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EXAMINING A LEGISLATIVE SOLUTION

TO EXTEND AND REVISE THE TERRORISM

RISK INSURANCE ACT (TRIA)

HEARING

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS,

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JUNE 21, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–43

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

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 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

DEBORAH PRYCE, Ohio 

RICK RENZI, Arizona 

RICHARD H. BAKER, Louisiana 

CHRISTOPHER SHAYS, Connecticut 

PAUL E. GILLMOR, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

SHELLEY MOORE CAPITO, West Virginia 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

BLACKBURN, MARSHA, Tennessee 

GINNY BROWN-WAITE, Florida 

TOM FEENEY, Florida 

SCOTT GARRETT, New Jersey 

JIM GERLACH, Pennsylvania 

JEB HENSARLING, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

June 21, 2007 .................................................................................................... 1

Appendix: 

June 21, 2007 .................................................................................................... 69

WITNESSES 

THURSDAY, JUNE 21, 2007

Dalton, Jill M., Managing Director, Global Property and Multinational Practice, Marsh, Inc., on behalf of the Council of Insurance Agents and Brokers . 50

Dinallo, Hon. Eric R., Superintendent, New York Insurance Department ......... 15

Emek, Sharon, Ph.D., C.I.C. Partner, CBS Coverage Group, Inc., on behalf 

of the Independent Insurance Agents and Brokers of America ....................... 52

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

York Mutual Insurance Company, on behalf of the National Association 

of Mutual Insurance Companies and the Property Casualty Insurance Association of America ................................................................................................ 54

Kunreuther, Dr. Howard, Ph.D., Cecilia Yen Koo Professor of Decision 

Sciences and Public Policy, Co-Director Risk Management and Decision 

Processes Center, Wharton School, University of Pennsylvania ...................... 56

Nason, Hon. David G., Assistant Secretary for Financial Institutions, U.S. 

Department of the Treasury ................................................................................ 13

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

and Resorts, Inc., and Chairman, The Real Estate Roundtable, on behalf 

of the Coalition to Insure Against Terrorism .................................................... 48

Nutter, Franklin W., President, Reinsurance Association of America ................ 58

Racicot, Hon. Marc, Chief Executive Officer and President, American Insurance Association ................................................................................................... 47

Smith, Dennis W., President and Chief Executive Officer, Missouri Employers 

Mutual Insurance ................................................................................................. 60

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 70

Ackerman, Hon. Gary L. .................................................................................. 72

Brown-Waite, Hon. Ginny ................................................................................ 75

Marchant, Hon. Kenny ..................................................................................... 77

Dalton, Jill M. ................................................................................................... 78

Dinallo, Hon. Eric R. ........................................................................................ 96

Emek, Sharon ................................................................................................... 101

Heck, Warren .................................................................................................... 109

Kunreuther, Dr. Howard .................................................................................. 124

Nason, Hon. David G. ...................................................................................... 175

Nassetta, Christopher J. .................................................................................. 183

Nutter, Franklin W. ......................................................................................... 192

Racicot, Hon. Marc ........................................................................................... 204

Smith, Dennis W. ............................................................................................. 210

(1)

EXAMINING A LEGISLATIVE SOLUTION 

TO EXTEND AND REVISE THE TERRORISM 

RISK INSURANCE ACT (TRIA) 

Thursday, June 21, 2007

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Paul E. Kanjorski [chairman 

of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Ackerman, Meeks, 

Moore of Kansas, Capuano, Hinojosa, McCarthy, Miller of North 

Carolina, Scott, Bean, Sires, Klein, Perlmutter, Murphy, Donnelly; 

Pryce, Capito, Baker, Shays, Gillmor, King, Royce, Barrett, BrownWaite, Feeney, Garrett, Davis of Kentucky, Campbell, Bachmann, 

and Roskam. 

Ex officio: Chairman Frank. 

Also present: Representative Maloney. 

Chairman KANJORSKI. The committee will come to order. I would 

like to welcome everyone here. It looks like we have a huge show 

at the subcommittee level, so we have to get on with the course of 

action. Now we anticipate a lot of requests this morning, so Ms. 

Pryce and I have agreed to limit each side’s opening statements to 

15 minutes. That rule does not apply to the chairman or the chairman of the full committee, but we will apply it to everyone else. 

Of course this is a long-term sought hearing in the Subcommittee 

on Capital Markets and Insurance, regarding terrorism risk insurance. I think we can move along, and I recognize that a lot of members will have statements and desire in that regard. Without objection, all members’ opening statements will be included in the 

record. 

We meet this morning to examine an important piece of legislation. This past Monday, Congressman Capuano, Chairman Frank, 

and several others introduced H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007. Again, I want to commend my colleagues for putting forth this bill that will amend the 

Terrorism Risk Insurance Act. Before we hear the views of our witnesses, I want to outline some of my thoughts on these matters. 

Overall, I believe that this bill is a good product. I support 90 

percent of the bill’s contents. It will help to protect our Nation’s 

2

economic security in several ways. For example, H.R. 2761 extends 

TRIA for 10 years, and creates a Blue Ribbon Commission. These 

provisions strike the right balance between providing greater certainty to the marketplace and encouraging the private sector to develop its own solutions to these problems. 

