INC.
Mr. Woo. Chairman Hensarling, Ranking Member Waters, and
members of the Financial Services Committee, I am very pleased
and honored to be here today to give my testimony on terrorism
insurance risk modeling.
Terrorism has become and will remain a catastrophe
insurance risk. The possibility of a malicious aircraft impact
in a central business district of a major U.S. city will exist
as long as there is air travel.
The private sector market for any catastrophe insurance
peril requires risks to be quantified. To meet this need,
catastrophe insurance modeling has progressed in covering
earthquakes and hurricanes in the 1990s to terrorism after 9/
11.
In 2002, when TRIA was introduced, and subsequently
reauthorized in 2005 and 2007, some attention was given to
insurance risk models, but experience was still too limited for
them to be accorded much weight.
Now, in September 2013, with a doubling of experience since
2001, terrorism risk insurance risk modeling has attained a
level of capability, validation, and maturity to make a more
notable contribution to the discussion of the future of TRIA.
What has become clear since 2007 is this: Terrorism risk is
as much about counterterrorism action as about terrorists
themselves. U.S. terrorism insurance is essentially insurance
against the failure of counterterrorism. This is true not just
in America, but across the Western alliance, Canada, Western
Europe, and Australia.
Numerous terrorist plots are developed, but the vast
majority are interdicted through the diligence of Western
intelligence and law enforcement agencies. Mass surveillance of
communication links, and intrusion of intelligence models
elevates the likelihood of plot interdiction with plot size.
The ambitious plots that might have a potential to cause
massive insurance loss would tend to involve a significant
number of operatives and thus be very prone to interdiction.
Too many terrorists spoil the plot. Attacks by a lone wolf
or a pair of operatives such as the Boston bombers may be
horrific acts of murder and destruction, but they are unlikely
to cause large catastrophe insurance payouts.
Now, an earthquake is a deadly and destructive force of
nature, but an earthquake is not a crime. After the Japanese
tsunami of March 2011, a Japanese boy asked his father why the
earthquake that caused the tsunami could not be arrested.
Terrorism is a crime. Criminals can be arrested in a way
that earthquakes and hurricanes cannot. With every terrorist
brought to justice, the evidence of counterterrorism control of
loss volatility is accumulating across the Western alliance.
Progressively, the courtroom record of terrorism convictions,
combined with low terrorism insurance losses and risk modeling
of terrorist social networks, should encourage cautious
expansion of the U.S. terrorism insurance market. However,
terrorism is not geographically diversifiable. The terrorists
predominantly choose iconic targets with a recognition in
populous urban centers.
The lack of geographical diversification inherently limits
the insurance market capacity for covering terrorism risk in
the central business districts of Manhattan and other main
metropolitan areas. An ongoing challenge for future terrorism
insurance market development is lack of capacity in some
prominent ZIP Codes.
I want to make this point, that the Federal Government has
a permanent, implicit involvement in terrorism insurance, in
that it provides extensive--and massive, even--counterterrorism
resources to stop terrorists before they move to their targets.
And these resources have been deployed very effectively since
9/11.
Now, the greater these resources, the less the insurance
loss burden. So the billions which have been spent on
counterterrorism, quite rightly, to protect citizens from
terrorist assaults, have helped to reduce the insurance loss
burden.
And to minimize the cost to the American taxpayer of TRIA,
continued development, continued proficiency of
counterterrorism action provides a solid security platform for
future development of the terrorism insurance market, provided
that a government backstop is in place for the most extreme
losses.
Thank you very much for your attention.
[The prepared statement of Dr. Woo can be found on page 142
of the appendix.]
Chairman Hensarling. Last but not least, the Chair now
recognizes Mr. Ellis for 5 minutes.
STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON
SENSE
Mr. Ellis. Thank you. Good morning, Chairman Hensarling,
Ranking Member Waters, and members of the committee. I am Steve
Ellis, vice president of Taxpayers for Common Sense, a national
nonpartisan budget watchdog. Thank you for inviting me here
today to testify on the Terrorism Risk Insurance Act and the
Terrorism Risk Insurance Program.
Congress enacted TRIA to ``establish a temporary Federal
program that would allow for a transitional period for the
market to stabilize, resume pricing of such insurance, and
build capacity to absorb any future losses.''
Taxpayers for Common Sense, to be clear, opposed the
creation and the extensions of the temporary program and
believe that nearly a dozen years after the tragic events of 9/
11, the terrorism marketplace has settled to the extent that it
is past time for the government to step aside and let the
private sector handle the portfolio.
Much of our concern with the terrorism reinsurance program
comes from the experience with the National Flood Insurance
Program, where the availability of subsidized Federal insurance
has largely prevented the development of a private market,
forcing taxpayers to pick up the tab for approximately $25
billion in losses to date.
In addition, below-market rates serve as a disincentive to
mitigate for risks, something which is concerning in both the
flood and terrorism context. President Reagan once observed
that Federal programs and agencies are ``the nearest thing to
eternal life we will ever see on this Earth.''
And so, you have this 3-year, explicitly temporary
terrorism reinsurance program extended for 2 years, then
extended for 7 years. And legislation, as we have heard about
today, has been introduced to extend the program for another 5
to 10 years. That will result in a temporary program that is
just about old enough to vote.
I know that insurance companies and insureds would like to
see the program extended as is. No wonder; it is a good deal.
But as then-CBO Director Douglas Holtz-Eakin has observed in
the 2005 reauthorization debate, it is not such a good deal for
taxpayers: ``It is easy to exaggerate the overall cost to the
economy of reducing the Federal subsidy for terrorism
insurance.''
In fact, those costs are likely to be small. One reason is
that TRIA does not lower total costs of terrorist attacks, but
rather shifts them from property owners to taxpayers. Indeed,
total cost might be lower without TRIA, because efforts to
mitigate risk could pay off in smaller losses from a terrorist
attack.
For more than a decade, insurance companies have been
pocketing terrorism insurance premiums with nary a payout.
Thankfully, I admit. For the insureds, the take-up rate for
terrorism insurance is roughly steady at a little over 60
percent since 2009.
Terrorism insurance premiums as a percent of total property
insurance premiums is fairly consistent, as well, from 4
percent to 5 percent. Reinsurance and insurance response to
disastrous events is to initially pull back, only to return
with greater capacity, like pruning a tree, even after 9/11.
A Journal article describes an airport director's testimony
to this committee on obtaining insurance in 2001: ``The
significance of the testimony is apparent. The insurance
industry has learned sufficiently about terrorism risk
insurance that, while on September 20th, insurance was
unavailable, a short while later, it was available at a price,
and by the third week of October, available at a lower price,
all without Federal support.''
As has been mentioned by my colleague here at the table
from Marsh, in their report from the spring, they noted that
capacity in the standalone terrorism insurance market has
increased significantly over the years. In the report, they
estimate that terrorism insurance market capacity is $4.3
billion, and there is up to $2 billion per risk in standalone
capacity.
It is important to note that in the United States, the
reinsurance market is servicing a very small slice of the
reinsurable pie. Some insurance companies are purchasing
reinsurance to cover a portion of their deductible. This market
would clearly grow if the Federal Government was not providing
reinsurance for free.
We believe TRIA should expire at the end of 2014. However,
it is important that this be an affirmative decision by
Congress and the Administration that can lead to an orderly
transition in the market.
If Congress should decide to continue TRIA in some form, we
have several recommendations, short term. A long-term extension
was done in 2007--a long-term extension, like what was done in
2007, lends itself to more permanence in transition. A 2- or 3-
year extension should be the maximum. Further, the law should
explicitly state that this is the last extension.
Skin in the game: The 2007 extension did nothing to shift
more responsibility onto the private sector, like was done in
2005. Any new extension should increase the trigger for Federal
involvement significantly, to as much as $50 billion or more.
In addition, the deductible should be increased throughout the
extension, and companies should pay a premium to the Federal
Government for reinsurance coverage.
TRIA was created in a much different time, with extensive
uncertainty about future risks in the marketplace for terrorism
insurance and reinsurance. The program doesn't reduce any of
the risks to people or property from terrorist attacks, nor
does it encourage companies to minimize and mitigate those
risks through security measures.
It simply shifts much of the fiscal risks off of property
owners and insurance companies and puts it on the backs of
taxpayers. It is time for that to end. Thank you very much.
[The prepared statement of Mr. Ellis can be found on page
121 of the appendix.]
Chairman Hensarling. I thank all the members of the panel
for their testimony. The Chair now recognizes himself for 5
minutes for questions.
There have been a number of references to 9/11, and the
tragedy of the Boston terrorist massacre. In fact, I have made
some of those allusions in my own opening statement.
But I want to ensure, I guess following up somewhat on Dr.
Woo's testimony about counterterrorism, does anybody on the
panel believe that TRIA has anything to do with lowering the
risk of terrorism?
If not, I believe Mr. Ellis referred to the Congressional
Budget Office, the nonpartisan Congressional Budget Office,
that concluded in an earlier report, ``TRIA does not lower the
total cost of terrorism risk, but rather shifts more of the
burden from commercial property owners and their tenants to
taxpayers.'' Is there anyone on the panel who wishes to take
issue with the Congressional Budget Office?
If not, we are trying to isolate the debate here. In fact,
Mr. Ellis, I think--
Ms. Abraham. I actually do have a comment.
Chairman Hensarling. Please.
Ms. Abraham. Mr. Chairman, I think TRIA will support an
orderly, speedy recovery. That is what TRIA is for our members
at our schools, colleges, and universities. It provides surety
that we can provide the primary insurance, our reinsurers will
be--
Chairman Hensarling. But does that lessen the cost of an
incident of terrorism to our society, or does it shift the
cost?
Ms. Abraham. If you look at the total cost, it would reduce
the cost, because the economy would recover faster. Schools
would open their doors faster. Businesses would be moving
faster.
Chairman Hensarling. I understand the argument.
Ms. Abraham. You look at a total cost of risk, yes, I
think--
Chairman Hensarling. I understand. Now, for something
completely different, Mr. Ellis, I think in your testimony, you
actually are making the case that TRIA can potentially increase
the cost of incidents of terrorism. Is that what I read in your
testimony?
Mr. Ellis. Yes, Mr. Chairman. One of the social benefits of
insurance is that it serves to encourage, through the price
mechanisms, to mitigate your risk, to essentially take measures
that are going to reduce your risk. If you don't smoke, you
have lower health insurance costs.
And so it is a similar sort of thing, that if it is priced
appropriately, the companies, the entities are going to be
required to take more security measures. I am not saying that
it is going to--that not having TRIA is going to eliminate
terrorism or the impacts of terrorism, but the price signals
try to mitigate the risk and diversify the risk.
Chairman Hensarling. Dr. Woo, yes, go ahead?
Mr. Woo. I wonder if I could just--
Chairman Hensarling. Again, if you could pull your
microphone closer, please.
Mr. Woo. I'm sorry. What is very interesting, to make a
comparison between the amount of money spent on risk mitigation
against natural hazards as opposed to terrorism. What is
remarkable is that a far greater amount is spent on mitigating
terrorism risk than on natural hazards, because terrorism is
something that people are especially fearful about.
So with regard to the comments of Mr. Ellis here, I would
say that if you just compare how much money is spent on
counterterrorism nationwide, it is a massive figure which far
outweighs the amount spent on natural hazards. If I could just
make a comment about the U.S. Geological Survey's budget,
annual budget of about, I think, $1 billion a year, that is
completely dwarfed by the budget for counterterrorism. So, I
think this is a very interesting comparison between natural
hazards and counterterrorism.
And it is one of the reasons the terrorism insurance losses
have been low since 9/11, because there has been this massive
expenditure on terrorism risk mitigation.
Chairman Hensarling. If I could, Dr. Woo, unfortunately, my
time is running out here, but I will give you another chance to
comment. Clearly, you believe there have been great advances in
the ability to model for terrorism attacks. I suspect it is one
reason why you are employed as a catastrophist, that you
actually believe this can be done.
And you talk about, every time a terrorist is brought to
justice, greater evidence, counterterrorism control, courtroom
record, low terrorism insurance losses, ``should encourage
cautious expansion of the U.S. terrorism insurance market.''
I think you go on to say that a plot involving as many as
10 operatives has only a slim 5 percent chance of avoiding
interdiction, as opposed to lone wolf attacks, which can be
very deadly to human life, but not necessarily economically
catastrophic.
