[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE FUTURE OF TERRORISM INSURANCE:
FOSTERING PRIVATE MARKET INNOVATION
TO LIMIT TAXPAYER EXPOSURE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 13, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-49
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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
Subcommittee on Housing and Insurance
RANDY NEUGEBAUER, Texas, Chairman
BLAINE LUETKEMEYER, Missouri, Vice MICHAEL E. CAPUANO, Massachusetts,
Chairman Ranking Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
GARY G. MILLER, California EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey BRAD SHERMAN, California
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin CAROLYN McCARTHY, New York
ROBERT HURT, Virginia KYRSTEN SINEMA, Arizona
STEVE STIVERS, Ohio JOYCE BEATTY, Ohio
C O N T E N T S
----------
Page
Hearing held on:
November 13, 2013............................................ 1
Appendix:
November 13, 2013............................................ 43
WITNESSES
Wednesday, November 13, 2013
Csiszar, Ernest N., Associate Fellow, R Street Institute......... 12
Driscoll, Kean, Chief Executive Officer, Validus Re.............. 10
Hartwig, Robert P., President and Economist, the Insurance
Information Institute.......................................... 15
McGovern, Sean, Director, Risk Management, and General Counsel,
Lloyd's of London.............................................. 8
Seo, John S., Co-Founder and Managing Principal, Fermat Capital
Management, LLC................................................ 14
APPENDIX
Prepared statements:
Csiszar, Ernest N............................................ 44
Driscoll, Kean............................................... 59
Hartwig, Robert P............................................ 66
McGovern, Sean............................................... 94
Seo, John S.................................................. 100
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Letter to the Treasury from the American Bankers Association,
dated September 16, 2013................................... 106
Letter to Representatives Grimm and Maloney from the American
Bankers Association, dated March 19, 2013.................. 110
Letter to Representatives Neugebauer and Capuano from the
U.S. Chamber of Commerce, dated November 12, 2013.......... 111
Letter to Representatives Neugebauer and Capuano from the
Coalition to Insure Against Terrorism, dated November 13,
2013....................................................... 113
Written statement of the Financial Services Roundtable....... 115
Written statement of The Jewish Federations of North America. 121
Letter to Representatives Neugebauer and Capuano from Liberty
Mutual Insurance, dated November 12, 2013.................. 122
Written statement of the National Association of Mutual
Insurance Companies........................................ 124
Written statement of the National Association of Professional
Surplus Lines Offices, Ltd................................. 129
Written statement of the Property Casualty Insurers
Association of America..................................... 131
Letter to Chairman Hensarling from Texas A&M University,
dated November 13, 2013.................................... 135
THE FUTURE OF TERRORISM INSURANCE:
FOSTERING PRIVATE MARKET INNOVATION
TO LIMIT TAXPAYER EXPOSURE
----------
Wednesday, November 13, 2013
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Luetkemeyer,
Royce, Capito, Garrett, Westmoreland, Duffy, Stivers, Ross;
Capuano, Cleaver, Sherman, Himes, Sinema, and Beatty.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representatives Grimm, Maloney, and Green.
Chairman Neugebauer. Good morning. The Subcommittee on
Housing and Insurance will come to order. The title of today's
hearing is, ``The Future of Terrorism Insurance: Fostering
Private Market Innovation to Limit Taxpayer Exposure.''
I am going to limit opening statements to 2 minutes per
side, and I ask unanimous consent that members of the full
Financial Services Committee who are not members of the Housing
Subcommittee, and who have joined us today, will be entitled to
participate in the hearing.
I will begin now with the opening statements, and I will
recognize myself for 5 minutes.
This is our second in a series of hearings on TRIA, a very
important subject. As I mentioned in the title of this hearing,
today is really to focus on getting more private market
participation in this process.
In addition to the previous hearing that we have had, we
have had numerous sessions, both at the staff level and the
Member level, with market participants, people who have an
interest in TRIA and the impact to both the users, the people
who are insured for terrorism, and the people who provide that,
the reinsurance market. We have tried to be as inclusive as we
can of bringing people in to get their perspectives on this.
As many of you know, TRIA was passed in 2002. It was meant
to be temporary.
And what we know in Washington is that there is really
never any temporary policy. Temporary moves very quickly to
permanent. And here we are over 10 years later and we still
have this temporary policy on our books.
The purpose of TRIA initially was to provide a transition
period for the industry to kind of regroup after the terrible
events of September 11th (9/11) where we saw the industry take
a hit of, I think, over $40 billion.
The transition really hasn't taken place as robustly as I
think a lot of folks hoped and as I think was promised. And so
what we are here to really to talk about today is how do we
accelerate that transition period and how do we accelerate the
private participation at a larger level.
Now, there is some good news along the way. The markets
have stabilized, and today the industry has more capital in
reserves than ever before in spite of some fairly major big
hits that the industry has taken over the last few years. We
have had several events even larger than 9/11, yet today the
industry is capitalized and the reinsurance market has a
tremendous amount of capital on the sidelines.
Risk modeling has advanced. One of the things we have heard
from other people who came and gave testimony was that it is
hard to model this risk for terrorism but, in fact, there has
been some progress in that.
And the price of the insurance, the coverage, has reduced
by over 70 percent since those early days. So, there are some
encouraging factors out there.
But quite honestly, the innovation in TRIA hasn't kept pace
with really the rest of the financial markets. One of the
things that we enjoy in this world today is some of the most
sophisticated financial products in the world. And we have
provided opportunity to cover a number of different kinds of
risk in a lot of different ways. Yet we haven't seen that same
innovation, quite honestly, in TRIA.
And so today, as we begin to have our discussion, I am
looking forward to hearing from this panel. I told my staff
earlier that I think we have put together an A panel today of
some very smart people who have different perspectives.
But I hope that our conversation will center around today
that if we are to continue to provide terrorism insurance in
this country, what are the ways that we can do it better, but
at the same time, make sure that the taxpayers have a smaller
footprint.
One of the things we know about government, particularly
the U.S. Government, is that we don't do an extremely good job
of pricing risk.
I don't think our government, the founders, ever meant for
us to be in the insurance business. But we have found ourselves
in that business in a number of ways, whether insuring
mortgages or insuring people against flood.
And when we look across-the-board at those programs, what
we see today is that the FHA is not adequately capitalized. The
flood insurance program is $30 billion underwater, and there is
no pun intended in that statement.
And so I hope to hear from our witnesses today of ways that
we can move forward. And what I would say is that my guess is
that this is our last pre-legislative hearing.
And where we go from here, we will begin to then put some
of the ideas that we have heard from market participants and
from the two hearings that we have had and moving forward with
something that we think is a positive direction.
With that, I yield back my time, and I recognize Mrs.
Beatty from Ohio for 2\1/2\ minutes.
Mrs. Beatty. Thank you so much, Mr. Chairman.
And let me just say to our witnesses today, thank you for
being here.
Certainly, as you know, today's hearing was scheduled
specifically for the purpose of evaluating the ability of the
private sector to sustain a robust terrorism risk insurance
market in the absence of a Federal Government backstop.
And I believe it is fair to say that the ability to
purchase broadly available and reasonably priced terrorism risk
insurance is a critical part of our modern American society,
covering everything, as you know, from property damage to
business interruptions to injury or loss of life liability to
workers' compensation. And businesses' ability to secure
terrorism risk coverage facilitates every facet of the modern
American corporate climate.
Without broadly available and reasonably priced terrorism
risk insurance, commercial real estate markets would likely
seize up and sports entertainment venues could lose their
ability to operate.
I am from a district where we have a large number of venues
that fall into this category. Even the high-risk office
buildings that create the iconic skylines from coast to coast
would be vacant as companies could not justify housing
employees in these terrorism magnets without workers'
compensation coverage for liability stemming from an act of
terror.
The unpredictable frequency and severity of terrorist
attacks prevents the use of normal risk-based pricing models
used in other forms of insurance. In fact, from all the
comments from industry participants, insurance and reinsurance
industries are simply not ready to bear the entire burden of
losses from one or more major terrorism events.
And without the extension of the TRIA government backstop,
all indicators suggest that there would be a large-scale
withdrawal of this coverage from the market, which would bring
us back to the untenable position in which we found ourselves
in the months following September 11, 2001.
So I look forward to hearing your testimony, and I thank
you for being here today.
I yield back.
Chairman Neugebauer. I thank the gentlewoman.
And now, I recognize the vice chairman of the subcommittee,
Mr. Luetkemeyer, for 2 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Congress originally intended for the terrorism risk
insurance program, or TRIA, to be a temporary one to stabilize
the insurance sector after September 11, 2001. It was passed
and then extended in order to allow time for the industry to
evolve and create private market solutions.
As the chairman has mentioned and I agree, I think it is
fair to say that a complete transition to the private market
has not been as rapid or as robust as we would have liked.
Given what I have studied and heard, I believe there
remains a real need for TRIA. But I also believe that we can
identify ways to increase the amount of private sector capital
in the program.
My biggest hope in doing so is that we better protect
taxpayers, continue to have a robust insurance marketplace, and
provide a backstop for financial security for the private
sector and investors. Today, we will more closely examine the
current terrorism insurance marketplace and discuss some
innovative ways to increase the role of the private sector in
this field.
I believe we can take steps to reform TRIA. And while I do
support a continuation of an improved program, I do not believe
it should be a permanent program.
At the end of this debate, it is my hope that we will have
a product that promotes increased stability and taxpayer
protection alike, as well as begins a process of winding down
the government's role.
I look forward to a productive hearing, and I thank our
witnesses for testifying.
With that, Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from New York, Mrs. Maloney, is recognized
for 2 minutes.
Mrs. Maloney. I thank the ranking member and the chairman
for calling this hearing and I thank all of my colleagues for
being here.
The title of this hearing is, ``Fostering Private Market
Innovation to Limit Taxpayer Exposure.'' I would just like to
point out that under the current TRIA program, the taxpayers'
exposure is already extremely limited. Total industry losses
have to exceed $100 million first, and then insurance companies
have to pay a deductible equal to about $34 billion. And this
is before any government money is used.
Even then, the insurance company has to share a portion of
the losses with the government. Under TRIA, if, God forbid, a
terrorist attack caused $50 billion of losses, which is $10
billion more than the terrible 9/11 attack, the government
would only be on the hook for roughly $13.6 billion, according
to the Government Accountability Office.
TRIA is a rare example of a government program that does
exactly what Congress intended it to do. It ensures that
businesses have access to terrorism insurance while also
limiting taxpayers' exposure. And it has done all of this
without costing taxpayers one 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 it would leave our economy
dangerously exposed in the event of a future terrorist attack.
I want to thank all of my colleagues for their support in
the rebuilding of our Nation after the 9/11 attack. And I
especially want to thank one of our panelists today from
Lloyd's of London, Sean McGovern, because after 9/11 all
building stopped in major urban areas. No one could get
insurance.
The only place some people--and this was limited--could get
insurance was from Lloyd's of London. So you couldn't build a
shack until antiterrorism insurance was put in place, the TRIA
program, which has not cost a dime.
So I strongly support Mr. Grimm's bill to extend this vital
program. It is important to our economy. It is important to our
Nation.
And I thank the chairman for having the hearing.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from New Jersey, Mr. Garrett, the
chairman of our Capital Markets Subcommittee, is recognized for
2\1/2\ minutes.
Mr. Garrett. Two minutes is fine.
First of all, I would like to thank the chairman for
holding this hearing on potential ideas to encourage private
capital and innovation, and at the same time, to protect the
taxpayers from footing the bill for terrorism coverage.
I would also like to thank all the witnesses here on the
panel before us as well.
It has been 11 years since TRIA was signed into law, as the
chairman has already indicated, and it was intended to be a
temporary program. And as most of you are aware, TRIA in its
current form requires the share in the certified act of terror,
as was indicated, $100 million if it exceeds that.
And while the risk is shared between the private insurers
and the taxpayers, the mandatory recoupment under TRIA does not
apply to catastrophic losses over a set figure, around $27
billion. Recall, then, that on September 11th, those attacks
resulted in more than $41 billion of losses.
So today we are here to discuss ideas to further work to
protect the taxpayer from catastrophic losses. While we hope
and pray that another September-11th-like event does not occur,
we cannot, unfortunately, rule out future attacks on our
homeland.
And given this possibility, it is in the interest of the
U.S. taxpayers for Congress to seek out innovative ways to
harness the power of private markets and private capital to
lessen taxpayer exposure.