The bill also eliminates the distinction between foreign and domestic terrorism. Terrorism, regardless of its cause or perpetrator, 

aims to destabilize the Government. This change therefore has 

much merit. 

In addition, H.R. 2761 lowers the event trigger to $50 million. 

This modification will assist small and mid-size companies in managing their exposures under the program. The legislation, moreover, adds group life insurance to the program. We need to protect 

the people who work in the buildings, not just the buildings in 

which they work. 

Finally, this bill improves coverage for nuclear, biological, chemical, and radiological terrorism events. If the goal of TRIA is to protect the economic security of our Nation against terrorist threats, 

then Congress specifically needs to address the threats posed by 

NBCR terrorism. Our Nation needs to plan for a potentially devastating attack by NBCR means by putting in place an explicit program, rather than an implicit promise now and a chaotic response 

later. By providing fairly low insurer deductibles, smaller copayments for larger NBCR events, and greater legal certainty, H.R. 

2761 aims to limit the exposure of insurers to this risk and promote a private market to price and distribute this product. 

That said, I know that some parties in the insurance world have 

raised concerns about these NBCR provisions. I want them to know 

that I am very open to considering how we can improve them. We, 

however, should not ultimately decide to continue to study this 

problem. We need to act. While the aforementioned changes take 

important steps toward appropriately revising and extending TRIA, 

two other provisions contained on approximately five pages within 

H.R. 2761 take away from the final product. In my view, they create a certain Christmas tree for special interests, and provide special preferences. Before moving this bill to a markup, we ought to 

consider carefully the policy implications of these proposals. 

H.R. 2761 includes a retroactive reset mechanism, where areas 

previously impacted by terrorist attacks would benefit from lower 

deductibles and triggers in any subsequent attack. By altering the 

equity of the current program, this provision, as currently constructed, has the potential to undermine the broad national support that TRIA presently enjoys. 

After the 9/11 attacks, the terrorism insurance marketplace retracted nationally, and not just in the areas directly affected. During the 2005 debate on the first extension of TRIA, the House recognized the situation and passed a provision that would have provided reset relief nationally and prospectively. The reset provision 

in this bill is retroactive, regional, and much more generous than 

what we adopted in 2005. We should work to modify it in the 

weeks ahead. 

In addition, the bill includes a section affecting the underwriting 

of life insurance for purposes related to past and future lawful foreign travel. I am sympathetic to the end that this provision seeks 

3

to achieve, but I believe that it deserves separate consideration outside of the TRIA process. At least until Congress enacts an optional 

Federal charter, State legislators and insurance departments also 

probably have the best expertise to address this situation. In recent 

years, we have already seen 11 States do so by law or regulation. 

In closing, a bill at its introduction represents only the beginning 

of the legislative process. I hope that we can continue to discuss 

these two matters and others. We should also strive to follow a balanced process, designed to obtain overwhelming bipartisan support 

for our final legislative product on the House Floor. 

Ms. Pryce? 

Ms. PRYCE. Thank you very much, Mr. Chairman. I want to 

thank you for holding this third hearing on TRIA. And also want 

to thank Chairman Frank and his staff for their continuing commitment to running this subcommittee in a bipartisan fashion. But 

I must say I am frankly disappointed that this TRIA bill that has 

been introduced this week has been done so with none of the Republican priorities included in the bill. I want to thank the Democrats for providing open lines of communication, but we have seen 

virtually nothing come of our ideas. So I am hopeful that today we 

can have a constructive conversation in discussing this bill and 

continue to work with the chairman toward a consensus document. 

I remain confident that if we continue to build in a bipartisan fashion on the work product of the last term we will have overwhelming support for TRIA. And as Chairman Kanjorski just 

noted, this is only the beginning of the process. Republicans are 

committed to a TRIA extension that embraces a responsible duration, a decrease in taxpayer financial exposure over time, and market reforms that increase insurance capacity. 

I strongly agree with Chairman Kanjorski’s statement at the last 

hearing that we must, ‘‘Choose a length of time that is long enough 

to provide greater certainty to the marketplace and short enough 

to encourage the private sector to develop its own solutions.’’ 

This bill is in essence a semipermanent expansion of a temporary 

program. Since its inception in 2002, TRIA has included several 

mechanisms designed to phase down the Federal taxpayer supported safety net over time. Every year, both the overall program 

trigger level and individual insurer deductible levels have been increased. The bill before us today proposes to freeze these increases, 

not allowing the Federal backstop to gradually contract. It is important that the industry have some skin in the game to ease transition to a private market response for terrorism insurance. 

In addition to a raised trigger and deductibles, any extension of 

TRIA should also include a debate on tax deferred capital reserving. Our current Federal tax policy limits the capacity of the private market to provide coverage in the event of a significant attack. 

Currently, insurers that hold reserves for over 12 months can’t expense the reserves and must pay income tax. Past versions of the 

House legislation included various risk pooling mechanisms and 

dedicated terrorism capital accounts. If there is any hope of lessening the burden on the Federal Government over the long term, 

we must get our tax policy right. Giving insurers the ability to increase private capacity is especially important, given the move to 

4

require insurers to make available coverage for nuclear, biological, 

chemical, and radiological attacks. 

Many view this as an uninsurable risk, which is made even more 

difficult for the private sector to cover when insurers are not given 

tools to properly reserve or price for the actual risk. 