But in the few seconds I have left--and I hope that other
members of the panel will answer this--you say, Dr. Woo, that a
future challenge is that lack of capacity in prominent ZIP
Codes. Ms. Abraham talked about, I think, 1,200 universities
and colleges that are members.
So I am trying to get a feeling, again, is this limited,
this risk to certain large, metropolitan areas, where the risk
cannot be effectively spread throughout the Nation? Because I
seem to be getting contrary testimony from others that there
are many soft targets that also have an incentive to be
insured.
But I have long since gone over my time. Perhaps others
will pursue that.
I now yield 5 minutes to the ranking member.
Ms. Waters. Mr. Chairman, I have listened with great
interest, of course, to all of the testimony. And I perhaps
have 101 questions for Mr. Woo to the degree risk mitigation
can reduce the cost of insurance or create models that could be
handled by the private sector.
But let me, before I ask any questions, just say this: I am
thinking very much about patriotism. And I am thinking a lot
about the fact that--I am thinking about 9/11, and I am
thinking about the fact that companies, both public and
private, were attacked. Jobs were lost. Lives were lost, on and
on and on.
And it seems to me that we would be thinking about
everything that we can do to make sure that the government
plays a role to reduce the losses, to get the private and the
public sectors back up and operating as quickly as possible and
all of that, and recognize that at this time we have not
experienced any losses, but we have a safety net for public and
private.
It seems to me that even with the thought of cost that
would be incurred by the citizens, that is just something we
should assume is what we should do and what we must do.
And so having said that, Ms. Abraham, in your testimony,
you indicated support not just for TRIA reauthorization, but
specifically for TRIA reauthorization in substantially the same
form as TRIA exists today. Can you explain briefly why
reauthorization with substantially similarly insured
deductibles is as important as TRIA reauthorization generally?
Ms. Abraham. Yes, thank you very much for the opportunity.
I think there are reasons for some improvement, and I would
agree with Marsh & McLennan's recommendations, but I mentioned
in my testimony the importance of making sure small to mid-
sized insurance companies are in the market providing capacity.
And if these deductibles are significantly raised above the
current 20 percent, then many of us will be forced to exit the
market. We wouldn't be able to take that kind of loss from
multiple events. Currently, the 20 percent is 10 percent of
United Educators' capital. That is a lot of money. That is a
risk that most businesses wouldn't put at loss. And so, if you
make the deductibles or the co-pay significantly different from
what it is, you will run small to mid-sized insurance companies
out of the market, reducing capacity.
So I really understand that it is counterintuitive, but the
Federal Government having a role in this encourages
competition, encourages more companies to play a role in
providing capacity and having opportunities for, in my case,
colleges and schools. Whether you are insuring a mutual in New
York or a mutual in Texas, you need to be able to have more
capacity entering the market.
So if it significantly changed, raising the deductibles, a
lot of our small and mid-sized companies will not be able to
absorb those kinds of hits to our balance sheets in the case of
a catastrophic event.
Ms. Waters. Thank you very much. I want to move to Mr.
Peter Beshar from Marsh.
Earlier this year, Marsh released a report that included
among other findings a section on standalone market capacity.
Can you please discuss these findings? In your opinion, is
there a willingness by the private sector to offer terrorism
coverage, absent a mandate such as TRIA?
Mr. Beshar. It is an excellent question, Congresswoman.
Clearly, the make-available provision is critical in inducing
property and casualty carriers to provide terrorism insurance.
And were that not to exist, our belief is that there are many
carriers that would not, in fact, be willing to provide
terrorism insurance.
Ms. Waters. Mr. Smith, reinsurance is a vital component of
terrorism insurance coverage. In the aftermath of September
11th, the reinsurance industry essentially fled the market. Can
you discuss the extent to which the reinsurance industry has
re-entered the market, if at all? How limited is current
reinsurance capacity?
Mr. Smith. The reinsurance market is very active in the
terrorism risk space. We believe that balance occurs today with
insurers. Whether you are individuals or businesses, you have
to take steps to fortify and to do what they can.
The primary insurance companies are taking a great load,
and they serve a wonderful purpose, but there is significant
capital from the reinsurers that are in the marketplace. And
when we had the attacks of 9/11, it was the reinsurers that
provided the majority of the funds to help rebuild our country.
So, we are there. With TRIA, we will stay there.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the chairman of our Housing and
Insurance Subcommittee, the gentleman from Texas, Mr.
Neugebauer, for 5 minutes.
Mr. Neugebauer. Thank you, Mr. Chairman.
Dr. Woo, you heard a number of our panelists say that one
of the problems with terrorism insurance is that it can't be
modeled. Do you believe that terrorism insurance can be
modeled?
Mr. Woo. Thank you very much, Congressman. Since 2007, one
of the major developments in terrorism risk modeling has been
the study of terrorist social networks, in particular to assess
the likelihood of a plot being interdicted as a function of the
size of the plot.
And, in fact, I have submitted with my testimony a
PowerPoint presentation which includes a table showing how the
chance of a plot being interdicted increases with the number of
operatives involved in it. This is work that I did in 2009,
2010, so it wasn't available at the time that TRIA was last
being discussed.
So this, to my mind, is a major development, because what
we are all interested to know is, what is the severity, the
likelihood of a given attack? If you just consider vehicle
bombs, there are bombs of all different sizes, from a car bomb
to a small truck bomb to a large truck bomb to a 5-ton or 10-
ton truck bomb.
The key point here is that there is no way that a 10-ton
truck bomb can be implemented as a terrorist attack without
having a substantial number of operatives involved. And if you
have a large number of guys involved in a plot, the plot most
likely is going to be interdicted.
If I can just make a point about the Federal Government's
involvement, any major successful terrorist attack almost
certainly would involve a substantial number of operatives. And
in any inquiry as to how this plot was allowed to get through
the security net, there is going to be a question of government
responsibility, liability, negligence around it. I live in
London. Just in May, we--
Mr. Neugebauer. Dr. Woo, I'm going to take that as a yes.
Mr. Woo. Yes. Yes. I'm sorry.
[laughter]
Mr. Neugebauer. And I appreciate that. One of the things,
when we talk about TRIA--and I want to go to Mr. Beshar, Guy
Carpenter, which is one of Marsh & McClennan's subsidiaries,
put out a report in 2010 which stated more than 80 percent of
the reinsurers are actively seeking new or expanded terror
insurance business. And two-thirds of the global insurers now
offer coverage for nuclear, biological, chemical, and
radiological events, a substantial shift in underwriting
appetite from the period immediately following 9/11.
This seems to make a strong case that there is an appetite
out there for TRIA, for terrorism insurance without necessarily
a Federal backstop, because in other markets there is not a
Federal backstop. So do you agree that there is an increasing
appetite for terrorism insurance out there?
Mr. Beshar. Congressman Neugebauer, I think the critical
fact is there is an increasing appetite in the presence of
TRIA. And the concern is that if you take that backstop away,
this is not a peril that most property and casualty carriers
are eager to underwrite.
And so, when we speak about some of the capital levels that
exist in the overall industry, I referenced a figure earlier of
$195 billion. That is for all lines across the world. And when
you shift to just the United States and then just to the United
States for terrorism insurance, the issue is much smaller, the
amount of capital.
Mr. Neugebauer. So what do buildings that are insured in
London and Paris and Hong Kong that don't have TRIA, what is
the appetite for insuring those buildings?
Mr. Beshar. It is part of the same public-private
partnership. So in the United Kingdom, there is a pool
reinsurance facility that the government has helped establish
that is similar to the case in Germany and France, for example.
Mr. Neugebauer. What if you separate the NBCR component
from that and you had a backstop for that, but the rest of the
risks were separated from that? Is there an appetite to assume
those risks?
Mr. Beshar. I think it is a gradual process, Congressman.
Right now, if you can validate that if there is underlying
coverage for NBCR, then TRIA will backstop that. That process
will encourage the P&C market to begin to expand its
willingness to go into broader NBCR. Again, in the absence of
TRIA there is not the appetite, just given the immensity of the
potential exposure to a catastrophe.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, for 5 minutes.
Mrs. Maloney. I would like to ask Peter Beshar from Marsh &
McClennan--and note that Marsh & McClennan was located in one
of the two towers. So we appreciate all of the panelists'
testimony today on this incredibly important issue.
I would like to ask you, in the last 5 years, how much have
property and casualty firms received in premium payments for
terrorism coverage in the United States?
Mr. Beshar. Congresswoman Maloney, I don't know that
specific answer, but I would be happy to have some of the
experts within Marsh and Guy Carpenter work with members of
your team.
Mrs. Maloney. Okay. And in the last 5 years, how much have
those firms paid in claims for terrorism events in the United
States?
Mr. Beshar. Thankfully, the response to that is very
little.
Mrs. Maloney. Now, when you look at the alternatives that
may be out there for TRIA that would result, are there any
alternatives, and if so, what are they, that would result in
the level of availability and terrorism risk insurance
sufficient to protect the broader economy? Are there any
alternatives that you can think of that could--
Mr. Beshar. We think that the existing framework that the
Congress developed first in 2002, and then reformed and
modernized, is probably the best available structure that can
exist, this public-private partnership, where particularly, the
Federal Government is trying to backstop the true catastrophe.
Mrs. Maloney. And as I mentioned in my own testimony,
during the days after 9/11, everyone halted their insurance. No
one could get any insurance. I don't think anyone was supplying
insurance in the United States.
The only place some companies could get insurance was
Lloyd's of London. Why was Lloyd's of London able, in very
limited ways, to provide insurance, yet no insurance company in
America was providing insurance to anyone, to any business in
New York?
Mr. Beshar. It was actually--aviation insurance was one of
the first issues that really came up and crystallized, because,
you will remember, essentially no planes were flying for a
period of time. And so, that was the first issue that the
insurance industry had to grapple with.
Marsh & McLennan actually worked with Lloyd's and other
brokers and carriers in the marketplace to first try to
stabilize the aviation so that the planes could begin to fly
and then worked beyond that into property and other areas.
Mrs. Maloney. Your work reminds me of the great resiliency
of our country. The fact that we bounded back after that
catastrophe in such an extraordinary way is a credit to every
public-private effort. If TRIA is not reauthorized, what do you
expect the impacts will be on the availability and pricing of
terrorism insurance or terrorism coverage?
Mr. Beshar. There are two principal concerns that we have,
Congresswoman Maloney: first, that P&C carriers will pull back;
and second, that in the workers' comp area, in particular,
where carriers have to make the coverage available, that if
there is not the backstop, they will simply decline to
underwrite the insurance.
Mrs. Maloney. And what do you think would be the material
changes or the economic impact if we were not able to continue
to current TRIA program, in terms of job creation, the overall
economy? What would be the effect on development?
Mr. Beshar. It is very difficult to estimate it,
Congresswoman. In the workers' comp area, if the coverage is
mandatory, in order to employ people, and there is very limited
coverage that exists in the marketplace, clearly, under that
scenario, that could be an inhibitor on job creation.
Mrs. Maloney. Some have attacked the program as ``corporate
welfare'' and a potential liability to the hardworking
taxpayers of America. Can you discuss the level of
responsibility private insurers continue to face under TRIA?
And can you more fully explain the relationship between the
public insurers, the private insurers, and the public, the
government, in paying claims which result from a terrorist
attack?
Mr. Beshar. Sure. I will focus just on one provision that
was implemented in 2007, the recoupment provision, so that if
there was to be a significant terrorist attack and the Federal
Government did have to, in fact, advance funds to carriers,
both on the reinsurance and insurance side, then the Federal
Government has the right to recoup those outlays over time
through increases in premium.
Mrs. Maloney. My time has expired. I just want to thank all
of you for your testimony. It is important. Just seeing you
reminds me of visiting with your survivors shortly afterwards.
And thank you for the leadership your company has had in this
area. Thank you.
I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New Jersey, the chairman of our Capital Markets
Subcommittee, Mr. Garrett, for 5 minutes.
Mr. Garrett. I thank the chairman.
So, let's begin. First, let's just take a look to see how
well the system is working right now. Someone on the panel, I
forget who, made reference to the trigger mechanism in the
current law and I believed referenced also the Boston bombing
situation. If my recollection is correct, the mayor of Boston
said, ``This is not a terrorist event.'' And I guess--Mr.
