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PROTECTING AMERICANS FROM

CATASTROPHIC TERRORISM RISK

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES

AND THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 27, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–123

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

JIM RYUN, Kansas, Vice Chair 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SUE W. KELLY, New York 

ROBERT W. NEY, Ohio 

VITO FOSSELLA, New York, 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

MARK R. KENNEDY, Minnesota 

PATRICK J. TIBERI, Ohio 

J. GRESHAM BARRETT, South Carolina 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

JIM GERLACH, Pennsylvania 

KATHERINE HARRIS, Florida 

JEB HENSARLING, Texas 

RICK RENZI, Arizona 

GEOFF DAVIS, Kentucky 

MICHAEL G. FITZPATRICK, Pennsylvania 

JOHN CAMPBELL, California 

MICHAEL G. OXLEY, Ohio 

PAUL E. KANJORSKI, Pennsylvania 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

ARTUR DAVIS, Alabama 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

September 27, 2006 .......................................................................................... 1

Appendix: 

September 27, 2006 .......................................................................................... 69

WITNESSES 

WEDNESDAY, SEPTEMBER 27, 2006

Abraham, Janice M., President and Chief Executive Officer, United Educators 

Insurance, on behalf of the Property Casualty Insurers Association of America .......................................................................................................................... 51

Ayer, Ramani, Chairman, President, and Chief Executive Officer, Hartford 

Financial Services Group ..................................................................................... 13

Case, Gregory C., President and Chief Executive Officer, Aon Corporation ...... 15

Dubois, Jacques E., Chairman and Chief Executive Officer, Swiss Re America 

Holding Company ................................................................................................. 17

Emek, Dr. Sharon, CBS Coverage Group, Inc., on behalf of the Independent 

Insurance Agents and Brokers of America, Inc. ................................................ 47

Harper, Edwin L., Senior Vice President, Assurant, Inc. .................................... 53

Heck, Warren, Chairman and Chief Executive Officer, Greater New York 

Mutual Insurance Company, on behalf of the National Association of Mutual Insurance Companies ................................................................................... 49

Kelly, Edmund F. (Ted), Chief Executive Officer, Liberty Mutual Insurance 

Company ............................................................................................................... 11

Knipe, Jonathan W., Senior Vice President, General Counsel and Director 

of Business Affairs, World Trade Center Properties, LLC ............................... 58

Nassetta, Christopher J., President and Chief Executive Officer, Host Hotels 

and Resorts, Inc. .................................................................................................. 19

Shapiro, Ira, Chief Executive Officer, Fisher Harris Shapiro, on behalf of 

the Real Estate Board of New York ................................................................... 55

APPENDIX 

Prepared statements: 

Ackerman, Hon. Gary L. .................................................................................. 70

Hinojosa, Hon. Ruben ....................................................................................... 71

Kanjorski, Hon. Paul E. ................................................................................... 72

Lynch, Hon. Stephen ........................................................................................ 73

Abraham, Janice M. ......................................................................................... 75

Ayer, Ramani .................................................................................................... 83

Case, Gregory C. ............................................................................................... 88

Dubois, Jacques E. ........................................................................................... 97

Emek, Dr. Sharon ............................................................................................. 110

Harper, Edwin L. .............................................................................................. 119

Heck, Warren .................................................................................................... 125

Kelly, Edmund F. (Ted) .................................................................................... 135

Knipe, Jonathan W. .......................................................................................... 145

Nassetta, Christopher J. .................................................................................. 152

Shapiro, Ira ....................................................................................................... 159

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Statement of the National Association of Realtors and the Institute of 

Real Estate Management ............................................................................. 171

(1)

PROTECTING AMERICANS FROM 

CATASTROPHIC TERRORISM RISK 

Wednesday, September 27, 2006

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES, AND SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittees met, pursuant to notice, at 10:04 a.m., in 

room 2128, Rayburn House Office Building, Hon. Richard H. Baker 

[chairman of the Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises] presiding. 

Present: Representatives Baker, Oxley, Bachus, Kelly, Ryun, 

Biggert, Fossella, Feeney, Hensarling, Garrett, McHenry, Campbell, Kanjorski, Maloney, Moore of Kansas, Capuano, Hinojosa, 

Crowley, Clay, Israel, McCarthy, Baca, Lynch, Miller of North 

Carolina, Scott, and Cleaver. 

Chairman BAKER. I would like to call this meeting of the Capital 

Markets Subcommittee to order. Today, we meet in a cooperative 

environment with the Committee on Oversight, chaired by Mrs. 

Kelly, who will conduct the hearing in the course of the second 

panel this morning. 

We also are reviewing the recently publicly released GAO report 

on the subject of unconventional weapons reinsurance coverage, 

and find the report to be of real value to the committee’s consideration. 

We have two very distinguished panels of witnesses from whom 

we look forward to hearing their perspectives on current market 

condition, and I will quickly summarize what I believe to be the 

important findings of the report: one, that the current structure of 

TRIA as passed by the Congress appears to offer little incentive to 

market participants to extend NBCR coverage; two, that while coverage for conventional weapons threats appear to have expanded 

within the market, unconventional coverage has not concurrently 

grown at all; and three, the conclusion reached by the GAO, to me, 

most important, given the challenges faced by insurers in providing 

coverage for and the pricing of NBCR risks, any purely marketdriven expansion of coverage is highly unlikely in the foreseeable 

future. 

I think it makes clear that the committee’s work and responsibility to respond to this observation is, indeed, important, and I am 

hopeful that we will hear suggestion as to how modifications to the 

2

existing TRIA coverage may be offered and some taxpayer responsible mechanism should be deployed, and for my own purposes, just 

wish to reiterate one element of a structure that I think important, 

and that is to view this assistance more in terms of a bridge loan 

as opposed to a grant, that at such time as it is necessary to call 

on the taxpayer to ensure market stability of the insurance industry, that at such time the industry returns to profitability, that any 

funds advanced be repaid to the taxpayer. 

In that fashion, we can ensure that there are favorable market 

conditions for stability in the insurance world, while at the same 

time not creating a moral hazard risk for taxpayers who would feel 

inappropriately taxed for purposes that would not necessarily be 

clear to them. 

Given those general overview statements, I welcome all of our 

witnesses to our hearing this morning, and I now turn to Mr. Kanjorski for any opening statement he may choose to make. 

Mr. KANJORSKI. Mr. Chairman, we return this morning to a 

question that we have often discussed in the last 5 years: how best 

to protect the American economy from terrorism risk. After the Al 

Qaeda attacks of 5 years ago, reinsurers curtailed the supply of terrorism insurance, and insurers began to exclude such coverage 

from policies. In response, Congress belatedly enacted the Terrorism Risk Insurance Act to address these pressing problems. Last 

year, after encountering an unnecessary delay, we decided to extend this law for 2 more years. 

TRIA is critical to protecting our Nation’s economic security. We 

also designed TRIA to be a temporary backstop to get our Nation 

through a period of uncertainty until the private sector could develop the models to price for terrorism reinsurance. I agreed with 

this decision. The reinsurance industry is dynamic, and we should 

not interrupt the development of new products. 

That said, however, it has become increasingly clear that it will 

take some time for the private marketplace to develop and offer 

terrorism reinsurance products, particularly for nuclear, biological, 

chemical, and radiological threats. Yesterday’s report by the General Accountability Office concludes that these risks are distinctly 

different from those hazards that are predictable, measurable in 

dollar terms, random, and unlikely to result in catastrophic losses 

for an insurer. Given these challenges, the GAO found that, ‘‘any 

purely market driven expansion of coverage,’’ for these specialized 

terrorism risks is ‘‘highly unlikely in the foreseeable future.’’ 

Late last year, when the House passed the initial bill to extend 

TRIA, we included language to provide protection against nuclear, 

biological, chemical, and radioactive terrorism incidents. We also 

included provisions to provide protection against domestic terrorism events and incorporated group life insurance as a covered 

line. Unfortunately, the final agreement adopted none of these reforms. 

We need to revisit each of these matters in the coming year before TRIA once again expires. We additionally need to work to develop a comprehensive, long-term solution to the problem of insuring terrorism risk, rather than continuing to address these issues 

on an ad hoc basis every 2 years and creating unnecessary uncertainty for the marketplace. 

3

To the extent possible, I continue to believe that any workable 

solution should allow for the private sector to underwrite the terrorism risks that it can cover. However, because terrorism risk is 

a societal problem and because the size of certain catastrophic terrorism risks would likely exceed the resources of the private sector, 

the Federal Government will likely need to play some role in this 

new system. 

Many of our witnesses today have already begun to think about 

what a long-term solution to these matters should look like. I look 

forward to hearing those ideas. I also want to assure them that I 

have an open mind on these matters. 

In closing, Mr. Chairman, I have regularly noted that the provision of terrorism insurance is not a Democratic or Republican 

issue. It is an American issue, a business issue, an economic security issue. I therefore continue to stand ready to work with all interested parties on these important matters. 

Chairman BAKER. I thank the gentleman for his statement. 

Mrs. Kelly? 

Mrs. KELLY. Thank you, Chairman Baker, for agreeing to cochair this important hearing with me. I believe it is especially fitting that the last hearing of our subcommittees this Congress is 

going to be on the subject that is of the most importance to each 

of us. 

The September 11, 2001, terrorist attacks on our country devastated our economy both nationwide and in New York. Thousands 

of lives and billions of dollars in property were destroyed in a single morning. While our national economy has largely recovered, we 

in New York still face the physical reminders. Our efforts to rebuild have been hindered by the lack of terrorism insurance available in the immediate aftermath of 9/11. 

Thanks to Chairman Oxley and you, Chairman Baker, and others, this committee has passed and renewed terrorism insurance 

legislation. Economic development in New York and elsewhere is 

moving forward, including the construction of the Freedom Tower 

in lower Manhattan. 

Our second panel consists of representatives from the World 

Trade Center development, along with business leaders from New 

York, and I welcome their testimony. 

The GAO report that was released yesterday confirms the continuing terrorist threat to our country, and it demands a Federal 

backstop to our insurers so that it includes, also, nuclear, biological, chemical, and radiologic attacks. We do not charge people more 

money for health insurance if they are hit by a car or a bus, and 

I do not think we should charge America’s consumers moire for coverage depending on which weapons our enemies use against us. 

Similarly, I think we must extend the protections of TRIA to 

group life coverage. Failure to include group life coverage is the 

economic equivalent of a neutron bomb. It protects employers 

against the loss of a building, but it leaves families exposed to the 

financial consequences of losing their loved ones. 

I was very pleased that the bill I cosponsored with you, Mr. 

Baker, in the House last year contained this coverage, and I hope 

that we will work together to make sure the bill we pass next year 

does the same. 

4

I urge all members—again, this morning, it is a busy morning, 

and I would urge all members to limit opening statements so that 

we can move on and hear from these important witnesses. I thank 

you, and I yield back the balance of my time. 

Chairman BAKER. I want to thank the gentlelady for her leadership on this issue, and all members from the New York delegation 

have been very focused in trying to seek a remedy that is appropriate, and I do appreciate her work product. 

Ms. Maloney? 

Mrs. MALONEY. Thank you very much, Mr. Chairman and Ranking Member, for holding this hearing, and I congratulate all of the 

witnesses today. 

In particular, I would like to welcome my constituent and good 

friend, Sharon Emek, from the Independent Insurance Agents and 

Brokers of America, who will be talking about the impact on small 

businesses and the challenge that they face in trying to get antiterrorism insurance. 

As a proud representative of New York City, one of our financial 

centers and the site of Ground Zero, I am deeply committed not 

only to our national security, but an important part of our national 

security is economic security, and we cannot have that without a 

strong anti-terrorism insurance program with a Federal backstop. 

The Al Qaeda attacked the World Trade Center and caused a terrible loss to life and economic loss. We were very proud that our 

markets reopened very quickly afterwards and our economy moved 

forward, but I can tell you, of all the challenges that we faced in 

New York—and they were huge, and we rose to that occasion. 

The private sector, the individuals did heroic work to rebuild the 

economy. The number one challenge that we had was getting insurance. After 9/11, nothing moved until this Congress finally passed 

anti-terrorism insurance. That was a great day for New York. 

The building started going forward, but what I hear from individuals, what I hear from the real estate roundtables and the trade 

organizations is that our businesses cannot get insurance now unless there is a provision on their insurance plan that says that this 

is contingent on getting a Federal backstop and Federal anti-terrorism insurance. 

I have heard stories that some have had to go to Lloyd’s of London to get insurance, and that the cost has escalated and hampered, but right now, what we face is that it may expire, and with 

that would end the economic development efforts that are taking 

place in New York and I would say across the country. 

I would like to congratulate this Congress and really the leadership of the two—of the ranking member and the chairman and my 

colleague from New York, Sue Kelly, in passing the TRIA legislation. 

We need to renew that, or some form, and it must include unconventional weapons—nuclear, biological, chemical, and radiological—because that is what the insurance agencies are demanding. 

The Government Accountability Office issued a report yesterday, 

and it states very clearly that, given the nature of these risks, we 

cannot expect the private sector to solve this problem alone, and 

I quote from the independent Government Accountability Office. 

5

‘‘Given the challenges faced by insurers in providing coverage for 

and pricing for nuclear, biological, chemical, and radiological risks, 

a purely market-driven expansion of coverage is highly unlikely in 

the foreseeable future,’’. 

I encourage all of my colleagues to read this very excellent report, which explains this conclusion in detail. 

Given this information, it is, once again, up to use to renew TRIA 

long before it expires at the end of 2007. As the witnesses will explain, the alternative is absolutely unacceptable. 

At the same time, we must provide for a true blue ribbon commission, with representatives from the industry, from affected policyholders, from victims and government, to study the problem and 

to come up with recommendations for potential long-term solutions. 

I was profoundly disappointed that this provision was removed 

from our last bill, and I will work hard to get it back in in any renewal we have. We from New York have some experience dealing 

with terrorism and its aftermath. So, this issue is very, very pressing for us, and many other cities, but it is a very serious error to 

view this as a New York or urban problem. It is a national challenge. 

Terrorists can strike anywhere, and in fact, studies by the Rand 

Corporation and others suggest that they may be more likely to attack less ‘‘hardened targets’’ and other locations, including rural locations. 

Chairman BAKER. Can the gentlelady begin to sum up? 

Mrs. MALONEY. Well, I have a lot to say on this, but time is of 

the essence, so I request permission to put all of my comments into 

the record. 

Chairman BAKER. Without objection. 

Mrs. MALONEY. I appeal to my colleagues on both sides of the 

aisle to work together, as we have in the past, to renew TRIA. 

Thank you for this hearing. 

Chairman BAKER. I thank the gentlelady for her continued effort 

on this important subject. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. I want to thank you 

for holding this hearing. It is truly a very serious topic that we discuss today. I was one of many who voted to extend TRIA, but at 

the time, I said that I had concerns about any time of permanent 

Federal backstop, and I come into this hearing continuing to have 

an open mind but somewhat of a skeptical mind, as well. 

Number one, truly I believe that the best way that we can reduce 

the risk of catastrophic terrorism is to unite together and figure out 

the best way to win this war on terror, clearly a debate for a different committee and a different time. 

I have a skeptical mind about a permanent reinsurance program, 

because I still have a firm belief in the power of the marketplace, 

given time, that if truly these types of policies are demanded, 

somebody will provide it at the relevant cost. 

Yes, I did spend most of last evening reading over the GAO report, and did note their conclusion that nuclear, biological, chemical, and radiological risk is distinctly different. 

I have not done my—I have not studied the history of the industry, but I am curious about other phenomena that at one time in 

6

American history were distinctly different that somehow the industry had to learn how to deal with, be it airline crashes, oil spills, 

power outages, data losses. 

Clearly, this type of risk is different in its catastrophic nature, 

but it wasn’t that many years ago that this Nation faced the Soviet 

Union, with their massive nuclear arsenal, with thousands of nuclear warheads pointing at us, and we all knew the nightmare of 

mutual assured destruction. 

I am somewhat curious how we as a Nation, in dealing with that 

risk, handled that catastrophe. Next, I am skeptical of any longterm Federal backstop, because I do not think the history of the 

Federal Government is particularly stellar in this area, when I look 

at what we have had to do recently in the Federal flood insurance 

program, which is having to be bailed out with billions of dollars; 

the Pension Benefit Guarantee Corporation, billions of dollars; and 

we all know about the plight of Social Security and Medicare and 

their trillions of dollars of un-funded liabilities. 

So, I continue to be very concerned, particularly about families 

who have a lot of their net worth in their homes, small businesses, 

but I also know, when it comes to very large, sophisticated businesses, there are other ways to reduce their risk, and that is not 

to have too much of their money in any one given bill. 

So, I know we have a number of serious challenges here. I look 

forward to hearing from our witnesses, and I hope that, indeed, we 

will explore all options, and particularly those that might limit the 

taxpayer exposure. 

With that, I yield back. 

Chairman BAKER. I thank the gentleman. 

Mr. Moore? 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman, for having 

this hearing. I would like to thank you and Chairwoman Kelly for 

having this hearing today. It is very important, I think. 

I would also like to welcome Greg Case, the president and CEO 

of Aon Corporation, and a Kansas native, who is testifying before 

us today on the first panel. 

The GAO released a study this week that examines the insurability—and we have heard about that some here this morning—

of risks from nuclear, biological, chemical, or radiological weapons 

attacks. The GAO study concludes that the risk of attacks from 

NBCR weapons generally fail to meet most or all of the principles 

of an insurable risk. 

As we know too well, the terrorist attacks of September 11, 2001, 

resulted in thousands of deaths and injuries, along with the destruction of the World Trade Center, and many other buildings and 

businesses in New York. Unfortunately, those attacks also resulted 

in significant economic and insurance losses. 

A recent study by the American Academy of Actuaries estimated 

the insured losses that could arise in four U.S. cities as a result 

of NBCR attacks. In New York alone, a large NBCR event could 

cost as much as $778 billion, with insured losses for commercial 

property at $158.3 billion and for workers comp at $483.7 billion. 

There are limited circumstances, I think, when the Federal Government needs to step in, when a private market fails to develop 

7

in a certain area, and flood insurance is one of those areas. I believe that terrorism insurance is another. 

Extending TRIA is not a partisan issue and should not be a partisan issue, and Democrats and Republicans ought to come together 

here to come up with a common sense workable solution to provide 

a needed element of stability and certainty to our economy. Terrorist attacks in our Nation don’t target Republicans or Democrats; 

they target all Americans, and they affect all of us, wherever we 

live and whatever we do. I look forward to continuing the successful public/private partnership that we have forged on this issue, as 

Congress works to extend the TRIA program next year. 

Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Garrett? 

Mr. GARRETT. Thank you, Mr. Chairman, and once again, I 

thank you for holding this hearing, as I join my colleagues here 

today, and I wish, as always, that this is a very important issue, 

that we would have more of our colleagues here to hear the discussion and testimony of this panel. 

I come here today with an open mind, to hear the sides of the 

discussion presented. The committee voted in support of the extension of the TRIA. We did so at the same time that Chairman Oxley 

asked GAO to report back to us, as we recently received a report 

that would look at the commonly accepted principles of insurability, 

and whether NCBR are measurable and predictable, some of the 

things that we, from a gut reaction, should be able to answer without a report, but now we will have that report in hand. 

In the near future, we are also expecting a more comprehensive 

report from the President’s working group, and many of us are anxiously awaiting that and trying to find out what the inside story 

may be on that, in anticipation of it, but anticipation, considering 

where it has come from, I can somewhat predict, not the leaning, 

the direction in which that report may come to us. 

This is an issue that just continues to—I do not want to use the 

word ‘‘haunt us’’ when they go back to the district, but certainly is 

raised when we go back to the district, in the State of New Jersey, 

from both big and small industry alike, the concern about the 

availability of insurance in general for them. 

New Jersey, the home of the shopping centers and shopping 

malls, maybe the largest concentration in the State of New Jersey, 

and the insurability across the various spectrums of insurable risks 

and businesses—I am constantly confronted with the issue, from 

chamber of commerces and business and industry, when will you 

finally, once and for all, address this in one format or another. 

So, I will just conclude, Mr. Chairman, that I think Congress 

must be taking some action in this area, whether it is on the private sector, as Mr. Hensarling suggested, or a more comprehensive 

approach, and I thank you for the hearing today. 

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Crowley? 

Mr. CROWLEY. Thank you, Mr. Chairman. I want to welcome this 

subcommittee hearing on this terrorism risk insurance, and welcome the panel before us and later today. 

8

The timing is great, with the GAO’s recent release of its report 

on the capacity of the private markets to provide NBCR coverage, 

and while we await, with baited breath, the President’s working 

group report, the GAO report states, ‘‘Given the challenges faced 

by insurers in providing coverage for and pricing NBCR risks, any 

purely market-driven expansion on coverage is highly unlikely in 

the foreseeable future.’’ 

The reasons behind this GAO conclusion that there was no private sector market for NBCR are the same reasons why there was 

no private sector market for any terror insurance. The fact is there 

is no appetite for the global reinsurance market to fill the gap for 

either terror insurance or NBCR insurance. 

Without some sort of Federal backstop, and I think supporters of 

TRIA are open to adjusting the program to include a pool for new 

tax incentives for the insurers and insured or other avenues, there 

will be no terrorism insurance at all. Insurers will walk away. We 

saw this between the time of the 9/11 attacks and when we first 

passed TRIA. Now it will be even worse. 