I look forward to hearing from our witnesses today whether the 

NBCR program outlined in this bill is a responsible and workable 

option. In closing, I want to thank the witnesses for coming today, 

thank the chairman for calling the hearing, and hope we can work 

together to improve this product before us, and pass a responsible 

extension of the Federal terrorism insurance program. We need appropriate reforms to make the program more dynamic, and allow 

the Federal safety net to contract or expand according to the evolution of the terrorist threat. 

Thank you, Mr. Chairman, and I yield back. 

Chairman KANJORSKI. Thank you, Ms. Pryce. Now we have two 

original cosponsors of the piece of legislation today, and one of 

them is the chairman of the full committee, Mr. Frank of Massachusetts. 

The CHAIRMAN. Thank you, and the chairman of the subcommittee is a very thoughtful student of insurance. He will in 

that capacity be undertaking some very significant initiatives later 

this year involving what the appropriate role would be in private 

insurance, and while he and I have some specific disagreements 

here, I am very appreciative of his expertise and of the impact he 

has had, and we will work these out going forward. 

Now as to the gentlewoman from Ohio, she said we are not sufficiently bipartisan. But that is not my fault. Bloomberg was a Republican when I started this process. Not being able to time the 

ups and downs of the mayor’s calculation of his political advantage 

has put me somewhat temporarily in a more partisan position than 

I thought I would be. I would note, however, that there are Republican members of this committee who have been energetic and active in supporting this. In the end we may have some disagreements. 

And I would say to the gentlewoman, I would divide the partisan 

question into a procedural and a substantive view. It is very important that we be procedurally bipartisan. I think we have managed 

to achieve that in this committee. We have had an open process on 

every bill, and I have the worn-out pant seats to prove it. But there 

are legitimate differences between the parties, and sometimes in an 

open way they will be litigated—or legislated. And here I want to 

make clear what mine is. 

I disagree with the approach, and it is an honest disagreement, 

I think in principle, about whether or not there ought to be more 

of a market solution. I am a strong supporter of market solutions, 

as we are almost all in this committee. But I don’t think Adam 

Smith is relevant to vicious fanatics trying to destroy this country. 

And I don’t think we ought to allow them to pick and choose as to 

where it should be more expensive to do business in this country 

than elsewhere. 

The main purpose of this bill is not to help the insurance companies. The insurance companies can walk away. Our problem here 

5

is with the commercial real estate industry, particularly in big cities. 

And let me touch on nuclear, biological, chemical, and radiological: I have to admit that I felt somewhat bizarre sitting in my 

office a couple of weeks ago with members of my staff, discussing 

what we would do in the aftermath of a nuclear attack. But here 

is the problem. If we do not provide this level of insurance, in my 

judgment, banks in many cases will not lend the money that is necessary for the construction of large commercial buildings. And that 

will have a negative effect on the economy as a whole, and it will 

have a particularly negative effect on certain of the cities. 

So the gentleman from Pennsylvania is right, we want this to be 

national. New York gets the focus because New York was the victim of that vicious attack of 2001. But it’s not the only big city 

where this could be a problem. And our job here is, I believe, not 

to allow vicious haters of our democracy and our system to be able 

to have an impact on our economy. 

I do not want the market to have to deal with this. This is part 

of the war on terror. And I do not believe we should try to have 

a market solution to the war on terror. We don’t have consumers 

at home paying for screeners at the airports. We have devoted significant tax money for that. I regard this as similar. The purpose 

of this is to say to those who would physically harm us because 

they disagree so much with our values and our system, we will not 

let you be a factor in our economy. And the market should do a 

great deal. Certainly we want a market-related insurance approach. We want people to have incentives to diminish risks. 

I do not think it is reasonable to expect the builders of commercial office buildings to be able to diminish the risk of terrorism. I 

know they make an effort. They have those nice people who stand 

in the lobby and make us sign our names. Now the notion that a 

terrorist is going to sign his name, and therefore not blow up a 

building, does not persuade me. I think that is a very nice ‘‘make 

work’’ program, and I am happy for those people to have jobs. I 

think it has no more to do with preventing terrorism than this 

microphone. 

In fact, we are talking about an inability to deal with these 

threats. And yes, I do favor, and this is reflected in this bill, along 

with many others, a nonmarket approach. I believe that the insurance market is a very good one. I believe the chairman of this subcommittee will be looking at how we can expand it. But I don’t 

want a market solution as part of the war on terrorism. I don’t 

want the market to tell us how we are going to defend ourselves 

against these vicious killers. And we do not, and here is the fear 

that I have, it is bad enough if an attack comes. We should do everything we can to neutralize the extent to which the fear of attack 

disarranges and interferes with the conduct of our economic affairs. 

That is why I support this legislation, including the provisions 

that the gentleman from Pennsylvania correctly notes are somewhat controversial—not the travel one, we can deal with that separately—but the retroactive reset. Yes, one particular area was singled out. 

And I think it is very important that we make clear to the terrorists, domestic or foreign, as this bill says, but obviously we are priVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
6

marily concerned about the fear appears to be worse from foreign 

areas, you will not influence the way we do business. We will not 

allow you to deter us, to inhibit us, to make us pick and choose as 

to where we carry out our economic activity. We will, as a united 

nation through a national piece of legislation, do everything possible to neutralize the extent to which fear of your savagery interferes with our way of life. 