So it is my hope that this hearing will provide this
committee with a better understanding of how we can encourage
private sector capital in the terrorism risk insurance
marketplace, and ways to ensure that taxpayers are, in essence
or in reality, not left footing the bill.
With that, I yield back.
Chairman Neugebauer. Thank you.
The gentleman from Connecticut, Mr. Himes, is recognized
for 2 minutes.
Mr. Himes. Thank you, Mr. Chairman. I am pleased to be here
at the second hearing on this very important topic.
And I would like to take a moment to welcome Mr. John Seo,
whose company, Fermat Capital, is headquartered in my district,
I believe in Westport, Connecticut.
Mr. Seo, I look forward to hearing your testimony.
And thank you, Mr. Chairman, for holding this hearing.
I think most of us agree that the goal here is to find a
well-balanced insurance structure that steps in where the
private market fears to tread for as long as that holds true.
To those who are perhaps completely ideologically allergic to
the idea, there are two good reasons in principle to consider
having a terrorism risk insurance program.
The first is the very simple financial concept that risk
should be managed and ultimately borne by the party that is in
the best position to understand that risk. And unlike, perhaps,
other kinds of risk, it is, of course, our intelligence
agencies, our Federal Government that best understands how,
when, where, and why a terrorist event may occur. And of
course, we make the laws that work to mitigate the risk of a
terrorist event.
Secondly and far more practically, as we saw on 9/11, and
as we saw in Hurricane Katrina, and as we saw in Hurricane
Sandy, in the moment of a catastrophe the Federal Government
does step in in a big way. I think it is a tribute to us as
Americans that when Americans are suffering anywhere, we don't
act stingy. We say, ``We will help you stand up again.''
So as long as we are stepping in, in a big way in any
event, we should do it in an organized and thoughtful way using
an insurance structure that doesn't represent subsidy, that
does not represent crowding out of private players, but
represents an orderly way, a careful way of thinking about
things that we don't want to think about.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Florida, Mr. Ross, is recognized for 2
minutes.
Mr. Ross. Thank you, Mr. Chairman, and thank you for
holding this hearing.
As a stalwart of physical conservatism, I agree that
taxpayer-backed programs are often poorly designed and managed
and end up adding too many dollars to our national debt.
My time as chairman of the Florida House Insurance
Committee years ago provided me with a deep understanding of
the need to maximize private capital. And I think we all
appreciate the embedded design flaws that led to our current
predicament with regard to the National Flood Insurance
Program.
Ideologically, I agree that taxpayers should not be asked
to foot the bill for those who choose to live or build in
riskier areas. However, I also believe that we are a body of
practicality.
Practically speaking, I do not think it is feasible to move
San Francisco away from the San Andreas Fault; neither could we
move Florida away from flood zones to escape flood risk.
Finally, we will not eliminate cities, take down iconic
structures, or prohibit mass gatherings so as to reduce the
risk of a terrorist event.
There are realities of risk in our world for which we must
find the best workable solutions. In the event of a terrorist
attack, I am confident that the Federal Government will step in
and provide relief to all victims, including those who are
uninsured.
I am a compassionate conservative. I don't think that
relief is a bad thing. But I would hope that we would
responsibly map out a plan for the deployment of private funds
to minimize the number on the check that this Congress has to
write.
In this subcommittee, we promote responsible risk
management, identify uncertainty as a cause of slower growth,
and view broad market participation as an indicator of healthy
market conditions. It seems to me that the terrorism risk
insurance program at its root targets these principles.
Now, could we do it better? Can we adjust the parameters to
further engage private capital? Can we help expand the capacity
of reinsurance and insurance-linked securities markets? It is
certainly possible, and I certainly hope so.
I thank the panel for being here, and I look forward to the
testimony.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the ranking member of the full Financial Services
Committee, the gentlewoman from California, is recognized for 2
minutes.
Ms. Waters. Thank you very much. I am pleased to
participate in this hearing on the importance of the successful
Terrorism Risk Insurance Act known as TRIA. For more than a
decade TRIA has supported critical economic growth by ensuring
access to terrorism coverage for our largest venues,
businesses, and employers. And Democrats are strongly committed
to renewing this program quickly and without controversy.
The terrorist attacks of September 11, 2001, caused a
tragic loss of life and significant disruption to our economy.
In addition, insurance losses totaled an estimated $40 billion
in today's dollars.
Such losses made it financially impossible for many
insurers and reinsurers to offer terrorism coverage. Most fled
the market. Those that did offer coverage did so at a cost that
was prohibitively high.
In 2002, Congress enacted TRIA to address the problem. 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 at the highest levels.
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 TRIA's 2014 expiration, leading
Republicans oppose this measure, arguing that TRIA is hindering
private sector participation and that private capital is
available to cover terrorism risk.
By continuing to drag out this noncontroversial
reauthorization, they are putting up roadblocks that threaten
the renewal and effectiveness of this important program. This
hurts our economic growth.
Industry itself has reported that private capital could
cover no more than a fraction of the gap that would result from
TRIA's expiration.
Contributing to this problem is an inability to
appropriately model and price the terrorism risk due to an
absence of actuarial data. This is because of the extreme
difficulty in predicting the frequency, location, and severity
of loss associated with a potential terrorist attack. Attacks
are random, infrequent, and details are largely classified.
Additionally, Republican opponents of TRIA argue that the
current structure leaves taxpayers exposed and that increasing
private participation will limit this exposure. However, TRIA
actually reduces taxpayer risk because it keeps most of the
terrorism risk with the private sector.
Without TRIA, many buildings, schools, and large venues
would remain uninsured against terrorist attacks, meaning that
the government likely will pick up 100 percent of the tab for
catastrophic losses.
But don't take my word for it. A wide array of TRIA's
policyholders and beneficiaries have expressed support for the
program, including shopping centers, hotels, and office
buildings, to insurers and reinsurers, as well as market
analysts, lenders, and developers. All these interests and more
depend on the quick, clean, and long-term reauthorization of
TRIA.
For all these reasons, I believe we need to reauthorize
TRIA as soon as possible. TRIA must remain in place to ensure a
speedy recovery after an attack, to avoid market disruptions,
and to protect schools, jobs, and businesses. We need to
realize that now is not the time to be having a debate over
alternatives to TRIA. The private market cannot and does not
want to step into the void.
I thank you again for holding this hearing. I continue to
believe it is of the utmost importance that TRIA is
reauthorized quickly, cleanly, and for the long term. Democrats
support it. Insurers support it. Businesses and the U.S.
Chamber of Commerce support it. There's no reason this should
not have broad bipartisan support in Congress as well. I look
forward to the witnesses' testimony and I yield back the
balance of my time.
Chairman Neugebauer. Now, the ranking member of the
subcommittee, Mr. Capuano, is recognized for--
Mr. Capuano. Thanks for having this hearing, Mr. Chairman.
I yield back.
Chairman Neugebauer. I appreciate that.
And now, we will go to our witnesses.
It is my pleasure to introduce: Mr. Sean McGovern, director
of risk management and general counsel for Lloyd's of London;
Mr. Kean Driscoll, chief executive officer of Validus
Reinsurance, Limited; Mr. Ernest Csiszar, associate fellow, R
Street Institute; Mr. John Seo, Co-Founder and Managing
Principal, Fermat Capital Management, LLC; and Dr. Robert
Hartwig, president and economist, the Insurance Information
Institute.
I thank all of you for being here. You will be each
recognized for 5 minutes to summarize your testimony.
And with that, I will begin with Mr. McGovern. You are
recognized for 5 minutes.
STATEMENT OF SEAN McGOVERN, DIRECTOR, RISK MANAGEMENT, AND
GENERAL COUNSEL, LLOYD'S OF LONDON
Mr. McGovern. Thank you, Chairman Neugebauer, Ranking
Member Capuano, and members of the subcommittee for the
opportunity to testify this morning on behalf of Lloyd's of
London.
My name is Sean McGovern. I am responsible for risk
management at Lloyd's and I am also general counsel.
Over our 325-year history, Lloyd's has earned a reputation
for having the capacity, the skill, and the appetite to
underwrite the world's most difficult risks. This is
particularly true in the United States, which is our largest
market and where we are a major direct insurer and reinsurer.
Our specialty is catastrophe coverage, and we have been
there to support the U.S. economy since the conclusion of the
Civil War, cementing our reputation with our response to the
1906 San Francisco earthquake and, more recently, claims paid
arising from Hurricanes Katrina, Rita, and Wilma in 2005.
We know how to underwrite catastrophic risk and we have an
appetite to take risk that others will not. It is our business.
With that in mind, our views on terrorism risk and TRIA are
informed by the following: First, Lloyd's paid more claims than
any other insurer or reinsurer following the tragic events of
September 11th--almost $8 billion.
Second, Lloyd's led the development of the standalone
terrorism risk market in the United States in the days
following 9/11. And third, Lloyd's is generally wary of
government intervention and believes in free markets and
private market solutions wherever possible.
With all that said, we support the renewal of TRIA. Like it
or not, the coverage of terrorism risk is different and the
United States is not the only country confronted with the
challenge of ensuring that the national economy is protected in
the event of the failure of counterterrorism measures.
The U.K. has lived with the threat of domestic terrorism
for many years, and while the structure of the government
industry arrangement is different than TRIA, the U.K. program
has an unlimited government backstop. And similar arrangements
exist in major European economies.
Terrorism risk is different because, as demonstrated by the
tragic events in Boston, risk assessment is very difficult.
Frequency and severity are very difficult to predict. Only the
government has access to intelligence information but cannot
share it.
And although terrorism modeling exists, it has limitations.
In particular, the supply of historic data is much more limited
than for natural catastrophes.
Now that is not to say that terrorism risk cannot be
underwritten. We have an active and growing standalone
terrorism risk market in Lloyd's, but it remains small.
All of these factors act to substantially limit the
appetite of the insurance and reinsurance industry to absorb
this risk, particularly in major urban areas where the density
and accumulation of asset values.
TRIA has succeeded in giving the insurance industry the
confidence to make terrorism coverage available. Without TRIA,
the aggregation of risk will quickly lead to the industry to
exclude coverage or withdraw capacity from key economic centers
in the United States.
While the industry is well-capitalized, it would be wrong
to assume that more capital leads to a dramatic increase in the
overall appetite to write U.S. terrorism risk insurance.
Reinsurers need to manage risk aggregation and seek
diversification.
Now, we accept the need to assess whether or not TRIA
should change, and it may well be that the balance between
government and private market involvement could tilt more
towards the private market. But any changes to TRIA to
facilitate greater private market involvement should not
sacrifice the stability that TRIA has already achieved.
And how changes are made can be just as important as what
changes are made. For example, sudden and dramatic increases in
retentions or co-shares could prompt some insurers and
reinsurers to concentrate their capacity elsewhere.
By contrast, well-defined, incremental changes over the
course of a long-term extension of the program may provide a
transparent process of reductions in the risk borne by
taxpayers.
For the avoidance of doubts, we do not see this as a
mechanism to transition to a complete removal of TRIA. We
struggle with the notion that there is no Federal backstop.
Whatever the future of TRIA, Lloyd's will remain committed
to providing the fullest coverage we can to our American
customers, just as we did immediately after 9/11. But our
ability to do that will be limited by our need to manage our
risk aggregation.
The same issue will apply to others, and we have no
confidence that the private sector alone is capable of
providing the entirety of the coverage that would be needed if
TRIA is not renewed.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. McGovern can be found on
page 94 of the appendix.]
Chairman Neugebauer. Thank you.
And now, Mr. Driscoll, you are recognized for 5 minutes.
STATEMENT OF KEAN DRISCOLL, CHIEF EXECUTIVE OFFICER, VALIDUS RE
Mr. Driscoll. Good morning. My name is Kean Driscoll and I
am the chief executive officer of Validus Re. I am pleased to
appear before you today to provide my company's perspective on
possible changes to the terrorism risk insurance program that
would incent more private market involvement.
I commend Chairman Neugebauer for holding this important
hearing and I welcome the opportunity to address the
Subcommittee on Housing and Insurance. Validus Group is a
leader in the global insurance and reinsurance markets,
operating principally through Talbot Syndicate 1183 at Lloyd's
of London and Validus Re.
Talbot has written direct and facultative terrorism at
Lloyd's for more than 12 years, and is now the largest writer
of that business by income.