Currently, the Federal role plus the make available language ensures we have an affordable market for terror insurance. We do not 

have a make available provision for the NBCR now, and what do 

we see? We see little NBCR coverage, because like any terror coverage, it is too difficult to price it for risk. 

GAO says this, but more importantly, the fact on the streets 

show this. I hear some of my friends on the other side of the aisle 

debate this argument that the Federal backstop stops any innovation in the private sector from creating pools or other non-government-backed terror insurance. This is simply wrong. There is no 

other alternative to terror insurance outside of the system we have 

that provides a Federal backstop, because there is no interest in 

the capital markets to create such a private run system with no 

government backing, and this will not change if TRIA disappeared 

tomorrow somehow. 

Some sort of Federal role will always be needed in the terrorism 

insurance marketplace, or there will be no insurance for terror. The 

result: If we suffer another attack, the government will be on the 

hook for the entire cost, as our government will not walk away and 

not help, as Katrina, for example. With some sort of backstop, our 

government is actually cushioned with financial support from the 

private insurance and reinsurance market. 

The commonsense approach to both protect our Nation’s economic well-being and the taxpayers’ money is to have a permanent 

Federal backstop in the terror insurance marketplace, and I will 

just add this one final point. This is terror month here in the 

House of Representatives. This is as good a time, I guess, as ever 

to examine the only economic security measure against terror that 

we have enacted on the economic level that has worked over the 

last 5 years. 

It has worked. This is a program that has worked, a program 

that, despite the GAO report to the contrary, many of my colleagues on the other side of the aisle want to see ended. I hope that 

is not the case at the end of 2007, and I hope that this hearing 

today will shed some additional light as to why we need to see 

TRIA ‘‘permanent-ized‘‘, and I yield back the balance of my time. 

9

Chairman BAKER. I thank the gentleman for his statement. 

Mr. Campbell, I know you are just arriving. Do you have a statement? 

Mr. Israel? 

Mr. ISRAEL. Thank you, Mr. Chairman. 

Mr. Chairman, I think I have said everything that could be said 

on this issue in the past 2 years, and so, I am going to yield back 

my time and listen to our witnesses. 

Chairman BAKER. I thank the brilliant observations of the leading member of your side. 

Mr. Baca, do you choose to proceed? 

Mr. BACA. I will make a statement. 

Chairman BAKER. Please. 

Mr. BACA. Thank you very much, Mr. Chairman, for holding this 

important issue, and this is not a partisan issue but an important 

issue of protecting America against a terrorism attack. The fifth 

anniversary of 9/11 serves as a reminder that we live in different 

times and must guard against economic cost of future terrorism attack. 

The Terrorism Insurance Act, TRIA, has been an important safety net and has played a critical role in helping protect our Nation 

against this risk. Post-9/11, it is clear that a Federal backstop for 

terrorism insurance is essential. 

The GAO report which informed us that the private sector has 

not fully developed the capacity to provide coverage for terrorism 

risk also confirms the need for Federal involvement. Without a 

Federal reinsurance backstop, insurance will include the type of 

coverage from the policy. Tens of thousands of jobs will be lost, and 

thousands of additional bankruptcies could occur compared to what 

we saw in 9/11. 

Our constituents, small businesses, property owners, and communities everywhere need protection. It is critical that they have 

access to coverage that are at affordable rates, at affordable rates. 

We must reach an agreement on the best solution, and I hope today’s hearing and the outcome of the report by the President’s 

working group, PWG, on financial markets, will help us assess 

some of the details that need to be decided upon. 

Terrorism is directed at our entire Nation. It is directed at our 

entire Nation, and not just certain cities and towns. It is a national 

security issue that needs permanent Federal solutions to help 

guard our citizens. 

I thank the witnesses for coming to share their ideas with us, 

and I look forward to their testimony, and once again, I thank our 

chairman for hosting this important hearing today. 

Thank you. 

I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Mr. Hinojosa, did you have a statement? 

I thank the gentleman. 

Mr. Lynch? 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. I will follow Mr. Israel’s lead. 

Chairman BAKER. Thank you very much. You are contributing 

mightily to our progress. I appreciate that. 

10

Mr. Scott? 

Mr. SCOTT. I will follow Mr. Israel’s lead a little bit. 

[Laughter] 

Mr. SCOTT. I just want to say that I think it is very significant 

for a couple of points. 

One, that we not only just have representatives of industry here, 

but we have the CEO’s, the chief executive officers of the insurance 

companies, because I think it points out that we definitely need a 

national strategy. That has to include plans to provide a back-up 

against possible massive insurance claims, and because terrorism 

is less predictable and possibly more severe than other catastrophes, it is necessary that the Federal Government ensure that 

insurance remains available even if the private market is not doing 

so, and while we passed TRIA through 2007, I think it is important 

that we provide a meaningful extension of TRIA, while creating a 

long-term market-based solution to the problem. 

A final point is that, as a sponsor of the Capuano bill, I also believe it is important that the people inside the buildings be insured, 

and therefore, I support the inclusion of group life insurance in 

TRIA as we move forward. 

That is it, Mr. Chairman. 

Chairman BAKER. I thank the gentleman. 

Mr. Cleaver? 

Mr. CLEAVER. Very, very briefly. 

I have listened—I have counted—there have been four different 

members who have said that this is not a partisan issue, and perhaps it is not, but it is the classic debate over the role of the Federal Government in this country, and it is a debate that did not 

start with—begin with TRIA, and I am looking forward to having 

that debate. It may be political, it may be ideological, it may be financial, but it is a debate, and it is not an accident that large numbers of minorities moved to Washington, D.C., because they wanted 

to get—they thought they were safer, the closer they got to the seat 

of government, and I have seen this argument even in the area of 

civil rights, and when you have $90 billion in New York alone in 

insurance losses, 200 billion in all, we are going to have a problem, 

and it is my hope that we will have a pure debate on this issue, 

because a lot depends on what we are able to do. 

Mr. Chairman, I spoke to a Rotary Club in my home district in 

Kansas City, Missouri, and during the question-and-answer period, 

one of the gentlemen stood up and just went ballistic, because he 

did not believe the Federal Government should be involved in the 

clean-up on the Gulf Coast, and I think there are people with that 

philosophy, not just in Kansas City but in this Congress, and something should be resolved, and we do not have a long time to do it, 

and so, it is my hope—thank you, first of all, for the hearing, and 

it is my hope that, before the gavel sounds at the conclusion, that 

we will have come closer to moving to a political, ideological, or 

philosophical position that will help the people in this country with 

regard to their insurance in the case of NBCR or another Katrina. 

Thank you. 

Chairman BAKER. I thank the gentleman. 

Mr. Hinojosa, did you choose to make— 

Mr. HINOJOSA. Yes. Thank you, Mr. Chairman. I am ready now. 

11

Mr. Chairman, while it is true that nuclear, biological, chemical, 

and radiological threats present unique risks in both size and 

scope, conventional terrorism, like that at the WTC, still remains 

a threat. I want to stress that it is absolutely necessary that we 

maintain a public/private partnership for these risks in order to 

keep this insurance coverage available. 

Additionally, I also hope that, in the future, we will revisit the 

flood insurance legislation and the impact the 100-year flood plain 

mapping will have on some of the poorest counties in the country, 

including Hidalgo County, which is in my Congressional district, 

the 15th district of Texas. 

With that, Mr. Chairman, I yield back the remainder of my time. 

Chairman BAKER. I thank the gentleman. 

Ms. Biggert, do you have an opening statement this morning? 

There being no further members for recognition, at this time I 

would turn to our distinguished panel and state our normal operating procedures. 

We ask that your full statement be limited to 5 minutes to enable members to engage in questions as much as possible. Your official statement will, of course, be made a part of the hearing 

record, and you will have to pull those microphones close in order 

to be heard well, and the little button on the bottom gets you in 

the game. 

So, with that, our first witness is Mr. Edmund F. Kelly, chief executive officer, Liberty Mutual Insurance Company. 

Welcome, sir. 

STATEMENT OF MR. EDMUND F. (TED) KELLY, CHAIRMAN, 

PRESIDENT, AND CHIEF EXECUTIVE OFFICER, LIBERTY MUTUAL INSURANCE COMPANY 

Mr. KELLY. Thank you, Chairman Baker, Chairwoman Kelly, and 

Ranking Member Kanjorski, for holding this meeting, and distinguished members for attending. It is a privilege to be here to testify on what I view as one of the greatest challenges facing our Nation, our economy, our industry, and its policyholders. 

Before I begin, I do want to pay tribute to—although he is absent—to Chairman Mike Oxley, who is retiring this year, for his 

leadership on the extension act of last year. We owe him a great 

debt of gratitude. Now on to the subject at hand, protecting Americans from catastrophic financial loss from terrorist attack. 

In an ideal world, protection from financial loss could be left to 

the private insurance industry operating in a free market, but as 

I stated in my written testimony, the insurance market is not free. 

Regulation prohibits us from making normal economic and fiduciary decisions mandated in the face of unpredictable and potentially hundreds of billions of dollars of losses terrorism presents. 

Congressman Hensarling raised an interesting issue. In fact, 

during the nuclear stand-off with Russia, most insurance policies 

allowed for war exclusion. They do not allow for terrorism exclusion. So, the country recognized the need for a special exclusion in 

the face of the Soviet threat. Without exclusions, the Federal backstop is necessary, but the industry does not have the capital—it is 

not just a matter of pricing. The industry does not have the $7- or 

$800 billion of capital necessary to absorb the threat presented, 

12

particularly by NBCR. There is little capital available in the world 

reinsurance market. 

We estimate that the total reinsurance capital available for normal terrorism, if there is such a thing, is in the area of $7- or $8 

billion. There is essentially none for NBCR. 

While the Terrorism Risk Insurance Act of 2002 and its extension of last year were very welcome, but they were just a stop-gap. 

As Chairman Oxley aptly characterized last year’s activity, it was 

merely kicking the can. The short-term acts have created instability. 

First, they are calendar-year-based, whereas we provide insurance on a policy year basis. Second, the lack of a long-term plan 

creates periodic economic and business uncertainty. Absent a Federal backstop, there would be little or no insurance available for 

terrorism. 

I know the subcommittee chairs, Chairman Baker and Chairwoman Kelly, understand this, and I would be remiss if I did not 

take this opportunity to acknowledge the sustained and effective 

support for the proposition by Ranking Members Frank and 

Capuano from Massachusetts. 

The GAO appears to have reached a similar conclusion, that 

given the challenges faced by the private market in providing coverage for terrorism risk, particularly NBCR, any purely private 

market for terrorism risk insurance is highly unlikely. 

So, how should a public/private partnership that is the essence 

of TRIA be reworked to reflect GAO’s conclusions and to meet the 

needs of insurers, buyers, and sellers, and to meet the legitimate 

concerns of you in Congress? In other words, what might the next 

generation of TRIA look like? 

About a dozen large company CEO’s, organized as the Property 

Casualty CEO Roundtable, which I currently chair, asked themselves the very same question. We at Liberty Mutual and The 

Hartford have led the industry effort to come up with an appropriate framework. The effort included the major insurance and reinsurance trades, effectively the entire U.S. property and casualty 

insurance industry. 

What we developed is not a detailed proposal but a framework 

that focuses government involvement on what private markets cannot do alone, while creating significant incentive for the private 

sector to do much more over time. In that way, it is responsive to 

the quite appropriate concern that TRIA or its successor legislation 

not displace or interfere with private markets. 

The framework envisaged a two-part structure financing both 

NBCR and non-NBCR risk. For NBCR, the Federal Government 

would assume a significant role—all or most of the risk on a reinsurance basis for losses which insurers cannot exclude, such as 

those on workers compensation insurance. 

For losses that would be covered but for exclusions, such as property insurance, NBCR risk would be assumed by the Federal Government on a following form basis that is subject to the policy 

terms and limits. 

For non-NBCR, a TRIA-like structure would be maintained. 

There would be insurer deductibles which would gradually inVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
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crease—for example, one point per year for 10 years, or be adjusted 

subject to Treasury determination of available capacity. 

There is no one right way to do this, but the notion is that insurers should bear a greater share of the non-NBCR risk as they have 

capacity to do so safely. 

Consistent with this, there should be creation of a voluntary, federally-charted entity to facilitate development of new private reinsurance capacity from the issuance of pre-event catastrophe bonds 

and the sale of industry loss warranty contracts to help fund insurer deductibles. We believe that such a two-part program will effectively address both the NBCR risk, which is totally uninsurable 

in the private sector, and the non-NCBR event. We are committed 

to working with this committee and others in our industry and in 

the policyholder community to establish an appropriate public/private partnership that makes terrorism risk insurance available for 

the long term. 

I do want to address Chairman Baker’s repayment option. We 

have considered that, and it is far too early to decide whether or 

not to support such a thing. We have two significant concerns. 

One, if it is established as a liability for the industry, it will go 

on our balance sheets and will make us just as bankrupt as if we 

had to pay the cash. So, you have to take care of the details and 

be careful about the accounting issues. 

Second, even if they are taken care of, there is a significant problem with recovery through surcharge. Policyholder surcharges always end up being picked up by small business. 

Large business can reduce their insurance buy through 

deductibles and self-insured retentions to avoid surcharges. So, inevitably, anytime there is a surcharge, it is borne primarily by 

small businesses. 

So, we have to be very careful, if there is a repayment mechanism, not to do more damage to the business and economy of the 

country than would be done already by the act of terrorism. 

We are willing to work to come up with an acceptable solution. 

But we have concerns with that approach, Chairman Baker. 

Thank you for the opportunity to address you. 

[The prepared statement of Mr. Kelly can be found on page 135 

of the appendix.] 

Chairman BAKER. Thank you very much, sir. 

Our next witness is Mr. Ramani Ayer, chairman, president, and 

chief executive officer of the Hartford Financial Services Group. 

Welcome, sir. 

STATEMENT OF RAMANI AYER, CHAIRMAN, PRESIDENT, AND 

CHIEF EXECUTIVE OFFICER, THE HARTFORD FINANCIAL 

SERVICES GROUP 

Mr. AYER. Good morning, Chairman Baker, Chairwoman Kelly, 

Ranking Member Kanjorski, and members of the subcommittees. 

Thank you for the opportunity to appear before you today. 

My name is Ramani Ayer. I have been at The Hartford for 33 

years, and have been its chairman and CEO for the past 9 years. 

I have filed my written statement for the record. Thank you for 

convening today’s hearing on this very important topic of the economic response to the threat of terrorism. 

14

The Hartford is a property casualty and life insurer. We provide 

retirement security and protection against loss for Americans and 

their businesses. The Hartford is the Nation’s second oldest insurer. Founded in 1810, we look back with pride at our record of 

serving our policyholders throughout the course of American history. 

Policyholders from President Abraham Lincoln to Babe Ruth 

have relied on us to fulfill our promise to meet our obligations to 

them. We were there to cover the losses of our policyholders during 

the Great Chicago Fire and the 1906 San Francisco earthquake. 

We were also there on 9/11. 

As I consider The Hartford’s 196-year history and my own experience in this industry, I see one peril that stands out as unique: 

the threat of a terrorist attack. Let me take a moment to explain 

why. First, terrorist acts are unpredictable. Our industry has no 

means of knowing when terrorists will attack, where terrorists will 

attack, and what kinds of weapons they will use. We do know from 

the terrorists’ own pronouncements that their principal objective is 

to disrupt our way of life, inflict massive casualties on our population, and bring our economy to a standstill. 

Second, as we saw with 9/11, the damage to property, loss of life, 

and injury, and the impact on our economy, is potentially unprecedented and incalculable. As our leaders in government constantly 

remind us, the terrorists’ ultimate goal is to gain access to even 

more deadly tools such as nuclear, biological, chemical, and radiological weapons. Their goal, of course, is to have the most severe 

impact. Frankly, some attack scenarios considered by our intelligence sources and private modeling firms are so devastating that 

they would not only overwhelm the entire insurance industry, they 

would put the economy into a tailspin. 

Third, terrorism is both a public and private risk. Most obviously, terrorist attacks are designed to hit people and property. 

Less obvious, they are also explicitly designed to threaten America’s national security, its economy, and its sense of confidence. 

They ar an attack on the entire country and its vast and complex 

infrastructure, no matter where they occur and whoever is hurt or 

killed. 

The incredible resilience of the people of this great country and 

its economy were shown in the hours, weeks, months, and years 

following the attacks of September 11, 2001. The terrorists thought 

they could change our way of life and shut down our economy. 

They were wrong. Our country responded as America always has 

in times of crisis, with resolve, purpose, and strength. 

This committee passed important new laws to reflect the new reality. One law that has played an important part in that response 

has been the Terrorism Risk Insurance Act. The purpose of the law 

is to provide a public/private partnership to prevent the terrorism 

threat from disrupting our economy. TRIA has worked. Since its inception, it has been the economic backstop that helped America’s 

economy to thrive in the face of a potential catastrophic threat. 

So, let me commend the members of this committee for helping 

advance the recovery from the attacks of 9/11 and defending our 

economy and its foundations. As I stated earlier, our leaders in 

government tell us the threat of terrorism is still very real. I look 

15

forward to working with the committee in your efforts to counter 

the effect of terrorism and secure the economic future of every 

American with important laws such as the Terrorism Risk Insurance Act. 

Thank you. 

[The prepared statement of Mr. Ayer can be found on page 83 of 

the appendix.] 

Chairman BAKER. Thank you, sir. 

Our next witness is Mr. Gregory C. Case, president and chief executive officer of Aon Corporation. 

Welcome, sir. 

STATEMENT OF GREGORY C. CASE, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AON CORPORATION 

Mr. CASE. Thank you. Good morning, and thank you, Chairman 

Baker, Chairwoman Kelly, and Ranking Member Kanjorski and 

members of the committee. I am very pleased to be here today to 

testify on behalf of Aon and on behalf of the Council of Insurance 

Agents and Brokers. 

What I wanted to do first is just take a bit of a step back and 

explain a little bit about Aon and why I am here. In many respects, 

I would suggest to you that Aon is in a somewhat unique position 

to comment on the very important topics of today. 

Aon provides risk management, risk advice. Aon is not an underwriter. So, we sit between companies and insurance companies and 

the capital markets. That is how we work. We do this across the 

world. We have got 47,000 colleagues around the world, in 500 offices and 120 countries around the world. So, arguably, we may be 

working with more companies on the topic of risk advice and, in 

accordance, terrorism than anybody else on the planet. That is the 

vantage point. 

I would also be remiss if I did not let the committee know that 

Aon takes this issue quite personally. While all of us commemorated the 5-year anniversary of the tragedy of 9/11, I will tell you 

that Aon also remembered 176 colleagues and friends who lost 

their lives in the twin towers. So, I want you to understand where 

Aon is coming from. We are not an underwriter. We are not an insurer. We do not do what my colleagues to the right do, Mr. Ayer 

and Mr. Kelly. 

We support them in what they do, but we really focus on our clients. That is the focal point. It is important for me to convey that 

to you, because I want you to use that as the basis to understand 

the comments I am about to make with regard to this critically important topic, and I am going to hit three issues and three issues 

only to start. 

First, I would suggest to you, as someone who is focused on companies, businesses that we serve every day, flat out, I will tell you 

that TRIA has worked, in our mind. Post-9/11, you, your predecessors, and the President enacted TRIA. You also took steps to 

enact the next iteration of that in 2002, and the next iteration in 

2005, and I will suggest to you, as we look at this through the eyes 

of the firms and the companies we work with around the globe, 

that this has been crucial in sustaining our economic performance, 

16

and I would suggest to you the economic performance and health 

of the economy. 

TRIA, flat out, made coverage available and accessible. The comments made about the absence of coverage post-9/11 were absolutely right. In our role, we are in search of underwriters, in search 

of markets to serve our clients. Post-9/11, the capacity did not 

exist. What little capacity did exist was priced to an extreme. 

I would suggest to you, as you look over the last few years, the 

uptake of terrorism insurance, companies out there in the United 

States who buy terrorism insurance, the uptake of that is 60 percent. That is an astounding number. 

In that time, over the last 3 years, as well, the cost of that insurance has roughly come down by around 25 percent, and I would remind the committee that is in the context of an industry in which 

the cost is going up over time. 

So, the pragmatic set of answers—I was not in the chamber, did 

not have to go through what all of you went through, but I would 

suggest the pragmatic set of answers and the actions you took to 

enact TRIA in the form that it was before 2005 and then after, and 

in the view of Aon, in the view of our clients, in the view of the 

companies we serve and work with, worked extremely well, and I 

commend the committee on that act. Without that, the outcome in 

terms of the impact to the economy would be quite devastating 

from our point of view. So, point one, TRIA has worked. It is a solution, a pragmatic solution that has worked. 

Second observation: From our point of view, the private market, 

currently, as things stand today, absolutely cannot cover terrorist 

risk without some kind of government involvement. I look forward 

to discussing that with the committee. We have heard three or four 

arguments over the course of the last year that suggest otherwise. 

One is the capital markets. The capital markets are going to come 

in, they are going to take this risk away, do not worry about it, the 

capital is going to come to pass. 

I am here to tell you, we work with the capital markets. We work 

with the primary companies, we work with the underwriters, and 

we work with the capital markets. We were a pioneer in issuing 

catastrophe bonds. We have issued as many catastrophe bonds as 

anybody on the marketplace today. The capital markets cannot 

come in and solve this issue. They will not come in and solve this 

issue. We know these capital markets. We know who would buy 

these bonds. They will not do this. 