I thank you, Mr. Chairman. 

Chairman KANJORSKI. Now the Chair recognizes Mr. King from 

New York, for 11⁄2 minutes. 

Mr. KING. Thank you, Mr. Chairman. I thank you very much for 

conducting this hearing. I want to thank the ranking member for 

the cooperation that she has given to me and my staff on this 

issue, and I want to thank Chairman Frank and Mr. Capuano for 

the initiatives they have taken. Coming from New York, and I 

know Mrs. Maloney is here, we have seen firsthand the devastation 

of the World Trade Center, having been attacked twice, the last 

time with $32 billion in damage. And this is absolutely essential. 

Now it is New York, tomorrow it could be any other large city in 

the country or any other area. 

As the former chairman and ranking member of the Homeland 

Security Committee, I have a fairly sufficient knowledge of the extent of threats and plots against this country, how it is ongoing, 

and how, for our lifetimes, we are going to be threatened. And if 

we can’t send a signal to the terrorists that we will stand by those 

who are attacked and do all that can be done to rebuild—and TRIA 

is essential to that—and that is why the reset provision is absolutely essential. Certainly the 10-year time frame, the duration is 

important for certainty. 

I am going to actually introduce an amendment at the full committee hearing to have that extended to 15 years, because this is 

not a giveaway, it is not a gift. It is America standing by areas that 

have been attacked and could be attacked, and a signal to terrorists, as Chairman Frank said, that we are not going to allow a terrorist to determine our economy. 

I am a conservative when it comes to the free market, but here 

we are not talking about people’s own mistakes or accidents or behavior. We are talking about vicious actions by a vicious enemy 

who is out to destroy us. We have to send a signal to people in our 

own country and to the world that we are going to stand by those 

who are attacked and tell the terrorists they will not bring us 

down. Reset is essential. So is the certainty of 10 years, and I believe 15 years, and I look forward to this debate. 

I thank the chairman for having this hearing, and I yield back. 

Chairman KANJORSKI. The gentleman representing the middle of 

America, from Kansas, Mr. Moore. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. I thank you 

for holding this hearing today and for your work on producing H.R. 

2761, the TRIA Act of 2007. According to the State Department’s 

annual report on global terrorism developments, entitled Country 

Reports on Terrorism 2006, our country faces a global threat that 

is only increasing. Congress needs to extend the TRIA program as 

a means of protecting our Nation’s economy in the aftermath of a 

future attack that we all hope will never happen. H.R. 2761 is a 

7

good first step toward extending this program on a long-term basis, 

and I look forward to this committee’s hearing today, and consideration of it in the future. 

This bill recognizes the important role the Federal Government 

needs to play in ensuring that our Nation’s businesses will have 

coverage for the riskiest exposures they face, including nuclear, biological, chemical, and radiological attacks, and that the Federal 

Government has the responsibility to ensure that the economy continues to function after an attack. 

This legislation also recognizes the reality that without a Federal 

backstop for large scale terrorist attacks, insurers could face waves 

of insolvencies after an attack that could imperil our Nation’s economy. While a permanent extension of TRIA would be preferable, 

the 10-year extension provided in this legislation will provide policyholders and insurers with much greater certainty than they 

have under the current program. The 71⁄2 percent deductible for 

NBCR is a reasonable level, and a recognition, in the words of the 

President’s Working Group Report of 2006, that no private market 

for NBCR terrorism risk insurance existed prior to September 11th, 

none exists today, and none is likely to exist in the foreseeable future. 

I also hope and believe that the inclusion of a reset mechanism 

for areas that have been previously impacted by terrorism in this 

country will encourage the growth of the capacity and the continuation of coverage in New York City. This area suffered most directly from the horrible attacks of September 11th; 5 years into the 

TRIA program, a private reinsurance marketplace has not developed for terrorism risk, and these risks remain inherently uninsurable. 

According to the testimony of Frank Nutter, the president of the 

Reinsurance Association of America, and one of the witnesses here 

today, the industry retention under TRIA, estimated at $35 billion, 

leaves plenty of room for the private reinsurance market to add capacity. The Federal Government has a responsibility and an obligation, in my opinion, to continue engaging in a public-private partnership with our Nation’s insurers and policyholders to ensure insurance remains available before an act of terrorism and that the 

economy continues to function after an unthinkable terrorist attack. H.R. 2761 is a good bill and an important step in the right 

direction. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you. Now we will hear from the 

gentlelady from Florida, Ms. Brown-Waite, for 11⁄2 minutes. 

Ms. BROWN-WAITE. Thank you, Mr. Chairman. And I want to 

thank you for holding this hearing, and I certainly look forward to 

hearing from the witnesses who will be participating. I wasn’t here 

when the original TRIA passed, but for the past 4 years, serving 

on this committee, I saw how it worked quickly and in tangent 

with the industry when it came to terrorism reinsurance, passing 

reinsurance fund after reinsurance fund. 

Unfortunately, it has left constituents in Florida and homeowners around the Nation to their own devices, however, I do support TRIA. I voted in favor of it when Congress extended the program in 2005. Since its creation, not $1 of TRIA has been spent, 

8

yet insurers have allocated additional capacity to terrorism risk. 