Validus Re is one of the largest standalone property
terrorism treaty coverage providers in the world, with an
estimated 10 percent market share, and it evaluates business
opportunities on approximately 90 percent of all direct and
facultative terrorism business written throughout the world.
Since 2001, insurers and reinsurers have worked hard to
develop a better understanding of conventional terrorism risk.
Reinsurers have created task forces, consulted military and
intelligence experts, hired specialty risk modeling firms,
invested in research and development, and implemented new
underwriting standards, all with the intention of offering
private market solutions for the transfer of conventional
terrorism risk.
Conventional terrorism can be modeled, priced, and managed
on a portfolio basis. The probability or frequency of an event
can be estimated, albeit with less certainty than with risk
classes of a more robust historical record.
However, the insurance and reinsurance industries have
pioneered risk transfer solutions for many other classes of
business that suffer the same shortcomings. To supplement the
lack of a rich data set on frequency, we use open source
intelligence that helps us estimate both the intent and
capability of terror threat agents.
The question is not whether conventional terrorism risk can
be priced, but rather the precision of the parameters in a
pricing model. We can and do currently price conventional
terrorism risk and estimate that approximately $7 billion to $8
billion of reinsurance coverage is purchased annually on a
standalone basis for conventional U.S. terrorism. This excludes
coverage that is included as part of general, property,
casualty, workers' compensation, and other specialty-lines
coverages.
We believe presently there is adequate reinsurance capacity
to cover the insurance industry's current $27.5 billion
retention under TRIA. And if the industry retention for
conventional terrorism grew over time, so too would the
capacity of the reinsurance industry for conventional terrorism
risk.
TRIA is valuable to the insurance industry in underwriting
conventional terrorism risk, but it takes a one-size-fits-all
approach that could be modified to encourage more private
market insurance and reinsurance participation.
If the committee is inclined to make changes to the
program, Validus encourages you to tailor the program in
accordance with the following comments: The program should
continue to cover catastrophic terrorism loss scenarios related
to nuclear, biological, chemical, and radiological attacks. The
broader industry cannot effectively address these perils, as
the breadth of potential events is either unknowable or could
potentially bankrupt the industry.
Cyber terrorism, a peril distinct from cyber liability,
should be clearly covered by the program. The scope, duration,
potential damage, and economic loss from this risk are also
unknowable, and therefore, uninsurable. The program should
clarify the process for certifying a terrorism event, including
a defined time for making the certification.
Validus has the ability and willingness to assume more
conventional terrorism risk exposure and I believe the
reinsurance industry also has the ability and willingness to
meaningfully expand its capacity for conventional terrorism
risk.
To reflect the fact that the industry's appetite for
writing conventional terrorism risk has grown since the last
extension, the program could be modified in a variety of ways,
including gradually increasing the insurance industry retention
and size of a qualifying terrorism loss under the program. This
reduces the likelihood of having to fund a loss through
taxpayer funds and it avoids short-term price and capacity
dislocation in the broader industry.
An expansion of the co-participation would better align the
insurance industry with the program. The insurance industry is
a critical facilitator of effective risk management in
virtually every industry, and every facet of life.
Risky behavior or highly exposed assets typically result in
a higher premium charge. Policyholders can reduce higher
premiums through effective risk mitigation techniques.
Currently, the program impedes the ability of the insurance
industry to properly price its products. By shifting the risk
of conventional terror attack from the policyholder to the
taxpayer, the improper allocation of risk premium facilitates
unintended outcomes.
We see this phenomenon playing out in the flood market, as
the heavily subsidized National Flood Insurance Program has
produced significant deficits. Congress should encourage a
greater private sector risk-bearing role and appropriate risk
pricing.
Insureds and insurers will then have an incentive to
mitigate risk and price it appropriately and Congress can focus
on generally becoming a reinsurer of last resort for
conventional terrorism risk.
Finally, special consideration should be made for smaller
insurers as well as for the insurance industry generally with
respect to workers' comp exposure accumulations in metropolitan
areas, both of which could be disproportionately impacted in
the near term by any of the changes to the program.
Thank you for the opportunity to testify, and we look
forward to continuing the dialogue as the renewal process
continues.
[The prepared statement of Mr. Driscoll can be found on
page 59 of the appendix.]
Chairman Neugebauer. I thank the gentleman.
Mr. Csiszar, you are now recognized for 5 minutes.
STATEMENT OF ERNEST N. CSISZAR, ASSOCIATE FELLOW, R STREET
INSTITUTE
Mr. Csiszar. Thank you. Mr. Chairman, and members of the
subcommittee, I appreciate the opportunity to appear before you
today. And let me add that while officially I am here on behalf
of the R Institute, which is an institute committed to free
markets, to which I am also fully committed, I am also a former
insurance commissioner, a former president of the NAIC, and I
sit on the board of a workers' compensation company that sells
this stuff, and I sit on the board of a company that buys a lot
of terrorism insurance.
I have a lot more interest in this than just good policy. I
have some practical reasons for being here as well.
Having said that, I want to address two issues, really.
One, how can we make reinsurance more attractive? Because
reinsurance is really the key here. Without reinsurance, there
is no insurance.
And the second point that I want to address is, can we make
the insurance-linked security market--and I am sure my friend
here will pick up on that as well to comment on it--more
attractive?
So to begin with, I think, Mr. Chairman, in your statement
you came out and said there had been a lot of change--
improvement in the insurance-reinsurance market. The point
really is that the capital--when I look back 10 years ago,
capital was around $250 billion, $280 billion. Today, that
capital is over $500 billion. It is hard to pinpoint an exact
number because a lot of insurance companies also sell
reinsurance.
The capital, in particular, has grown between 1 and 5
percent every year consistently since--actually, since the
financial crisis. More money has come in because it is such a--
the yield environment in other areas is so low.
So companies are looking for higher returns and the
reinsurance industry has naturally benefited from that to the
point where I would say when I recall Hurricane Hugo in my own
State of South Carolina, which was a disaster, and Hurricane
Andrew, as I recall, created severe disruptions in the market.
Now I look at it and I say, look, here we have had
Hurricane Sandy, slightly less than $20 billion, and it has
barely caused a blip. If anything, reinsurance rates have gone
down.
I look at wildfires in California and Nevada and Utah, all
through the entire West, storms in the Northeast, hurricanes.
The industry, as a natural course, almost ritualistically every
year pays out $15 billion, $20 billion to $25 billion in
catastrophe.
So my approach to this entire issue was can the private
market, in effect, take over at a much higher stage than that
$100 million? And while I am in favor of renewing TRIA for an
extended period of time--5 years, 10 years, whatever it may
be--I also think that I would suggest that we can take steps to
make it more private-market friendly.
First of all, my suggestion would be that you take a very
close look at that $100 million trigger, that it could--when
you look at, again, what the industry has been able to cover in
the billions--$20 billion, $15 billion, $25 billion--that
trigger can be set much higher than what it currently is.
I would caution that we are not quite sure here whether the
money that has come into this industry is really what I would
call hot money--quick in, quick out. I would caution that there
are still some modeling problems with this. I would caution
that the data isn't the best in the world.
So I would suggest that if you were to take that kind of
approach, it can be staggered. All of this is severable. You
can do it in pieces and parts. But take a close look at that
trigger.
The second thing I would suggest is there is room for
increasing both the horizontal kind of deductible as well as
that vertical kind of cost-sharing arrangement. Increase it by
10, 15 percent or so to leave the industry with more skin in
the game. And also, it would reflect the fact that there is
much more capacity in the industry.
And then third, I would suggest you take a close look at
charging for this. You charge for flood insurance, albeit the
charges that you have are inadequate. Nonetheless, people pay
for flood insurance.
As far as the insurance-linked securities market is
concerned, I would suggest you take a very close look at the
accounting environment and at the tax environment.
I would love to bring this industry back onshore. It is
down 90 percent in the Cayman Islands in terms of these special
purpose vehicles. Bring it back onshore, allow some tax flow so
that there is no double taxation, perhaps look at how it is
reserved, and certainly look at the accounting issue where
there is an enormous difference between how these insurance-
linked securities are treated for creditor insurance versus
true insurance.
Again, I thank you for the opportunity and, of course, I am
open to questions whenever this committee is ready. Thank you
very much.
[The prepared statement of Mr. Csiszar can be found on page
44 of the appendix.]
Chairman Neugebauer. Thank you.
Dr. Seo?
STATEMENT OF JOHN S. SEO, CO-FOUNDER AND MANAGING PRINCIPAL,
FERMAT CAPITAL MANAGEMENT, LLC
Mr. Seo. Thank you, Mr. Chairman. Good morning.
My name is John Seo. I am a co-founder and managing
principal, along with my brother, Nelson Seo, of Fermat Capital
Management, which is believed to be the largest investment
manager of catastrophe bonds, or so-called cat bonds,
worldwide.
Hurricane Andrew in 1992 and the Northridge Earthquake in
1994 caused many insurers to realize that they were sitting on
top of a risk of ruin they didn't realize they had before. It
was judged that the capital market, with its much bigger
capital base, could safely remove this risk of ruin from
insurers and so the cat bond market was invented in the mid to
late 1990s.
To investors, cat bonds operate just like corporate bonds,
depending on your point of view. Corporate bonds are
effectively cat bonds that happen to cover credit risk and cat
bonds are just corporate bonds that cover insurance risk.
Over the years, the reinsurance equivalent of cat bonds,
collateralized reinsurance, as paralleled the development of
the cat bond market virtually dollar for dollar. Together, cat
bonds and collateralized reinsurance are called insurance-
linked securities or just ILS. Today, I will speak to the ILS
market as it relates to terrorism insurance.
The ILS market currently stands at $45 billion. Risk
coverage has gone beyond hurricane and earthquake to include
such things as tornado, hail, wildfire, disease, flood, and of
course, terrorism.
The ILS investor base is distinctly global in nature and
enjoys significant participation from all investor categories.
Innovation remains a hallmark of ILS markets. For example,
a flood bond covering the New York Metropolitan Transportation
Authority was issued this year in July.
It is generally accepted that we are at the beginning of a
burgeoning market for flood bonds. Only a few years ago, most
market observers would have considered such a thing as nearly
impossible.
Regarding terrorism specifically, the cat bond side of the
ILS market covers only $1.4 billion in terrorism risk. If we
extrapolate that to the other half of the ILS market we can
reasonably estimate that capital markets cover roughly $3
billion of terrorism risk today in total.
At current rates of growth, the ILS market is expected to
be in the range of $150 billion to $200 billion by 2020. By
mere extrapolation from our current condition, this would put
ILS terrorism capacity at $9 billion to $12 billion by the end
of this decade.
Now, I know some market observers have questioned whether
or not capital markets are fundamentally cut out for terrorism
risk. In particular, a common misunderstanding is that
investors strictly avoid ILS investments that cover events
which may also cause temporary drops in the stock market.
I say plainly, this is not true. If it were, we would have
no earthquake bonds.
I explain all of this in excruciating detail in my written
testimony so let me summarize my view on this matter as
follows: ILS investors care mainly about fair compensation for
the risk and everything else is secondary to that.
I now end my testimony by briefly touching on two ways to
increase capital markets efficiency for terrorism risk. Cat
bond coverage for terrorism risk is typically bundled with life
and health risks. Of course, that is not surprising, but
additional bundling could increase efficiency of coverage, for
example, bundling terrorism, life, and earthquake risk in one
transaction.
The main intuition here is simple: Risk bundling reduces
frictional cost.
Finally, coverage for terrorism risk in the cat bond market
currently includes NBCR. There is no doubt in my mind that NBCR
coverage is holding back market capacity.
If NBCR were more commonly excluded from coverage, capital
markets' capacity for terrorism risk would increase
significantly from current levels.
Thank for this opportunity to testify before the
Subcommittee on Housing and Insurance today. I look forward to
answering any questions you may have.
[The prepared statement of Dr. Seo can be found on page 100
of the appendix.]
Chairman Neugebauer. Dr. Hartwig, you are recognized for 5
minutes.
STATEMENT OF ROBERT P. HARTWIG, PRESIDENT AND ECONOMIST, THE
INSURANCE INFORMATION INSTITUTE
Mr. Hartwig. Thank you, Chairman Neugebauer, Ranking Member
Capuano, and members of the subcommittee. My name is Robert
Hartwig and I am president and economist for the Insurance
Information Institute, an international property-casualty
insurance trade association.