Beshar is shaking his head. Is that--
Mr. Beshar. I don't know that specifically, Congressman.
Mr. Garrett. Okay, yes. But you will confirm that has not
been, as of yet, officially declared a terrorist event. Is that
correct?
Mr. Beshar. That is correct.
Mr. Garrett. Right. Many months ago. And so, I can
understand why a mayor or governor or actually the Federal
Government would want to say that it is not a terrorism event,
because if you declare it a terrorism event, all of those
businesses which did not secure coverage would then be
basically ineligible to seek their normal coverage on their
policy. I will look to--Mr. Beshar, is that your understanding?
Mr. Beshar. That is part of the complexity of it, is that
some businesses will have terrorism protection, and some will
not. And so, if there hasn't been a formal declaration, it
makes it harder for the marketplace to respond.
Mr. Garrett. Right. And so that is going to--it has been
apparent, from that incident, since it is many months later and
we still don't have a determination on it, I guess that is one
of the issues that is brought to my attention as a flaw in the
system, because you can imagine the political pressure for,
unfortunately, if there is another event, political pressure
not to declare that a terrorist event, because then there will
be a lot of people who will be basically uninsured.
Mr. Ellis, do you have a comment on that?
Mr. Ellis. No. No comments. I think it is a very valid
point.
Mr. Garrett. So as long as you are--I am talking to you,
let me just reference a report that Chairman Hensarling raised.
It was a 2007 report by the CBO, and as it said, ``TRIA
legislation raises difficult questions about economic
deficiencies. For instance, some analysts and policymakers
maintain that TRIA does not lower the cost but simply shifts
the cost.''
As you are all aware, TRIA has a trigger set at $100
million. I believe, in your testimony, you said you had thought
we could lower the thresholds, lower the deductibles. I think
you probably also heard from the colleague just to the right of
you, figuratively speaking, Ms. Abraham said that the threshold
at 20 percent is problematic.
I will look to you first, Mr. Ellis. Is there potential
that those numbers will be changed, if there was reform to this
legislation?
Mr. Ellis. Certainly we would advocate that if we are going
to extend the program, we would be trying to lay off more risk
onto the private sector and allow the reinsurance market to
grow. And so certainly, what some insurers have done is to lay
off some of that 20 percent deductible.
We heard about how the terrorism reinsurance market is
growing. That is the place where it can actually grow, is in
that 20 percent. So if we actually increase the deductible,
then we would be able to lay off more risk to the private
sector and not have the taxpayer on the hook.
Mr. Garrett. Right. Although this law has been here in
place longer than what was intended, the numbers have changed
over time. Originally, I guess it was at 15 percent, and then
it went to 17.5 percent, and now we are at 20 percent.
And memory doesn't serve me too well, whether there were
statements at those times, as well, that the industry was not
able to absorb it. So, I assume that is the case today.
Mr. Smith, there is a Swiss Re publication that came out
after September 11th, which was entitled, ``Terrorism Risk in
Property Insurance and their Insurability after September
11th.'' And it said, ``Swiss Re basically agrees that property
and business interruption losses resulting from terrorism are
insurable, even in the aftermath of September 11th.''
Do you all still stand by this?
Mr. Smith. Congressman, we are actively involved in
insuring terrorism risk today, so--
Mr. Garrett. Right.
Mr. Smith. I think you have--the full report talks about
the presence, or the hopeful presence of a government backstop.
Being a global reinsurer, we have to deal with terrorism risks
all over the globe, and, unfortunately, our country in the
United States, we are the main target. So, we are very
concerned about TRIA--
Mr. Garrett. I understand.
Mr. Smith. That it is with the presence of a backstop, that
it has to be there.
Mr. Garrett. Was that part of that report?
Mr. Smith. I believe so.
Mr. Garrett. Okay. I see my time is--I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Smith, historically, smaller firms have much lower
take-up rate of terrorism insurance when compared to larger
companies. Some reports show as few as 10 percent of small
businesses have such coverage. In your opinion, what is the
reason for this lower take-up rate?
Mr. Smith. That is part of the dynamics of the marketplace.
So terrorism risk is something that is--for smaller businesses
that tend to work on thinner margins and in a more
straightforward business approach, it is one of those optional
coverages that oftentimes they don't feel that they can afford.
It is not just terrorism risk. There would be other
optional coverages that small businesses oftentimes will
exclude, that a larger, more sophisticated business, perhaps a
publicly traded company with a board and a risk management
apparatus in place, would not be able to avoid.
Ms. Velazquez. Mr. Beshar, do you have any stats on
terrorism insurance coverage by small businesses pre-9/11 and
post-9/11?
Mr. Beshar. I don't believe we have data pre-9/11, because,
really, the coverage was embedded in property and there was so
much less focus on it. In this Marsh report that we released
earlier in the spring, there is a lot of analysis about the
pricing, based on the size of companies. So, larger companies
generally are paying a smaller rate online, in terms of
percentage of premium, than smaller companies.
Ms. Velazquez. And do you have any opinion as to any
mechanism that we should explore to make terrorism insurance
more affordable for small businesses?
Mr. Beshar. I think the continuity of the program--if there
is less uncertainty about whether the program is going to
continue, I think the market will naturally evolve so that
there are higher take-up rates, particularly in some of the
small businesses that you have referenced.
Ms. Velazquez. Thank you.
Thank you, Mr. Chairman.
Chairman Hensarling. The gentlelady yields back.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman. Thanks to each one of
you for your testimony today. I generally am concerned about
businesses and the ability of businesses to work through the
problems they face. I would like to ask questions kind of from
the other direction this morning, though.
The idea that safe and orderly speedy recovery of an
industry would result by having this coverage, I wonder if any
of you are familiar with Sri Lanka? In 2001, they lost 5 or 6
of their 12 aircraft. And do they employ some sort of a process
to rebuild the industry? Or what was their aftermath? I will
just ask that as an open question to anyone who might want to
take it on.
Mr. Smith. Let me go with that. When you look across the
globe at developed nations versus developing nations, you are
going to find much lower participation in insurance programs.
Whether we are talking about Sri Lanka, or whether we are
talking about the tsunamis, there tends to be a slower
recovery, so the resilience that we enjoy in the United States
unfortunately just doesn't exist in many parts of the world.
So, the recoveries are very slow. They tend to be much more
community-based. They tend to involve a very different mindset
of the population.
Mr. Pearce. I would note that Sri Lanka, at that point, had
12 aircraft. Now they have 22 in about 10 years, and so it
looks like the industry has not suffered and it didn't just
stall out.
I also am kind of drawn to the situation with the two
successive hurricanes. Hurricane Katrina, of course, came in
and off-course out of the Gulf. Then, I think it was the next
year or the next hurricane sat out there and jammed around on
Cancun. We had been to Cancun a year or two before, and were
scheduled to go back, but we didn't bother.
But I asked the travel agent about a year later, did they
ever get fixed? Yes, they were fixed in a matter of weeks. They
understood that if they didn't fix Cancun, nobody was going to
come, and yet it took years, with $100 billion more or less
sent to Louisiana.
And so, again, I am sympathetic to the argument. I tend to
feel a little bit like Mr. Capuano described, that I might not
like it, but I am not sure what else to do with it, and I am
still processing this idea of, is it essential?
One of you mentioned--I am not sure which one--that many of
the underwriters simply wouldn't tolerate the risk, they
wouldn't carry the insurance. What would companies do, for
instance, if they lost an airliner, let's say, or a building? I
am not willing to discount the human loss, but let's say that a
major facility was damaged and a business did not have risk
insurance, did not have terror insurance.
Mr. Beshar, I really appreciated your testimony. It was
clear and precise, and I appreciated that. How do businesses
react when they don't have that coverage?
Mr. Beshar. It is not a great scenario, because if you
have, obviously, a substantial loss and there is really no
third party, not a private insurer, not the government that you
can turn to, you have to absorb that loss.
One other brief point, Congressman, in Mexico--you cited
the example--they have recently issued, together with Swiss Re,
catastrophe bonds to try to protect against certain risks,
earthquake risk, for example, and it has been quite successful.
It is a very unusual program of the Federal Government trying
to essentially market something like that. And over the years
ahead, hopefully there are those types of alternative
instruments that might play an increasing role in the
marketplace.
Mr. Pearce. Let me crowd one last question in here, if you
don't mind.
A couple of you have mentioned the risk of lawsuits
downstream. If what we are doing is to give trial lawyers
access into unlimited pools of taxpayer money, then I become
greatly more resistant, and so probably you will have to answer
in writing, but if any of you could address how we could limit
the frivolous lawsuits downstream, I would be a lot more
interested in the program.
But, Mr. Chairman, I see my time has expired. I appreciate
the opportunity, and I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from New York, Mr. Meeks, for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
And I want to thank all of the panelists for their
testimony today on this very important issue. I think it is
important to all of us, given the day and time in which we
live.
Let me first ask Ms. Abraham the question about terrorism
insurance being an uninsurable risk, but the capacity of the
private sector to--if they had to insure on their own, do you
think that they would be able to have the capacity without the
public-private partnership to cover?
Some have said because of their financial capacity, it
could be meaningless if they issued insurance and they didn't
have the capacity. So, I wonder if you could just give me your
thoughts?
Ms. Abraham. No, I do not believe, Congressman--thank you
for the question--that there is capacity to insure the type of
losses that we have all read about that could come either in
major gatherings--I noted, as others, a football gathering or a
major city or anywhere around the country.
So, no, I do not believe there is an--although there is a
lot of capital in the world now supporting insurance companies,
that capital is both for natural catastrophes, it is for global
risks, as well as domestic risks. I do not believe there is
enough capital to support the type of losses and multiple
losses that could occur in this country from a major terrorist
event. This is about catastrophic losses.
Mr. Meeks. Thank you.
And, Mr. Smith, every time that Congress has extended TRIA,
we have passed additional risk retention to the private sector.
What has been the impact on terrorism insurance pricing and
coverage? Have the private insurers, for example, bolstered
their capacity to be able to cover up to $40 billion in losses
should another tragic event like 9/11 happen again, that we
hope never does happen?
Mr. Smith. There are a couple of elements there.
The first is that, as time has gone on and as businesses
especially have learned more about terrorism risk and have
chosen to take on the coverages, with the partnerships that are
in place between primary insurers and reinsurers and TRIA, the
market has been stable, the coverages have been, we think,
affordable, and there has been a greater uptake.
But it is kind of two steps. First, businesses have to
better recognize the risk they have, but then they are able to
turn to primary insurers with the backing of reinsurers and
TRIA and fulfill upon what their desires are.
Mr. Meeks. It seems as though we are making progress, as
the longer we go without a major incident, et cetera. So as we
debate--we have several bills that are before us. Could you
tell us what you think? Some say 5 years extension, some says
10 years, some say even longer. What do you think would be the
appropriate extension of TRIA?
Mr. Smith. I think this is an exceptional program. There is
great balance to it. The majority of the costs are going to be
borne by the primary insurers and the reinsurers. But terrorism
risk is just in a league of its own, and it cannot be modeled.
The extreme events will be devastating to our industry. So,
therefore, without the backing of TRIA or a similar-type
program anywhere in the world, you won't see the presence of
insurers and reinsurers being able to participate.
We would say that the program we have today is in great
balance. It does allow smaller and mid-sized companies to
participate and to provide important coverage. If we start to
go higher, we are going to start to lose some of those smaller
and mid-sized players. So we would urge, keep it as is, and
let's stop going through this over and over again every so many
years. We would urge a 5-year minimum, and we would prefer 10
years.
Mr. Meeks. Ms. Abraham, would you agree?
Ms. Abraham. Absolutely. I hope we are all alive when
terrorism is not a risk. Dr. Woo said it has existed for a
millennium. But it exists. The partnership works; the
collaboration works. If we can rule out terrorism, this law can
have a sunset. It works. It is not broken. It is effective. It
allows us to provide capacity. I strongly encourage extension,
as long as you feel comfortable.
Mr. Meeks. And in the 35 seconds that I have left, Mr.
Beshar, would you agree that it is important for Congress to
send a message now that we are going to extend TRIA insurance?
Would that be an important stability factor as we move forward?
Mr. Beshar. The more certainty that you can have in the
marketplace, the better.