Prices have declined, and takeup rates have increased. 

In 2003, only 27 percent of companies purchased terrorism insurance. In 2005, 58 percent of companies purchased that reinsurance. 

Deductibles have risen from 7 percent in 2003 to 17 percent in 

2006. Even with this increase, the total cost of coverage has fallen 

3 to 5 percent. If this type of success can come from a terrorism 

risk insurance fund, we have to question why anyone would not 

feel the same about a Federal catastrophic fund. 

Unfortunately, this third extension is not being handled in the 

bipartisan manner that we previously were accustomed to. Nothing 

in the bill that has been introduced represents the agreement between the two parties. The provisions in the bill are the sum of the 

proposals of my colleagues on the other side of the aisle, obviously 

without any concessions to the minority party. The leaders on the 

Republican side offered very good, common-sense market reforms 

to gradually phase out TRIA and let the market continue to flourish. I hope this initial showing of partisanship is not indicative of 

how this committee will proceed as we extend TRIA. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman KANJORSKI. Thank you. Now we will hear from Mr. 

Hinojosa for 11⁄2 minutes. 

Mr. HINOJOSA. Thank you very much, Chairman Kanjorski. I 

want to thank you for holding this very timely and important hearing on the reauthorization of the Terrorism Risk Insurance Act. I 

have supported the Terrorism Risk Insurance Act in the past, including the reauthorization of the Act. To help me decide whether 

to cosponsor the current bill under consideration, I look forward to 

hearing the testimony of today’s witnesses. I plan to meet with outside groups interested in this legislation, particularly consumer 

groups and community-based organizations and associations that 

have traditionally been interested in terrorism risk insurance. I 

will also contact constituents in my congressional district to determine if they want me to cosponsor H.R. 2761, the Terrorism Risk 

Insurance Revision and Extension Act of 2007. 

Again Mr. Chairman, I look forward to hearing from today’s witnesses, and especially working with you, as our chairman, and your 

staff on the legislation as it moves through the committee and onto 

the Floor of the House of Representatives. And with that, I yield 

back. 

Chairman KANJORSKI. Thank you, Mr. Hinojosa. And now we 

will hear from Mr. Royce of California for 11⁄2 minutes. 

Mr. ROYCE. Chairman Kanjorski, thank you very much for holding this hearing. Following the terrorist attacks in 2001, Congress 

at that time attempted to limit the volatility posed by another potential terrorist attack by passing TRIA, and it was designed at the 

time to ensure reasonable, predictably priced terrorism coverage by 

providing a temporary Federal backstop. Congress hoped at that 

time to encourage insurers to offer affordable coverage for the unprecedented financial risks posed by foreign acts of terrorism in the 

United States. And given the economic uncertainty at the time I, 

along with many of my colleagues here today, believed TRIA was 

a worthwhile endeavor. However, going forward, instead of allowVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
9

ing the industry to develop as their ability to appropriately price 

the risk of terrorism improves, instead of looking at ways to get industry more fully in the market, I believe we are taking a step 

back with the proposed legislation. This bill fails to recognize the 

advances made in the industry since the enactment of this program 

and fails to look at, I think, some innovative ways to get the industry involved. 

Ronald Reagan once quipped that the closest thing to eternal life 

on Earth was a Federal Government program. And unfortunately, 

it appears TRIA is headed down that path. I believe the Terrorism 

Risk Insurance Act has accomplished its original purpose, and 

gradually should be scaled down. 

But again, Chairman Kanjorski, I want to really thank you for 

this hearing here today. I appreciate it. 

Chairman KANJORSKI. Thank you, Mr. Royce. And now we will 

hear from the other sponsor of this legislation, Mr. Capuano of 

Massachusetts. 

Mr. CAPUANO. I guess I have been called worse. Thank you, Mr. 

Chairman. And again I want to echo my thanks for having this 

hearing, and for being so involved with the discussion on this important matter. I wasn’t going to have an opening statement, but 

I think it’s important for me to at least say one thing. I don’t think 

anybody really has any empirical data on which to base any decisions. Everything we have done from day one relative to TRIA is 

kind of guesswork at best. And so therefore, I want to go right to 

one of the conclusion statements by the Treasury Department, that 

it would be better to have no TRIA than a bad TRIA. In general, 

I guess I agree with that concept. However, I don’t know how you 

define bad TRIA. And to me it would certainly be worse to have 

no TRIA than an uncertain TRIA. 

I can’t sit here and tell you that I am absolutely certain that anything in this bill is correct, and neither can you. And you can’t tell 

me that anything in this bill is absolutely unequivocally incorrect. 

These are guesses. This is the best we can do in an uncertain 

world. 

For instance, I have no false ideas that we can cover or even try 

to cover a massive nuclear attack. Maybe we can handle a small 

one, a dirty bomb. I don’t know; no one knows. We don’t know what 

our response is going to be. However, I do know without question 

what would happen if we have no TRIA bill come the end of this 

year. Jobs will be lost, construction across this country will halt, 

the insurance companies will not, regardless of the philosophical 

arguments of some, they will not offer terrorism coverage, therefore 

banks will not make loans, construction will halt, people will lose 

jobs, and on and on and on. 