I appreciate the opportunity to have been asked by the
committee to provide testimony on TRIA and the market for
terrorism insurance in the United States.
The terrorist attacks of September 11, 2001, produced
insured losses larger than any natural or manmade event in
history. Claims paid by insurers to their policyholders
eventually totaled $42 billion in today's terms.
Exclusions proliferated, prices soared, and very little
private sector capacity for terrorism entered the market as the
general consensus emerged that terrorism risk is fundamentally
not insurable.
Only when TRIA was enacted by Congress in late 2002 did
stability finally return to the market and coverage for
terrorist attacks resume.
Eleven years later, the war on terror is far from over, as
April's Boston Marathon bombings attest. But TRIA by all
objective measures is now an unqualified success.
The program not only succeeded in restoring stability to
the country's vital insurance and reinsurance markets, but it
has done so at effectively no cost to taxpayers.
Indeed, TRIA as currently structured provides at least
eight levels of protection to taxpayers while fostering
competition among insurers of all sizes. And I document those
in my written testimony.
The unambiguous success of TRIA demonstrates that the Act
has become an indispensable component of the country's national
security infrastructure. Under TRIA, private insurance, not
government aid, is the principal funding and delivering
mechanism that will drive rebuilding efforts and economic
recovery after any future attack.
One hundred percent of the losses up to $100 billion will
be financed directly by private insurers or can be recouped in
full through assessments on the private sector. In the event
TRIA is allowed to expire or its structure significantly
altered, the preponderance of the burden for funding post-
attack recovery efforts could well shift to the Federal
taxpayer.
While there is no question that private insurers and
reinsurers would continue to offer limited amounts of terrorism
coverage, there is also no question that in the absence of
TRIA, private insurance and reinsurance market capacity, for
several reasons, will be diminished relative to what is
currently available and purchased today.
Primary insurers, for example, may be forced to scale back
their sale of terrorism insurance due to rating agency and
regulatory pressure. Already, the leading insurance rating
agency, A.M. Best Company, has subjected insurers to stress
tests involving simulated terrorist attack scenarios.
Those insurers that failed the stress test are required to
present an action plan detailing the steps that they will take
to ``reduce concentration of exposure to terrorism risk, should
TRIA protection change materially.''
In the event the insurer's action plan is deemed to be
insufficient, ``the rating unit will face negative rating
pressure.''
A.M. Best concerns run deeper still, adding that while
private reinsurance is currently available in the market,
future availability and affordability of this coverage is
``uncertain in the event TRIA is not renewed or if the program
changes significantly.''
The same stress test analysis shows that smaller insurers
would be disproportionately impacted by major changes in TRIA.
Preserving a TRIA structure that encourages market
participation among insurers of all sizes is critical.
More than 90 percent of small- and medium-sized insurers
write TRIA coverage today. An Insurance Information Institute
analysis of market shares indicates that insurers with less
than $1 billion in surplus provided nearly a quarter of the
U.S. TRIA capacity in 2012.
One corollary to this finding is that many insurers,
particularly small- and medium-sized insurers, are already at
or near their maximum exposure to terrorism risk. This means
that changes to the program that would increase their exposure
would not motivate them to write more coverage.
Indeed, the opposite is likely to happen. The bottom line
is that any dramatic changes to the program are likely to be
highly disruptive to a large share of the market, potentially
reducing competition.
Expiration of TRIA or a major restructuring of its key
provision threatens to turn the market, in effect, into Swiss
cheese. By that, I mean a market that on its surface may give
the appearance of being solid but which, in reality, is riddled
with holes.
These holes are coverage gaps and shortfalls that could
leave millions of American businesses and workers as well as
taxpayers needlessly vulnerable. These holes and gaps will
impact every industry in every region of the country, and the
Federal Government will be called upon to fill these gaps in
the event of future attacks.
In conclusion, a purely objective assessment of TRIA in its
current form is very encouraging from a cost-benefit
perspective. TRIA has brought much needed stability and
capacity to the market, benefiting the entire U.S. economy, and
it has done so within a fiscally responsible framework.
The program has no major structural defects. Moreover,
there is no evidence that the existence of TRIA crowds out
capacity or stifles innovation in traditional or ILS markets.
In the 11 years since TRIA was enacted, private sector capacity
has gradually expanded in the market not in spite of TRIA but
because of it.
Thank you for the opportunity to testify before the
committee today. I would be happy to respond to your questions.
[The statement of Dr. Hartwig can be found on page 66 of
the appendix.]
Chairman Neugebauer. I thank the gentleman, and I thank the
panel.
And we will now go to a question-and-answer period. Each
Member will be recognized for 5 minutes.
And I will recognize myself for 5 minutes.
Mr. Driscoll, since 9/11 the global insurance and
reinsurance industry has shown remarkable resilience. They have
taken, I think--for example, in 5 of the last 11 years since 9/
11, insurers and reinsurers have absorbed catastrophic losses
greater than $47 billion.
Despite these losses, the industry capital has hit near-
record highs and the reinsurance capital particularly is over
$500 billion. With these strong capital positions in both the
insurance industry and the reinsurance, coupled with the
modeling efforts that have moved forward on terrorism
insurance, it appears to me that the industry is ripe to have
more private sector participation. Would you agree with that?
Mr. Driscoll. Absolutely. We have grown the capital base of
our industry over 300 percent since 2001. We responded to
Hurricanes Katrina, Rita, and Wilma in 2005, the four storms
that impacted Florida in 2004 to the financial crisis in 2008,
and to over $100 billion in natural cat losses in 2011 on a
global basis. And our industry collective balance sheet has
never been stronger.
Further to that, I think the willingness and ability to
both price and manage conventional terrorism risk is at an all-
time high. So, I absolutely agree with your comments.
Chairman Neugebauer. Thank you.
Mr. Csiszar, insured losses from the 9/11 attacks in
today's dollars I think is estimated to be over $40 billion.
The industry was able to absorb that, with some difficulty.
So 12 years removed from that, we have not seen any
attacks. But there have been major efforts in modeling
terrorism.
You mentioned in your testimony that the current $100
million trigger is probably too low, and that there is capacity
in the industry to take on more of that risk. And so would the
fact that the industry has, over the last few years, absorbed
fairly major events in the $25 billion, $30 billion, $40
billion range, what would be your suggestion as an appropriate
trigger if we were to change that?
Mr. Csiszar. I look at two things, Mr. Chairman. First of
all, if you were to withdraw the entire backstop you are
looking at creating a crater of 20 percent, basically. That is
huge. They can't handle that.
So what could we put in place to make it palatable? One
thing I looked at, for instance, was we have these ILS, they
are called, industry loss warranties. And these are in the
private markets.
What is the trigger in the private market? In the private
market, ironically, the most typical trigger for an ILW,
industry loss warranty, is $20 billion. Now, you can purchase
$10 billion or $15 billion, but it is a lot more expensive to
purchase that.
So my thought, in looking at what the industry loses on an
annual basis, as I said earlier, almost ritualistically paid
out in catastrophes, is somewhere between $15 billion and $25
billion. Then, you have this industry loss warranty trigger at
$20 billion. Somewhere in that range is what I would suggest.
Chairman Neugebauer. Thank you.
Mr. McGovern, recently some insurers have expressed their
willingness to underwrite terrorism risk for commercial
property even if the current program were to expire. For
example, John Doyle, AIG CEO of Global Commercial Insurance,
said he could see a market emerging fairly quickly for property
risk absent a backstop.
The CEO global corporate at Zurich also said his company
would continue to offer property coverage to his clients
without a backstop. Mr. Greenberg, CEO of CBR, has also made
similar comments.
Since Lloyd's is one of the industry's leaders in providing
standalone terrorism insurance, at a minimum do you feel that
the current program is too generous for property coverage?
Mr. McGovern. Lloyd's is a major leader in the standalone
market but I think we need to keep the level of capacity in
perspective. We calculate that our standalone terrorism market
in premium terms at Lloyd's for U.S. risks amounts to $460
million of premium for U.S. standalone terrorism.
Put that in the context of our overall premium income from
the United States at $12 billion. I think that tells you
something about the capacity of the market to allocate capacity
to major U.S. terrorism risks.
I think the other point that--and it is clear that capacity
is growing. I think what we worry about is the aggregation of
risk in key urban centers where asset values mean the ability
of the industry to absorb major exposures is always going to be
somewhat limited.
Chairman Neugebauer. My time has expired.
And now the gentlewoman from California, the ranking member
of the full Financial Services Committee, Ms. Waters, is
recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Neugebauer.
And I would like to thank all of our panelists who are here
today.
Of course, we all think about TRIA in relationship to 9/11.
And as it was said by perhaps more than one of the panelists
today, there is nothing to compare with what took place on 9/
11--the destruction, the loss of life and property, et cetera.
And so I am somewhat baffled by any resistance to making
sure that we have the kind of coverage that TRIA would provide
in the event of another terrorist attack. Those of us who--I
guess all of us are concerned about terrorism. All of us are
concerned about the ability for our country to not only
prohibit these kinds of acts but about restoration in the event
of such catastrophe.
Now, we have a lot of information. I am told that
reinsurance is a vital component of terrorism insurance
coverage; in the aftermath of September 11th, the reinsurance
industry 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 insurance capacity?
And I guess I would like to start with Mr. Sean McGovern,
the director of risk management and general counsel at Lloyd's
of London. Would you respond to that?
Mr. McGovern. Thank you for the question. It is clear that
the reinsurance market overall has grown, the global market has
grown, the North American reinsurance market has grown. And
indeed, the reinsurance market for terrorism risk has grown.
And the estimates I have heard is that the terrorism
reinsurance market in the United States is about $6 billion to
$10 billion. Compare that to the industry retentions, which are
currently estimated to be about $35 billion. There is clearly
somewhat of a gap there.
Now, it is clear that the reinsurance market could grow
further. I think the challenge we all have is that clearly,
thankfully, we have not had an event for many, many years. And
that inevitably has an impact on availability and price.
It is true to say that when events occur, people take
different view of risk and people price risk differently. And
that inevitably has an impact on capacity and price.
Ms. Waters. So what you are telling me in essence is that
if an event such as 9/11 occurred today, that the reinsurance
market, even with its growth, would not be able to handle it.
Is that correct?
Mr. McGovern. No. That is not what I am saying. I am saying
that actually the reinsurance industry could handle that
because of TRIA. The TRIA program actually gives the insurance
and the reinsurance industry the confidence to offer and make
available coverage.
Ms. Waters. Thank you very much.
Mr. Hartwig, you gave very powerful testimony. And I
learned something about the stress tests that you described.
Could you tell us how those stress tests are being carried
out? Who is being identified as the companies that have
capacity, stress tests? And how is it going?
Mr. Hartwig. Right. So it is the best known of the rating
agencies, insurance rating agencies, A.M. Best, which has
carried out these tests. They have looked at nearly 900 so-
called rating units, and they have looked at several hundred
that have significant terrorism exposure.
And the test that they basically run them through at this
point is actually a very, very modest test, something like a 5-
to 6-ton truck bomb, okay? That doesn't even come close to
approaching a 9/11-type event.
And so what they have found is that in the absence of TRIA
or a major restructuring of TRIA that would require insurers to
take on much more risk, they found that some insurers are, in
effect, overexposed today under that scenario in the absence of
TRIA or a TRIA that is significantly restructured.
Obviously, the larger the event that you would have, you
would expect to see more of this experience. So each and every
one of these insurers are going to be required to put together
a plan, and if that plan is inadequate they potentially face
downgrade action.
That raises their cost of capital, could cause the cost of
their reinsurance to rise, and many customers may not do
business with them, and those kinds of scenarios.
So it is an environment in which it is possible where,
under these stress tests, the available capacity winds up being
reduced in the marketplace, reducing competition.
The point I wanted to make there is that small insurers may
be small, but small- and medium-sized insurers as a group
provide a quarter of the TRIA capacity in the market today.
Chairman Neugebauer. The time of the gentlelady has
expired.
Ms. Waters. Thank you very much.
Chairman Neugebauer. The vice chairman of the subcommittee,
Mr. Luetkemeyer, the gentleman from Missouri, is recognized for
5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. McGovern, as someone who is from another country who
insures risks around the world, you indicated that there are
other countries that have terrorism insurance coverage for
their properties in those countries and you participate in
those.