Second, we have heard that the insurance companies will step up 

and actually take up the slack. Colleagues to my right, Mr. Ayer 

and Mr. Kelly, will be able to do this with their firms. 

I am to tell you, they price their products, they price what they 

do based on what is the risk, the frequency of the risk, the impact 

of the risk. It is un-achievable in this situation. They simply cannot 

come in and fill the entire void. As someone who represents clients, 

that is just the fact. That is just the case. 

The final point is that reinsurers will be able to come in and 

solve this issue. We work with these reinsurers every day. That is 

what we do on behalf of our clients. The reinsurers, even more so 

than the primary insurers, have to price their efforts and products 

17

around frequency, how often it will occur; severity, how big of a 

deal will it be? 

That is where it differs from airlines and from other catastrophes 

that have occurred over time. It is very, very different. The other 

factor I would suggest the committee look at is the impact of the 

rating agencies over the course of the last year. 

Rating agencies post-Katrina have even restricted the reinsurers 

even more, perhaps justifiably so, but in terms of the aggregate 

ability for them to step in, it is very, very difficult. 

The final point I would just make is that I would absolutely 

agree that the long-term answer has to be a combination of private 

sector solution, primarily—it should carry the day. The private sector solution would be the one that we would suggest, in the eyes 

of our clients, would be most important. 

In fact, I would tell you that Aon, a year ago, put forth a solution 

which laid out an $80 billion pool, aggregate. It would cover four 

World Trade Center events, four, and be covered by the industry, 

and there will be many other proposals that come forward, and we 

would suggest to you, again, on behalf of the clients we serve and 

the companies we serve, the firms we serve, one of those sets of options, which will be different than TRIA—it will be an evolution of 

TRIA. 

It will put the private sector more involved than every before, 

but will still need to involve some form of government support, government backing. I prefer to call it a bridge, a bridge to more of 

a private sector solution, as opposed to a backstop. So, my third observation is we absolutely need to move in that direction. 

So, I thank the committee. Thank you very much. 

[The prepared statement of Mr. Case can be found on page 88 

of the appendix.] 

Chairman BAKER. Thank you for your statement, sir. 

Our next witness is Mr. Jacques Dubois, chairman and chief executive officer, Swiss Re America Holding Company. 

Welcome. 

STATEMENT OF JACQUES E. DUBOIS, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, SWISS RE AMERICA HOLDING COMPANY 

Mr. DUBOIS. Good morning. My name is Jacques Dubois, and I 

am president and chief executive officer of Swiss Re America Holding. I am also here on behalf of the Reinsurance Association of 

America, the RAA. 

Before I begin my testimony, I want to thank Chairman Oxley, 

Chairman Baker, Chairwoman Kelly, Ranking Member Kanjorski, 

and the members of this committee for the leadership you have all 

shown on the terrorism insurance issue. Your leadership has been 

critical to the adoption and continuation of the successful TRIA 

program. The reinsurance industry appreciates the hard work and 

support you have provided on this important issue. 

Now, Swiss Re and the RAA strongly supported the adoption of 

the Terrorism Reinsurance Act in 2002 and its extension in 2005. 

The Act has assisted in filling a vacuum in reinsurance capacity, 

and has helped bring stability to the marketplace and to the economy. 

18

TRIA has enabled insurers to provide insurance coverage to protect assets and to support economic activity. From our perspective, 

TRIA has performed as designed and has cost little to administer. 

Swiss Re and the RAA believe that the U.S. insurance and reinsurance industry cannot adequately underwrite and model the 

scale and frequency of potential future terrorist attacks. Consequently, we believe that the insurance and reinsurance industry 

cannot provide significant terrorism coverage for this country without TRIA’s support. 

Now, this may change in the future if terrorism risk lessens, but 

absent such world conditions or improvements, Swiss Re does not 

see a time when the frequency and severity of terrorism risk can 

be significantly and successfully modeled and underwritten for the 

insurance industry to supply market needs by itself. Some have expressed concern that TRIA preempted the private reinsurance market. This is absolutely not the case. 

By establishing definitive loss parameters, TRIA has provided a 

defined layer for reinsurers to participate in sharing the retained 

risk that primary companies face, and reinsurers have been willing 

to put limited capital at risk to manage terror-related losses. 

Swiss Re is active in this limited market, but the amounts are 

small. The RAA surveyed both reinsurance brokers and reinsurance underwriters to estimate how much terrorism reinsurance capacity the market is providing, and overall, the RAA estimates the 

global reinsurance capacity available in the United States for 2006 

at about $6- to $8 billion for TRIA certified stand-alone and treaty 

reinsurance, and it is also important to emphasize, as others have 

today, that there is very little reinsurance appetite for nuclear, radiological, biological, and chemical risks. According to the RAA survey, NRBC capacity is estimated to be 15 to 20 percent of the terrorism risk capacity I cited a moment ago, and when it is available, 

pricing for coverage including NRBC is at a significant premium, 

and coverage amounts are also strictly limited. 

With specific regard to workers compensation, insurers have 

been able to add terrorism peril to their reinsurance programs, but 

this coverage excludes NRBC losses. Some have suggested that the 

capital markets could assume terrorism risk. Setting aside the pricing problems that would also be faced by the capital markets, capital market participation today in insurance risk-taking is small. In 

2006, issuance of cap bonds and other capital market vehicles will 

likely exceed $6 billion. Swiss Re experts estimate that cap bond 

issuance to grow to approximately $10 billion by the year 2010. 

Now, this amount is dwarfed by the total value of privately 

owned commercial structures in the United States. According to the 

Bureau of Economic Analysis, these structures had an estimated 

value of $8.8 trillion at year-end 2005, or an amount more than 

1,000 times greater than the current cap bond market. 

Certain group life insurers have petitioned for inclusion of group 

life in TRIA. Swiss Re is the largest reinsurance of group life writers in the world and in the United States, and we support their petition. Most State regulators will not allow group life insurers to 

manage their risk through terrorism exclusions. As a public policy 

matter, most State regulators have decided that this basic insurVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
19

ance, covering 167 million Americans, is vital. We urge you to add 

group life insurance to a permanent backstop. 

In conclusion, due to the nature of the terrorism peril, we believe 

that the private market mechanisms are insufficient to spread the 

risk of catastrophic terrorism loss. Without some form of Federal 

backstop, we would expect less coverage available at the policyholder level, increased prices for what limited amount of terrorism 

cover is available, and limited reinsurance capacity. 

I thank you for this opportunity to address you on this important 

issue. 

[The prepared statement of Mr. Dubois can be found on page 97 

of the appendix.] 

Chairman BAKER. Thank you, sir, for your statement. 

Our next witness is Mr. Christopher J. Nassetta, president and 

chief executive officer, Host Hotels and Resorts, Inc. 

Welcome. 

STATEMENT OF CHRISTOPHER J. NASSETTA, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, HOST HOTELS AND RESORTS, 

INC. 

Mr. NASSETTA. Good morning, Chairman Baker, Chairwoman 

Kelly, Ranking Member Kanjorski, and members of both subcommittees. 

My name is Chris Nassetta, and I am president and CEO of Host 

Hotels and Resorts, the largest public owner of hotels. I also serve 

as chairman of the Real Estate Roundtable, and I am appearing 

today on behalf of the Coalition to Insure Against Terrorism, or 

CIAT. CIAT is a coalition representing a broad range of businesses 

and organizations from across key sectors of the U.S. economy, 

businesses that are the Nation’s principal consumers of commercial 

property and casualty insurance. 

I would like to make three main points today: first, that the key 

market conditions that necessitated TRIA’s enactment have not 

changed; second, that as proven in 14 other industrial nations, 

there is a need for a long-term public/private partnership, with a 

role for the Federal Government; and third, we stand ready to assist your subcommittees and Congress in general in developing the 

appropriate long-term partnership. There are a number of facts 

surrounding today’s insurance market that have not changed since 

TRIA’s enactment in 2002. 

First, the reinsurance market currently only provides a fraction 

of the capacity needed to protect the U.S. economy from catastrophic terrorism losses. Current capacity is nowhere near the 

level needed to provide protection to our economy without the TRIA 

backstop. Furthermore, even with the TRIA backstop, reinsurers 

are not meeting the capacity demand of primary insurers for their 

deductible and co-insurance layers. This suggests that private reinsurers simply want very little exposure to terrorism risk, and refutes the notion that the Federal backstop is crowding out the private market. 

Second, primary insurers remain largely averse to exposing 

themselves to potentially catastrophic terrorism losses without adequate reinsurance availability or a Federal backstop. We saw this 

last year when insurers began including—springing exclusions that 

20

would have voided terrorism coverage had TRIA lapsed. Terrorist 

attacks, particularly those including NBCR weapons, could result 

in catastrophic losses. As a new GAO report concludes, such risks 

are largely uninsurable because of their potential severity. 

Third, even though TRIA covers NBCR perils, we have not seen 

any evidence that suggests coverage is being written, except where 

mandated in workers compensation. NBCR coverage was not included in TRIA’s make-available requirement, and unfortunately, 

the private markets have thus far failed in this area. I am aware 

of no evidence to suggest this trend will change, particularly if Federal involvement were to cease. The GAO report confirms this and 

plainly states any purely market-driven expansion of coverage is 

highly unlikely in the foreseeable future. 

It is a simple, indisputable fact that markets like certainty. Unfortunately, there is almost nothing that can be considered certain 

about terrorism risk. It is clear to us that simply allowing the Federal backstop to expire will have significant negative economic consequences. It is imperative that lawmakers, insurers, policyholders, 

and all other stakeholders come together to work on a long-term 

solution to the availability problem. 

CIAT is aware of several proposals circulating for a long-term solution, and we are studying them with great interest. The Real Estate Roundtable has developed a proposal that would create a new 

mutual reinsurer that would cover conventional and NBCR risk 

through a pool that would stand between primary insurers and the 

Federal Government. 

Over time, the Federal backstop would be reduced as the mutual 

reinsurer accumulates reserves, and would only be activated if terrorism losses exceeded a certain level. Meanwhile, the American 

Insurance Association has come up with a set of principles that differentiates between NBCR attacks and conventional terrorism, putting a TRIA-like backstop in place for conventional terrorism, while 

the Federal Government would assume responsibility for all NBCR 

attacks, with the ability to recoup up to 10 billion through policyholder assessments. 

CIAT has not endorsed any specific proposal at this time, but we 

are pleased that many include a public/private partnership that 

recognizes the Federal Government’s responsibility to assist markets to function appropriately and to retain a Federal backstop for 

only the most catastrophic losses that the insurance industry and 

the economy simply cannot absorb. This is a national problem that 

requires a Federal solution. 

In the end analysis, terrorism is not aimed at a specific business 

or property owner; it is aimed at our governmental polices and our 

way of life. Government assistance to help the market function appropriately must continue to be part of our economic response to 

the threat of terrorism. Contrary to what some would like us to 

think, TRIA is not crowding out the development of private terrorism insurance markets. 

Another key element of these proposals is that they are all longterm solutions. Certain market conditions are simply not going to 

change as long as the threat of terrorism persists, and it does the 

market no good to have the threat of a backstop expiration hanging 

21

over our heads every few years. A long-term solution will give the 

market participants what they need most, which is certainty. 

Once again, we applaud the chairs and ranking members of these 

subcommittees for holding these very important hearings today, 

and I appreciate your time. 

Thank you. 

[The prepared statement of Mr. Nassetta can be found on page 

152 of the appendix.] 

Chairman BAKER. Thank you very much, sir. 

I will start questions with Mr. Case, just because of your position 

of observation as an interface. 

My concerns about our role in this are likened to the CEO’s responsibility to their shareholders. They have to assure shareholders of safe and sound operation and, at some level, profitability. On my side of the desk, my shareholders are the taxpayers. 

I have to prove to them that when I write a check out of their 

pocket, it is for a public policy reason of necessity, that it is constrained in the scope of what it offers, and that, where possible, we 

recover at any opportunity that assistance. The industry has been 

prohibited from having a long-term build-up of reserves, even dedicated for this type of risk. If we were to assume that could be made 

possible, which is a very long-term solution, it would also mean 

that we would hope for no intervening adverse event in the near 

term. 

Should there be, however, we had proposed in earlier iterations 

a sliding scale where the smaller the event, the more the industry 

responsibility; the more catastrophic, the more the Federal Government role would be enhanced. Even with that, over time, we would 

have deductibles moving up, we would have benefits moving down, 

and transferring as best we can, in a very steady, gradual methodology, less risk from taxpayer and more to industry, because over 

that same time period, the dedicated reserves would be building 

up. 

Give me your view. I am of the opinion that something must be 

done. The debate will be what is the nature of the remedy that is 

ultimately posed. What is your view of the acceptability of that 

general structure to the clients you represent and the ability of the 

industry to work in that type of environment? 

Mr. CASE. Chairman Baker, if you take a step back—and again, 

we are in discussions with businesses all the time about this—and 

just think about the track from 2002 to where we are today, and 

then consider the multiple proposals that are on the table—colleagues to my right and left—we have suggested there are four on 

the table that are coming up today that we could talk about. 

If you think about the track, we were at a place in 2002, when 

TRIA was enacted, in which we had an industry which had a limit 

of $15 billion that was the first initial term. We have raised that 

limit to $25 billion. 

I think, from the standpoint of what you all should and can and, 

I hope, do say, and I hope the constituents understand, you all put 

in place something, in our mind, again, with our company hat on, 

our firm hat on, that in no uncertain terms created a market that 

would otherwise have gone away. 

22

In our view, had TRIA not been enacted in the last bit of time, 

in its two iterations, capital investment in the United States would 

have slowed down, full stop. So, we represent and work with the 

largest construction companies in the world. 

We are privileged to work with many of the largest hotels in the 

world. It would have slowed down. So, first thing, to your question 

on speaking to constituents as a CEO, if you will, in terms of the 

track, I think the track to date, as I said in my opening statement, 

has been about as good as one could get. It required a pragmatic 

solution that is never going to be perfect, but in the end, it provided affordable coverage for a very uncertain risk. 

Going forward, specifically to your question, is there a solution 

that is longer-term, that creates more private sector ownership of 

a private/public combination? I suggest, absolutely. 

In fact, again, the Aon solution we proposed a year ago was one 

in which we felt so—we were so concerned about the situation on 

behalf of our—the companies we serve, we put a proposal on the 

table to get reaction, to force the conversation. We are not wedded 

to the Aon solution only. We are wedded to a solution, but let me 

describe that solution. 

Chairman BAKER. If you can be brief, I want to give Mr. Kelly 

a chance to jump in here before my time expires. 

Mr. CASE. I apologize. The solution is an $80 billion private solu- tion, with a $40 billion initial floor-way that builds up over the 

years, and if something should happen in the interim, has a funding bond which the industry pays for, which we do not believe 

would actually measurably increase premiums in a substantial 

way, and so, to your question, is there a solution that we can collectively come up with that starts to change the balance, make it 

more private ownership, less public, but keep the combination, absolutely. What we need is we have to have the government bridge 

in order to make that happen. 

Chairman BAKER. Thank you. 

Mr. Kelly, I know of your concerns about the repayment provision. I think at least my outside observation is the worst thing for 

the industry is uncertainty and surprise. If we are to do this in a 

very gradual, long-term program, while allowing internal reserves 

to build for this purpose, isn’t that—I guess my role here is to tell 

you, I do not want to make you happy. 

I want to make you reasonably uncomfortable with the solution, 

because that sounds like a pretty good deal from my side. In the 

real estate business, I never wanted to see somebody get overjoyed; 

I would know I had made a big mistake. So, I am trying, I guess, 

to be cautiously generous to make sure solvency and economic function is maintained, but we do not want to fund the industry’s profitability. That is not our job. Given those concerns, can you see how 

a gradual implementation of the structure that I have talked about 

could be made acceptable? 

Mr. KELLY. Actually, not only can I see it, Chairman Baker, I 

would applaud it. I think it is desirable that we feel uncomfortable. 

It is only if we are uncomfortable we will work aggressively with 

the capital markets to come up with solutions, but in the interim, 

we cannot expose—it would be Russian roulette for us to go forward without a Federal backstop. Although the chance of losing 

23

Russian roulette is only one in six, I do not expect to play it with 

the capital of the company. 

Chairman BAKER. But that sliding scale where, if it is a smaller 

event, we do less; if it is a bigger event, we do more—that is the 

near-term deal on our side. 

Mr. KELLY. In the current situation, we—I can speak for Liberty 

Mutual. If there were a significant event—we would lose $11⁄2 billion. $11⁄2 billion is not insignificant. So, we are already under 

pressure, and we are willing, as I stated in my testimony, to work 

on any method that increases the deductible over time. It has 

worked very well. 

Remember, what has happened in the last 5 years—buildings are 

more secure today because of the deductibles and insurance that 

we worked actively through the distribution mechanism and with 

our policyholders to make sure they are better protected today than 

they were 5 or 6 years ago. 

So, TRIA has worked not just to provide reinsurance or insurance, but has also made the country safer. As we get better at that, 

working with the policyholders, as we build up the capital, absolutely, we stand ready, over time, to assume more of the risk, and 

I think it is very desirable. We are firmly committed to the private 

market. However, we cannot play Russian roulette with the existence of our company. 

Chairman BAKER. Thank you, sir. My time has long expired. 

Mr. Kanjorski? 

Mr. KANJORSKI. The risk, obviously, is to the equity holder or to 

the funder. Yet, we do not cover certain of the contingencies that 

could happen in a terrorist attack on the United States. Apparently, even with that, the mortgage holders and lenders of these investments go forward and offer these mortgages. How do you explain that? 

Mr. KELLY. Well, I mean, right now, I think—we have a mandatory offer. Under TRIA, we are mandated to offer terrorism coverage, and I think the real estate industry has made it clear that 

they see the absolute need for their mortgage holders. In fact, if 

you look at how quickly New York has recovered, I think both Congresswoman Maloney and Chairwoman Kelly alluded to how well 

New York has recovered, we met those needs because of mortgage 

holders where legitimate claims were paid. 

Mr. KANJORSKI. Mr. Kelly, I am curious. Why were the mortgage 

holders happy when a great deal of their risks were not covered? 

Mr. KELLY. Well, I think, in any environment, there is only so 

much money that we can make available. 

Mr. KANJORSKI. That is what I am trying to get to. Just how 

much of the risk should we think about covering? 

There has to be certainly the possibility of a hydrogen attack on 

New York City. It would be trillions of dollars in losses. So, regardless of what we write into law here, it would pretty much bankrupt 

the country. 

Mr. KELLY. I think there is a two-phase process. I think we all 

share the belief that the private sector should take on as much as 

it can right now. So, we work on that. We can envision $7-, $8-, 

$900 billion events very easily. 

24

So, what we would propose is, right now, set a deductible that 

the private sector can handle, not comfortably—and I understand 

what Chairman Baker says. We are uncomfortable with it, because 

it is un-priceable, but we can get some money for it. 

Start with a deductible, and then say, beyond that deductible, it 

is so unpredictable and potentially so large that no single industry 

or no sets of industry can absorb that risk. It does become a shared 

risk, albeit the taxpayer shares it, but it is so large that the private 

sector cannot absorb it. 

Mr. KANJORSKI. Because we do not cover that risk at all right 

now, what portion would we have to cover— 

Mr. KELLY. We absolutely do cover it. Under workers compensation, we have no exclusions. I mean if an event were to happen— 

Mr. KANJORSKI. I am talking more about other property and casualty lines. 

Mr. KELLY. Well, on property, in many States there are—in 16 

or so States, which represents a small number of States but more 

than half the insurance industry premium, we cannot exclude—we 

are mandated to provide the coverage. In New York, for example, 

we have to provide the coverage. I mean we cannot exclude it. So, 

the exclusions are not there, not available to us. 

Under a normal free market, we would exclude risks that would 

potentially bankrupt us. We cannot exclude those risks in most of 

the major States. 

Mr. KANJORSKI. When do the mortgagers become happy and satisfied to continue the normal course of business? In other words, 

what is that risk that they are willing to accept that you cannot 

insure and you do not want to cover that risk? 

Mr. KELLY. I do not think it as much the mortgage holders as 

it is the lenders. 

Mr. KANJORSKI. Lenders. 

Mr. KELLY. I think they have made it very clear. 

The mortgage issuers made it very clear that, absent a Federal 

backstop, there will be no commercial—very limited commercial—

mortgage available, and I think this would better be addressed by 

the representative of the Real Estate Roundtable. 

Mr. NASSETTA. I think that is right. 

I think the question you are trying to pinpoint, as I am hearing 

it, is on NBCR, for example, where we are saying there are exclusions, how are mortgage holders getting comfortable that—having 

something on basic conventional terrorism but nothing beyond 

that, and I think the answer is, from our perspective, they had 

minimally been comfortable with that, but I think that the risk in 

it is there only has to be one event, and it does not have to be a 

large event, that falls into those other categories, and I will tell you 

uncategorically, you will see the mortgage industry shut down in 

terms of its ability to lend to the real estate industry, because it 

will not be willing to take those risks. How they have concluded to 

date to take those risks—I could not tell you how the underwriting 

has been done, but I can assure you, in our opinion, that to the extent you have any event, that will shut down the CMBS market, 

which is obviously a large part of that market. 

Mr. KANJORSKI. If it shuts down, how will you reopen it? 

25

Mr. NASSETTA. I think you will reopen it by having that risk covered in some way. 

Mr. KANJORSKI. So, we would have to come back here to Congress? 