So for me, an uncertain bill is all we can ask for at this point 

in time, which is why I have been so insistent on various studies 

throughout this process. And up until this point, we haven’t gotten 

studies on which we can base our opinions. 

So that is why I felt it was important to have a statement. I generally don’t do these, but I think it is important to say the truth. 

And the truth is that no one in this room, no one in this country, 

no one in this world, really knows with actuarial or empirical cerVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
10

tainty what we are getting into. We are groping in the dark and 

we are trying to do the best we can without certainty. 

That is why this bill is critically important. I don’t want to pretend that anything here is somehow stuck in concrete. I know that 

several Members—whom I have the greatest respect for—have certain hesitancies about certain aspects. I agree with those 

hesitancies. I have fallen on the side that even with those 

hesitancies, I support the bill because something is essential. It is 

not just better than nothing, it is essential to the economy of this 

country. And I hope in a reasonably short period of time we can 

begin the process of getting that empirical data that we so desperately need to make intelligent decisions and to get to a point 

where the private sector will feel comfortable being involved with 

this without Government involvement. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Capuano. 

Again I want to congratulate you and your effort with Mr. Frank 

in putting this legislation together. We now have the gentleman 

from New Jersey, Mr. Garrett, for 11⁄2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. You know, since I was 

last here, Congress extended the TRIA program, with some additional reforms and changes, for a 2-year period. And I supported 

that extension because I felt more time was really needed. And if 

you go all the way back since September 11th, insurers and reinsurers have cautiously reentered the terrorism insurance market, 

allocating more capacity year-to-year. And more commercial policyholders are becoming insured year-to-year. I view this increased 

private sector involvement and a decrease in Government involvement exposure to be a positive element. 

But I just now recently have seen a copy of the legislation that 

the majority intends to move, and there are a number of changes 

that are being considered that are really alarming to me. And I am 

also greatly disappointed that in regards to an issue that this committee has historically acted on in a bipartisan manner, that the 

chairman of this committee has rebuffed in full, and without what 

I believe are proper considerations of a number of proposals that 

my colleagues on this side of the aisle have offered. 

One main concern I have is the proposed length of duration of 

this program. If we extend this program for too long a time, I fear, 

quite honestly, that we will not revisit this important topic and 

continue to try and make improvements like we did after the last 

time the program expired. A short-term, temporary extension allows for periodic reassessment of market conditions to see if there 

is more room for a private sector participation, and allows for that 

gradual scaling back of the programs going forward as we observe 

how the private insurers and reinsurers continue to expand in the 

market. 

Now given that the private sector continues to increase its capacity to cover terrorism risk insurance, I firmly believe that a shortterm extension is more appropriate than creating some permanent 

revisionless program. I am concerned that if we redo it permanently, or for a long period of time, we will not revisit it, and the 

private sector will lose out. They will lose their incentive to look 

11

for innovation and newer solution, and Congress also will lose out, 

for we will lose our incentive to revisit this important program. 

With that said, Mr. Chairman, I do thank you again for having 

this hearing today, and I look forward to hopefully now going forward and working with you and the rest of the committee on the 

ideas that this side of the aisle has to improve this program. And 

with that, I yield back. 

Chairman KANJORSKI. Thank you, Mr. Garrett. And now very 

quickly, Mr. Meeks of New York, for 1 minute. 

Mr. MEEKS. Thank you, Mr. Chairman. And first I want to affiliate myself with what Mr. Capuano said. Every now and then there 

should be a bill that comes forward that makes good sense and everyone can agree upon. There is no better issue than TRIA to unite 

us, because TRIA has to be in place, not because of a major city 

or a rural town, it is because of the new world in which we live. 

We hope that no one will ever have to use this insurance, but we 

know that it has to be in place because it is a new world, a different world in which we live. And we do want to send a strong 

message that we are united as a country, and that we are going 

to protect our economy, our businesses, and our people, no matter 

what those from the other side may want because they are jealous 

of what we have here. And TRIA should be that uniting piece of 

legislation that sends a word out that we are going to make sure 

that we are going to hold, as best as we can, our economy up to 

the highest standards that it is, we are going to protect our businesses, and we are going to make sure that our people continue to 

work. 

That is what this is. There may be some differences. And we are 

going to have markups and we will have talks and we will have 

our process in which we can do that. But we need to move forward 

as a united body, understanding the importance that this TRIA insurance means to our economy, to our employers, and to our employees. It unites us all, whether we are a Democrat or a Republican, and whether we come from the East or the West, the North 

or the South. Because we have to send a strong message that we 

are going to protect our people and we are going to protect our 

economy. 

I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Meeks. And 

now from our Republican side, Mr. Davis of Kentucky, for 11⁄2 minutes. 

Mr. DAVIS OF KENTUCKY. Thank you, Chairman Kanjorski, and 

Ranking Member Pryce, for holding this hearing today. As a strong 

supporter of an extension of TRIA, I just want to take a moment 

to join with my colleagues on this side of the aisle in expressing 

our frustration and bewilderment at what I believe is a lack of good 

faith collaboration on H.R. 2761. Despite offering two pages worth 

of suggestions, only one minor Republican issue was included. No 

one on our side even saw a draft of the legislative text until just 

before it was introduced, thus preventing the opportunity for us to 

engage in a collaborative discussion. 