Can you explain or give us an idea of some of the backstops
that other governments have? And are there any governments that
do not provide this backstop, so that the businesses within
those countries are totally insured by the private sector or
take the risk themselves?
Mr. McGovern. There are a variety of programs around the
world. Some countries don't have programs. But in the major
European economies like the U.K., France, and Germany, for
example, there are programs that have existed for some
considerable time.
Perhaps focus on the U.K. The U.K. program is a pooling
program with the industry, so there is an industry pool. The
backstop that the government provides is unlimited for all
types of terrorism cover. The industry pays a premium for that
coverage.
Pool Re, which is the company that operates the pool, is
sitting on 5 billion pounds worth of assets. So it can be made
to work, to have a mechanism whereby the industry pays for the
government backstop. Arrangements in other countries are
different.
Mr. Luetkemeyer. Okay. You indicated that you apparently
had insured or provided terrorism risk insurance here in this
country before 9/11. Is that correct?
Mr. McGovern. Terrorism insurance was generally just folded
into all risk policies, so it wasn't--
Mr. Luetkemeyer. Okay. My question is, if you were here
before 9/11, how did you model it?
Mr. McGovern. Interestingly, before 9/11 no one really
modeled terrorism risk in the United States. We modeled
terrorism risk in the U.K.
Mr. Luetkemeyer. So it was just a throw-in coverage at that
point.
Mr. McGovern. It was not excluded from the policy.
Mr. Luetkemeyer. Since then you do model, I take it?
Mr. McGovern. We do model, and there have been developments
in modeling terrorism risk. But those models are limited by the
quality of real event information.
Mr. Luetkemeyer. Okay. One of the things that has been
discussed a couple different times already--and Mr. Hartwig
brought it up--is the problem with if we change the structure
of our system right now we may squeeze out some of the small or
midsize guys.
Mr. Driscoll's testimony indicates that there continues to
be an influx of cash into this industry, into the reinsurance
industry, so that there is capacity to take on more risk.
Mr. Driscoll, how do you respond to Mr. Hartwig's comment
about the risk to the small or midsize folks? Are they growing
enough to accept some more additional risk themselves, to be a
continued participant if we make changes? Or do you think that
if we make some significant changes they may be out in the
cold, they won't be able to participate in this?
Mr. Driscoll. Yes. The smaller insurance companies are a
critically vital, important component of the overall industry,
but a very important part of our portfolio.
And we are sensitive, I think, to the needs of smaller
insurance companies. They tend to be much more reliant on
purchasing reinsurance protection for really any perils,
whether it be natural catastrophes or terrorism.
So from our perspective as a reinsurance capacity provider,
we are raising our hands saying we are willing to support the
smaller segments of the insurance industry.
The challenge that the smaller insurance companies have is
the inability to effectively recoup terrorism rate. And this is
really a function of the fact that TRIA is a subsidized
program. It inhibits the natural process of charging an
appropriate risk premium.
At the State level, a lot of these companies are inhibited
with how much terrorism premium they are able to recoup. So
there is a natural mechanism by modifying TRIA and opening up
the amount of risk that the private industry is willing to take
that should feed through into the ability for insurance
companies, particularly smaller ones, to charge more premium
and thus be able to purchase more reinsurance. So there is
really a natural environment that exists.
Mr. Luetkemeyer. One last question before I run out of time
here along the same line. It would seem to me that as you sort
of transition away from the government backstop, larger--a much
more large--a larger portion being taken over by the private
sector, is there--do you think the reaction by the private
sector would be to be able to cap themselves with their own
risk?
In other words, if you are a small company, you would only
take a certain portion. You wouldn't have an unlimited backstop
on the upper end. You would only take on so much risk and then
you would partner with somebody else to be able to take on a
large risk? Or is that a viable option?
Mr. Driscoll. Yes. I think that it is a viable option. A
central tenet of any well-run and well-managed insurance
company is to balance the amount of risk you take against your
capital base. So that process occurs every day.
And there are financial mechanisms, particularly within the
reinsurance industry, that will help facilitate the capital
construct of smaller insurance companies, whether it be
proportional or excess protections.
Mr. Luetkemeyer. Thank you.
I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentleman from Missouri, Mr. Cleaver, is recognized for
5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman.
I am going to be a little parochial in presenting my
questions. I am from Missouri, and you have a problem if you
live in Missouri because if you come to Kansas, people say they
land--``I have just landed here in Kansas.''
And of course if you land in Kansas, you die, because there
is no airport. Some sports person just wrote a deal last week
about the 9-0 Chiefs saying, ``We are going to play descendants
of Dorothy.'' And of course, I don't think a woman in Missouri
is named Dorothy.
But one of the things that we have to deal with is we
have--the Missouri River is the longest river in North America.
It is the longest tributary in the United States.
Well, 54 bridges, all of which are insured by TRIA, or that
is a part of the insurance. Most people when they think about
terrorism, they are thinking of New York, the East Coast, Los
Angeles, or maybe Chicago.
But we have serious targets, or what we think would be
targets. So this is not, for me, just a committee exercise. It
is very real. Our power and light company is insured through
TRIA.
I guess one of the questions I am interested in--maybe just
hearing any of you--and I try to avoid volatile words, but how
many of you believe that TRIA is corporate welfare? Is there
anybody who believes that?
Mr. Driscoll. I will answer that question. I wouldn't use
the phrase ``corporate welfare,'' but there is an unnatural
element to TRIA in the sense that it is free and you are trying
to transfer risk for free. And so in that respect it creates
unintended consequences that in some cases are beneficial, but
more often than not are problematic.
Mr. Cleaver. Anyone else?
Mr. Hartwig?
Mr. Hartwig. Again, as has been alluded to a number of
times, I think, on this panel and on the committee, I think
that we have to look at the unique nature of terrorism risk,
that ultimately the bearer of that risk should be the entity
that possesses the greatest information associated with that
risk.
And that is certainly not anybody at this table. In fact,
that is the Federal Government.
And so when you are in a position like that, I think we
have to rethink the particular issue here, that it is
absolutely appropriate, in a circumstance such as this, that
some of the risk be shared in a public-private sector manner.
Mr. Cleaver. Does TRIA replace what would be significant
government exposure, Mr. Seo?
Mr. Seo. I'm sorry. Would you repeat the question. Does it
replace--
Mr. Cleaver. Yes.
Mr. Seo. --what would be--
Mr. Cleaver. Significant exposure by the Federal
Government.
Mr. Seo. I see.
Mr. Cleaver. By the taxpayers.
Mr. Seo. Right. Potentially, it does. There is a delicate
balance in the industry around a risk like this.
So I think there is some credence to the notion that by
taking on the risk in a controlled manner through TRIA, the
government is potentially reducing its long-term liability.
And actually to answer your question about the welfare, I
think initially not, but of course, the question is when does
it cross over and become that way? And that is an over-time
issue, not necessarily by-design issue.
Mr. Cleaver. Yes.
Mr. Hartwig. Sir?
Could I--just very quickly, it absolutely--TRIA does
insulate the taxpayer, again, to the tune of many, many tens of
billions of dollars. But you are also, in effect, you are
buying the delivery mechanism.
The reality is that the Federal Government has no effective
means for delivering the benefits in the absence of a TRIA-like
structure where it utilizes or piggybacks, in effect, on
insurers.
In the absence of a TRIA situation, you wind up with a
post-Sandy, FEMA-type scenario where people are still waiting
for their Federal Government aid.
Mr. Cleaver. Yes.
Mr. McGovern, what do you think would happen to the
uninsured losses if there is a terrorist event? Who do you
think will be approached to deal with uninsured losses?
Mr. McGovern. The insurance industry will deal with the
insured losses as it has always done--
Mr. Cleaver. No, but the uninsured?
Mr. McGovern. The uninsured losses?
Mr. Cleaver. Yes.
Mr. McGovern. That is a matter for Congress and the Federal
Government.
Mr. Cleaver. Thank you.
Chairman Neugebauer. I thank the gentleman.
Now, the gentleman from New Jersey, Mr. Garrett, is
recognized for 5 minutes.
Mr. Garrett. Again, thank you, Mr. Chairman, for holding
this hearing. I just have a couple of questions.
Mr. McGovern, I will start with you, I guess. The CEO of
one of the world's larger terrorism insurers was recently asked
about the modelability of conventional terrorism risk, and that
CEO stated that the insurance industry ``doesn't service itself
well by claiming that terrorism risk can't be modeled
effectively,'' and ``The argument that the industry cannot
underwrite conventional terrorism was a classic example of
driving business out of the market and into the government
solutions.''
Would you like to comment? Do you disagree with the
statement of I guess one of your competitors out there?
Mr. McGovern. It is true to say that terrorism risk
modeling does exist. But, as I said in my testimony, it is in
its infancy. At the end of the day, models are just models.
They should inform your decision; they shouldn't drive your
decision.
Models are at their most reliable when they have lots of
real-life world events inputted, which is why catastrophe risk
modeling is so much more advanced than terrorism risk modeling,
because we have had a lot of natural catastrophe events, which
makes models more reliable.
Mr. Garrett. Okay.
Mr. McGovern. Terrorism risk models are there, but I think
people have a cautious approach to value of those risk models--
Mr. Garrett. How long have you been doing it in Europe,
modeling it?
Mr. McGovern. I wouldn't want to put a year on it, but
clearly--
Mr. Garrett. Ballpark, like 5 years, 6 years?
Mr. McGovern. Probably 20 years.
Mr. Garrett. Yes, because it goes back quite a ways, I
thought. Yes.
Mr. McGovern. Yes.
Mr. Garrett. How many years is an appropriate amount of
time to say we actually have a model there?
Mr. McGovern. Thankfully, the frequency of these events is
very low--
Mr. Garrett. Right.
Mr. McGovern. And that has an impact on the validity of
models.
Mr. Garrett. Right.
Dr. Hartwig, you said there are no major structural defects
in the law right now. Let's look at Boston. Can you or anybody
else tell me, was Boston a terrorist attack event? Has that
decision been made yet?
Mr. Hartwig. As defined under TRIA, there has been no
certification associated with that. In my testimony, and I
think in the testimony of others, I think that there has been a
call for a clarification of the certification process.
Mr. Garrett. That is a pretty big major structural--if we
don't--after an event which, if you recall, was--
Mr. Hartwig. I think it is generally agreed that there
needs to be some tightening of that certification process, and
I and others have called for that.
Mr. Garrett. Okay.
Mr. Driscoll, in order to not establish, but to grow the
market into these areas, if we were to modify TRIA as it stands
right now--raise the caps, do some other structural changes,
what have you--is there an appropriate length of time that we
should do so in legislation?
In other words, you have two ends of any spectrum, right?
One is to say, ``We are going to do this--the next TRIA bill is
only going to be for 12 months, so the next one is going to be
a permanent temporary program.''
So what would the industry be looking at in order to be
responsive?
Mr. Driscoll. I can only speak for Validus Re rather than
the industry, but--
Mr. Garrett. Okay.
Mr. Driscoll. --from our perspective, the changes to the
program that we think would be most beneficial should be
largely nuanced.
One, there is a permanence that could be considered in
context of nuclear, chemical, biological, and radiological.
From our perspective, we feel strongly that those are
uninsurable risks, not in the determination of frequency, but
the severity and potential to bankrupt the industry. And so, a
government backstop with respect to that element or that type
of terrorism is vitally important.
With respect to conventional, the industry capital base is
growing. It continues to grow. We are highly confident in its
permanence and reliability.
We would expect that any changes to avoid dislocation in
the market, whether it to be to workers' comp insurers or
smaller insurers or the largest insurers, should be done
gradually over time.
And so whether that is 2 years or 5 years, there ought to
be a glide path that would help the industry capital flow in,
and respond to the additional demand.
Mr. Garrett. Okay.
And I guess I will just make a comment on a question--that
is to a question on the other side. At the end of the day,
anything that we do here is not eliminating the risk. Is that
correct?
Mr. Driscoll. Absolutely.
Mr. Garrett. And so all we are really doing is deciding who
pays, whether it is the person who--the individual, the entity
who has the beneficial use of the asset--
Mr. Driscoll. Yes.
Mr. Garrett. --whether that person pays for the fact or the
privilege or the right of having that asset, or whether it is
the American taxpayer who is actually footing the bill.
That is ultimately what we are deciding. Who pays? The
person who benefits or the taxpayer?