Mr. NASSETTA. You would have to come back, and so, I think 

part of our objective in being here, and having worked on this personally for the last 5 or 6 years, is to have an orderly process set 

up in advance to deal with these problems, rather than having a 

catastrophic shutdown in one or more parts of our capital markets. 

Mr. KANJORSKI. Okay. Maybe I misunderstand you, but are you 

suggesting that if we do not cover nuclear, chemical, and biological 

events, and once that occurs, and since it is not covered, that it will 

shut down the market? 

Mr. NASSETTA. I think that would cause a very significant shutdown in the lending market. 

Mr. KANJORSKI. So, as TRIA exists today, it would take one terrorist attack, using one of those mechanisms, to cripple the economy? 

Mr. NASSETTA. In my estimation. 

TRIA exists today. I think it is fabulous. I applaud the leadership 

in getting it done, and it does allow for capacity in the market that 

has been needed to keep the capital markets generally flowing, but 

there are some important things missing from TRIA. 

I think the distinction between domestic terrorism and the risk 

associated with domestic terrorism is a gap in the system, and 

NBCR is a meaningful gap, not in TRIA, but given the fact that 

it—unlike conventional terrorism, there is not a make-available 

provision. It is not offered, and I think, absolutely, to the extent 

you had a meaningful event that fell under those categories, it 

would be very disruptive to the financial markets. 

One other comment on the question Mr. Baker asked and got a 

response to: When we think about reduction or increases, rather, 

in retention or deductibles and additional capacity coming into the 

market—and I respect, obviously, everybody to my right that is in 

the industry, that is providing this product, but I will tell you, from 

my experience, personal experience on the matter, with the 

deductibles going up after the extension, actually capacity has been 

diminishing in the market, and the cost has been going up. 

Now, we are not here from a consumer point of view to complain 

about costs. We will pay what it takes. We are just talking about 

capacity. But I think we have to be very careful to make sure whatever we are doing in weaning the Federal Government out of the 

system, which we absolutely agree with over time, that there is 

somehow created a pool of capital that is there to pick up the slack, 

because to the extent—as we are doing today, we just modify TRIA, 

and we do not create any mechanism for capital to accumulate. 

My own opinion is that there is risk to the capacity in the market. Certainly, as I say, our personal experience has been, in the 

last 2 years, capacity for what we could achieve has gone down, 

costs have gone way up. 

Mr. AYER. Chairman Kanjorski, if I could jump in here and just 

clarify a couple of things? 

Mr. KANJORSKI. Yes. 

26

Mr. AYER. First of all, on the question of nuclear, biological, 

chemical, radiological, the GAO report has one or two errors in it. 

The market still does cover, first of all, all conventional attack 

modes. There is also coverage available today, and specific to the 

nuclear peril, since most property destruction occurs from fire following the nuclear peril. So, there is enormous coverage. 

Mr. KANJORSKI. You therefore think that there is potential coverage there? 

Mr. AYER. Fire following coverage, as Mr. Kelly was pointing out, 

is still in the contracts, and our big concern is the fact that absent 

NBCR type of backstop, we not only take property-oriented risk, 

but workers compensation, which is a big, big amount of coverage 

that the insurance industry provides for American workers will be 

one where the industry could get devastated. 

Mr. KANJORSKI. I am going to use a term now that will absolutely exacerbate the other side of the aisle, but I am throwing it 

out to you, because I am listening to an industry that wants help. 

Mr. AYER. Please do not get me in the middle of that. 

Mr. KANJORSKI. I have always been considered extremely conservative about inserting government into the private sector. But 

now, as testified here rather unanimously of the need for government involvement and as my opening remarks indicated, I tend to 

agree with you in this time of peril, perhaps the next 2 or 3 decades, we are probably going to have that involvement. 

As a potential solution, how much thought has been given—I 

think, Mr. Kelly, you may have even referred to it in your testimony—to creating a government-sponsored enterprise, somewhat 

similar to Fannie Mae or Freddie Mac? 

Chairman BAKER. You are right about some people’s response to 

that. 

Mr. KANJORSKI. I just wanted to give you prior warning. 

Mr. KELLY. I did not mean a government-sponsored entity. 

I mean legislation that would enable the private sector—for example, the cat bond market, right now, is, in fact, based in the 

Cayman Islands, for tax reasons. It is not a U.S. market. 

Mr. KANJORSKI. You get all the up-side, and we get all the downside. 

If we form a government-sponsored enterprise, we fill a vacuum 

that the private sector has not yet filled. 

It can be structured in such a way as to create a reinsurance 

market and eventually go back to the private market. But if, in the 

meantime, no disaster occurs and there are some premiums that 

are acquired, there is a sharing of the benefit. I think it is only 

fair, if we are going to play cards together that the taxpayers that 

Mr. Baker wants to protect should be the recipients of some of the 

premiums or benefits from the game. 

Mr. KELLY. I do not want to get into the discussion of Fannie 

Mae and the issues involved in government-sponsored entities. 

I do believe that, to the extent there is no event, the taxpayer 

does participate; it gets 35 percent. We pay significant taxes on our 

profits. We are a significant taxpayer. So, to the extent there is no 

event, indeed, the government participates. What we want to do is 

create an environment where the economy can grow. The government is going to benefit from increased tax revenue. 

27

Mr. KANJORSKI. So, your answer is you would not look at a government-sponsored enterprise. 

Mr. KELLY. No, we think—legislation enabling the private sector 

to form better structures. Right now, the cat bond market, for example, is, in fact, an offshore market for tax reasons. 

Mr. KANJORSKI. Should it be mandatory that every company— 

Chairman BAKER. That has to be the gentleman’s last question. 

Mr. KELLY. Mandatory that every company offer terrorism— 

Mr. KANJORSKI. Yes. 

Mr. KELLY. We work under a mandatory offer right now. It has 

worked. Whether or not I get into the philosophical debate is immaterial. It has worked, and I think we can live with the current 

mandate. 

Chairman BAKER. The gentleman’s time has expired. 

Chairman Oxley? 

The CHAIRMAN. Thank you, Mr. Chairman. 

Mr. Kelly, your answer on the GSE’s was absolutely correct, and 

I am sorry I missed your opening statement. I hope you did not do 

any unwarranted bragging about the results of the Ryder Cup. 

Mr. KELLY. I restrained myself. 

The CHAIRMAN. Thank you. 

Mr. KELLY. But if you want me to start, I shall. 

The CHAIRMAN. No, I do not want to give you that chance. 

We have had quite a history of TRIA, and I was thinking the 

other day that our goal, ultimately, when we passed the original 

TRIA bill, with the strong support of the President—we probably 

would not have been able to do it without his aggressiveness on 

dealing with this issue, and I remember, at the bill-signing ceremony, how proud I was that we had really come together, bipartisan, and the Administration, to pass the original TRIA bill, and 

then the second go-round was not as satisfying, because we had 

issues with the other body, to some extent, with the executive 

branch, about the extension and how we would—ultimately, what 

kind of conclusion we would come to. 

Ultimately, the goal, as Chairman Baker knows, and Chairwoman Kelly, and others who worked on this bill, was to provide 

a backstop but, indeed, to encourage the private sector to step up 

and deal with this issue, to get the reinsurers back in the game, 

to really gradually come back to a free market solution. 

It is obvious from your testimony and experience that that has 

not happened, and we still face that same problem, except that we 

now face it with a looming deadline that could be catastrophic, to 

coin a term, for our economy in going forward with our insurance 

coverage. 

As you know, both the original TRIA bill and the Baker-OxleyKelly extension bill allowed insurers to set aside dedicated terrorism reserves, and because we were unable to secure the cooperation and support of the Ways and Means Committee, we were left 

with something less than a whole package to try to deal with that. 

So, let me just ask anybody, or all of you on the panel, is there 

any question that allowing long-term reserving for terrorism risk 

without a tax penalty would help stabilize the market over time? 

Is there any doubt about that statement? 

28

Mr. AYER. Congressman Oxley, first of all, thank you for your 

leadership on the first TRIA bill and your continuing support. I 

just wanted to be sure we all recognize your contribution here. 

Going back to the chairman’s earlier question on this whole issue 

of tax reserves, tax reserves, over time, will help the insurance industry deal with catastrophic losses if we are permitted to do so, 

but it is very important that we all recognize—and you as CEO’s 

have to be commended, CEOs in the taxpayers’ behalf, because you 

moved our retention from 71⁄2 percent to 20 percent. Our retention went from somewhere around $400 million or so 

to $1.3 billion going into next year. So, you are shifting accountability to a greater and greater degree, and even in the layers 

above the industry’s retention, the participation of the industry will 

increase going into 2007. So, you are doing a fair amount of shifting accountability to the private sector. My big concern is, even 

given all these best efforts, on NBCR-type perils, the devastation 

that could result from it, absent a Federal backstop, will wipe out 

big chunks of the insurance industry. That is the reason why we 

need a public/private partnership. We cannot forget that. 

The CHAIRMAN. I think that is well spoken, and indeed, the hidden secret is that this thing has worked, and it is proof positive it 

has worked, and I think it would have worked better, frankly, if 

we had the reserving option, and hopefully, in the next Congress, 

we are kind of setting the table here, I think, Mr. Chairman, for 

what will inevitably be an effort to reestablish TRIA, to continue 

to provide for more participation of the private sector, for you folks 

to have more skin in the game, to be able to protect the taxpayers, 

which Chairman Baker has insisted on, correctly, but I would hope 

that we could take a step back and look at the whole picture, and 

clearly, the reserving aspect is critically important. 

I wondered if all of you could just simply give me a sense of how 

long and how we would best structure a reserving program, how 

long it would take, for example, and how you would see it unfold 

as we try to move more responsibility towards the private sector 

and less towards the government. If you were to write a bill or if 

you were to look at your own particular situation, how would you 

structure that that would make sense and protect our economy and 

really make certain that we do not have a real meltdown should 

some catastrophic event occur? 

Mr. KELLY. This is an issue—there is significant discussion within the industry, because it is not just with respect to terrorism risk, 

it is also the overall natural catastrophe risk. 

There is no debate that, for every contingency that confronts the 

country, we are much better off if there is savings accumulated in 

the private sector, and reserves are a form of savings, if you will, 

and tax-free reserving encourages saving. 

In most countries, in Europe, there have been traditionally—and 

up until about 20 years ago in the U.S. casualty industry—contingency reserves allowed on an accounting basis, not on a tax basis 

in the United States, and you can set up mechanisms that say how 

much a company could put into it in a given year, based on their 

total exposure, on the deductibles, and whatnot, as the deductible 

moves up. 

The CHAIRMAN. So, it would be a ceiling, essentially? 

29

Mr. KELLY. Yes, a ceiling. The problem is—as a mutual—we are 

under less pressure from shareholders to release profit quickly. So, 

as the industry is sorting it out, we have to balance the industry 

with shareholders and whatnot, the public, but there is a significant portion of the industry that believes that tax-free reserves, 

properly structured, are a very good way, over time—I have not 

seen a model to see when we would accumulate a lot, but this is 

still an open discussion in the industry. 

Mr. AYER. If I could just clarify, Congressman Oxley, the eligible 

lines, property casualty insurance lines, premiums is about $150 

billion or so, and so, if you are thinking in terms of a $100 billion 

event, you know, you can do the math on how long it is going to 

take from a reserving perspective to provision for something like 

that, and that is exactly why a public/private partnership is very 

helpful, because under the current TRIA bill, post-an event, the 

government does have a recoupment mechanism excess of the company retention. 

There is an enormous amount of genius in the way you all have 

constructed the current proposal. I would not reject it that easily, 

because there is a good balance between private involvement, between your capacity to recoup from policyholders and companies 

over an extended period of time once you have a terrorism event. 

The CHAIRWOMAN. I know Mr. Case wants to respond, but back 

to my frustrations, had we enacted that reserving as part of our 

original bill, we would be well on our way to having those reserves, 

and so, we really—we have lost 4 or 5 years here, dithering around, 

worried about jurisdiction and everything else that is totally irrelevant to the issue at hand. 

Mr. Case? 

Mr. CASE. Congressman Oxley, I think the facts bear out exactly 

what you said, and I think your specific question was what you do 

going forward. At the risk of putting an option out that Aon put 

forward to the industry a year ago for colleagues to react to, I will 

get very specific around how one might think about it. First of all, 

do you need the build-up capability you have described? Absolutely. 

I think the committee has to make some decisions, and our 

broader—the broader group has to make some decisions. Is the government going to be involves? Yes or no? You have heard all of us 

say quite strongly it will not work otherwise. 

Then the second question is to what level? How high does it go? 

And you need some specifics. The analytics we did basically said, 

at what point will the reduction in capital—again, we are doing 

this on behalf of clients, of which some are insurance companies—

at which point does the industry start to lose rating, and when the 

industry loses its rating, it will lose its ability to write, capacity 

goes away, and none of us like that picture. 

So, there is a threshold. The threshold around the analytics—and 

we are not saying it is exactly right—was roughly $40 billion. So, 

in a $40 billion first traunch, if the industry—we stepped up to 

that, and they had made a $2 billion contribution every year for 

the next 20 years, we start to build what you have described. Now, 

$40 billion—that is two World Trade Center events. That would be 

first layer. 

30

The second layer would be a post-event issuance of a bond. If 

something happens, a bond is issued, and the industry pays it 

back. This actually has—you captured a lot of this insight in the 

first round of TRIA, and that’s another $40 billion, and the industry would pay that back. That basically says that the industry 

steps up to $80 billion over time, and I have thrown out a 20-year 

time-frame, again not because, Congressman, it is the right answer, but it gives you a perspective. 

If you said—and you are going to have make that—we are going 

to have to make that call. You are going to have to make that decision, at what level are you describing, I would put forth two $40 

billion traunches, one more direct, one more indirect, at $80 billion. 

The item I would urge you not to get confused is we continue talk about NBCR and the efforts—you know, $80 billion, while a 

tremendous amount of money, is wiped out in some of these other 

issues, which is why they have to be included, from a government 

standpoint, but make no mistake about it, you know, getting the 

industry, guys to my right and left, to step up to an $80 billion 

commitment, traunched over time, with the build-up you have described, puts us in a fundamentally different position, and again, 

back to you as a CEO, thinking about your constituents, there is 

$80 billion at risk before the government steps in. That is a pretty 

fundamental commitment, and again, we are not suggesting the 80 

billion is correct, or the traunch of 40, Congressman, is right, or 

the next traunch. 

What we looked at was inflection points and when the industry 

got downgraded, at which time the industry would lose its ability 

to actually be effective. 

Chairman BAKER. Thank you. 

Mr. DUBOIS. I would like to comment that I think there are examples elsewhere in the world, in other countries, where reserves 

have been allowed to build up in pools or other vehicles, that then 

get used to pay for terrorism risk, should terrorism events happen. 

Now, none of these other pools or reserves have suffered losses 

like we did on 9/11, but nonetheless, there certainly are possibilities and models that can be looked at. 

You know, the industry, with, let us say, a $30 billion retention 

today, or whatever, is already in a position of having a lot of skin 

in the game, and the types of losses that NBCR could create are 

so severe that these losses—and I do not think there really are 

pools that could be created on a short-term basis, that could come 

close to dealing with this. I think the government has to be involved, and has to be involved in a very substantial way. 

I think that there are also potential issues with regard to how 

you go about establishing reserves for this. There needs to be an 

actuarial determination. How do you determine how much reserve 

you should put aside for something for which the frequency and severity are unknowable? I think those are big issues that would 

have to be wrestled with to avoid problems that could be created 

and create issues that taxpayers would object to. 

The CHAIRMAN. Thank you. 

Mr. NASSETTA. I guess, following on what the two gentlemen to 

my right just said, the thing we cannot lose sight of in any program, ultimately, that we jointly come up with is that, whether it 

31

is $70- or $80 billion of skin in the game, from a consumer point 

of view, one of the things—and from an economic point of view, 

looking at the country’s economy, we cannot disregard the NBCR 

and the super-cat. 

A lot of the solutions that have been batted around, I think—and 

while TRIA, as I said already today, is a very successful program 

and allows for NBCR, we have to find a mechanism in whatever 

we do to allow for capacity in those areas. 

If we do not, obviously the markets are functioning reasonably 

well today, effectively, without it, because it is not being offered, 

but as I mentioned in response to Mr. Kanjorski’s earlier question, 

all it takes is one event, and we are back in a mad scramble, a la 

Katrina, to figure out what we are going to do, and what I would 

off out is I think it will cost the Federal Government a lot more 

money trying to clean up the mess afterwards than it would have 

to have a reasoned program put in place up front. 

So, while we have not had to deal with it yet, certainly the risks 

that we all hear about from our President and everybody down the 

line is those are the real risks that are in front of us today. 

I think any program we come up with that leaves those supercat kind of concept to, you know, figuring it out later are misguided. I think it will be very costly to the economy and very costly, ultimately, to the taxpayers. 

The CHAIRMAN. Mr. Chairman, I think Mr. Nassetta said it best. 

That is, does anybody here really think, if we had a catastrophic 

event, that the Federal Government would not respond, the way we 

did with Katrina or any other natural disaster, whether they are 

floods or draught or anything else? 

That is just the nature of the beast, and anything that we can 

do to alleviate that or to mitigate it seems to me exactly the right 

approach to take, and to say, you know, next year, the program expires and everybody goes back to their corners, to me, is not even 

close to a solution. As a matter of fact, it abdicates our responsibility to the taxpayers big time, and I thank you for your leadership, Chairwoman Kelly, others on the committee, who get it and 

who want to make this thing right, despite all of the political difficulties that we run into. You are on the right track, and I wish 

you the best. 

I yield back. 

Chairman BAKER. Thank you, Mr. Chairman. I simply want to 

say that the general testimony here this morning has been that the 

TRIA in place has had a substantial positive effect on market function. It has worked, it was properly crafted, and to a great extent, 

it is the product of your work effort and intense focus to get this 

across the finish line. 

So, I wish to sincerely commend you for your hard work on this, 

and please know, going forward, whatever fortunes hold next year, 

you hanging over our shoulder up here will be a constant reminder 

we need to get this thing right. 

Ms. Maloney? 

Mrs. MALONEY. Thank you, Mr. Chairman. I would add to your 

statement about TRIA working. From our experience in New York, 

we could not even build a hot dog stand until we got TRIA in place. 

All building had stopped, and the rebuilding had stopped, until we 

32

got the insurance program in place. I join my colleagues in thanking you for your thoughtful testimony. 

All of you have spent a great deal of time trying to come up with 

some long-term solutions, and that is the type of thinking that 

members of this committee tried to write into the TRIA extension 

bill. 

We tried to include a blue ribbon commission of leaders in the 

industry that would come forward with concrete ideas and solutions to move forward with. Unfortunately, that was not included 

in the extension of TRIA. It only provided for a working group, 

which is led by the Administration. The Administration has not 

issued their report yet from this working group, but from some of 

the signals that I have gotten from the Administration, I am not 

optimistic that they will come out with creative ideas that include 

a government component. 

So, my question to you is what have you done to advance your 

ideas with the Administration or, specifically, with the working 

group that is charged with coming up with a long-term solution, 

and then, secondly, what can we as a government do to help your 

industry, to support your industry while you work to come up with 

a long-term solution? 

As I said, we tried to have it in the Administration—in the bill 

that we put forward, but the working group is out there, they are 

going to be coming out with a report soon. I hope that you have 

made contact with your ideas, and I would like to really call first 

on Mr. Case and Mr. Kelly, because they have spoken at great 

length on some of their ideas and some of their solutions, and really open it up to all of the members of the panel. 

Mr. KELLY. Thank you, Congressman Maloney. 

We have met—Liberty and the industry have met several times 

with the working group. I do not think they heard anything that 

you have not heard today. We have spelled out clearly two things, 

and I will reiterate them. 

First, there is not enough capacity—I think there is unanimity—

there is not enough capacity in the private sector to absorb a significant event. 

Second, the private sector stands willing to absorb more risk over 

time and is willing to work with creative mechanisms to allow us 

to do that. We have made that clear. 

Most importantly, we cannot live continually under a period 

where we are going to lose coverage every 2 or 3 years. It is not 

useful for us, it is very disruptive for our policyholders, and it is 

bad for the economy. So, we need to recognize—and we have made 

this point very clear—we cannot do it without government help, we 

will try to do more over time, and we cannot continue to stand the 

uncertainty. 

Mr. CASE. Congresswoman Maloney, you asked two questions. 

One is what specifically are we doing and what you can do to 

help the industry. You know, what we have done is tried to put a 

concrete proposal on the table, again not as an answer but as a 

stocking horse, if you will, to take shots, and it has gotten plenty, 

lots of new ideas on the table, but we are going to continue to redouble our efforts to make sure that the committee understands 

what is out there, what the possibilities are. 

33

The most important thing I would address, though, is, in my 

mind, your second question, which is what can the industry do? 

One thought I would suggest to the committee is that if this is 

viewed as an insurance industry issue—again, Aon is not an insurer in the way that my colleagues to the right and my left are—

it is a view on the issue that is—scope is way too narrow. 

I am not suggesting you were there in any way, in any event, but 

just for the record, this is an issue for businesses. It is an issue 

for Marriott. It is an issue for businesses around the world. 