I appreciate the comments saying that it is not a Democrat or 

Republican issue; it is an American issue. I agree with that wholeheartedly, but it is a shame that I think this is just another examVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
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ple of feigning transparent and bipartisan governing and then failing to meet standards that we had in the last Congress for collaboration on such critical issues like this. 

TRIA has always been drafted and debated in a bipartisan fashion, passed by unanimous or nearly unanimous bipartisan votes. I 

am truly appreciative of the commendable efforts thus far by Ranking Member Pryce and Congressman Baker on TRIA, and I am 

hopeful that the majority will at least work with us on the manager’s amendment to include some of the Republicans’ proposed 

changes, especially market reform changes that would continue to 

grow the private sector participation in the program. 

And I would close with this one concern. Codifying for many, 

many years in advance something that would affect a market that 

is going to continue to adapt to changes, as well as the enemies of 

this country are adaptive and changing, our economy is changing, 

I think it is better to have a limited period of time, and in that limited period of time give us a chance and succeeding Congresses the 

opportunity to adjust this program so it fits the best needs of the 

country. 

I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Davis. And 

now very quickly for a little less than 1 minute, Mr. Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. Terrorism, 

without question, is today the single most significant risk facing 

our Nation’s economic security, bar none. The gentleman from New 

Jersey made a statement that said that we should do it over a 

shorter period of time. The one thing we need in this effort, certainty for the industry and for our economic system, is stability. 

And simply because you are extending it for a 10-year period, could 

be even longer, 15 years, that gives some stability. It does not 

mean that you will not go back, if circumstances present themselves, and be able to adjust anything. We do it all the time here 

in the Congress. 

We can’t predict the future. But make no mistake about it, the 

industry, the American people, deserve certainty and deserve stability. Those are exactly the cornerstones of TRIA, and that is what 

is needed. 

So Mr. Chairman, I really appreciate this hearing. Like I said, 

there is no more important piece of legislation. It is without question necessary for the Federal Government to ensure that insurance remains available and continues to require studies regarding 

the development of private markets for terrorism risk insurance. 

And I believe that Congress must work to provide a meaningful extension of TRIA, while at the same time creating a long-term market-based solution to this problem. 

There is no perfect situation in the world, least of all us. We are 

all imperfect, but we move towards a goal for good. And that is 

what this TRIA extension does. I am proud to be a part of it. And 

I want to thank you, Mr. Chairman, for putting forth the leadership on this. Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Scott. Now we 

will move on to the reason we are here, the testimony of the panel. 

We will start with the government panel. First, we have the HonorVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
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able David G. Nason, Assistant Secretary of Financial Institutions 

of the United States Department of the Treasury. Mr. Nason. 

STATEMENT OF THE HONORABLE DAVID G. NASON, ASSISTANT SECRETARY FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY 

Mr. NASON. Thank you, Chairman Kanjorski, Ranking Member 

Pryce, and other members of the subcommittee for inviting me to 

appear before you today to discuss terrorism risk insurance. The 

market for terrorism risk insurance in the United States was, of 

course, significantly changed by the terrorist attacks of September 

11, 2001. Of course prior to September 11th, terrorism risk clearly 

existed in the United States. However, the scale of losses associated with September 11th, approximately $32 billion, along with 

the recognition that terrorist attacks could cause insured losses of 

such scale across multiple insurance products led to changes in the 

way the insurance industry views terrorist risk. 

In response to this, Congress passed, and the President signed, 

the Terrorism Risk Insurance Act, or TRIA, in late 2002. TRIA established a temporary Federal program of shared public and private compensation for privately insured commercial property and 

casualty losses resulting from acts of terrorism. TRIA was again 

temporarily extended in 2005 for an additional 2 years. 

My written statement provides an overview of the key features 

of TRIA, the extension act, and the President’s Working Group Report on terrorism insurance. What I would like to focus on today 

is Treasury’s view on the Federal Government’s role and the market for terrorism risk insurance going forward, and H.R. 2761, 

which proposes a further extension of TRIA, and makes a number 

of changes to the program. As a basic principle, the Federal Government’s role in any market, including the market for terrorism 

risk insurance, should be limited to those areas where the private 

market cannot function and broader costs are imposed on our Nation’s overall economy. 

Our view of TRIA is shaped by the belief that the most efficient, 

lowest cost, and most innovative methods of providing terrorism 

risk insurance will come from the private sector. In playing a role 

at a time when it was needed, TRIA appears to have been successful. Subsequently, there have been positive market responses by insurers and reinsurers to the reduction in the Federal role during 

each of the 5 years that TRIA has been in place, most notably by 

taking on additional terrorism risk exposure in each year of the 

program. And as insurance companies have increased their terrorism risk exposure as TRIA has been scaled back, prices for terrorism risk coverage have declined or remained stable. In some 

sense, we have conducted a market experiment under TRIA that 

has illustrated that the private sector is capable of taking on increasing amounts of terrorism risk as the Federal Government’s 

role recedes. 

Given the success achieved under TRIA to date, the obvious 

question is, should the Federal Government maintain a limited role 

in the provision of terrorism risk insurance? It is clear that some 

challenges still remain in the market for terrorism insurance almost 5 years after the passage of TRIA, and nearly 6 years after 

14

September 11th. Insurers have made great strides in modeling loss 

exposure and managing concentration of risk; however, the ability 

of the insurance industry to model the frequency of attacks remains uncertain. As a result, insurers are cautious in allocating 

more capacity. 