Mr. Driscoll. Absolutely. The strength of our industry is
the capital construct that helps facilitate fund inflows after
disruptive events to help rebuild our infrastructure and get
our citizens back on their feet.
Mr. Garrett. Thanks a lot. I appreciate it.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from Arizona, Ms. Sinema, is recognized for
5 minutes.
Ms. Sinema. Thank you, Mr. Chairman.
My question is directed to any of the gentlemen who are on
the panel. And thank you all so much for being here today.
My district in Arizona is home to the largest public
university in the country, Arizona State University. There is
significant concern at home that with a possible elimination of
TRIA coverage or without the opportunity to get TRIA coverage
that ASU may not be able to afford terrorism coverage on its
own.
I am wondering if any of you could expand on the impact
that the expiration or adjustment of TRIA would have on our
Nation's public universities such as mine.
Mr. McGovern. I can't comment specifically on universities,
but I think if we felt--if Lloyd's felt that TRIA was crowding
out the private market, our testimony would be different today.
Second, and as I have said before and as other panelists
have said, capacity is in the market because TRIA exists.
Without TRIA, I think there would be uncertainty for
policyholders around the country as to whether or not they
would be able to get adequate coverage for terrorism risk.
Mr. Hartwig. And if I could add on specifically to your
question about universities, when you think about the diversity
of the exposures of property, liability, workers' compensation,
exposures that exist on a campus like ASU, you are talking
about scientific facilities, you are talking about sports
stadiums, you are talking about dormitories with thousands of
students, classrooms with thousands of students. You are
talking about many other types of--you are talking about
infrastructure associated with the university.
You are talking about a type of risk that can only be
insured today really because of the existence of TRIA, just to
echo what Mr. McGovern said. It is a very diverse risk and I
think one that is particularly dependent on TRIA.
Ms. Sinema. Thank you, Mr. Chairman.
And, Dr. Hartwig, a follow-up question: I remember in the
immediate aftermath of September 11th, the commercial property
and casualty insurance market for terrorism coverage basically
evaporated. And then again in 2005 and 2007, when expiration of
the program was looming in Congress, a majority of insurance
companies in our country moved to file conditional exclusions,
indicating that they wouldn't be interested in offering
terrorism coverage absent TRIA.
Has anything changed in the market since 2007 that would
give this panel or this body cause for optimism that the
private market is willing to accept significantly more
terrorism risk than we have seen in the past?
Mr. Hartwig. Incrementally, over the last 6 or 7 years, we
have seen some capacity come into the market, and, as I said,
incrementally. And as I said in my testimony, the reason that
capacity came in is not in spite of TRIA; it is because of it.
It is also because of the fact that we have not had a major
successful terrorist attack on U.S. soil. Again, if we had had
one--and there have been dozens of attempts on U.S. soil,
thankfully, all but one of which has been thwarted--I think we
would be having a very different conversation here today.
So at the end of the day, it is likely that these
conditional exclusions are going to come back into the market
as we move into 2014 and markets begin to look ahead to the 01/
01/2015 period, a period in which TRIA might not be in place
without a reauthorization.
Ms. Sinema. Thank you.
And Mr. Chairman and panel, one final question.
Dr. Hartwig, you briefly mentioned the issue of workers'
compensation insurance. Businesses in Arizona are required to
purchase workers' compensation insurance. They don't have the
option to exclude coverage for acts of terrorism in the context
of workers' comp. So for those that provide workers' comp
coverage, it is mandatory to include this terrorism coverage.
What would be the impact of this body not reauthorizing
TRIA or significantly changing the structure of TRIA to
individuals who are purchasing workers' compensation for their
employees?
Mr. Hartwig. Basically, every employer in America has to
buy workers' compensation coverage. It is required by law in
all 50 States, not just in Arizona. And it is also the case
that under law, insurers cannot exclude terrorism coverage
under a workers' compensation policy.
So I think we have heard several times on the panel already
that is a particular area of concern that really if there is a
bottleneck in terms of capacity, it exists in a number of
places, but it is particularly explicit or particularly strong
in the area of workers' compensation.
Ms. Sinema. Thank you, Mr. Chairman.
And thank you, Dr. Hartwig.
Mr. Chairman, this is a growing concern for employers in my
district so thank you for allowing me the opportunity to speak.
Mr. Driscoll. Mr. Chairman, may I have a moment just to
respond to one of the earlier questions, with respect to post-
event and the industry response?
I think it is important to understand that the perception
around transnational terrorism risk prior to 2011 within the
insurance industry was that it was not a major risk. And so I
think it is reasonable post-event for there to be a natural
reassessment of risk. We see that with any unique event that
occurs in our industry.
Since that time, the market has responded with significant
additional capacity and additional capital for terrorism risk.
Ms. Sinema. Thank you.
Chairman Neugebauer. I thank the gentleman.
And now the gentleman from Florida, Mr. Ross, is recognized
for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman.
As I mentioned in my opening statement, I very much believe
in market-based solutions for risk problems, and I see TRIA as
being a necessary evil at the time that we created it. Based on
the testimony today, I understand the significance of
maintaining TRIA in place, but I also understand that it is
very important that we have to make a transition.
And hearing from the panel today that we have a significant
amount of private capital and capacity in the private markets
out there is very encouraging. Now, how do we make that
transition to provide more incentives and less impediments, is
an issue that we have to face.
Dr. Seo, one of the things that has intrigued me ever since
I read your article several years ago about the Nation's casino
has been the use of ILSs. These cat bonds--we have used them in
Florida for our Florida Hurricane Catastrophe Fund--seem to be
an opportunity for diversification and growth, in terms of
market share, that may offer us an opportunity to make
available more capacity in the private sector.
You mention in your testimony that if terrorism risk were
bundled with natural catastrophe risk, such as hurricane and
earthquake, the efficiency of ILS coverage for terrorism risk
could potentially be improved. Would you elaborate how this
would benefit all types of coverage, not only terrorism, but
maybe also natural catastrophe coverage?
Mr. Seo. In this case, actually, the benefit was to the
terrorism risk.
Mr. Ross. Right.
Mr. Seo. And I would say that the impact on the natural
catastrophe coverage is relatively neutral.
Mr. Ross. But it wouldn't--would you consider there would
be an increase or a decrease, or would it just remain stable?
Mr. Seo. Overall efficiency in the system would be
increased for sure--
Mr. Ross. Good.
Mr. Seo. --by doing this type of bundling arrangement. See,
that is the difficulty when you isolate risk too much on a
standalone basis--any risk--it becomes very expensive to cover.
Mr. Ross. So you combine the risks?
Mr. Seo. Correct.
Mr. Ross. Let me ask you this question: Could we--and I
hate to digress on this, but I have to ask this question
because the NFIP is an issue that we have to face, but could
the use of these insurance-linked securities assist us in
diluting and reducing the amount of premiums in the flood
insurance program?
Mr. Seo. Yes, absolutely.
Mr. Ross. Good.
Mr. Driscoll, one of the things that I am concerned about
is not only incentives, but impediments to private capital. And
I am sure you are familiar with the Obama-Neal reinsurance tax
that is out there, which concerns me greatly.
Do you feel that this tax would limit the capacity or the
capability of insurers and reinsurers to take on more risk from
terrorism or flooding and thus be counterproductive to our
long-term plan to try to bring back or at least create a
private market and reduce the size of government involvement?
Mr. Driscoll. Yes. Whether it is flooding, terrorism, or
any other natural peril, reinsurers need to be able to pool
risk to gain diversification. And any limits on affiliated
reinsurance would impede global risk-pooling--
Mr. Ross. Significantly.
Mr. Driscoll. --and that, in essence, fragments group
capital and would impede market development, and I think
ultimately it increases consumer price.
Mr. Ross. Dr. Hartwig, it has been talked about, in fact by
Mr. Csiszar, with regard to workers' compensation insurance.
Look, it is as strict liability statute. It requires that every
employer provide it. We understand that it is backed
predominantly by reinsurance and reinsurance instruments.
And I think that the impact financially doesn't come
initially from the occurrence of an event as to the
availability and affordability of workers' comp insurance. It
has to do with whether there is a market that allows for
affordable and available workers' compensation insurance.
So I guess my question is--and I will go to you, Dr.
Hartwig--TRIA expires December in 2014. If it expires, what
impact would there be on the workers' compensation market for
availability and affordability of insurance?
Mr. Hartwig. For workers' compensation, I think there would
be a pretty swift and a pretty significant impact. It would
begin well before the end of next year, as again, we are
looking forward into 2015. But some carriers might even
position themselves ahead of time.
Under the expectation of a lack of TRIA protection
beginning in 2015 you would expect insurers, because of this
aggregation issue that they have with respect to workers' comp
risk, property risk, liability risk, and everything that they
are exposed to, they would need to pare that back in some way.
They are also very concerned about workers' comp because
the potential liability under a workers' comp claim is
effectively unlimited. A building has a certain value; for a
human life, someone who may be a quadriplegic, it is unbounded.
Mr. Ross. Quickly, Mr. Driscoll, I have 10 seconds--you
talked about risk mitigation. I think risk management is
absolutely important. What do you consider to be risk
mitigation in terrorism insurance?
Mr. Driscoll. I think, very quickly in context of property,
because it is a huge topic--
Mr. Ross. Structural.
Mr. Driscoll. Structurally, I think there are boundaries
that could be put in place. There are security measures that
are put in place. There are a variety of factors.
All of these things are methods to not only improve the
risk but to actually reduce the premium associated with the
terrorism surcharge.
Mr. Ross. Thank you.
My time has expired. I yield back.
Chairman Neugebauer. I thank the gentleman.
The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5
minutes.
Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking
Member Capuano.
And again, to all of our panelists, let me just repeat what
I said in my opening remarks, and thank you for being here and
for your testimony.
As you can probably imagine, it is just amazing for me to
be a freshman serving here in Congress and to be able to go
back and say to my constituents that I have had the opportunity
to address such scholarly individuals as you.
It is also equally amazing to be sitting here and talking
about all of the issues with TRIA that we are talking about
today in this wonderful America that we live in. It is very
difficult for me to even believe that I would be sitting in a
hearing where people would be against TRIA, against anything
that would be protecting us and insuring us from terrorism.
I want to start by also thanking you, because I used to
represent one of the largest single campus universities in the
United States and worked there as a senior vice president. So
when you think about not only universities but K-12
institutions, I want my constituents to see that we are putting
a face on what we are doing. And I appreciated your answers and
responses to that as well as to the workers' compensation
question that my colleague asked of you.
Let me switch and ask you, as we think about policy price
sensitivities and government support, has anyone examined the
price sensitivities of changes in the trigger value, deductible
amount, or co-sharing percentages?
And I can start with you, Mr. McGovern.
Mr. McGovern. We haven't done any of that analysis. And
that clearly is the balancing act that Congress is going to
need to grapple with as it looks at whether it wants to make
changes to the TRIA program.
On the one hand, how do you make changes to the program to
introduce more private capacity into the market without, on the
other hand, reducing take-up rates in the market or increasing
price? Take-up rates generally seem to be around 60 percent
nationwide. That is regarded as a success.
If you are changing the program in the name of increasing
taxpayer protection, if those changes result in higher prices
and lower take-up rates, I would just ask you whether you have
achieved what you set out to achieve in making those changes.
Mrs. Beatty. Any other comments on that?
Mr. Csiszar. If I could add to that, again, if I look at
all the natural catastrophes, and if I look at an event like
Hurricane Sandy, in the aftermath of every event, reinsurance
prices actually drop, because new capacity comes into the
industry in the expectation of making a greater profit. And the
next thing you know, they are all going after market share and
the profitability that they expected evaporates rather quickly
and prices drop.
Mrs. Beatty. Let me also ask you, what sort of contingency
planning has any of your industries undertaken to ensure
continuity of coverages for businesses that have secured
terrorism risk coverage in the event that there, God forbid,
would be a terrorist attack which results in damages that are
in excess of the $100 billion cap?
Mr. McGovern. As I mentioned in my testimony, I think
Lloyd's has a reputation for continuing to provide coverage
when other people don't. And certainly that was the case after
9/11, as was noted by Congresswoman Maloney.
Lloyd's takes its commitments to its policyholders
extremely seriously, and whether it is after a natural
catastrophe event or after a terrorism event, we will continue
to provide as much capacity as we are able to. But as I said in
my testimony, we always have to be very mindful of how we are
managing our aggregate exposures.