Our concern, which is the reason we put forward a solution, is, 

if it ever gets construed as an insurance company set of issues and 

an insurance company backstop, if you will, in our view, that undermines what you all have actually put in place, and undermines 

the ability to actually talk about this issue in a way that can be 

very productive. So, I would ask your help to make sure that, when 

the solutions come forward, they are from a broad-base sector—financial services, which include the banks; the insurance companies, their constituents and companies out there trying to make investments and build. All these constituents are incredibly impacted 

by this. 

I can make an argument that banks are as impacted as insurance companies. Banks will eventually be—if they are building 

buildings and they finance them, they eventually are going to be 

the construction owners, and they are eventually going to be insurance companies, if anything happens, and the banks do not want 

to do that. So, please help us make sure the constituent group is 

broad enough. 

Mrs. MALONEY. Any other comments? 

Mr. AYER. We belong, Congresswoman Maloney, to—we belong—

the AIA, ACLI, as well as the CEO Roundtable that Mr. Kelly referred to, and in all cases, we have actually worked and reached 

out to the working group to advance ideas and kick around different alternatives, and I believe that the industry eagerly awaits 

the analysis and is hopeful that, fundamentally, we will continue 

to have a public/private partnership here for the risk of terrorism. 

Mr. DUBOIS. We have been involved in this discussion for 5 years 

now, as many of us here in this room, and we are today reinsuring 

terrorism risk, to some extent. We are the largest reinsurer worldwide, and we collect premiums from around the world to cover exposures here and in the U.K. and in Spain, etc. 

The appetite, for the industry, however, as I said earlier, for reinsuring terrorism risk, is still limited. That may change over time, 

but it would require the reinsurers and society at large to consider 

terrorism risk to be a lessening risk. We do not yet see that. 

We in the RAA have been working on alternative solutions, as 

well, just as Mr. Kelly and Mr. Ayer and Mr. Case have been suggesting for themselves, and I think that there is an opportunity for 

all of us to get together to work on these solutions. Pools are one 

possibility. Reserving is another possibility. They all have problems 

attached to them, but I think that there may be ways that, collectively, we can do it. 

You know, cat bonds are suggested as an alternative. Yes, but 

cat bonds face the same pricing problem that we face. I do not 

34

know why the capital markets would look at the pricing any differently. After all, the capital markets supply capital to us. 

So, consequently, I think that it is a potential long-term solution, 

but it is nothing immediate, but I can assure you that we, Swiss 

Re, are more than happy and willing to work with any working 

group or any of the insurers, reinsurers, and brokers, etcetera, to 

come up with alternative solutions that can be meaningful on as 

short a term period as possible. 

Mrs. MALONEY. Thank you. 

Mr. NASSETTA. I think most of it has been said. On behalf of 

CIAT and the roundtable and personally, we have been spending 

a lot of time with the members of the President’s working group 

and, I think, have had a good dialogue, as others have, about the 

various options. We are not, at CIAT, promoting one versus another. We think there are a lot of alternatives that would make 

sense. 

What we are promoting is, really, making sure all the interested 

parties are in the same room and have an incentive to find a way 

to make this work that is balanced, that is balanced in terms of 

the policyholder versus the insurers, the reinsurers, and ultimately 

the taxpayer. So, from the standpoint of your question, what can 

you do, short of, of course, passing legislation, which would be terrific, it would be to continue to put the pressure on all of us and 

all the other interested parties on this issue to really sit down and 

force the parties to figure out a balanced public/private partnership 

equation that ultimately makes everybody reasonably uncomfortable, as Chairman Baker said, which I think was a very good way 

of putting it, and so, I think there is a good start. 

I think there is a lot further to go, obviously, and we are going 

to be running out of time. People are renewing policies. From a 

consumer point of view, this is an issue that is accelerating very 

rapidly as people go out to renew their policies, and so, very timely 

that we are having the hearing today, and again, all of us very 

much appreciate it. 

Chairman BAKER. The gentlelady’s time has expired. 

Our co-chair, Mrs. Kelly. 

Mrs. KELLY. Thank you. The House bill we drafted last year had 

a specific program for the NBCR coverage, and the GAO has said 

that that is the greatest terror risk to our country, but there is no 

private market that has really developed on that. Is there any 

doubt that we need to have a specific NBCR protection written into 

this law? Do any of you have any question about that? I am just 

going to ask you to give me a quick yes or no. 

Mr. KELLY. I think, given the significant difference in NBCR 

from, if you will, conventional terror—I mean it is somewhat sad 

that we now talk about conventional and non-conventional terrorist 

acts, I mean the world has changed so much. 

There is such a significant difference in terms of predictability, 

in terms of the long-term emergence of damage from—whether it 

be biochemical or nuclear—that it is so significantly different, we 

believe it is highly desirable to treat the two separately. They can 

be coordinated, but they need to be treated separately. 

Mr. AYER. There is no doubt in my mind that we need a Federal 

partnership on NBCR. I would also say, on conventional acts, we 

35

are always concerned, as you saw in the case of the London terrorism incident, of what we in our industry refer to as swarm attacks. So, you could have conventional attacks occur in several cities at the same time, which collectively could be a serious size loss 

that the industry would have difficulty responding to. 

That is the reason why your increasing retention has been a nice 

device, a good device to construct the right balance between how 

much the industry ought to bear versus how much the government 

ought to step in as a backstop. 

Mrs. KELLY. One of the things I think that is problematic for the 

general public is that they have not seen the movements within the 

industry that have enabled it to cover, so far, the World Trade 

Tower disaster and Hurricane Katrina, and with the terrorist attack on the towers, followed by Katrina, it has had an economic effect on the whole country, but people have not thought about what 

has gone on within the industry itself, and I would like to ask what 

it took, if you are willing to share, what it took within your industry to be able to cover the disaster of Katrina and the hit of the 

terrorist in New York. 

Mr. KELLY. We assume great fiduciary responsibility for the capital of our companies, so we try our best to manage risk, and it is 

a truism in the insurance industry, the best accident or best claim 

is one that never happens. I think if you go around the cities and 

malls of America, you will see that they are significantly safer, 

whether it be devices as concrete pylons, metal pylons, to keep 

trucks away from the front of the building—we, separately, and a 

competitive marketplace, have worked with each of our policyholders to reduce the terrorism risk. 

The average consumer does not see that. They see a planter in 

front of a building, and they think we are beautifying the building. 

No. We are working with the policyholder to make sure nobody can 

drive a truck bomb up beside that building. 

I think what is not obvious—obviously, what is obvious in New 

York, Chairwoman Kelly, is that things recovered, but what is not 

obvious is that around the country, we, working with the policyholders, have made this country safer against terrorism. We are 

glad it is not noticed. We are proud of what we have done, and 

each of us do it in our own way, but it is a safer country for that 

reason. 

Mrs. KELLY. I want to go back to this question again and ask 

about manipulations within the industry itself. Have you had to 

help each other because of the amount of coverage and exposure 

that one person in the industry has had versus another person? 

Mr. KELLY. The TRIA has allowed the free market to work in the 

following sense—and I speak for how we approach it. We can tell 

you in New York, within a hundred yards, within a quarter of a 

mile, how much exposure we have. Once it gets more than we have 

an appetite for, we back out. 

TRIA allows other people who are willing to step in, to pick up 

the exposure. We cannot do it in collusion, but when we, as a company, decide not to bid, there is always enough people in there bidding for the risks we do not want. So, TRIA, by creating a certainty 

as to the absolute amount of loss, no runaway losses, has allowed 

the free market to work very, very well. We can make normal ecoVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
36

nomic decisions, and there is enough capacity left underneath the 

TRIA deductible to meet the needs. So, it is a remarkably effective 

construct. 

Mr. AYER. From a consumer point of view, I agree with all that, 

and I think it is actually a fairly simple approach, when you think 

about it. 

As it has been for a hundred years or more in the insurance industry, the tradeoff has been limited, as described by Mr. Kelly, 

meaning limiting exposure in certain areas. 

It has been through exclusions, like excluding NBCR and other 

things, so that not taking certain risks at all—and it has been 

through rates, which is to say that our rates from a consumer point 

of view—and again, I am not saying it in a negative sense, it is because of these things that have happened—the rates are multiples. 

So, it is through limiting risk, excluding risk, and getting greater 

payments to cover what risk remains. It is a simple equation of a 

profit-making business. 

Mrs. KELLY. Mr. Case, I see you looking as though you would 

like to answer that question. 

Mr. CASE. Congresswoman Kelly, it is interesting—I agree the 

markets have worked in a wonderful way. There is $15- to $25 billion at risk as that has evolved over time. Mr. Nassetta is right, 

though. Rates have gone up. Post-9/11, rates went up quite substantially, as they needed to do. 

If you talk to constituents, look at the balance sheets of the insurance industry, because one question you should be asked is why 

would you be thinking about this when it looks like the industry 

is so strong right now? That will be a question you will be asked. 

I think a reasonable response is that the balance sheets of the 

entire industry, the overall capital, were at a much weaker position, having coming through a decade of softer prices in 2001. The 

$20 billion event, which was the World Trade Center, was devastating in that context, plus we had a market crash afterwards, 

equally devastating. 

Understand, last summer was a 60-plus-billion-dollar event that 

my colleagues’ balance sheets absorbed, and they actually came out 

of it quite well. In fact, they are prepared and they are well 

equipped to kind of continue to meet the needs of consumers and 

of businesses, and it is because of all the preventions that happened, that Mr. Kelly talked about, and everything that went on, 

all those are good, but the market was forced to react. Prices did 

go up over time, and the mechanisms did work. 

Mrs. KELLY. Thank you. 

Yes, Mr. Ayer. 

Mr. AYER. Just a quick additional thought here. TRIA cost us 

close to a billion dollars—not TRIA—the World Trade Center cost 

us close to a billion dollars, and the devastating hurricanes of last 

year cost us close to a billion dollars. When we had the WTC event, 

we did have reinsurance. Today, our retention inside of TRIA is entirely borne by The Hartford. 

On the other hand, we have close to a billion-and-a-half of reinsurance available on natural disasters, and so, today, we scour the 

world markets, including capital markets, to seek reinsurance support. So, that is the distinction. 

37

So, what changes inside The Hartford? We not only are a writer 

of property, casualty, and workers’ compensation insurance; we 

also provide group life, and we are one of the largest lenders to 

commercial real estate through commercial mortgage-backed securities. 

So, what we have to do is really take a second look at how our 

aggregations stack up inside of cities, including New York City, 

how much lending are we doing, how much group life are we writing, how much comp and property insurance are we affording, and 

that is the change in our lives post-TRIA. 

Mrs. KELLY. I have one more question, and that is, the White 

House-controlled PWG report last year was not—did not contain 

what the House bill contained. The House bill—we had an independent commission looking at the future of terrorism insurance 

that would have had experts from both sides. Would you support 

the establishment of an independent TRIA commission that represented government, policyholders, and the industry? 

Mr. KELLY. I hate to say yes, but—yes, I think that would be a 

very desirable way to make sure there is an open hearing and a 

broader constituency. 

My concern is that were we to advocate such a commission, it 

would provide an excuse to give us another temporary extension, 

and one message I do want to leave—I have said it several times, 

and I will say it again, and I think Mr. Nassetta alluded to it several times, too. This idea that, every 2 or 3 years, we are in limbo 

is not a good thing. 

So, if a commission delayed a permanent solution—it would be 

not a desirable thing at all. On the other hand, any mechanism 

that gets the best and widest thinking would be highly desirable. 

Mrs. KELLY. Thank you, Mr. Kelly. 

Chairman BAKER. I thank the gentlelady. 

Mr. CASE. As long as the industry is defined broadly enough—

and I apologize for repeating, but if the industry is the insurance 

world, it has, in my view, hindered the ability to actually push this 

forward. If the industry is represented by the capital providers, 

banks, etcetera, and is there with insurance companies, with reinsurers, and it is broad-based, you are going to get a much richer 

view of what the possibilities are. 

Chairman BAKER. I thank the gentleman. 

Mr. Hinojosa? 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

I would like to make a statement and then ask a question of Mr. 

Gregory Case. 

Some folks suggest that TRIA is crowding out private market solutions. Has the amount of reinsurance available for this risk increased since we renewed TRIA, and is it enough? 

Mr. CASE. To the question of is it crowding out private solutions, 

within the construct that was set up by TRIA, in terms of the aggregates that are there for the broader market that the industry 

absorbs, I think, as Mr. Kelly was pointing out, there has been a 

tremendous amount of innovation to try to operate within that context. To take on additional risks that are both unpredictable and 

unquantifiable, basically, if I may offer, kind of finite capital 

against infinite risk, there have not been a lot of solutions that 

38

show up sort of in that genre, as Mr. Dubois described, which is 

why, within the context of the next iteration, should there be one, 

of how we think about, you know, a set of solutions, the innovation 

in the capital markets and the innovation in the industry, the innovation on the reinsurance side is—you know, in my view, is not 

going to be constrained at all with regard to whether the government—if the government is involved. In fact, quite the reverse, 

what the government backing would do is to provide a stable playing field upon which the participants could actually put some 

things forward and potentially price product to be effective. 

Mr. HINOJOSA. Mr. Chairman, based on what I have read and 

heard, I think it remains extremely important that we, the Federal 

Government, continue to collaborate with the private sector and, in 

some form, on this issue. 

I want to thank you, Chairman Baker, for holding this hearing, 

and I want to work with you and Ranking Member Kanjorski and 

with other members of our subcommittee to keep this terrorism 

coverage available. I yield back the balance of my time. 

Chairman BAKER. I thank the gentleman. 

Mr. Garrett? 

Mr. GARRETT. Thank you, Mr. Chairman. Just a couple of quick 

questions. 

Mr. Case, you had made an indication before that, after 9/11, because of the situation at that time, a deadening of the economy, 

and but for us taking some sort of action on TRIA, you would have 

probably seen a deadening of the economy and new construction 

and the like, what have you. You also indicated that you have constituents or clients around the world, as well. Could you or other 

members just very briefly tell us what is going on in the rest of 

the world, to the best of your knowledge, in this area, whether they 

have a TRIA backstop in the other countries, or do we see a flattening of their economies? 

Mr. CASE. First of all, in terms of sort of what happened in the 

United States, it is, in fact, exactly what happened for a period of 

time, until things became more stabilized. We have seen other constituents around the world asking the same sets of questions. The 

capital is global. The capital is fungible. 

They are seeking and they are trying to understand, when you 

think about the events that have happened in the U.K., the incident that happened in Madrid, a whole set of issues are being 

raised. This is not just a U.S.— 

Mr. GARRETT. But did the other countries adopt this? 

Mr. DUBOIS. Maybe I could address that for a moment. There are 

a number of countries around the world that have terrorism risk 

protection programs in place. One of the oldest is the one in the 

Republic of South Africa, and it has been there for decades. Potentially older is the program in Spain, which dates back to the early 

Franco days, in the civil war. The U.K. has a program that can be 

considered a model for us. France, Germany, and other countries, 

the Netherlands, set up programs after 9/11. Australia has, as well. 

So, there are plenty of models out there that we can look to for example. 

They all have what some might consider failings, but nonetheless, you know, they are in place. Other than Spain and Israel and 

39

South Africa, there is only one that really has responded to terrorist acts, and that would be the U.K. program. It was set up in 

1993 in response to IRA attacks in London and elsewhere in England. The funding was provided through a mechanism where policyholders paid insurers, who paid into a pool, and that pool accumulated the funds. 

It also purchased a reinsurance line from the U.K. government, 

which served as the ultimate reinsurer for that pool. It has responded on three or four occasions out of the funds that have collected in the pool and is, today, expanding its coverage. It is not 

shrinking it. It is expanding what it covers. So, it is actually going 

in the opposite direction. Instead of reducing its involvement, it is 

actually going the other way. 

As I understand it, that company, although more limited in size, 

in terms of the funds involved and its coverage, it employs about 

nine people. So, it is not exactly an enormous bureaucracy. It has, 

frankly, been quite effective. 

Mr. GARRETT. I guess my next question was going to be—as far 

as whether what we have done has sort of frozen out either innovation or any enlargements into the system because—obviously, industry knowing that we are here, you are not going to be expanding into this market. 

Mr. DUBOIS. Well, from a reinsurer perspective, I can say that 

we have changed our view on terrorism risk over the last number 

of years. 

As some of you know—we can talk, certainly, about large num- bers—we suffered losses of $3.3 billion on 9/11, and we immediately, within a week’s time—my colleague from Switzerland and 

I visited the White House and indicated that we would not be renewing our treaties with reinsurance—with terrorism being protected under our treaties. Since that time, we have been changing 

our view, and we do now provide reinsurance protection for terrorism risk, as I testified earlier. 

Mr. GARRETT. So, had the original TRIA been in place prior to 

9/11, the impact upon the industry, the government, in that situation, would have actually had to have stepped in to a significant 

degree. First of all, is that correct, and secondly, if it is correct— 

Mr. DUBOIS. I think it would depend on what you mean. What 

were the deductibles in place, you know, in a pre-9/11 TRIA package? 

Mr. GARRETT. The original TRIA that we passed. 

Mr. DUBOIS. Then the government would have picked up, probably, some of the tab, yes. 

Mr. GARRETT. Thank you. 

Mr. KELLY. If you recall, the very low level of industry deductible 

early in TRIA was because we were recovering from 9/11. We did 

not have the capital at that time. 

One can always speculate as to what might have happened, but 

had it been—my belief is that, had TRIA been enacted earlier, the 

deductibles would be more like the levels we have right now, in 

which case there would have been very little Federal Government 

involvement. The early 71⁄2 percent was only so low because the 

capital has been significantly damaged by 9/11. 

Mr. GARRETT. But the industry was able to absorb— 

40

Mr. KELLY. Yes, we were able to absorb it, but we could not absorb the high deductible, 71⁄2 percent, post-event. 

So, the 71⁄2 percent initially was recognizing that we had been 

damaged significantly. 

Mr. NASSETTA. I think Chairman Oxley made the comment before, which is worth noting again, which is to say some of these 

other programs, as Mr. Dubois describes around the world, have 

been very successful, including the U.K. program, where they are 

building pools. 

To the extent that approach had been taken, which is an approach that a number of parties, including the Roundtable, have 

put forth, 5 or 6 years ago, you would have, today, substantial 

pools of capital that would be available. 

So, it is something that—it is not the only solution, but is a solution that we should be, as a group, considering. In the end analysis, some kind of pooling system—we can debate what mechanism, 

and whether it is reserves, tax-free reserves, etcetera—some mechanism to build up a capital base of some kind or another is absolutely necessary here in order to ultimately have the Federal Government be able to lessen its role over time, and again, debatable 

what exact form that will take, but the concepts that have been 

used around the world, which vary a great degree, have largely, in 

my opinion, been successful, because they have build up independent pools of capital to deal with this risk, and ultimately taken 

their Federal Government exposure down over time. 

Mr. GARRETT. In each one of those cases, is there always a government backstop at the other side of those pools? 

Mr. NASSETTA. There has been in each one that I am aware of, 

yes. 

Mr. KELLY. There is not enough capital in the private sector to 

absorb the hundred, three, four, five hundred billion dollar loss 

that could easily occur. There is a level at which there is not 

enough—there is no mechanism that will create enough private 

capital. What is desirable is to create an environment with a mechanism to move that government step-in point higher and higher 

over time, but there will always be a need, ultimately, for a Federal 

Government backstop. 

Mr. AYER. One misunderstood point, Congressman Garrett, is the 

fact that, today, there is private capital. It is the insurance industry, and you know, in stepping up our retention from 71⁄2 percent 

to 20 percent, what you have done is brought the insurance in as 

private capital, but unlike natural disaster risks that take us—for 

example, we are in the market on natural catastrophes where we 

have reinsurance from cat bonds protecting us. 

With respect to TRIA, we cannot get or secure protection from 

capital markets or from reinsurance markets, and that is the distinction. 

Chairman BAKER. The gentleman’s time has expired. 

Ms. McCarthy? 

Ms. MCCARTHY. Thank you, Mr. Chairman. I want to thank everybody for the testimony. It really has been fascinating. 

I am one of those who do believe that the Federal Government 

should be involved in backing up for the terrorist insurance, and 

41

actually even for catastrophe insurance, what we have seen in the 

last couple of years that has happened here in the United States. 

From listening to your testimony, probably most of you were 

talking, especially, from 9/11 and Katrina. It has opened up our 

eyes to what we all are exposed to, but one of the things I have 

not heard—one part, I heard that the insurance have actually gone 

down about 25 percent, I believe, Mr. Case, you had mentioned, 

that it was being stabilized? 

Mr. CASE. What I mentioned was in the context of the effectiveness of TRIA, that the terrorism rates had come down roughly 25 

percent. That is, within the context of insurance rates, dramatically 

increasing over that period of time. 

Ms. MCCARTHY. Okay. Because my concern is really—no one has 

talked about small businesses. We know that, from 9/11, in the 

building, certainly there were large corporations, and certainly they 

were extremely hurt, but there was also small businesses that were 

in the building and in the surrounding areas. 

My concern would be a lot of those businesses have not cone 

back, because they were not prepared for, certainly, that kind of a 

disaster, and I think one of the problems that we are going to see 

in the future, whether it is a Katrina-like issue or another terrorist 

attack, if it does happen here in the United States, that small businesses are still going to end up losing, and I think that is something that needs to be adjusted somehow. 

You had mentioned that your costs have gone up quite a bit. Is 

there anything that we can do to incorporate—to make sure that 

small businesses are covered—with the rates? 