Mr. Meeks. Thank you.
I yield back.
Chairman Hensarling. The Chair now recognizes the gentleman
from California, Mr. Royce, for 5 minutes.
Mr. Royce. Thank you very much, Mr. Chairman.
I know it has been said that you never really know if an
event is insurable until after that event happens. We can,
however, attempt to put parameters around what is insurable and
what is uninsurable based on the industry's ability to price
risk, to reserve for risk, to pay claims. And we know, for
example, that the very tragic attack on 9/11 on the World Trade
Center, at that time, was insurable at a cost of approximately
$32 billion in dollars then and $42 billion in today's dollars.
Also, in a 2003 publication from one of the companies
testifying today, we read that Swiss Re basically agrees that
property and business interruption losses resulting from
terrorism are insurable, even in the aftermath of September
11th. We had that exchange, but I just re-read that document,
and that is the attestation in the document.
So we have read in testimony that the TRIA program trigger
could increase substantially to $1 billion from $100 million,
in the case of Mr. Beshar, and to as much as $50 billion in the
words of Mr. Ellis. And this, of course, assumes that the
private sector could insure the losses up to the program
trigger.
So let me ask the panel specifically, what are the most
important factors when discussing where to draw the line on
insurability of terrorism insurance? Clearly, size and
frequency of events is important. The type of attack, whether
it is a conventional attack or something beyond that, has to be
a factor. The lines of insurance covered, as we discussed, also
weigh in on this calculation.
Mr. Smith, if I could start with you, do you agree that
certain lines of coverage--property and business interruption,
for example--are easier to price when looking at terrorism
risk? Are these insurable without a government backdrop, as is
implied in the study cited earlier by Mr. Garrett?
Mr. Smith. My recollection of the study, Congressman, is
that it is a broad study. It talks about different types of
perils that can be covered and different types of covers that
we can put in place.
But it does make reference to government programs. It may
not mention TRIA specifically, given the timing of it, but it
does talk about government programs and the ability to
backstop.
So the element of terrorism that I would encourage us to
stay keenly focused on is that, unlike natural catastrophes and
other large catastrophic events, the top end on these types of
attacks are phenomenal. They are just beyond what--
Mr. Royce. We understand that. But I am looking at this
report. As we have seen so far, it says that business and
interruption losses resulting from terrorism are insurable,
even in the aftermath of September 2001, provided certain
criteria are met. The liability for losses caused by terrorism
must be limited in normal property and business interruption
policies.
I think it strongly implies that in these cases, the market
could have sufficient capital. But go ahead with your
observations.
Mr. Smith. Congressman, I believe that we are in the
market. We are actively in the market. We deploy tremendous
capital against terrorism risk in the United States. And so to
our investors, to people across the globe who rely upon us to
make responsible decisions, I think that is the context that it
is and are in the market.
Mr. Royce. Okay. Let me go to Mr. Beshar. You put the
program trigger at $1 billion. My question is, why draw the
line there? Couldn't the private sector cover a conventional
attack at $10 billion, or $20 billion, or even $30 billion?
Mr. Beshar. Congressman Royce, just as a point of
clarification, in our written testimony we referenced a number
of different views that exist in the marketplace, from
abolishing the program in its entirety to raising the trigger
to $1 billion. That is not the position of Marsh & McLennan.
Mr. Royce. Yes, I understand. But I am asking you right now
to comment on a question. Wouldn't there be $10 billion, $20
billion in the market? Anyway, I think my time is up. But I
would like to follow up with some questions to the panel. And I
appreciate the opportunity, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the gentleman
from Massachusetts, the ranking member of the Housing and
Insurance Subcommittee, Mr. Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. I want to thank the
panel for being here today. You are the second-best panel of
the day.
[laughter]
Mr. Chairman, I would also like to ask unanimous consent to
submit a group of 28 different communications all in support of
extending TRIA.
Chairman Hensarling. Without objection, although I don't
know if the Member's earlier opinion is universally held.
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Ellis and Mr. Woo, I just want to--I respect your
testimony. I will accept the fact that we just disagree on
certain things. That is fine. It is not a big deal. I could be
wrong, I guess. That is possible.
But I would like to just probe for a minute exactly where
our differences lie. And I would just ask you, if tomorrow--we
are in hurricane season--a hurricane rolled up on Galveston,
Texas, a Category 5, and wreaked $100 billion worth of damage,
and killed 700 people, would you suggest that the United States
Government should not participate in that response, that we
should just sit on our hands because it was a local disaster?
Mr. Ellis?
Mr. Ellis. No, sir. Not at all.
Mr. Capuano. I didn't expect that you would, but I just
wanted to hear it. Mr. Woo, do you suggest that we would sit on
our hands or we should sit on our hands?
Mr. Woo. If I can make a modeler's comment, which is--
Mr. Capuano. It is a simple question. Do you think the
United States Government should sit on its hands if a Category
5 hurricane hit Galveston tomorrow?
Mr. Woo. Well, no.
Mr. Capuano. I appreciate that. So the answer is, even you
believe that there is some role for the Federal Government in
natural disasters. And I respect that. Now, we are arguing
where the line should be. And that is a fair argument. That is
always a fair argument.
I just wanted to see what kind of purists--and I am glad I
am not dealing with a purist, because that is really not fun.
But, look, we are going to have differences of opinion. I
accept them, and I respect them.
And I just--I also want to know, did any of the panel, did
you see a CBS News report today which said that Al Qaida has
just been found to be trying to get chemical weapons in a
Somali lab? Did anybody read that report?
I presume it is true, it came from a reputable news source,
and it is based on a court case in New York City. On the
presumption that is true, and the presumption--let's presume
for a minute that Al Qaeda does succeed in getting itself
chemical weapons somewhere around the world, either developing
them or getting them from somebody else, let's presume for the
moment that they still hate us, and they still want to wreak
damage on us.
And let's presume that, God forbid, they actually can get
them to the United States and set them off. Does anybody on the
panel think that the United States Government should not
respond if Al Qaeda were to set off a chemical device in the
United States of America? Do you think we should sit on our
hands and do nothing, because--let the private market deal with
it?
Mr. Beshar, do you think that?
Mr. Beshar. No.
Mr. Capuano. I didn't--Mr. Smith?
Mr. Smith. Absolutely not.
Mr. Capuano. Ms. Abraham?
Mr. Woo, do you think?
Mr. Woo. No.
Mr. Capuano. Mr. Ellis?
Mr. Ellis. No.
Mr. Capuano. So we clearly understand that there is a role
for the Federal Government in dealing with both natural
disasters and terrorism when things get so bad that no one else
can deal with this. And now we are arguing about detail, which
is a fair point. Details are important, and where the line is,
is a fair point.
I guess for the three people who are professionals in this
market, if I were to tell you I want to build a huge structure
that is going to cost $450 million, and I want to put $300
million out to bond to pay for that humongous structure, a big
icon in the middle of my community, but I said, you know what,
I don't really want to have terrorism insurance on that
facility, or for the people going to that facility when it is
done, what would you do if I said, ``Please, buy my bonds?''
Would you say yes? And if you said yes, would you say, ``okay,
and I want to pay you the lowest possible rate?'' Or would you
charge a premium if I said I don't want to have terrorism
insurance?
Mr. Beshar, I know that some of you do buy, some of you
don't buy, but I also know that all of you know the market. If
you can't--I wouldn't ask you to answer on behalf of your
companies. That would be wrong. But you are professionals. On
your own personal experience, what would you say to somebody
who wanted to do that?
Mr. Beshar. I think a lot of bank lenders and bondholders
would require the existence of terrorism coverage, for example.
And in the absence of that, there probably would be some
pricing ramifications to it.
Mr. Capuano. Mr. Smith?
Mr. Smith. It would be irresponsible as an investor.
Mr. Capuano. Ms. Abraham?
Ms. Abraham. I would agree with Mr. Smith.
Mr. Capuano. So if I were to build a humongous icon of a
football stadium, and if I would have named it Kyle Field, I
would then be--the market would want me to have terrorism
insurance or ask my taxpayers to pay more, probably a lot more,
to pay off those bonds.
I just wanted to get the facts straight. And I appreciate
your input. Thank you all. My time has run out.
Chairman Hensarling. We are glad the gentleman from
Massachusetts has learned his Texas geography lesson.
[laughter]
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Just following up a little bit on that last comment with
regards to the regulators, I think it is important to note that
there may not be the ability to build big structures if we
don't have this backstop, if the regulators require that there
be a terrorism policy in place in order for them--for the
lending institution to have their i's dotted and t's crossed.
It may prohibit the ability of these large projects. Has
anybody studied that effect at all? Mr. Smith, have you seen
that at all anywhere?
Mr. Smith. I can't cite a specific study, Congressman. But
our experience has been that a large global corporation, if
they are going to make an investment somewhere, they will take
into account what is the extent of terror coverage, wherever
they are going, and what is the likelihood of terrorist
attacks. So we have a particular challenge in our country to
keep those global investments coming here.
Mr. Luetkemeyer. So there may be the possibility of
somebody not coming here with investment if we didn't have this
in place. Is that what you are saying?
Mr. Smith. Absolutely. That would happen.
Mr. Luetkemeyer. Okay.
Ms. Abraham, you made the comment, and it kind of spurred a
question from me with regards to activities that sometimes
occur on college campuses. Do you, with your company, cover
political speeches, or band concerts, or some other sort of art
shows, or anything there that could spur an attack of anything?
Are those things that you cover?
Ms. Abraham. Absolutely. Colleges and schools and
universities are often magnets of controversy. And whether or
not it is--I think all of the debates were held on college
campuses, as controversial as the Presidential debates, as
controversial as those were. But concerts, and speakers,
college campuses are the first format, the first forum for
controversial exercise of First Amendment rights.
Mr. Luetkemeyer. So if terrorism insurance--
Ms. Abraham. And we absolutely cover any liability that
would come to the university from events occurring from that.
Mr. Luetkemeyer. If your company would not be available to
the universities, if that coverage would not be available to
the universities, what would happen?
Ms. Abraham. We currently do provide that coverage. And
after January 2, 2014, policies written after that point would
not have this coverage. If TRIA goes away, our reinsurers have
told us that the unlimited, the broad capacity that we have now
would disappear, and they would not have, as members of United
Educators, the broad liability coverage for terrorism that they
currently have.
Mr. Luetkemeyer. So the inference would be there, the
normal assumption of how this would all play out then would be
probably, at the very least, a restriction of those types of
activities on the campus, if not a lot of it going away all
together?
Ms. Abraham. I am a trustee of a college in Washington
State. I think there would be very hard thinking about
attracting elements to a campus and holding events that would
cause more of a magnet or more of a potential--and emphasize
the iconic nature that they already have within the country.
So, yes, I think that is true.
Mr. Luetkemeyer. Mr. Smith, if TRIA goes away and the
markets--the Wild, Wild West, everything opens up, how much
additional cost do you think the average policy would go up to
be able, again, like I say, build that big building or sponsor
that concert? How much of more an increase do you anticipate
would happen if TRIA went away?
Mr. Smith. It is hard to have an exact number, but the
market would become extremely disrupted. Some people would not
be able to get terrorism coverage. Others would have to acquire
it at an extremely high price. So, it would be an enormous
disruption to the market.
Mr. Luetkemeyer. I would think, though, that after a while
the market would settle down. There would be a period of
disruption, but eventually it would settle down. Now it is
going to be disrupted forever and ever?
Mr. Smith. Not in the United States.
Mr. Luetkemeyer. Okay.
Mr. Smith. And I'm sorry, I wish I had a better answer, but
not here in our country.
Mr. Luetkemeyer. It is interesting, from the standpoint
that we are talking about something here that is really a
backstop for all the activities or these terrorist activities
that could occur, have occurred in the past. When we look at
other catastrophic losses, a lot of those have been--the tab
for them has been picked up by the government eventually as a
backstop anyway. And what we are trying to do here really kind
of, in my thinking, is quantify our limit or somehow the
government's exposure to the loss by having the private sector
take part of it and being able to price that accordingly. It is
kind of an interesting situation, kind of backwards.
But, very quickly, I just have one quick question for Mr.