Mrs. Beatty. And lastly, as we approach the 2014 date, as
we look at reauthorization, we have proposals before us with a
5-year reauthorization and a 10-year reauthorization. Do you
have any opinions on that, assuming you would be favorable to a
5- or 10-year reauthorization?
Mr. McGovern. Lloyd's is in favor of a long-term extension
to TRIA. Whether or not Congress wishes to make any changes to
the TRIA program, our belief is that those should be made in
the context of maintaining the stability that the TRIA program
has already provided, so basically keeping the structure of
TRIA as is.
If there are going to be changes, bearing in mind the
balancing act that I mentioned earlier, those should be small,
incremental changes over a long period of time, which would
allow the industry to adapt.
Mr. Hartwig. And if I could echo that, again, I think what
makes the most sense from an economic stability standpoint,
from a stability standpoint within the insurance business in
general, is a long-term extension. And I should add that when
we look abroad at many of the terrorism insurance programs that
are abroad, these are long-term permanent programs in effect.
They are permanent.
Mrs. Beatty. Thank you. That sounds like a 10-year
extension to me.
Chairman Neugebauer. I thank the gentlewoman.
And now the gentleman from Wisconsin, Mr. Duffy, is
recognized for 5 minutes.
Mr. Duffy. Thank you, Mr. Chairman.
I appreciate the panel appearing today. I just want to be
clear on a couple of facts. In the private market policyholders
actually pay a premium for the coverage that they receive. Is
that correct? Does anybody disagree with that?
And the way that the current TRIA legislation works is that
the taxpayer does not collect a premium for the coverage that
they provide. Is that also correct? Do we all agree with that?
Does that provide a competitive advantage when you look at
the private market getting involved in terrorism insurance, Mr.
Csiszar?
Mr. Csiszar. Clearly, it is a subsidy.
Mr. Duffy. Thank you. I would agree.
Mr. Csiszar. And to the extent that it is a subsidy, I
think my friend, Mr. Driscoll, put it well before. The price
signals disappear. This is is not a natural market, whereas if
you were to charge a price--and I would suggest we don't make
the same mistake as we did with the flood insurance, which we
underpriced, which made things worse, actually, in a way--but
there is certainly that if you can have an actuarially sound
premium and that would send the appropriate price signals to
the market, not just in terms of capacity but also mitigation
efforts.
Mr. Duffy. Does anybody disagree with that on the panel?
Mr. Driscoll. I am a little dubious about the ability of
the Federal Government to set a well-established and sound
actuarial price, and I say that with the utmost passion--utmost
respect. I think the private market can effectively do that,
but I am concerned about--
Mr. Duffy. But if people--
Mr. Driscoll. I am concerned that if you establish a
premium rate within TRIA, it truly does become a permanent
vehicle.
Mr. Duffy. And I share that concern as well, but to think
that we provide reinsurance and don't collect a premium,
though, I don't--I share your concern, too, about the
government being able to price that.
Mr. Driscoll. There is a post-event recoupment mechanism,
so there should be, it is never net neutral, but it is designed
to be net neutral in terms of the impact on the taxpayer. But
it is--again, it is--there are challenges there.
Mr. Duffy. I agree. My concern is that no market works like
that, though, that we are going to try to recoup the cost at
some later point from people who may be in the space or not be
in the space. It doesn't make a lot of sense for me when I try
to protect the taxpayer, but I do get the recoupment.
Mr. McGovern, would you like to respond?
Mr. McGovern. I was just going to add that our experience
in the U.K. with Pool Re, where the industry does pay for the
government backstop, that is not an actuarial-based pricing; it
is a pricing based off your relevant premium. So it is not
actuarially sound as a pricing mechanism. It effectively
amounts to a tax, and clearly what you have is then you create
an infrastructure and bureaucracy around the management of the
collection and distribution of those funds.
Mr. Duffy. But it is actually--it is not a tax because they
are providing a product, right? You are actually getting a
product, which is reinsurance for terrorism. So the tax
argument doesn't really work, does it?
Mr. McGovern. It creates a fund. That is the first fund
available for losses outside of people's limits.
Mr. Duffy. But one would argue that you tax to then
redistribute. You are actually paying a fee for a service,
which is reinsurance, correct?
Mr. McGovern. Yes, that is right.
Mr. Duffy. And so I want to make sure that--I don't think
the argument that this is a tax holds water.
Mr. Csiszar as well, is it your testimony that you believe
that the $100 million trigger is too low and it could actually
go up to $20 billion? Is that your testimony?
Mr. Csiszar. Yes.
Mr. Duffy. Okay. Does anyone disagree that the $100 million
trigger is too low, or does everyone--does the panel think--Mr.
Hartwig, do you think the $100 million trigger is about right?
Mr. Hartwig. I think the programs work very well with the
current $100 million trigger, and when we look at the fact that
the industry overall is retaining somewhere in the $35 billion
range in aggregate, we can see that, in fact, within that
space, there has been plenty of participation by private
insurers, by private reinsurers, and there is the ability to
expand.
As we have already heard, there is only maybe $7 billion,
$8 billion, $9 billion dollars of private reinsurance cover for
the terrorism market in place today. So there is plenty of gap,
there is plenty of room in here to expand.
Mr. Driscoll. Just to clarify, on that $7 billion, $8
billion dollars, that is standalone terrorism treaty
reinsurance sold in the United States. There are many, many
billions of dollars of other terrorism limit sold in the
reinsurance market that is bundled together with property and/
or casualty. So the market is substantially bigger than--I just
want to be crystal clear on that.
Mr. Duffy. Mr. Driscoll, do you agree that we could
increase the $100 million trigger?
Mr. Driscoll. I think with respect to conventional
terrorism--with nuclear, chemical, biological, and
radiological, it is a different dynamic. It is a different type
of peril.
But I think with conventional terrorism, the single risk
market right now has been estimated by third parties as $2
billion to $2.5 billion. That is one single location. These are
large commercial locations, typically in metropolitan areas.
I think if you view the $100 million trigger in the context
of a single risk, undoubtedly the market has much more capacity
for that. So yes, I would agree.
Mr. Duffy. My time has expired. I yield back.
I would have liked to have gotten to you, Mr. Csiszar.
Chairman Neugebauer. I thank the gentleman.
The gentleman from California, Mr. Sherman, is recognized
for 5 minutes.
Mr. Sherman. I understand the desire to try to protect the
taxpayer and the Treasury, but as we have seen with flood
insurance, but even more here with terrorism insurance, if the
event occurs Congress is going to pass the supplemental
appropriations bill. We can come into this room and be as
stingy as Ayn Rand might inspire us to be, but if there is an
actual terrorist instance and we are on the Floor, we will be
as generous as Monty Hall.
There is no way to protect the Treasury, especially when we
are in here. If a hurricane hits, it is not the fault of the
Federal Government. And I realize there are environmentalists
and climate change and whatever, but certainly the hurricanes
that have hit so far. If a terrorist attack occurs on U.S.
soil, that will be regarded as a failure of American
antiterrorism policy directed by the Federal Government.
So I think our effort here is to develop a system by which
the Federal Government will either get premiums in advance or a
recruitment process, encourage people to have insurance, and
know that we will be providing aid to those who suffer
uninsured losses from a terrorist act.
Now, Dr. Hartwig, there have been some who maintain that
there have been major improvements in the capital sector's
ability to model and price for terrorism risk. Are you aware of
such improvements?
Mr. Royce and I just got out of the Foreign Affairs
Committee. I don't think there is anyone involved in foreign
policy who could give you an actuarially reasonable estimate of
what the risk is of a major terrorist act here in the United
States. Do you have any--could anybody in your world know how
to do this?
Mr. Hartwig. I think nobody at this table has accurately
predicted a terrorist attack before it happened, and I don't
think we are about to. And we have heard several times that our
ability to model terrorism is very crude and in early stages
relative to natural disaster risks such as hurricanes, where we
have thousands and thousands of actual data points to run in
the system. We have absolutely nothing close to that when it
comes to terrorism.
Mr. Sherman. And the very fact that we have different rates
in different areas--I represent a desert; flood insurance is
cheap or unnecessary in most areas. Earthquake insurance is
more expensive in Los Angeles than it is in Kansas. That is
because you actually know what might happen.
I can't tell you that the Rose Bowl has less or more risk
of a terrorist attack than some stadium in another part of the
country.
Mr. Csiszar, you said that yield may drive or is driving
capital flows into the private reinsurance market. We are
seeing yields on bonds and other safer instruments going up.
Wouldn't that leave the need for government to continue to act
in this capacity, at least for several more years as we see
yields on more traditional investments growing?
Mr. Csiszar. This sector, I think it is fair to say,
attracts investors that have a taste for higher risk. And I
don't think that doesn't change. That risk premium keeps moving
up with the yield on Treasuries and so on. You will always have
that spread.
So my sense of it is that it is probably more permanent
capital, but on the other hand, the jury is still out because
this is a phenomenon that we have only seen in the last 3 or 4
or 5 years since the financial crisis.
Mr. Sherman. Okay, but it is--the additional advantage this
market has due to the low risks--low yields prevailing in the
economy will probably evaporate before Congress acts on the
legislation that we are considering.
Mr. Csiszar. It depends on what the Federal Reserve does, I
guess.
Mr. Sherman. We will have another hearing on that.
Let's see--my time has virtually expired. I yield back.
Chairman Neugebauer. I thank the gentleman.
And Mr. Royce from California is recognized for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
As chairman of the House Foreign Affairs Committee, it is
clear to me that the threat of global terrorism has not
dissipated since 2001. So the question before us today is not
whether terrorism insurance is needed for commercial
policyholders; the question is what role the Federal Government
should play, and will play going forward in the marketplace.
And I was going to ask Mr. Driscoll, in your opening
statement you state that there is adequate reinsurance capacity
to cover the insurance industry's current $27.5 billion
retention under TRIA, and that capacity could grow over time.
How do we gauge this capacity? What sources and numbers
should we be looking to as policymakers? How do we maximize the
capital stock there, the private capital stock?
And then I was going to ask Mr. McGovern for his comments
on this as well. If this committee does adopt a policy of
changing the industry retention level, what numbers should we
look to? Should it be flexible? Should it be based on market
conditions?
And so let's hear from you gentlemen, if I could.
Mr. Driscoll. Sure. I think it is probably helpful to think
about that $27.5 billion in the context of a few other figures.
The notional limit purchased on a global basis for natural
catastrophe is over $300 billion currently. The capital base of
the industry is close to half a trillion dollars.
Terrorism within the United States on a standalone basis,
as I noted earlier, is $7 billion to $8 billion, but a number
substantially larger than that if you include terrorism that is
purchased on a bundled basis with other traditional insurance
coverages.
And so I think that the best way to source that
information, the best way to collect a view on industry capital
is probably work with trade bodies like the Reinsurance
Association of America (RAA) or Avier, which represents Bermuda
insurance and reinsurance carriers, and clearly working with
Lloyd's of London, which is not only one of the largest global
writers of insurance terrorism but also reinsurance terrorism.
Mr. Royce. Let's hear what Lloyd's of London has to say
about it.
Mr. McGovern. Congressman, it is very difficult to predict,
and you are probably sensing that there are some differences of
opinion about what we think the reinsurance industry could cope
with. And I think the problem is that I think the reinsurance
industry is very well-capitalized, unquestionably, but that
doesn't necessarily lead to a very dramatic increase in the
reinsurer's ability to provide reinsurance capacity,
particularly in major urban areas with large accumulations of
asset values, when the decisions about the deployment of
reinsurance capacity will come down to an assessment about how
individual reinsurers are managing their aggregate exposures.
So it is a complex issue. It is not my place to sort of
throw out numbers without understanding what the implications
would be.
Because as I have said before, the balancing act for
Congress in looking at TRIA renewal is if step changes are made
with the intention of increasing private market participation,
but that doesn't--that leads to a reduction in take-up rates
among commercial policyholders, which are currently pretty
good, then actually you have reduced the amount of the
insurance capital at risk rather than increased it.
Mr. Royce. Let me ask another question, and it goes back to
something we did in 2005 in the House. It never made it into
final law, but in our version of TRIA reauthorization at that
time there was a mechanism allowing direct writers to establish
TRIA capital reserve funds, and these funds gave the option to
set aside premiums collected under TRIA to help ensure that
taxpayers are repaid for government outlays in the event of an
attack. Insurer obligations under the program, including
deductibles and including the co-share requirements, could also
be met with these funds.