Mr. AYER. If I could pick up on this, The Hartford is one of the 

largest small business insurers in the country. We have 770,000 

small businesses that we insure today, and a ton of them were our 

insureds in the 9/11 incident, and a ton of them have come back, 

and absent reinsurance availability, that would be a challenge, but 

a lot of them do buy the terrorism insurance currently in their contracts, because it is automatic on workers compensation, and it is 

also available on property insurance, because it is a mandatory 

offer today. 

Ms. MCCARTHY. I am wondering today, with what we are dealing 

with, possibly, for the future—I know here—actually, on one of my 

other committees, we had—for small businesses to be able to buy 

health care, to pool together. When I talk about small business, I 

am talking about the little guy that has got a little shop, probably 

does not have any insurance whatsoever, or if it is, it is minimal, 

because we talked about fire, but if we had a biological attack, 

which we are hearing about constantly, there would be no fire. 

Obviously, some other attacks, yes, there would be explosions 

and then fires. That would be covered. How do we, as the government, work with you to try and cover those particular different 

areas? 

Mr. KELLY. First of all, the small business market is very competitive. There is lots of property and casualty capacity available 

to small business. Now, whether or not they want to pay for it or 

not, that is a decision. 

42

They have to pay the rent, and there is the form of doing business. It is a competitive market. We compete against my colleagues 

at The Hartford. 

It is a very active—and I think, later, you will hear from the 

independent agents—it is a very active market, but to the extent 

they are exposed to things such as nuclear or biological, you know, 

it is the same for an aggregation of small businesses as for a big 

business. Our capital is at risk. 

So, if TRIA provides the appropriate backstop, then we can provide the coverage. It is no different. The mechanism will be no different than it is for the larger risks. 

Ms. MCCARTHY. Let me ask you a question, because it just 

popped into my mind. You know the insurance business better than 

I do, but with a large corporation—say they are an accounting firm. 

You know, they have records, they have paperwork, but downstairs 

there is a restaurant which would be considered a small business. 

They might not be prepared for the loss of, number one, closing 

the restaurant down for weeks, months, certainly the loss of income, food, and everything else. So, your insurance would cover 

something like that? 

Mr. KELLY. Business interruption insurance is probably the most 

significant part of their coverage. They would get significant business interruption payment that is based on their revenue and profits. Mr. Ayer alluded to how well his policyholders recovered, the 

same as ours. That is a huge part of the business, business interruption insurance. It is readily available, it is freely available, and 

if someone decides not to buy it, I mean—it is a cost of doing business, but it is there. It is there. 

Mr. NASSETTA. I think, again, from a consumer point of view, 

whether large or small—and a lot of our businesses certainly are 

large, but there are small businesses involved—I think it gets back 

to the underlying issues that I have talked about, others have 

talked about here, and that is we cannot—in thinking about terrorism insurance, you cannot exclude certain aspects of it like 

NBCR and feel like we have accomplished the objective. 

Again, while TRIA has been very, very successful and does, in 

fact, cover it, there needs to be a plan put in place to stimulate 

more capacity for those types of things, for small business, big business, medium-size businesses. Otherwise, to the extent that we 

have an occurrence of that sort, it is going to devastate all businesses in whatever particular zone of the country that it occurs. 

So, I think the small business will ultimately benefit from whatever we are doing in the same exact way that any medium or larger business would. 

Chairman BAKER. The gentlelady’s time has expired. 

Ms. MCCARTHY. Thank you, Mr. Chairman. 

Chairman BAKER. I thank the gentlelady. 

Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

Mr. Kelly, you have at least mentioned, for the first time in any 

of the hearings on TRIA, a concern that I have had about what is 

the insurance industry doing to push the private sector to be prepared for terrorism attacks, to be—what is the insurance industry 

43

doing for preparedness. I am glad to see that that—that you have 

addressed that, or you mentioned it, at least. 

The 9/11 Commission report said that the private sector was almost wholly unprepared. All of the witnesses said that, despite the 

clear risk, the private sector was almost wholly unprepared, 85 percent of the likely targets were in the private sector, and that there 

was, in fact, no widely understood set of standards for care, for preparedness that was being embraced, that was embraced by the private sector, and actually, when the 9/11 Commission did their follow-up report card just a year ago, private sector preparedness still 

got a grade of minimal progress and said that the insurance and 

credit rating industries were just beginning to incorporate national 

preparedness standards into their underwriting and risk assessment criteria, and that there needed to be a great deal more of that 

done. 

Are you requiring your insureds to submit to preparedness, terrorism preparedness audits? Are you telling them of standards? 

Are there clearly understood standards for preparedness? 

Are you telling them about that? Are you able to require that 

they meet those standards? 

Mr. KELLY. Yes. I think it is always easy to look at 9/11 and say 

we should have been prepared. As a country, we should have been 

prepared. We were not. We were not prepared. 

I understand it is easy to say, in retrospect, we should have 

been. No one could have anticipated it. So, that criticism, let us put 

aside, but I do think the report is absolutely incorrect. 

Each of us in our own way—we cannot compare underwriting 

rules. The Hartford has theirs; we have ours. 

It is an essential part, before we will assume a risk. Have they 

protected the building? Have they taken care if something goes 

wrong? And we have worked with various groups to develop our 

underwriting standards. 

Our competitors have similar standards, and it is a central 

part—people who do not meet the standards cannot get insurance. 

Mr. NASSETTA. As a consumer, I would have to agree with that, 

from what we are seeing. 

It is certainly a very active dialogue that occurs as we are placing our insurance—as an industry, we are placing insurance. It 

starts with a fundamental belief that there are some things that 

you can protect against and some you cannot. We cannot protect 

against a plane flying into our building, as an example, and we had 

that happen at our company. We owned the World Trade Center. 

Marriott—we lost a number of guests, a lot of employees, and ultimately, an 820-room hotel that was taken out. 

There is nothing, ultimately—the Federal Government can help 

protect us against that; we cannot. Having said that, as an industry, not only is it being driven through the discussion we are having with lenders and insurers, but it is being driven by our own 

interest in protecting ourselves because of what I am describing, 

which is a lot of these risks and perils that we have, we do not 

have coverage for. 

I mean the fact of the matter is, when it gets down to NBCR—

I have talked about it 5 times. I will not say it again. We really 

think we have very little coverage. So, we have to protect ourselves 

44

right now as best we can. There are some things we can do, some 

we cannot. The real estate industry has gotten together with the 

Federal Government and created a real estate information sharing 

analysis center, real estate ISAC, that we have invested a lot of 

capital into, that is working very well. 

Individual companies are doing a great deal to harden targets as 

best they can. I know we are spending millions and millions of dollars, our company, additionally, a year, on security and protection 

against NBCR and other forms of terrorism that we think we can 

protect against. So, I disagree with the report in the sense of what 

I see day to day and what we are doing in our business, what I 

see in the industry, overall, and I think, you know, there is a kind 

of self-help component to what is happening, not just the influence 

of lenders and insurers but a self-help in the sense that it is the 

only protection we may have on some of these events right now. 

Mr. MILLER OF NORTH CAROLINA. One of the other findings of the 

9/11 Commission was the civil liability system should be part of the 

market inducement to preparedness, that if the company has what 

should be a known risk and fails to take the actions to prepare for 

that risk and causes harm to others, under the civil justice system, 

they should have liability for that. 

Mr. Kelly, do you agree with that finding of the 9/11 Commission? 

Mr. KELLY. That is an area I think is beyond where I have expertise. 

Mr. MILLER OF NORTH CAROLINA. Does anyone on the panel wish 

to claim expertise and address that? 

Mr. NASSETTA. I have no expertise, but I have to say I would not 

be in favor of it. 

I think what it will lead to is a massive amount of litigation in 

which you are going to turn—what will ultimately happen is the 

victims of terrorism will be victimized again with a debate, with a 

thousand lawyers trying to determine whether the locks on our 

doors of our HVAC system were adequate enough to keep somebody out of putting a chemical agent in there that harmed our 

guests. I can only imagine the anarchy that would follow. 

So, I personally, speaking on my own behalf, think it is a very, 

very difficult thing to do. 

Mr. MILLER OF NORTH CAROLINA. Actually, I think the 9/11 Commission was not talking about statutory liability but simply common law liability; the existing law of negligence would hold that 

once—in 9/11, nobody thinks the World Trade Center should have 

understood that they were going to be hit by a plane filled with jet 

fuel. 

No business in America can now say who would have thought—

who would ever have thought we could be the victim of a terror attack, particularly the chemical industry, particularly all the industries that we know are likely victims. 

If there is a clear set of standards of what they should do, they 

did not do it, and others suffered as a result, you do not believe 

that they should be held— 

Mr. NASSETTA. The clear standards are the rule of law and people that are not abiding by the rule of law or set-out rules, I think 

45

there is a different set of issues involved. That is not how I understood the— 

Mr. KELLY. Let us hypothesize a situation. There are certain 

glass standards you can put in a hotel. I will posit that as a situation. Well, unless you mandated a specific manufacturer and said, 

unless you buy that manufacturer’s glass, then there is significant 

liability. Well, the bar will begin saying, well, you bought that 

glass, but that does not quite meet the standard in the following 

way—or it was not installed properly because in the upper righthand corner, on the 22nd floor, you find a millimeter—it opens and 

so on. The plaintiff bar is remarkably creative in using liability 

laws to significantly increase the cost of doing business in this 

country, and to create a new liability, with all the interpretation 

of clear standards, and use legislation to encourage litigation, 

which this would do—it would not just allow it, it would encourage 

litigation—would be a deleterious effect on the broad economy. 

Mr. AYER. It would be a tragedy, Mr. Miller, if you used this legislation to spawn or support the idea— 

Mr. MILLER OF NORTH CAROLINA. Actually, I was just asking if 

you agreed with the 9/11 Commission. 

Mr. AYER. I just believe that litigation is not the best way— 

Mr. MILLER OF NORTH CAROLINA. I think the answer is no. 

Mr. AYER. Litigation is not the best way to enforce accountability, in my view. 

Mr. CASE. The one item I would also just highlight is to what 

purpose? 

What I thought was interesting when you asked the question, is 

there preparedness and is there efforts around preparedness, you 

actually heard as emotional a response as you have heard today, 

and it was from the insurance world, who talked about—you know, 

they actually spend real time with companies, with firms, not just 

asking but requiring, and the penalty for not complying is much, 

much higher rates or no coverage, and then you heard a client describe the fact that they believe most of their terrorism risks right 

now are uncovered. They are self-insured, and what is insured—

again, they have tremendous economic incentive to try to get the 

best possible situation they can. 

So, I would just ask—I would concur with the other panel members but would ask to what end? Are we trying to improve the situation, because we have got tremendous incentives to try to do that 

now. 

Chairman BAKER. Can you make this your last one, Mr. Miller? 

Mr. MILLER OF NORTH CAROLINA. I can. 

I also understand that, for the vast majority of insureds, who are 

not required to have a form of insurance—workers comp insurance, 

one obvious example; the other is the requirements of the lenders, 

mortgage lenders—that the vast majority of insureds, commercial 

insureds, decline terrorism insurance. 

They do not pay the additional premium. They simply bear the 

risk. Given the fact that some are obviously vulnerable, their vulnerability affects others. Their failure to take precautions affects 

others. 

Do you believe that, for some businesses that are obvious terrorism risks, that insurance should be optional or required? 

46

Mr. KELLY. I think mandatory coverages inevitably lead to regulatory abuse, and I think to mandate coverages would be a bad 

thing. 

Let the person’s risk appetite determine what they are willing to 

pay in the marketplace, and it is not—you should not be surprised 

that the take-up—it is increasingly dramatically, I think, as Mr. 

Case pointed out—take-up is low. 

Think of a California earthquake. A State program available to 

individuals on their homes, people living on the faults do not buy 

it. Very small take-up of earthquake insurance by individuals in 

California. Is that a rational act? No. But should the government 

mandate rationality? I think that would be unfortunate. 

Chairman BAKER. I think government and rational are mutually 

exclusive. 

That was the gentleman’s last question, I believe, and I just 

wanted to clarify, Mr. Kelly, with regard to pricing freedom, the 

NAIC has taken the position with regard to this issue that there 

are no pricing constraints. The GAO report seems to indicate that 

there is considerable friction between insurers and varying State 

regulation. I believe it extremely important to have pricing freedom 

for this product in order to have availability. 

From your role, and particularly given the extent to which you 

are engaged in workers comp, do you find, from your perspective, 

there is State regulatory intervention in your pricing models? 

Mr. KELLY. Significant. In our own State of Massachusetts, pretty much the rate is mandated. 

I think very interesting in the GAO report is the situation in 

California. 

The industry is in a peculiar Catch-22 situation. California regulation says that before a rate can be approved, it must be actuarially based. Because of the nature of the terrorism risk, they say 

your rates are not actuarially based, so we will not let you charge 

anything. Essentially, I mean it is a Catch-22. I mean it is not an 

actuarial system. 

So, in many, many, many States, there is significant price control 

of workers comp. We do not operate in anything remotely like a 

free market. 

Mr. AYER. Congressman Baker, I would like to add—I think it’s 

a very well-framed question. 

I believe, today, that price and forms are not areas where the industry has much freedom. 

As a matter of fact, I believe that the NAIC is not right in suggesting that there is enormous freedom in both rates and forms 

today. 

Chairman BAKER. I thank you. I want to express appreciation on 

behalf of the committee to each of you. This has been a very informative hearing, very good information provided from various 

perspectives, and it will be of substantive help to us as we move 

forward in this resolution. 

Mr. KELLY. Thank you for inviting us to testify. 

Chairman BAKER. I appreciate your time, and this panel is dismissed, and Mrs. Kelly will assume the chair. 

Mrs. KELLY. [presiding] Thank you very much for joining us 

today. 

47

This second panel begins with Dr. Sharon Emek, a partner of 

CBS Coverage Group, Incorporated. She appears today on behalf of 

the Independent Insurance Agents and Brokers of America. She 

has testified numerous times before the New York State Assembly 

on terrorism insurance, insurance market conditions, and broker 

compensation. Most recently, she testified before the National Association of Insurance Commissioners on developing a permanent 

terrorism insurance solution. 

We welcome you, Ms. Emek, and let us start with you. 

STATEMENT OF SHARON EMEK, CBS COVERAGE GROUP, INC., 

ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS 

AND BROKERS OF AMERICA, INC. 

Dr. EMEK. Thank you. Good morning, Chairman Baker, Chairwoman Kelly, Ranking Members Kanjorski and Gutierrez, and 

members of the subcommittee. My name is Sharon Emek, and I am 

pleased to be here today on behalf of the Independent Insurance 

Agents and Brokers of America to present our association’s perspective on terrorism insurance. I am currently a managing director and partner at CBS Coverage Group in New York, and also 

chair of the board for the Independent Insurance Agents and Brokers of New York. 

I would like to begin by complimenting the committee and Congress for passing TRIA in 2002 and its extension in 2005. The Federal backstop created by these laws have worked well. It has ensured that terrorism insurance is available and more affordable. It 

has allowed businesses to continue operating and growing and preserve jobs, at virtually no cost to the Federal Government. 

However, as we all know, TRIA is scheduled to expire at the end 

of 2007. There is still no reason to believe that the threat of terrorism is on the decline, or that the private insurance alone can 

adequately provide coverage. 

As such, the Big I encourages Congress to develop a long-term 

solution that encourages the private sector to take on additional 

risk. Based on our members’ experience in the market, we would 

like to stress that this is not just a big city or a big business problem; it is truly a national issue. Policyholders across the country 

insist on having the coverage. We have seen terrorism coverage 

purchased everywhere, from small towns in Mississippi to small 

and large businesses in New York City. 

Similarly, this issue impacts all businesses, large and small. The 

fabric of this country and our economy are built on small businesses. Without a long-term solution, we anticipate that coverage 

would be very expensive and unaffordable to smaller businesses. It 

would be years before there would be sufficient take-up to make it 

affordable for small businesses, if ever. These businesses would be 

at risk, with no option, and I personally have seen what can happen after a terrorist attack. 

I work and live in New York City, and I lived through the horrific event at the World Trade Center. After 9/11, a number of my 

friends had to close their businesses because they did not have sufficient business interruption coverage, even with terrorism being 

covered on their policies at the time, because no one could have anVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
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ticipated the length of time it would take to get back into business 

after a terrorist attack. 

Imagine how many more businesses would go out of business 

without business interruption coverage at all, because they could 

not purchase affordable terrorism insurance. Without the ability to 

purchase affordable terrorism insurance, businesses will have no 

business interruption protection, and in the event of a terrorist act, 

many more businesses will go out of business. 

You have heard plenty of testimony from experts on why terrorism insurance is uninsurable in the free market alone, as it does 

not have the appropriate characteristics and creates adverse selection. So, I would like to tell you about the businesses I insure, and 

what they think and worry about every day, and I insure small to 

mid-size businesses all across the country, not just in New York. 

At most of my client renewal meetings this year, my clients ask, 

first thing, about a permanent terrorism insurance solution. They 

say will it still be available? Will it be affordable for me? What 

would happen to me if a terrorist attack happened in my surrounding area? How would I get back into business? 

We agents have to deal with these questions and help our clients 

figure out how to best protect themselves in the case of a terrorist 

event. Without the availability of affordable terrorism insurance, 

we would not be able to help them. 

Imagine a terrorist act happening in a few industrial complexes 

around the country, some of which I insure, at the time, and a ripple effect it would have across the country on the businesses in 

their supply chain. If they cannot get back into business because 

they were not able to purchase affordable terrorism insurance, it 

will have a dire economic effect on all the businesses they support, 

not just perhaps their distributors and the retailers that they 

might supply, but their accountants, consultants, attorneys, the 

coffee vendors, the office supply vendors—all of them would have 

economic impact because these businesses would not be able to get 

back into business without the ability to purchase affordable terrorism insurance. 

I can tell you from firsthand experience that the ripple effect of 

9/11 in the city was enormous. All of the retail shops in downtown 

New York were closed for months. Many never were able to get 

back into business, even with having terrorism coverage at the 

time. 

Imagine how many more would have gone out of business without it, but it was not just the retail stores. One of my clients was 

a dentist, just blocks away from the World Trade Center, and his 

practice was built on servicing those professionals who worked in 

the World Trade Center. At 55 years of age, he was out of business, 

because there were no more customers available. 

What I want to reiterate is that we need to look at this problem 

from the bottom up and not just from the top down. Millions of 

small businesses across the country can be affected without affordable terrorism insurance. The Big I is encouraged by the report released by the Government Accountability Office yesterday. We believe its findings highlight the need for a limited but continued 

Federal role in terrorism insurance. 

49

Coverage would be very limited and less affordable without a 

Federal role to encourage the private market, especially as it relates to NBCR attacks. 

The requirement that insurance companies make available coverage has been very important to the policyholders that our members serve, because it encouraged greater uptake, resulting in increased capacity and lower premiums. 

The Big I supports the continuation of make-available requirements in any future public/private partnership, and consider extending the make-available provision to NBCR attacks, providing 

that this risk is separated and given special treatment. 

Any program should focus on increasing uptake rates to spread 

the risk and build capacity while protecting taxpayers from ad hoc 

post-disaster funding. 

In conclusion, the Big I applauds Congress for not ending TRIA 

abruptly last year and for having the foresight to continue the program while working on a viable long-term solution. 

Most importantly, we thank this committee and Congress for its 

continued leadership on these issues. Your efforts are crucial for 

finding long-term solutions of the economic and physical risk associated with terrorism. 

Thank you. 

[The prepared statement of Dr. Emek can be found on page 110 

of the appendix.] 

Mrs. KELLY. Thank you, Ms. Emek. 

Mr. Heck, I am going to call on you, but I am going to ask if you 

could curtail your opening remarks. We have your full testimony, 

it will be made part of the record, but we are just being called to 

the Floor for some votes, and if we could have your testimony before we go to the Floor, it would be very convenient for Chairman 

Baker and myself. 

STATEMENT OF WARREN HECK, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, GREATER NEW YORK MUTUAL INSURANCE 

COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

MUTUAL INSURANCE COMPANIES 

Mr. HECK. I will cut out most of what I was going to say, but 

there are a few items that I think I should cover. 

My experience tells me that, without a Federal program, we 

would find ourselves in the same position we were in at 9/11, with 

insurers excluding terrorism, unless they were required, as they 

are in New York, to provide it. Insurers forced to write such coverage in New York would either leave New York or they would increase their rates. 

Now, my company is a medium-size company. It is the fourthlargest writer of commercial multi-peril in New York State, and we 

are one of the major writers of commercial insurance in New York 

City. We talked about the capital markets, so I will not say anything about that, but I would like to say that the insurance industry has been working to devise a long-term program for Congressional consideration that would maximize private sector participation without threatening the economy and the industry. 

One way might be to create a federally-charted entity that will 

establish a reinsurers market below the deductibles. With volVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
50

untary insurer participation, this ‘‘middle layer’’ of potential riskbearing capacity would provide the kind of private market test that 

some in the Congress believe is needed. Another critical consideration is the size of the trigger, and this is very important. We 

heard a lot of very large insurance companies discuss this today. 

We should consider the small and medium-size companies, and 

for medium-size and small companies, the event trigger is critical. 

Too high a trigger would drive them from the market, because reinsurance costs would be too expensive, making primary coverage 

unaffordable. 

A trigger in excess of $50 million would severely limit my company’s ability to offer as much coverage as it does now. I think a 

$50 million trigger would likely assure the continued involvement 

of these insurers in the sale of terrorism insurance. 

Absent their involvement, I believe there would not be enough 

capacity and interest to stabilize the economy after another event. 