Ellis. You made the comment that TRIA can actually cause
insurers to take on more risk. I have a hard time believing
that somebody would want to lessen their security so they could
actually have the opportunity to have more of an attack, but
that is like one of your comments a while ago. Does that--
Mr. Ellis. I am not sure I am following what you are
referring to, Congressman. I indicated--
Chairman Hensarling. If you could be brief, the
Congressman's time has expired. Can you summarize your answer
quickly?
Mr. Ellis. Sure, yes, Mr. Chairman.
No, I am saying that if you don't price it appropriately,
then you don't take the efforts to mitigate your risk, and it
may be not knowledgeable, but you would do more to reduce your
price.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott, for 5 minutes.
Mr. Scott. Yes. We don't know what or we don't know when,
we don't know who. But one thing is for certain: We know that,
as we are sitting in this room, there are people all over this
world who are plotting terrorist attacks against the United
States.
And before I get to that, I must respond to something that
Chairman Hensarling--whom I respect so greatly--said regarding
the taxpayers' expense, but the budget office said to me these
words, that the TRIA has provided a necessary service at nearly
zero cost to the taxpayer. So, I want to make sure that is out
there.
Now, back to my point, we don't know where, we don't know
when, but we are targets. We are here. And Mr. Woo and Mr.
Ellis, you all have made some interesting points, but we know--
you can count the times in New York City alone, as Mrs. Maloney
pointed out, that attacks have been prevented. And, Mr. Woo, in
your calculations of this, the regularity of attacks.
I am out of Atlanta, Georgia, where we had the Olympics
attacks, where we have constant surveillance. We have our
intelligence sources that I cannot tell you in public how many,
when, where, how, but we have to be serious about this. This
ought to be in place right now. It ought to be at least 10
years so we can plan appropriately.
And let's get off of this nonsense that we can play around
with this. We owe it to the American people who are themselves
the targets, not knowing when, not knowing where, not knowing
who, but knowing they are on their way.
Now, Mr. Ellis, it is amazing to me how you and others who
are opposing TRIA can be certain that a market could exist
without TRIA, especially given that insurance companies and
reinsurance companies all say that they would have to leave
that market without the certainty of TRIA. How do you respond
to that? How can you--
Mr. Ellis. Congressman Scott, especially among the
insurance companies, there is absolutely--they are getting
reinsurance for free. Of course they are going to say that they
are not going to--why would they negotiate with themselves
right now?
And as far as--I just point out, I completely agree with
you that there are people all around the world who are scheming
to hurt us. I absolutely agree. TRIA doesn't stop that. TRIA
doesn't prevent terrorism. TRIA doesn't--it is a way to respond
for--to recover from terrorism--
Mr. Scott. Yes, I know it doesn't do that.
Mr. Ellis. --doesn't do any prevention.
Mr. Scott. I know it doesn't do that, but TRIA prepares for
the storm before the hurricane is raging. It is there to give
protection awareness. The point is, we are not being realistic
about the continuity. When you say, okay, sure, maybe short
term, what is short term? When we know that we are in a serious
situation. There is no country on this planet that is a target
of terrorists like the United States of America.
But I only have 55 seconds, and I wanted to get to you, Ms.
Abraham. Tell me, in your opinion--and, Mr. Smith, if you
could--what happens if we in Congress wait until the last
minute to authorize TRIA? And what would be the real-world
effects if this Financial Services Committee drags its feet on
moving this legislation forward?
Ms. Abraham. That is a great question. I will take a first
stab at it very quickly.
Our reinsurance treaty is under negotiation now for January
1st, and that would begin covering policies that we underwrite
that would expire over the course after TRIA expires. And so,
we are in a position, on January 1st of this year, of having a
reinsurance treaty that will not cover, if there is not
certainty with TRIA.
So it is disruption, and it is confusion, and I am in a
real quandary as to what we should tell our colleges and
universities, because we are in this as of January 1, 2014, not
December 31st.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman responsible for
bringing us together today. The gentleman from New York, Mr.
Grimm, is recognized for 5 minutes.
Mr. Grimm. Thank you, Mr. Chairman, and you can thank me
later for all the fun we are having. Seriously, thank you, Mr.
Chairman.
Excellent discussion. But I just want to tidy it up a
little bit, because I think some of the questions are
misleading. And most of all, let's remember, no one is saying
that TRIA prevents terrorism. This is all about recovery from a
terrorist act. That is first of all.
And the underlying premise that every Member I have ever
spoken to, if there is a catastrophic event, regardless whether
it is terrorism or not, if a community is devastated, that
mayor is going to come out, that governor is going to come out,
most likely the president of the United States is going to come
and they are going to say we are going to rebuild it better and
stronger and the taxpayer is going to be on the hook. If anyone
doesn't believe that, then they don't know the history of this
Congress, and Hurricane Sandy is a good reminder.
So this is about protecting the taxpayer as much as we can.
This is the fiscally conservative, prudent way to do so.
We have also heard about why not changing the numbers--$10
billion or $10 million or $100 billion, $1 billion--$100
million is only the trigger that says now it is a TRIA event if
it was an act of terrorism. But if there was an act, and all
the insurance companies were collectively responsible, the 20
percent deductible would equal $34 billion. So the event would
have to be more than $34 billion in losses before the cost-
sharing even kicks in.
Now, before that, there is 15 percent shared first by the
insurance companies. So, there is $34 billion in the 20 percent
deductibles possibly, then there is 15 percent in front of
that, then the taxpayer. I think that is fiscally responsible
and prudent.
But I want to go to Mr. Smith for a second. If an insurance
company takes on too much risk, because we have heard about
raising these numbers, the problem with raising these numbers
is the smaller insurance companies drop out, they just can't--
they can't take that risk. They are not big enough. So then you
are left with just a few large insurance companies, which will
have concentration risk in major cities so that doesn't work,
either. That is why this is well-thought-out, and you have to
really understand insurance to completely understand that.
But if an insurance company did take on too much risk,
wouldn't they lose their rating by the rating industry,
especially if they are AAA or AA?
Mr. Smith. Very possible, correct.
Mr. Grimm. Ms. Abraham, you mentioned it is
counterintuitive by capping the liability, can you explain
that? Because I understand that if you increase--if you capped
the liability, the mid-sized companies can then enter the
market. If there is no cap, they cannot, the small insurance
companies without a doubt. Can you just elaborate on that?
Ms. Abraham. That is absolutely right, Congressman, and it
allows the reinsurers, as they are pricing their risk, to
reinsure a small insurance company, to understand and charge
for the appropriate level of risk. It is extremely difficult to
price an unlimited, unknown risk that we have no control in
preventing.
But by capping the liability, the reinsurers and insurers
understand this is what I have to price for, this is what I
have to charge for, this is what I have to reserve for. So it
provides a level of certainty which allows us in a very unknown
environment to put capital at risk. So we are able to go and
actually understand how much we could lose--
Mr. Grimm. But, again, if the losses are--knowing what you
can lose also means that if I am a smaller company and there is
too much at risk there, I simply can't participate.
Ms. Abraham. Absolutely, sir.
Mr. Grimm. And if the smaller companies can't participate,
you are left with just the larger companies.
Ms. Abraham. And a lot of capacity exits the market. We
bring, as small as we are, a lot of capacity to the market, and
you want all of those small and mid-sized companies--many are
mutuals--in the market, providing capacity. So, we are part of
that flow.
Mr. Grimm. Thank you. I would posit--and I mentioned in my
remarks, that when it comes to the workers' comp portion, you
don't know how many employees could be--a massive hospital
could have 2,000 to 3,000 employees at any time, and the same
with a university.
So, Mr. Ellis, I would ask you, with the workers' comp
portion being somewhat of an unlimited risk, because of the
number of employees, and also, employees could be maimed--an
employee, not only could they be killed, but they could be on
disability for the rest of the lives, it is almost impossible
to calculate for that many employees what the risk would be.
And it is mandated by the State to have that insurance.
What CEO, what president of any company, whether an
insurance company or any financial company, would take on an
unlimited risk if they were prudent? Can you name even one that
would take on an unlimited risk if they were prudent,
executive, president or CEO?
Mr. Ellis. I can't name anybody who would take on unlimited
risk if they were prudent, but I don't believe that is exactly
how that would end up being in the workers' comp, and they
would be able to lay off some of the risk in other markets. And
that is part of the whole thing that--where I think we just
disagree, Congressman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing. I thank the ranking member, as well, for her
statements, and I would like to associate myself with the
statements of the ranking member.
While I have really paid close attention to all of the
testimony, and I appreciate what all of you have said, I do
want to ask a few questions of just a few of you, and I hope
that the others won't feel that somehow I am slighting you in
any way, because, candidly speaking, I assume that all of you
can give us additional credible testimony.
But, Mr. Ellis, you have indicated that you believe a short
extension would be in our best interest, if it must be extended
at all. Is this correct?
Mr. Ellis. Yes, Congressman.
Mr. Green. And what I would like for your colleagues on the
panel to do is explain why they perceive a short extension to
be something that is antithetical to our best interests, so
let's start with Mr. Smith. Mr. Smith, why would you oppose a
short extension?
Mr. Smith. Because it is an unnecessary disruption to the
marketplace. This is a wonderfully well-thought-out program. It
is functioning extremely well. The longer we can renew it, the
less disruption we have to the marketplace.
Mr. Green. And let's go to--all right, Mr. Woo?
Mr. Woo. My opening statement, in my testimony, was that
terrorism has become and will remain a catastrophe insurance
risk, so I personally would recommend not just an extension for
a finite period of time, but one without a specific time limit,
simply because this issue is not one which will ever go away.
Okay?
So, I do consider that some thought should be given to the
whole issue, not just in the short or medium term, but in the
long term, as Mr. Smith said, that the market's ability is
important, that this whole issue of the backstop be addressed.
And I am speaking as someone who lives in England, where we
have a terrorism insurance pool which has no finite term or
limitation. That is because the terrorism risk in London is
permanent. It doesn't go away; there will be terrorism risk in
London for as long as one can consider.
So my personal response to your question, Congressman, is
that there should be serious consideration given for a long-
term reauthorization of TRIA, and that is something which to my
mind should be discussed.
Mr. Green. I see that Ms. Abraham wants to respond, and I
have another question.
Ms. Abraham. We are in the business of taking risks. We
understand that. But uncertainty in this is disruptive. It is
difficult to plan a major construction project, it is difficult
to plan a major program when you don't know whether these risks
will be there and covered in the foreseeable future.
Mr. Green. Do we find that we have some companies--let's
call them megacompanies--that would have serious concerns about
locating in a country that does not provide this kind of
insurance? Does this help us to attract business, Mr. Smith?
Mr. Smith. Absolutely. Given the corporate governance that
is in place today and all the enterprise risk management that
is occurring at all these large corporations, they have a very
sophisticated decision tree they go through as to where they
are going to make their investments.
We have a challenge here in our country, because of our
risk of terrorism. Without great coverage, it is going to be
very difficult for us.
Mr. Green. All right. Let me do this with the remainder of
my time--and, Mr. Chairman, if you find that I go beyond the
time that I have left, would you just kindly sound the gavel
and I will cease and desist.
But what I would like to do is read the list of entities
that are supportive of extending TRIA. And the list is rather
long, but I think it is important to not only place these in
the record, but for the American people to know what is
actually in the record.
So, here is the list: The National Association of
REALTORS, the U.S. Chamber of Commerce, the American Gaming
Association, the International Association of Amusement Parks
and Attractions, the Jewish Federations of North America, the
National Association of Insurance Commissioners.
We have a joint letter from the national sports leagues and
organizations, the National Conference of Insurance
Legislators, the National Conference of State Legislatures, New
Mexico Mutual, the American Public Transportation Association,
the U.S. Conference of Mayors, the workers' compensation Fund,
the National Association of Mutual Insurance Companies, the
National Association of Real Estate Investment Trust, the
Commercial Real Estate Development Association, the
International Council of Shopping Centers, Inc., the Building
Owners and Managers Association International, the Real Estate
Roundtable, the CRE Financial Council, and the Real Estate
Board of New York.
I yield back the balance of my time.
Mr. Neugebauer [presiding]. I thank the gentleman. Is he
requesting that those be made part of the record, as well?
Mr. Green. Yes, sir. Thank you, Mr. Chairman.
Mr. Neugebauer. Without objection, it is so ordered.