And I would ask Mr. Hartwig and Mr. Csiszar, do you support
looking at similar reserve mechanisms as we look towards TRIA
reauthorization?
Mr. Hartwig. If you are talking about reserving in advance
types of situations, and I think maybe that is what you are
discussing there, I think that there has historically been an
issue with that, and the issue with that is these typically
wouldn't be recognized for tax purposes. And so, these become
extraordinarily expensive.
Mr. Royce. We had believed at the time that we had worked
out something with the Ways and Means Committee that would
guarantee that we had avoided that pitfall, but--
Mr. Hartwig. That is the principal objection I have heard
in the past, so I am not sure it is mine to render a final
opinion on that. I certainly would defer to the advocacy trades
in the organization who would be in contact with their members
on that.
Mr. Csiszar. Congressman, I didn't mention it in my verbal
summary, but in my written testimony it is pretty clear that I
would support that kind of a reserve mechanism.
The reality of it is that European companies--the U.K.,
France, Italy, Germany, Spain, you name it, the OECD, European
OECD countries--do, in fact, have what they call equalization
reserves. And not just for terrorism, but for catastrophes in
general.
Mr. Royce. I think we should rename them, Mr. Chairman.
Thank you, Mr. Csiszar. I appreciate it.
My time has expired. Thank you, sir.
Chairman Neugebauer. I thank the gentleman.
The ranking member of the subcommittee, Mr. Capuano, is
recognized for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman.
I want to thank the members of the panel for being here
again for another TRIA hearing.
I just want to be clear: There is no one on this panel who
actually believes that if, God forbid, there was another
significant terrorist attack in a downtown metropolitan area or
in a cornfield in the middle of the Breadbasket that the
American people should not respond to that immediately and do
whatever it took to deal with the issues. Does anybody here
think that we should not respond?
I knew the answer is no. I presume the answer is no. But if
you have the coverage to say we shouldn't, please do.
So that being the case, oh, go ahead?
Mr. Seo. I'm sorry. I am not sure what you mean by respond.
Respond--
Mr. Capuano. Respond to whatever it took to deal with the
issue, with or without TRIA or anything else. Do you think that
the U.S. Government, the people of America, should allow their
fellow citizens to suffer a nuclear or biological attack
without action?
I didn't think so. So now, all we are talking about is when
do we step in. We are not talking about whether we will.
There is nothing that anybody here has suggested nor has
suggested to me ever that the American people shouldn't step in
at some point. The question is when? What is the degree? That
is the argument from day one.
And here is the question--the question that I thought Mrs.
Beatty asked very clearly that did not get a response. It is my
understanding that when any business--not just insurance--when
they have a larger risk of loss, that is a major factor in
determining the cost of the item.
When risk of loss goes up, cost goes up. That is natural.
Commercial enterprise. That is the way it should be.
So therefore, Mr. McGovern, if I told you your company now
would be exposed to something more than $100 million, now you
are going to be potentially exposed to $500 million, pick a
number, would that not play a factor in your determining rates
to be charged?
Mr. McGovern. It certainly would. The risk profile changes
and the costs associated--
Mr. Capuano. Mr. Driscoll, would you take that into
consideration in determining rates?
Mr. Driscoll. We manage risk concurrent with the size of
our capital base, so yes. I think the--
Mr. Capuano. So risk doesn't matter? Potential loss doesn't
matter?
Mr. Driscoll. --size of the industry, loss potential is
important.
Mr. Capuano. No, no, I am asking for your company. Your
company--
Mr. Driscoll. We take as much risk on as we think is
prudent with respect to managing for our shareholders and--
Mr. Capuano. And risk doesn't play a factor in determining
rates?
Mr. Driscoll. No, risk, absolutely does. That is what I--
Mr. Capuano. So it does?
Mr. Driscoll. Yes.
Mr. Capuano. So if your risk is exposed to a higher number,
your rates will go up. It is natural. I don't think it is a
complicated question.
Mr. Driscoll. Sure, yes.
Mr. Capuano. So if we change these triggers, it is
unequivocal, it is indebatable that rates will go up. Now, how
much? Nobody seems to know or seem to care, but they go up.
When rates go up, what happens when things get more
expensive? People don't buy it. Therefore the take-up rate goes
down.
That 62 percent or whatever it is we are hitting now goes
down. Does anyone here think that the take-up rate should go
down?
See, here we are again. We have a system with all of its
problems. And again, I have said from day one--I was here every
time we have had a TRIA hearing--I don't like the program. I
would like to come up with a better program. But it seems to be
working.
We have a great take-up rate that the industry told us a
long time ago that 60 percent take-up rate is reasonable. It is
normal. It is the target. We are there. I don't get any
complaints from people buying the insurance that it is too
expensive.
Mr. Duffy. Would the gentleman yield?
Mr. Capuano. No, not at the moment.
Mr. Duffy. Okay.
Mr. Capuano. I didn't interrupt you, so but what you have--
go right ahead.
Mr. Duffy. I was going to ask you, are we talking about
TRIA or Obamacare? I am--
Mr. Capuano. That is exactly why I didn't yield.
Mr. Driscoll. Congressman, can I--
Mr. Capuano. I have just spent an hour-and-a-half listening
to your nonsense, and you can't listen for 5 minutes to mine.
Mr. Driscoll. Congressman, can I just with respect to the
evolution of TRIA, to your point on rates, I think we would all
agree that since 2001, the average per unit cost for terrorism
has gone down pretty consistently, whether it be metropolitan
or rural areas. We have seen an expansion of the private
market--
Mr. Capuano. My time is limited. This is not a new issue to
me.
I just look at a program that is working, that I am not
getting any complaints about except by a few idealistic ivory
tower types, but I am not getting complaints about from anybody
in the business, and I am being asked to fix something that
doesn't seem to be broken. It seems to be working.
And that kind of concerns me, particularly when I am also
told that--we are told we are interested in small businesses
coming in, yet I am also told--tell me if I am wrong--that 67
percent of the companies writing TRIA insurance right now are
valued at less than $100 million. If we change that trigger, we
would probably push a whole bunch of them out.
How is that good for competition and pricing? Now, I am not
opposed--I am not sitting here philosophically telling you TRIA
is wonderful. I am actually agreeing, it is not.
But unless I hear a specific proposal with specific
consequences from those proposals so they have some idea what
we are doing, it is awfully difficult to argue that we should
mess with something that is working, that has worked reasonably
well, that no one is complaining about.
And so therefore, if you have concerns about the program, I
share them, but I think you have an obligation to give us
specific proposals with specific consequences of those
proposals as you see them. And then, we can have a discussion.
Other than that, this is a very nice and interesting
philosophical discussion that doesn't amount to a hill of beans
when everything is said and done because I still need things
built, I still need people employed, and I still use up more of
my time than I should.
Thank you, Mr. Chairman, for your indulgence.
Chairman Neugebauer. I thank the gentlemen.
And now the gentleman from Ohio, Mr. Stivers, is recognized
for 5 minutes.
Mr. Stivers. Thank you, Mr. Chairman. I appreciate you
having this hearing.
The benefit of going last is all the stupid questions have
already been asked, and if you are smart, you know what to stay
away from. I want to try to use my time as a summary.
You all agree that TRIA should be authorized, correct?
Could we just go down the line?
Mr. McGovern. Agreed.
Mr. Driscoll. Yes. We are proposing modifications, but
overall agreed.
Mr. Stivers. Yes. I understand.
Mr. Csiszar. Yes.
Mr. Seo. Yes.
Mr. Stivers. All right, so the panel all agreed that TRIA
should be reauthorized.
And, Dr. Hartwig, I want to focus--I want to correct the
record on something. A few of our committee members have said
something that is incorrect in this hearing and your testimony
helped bear it out, but is recoupment limited to only $27.5
billion under TRIA or can it go up?
Mr. Hartwig. No. The $27.5 billion is basically the
industry's retention. Above that, there are a couple of
recoupment mechanisms. One is mandatory--
Mr. Stivers. The Treasury Secretary can allow recoupment to
go above that amount, correct? Yes or no? That is all I need.
Thank you.
Mr. Hartwig. Yes. Exactly, yes, to the top.
Mr. Stivers. Thank you so much.
So let's talk about some changes you all agree on, I
believe, from listening to your testimony. You all agree that
we need a certification timeline, correct? Is there anybody who
disagrees with that?
Okay. And I have heard most of you say, and I think there
is--Mr. Csiszar is maybe a holdout, that changes in the program
on an incremental basis, on a threshold trigger, on an
aggregate retention, and a copay of excess retention, as long
as it is incremental, I think four of the five of you agree
with that. Let's--hold on, let's make sure that that is
correct. Is that correct?
Mr. Csiszar. Make it five out of five--
Mr. Stivers. Okay, five out of five agree that incremental
changes--but $20 billion is a little bit more than incremental,
sir.
Okay. So you all agree, five out of five, that some
incremental changes make some sense, and I think that is really
important to note.
And I want to take off on something that Mr. Capuano just
asked. I want to think through some of the risks as we make
changes. I happen to represent a district that has grange
insurance, motorists' insurance, State auto insurance, some
small P&C and workers' comp carriers that, if the changes are
too big, too quick, the result will be that those smaller
companies will exit the marketplace, and it will actually
concentrate the risk in fewer companies, and will there or will
there not be fewer private dollars at risk in the marketplace
because it will be concentrated in fewer companies?
Would everybody agree with that statement? Would anybody
disagree with that statement? Let me--nobody disagreed. Okay.
So I think that it is really important that we pay
attention and only make incremental changes so as not to push
the small insurers out of the marketplace. And, I think that
you all agreed that there is more private capital in the
marketplace now that is competing for market share and actually
resulting in lower prices for P&C and workers' comp with regard
to the terrorism risk out there. As long as we make those
incremental changes, is it true to say that the private capital
and the increase of private capital will be deployed in a way
as to continue to decrease the prices for ultimate customers
over the time period?
Isn't that where the private capital will deploy, Mr.
Hartwig? Do you want to--
Mr. Hartwig. Assuming no major event or sequence of events.
Mr. Stivers. Correct. Right. Okay. Well, we also haven't
had a major event since 2001.
Mr. Hartwig. I think it is easy to underplay the importance
of that.
Mr. Stivers. Yes. And that is why we are here in a time in
2013 when the program has actually never been used, so--and I
do want to just engage in a conversation with Mr. Csiszar,
because you have--I think you are the--are you the only one on
the panel who wants to charge an up-front premium?
Because I actually think that the current mechanism works
pretty well. There is a recoupment on the back end and I
believe it will happen. I believe it is set in such a way that
it can happen. We can change and play with the numbers in a
way, but I am frankly worried because the Federal Government
has such a horrendous record, whether it is FHA, flood
insurance--any time the Federal Government actually tries to
price risk, it is a horrendous disaster, and I guess I am just
curious why you would want to do that in this case?
Mr. Csiszar. Better to have something than nothing--
Mr. Stivers. Okay. I understand, better to have something
than nothing. However, the recoupment at 133 percent is
something, and it is a mechanism that I believe will work. It
is currently guaranteed on the first $27.5 billion, but I think
there is a way to change some of those things in an incremental
way over time.
In fact, every time we have reauthorized TRIA, we have
messed around or moved around the aggregate retention, the
copay for excessive reserves, and also the trigger. So it is
logical to see that we can move those things, but I think in an
incremental way.
So, thank you for your testimony. I think you have given us
great perspective on the fact that we need to reauthorize TRIA
and we need to do it pretty soon because there are people who
are writing policies starting in January that actually will go
past the expiration date, and so that creates some real
uncertainty in the marketplace.
Again, thank you for your testimony. I'm sorry I have gone
over my time, but I look forward to working constructively with
Republicans and Democrats to get TRIA reauthorized. Thank you
all.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And I would like to thank each of our witnesses today. I
think we have had a productive session today.
I thank my colleagues for participating in a very
productive dialogue. As I said at the beginning, I think it is
important now that the committee have a swift and deliberative
process here to bring some certainty to the market.
While this program expires in 13 months, many of these
policies will begin to be written here right after the first of
the year, and so it is my intention to move forward in a way to
bring as much certainty to the marketplace as we can.
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 is now adjourned.
[Whereupon, at 12:06 p.m., the hearing was adjourned.]
A P P E N D I X
November 13, 2013
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