One of the very important things to consider is that there are 

2,100 property and casualty insurance companies that operate in 

the United States. If you look at the amount of premium that they 

write and the surplus that they have, there are only approximately 

40 companies that have $1 billion or more of written premium and 

about 60 companies that have $1 billion or more of surplus. 

In order to make terrorism available and affordable, it is essential that all companies participate, so that the risk can be spread. 

You need the smaller companies, too, and many small companies, 

like my company, operate in New York, and write a significant part 

of that market. There is much more detailed information, as you 

had indicated, in my written testimony, as well as a description of 

NAMIC’s views regarding a long-term terrorism risk insurance proposal. 

Thank you once again for the opportunity to testify on this issue. 

NAMIC appreciates your continuing leadership. We stand ready to 

assist you in any way possible in developing an effective long-term 

terrorism insurance plan. 

[The prepared statement of Mr. Heck can be found on page 125 

of the appendix.] 

Mrs. KELLY. Thank you. 

Mr. Heck is chairman and chief executive officer of the Greater 

New York Mutual Insurance Company, and he testified today on 

behalf of the National Association of Mutual Insurance Companies. 

Mr. Heck, you have been with us before. You have testified before. 

We are always happy to have you here again. 

We have been called, as I said, for a vote. There are three votes. 

I would imagine that we will probably have to figure, I would 

think, at least—to give it some time, because I do not know what 

is going to happen between the votes, I would say we will recess 

for approximately 20 to 25 minutes, and see you all back—I am 

sorry for the break, but this is the way it is today. 

Thank you. 

[Recess] 

Mrs. KELLY. [presiding] Thank you very much, all of you, for 

your indulgence on our going off to vote. 

We will hear now from Janice M. Abraham, who serves as the 

president and chief executive officer of United Educators InsurVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
51

ance, having occupied that position since 1998. She testifies today 

on behalf of the Property Casualty Insurers Association of America. 

Ms. Abraham has over 14 years of experience in serving the higher 

education community through her work as chief financial officer/

treasurer of Whitman College, various senior positions at Cornell, 

and the National Association of College and University Business 

Officers. 

We welcome you and we look forward to your testimony. 

STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, UNITED EDUCATORS INSURANCE, ON 

BEHALF OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA 

Ms. ABRAHAM. Thank you very much, and I appreciate the opportunity to talk to you today, Chairwoman Kelly, and Ranking Member Kanjorski. Thank you very much. 

I am Janice Abraham, and I am president and CEO of United 

Educators. We are an insurance company owned by over 1,200 

schools, colleges, and universities throughout the United States, 

and we are very interested in the continuation of the partnership 

that exists in providing liability insurance, property insurance, and 

workers compensation insurance for terrorist events in this country. 

On first blush, it might be unlikely to think about educational institutions as targets, but the experts have identified educational institutions, colleges, and schools as potential soft targets, and there 

are really four reasons that we are focused on that. 

The first is colleges and universities. Our schools are symbols of 

what is great about this country. They are the envy of the entire 

world. They are icons of America. It is not at all unusual to walk 

down the street of a foreign capital and see a t-shirt for Sarah 

Lawrence, for Dickenson, for any of the institutions, University of 

Michigan, Cornell University, St. John’s, on somebody walking 

down the street. They are known, they are respected, and they are 

envied around the world. 

Our campuses, our schools are open. They are open for debate, 

for controversy, and they are open physically. We cannot and we 

do not want to lock down our campuses. There are some areas that 

are restricted, obviously, but for the most part, we encourage visitors. We encourage individuals to come to our campuses, to engage 

in the arts, to engage in the discussion and the gatherings that 

happen, and so, we cannot lock down nor do we want to make a 

hardened target for our colleges and universities. 

We are also magnets for mass gatherings, whether or not it is 

110,000 people at the football stadium at the University of Michigan; the presidential debates, which are often held on our college 

campuses; or a commencement, where you will have thousands of 

individuals, plus illustrious speakers, gathered for an important 

ceremony. Thousands and thousands of people come to our campus 

every day for nationally televised events, and it is an important 

symbol of what we do. 

Finally, some of the most important research, often done under 

Federal grants and contracts, is done in the laboratories of schools 

and colleges and universities. Research on ebola, on anthrax, and 

52

on botulism is done in our labs, and we take great care to keep 

those laboratories safe; however, it is not unthinkable that there 

would be a break-in and dangerous substances would be stolen and 

used as part of a weapon in a terrorist event. 

So, it is—we are targets, potentially soft targets for a potential 

terrorist event. 

Our first line of defense as an insurance company which is 

owned by the educational institutions is to do risk management, 

and we do extensive work on crisis planning, on safety, on security, 

but if that were all it took, we would not be here today. We would 

not be talking about this issue. 

Rather, we need—we are dependent on having a three-way partnership to provide terrorism insurance. We offer very high limits 

of liability insurance to our educational institutions, and if the Federal Government is not part of the three-way partnership, we will 

not be able to offer this coverage to our members. 

We will either exclude it or we will sub-limit it significantly and 

leave our educational institutions with a significant uninsured position, and the three-way partnership is this: 

First, our schools and colleges commit a lot of resources in crisis 

planning, keeping the athletic stadium safe, and they have significant financial investments in this. 

Second, as an insurance company, we have a significant investment in the risk management that we offer our educational institutions, and we have a significant financial exposure to the loss. That 

is what we do. We are not looking to step away from that, but we 

are a small company, and we are dependent on our reinsurers. 

I just came back late last night from meeting with five of our domestic reinsurers, and they told me that they are not able to provide unlimited terrorism insurance for us, for United Educators 

without the role of the Federal Government. They cannot predict 

what the frequency, the severity, when it would happen, how it 

would happen, and they are not able to provide that protection to 

us, and so, without—as a small company, without the reinsurance 

support, we will not provide it. 

So, we need the Federal Government to be a backstop, not a bailout but a partner in a long-term solution, some of the solutions 

that were talked about earlier this morning, to make sure that educational institutions continue to meet their mission. 

In conclusion, we do not know when the next event will be. We 

do not know where it will be. Will it be at a college? Will it be at 

a shopping mall? Will it be at a Federal Government building? We 

do not know that. 

We do not know what method the terrorists will use, but what 

we do know is that United Educators, small insurance companies, 

our educational institutions, and our reinsurers want to be part of 

that solution, but we cannot do it without the role of the Federal 

Government. 

Thank you very much for the opportunity to speak to you today. 

I would be happy to answer questions later on. 

[The prepared statement of Ms. Abraham can be found on page 

75 of the appendix.] 

Mrs. KELLY. Thank you, Ms. Abraham. 

53

We turn now to Mr. Edwin Harper. Dr. Harper is a senior vice 

president with Assurant. Prior to joining the Assurant Group in 

1998, Dr. Harper held a number of senior management positions in 

the private sector. He also served as an assistant to President 

Richard Nixon for policy planning and budgeting. During the 

Reagan Administration, he was Deputy Director of the Office of 

Management and Budget, and Chief of Policy Development. 

We welcome you and look forward to your testimony, Mr. Harper. 

STATEMENT OF EDWIN L. HARPER, SENIOR VICE PRESIDENT, 

ASSURANT, INC. 

Mr. HARPER. Thank you very much, Chairwoman Kelly, and 

Ranking Member Kanjorski. My name is Ed Harper, and I am here 

today representing the ACLA, Assurant Inc., and as chairman of 

the Group Life Coalition, and I will summarize my written testimony by making a couple of points and then telling a story. 

In 2001, I walked through the smell of quenched fire and ashes 

to my office at One Chase Manhattan Plaza, and from my office, 

I looked down into the hole which was the site of the World Trade 

Center, where more than 2,000 people lost their lives. Most of those 

lives were covered by group life insurance. So, we at Assurant 

know about terrorism attacks and group life from close-up. 

My message here today, to this committee, is do it again, and do 

not let go. This committee got the TRIA extension right by including group life in last year’s bill, and as we heard from the earlier 

panel, TRIA has done a lot of excellent things and has made a huge 

difference, but TRIA has a big gap, as it was finally enacted. 

It provided for the buildings, the brick and mortar, but not for 

the people who work in those buildings. The workers got left behind when the bill was finally signed. 

The National Association of Insurance Commissioners has publicly stated its support for group life’s inclusion in TRIA. Howard 

Mills, New York’s superintendent of insurance, vigorously restated 

his support for this position in a hearing at the NAIC’s quarterly 

meeting 2 weeks ago in St. Louis, and group life is important, because it is the only insurance that most of the working men and 

women of America have. 

At the end of 2004, there were 165 million certificate holders of 

group policies. It is interesting. I am told, historically, that New 

York State wanted to isolate itself from potential insurance company failures in other less rigorously regulated States, since the 

subsidiaries who operate in the single State of New York, the 

amount of surplus and assets available to pay claims is limited to 

the amount of company operating in New York but protected by potential failures elsewhere. 

The normal solvency regulation says you have surplus proportionate to the amount of risk the company has. Some group life actuaries would suggest that normal is to expect four deaths per 

1,000 lives covered each year, with the average claim cost of just 

over $46,000. 

Thus, the normal loss would expect to be about $184,000 per 

thousand employees covered per year. However, in terrorism risk, 

there is no normal. 

54

Let me illustrate the dynamics of the situation with a story 

about two companies: one, the ABC Financial Services Company; 

the other, the XYZ Insurance Company. The story is fiction, but as 

they say in movie previews, it is based on a true story. 

What is true is there was an ABC Company that was decimated 

in 9/11, and the XYZ Insurance Company’s financials represent 

those of a not atypical mid-sized group life insurer. 

In our story, ABC Financial Services, a successful company with 

about 700 employees operating from the heights of a prime building on Wall Street decide to get group life for its employees it pays 

well, about $250,000 a year, so they got group life coverage of one 

times their salary, then an accidental policy covers another one 

times their salary. So, the average employee there could expect a 

half-a-million dollars of death claim if they died. 

ABC’s risk manager checked out the XYZ Insurance Company 

and found that XYZ was operating profitably in New York, with a 

$50 million surplus. In further checking, he found that, on 9/11, 

XYZ had catastrophic reinsurance which covered the entire amount 

of claims, without a deductible, but today, the best catastrophic reinsurance they could get is $60 million of reinsurance after paying 

a $20 million deductible. It should still not be a problem, right? 

This risk manager was a tough analyst, and he looked into New 

York State’s regulatory regime, and he realized they were good, 

solid regulators. Well, the risk manager felt good. He had bought 

group life cheap as a part of his employee benefit package. He had 

bought from a company that was profitable, had a nice surplus, 

and from a company under a strong regulatory regime, and XYZ 

surplus was far in excess of the claims one would normally expect. 

What could go wrong? Now, we start the movie based on a true 

story. ABC is devastated by a terrorist attack, with 658 of the 700 

employees killed in the terrorist attack. The claims are $329 million. XYZ’s reinsurance pays $60 million of that amount, leaving 

claims of 269 million to be paid from assets and surplus, but XYZ’s 

surplus in New York, available to pay claims, is only $50 million. 

Thus, if XYZ’s New York operation were bankrupted to pay 

claims, there would still be 438 employees who would have to rely 

on public guarantee funds to be paid their justly due claims, and 

claimants in XYZ’s other lines of insurance would find that they 

were not getting paid because the company was bankrupt, it was 

gone. Well, that is a short, gruesome movie with needless suffering. 

If XYZ had been able to purchase the same level of catastrophic 

reinsurance it had before 9/11, there would not be a problem, no 

need for public sector involvement, but the catastrophic reinsurance available since that time has not been on the terms or in the 

amounts available for it. There is a lack of capacity. 

Interesting, revitalizing the private sector market for catastrophic reinsurance for group life could be as simple as including 

it in TRIA this time. 

The June 30, 2005, Treasury study assessing the effectiveness of 

TRIA demonstrated that reinsurance markets for a covered line, 

such as workers comp, was revitalized by its inclusion in TRIA. 

You might look at page 113, among other pages, for that point. The 

data suggests that the reinsurance market for group life would be 

similarly revitalized by the inclusion of group life in TRIA. 

55

This committee understands the problem. In its prior action, refining TRIA and extending it, it included group life. This time it 

must include group life again and insist that the others in the legislative process not leave group life and the American workers behind. 

Thank you very much. 

[The prepared statement of Mr. Harper can be found on page 119 

of the appendix.] 

Mrs. KELLY. Thank you very much, Dr. Harper. 

Next we hear from Ira Shapiro, who serves as the chief executive 

officer of Fisher, Harris, Shapiro Company, an outsourced risk 

management company. He appears today on behalf of the Real Estate Board of New York. Mr. Shapiro was principal of the JLS 

Group, one of the Nation’s larger mid-sized boutique brokerage 

firms, for 30 years. He was also a senior executive of the Kay 

Group, Incorporated, and in 1995, he founded Ira Shapiro Consulting Services, Incorporated. In 1998, Mr. Shapiro combined with 

colleagues to form Fisher, Harris, Shapiro. 

Mr. Shapiro, we look forward to your testimony. 

STATEMENT OF IRA SHAPIRO, CHIEF EXECUTIVE OFFICER, 

FISHER HARRIS SHAPIRO, ON BEHALF OF THE REAL ESTATE 

BOARD OF NEW YORK 

Mr. SHAPIRO. Thank you very much. I appreciate the opportunity 

to be here and testify on behalf of this subject matter. I am the 

CEO of Fisher, Harris, Shapiro. We are a outsource risk management consulting firm. We do not sell insurance. Most of our clients 

are in the real estate business. We serve over 30 real estate portfolios and large construction projects, most of which are New York 

City-based or located in New York City area. My clients represent about $45 billion of total insured value, 900 

million square feet of commercial space, and 71,000 residential 

units. As a result of that, we are well versed of what is going on 

in the marketplace. 

While New York City and other urban centers face serious concentration of risk issues, the problem is a national scope. As an example, mortgages: Mortgages were discussed earlier today, but 

mortgages are securitized, and these securities are held by pension 

funds, mutual funds, and individuals. 

Without TRIA, these commercial mortgage-backed securities are 

in danger of underlying the mortgages and being in default. This 

could impact millions of Americans, as one example. 

What I would like to talk about is the present state of the insurance marketplace. New York City, in particular, and I am sure, 

other major cities, are having more and more problems in getting 

their insurance portfolios completed. It is happening almost—and 

I am not being dramatic—almost on a daily basis, insurance is disappearing. 

Just yesterday, we got a call from one of our portfolios that the 

broker was trying to put it together. He had anticipated buying 

$175 million, which was promised to him by the insurance company, in one of their layers which was scheduled to be put in place 

on October 26th. They called him yesterday and they said you put 

the insurance in force today or we are going to take the capacity 

56

away from you, and this is without the portfolio having been completed. So, this is something we had to do. There was no option. 

The reason that—2006 has been probably the most difficult year 

that I have seen in the insurance business, and I have been in the 

business for over 40 years and in my consulting firm for over 12 

years—and the question is why is 2006 such a difficult terrorism 

issue when TRIA is still in effect, and this has come about because 

of TRIA. TRIA obviously has been a basically very important matter to the industry. Had it not been for TRIA, we would be having 

a catastrophe as far as trying to get insurance. 

The government has tried, in the extension of TRIA, to remove 

itself as much as possible from small exposures and tried to get the 

insurance industry to take on higher risks. The extension of TRIA 

was a godsend to buyers of insurance, because TRIA now had to 

be mandated by the insurance companies. 

On the other hand, the insurance companies were being—with 

the extension of TRIA—were being exposed to greater self-insured 

retentions. We had a $5 million criteria before TRIA would respond 

to an event. With the extension of TRIA, it is now $50 million. So, 

insurance companies, on any risk that becomes less than $50 million, has no TRIA back-up. 

There have been actuarial studies made by the American Academy of Actuaries and Risk Management Solutions wherein they 

took a study of 10 possible terrorism attacks and came to the conclusion that 9 of those 10 attacks would not pierce the $50 million 

layer, and the insurance companies look at that and say we are not 

going to have protection. I am not here to support the insurance 

companies. I am here to tell you how it impacts on the buyers of 

insurance. 

The situation, also, the insurance companies are more exposed 

because of the fact that the—and this has been discussed in the 

morning, that the percentages that the insurance companies have 

to assume has gone from 71⁄2 percent up to as much as 20 percent 

next year, and in addition, to the extent that the—that an event 

would pierce the 50 million and pierce the retention that they have, 

the insurance companies now have to co-share with the government 15 percent of whatever it goes above that. 

The impact that that has had on the insurance—on the buyers 

of insurance is that insurance companies are not putting out the 

kind of limits that they were putting out prior to—in the year or 

two prior to that. They are concerned that—putting up big limits. 

They are insurance companies that were putting up $100 million 

and $200 million of exposure, are now putting up $25 million and 

$50 million. 

Many insurance companies have come to the conclusion that they 

cannot afford to provide terrorism insurance. Since you cannot 

write property insurance without having terrorism insurance, a lot 

of these companies have stopped writing altogether. 

We have some very large portfolios. We have large construction 

projects going on. We have a very large construction project that 

was in progress, that is in progress, and the builders risk—there 

are very few insurance companies that are providing builders risk 

insurance for Manhattan construction—large construction projects. 

57

When we took this project to the insurance marketplace through 

one of the major brokers, the insurance companies turned around 

and said we will not provide you any insurance unless you agree 

in advance not to buy terrorism coverage. So, we had to go out and 

buy it without terrorism coverage in order to get them to buy allrisk coverage, and then we had to go to the stand-alone terrorism 

market at enormous prices and with tremendous deficiencies in 

coverage. 

Mrs. KELLY. Mr. Shapiro, I would appreciate it if you could 

please sum up. The red light is on, and if you could sum up, it 

would be appreciated. 

Mr. SHAPIRO. A couple of things I just wanted to mention. The 

insurance industry is now being managed by the rating agencies. 

There are insurance companies that are willing to put up a lot 

of capacity. The rating agencies are threatening these insurance 

companies and saying to them that we will reduce your ratings if 

you continue to write terrorism. So, we have had insurance companies that have basically pulled back from the marketplace because 

they had to, not because they wanted to. 

Mrs. KELLY. You understand, Mr. Shapiro, your full testimony is 

a part of the record. We have all read that. 

Mr. SHAPIRO. Okay. 

Mrs. KELLY. So, let me explain for Mr. Knipe, in case you have 

not testified before us before, the box sitting in front of you has 

three lights in it. One is green, the middle one is yellow, and when 

it is read, it means the time is up. You each have 5 minutes for 

your testimony. Mr. Shapiro, if you have not finished, please do. 

Mr. SHAPIRO. Just one final paragraph. 

Clearly, a long-term payment permanent solution is needed. A 

workable solution will require government involvement. Let me 

just say one thing off the paper. I think the government wants to 

move back from the exposure, and I think the best way to do that 

is the pooling arrangement. It puts the pooling arrangement between the government and the insurance companies, which I think 

would be the ultimate situation. 

Mrs. KELLY. Thank you. 

Mr. SHAPIRO. Thank you. 

[The prepared statement of Mr. Shapiro can be found on page 

159 of the appenidx.] 

Mrs. KELLY. We hear next from Jonathan Knipe, a senior vice 

president, general counsel, and director of business affairs at World 

Trade Center Properties, LLC. He is responsible for managing the 

legal and business aspects of the Silverstein organization’s to rebuild the World Trade Center site. Prior to joining Silverstein 

Properties, Mr. Knipe was the general counsel for Fisher Brothers, 

a New York City-based real estate development and finance company. Mr. Knipe, we appreciate your being here. You have heard 

about the lights. So, we look forward to your testimony. 

Thank you. 

58

STATEMENT OF JONATHAN W. KNIPE, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND DIRECTOR OF BUSINESS AFFAIRS, WORLD TRADE CENTER PROPERTIES, LLC 

Mr. KNIPE. I think I have all of the lights figured out. Thank 

you, Chairwoman Kelly, and Ranking Member Kanjorski. We really 

appreciate you allowing us to participate today. 

I would also like to thank the other distinguished members from 

New York, in addition to Chairwoman Kelly, for your continued 

hard work and support over the last several years, as we have 

dealt with the various terrorism insurance concerns, particularly 

Congressman Crowley, Congressman Fossella, Congresswoman 

Maloney, Congresswoman McCarthy, Congressman Israel, and of 

course, again, Chairwoman Kelly. 

As the lights are getting away from me in thanking everybody, 

as most of you know, our companies leased the commercial office 

portions of the World Trade Center site from the Port Authority of 

New York and New Jersey just 6 weeks prior to September 11, 

2001. Since that terrible day, our entire effort has been focused on 

rebuilding what was lost. 

Last Thursday, as most of you know, marked an extremely gratifying and long overdue milestone for those of us involved in the redevelopment of the World Trade Center. The business deal between 

Silverstein Properties and the Port Authority was formally agreed 

upon and approved. This means that the entire World Trade Center site, with four exceptional skyscrapers, designed by four of the 

most talented and renowned architects in the world, should be entirely rebuilt by 2012. 

These office towers will be a magnificent addition to the rebirth 

of lower Manhattan, creating vibrant retail and office space, and 

joining the Santiago Calatrava-designed PATH transportation hub 

and our own Seven World Trade Center, the David Childs-designed 

building that our company completed and moved into at the beginning of this year, to make lower Manhattan, once again, one of the 

more exceptional destinations in the world. 

The new skyline that will be created will be worthy of a new 21st 

century downtown, restoring New York City’s historic birthplace. 