Now the gentleman from Ohio, Mr. Stivers, is recognized for
5 minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate it.
I am going to try to get to four questions, so I am going
to ask some yes-or-no questions. The first question is for Mr.
Beshar, Mr. Smith, and Ms. Abraham.
Insurance is the business of pricing risk. And because the
information related to both the likelihood and intensity of
terrorism events is classified information--this is the yes-or-
no part of the question--do private insurers have access to
classified information with which they could price the risk
associated with both the likelihood and the intensity of
terrorism acts?
Ms. Abraham. No.
Mr. Stivers. We can just go down the--
Mr. Smith. No.
Mr. Stivers. Okay.
Ms. Abraham. No.
Mr. Stivers. Verbal responses would be best.
Mr. Smith. Okay.
Mr. Stivers. No, no, no. I got three noes, right? One of
them was a shaking of a head. This question is also for the
same three folks. Are acts of war insurable or uninsurable
risks, if you could give me verbal responses?
Mr. Beshar. Generally excluded.
Mr. Smith. Same, generally excluded.
Ms. Abraham. Generally excluded.
Mr. Stivers. Generally uninsurable, because governments
have historically taken on that role.
Ms. Abraham. Correct.
Mr. Stivers. So acts of terrorism are merely acts of war by
non-state actors, and this is more a statement, because I want
to get to my last couple of questions--because they are the
same things of acts of war by non-state actors, they should be
treated the same way, in my opinion. So, thank you for your
answering that question.
Mr. Grimm did a good job of talking about the private money
that comes in front of any government money that would be
associated with TRIA, but I think it is important to talk about
how the government money would work, and how it would work with
TRIA and without TRIA.
So--and this is one that may take a little longer--but
because there is 133 percent recoupment of any taxpayer-related
costs of events over time, do you believe--and, again, for the
three insurance professionals--that the system under TRIA would
result in higher or lower total cost for the taxpayers than a
non-TRIA system?
Ms. Abraham. I believe it would be lower. TRIA would have a
lower recovery than without it.
Mr. Stivers. It would cost the taxpayers less, right?
Ms. Abraham. It would cost the taxpayers less, correct.
Mr. Stivers. Because there is private money in front and
there is an incentive with the recoupment--
Ms. Abraham. Correct.
Mr. Stivers. --to make sure that is the difference between
the TRIA system and, say, the flood insurance system. Our flood
insurance system has no recoupment, and the only people who buy
it are people who are guaranteed to file claims.
So, you wouldn't make those policies in the private
insurance world because there is that moral hazard that only
people who are going to file a claim are going to take it out.
For the other two insurance professionals, do you believe
the total cost of the government would be higher or lower
because of the recoupment mechanisms in TRIA?
Mr. Smith. We believe it would be lower.
Mr. Beshar. We agree.
Mr. Stivers. Great. Thank you for that.
The last thing that I want to ask everybody on the panel
relates to the term of a TRIA bill. There has been some
disagreement on the term of the TRIA bill. I came to Congress
to reduce uncertainty for businesses, and I believe a longer-
term TRIA bill reduces uncertainty more than a shorter-term
TRIA bill.
For everyone on the panel, do you believe a longer-term
TRIA bill will reduce uncertainty? And you can give me a few
seconds of why, because we have a minute and 30 seconds.
Mr. Beshar. Yes. Yes, it absolutely will.
Mr. Smith. Yes.
Ms. Abraham. Absolutely.
Mr. Woo. Absolutely.
Mr. Ellis. It reduces uncertainty, but it also doesn't
allow Congress to actually reform and change the program,
because we know the only time they look at it is when it comes
up for reauthorization. It was supposed to be a temporary
transition.
Mr. Stivers. I understand it was intended to be a temporary
transition, and I appreciate that, but it does reduce
uncertainty, which I think is really important as we try to get
our economy back on track.
And so for those reasons, I think the TRIA bill is pretty
well thought out; I think it will result in lower cost to the
taxpayers, and I think it will actually work well.
I am going to yield the balance of my time--45 seconds to
the gentleman from New York, the sponsor of the bill.
Mr. Grimm. Thank you very much. I appreciate the gentleman
yielding.
I just wanted to know two things. One, the correlation of
flood insurance has been brought up before; it doesn't work
well. We all know that. I would say that what we should be
doing is looking at TRIA to use as a model for flood insurance.
So, TRIA really works; it is doing well, and that could be the
fix for flood insurance. That is number one. So, I like the
argument, I just think it is being used in reverse.
The other idea, that this was because the legislation was
originally temporary, that is a big argument on why we need to
sunset it. It shouldn't be temporary. It should be permanent.
It is a program that works; it works well, and it protects
taxpayers, which makes it fiscally responsible. So, when
something is working well, we should keep it.
Those are my only comments, and I yield back.
Mr. Neugebauer. I thank the gentleman.
And now, the gentlewoman from Alabama, Ms. Sewell, is
recognized for 5 minutes.
Ms. Sewell. Thank you, Mr. Chairman. First, I want to thank
all of our witnesses for your testimony today and the time that
you are taking to both educate us as well as to make sure that
we are making the right kinds of legislative decisions.
I especially want to thank Mr. Beshar and his colleagues at
Marsh & McClennan for your continued use of your expertise in
helping younger Members like myself understand the importance
of TRIA and answering the questions that we may have. And I
want to thank you for personally doing that.
My question to you is we have talked a lot about the time,
the sunset, whether it should be 5 years or 10 years. Mr.
Beshar, I was wondering if you could elaborate on other fine-
tuning that we can do in TRIA and the reauthorization of other
provisions related to TRIA, workers' compensation or trying to
reduce their ambiguity in other areas of this Act since we are
taking up the totality of the act.
Mr. Beshar. Congresswoman Sewell, thank you for your
gracious comments. Two suggestions. First, we spoke about NBCR,
so that if coverage is provided on the underlying policy to
validate that concern, TRIA would backstop that. And then
second, cyber terrorism. What does it mean? What is the best
way to try to address that new emerging risk?
Ms. Sewell. Mr. Smith, would you have any additions as to
what other things we can be looking at?
Mr. Smith. Our aspiration is it renews the way it is for a
long period of time. We are more than willing to engage in
debate on specifics as far as modeling how this might work out,
but we would hope to just renew as is.
Ms. Sewell. Okay. Are there any ambiguities with respect to
workers' compensation or others that--
Ms. Abraham. Mr. Beshar mentioned earlier his third point
for improvement on the bill, and that is clarity on the
certification process. I think that would help. Again,
uncertainty is never good when you are running a business or
running a university, and clarity around that would help.
Ms. Sewell. Can either one of you explain to me sort of the
relationship between the private insurer and the government in
paying claims as a result of a terrorist attack, how that works
now, and whether that is a good thing or a bad thing?
Mr. Smith. Let me make sure I understand your question. As
far as the mechanisms as to if there is an act of terrorism--
Ms. Sewell. Yes. The levels of payment, how the payment
structure would work as between private insurer and government.
Basically, I want to know how much money are the taxpayer is on
the hook for.
Mr. Smith. Right. To Congressman Grimm's earlier point, you
can think of $34 billion as kind of the starting point. Most
acts of terrorism that are likely to occur are going to be in
what we call the lower layers. The first layer is the primary
insurers, the second layer is the reinsurers, and the third
layer is the TRIA program, the government backstop.
So, it is going to take a substantial event to get to that
third layer. Most things that we would see are going to be in
those lower layers.
Ms. Sewell. Great.
I yield back the rest of my time. Thanks.
Mr. Neugebauer. I thank the gentlewoman. Now, the gentleman
from South Carolina, Mr. Mulvaney, is recognized for 5 minutes.
Mr. Mulvaney. Thank you, Mr. Chairman.
A couple of different questions all across-the-board.
Dr. Woo, I will start with you. Help me understand. Is this
modelable or not? I hear that maybe it is. I hear that maybe it
isn't. Maybe it might become more modelable over time as we
have more experience. Help me understand where we are on that.
Mr. Woo. Thank you, Congressman. Can I just answer the
question about the need for classified information? There is
information which is in the public domain which is the outcome
of terrorist trials. In every democratic country, someone who
has been arrested on terrorist charges has the right to have
his day in court. If he is convicted, that counts as a plot. If
he is acquitted, it is not a plot.
And on the basis of terrorist courtroom outcomes across the
Western alliance, not just in America but in Britain, France,
Germany, and so on, we can calculate how many terrorist
convictions there have been and we can figure out what
proportion of those have not been interdicted.
Typically, what happens is you have 10 guys who have been
convicted in court. You have 10 plots, and maybe one out of
those 10 is a plot which the intelligence staff did not know
about. This does not require classified information because it
is all public domain information.
Again, it is known that obviously there are rumors of plots
and so on, but that is fine. But in a democracy, a plot--
Mr. Mulvaney. Is it fair to say we are getting more
information as we move forward?
Mr. Woo. The point I would like to make is that--I would
not be making these comments in 2007. It is just that there is
a time lag of about 2 to 3 years for people who have been
indicted on terrorism charges to have their day in court.
And here I am speaking in 2013, and I have done analysis of
all the terrorist convictions in court in the Western alliance.
And it is on that basis that our estimate of frequency is
calculated. It does not require any intelligence information.
Mr. Mulvaney. Thank you very much.
Mr. Ellis, I very rarely agree with Mr. Capuano, although
when I do, I like to celebrate that fact. One of the things he
said was that he didn't like the program very much but he
couldn't think of anything else. Help me think of something
else. Give me ideas of things we should be looking at that
possibly could replace this or act as substitutes.
Mr. Ellis. Congressman, certainly--
Mr. Mulvaney. Other than just having the government write a
check at the end, which is not acceptable to me. It probably is
to him, but that is where we would disagree.
Mr. Ellis. Yes, Congressman. I did lay out a few ideas in
my testimony. I think it really is about increasing the skin in
the game for the insurers and allowing the industry to continue
to develop. Because right now, the reinsurance industry is
really only playing in that 20 percent deductible.
So if you can change the deductible, you can change the
threshold of what is an event, then that is going to eventually
move the government out of the role of being the reinsurer. And
you can see that in the--
Mr. Mulvaney. It would involve moving the deductible down,
correct, not up?
Mr. Ellis. Right. The deductible--yes. Yes. Increasing the
amount that is retained by the insurance companies that they
then have is what I am saying.
Mr. Mulvaney. Mr. Beshar, I guess that will lead to this
question, a follow up on--excuse me, Mr. Smith.
Mr. Grimm asked about the triggers. There is some
discussion about whether we should increase the triggers. And
my understanding is that if we do that, it actually might
weaken the program and make less capital available to fewer
participants in the program. Am I understanding that correctly?
Mr. Smith. We believe very strongly that is what will
happen. The small and mid-sized insurers are numerous and they
provide tremendous capital into this space. As you lift up the
limits, you are going to squeeze out the small and the mid-
sized insurers, and that is not a good outcome.
Mr. Mulvaney. With that, I will yield the balance of my
time back to the Chair.
Mr. Neugebauer. I thank the gentleman.
And now the gentleman from Washington, Mr. Heck, is
recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Chairman, and Ranking Member
Waters.
I want to add my expression of gratitude to the five of you
for spending so much time with us this afternoon. And even
though they have departed, I would like to acknowledge
Congressmen Grimm and Capuano for their advocacy and leadership
in this area.
Mr. Smith, you drew the short straw. This program's
opponents have suggested that you are being crowded out of
profitable opportunities by TRIA and yet you say you are not. I
am tempted, tongue-in-cheek, to ask you what is it that they
know about your business that you don't know.
But instead I would rather ask you, beyond the oft-repeated
premise that by their very nature acts of terrorism do not lend
themselves to actuarial projections, what more can you say to
give color or depth to why it is you can't or won't enter this
market in a more robust fashion in the absence of TRIA?
Mr. Smith. Sure. The dynamic that is in place is that the
nature of the terrorism risks are the serious events that are
so large and the prospects for frequency are so unpredictable.
We have legions of Ph.D.s who work with Swiss Re across the
globe. We have been building models for 150 years. We know the
flood business inside and out. So, we would love to engage
around the NFIP. We could bring much value to that.
But when it comes to terrorism, it mathematically doesn't
work. The upward occurrence limits are too high and the
unpredictability of frequency, it is just not there. And so we
are playing, we are contributing, we are committing capital
because we are comfortable in the layer that we are in.
And we know that we can pay billions of dollars of claims
in the years ahead in that layer. We know that. We are
comfortable with that. But if that upper limit goes away, if
the backstop goes away--and we do not believe that is in any
way, shape, or form subsidized reinsurance.
If it was subsidized reinsurance, the dynamic goes away,
and then we are more comfortable going up and taking more risk.
If that goes away, we go away. We will not play in terrorism
risk if the backstop goes away.
We can't. It would not be financially prudent to our
shareholders and to all of our policyholders across the globe,
all the governments, and all the insurance companies that we
back. We wouldn't be able--we just can't do it.
Mr. Heck. Thank you.
I would interject that I thought the gentleman from Ohio
had this exactly right. There is a material effect on our
economy and economic growth if we don't do this correctly, and
it is one of the very good reasons to be supportive of some
continued direction here.
Mr. Beshar, in your addendum you had the following
statement I would like to briefly follow up on: ``Notably, as
the severity and frequency of cyber attacks have grown more
prominent, several proposals have been made to clarify that
TRIA could apply as reinsurance in the event of a massive cyber
attack. Were that clarification realized, TRIA could spur
additional capacity in the cyber market.''
My question is, do you have any suggestions about exactly
how we might clarify in this regard? If so, please provide
them.
Mr. Beshar. It is something that I think really warrants
further study. It is clearly something that wasn't envisioned
as recently as 2007. So as people speak about cyber 9/11 and
cyber Pearl Harbor and speak about it with a degree of emphasis
in terms of the potential for catastrophe, we have to figure
out what is the best way of incorporating that into TRIA.
There is an increasing cyber liability market that is
developing right now. It tends to be at more modest levels.
People buying coverages for $10 million, $20 million. And so,
this is something really very different. Where is the right
flex point between the private market and what the government
might do?
Mr. Heck. Okay. I get that you are not yet ready with the
specific recommendations. But I, for one, feel that the threat
here is so real, and has the potential to have such a magnitude
of impact that if you are right, and we are not yet ready, we
ought to at least get started on the process.
So at a minimum, I would request that anybody listening who
has any skin in this game suggest language about how we might
undertake that process. Because the threat of cyber attacks is
very real.
Thank you, Mr. Chairman, for your indulgence. I yield back
the balance of my time that I don't have anymore.
Mr. Neugebauer. I thank the gentleman.
The gentleman from Illinois, Mr. Hultgren, is recognized
for 5 minutes.
Mr. Hultgren. Thank you very much, Mr. Chairman.
Thank you all for being here.
First of all, Mr. Beshar, if I could address this first
question to you. I am just really trying to understand triggers
here, and wonder if you could describe how a terrorism event is
certified to trigger TRIA coverage if necessary?
What agencies or departments are responsible for gathering
information? What determinations are required? And do we think
it works? Is that the right way for the triggers to happen?
Mr. Beshar. I am dealing with this from memory, but my
understanding is that it is the Attorney General, the Secretary
of State, and the Secretary of the Treasury, that all three of
them have to agree to certify an event as a TRIA-covered event.
And so our recommendation was that may well be the sound
process, the right people involved in making the determination.
But to just try to put some sort of a time focus, there are
obviously circumstances where it may not be immediately clear
whether it is a terrorist event or not.
So the idea that it takes some time is perfectly
appropriate. We were just suggesting that there be some sort of
a limit on that time.
Mr. Hultgren. Remind me again of your suggestion of what
would make a common-sense limit. My guess is there would be
needs immediately, or very quickly, to respond if something
like this happened.
As you also said, we may find out more information as time
goes on. So I wonder, too, if there is a possibility to have a
response, but maybe a follow up, or a look back after 60 days
or something like that.
But is there some thought of what a reasonable amount of
time would be, our current process, how long it would take:
what you would recommend as a reasonable length?
Mr. Beshar. We would suggest 90 days, with some sort of
provision that if there is not clarity, then it can obviously
be extended.
Mr. Hultgren. Okay.
Dr. Woo, if I can address this to you and get your
thoughts, first of all--and maybe somebody has already said
this--but I definitely think we need a catastrophist here in
Congress watching over everything that is going to happen over
the next couple of weeks. What a great title.
Dr. Woo, I wonder, the World Trade Center attack totaled
about $42 billion in today's dollars and insured losses, but
the majority of that was property.
Modeling for a terrorist attack, can you talk a little bit
about how you model the potential losses from workers'
compensation claims, and for a wider-area event, how you model
that? And also maybe how State mandates and State-based
regulations might make it more difficult to model some of this
specifically to workers' compensation?
Mr. Woo. Thank you very much, Congressman. Of course,
workers' compensation applies to natural hazards, as well as
for terrorism. And so at RMS, we have a model, a workers'
compensation, say for earthquakes, as well as for terrorism.
Now, as far as the claims consequences of an event are
concerned, there are similar ambiguities between earthquakes
and terrorism. We don't exactly know how many people would be
affected in a given event.
And so what I have tried to focus on is on the threat
dimension of terrorism. And the key point I would like to
emphasize is simply that terrorism is a control process. We
can't control earthquakes. We can't control hurricanes.
But there are people out there, the FBI and the CIA, who
are trying to control these. And if I can just quote from
Robert Mueller, when he left office he said that through the
hard work of his staff, dedication, and adaptability, the FBI
is better able to predict and prevent terrorism and crime.
It is not my job to predict the next terrorist event, but
it is their job. It is the FBI's job, okay. My job is to figure
out what the net result is of the terrorists trying to cause
loss. And what the FBI's job is, is to stop it, okay, these key
points. Can I just make this point, that the need for TRIA is
based on what Donald Rumsfeld would have called the ``known
knowns,'' which are: (A) that the terrorists are trying to
cause a maximum loss; (B) they target high-value properties in
big cities; and (C) that responsibility for stopping these
losses rests with the Federal Government.
So it is the ``known knowns'' which make the renewal of
TRIA essential. And again, I come back--I know that there is a
lot of controversy about the modelability of terrorism risk.
And in fact, if I can just say that in less than 2 weeks'
time, I should be giving a keynote address at the Casualty
Actuarial Society in Chicago at the major catastrophe insurance
conference. And as they have very kindly given me 75 minutes to
explain myself in terms of the modelability of terrorism risk.
Anyone who is skeptical about it, please send their staff along
to Chicago.
Mr. Hultgren. It is a little hard in 5 minutes to get much,
but I appreciate it.
And again, thank you all. We will follow up with questions
that we have as well, if that is all right. So thank you for
being here.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman.
We have a system for providing insurance for the property,
we have workers' comp for the personal losses suffered by
individuals who are working. Under our current system, if
somebody is not working and happens to be the victim of a great
terrorist attack, do they have any coverage? Somebody just
happens to be visiting the World Trade Center, because they
want to see what the building looks like.
Ms. Abraham. I would think there is a liability component
potentially associated with it; not just a visitor, but if
there is something where the evacuation plans weren't as
efficiently developed, there is a potential for liability
associated with it, but generally speaking, I would say no.
Mr. Sherman. Okay.
Do any of you favor collecting monies in advance by the
U.S. Government, rather than just a post-event, ex ante
approach?
Mr. Ellis?
Mr. Ellis. Yes, Congressman. We do support the idea of a
premium and having that approach.
Mr. Sherman. Anyone else?
Mr. Ellis. We believe the program is constructed in the
most efficient manner possible. So, we do not.
Mr. Sherman. Okay.
Watching this hearing has been--there is so little
disagreement. We have two major proposals that are pretty
similar. It seems odd that we have a lot of anonymity.
Who on the panel would argue for a major change in the two
pieces of legislation, other than the gentleman, Mr. Ellis, who
is of a different view than the rest of the panel?
Mr. Ellis, the floor is yours.
Mr. Ellis. Thank you, Congressman. As I said in my
testimony, we just think that if Congress decides to extend the
program, that we need to, just as we did in 2005, continue to
move it more onto the shoulders of the private sector, and to
protect the taxpayer.
And so that is what we are looking at, as far as any kind
of reauthorization.
Mr. Sherman. So it is not that you like what we did in
2005, it is just you thought that was a step better than the
previous legislation. You want to go one step further beyond
that; is that correct?
Mr. Ellis. Sir, in my dozen years of being an advocate for
taxpayers, I have learned that a lot of times I have to swallow
incremental progress. And so, that is what we are looking at.
Mr. Sherman. I would point out that for those who want to
protect the Treasury, not only do you have to look at what
risks do we have of under TRIA, but every time there is a
disaster of the magnitude of a major hurricane, we end up
writing checks for far more than we are technically liable for.
And I know Citizens for Common Sense might argue for us to
be more stingy, but I don't think that is what my future
colleagues will do.
Mr. Ellis, does it make sense to be fighting to limit the
legal liability of taxpayers if, when we have the major
publicized instance, we are going to write checks far and in
excess of that?
Mr. Ellis. No matter what, even with TRIA, we are going to
be writing checks. There is going to be the public
infrastructure, there is the rebuilding. There are roads. That
has always been the case. And that is not insured.
So essentially, we recognize that. And Mr. Capuano asked me
about that earlier, do I think that there will be a Federal
role after a major disaster, whether it is a hurricane, or
whether it is a terrorist attack. And, yes, and I think it is
appropriate.
But it needs to be--I want to see that the checks are as
small and are reasonable and appropriate to help these
communities recover and become more resilient in the future.
And my concern about not actually pricing this terrorism risk
appropriately is, again, it doesn't prevent the terrorist
event, but it will help companies mitigate the risk more
effectively, or encourage them to.
Mr. Sherman. For the first time ever, I am going to yield
back my time when I still have time. Thank you.
Chairman Hensarling. The Chair takes note.
The gentleman from Florida, Mr. Ross, is now recognized for
5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
I would like to begin by first explaining why I, as a
capital purist and one who believes in free markets as the best
regulator of all, who also served in the Florida legislature,
and chaired a committee that oversaw the efforts to bring back
the private market and our property insurance, and who, quite
frankly, was one of two votes against the expansion of a
government-run insurance company in the State of Florida that
cost me my chairmanship.
But I still believe that in this particular situation, a
TRIA bill is necessary. And I go back to the fundamental
principles of insurance that not only do we need to have
prefunding of events in an actuarially adequate fashion, but
also that we have adequate capital set aside, and that those
who are responsible for maintaining and administering that risk
have the ability to do risk management.
And unfortunately, when it comes to terrorism, risk
management is predominantly a function of homeland security.
So, Mr. Woo, I agree with you that there may be a way to
assess or predict or forecast terrorist events, but until such
time as we learn how to mitigate against these, I foresee maybe
State Farm sponsoring gas masks, Farmers Insurance sponsoring
flak jackets, and maybe AIG sponsoring F-16s in order to
mitigate against attack, which of course is an absurdity.
But I bring that out as saying that if we are going to say
that we want a private market backed, then we need to allow
them to have what traditionally private markets have in
providing insurance. I think adequate capital is necessary.
Mr. Ellis, you talked about in your opening that in 1992
after Hurricane Andrew, the markets dried up, but then the
reinsurance came back. It came back as a result of a
legislative change that created a Florida Hurricane Catastrophe
Fund not unlike TRIA. It came back because they allowed pup-
companies which were subsidies of major insurance companies to
be based in Florida and limit their liability. They came back
because they had joint underwriting associations for homeowners
and also the wind storm pool.
What I am getting at is that as much of a purist as I am,
practically speaking from a political perspective, government
is going to be involved, and to that end, how do we minimize
government exposure.
Mr. Ellis, I agree with you on pre-funding. I think that is
absolutely important that if we are going to look at
transitioning over into a market to come back, we have to have
some sense of pre-funding.
Mr. Woo, based on your assessment, let me ask you, can you
actuarially, adequately price terrorism insurance?
Mr. Woo. I think the question has to be put in the context
of other catastrophe perils like the natural hazards. If you
take Hurricane Irene, on its path towards New York City at one
stage, RMS did a review, an analysis to show that when it was a
Category III in the Atlantic, the loss potential was $200
billion.
Mr. Ross. I agree with you, Mr. Woo, but we also have a
cone--we know 5 days in advance pretty much where it is going
to go. We have ways to mitigate and prepare once we know that
the event is about ready to occur. We don't have that luxury in
terrorism.