That and the World Trade Center memorial will honor the memory 

of the heroes of the attacks of 9/11. 

Now that Silverstein Properties and our partners at the port authority have designed these great buildings and resolved our business issues and received the full support of the City of New York, 

the State of New York, and the State of New Jersey, we need to 

face our other remaining challenges. Along those lines, the timing 

of this testimony is ideal, because we face no greater obstacles to 

our redevelopment efforts than our insurance concerns. 

Our first insurance concern does not have anything to do with 

TRIA. It is our current litigation against several of the large insurance companies that insured the Twin Towers that were destroyed 

on 9/11 and are refusing to pay what they owe. 

Our second big obstacle is the reason for this hearing today, and 

that is the current lack of terrorism insurance capacity in the lower 

Manhattan market. We are scheduled to begin construction on the 

three office buildings to be owned by our companies January 1, 

2008. 

59

As you all know, the extension of TRIA expires one day prior to 

this, on December 31, 2007. I am not an insurance expert, like my 

colleagues to my right, nor are most real estate developers. However, we have instructed our consultants and brokers to scour the 

markets and determine how we can secure adequate terrorism insurance for our buildings. 

The most recent information we have been given, as you all know 

and as you learned even more about today, paints a very bleak picture. Even with the current TRIA extension in place, if we had to 

go out and buy a builder’s risk policy today, we are told that there 

is less than $500 million worth of coverage available in the entire 

lower Manhattan market. 

Our consultants have also informed us that they see no viable alternative beyond the traditional private marketplace, and that 

without some sort of permanent, workable, governmental backstop 

in place, there will essentially be zero terrorism insurance capacity 

in downtown New York City at the end of 2007, when we commence construction of our buildings. 

As you can imagine, this reality is staggering to us. Even more 

shocking to us was that our professionals told us that there is currently no identifiable insurance, reinsurance, or capital market solution that could finance the potential losses in the absence of a national framework. 

We cannot finance office buildings that cost billions of dollars 

without adequate terrorism insurance coverage. While a substantial portion of the $8 billion needed to rebuild the World Trade 

Center comes from insurance proceeds, we will also need to obtain 

billions of dollars worth of financing in the form of liberty bonds. 

To obtain this financing, our lenders will require terrorism insurance. It would not currently be possible, even with the current 

TRIA extension in place, to adequately insure even one of the four 

office towers on the World Trade Center site, and this does not 

take into consideration the other construction going on in downtown Manhattan, like the Goldman Sachs buildings and the other 

major construction projects. 

Without a permanent workable solution and despite all of the 

collective hard work, the redevelopment of the World Trade Center 

site will come to a grinding halt without a permanent workable solution with a government backstop. 

Thank you again for allowing us to participate today, and we 

welcome any questions you may have. 

[The prepared statement of Mr. Knipe can be found on page 145 

of the appendix.] 

Mrs. KELLY. Thank you, Mr. Knipe. 

Mr. Knipe, you have testified that TRIA has been essential in 

moving forward on the Freedom Tower project. Would it be fair to 

say that if we do not make TRIA permanent in some form, the terrorists will not only have destroyed the World Trade Center, but 

also prevented it from being rebuilt, with the help of Congress? 

Mr. KNIPE. Absolutely. Without adequate terrorism coverage, 

which does not exist, from everything that we have been told by 

all the best people in the business, the new towers will not be built. 

60

Mrs. KELLY. I also will be submitting testimony, Mr. Knipe, on 

behalf of the New York labor union members who are working on 

your project, who also support the renewal of TRIA. 

I would like you to explain, if you would, to the committee, the 

importance of TRIA to the union members, the men and women 

who help build our country. 

Mr. KNIPE. In New York City, over the course of the next 5 or 

6 years—I think I have my statistics correct—there will be over 

$15 billion inserted directly into the economy, as well as over 8,000 

jobs, as these four skyscrapers are built. So, 8,000 jobs is a whole 

lot of union employees and whole lot of people who are looking to 

make a living. So, certainly, it would have a great effect on that. 

Mrs. KELLY. Thank you. I ask unanimous consent for testimony 

of the National Association of Realtors and National Construction 

Alliance be admitted to the record. 

So moved. 

Mr. Heck, you note the specific difficulties small mutual companies have in the terrorism risk environment. 

I would like you to elaborate, if you would, on the challenges of 

raising risk capital in a terrorism risk market with a mutual structure. 

Mr. HECK. Well, it is very difficult for a mutual company to raise 

capital. All of the capital that my company has, which is about 

$300 million, was earned out of operations, and so, we purchase reinsurance, which is another way of increasing your capital. 

Unfortunately, as you have heard all day, there is not enough reinsurance available for terrorism. We still buy quite a bit of it, and 

we are fortunate enough to be able to buy it, but it is extremely 

expensive. 

As the retentions go up and as the triggers are increased, it requires more reinsurance coverage, and we cannot afford to pay for 

the coverage, because we cannot charge enough for our policies. So, 

it is a very serious problem. 

Without having TRIA to cover the industry, it would be difficult 

for us to continue to do what we have been doing in the last 5 

years. 

Mrs. KELLY. Mr. Shapiro, when you were speaking, I was mindful of the fact that a real estate entity arrived in my office with 

a picture, a graph, if you will, of what it took for them to put together the amount of terrorism risk insurance that they needed to 

carry prior to 9/11, and then they showed me the picture of what 

it took to even get one-half of that after 9/11, and I was interested 

in the fact that, no matter what they did, they still could not come 

back up to the coverage they had had prior to 9/11. 

I would assume that you would agree with me that, if TRIA had 

been in place when they first started looking, after 9/11—they were 

looking immediately before we had enacted TRIA—I would imagine 

they would have been able to get better coverage. 

Would you agree with that? 

Mr. SHAPIRO. Yes. Before 9/11, terrorism was not even considered 

a peril. It was an all-risk policy with no terrorism exclusion, and 

nobody ever gave any thought to the fact that terrorism was going 

to happen. Terrorism came into place after 9/11, before TRIA, when 

insurance companies started to exclude terrorism. 

61

Before 9/11, you could put together, with a half-a-dozen companies, or even more, a billion dollars worth of coverage to cover an 

entire project. To do it after 9/11, it did not get—it did not become 

a problem right away after 9/11. 

The policies that had been written before 9/11 had 12 months, 11 

months, 10 months to go. So, those companies were okay. Towards 

the end of 2002, it was not too far before TRIA came into place. 

Then you had reinsurance treaties; 70 percent of them expire at 

the end of 12/31, but there was still 30 percent of those reinsurance 

companies going through to the end of April or the end of July. So, 

after 9/11, it was not as bad as everybody thought it was. 

2002 was a bad year, because—when basically all the treaties 

were gone. You cannot get a billion dollars from anybody anymore. 

Now, the most—and if I had to go back a year or a year-and-a-half, 

you could get $200 million from an insurance company. Now, we are seeing $25 million, $15 million, $50 million. That 

is about it, and when you get these big projects which have a billion dollars or $1.2 billion, in one case, for my client, it is almost 

impossible to find enough insurance companies to fill that up. 

Many insurance companies have dropped out completely. They just 

cannot afford the retentions, so they are just not participating. 

Mrs. KELLY. Thank you. 

Ms. ABRAHAM. Mrs. Kelly, if I could add to and build on Mr. 

Heck’s comment very briefly, we are similar in structure to a mutual insurance company. We are a reciprocal. So, all of our policies 

are held—all of our capital are held in the name of our insureds, 

our educational institutions, and since 2001, we have gone back to 

them and asked them to contribute capital. 

They have—so that we could provide the breadth of coverage 

that we do. We have gone back to our members, our policyholders, 

and raised additional capital, but without the Federal backstop in 

providing TRIA, we would not be able to go forward. 

So, they are will to contribute, they are willing to make investments in risk management and in capital, but we need them—we 

need you to be part of the solution. 

Thank you. 

Mrs. KELLY. Thank you. 

I was going to ask you, Ms. Abraham, about how your members 

are responding to the challenge of continuing overseas research 

that I know that they do, and also, the outreach and admittance 

of foreign students in this kind of an environment must also affect 

your ability with regard to insurance. 

Ms. ABRAHAM. It absolutely has, Chairwoman Kelly. As you 

know, we are great importers of students. Students from all over 

the world come and study with our educational institutions. 

After September 11, 2001, there was a blip in the number of students who come over, particularly in the graduate research programs. So, much of the research has slowed down. It is beginning 

to pick up. 

The institutions have made additional risk management steps, 

background checks, working with the Federal Government on USA 

Patriot Act, and they are doing significant additional work, unfunded mandates, if you will, in order to reach—try to create a secure campus, still have the research, still have the exchange of 

62

ideas, but it has added an additional challenge to them in order to 

meet the open campus, the ongoing research, and continue to attract students from all over the world in order to study here. 

In addition, our students are going overseas. That is good. That 

makes better global citizens, but it has added an additional burden 

for terrorism here, and we do provide terrorism coverage, internationally or domestically. 

So, that is a coverage that we feel has to be provided, going forward. 

Mrs. KELLY. Thank you. 

I have finished with my questions, and I have an appointment 

in my office. So, I am turning the chair over to my colleague from 

New York, Mr. Fossella. 

Mr. FOSSELLA. [presiding] Good afternoon. This will be fast. 

Thank you all for your testimony. 

I think the inherent irony in all of it—and it has been stated in 

a couple of different ways, but it bears repeating—inasmuch as 

that the site will not commence construction till January 2008, the 

one project that will definitely not be covered under TRIA is the 

basis of why we are here, the rebuilding of the World Trade Center 

site, and I find that utterly ironic, as we deal with this issue, that 

the one guarantee we will have under the current law is that the 

trade center site will not be redeveloped, which brings me to Mr. 

Knipe’s point, in part, raised regarding the litigation and insurance 

proceeds. 

I understand much of the rebuilding is going to be done through 

insurance proceeds. Can you give us—describe the current status 

of those proceedings, and what is the minimum required of insurance that has been paid? 

Mr. KNIPE. First of all, Congressman Fossella, thank you for 

being here today, and on behalf of Silverstein Properties, we want 

to thank you for your years and years of hard work, not only on 

our behalf, but on the entire lower Manhattan community’s behalf, 

to help with the rebuilding of downtown, and I also wanted to 

touch upon one of the things you said before I get into the new insurance—the other insurance issue, which is the Freedom Tower, 

which is now controlled by the Port Authority, actually construction has commenced on the Freedom Tower, and it will be up to 

grade level by the end of next year. 

So, it is just the three towers that will be owned by Silverstein 

Properties that we are not starting to build until January 1, 2008, 

after the appropriate excavation work has been done. As far as the 

state of the current litigation, thank you for asking about that, as 

well. 

As you know, juries have decided that this was a two-event attack, and that several of the major insurers have to pay for the two 

events. Unfortunately, several of the major insurers, particularly 

Aleons, Royal, Swiss Re, Gulf, Wasaw, and Zurich, have not even 

paid for the one event coverage, and we are just in a horrible litigation that drags on and on, and they are dead wrong. 

We now have, you know, unanimous support, letters being written by the day from every level of government to these insurance 

companies to get them to pay what they owe, and you know, this 

money is desperately needed to rebuild downtown. 

63

Mr. FOSSELLA. To what extent will that impact the framework 

that has been established among the Port Authority, the City of 

New York and the State of New York and your company? 

Mr. KNIPE. Well, they are arguing everything they can get their 

hands onto, the insurance companies. We really—it has just become clear that they are looking to be an impediment to construction. 

One of the theories that they came up with that would enable 

them not to pay what they owe is that this conceptual framework 

agreement, which transfers ownership of the Freedom Tower and 

Tower 5 to the Port Authority, is contradictory to an anti-assignment provision within the insurance policies. 

In fact, the Port Authority is a named insured on those policies, 

and there is just no question, as a matter of law, that they do not 

have a leg to stand on with this fight. If they do not agree to pay 

up—and again, there are several insurers—I mean I want to make 

clear, the vast majority of the insurers have agreed to honor their 

commitment and pay what they owe, but there are still several insurers—Aleons, Travelers, Royal, and Swiss Re—that owe a total 

of $1.12 billion in insurance money. Again, the buildings just will 

not be built without that money. It would completely thwart the 

conceptual framework, and there would be no deal, in effect, and 

no buildings, if they do not pay what they owe. 

Mr. FOSSELLA. To clarify what I talked about before, about the 

irony, is we first met to discuss TRIA to redevelop the Trade Center site in its entirety, and the buildings that your company is discharged with the responsibility of building could be left out in the 

cold. 

Is that true? 

Mr. KNIPE. Yes, absolutely. 

Mr. FOSSELLA. Finally—I know it has sort of been dealt with in 

different ways, but in the long term—and any of the panelists 

could comment, if they so choose. If not, we will end the hearing. 

What are the key factors that will determine the amount of private market insurer and reinsurer capacity available for terrorism 

risk insurance coverage in the long term? Anybody want to offer 

that opinion? 

Ms. ABRAHAM. Thank you very much. 

I think the first issue is we need to recognize that there is a 

three-part partnership. The first is the business—in my case, the 

educational institution—the second is the insurance companies, 

and the third is the government. 

The second is the stability, that we need to have a long-term 

plan to know that whatever happens will need to be phased in. 

It is not something, whether it is a pool, which is a concept that 

needs additional research, but something that we know we are 

working towards. 

A 2-year solution, a 3-year solution will not help us, but all parties that I have talked to in the insurance and the business world 

are interested in taking significant risk and phasing out over a 

very long period of time the government’s role. 

What we need is a long-term solution rather than these quick 2 

years, so that we can plan for it, and a pooling arrangement, parVerDate 0ct 09 2002 15:37 Apr 10, 2007 Jkt 031552 PO 00000 Frm 00069 Fmt 6633 Sfmt 6633 K:\DOCS\31552.TXT HFIN PsN: TERRIE
64

ticularly, will take many years in order to provide the adequate 

support that we need. 

We heard this morning the European countries have been working at this, and South Africa, for a very long period of time. 

We are anxious to get engaged in that and start that funding 

sooner rather than later. 

Mr. SHAPIRO. To add to that, I believe that the pooling arrangement satisfies both the needs of the buyers, the insurance companies, and the government. The government is trying to remove 

itself from the smaller exposures. 

The insurance companies are troubled with—they cannot afford 

to take those exposures, and the pooling would sit right in the middle of that, so that the insurance companies can come back into the 

marketplace and take some risk, get the pooling in between that 

and the government, and would actually remove the government 

further away from exposures, and that will take over a period of 

time, but it will work. It is the only way it is going to work. 

Mr. HECK. I would like to also say that NAMIC, working with 

the CEO Roundtable, does have a plan, and it involves a public and 

private arrangement bewteen the Federal Government and the insurance carriers. There is a middle layer, which is really a reinsurance layer, to help the smaller companies that need to buy down 

their deductible. 

We talked about cap bonds. If that could develop, it would be 

very important to providing capacity. We talked about tax-free reserves. When you think of how large an undertaking it is, to cover 

the catastrophic loss. Potential from terrorism risk, you need to 

employ all means at your disposal to increase capacity, and it is 

going to take time to build that capacity. 

It is not something that can be done in just a few years. It would 

probably take 10 to 20 years, but if we can all agree on some type 

of a solution, we can begin to implement it. As time goes on, the 

government would have less and less exposure, and the private sector would take up more of the exposure. It is not something that 

can be done overnight. 

Mr. HARPER. If I could add, a member of the committee this 

morning brought up a concept which I think is important and fundamental to understanding where we should be going with a solution, and that was—he referred to the war on terrorism which we 

have to win. 

I think it is not inappropriate to think of the risk we are looking 

at as a war risk, and as there were several programs during World 

War II and prior wars that—where Congress enacted legislation for 

the duration of the war. Maybe we should look at terrorism risk 

insurance as something that would be enacted for the duration 

against terrorism, because war is ultimately and fundamentally a 

governmental responsibility, and it can be so devastating to the 

economy and to the civilization of our country that there is no limit 

to how much could be involved, and therefore, if the government 

can do anything to define the risk that the private sector is taking 

and, in effect, it is asking the private sector to take on behalf of 

the government, I think that would do a lot to bring back reinsurance and to revitalize the capacities for the private sector to take 

care of the Nation’s needs. 

65

Dr. EMEK. I would like to add that the Independent Insurance 

Agents and Brokers of America—we believe that we need to explore 

ways to strengthen the program and maximize, you know, the private market participation, whether it is from a risk-sharing mechanism, capital reserve accounts or, you know, tax-free reserves, cap 

bonds, but it has to be a long-term solution. 

It is so disruptive to the marketplace when, every 2 years or 3 

years, we have to worry about terrorism insurance. 

What happens—it drives capacity out of the marketplace, and if 

you take a look at New York, where you cannot exclude terrorism, 

without TRIA being reauthorized in some way, or some mechanism 

over the long term, carriers will not be able to write in downtown 

Manhattan or in Manhattan or the surrounding area, and you will 

find that small businesses, large businesses just will not be able to 

pay the price for the cost of insurance. 

Without capacity, even property insurance goes up. So, what happens if nobody is writing, or very few companies are writing in 

downtown, there is less competition; less competition, prices go up, 

and then it is a burden to the businesses in the city, or anywhere 

in the country that will face the same problem. 

Mr. FOSSELLA. Along those lines, with respect to price and the 

rising premiums, how is that ultimately passed on to the tenants 

in the forms of, you know, the higher premiums or rents? 

What is the impact or has been the impact over the last several 

years? 

Can anybody comment on that? 

Mr. HECK. I could say something about that. I think the fact that 

TRIA was passed in 2002 went a long way to help the consumers 

in the business community. Without it, prices would have been 

much, much higher, and I believe that if there is no government 

backstop after 2007, there will be a shortage of insurance 

availablity, and that will push prices up. 

Dr. EMEK. I would concur with that. I have a client who owns 

a number of industrial buildings, and they are in New Jersey, they 

are not in New York, and they face that same problem. 

When premiums went up because of the terrorism issue, they 

had to pass on that cost to their tenants. So, their tenants’ rents 

up, and TRIA will help stabilize that, by continuing TRIA. Without 

some form of extension of this, premiums will definitely go up, and 

that will definitely impact what tenants will have to pay. 

Mr. SHAPIRO. I can add to that, that nationally, insurance prices 

have gone down in the last year, with the exception of property insurance in the major cities. In the major cities, property insurance 

is going up, and primarily because a lot of insurance companies are 

dropping out or providing low capacity, and it is causing price increases. 

Mr. FOSSELLA. Is there a way to quantify this? You say it is 

going to go up or it has gone up or will continue to go up. Is there 

any way to put like a dollar per square foot— 

Dr. EMEK. Well, I could give you—not necessarily a dollar per 

square foot, but an example, just in a small business. 

Because of the higher retention for the carriers, a number of the 

small, you know, and regionals are really not writing very much in 

the city, and so, now you have smaller businesses who have had 

66

to buy insurance from larger carriers, and they are paying more, 

but in terms of just terrorism, I have seen a small business who 

paid maybe $500 for their office policy for terrorism insurance this 

year paying $2,500. 

Now, for a small business, that has dramatic impact on their bottom line and just because there is a higher retention—so, imagine 

the effect that then has on all businesses in the city. 

So, I cannot quantify it per square foot, but I could tell you that 

it does impact, and it does not just impact on the cost of their rent, 

but it is impacting their own particular insurance premiums. 

Mr. KNIPE. Let me also try to address that from our unique perspective, and I am glad you asked it, Congressman. 

We are not even looking at price. 

Obviously, it has to be something that enables us to build our 

buildings and have tenants that can afford their rent. 

In our particular situation, which, albeit, is unique, as a main 

consumer of insurance at the World Trade Center site, the capacity 

is just not there, at any price, and that is the bottom line. 

It is not that the private sector is coming after us and charging 

us a premium. 

It just not available. 

Mr. FOSSELLA. How does that translate—you know, everything is 

fungible, right, and if a prospective tenant has to incur an additional cost with respect to—because terrorism risk insurance is—

or the premiums have gone up, does that put places like New York 

City at a competitive disadvantage with other areas because of an 

increase in rents, or is that a specious argument? 

Mr. SHAPIRO. I think New York City is New York City, and there 

a lot of companies that are not going to move out just because the 

pricing is going up. The real estate owners can afford the price increases, as was said here. 

It is getting the capacity and getting the right terms and conditions that are the problem, but those costs on commercial buildings 

are being passed through to tenants, and some of those increases 

are very substantial. 

So, it is not hurting the real estate companies as much as it is 

the tenants. 

Mr. FOSSELLA. Is there any way we can get that number? People 

throw around numbers—substantial, a lot, large. It’s pretty subjective. 

Is there a way to say that, in this particular building, we have 

seen rents go up by a dollar-fifty a square foot because of this, or 

is that possible or no? 

Mr. SHAPIRO. Rents are definitely going up, and the real estate 

board in New York will do everything possible to try to keep that 

under control.

67

The situation is such that one of the major insurance companies 

who writes the primary layers on these programs has basically 

come out and said that we are going to give 10 to 20 percent increases on our policies. That is not going to say that every one is 

going to be 10 to 20 percent, but that is what they are trying to 

put out there. It is a big increase. 

Mr. FOSSELLA. Okay. The hearing is adjourned. 

Thank you very much. 

[Whereupon, at 2:26 p.m., the hearing was adjourned.] 

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A P P E N D I X

September 27, 2006

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