So my question to you is, can you actuarially, adequately
price terrorism insurance?
Mr. Woo. Well, what--
Mr. Ross. You can't, can you? And that is the key here
because if you could actuarially, adequately price terrorism
insurance, would it be less than, equal to, or greater than
what people are paying now?
Mr. Woo. The key part to actual pricing is allowing for a
factor for uncertainty.
Mr. Ross. Right.
Mr. Woo. And uncertainty has an element of perception to
it. I am the first to admit, sir, that obviously the perception
of the uncertainty is very high within the insurance community.
But if I can just make this point, which is that over time,
again, with the kind of process I have mentioned, namely people
tracking courtroom convictions, people tracking plots through
social network analysis, and so over time, I think there will
be a gradual better understanding of the nature of terrorism
risk.
Mr. Ross. But the pricing is what concerns me, because
right now, we have a government backstop and my history in
government backstops, as you look at the National Flood
Insurance Program, and as you look at citizens' property and
causality insurance program in the State of Florida, is it
leads to bad behavior.
It leads to building a high-risk area. It leads to
rebuilding in high-risk areas. And so what I am saying is if we
are going to bring back a market, we are going to have private
capital at risk, we have to give them some opportunity.
In my State, people say well, give us adequate actuarial
pricing. I don't know if we can do that in TRIA. I don't think
we can, and until we can answer that question, we have to have
a government backstop. But I think we also have to look at Mr.
Ellis' points where we have to be able to pre-fund it.
Because in the workers' compensation--you don't have
exclusions in workers' comp other than fraud and--basically
other than fraud because it is a strict liability. How are you
going to be able to fund workers' compensation other than have
a regulator who says, we don't have much of a market so we are
going to lower our standards, then you have thinly capitalized
companies out there that are going to go to a guarantee fund?
Any comments on that? I have 14 seconds.
Mr. Woo. I don't know if there is a distinction between
modelability and insurability. As I said, TRIA is needed for
the absolutely known knowns. Terrorists, unlike natural
hazards, target high-value properties in central business
districts.
Mr. Ross. I am not disagreeing with you, I think--yes, TRIA
is needed.
Mr. Woo. Okay, but--
Mr. Ross. But we have to transition it over time.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman, and I appreciate again
the panel staying here so long today.
Mr. Smith, I just want to understand what you do at Swiss
Re, you guys offer primary insurance and reinsurance, is that
correct, both products?
Mr. Smith. We are about 85 percent a reinsurance company,
so mostly what we do is reinsurance. We have a small commercial
insurance presence.
Mr. Duffy. Okay.
Ms. Abraham?
Ms. Abraham. We are exclusively a primary insurance
company.
Mr. Duffy. Do you buy reinsurance?
Ms. Abraham. Yes.
Mr. Duffy. Okay.
Ms. Abraham. We buy extensive reinsurance, and without
TRIA, our reinsurers have said they would not provide the kind
of protection that we want to provide.
Mr. Duffy. Mr. Smith, if at Swiss Re, you were trying to
price your reinsurance with the terrorism component as part of
your product without a government backstop, could you actually
do that and would it be pretty expensive?
Mr. Smith. We believe that mathematically, that is not
possible. So we feel, Congressman, that we cannot do that.
Mr. Duffy. Would it be expensive if you did try to price
that?
Mr. Smith. It would be extremely expensive.
Mr. Duffy. Okay.
On your primary products, the 15 percent that you offer the
primary products on, for the terrorism reinsurance, through
TRIA, what do you pay the Federal Government as a premium?
Mr. Smith. The only mechanism for payment to the government
through TRIA is at the backend of a loss. There is no upfront.
Mr. Duffy. There is no premium that is paid to the Federal
Government for taking on this risk, right? It is paid at the
back end.
In your business, at Swiss Re, you don't say to your
customers, we will take on the risk if you have losses, we will
come back to you and re-collect for the payments that we have
paid out, right? You have to collect the premium up front. And
then if there are claims, you pay them out of the money that
you collected. But that is not how this system is working with
TRIA in the Federal Government, is it?
Mr. Smith. That is correct.
Mr. Duffy. Do you think it is a good deal for the American
taxpayer--
Mr. Smith. Absolutely.
Mr. Duffy. --to try to collect on the back end?
Mr. Smith. Absolutely.
Mr. Duffy. Okay. So you would say that it is a bad idea to
have some premium--we could debate how much that should be. We
would probably agree that you can't price the full risk, but
there probably should be some payment made to build up some
fund so that if there is an attack, we can draw upon that fund.
But your position would be there should be no pre-funding, we
should come at the back end and try to collect it. Is that your
position?
Mr. Smith. You can argue it either way.
Mr. Duffy. I am asking--
Mr. Smith. Our perspective is that the way it works today
is extremely efficient because the--
Mr. Duffy. Because you don't have to pay for it, right? It
is free.
Mr. Smith. Well, we would--
Mr. Duffy. Of course--
Mr. Smith. --disagree with that. We cover what we cover.
Mr. Duffy. You don't pay a premium. There is no premium for
the American taxpayer taken on the risk.
Mr. Smith. Except they are not covering what I cover. We
are at different layers. I pay what I pay, that is what I
cover, that is what I charge for, and that is what I am on the
hook for.
Mr. Duffy. Right, the Federal Government is on the hook for
the terrorism component and--
Mr. Smith. The extreme upper layer.
Mr. Duffy. --there is no premium charge for that, right?
Mr. Smith. Right.
Mr. Duffy. And you don't take on risk without charging a
premium, right?
Mr. Smith. That is correct.
Mr. Duffy. How come it is a good deal for you to collect a
premium, but it is a good deal for the American people to not
collect a premium? Why is it a great standard for you at Swiss
Re and bad for America and the American taxpayer to collect
some form of a premium to build some form of a fund to actually
draw upon if there is an attack?
Mr. Smith. Again, Congressman, you can argue it either way,
and you are asking--and our point of view is that the
efficiency of how it is done today we think is rather brilliant
because the odds of the U.S. Government of it getting it up
into that layer are so small that to pre-fund it, how are you
going to do that? You are going to have make--
Mr. Duffy. With a premium.
Mr. Smith. --you don't have a model so you can't model it.
Mr. Duffy. So the model is, ``don't collect anything?''
Mr. Smith. You have a model that--you have a--
Mr. Duffy. We could place some premium--
Mr. Smith. --mechanism in place to try to build a--
Mr. Duffy. [Off mike.]
Mr. Smith. --only if there is a claim paid.
Mr. Duffy. I am sure Ms. Abraham would love to say, ``You
will reinsure us for free, and we will pay you on the back
end.''
I support TRIA. I want you guys to be aware of that. I
think we have to have some action here, but to say that we are
not going to try to collect some form of a premium that may not
correlate with the risk that the taxpayer is taking on, but
some premium, to have a fund set up that we can draw upon if
there is an attack.
Mr. Ellis, do you agree that we should have some form of
prefunding?
Mr. Ellis. Absolutely, Congressman.
Mr. Duffy. Some premium should be paid, you would agree?
Mr. Ellis. Absolutely. Right now, there have been insurance
companies that have been collecting terrorism insurance
premiums from their clients for a decade, and haven't paid
anything for the Federal backstop that they have.
Mr. Duffy. I would just make a note to the panel, I think
you could get better buy-in if there was some premium paid to
the American taxpayer to offset the risk. They are not going to
get a full premium, as you mentioned, Mr. Smith. You can't
assess it, but if we are paying some form of a premium for the
American taxpayer risk, we will get a far better buy-in. I
yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Thanks for your testimony today. I have a question for Mr.
Smith, and a question for Dr. Woo, and I would like for both of
you to respond to some testimony of each other.
For Mr. Smith, Dr. Woo testified earlier that TRIA is
insurance against counterterrorism failure. And I thought that
was very interesting testimony. He said that--you heard his
testimony, but what occurs to me, the takeaway from what he is
saying is that perhaps as the Federal Government invests more
aggressively in counterterrorism measures through the
intelligence community and other assets, perhaps the need for
the Federal backstop in TRIA might, as a percentage, decrease
as the Federal Government maybe increases its efforts on the
counterterrorism side.
I would be interested in your reaction to that potential
takeaway from his testimony.
For Dr. Woo, I would be interested to hear you respond to
Mr. Smith's point, that while you say there may be some
actuarial certainty, or some experience that you are gleaning
from, since 9/11, based on convictions, that what seems to be
pretty compelling from Mr. Smith is that the gravity and the
seriousness, or the level of the catastrophe is so great, that
it is very difficult to quantify.
Even if you can quantify some experience based on
convictions on declassified instances of terrorism, what seems
pretty compelling from Mr. Smith is that it is very hard to
quantify on an actuarial basis the severity of the losses that
could occur. And that is why the risk is difficult to quantify.
So, if both of you could respond to those two items.
Mr. Smith. I will go first. It is an interesting concept,
but when you build mathematical models around such
catastrophes, there are many elements to it. So he has an
interesting theory about one element, but there is just not
enough real data.
There is no model that has been tested yet, and so for
those of us who actually deploy capital, we just don't feel
comfortable that it is something that you can model.
Mr. Woo. I would just like to make a comment about the
massive amounts of investments the U.S. Government makes in
counterterrorism. Precisely because of this huge investment,
the effective cost of the TRIA backstop is really tiny compared
with the investment in counterterrorism. Okay, talking about
many billions spent, tens of billions spent on
counterterrorism.
And the effective cost of the TRIA programs, notional cost
is actually just a tiny fraction of that. Also, I would like to
make the point that if there were to be a catastrophic
terrorist attack involving a good number of operatives, almost
certainly, this would be a consequence of some degree of
negligence on the part of the security agencies.
If I just mention what happened in Britain recently, there
is a case of a soldier being killed on the streets of London,
and people wanted to sue MI5 over it.
Okay, so if I can just make the point, which is that as far
as the taxpayer is concerned, the value of TRIA is that without
it: (A) you wouldn't have much private participation in the
market, but also the potential liability of the Federal
Government in the event of a massive attack would dwarf the
backstop in TRIA.
Mr. Barr. Let me quickly move on to a point that Mr. Beshar
made earlier. In your testimony, your original testimony, you
indicated that there is more capital in reinsurance now than
before. Does this suggest that there is cause for reform to
increase the thresholds?
And for everyone on the panel, or for Mr. Beshar, Mr.
Smith, and Ms. Abraham, if there are to be changes, obviously
there are some skeptics or advocates for reforming TRIA. If
this committee were to reform TRIA, what level of changes in
the thresholds would be appropriate, and would not be
disruptive to the marketplace?
Mr. Beshar. Clearly, there is additional capital and
capacity in the insurance marketplace. The key question,
Congressman Barr, is how much of that capital would actually be
interested in writing terrorism risk? And that is a very hard
thing to try to estimate.
You have heard from Mr. Smith that it is not much, that
essentially what is being underwritten right now is essentially
the appetite that exists in the market. And so, I think that is
a process that has to be analyzed further.
Mr. Barr. Ms. Abraham, really quick, I am running out of
time, but obviously a terrorist attack against one American is
a terrorist attack against everyone. You talk about rural
stadiums. And I come from a relatively rural district, the
University of Kentucky is in my district. But in terms of--
Ms. Abraham. And we insure it.
Mr. Barr. I am sure you do. And thank you for that. But in
terms of shifting risk, what would you have to say about rural
taxpayers bearing risk for large urban areas, which have a
higher actuarial potential of bearing the--
Chairman Hensarling. A very brief answer, please.
Ms. Abraham. Some of that is done in the underwriting
process. There is a credit and debit process. And
vulnerabilities, location, preparedness, that is already
factored into our underwriting process. So not every--the
University of Kentucky does not pay the same price as the
University of Nebraska. They are different based on their
planning, and their location. So, it is different, and is
factored into the pricing already.
Chairman Hensarling. The time of the gentleman has expired.
I would ask for unanimous consent that letters from the
Financial Services Roundtable and the American Insurance
Association be entered into the record. Without objection, it
is so ordered.
I would like to thank our witnesses again for their
endurance, their patience, and their testimony today.
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 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing stands adjourned.
[Whereupon, at 1:15 p.m., the hearing was adjourned.]
A P P E N D I X
September 19, 2013
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