Based on where the market for terrorism risk insurance is today, 

our view is that the following three elements are critical if TRIA 

is to be reauthorized a second time: First, the program must remain temporary and short term; second, private sector retentions 

need to be increased; and third, the program should not be expanded. 

First, it is important that the program remain temporary and 

short term given the positive market developments that we have 

seen in the last 5 years. We do not believe the Government’s role 

should be permanent, nor should it be long term, which could lead 

to market complacency. We believe the 10-year extension in H.R. 

2761 is not consistent with this critical element. 

Second, it is also important to continue the trend of increasing 

the private sector’s participation. Private sector retentions can be 

increased through deductibles, co-shares, or program triggers, and 

any extension of TRIA should not backtrack from current levels, 

but rather should reflect some real amount of increased private 

sector participation. As has been demonstrated by the increased 

willingness of insurance companies to take on terrorism risk exposure during the life of TRIA, there is ample opportunity to continue 

increasing retentions. A number of provisions of H.R. 2761 move 

away from this. 

Third, the program should not be expanded to introduce new 

lines or types of coverage willingly provided by the private market. 

Treasury would oppose such efforts that move the program in the 

wrong direction. 

Finally, there have been questions raised about the lack of coverage for chemical, nuclear, biological, and radiological, or CNBR, 

terrorism risks. Outside of workers’ compensation insurance, coverage for CNBR risk has generally not been provided by insurers. 

However, TRIA does provide coverage for CNBR risk if insurers include such coverage in their policies. If policyholders were to demand CNBR coverage, and were willing to pay appropriate prices, 

we would expect some additional capacity for CNBR risk. 

Nevertheless, outside of the debate surrounding TRIA, we should 

continue to consider the potential economic implications associated 

with the limited amount of CNBR coverage that is currently being 

provided. We appreciate the efforts of the chairman and members 

of the subcommittee in evaluating these issues associated with terrorism risk insurance and TRIA. 

These three critical elements that we have set forth surrounding 

an acceptable extension of TRIA reflect the positive experience 

under TRIA to date, and are grounded in the basic principle of limited Government involvement in private markets. Without these 

critical elements, we would not be supportive of extending TRIA, 

as the program would be moving in the wrong direction. TRIA 

should be phased out in order to increase private sector participation. We look forward to continuing to work with Congress on this 

important issue. 

15

Thank you for having me here today, and I look forward to answering your questions. 

[The prepared statement of Assistant Secretary Nason can be 

found on page 175 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Nason. Now 

the second member of the panel, the superintendent of the New 

York Insurance Department, the Honorable Eric Dinallo. 

STATEMENT OF THE HONORABLE ERIC R. DINALLO, 

SUPERINTENDENT, NEW YORK INSURANCE DEPARTMENT 

Mr. DINALLO. Thank you, Chairman Kanjorski and Ranking 

Member Pryce. It is an honor to be here, and I am happy we are 

here discussing not whether TRIA is extended, but how exactly it 

should be extended. It is a fantastic accomplishment, and I want 

to commend and thank the subcommittee for its careful work, including incorporating some of the suggestions from the field testimony, and for coming all the way to New York and collecting that 

evidence. We greatly appreciate it. 

But I know there is still some concern about the program and 

that it crowds out private sector involvement or that it is a form 

of a bad subsidy. And as I said in the field testimony, I think it 

is actually a program that makes private sector involvement possible, because it solves what I termed before the ‘‘blind pricing’’ 

problem, where there just simply is not enough data, especially the 

upper reaches of potential terrorist activity, for underwriters to accurately price it. 

I showed that chart, which I have here again, but I won’t bore 

you with the chart unless I am asked to during the question and 

answer period. But I think it is important to understand what it 

does. By cutting off the far end of the bell shaped curve, it permits 

that pricing. And it is at least possible that the positive market developments that we see now are due to the existence of the TRIA 

program. Taking it away will cause that pricing clarity to go away, 

and you will be back to the same unclarity and blind pricing problem that you had before. 

I also don’t think it is subsidy in the classic sense, because I 

don’t think it encourages morally hazardous conduct, as economists 

say. We want people to collect in cities and work in concentrated 

areas, and so I think that it is not the kind of subsidy for the industry or for society that is viewed as a negative in encouraging 

ill behavior. 

Having said that, I think the program should benefit all of the 

United States, and not just New York City. A lot of people seem 

to think that this has become kind of a New York City only issue, 

and I just can’t disagree more. As we review some of the provisions 

today, I would like to recommend that they in fact be adjusted with 

that in mind. Specifically on the duration and the reset provision, 

I would make some modest suggestions that they be changed in a 

manner that incorporates more of the country. So for instance, I 

think on duration, longer is better. The two markets need the longest and best certainty. The insurance market needs it to be able 

to price accurately and include as much capacity as possible. Every 

time the renewal comes up, there is a hesitancy on the part of the 

insurance market, which I can feel as a regulator. I am sure you 

16

have heard a lot of testimony on that, and I think a shorter period 

undermines that confidence. The other market, of course, of building and real estate needs the longevity because, as you have heard 

from your fellow members today, the loans are of such a duration, 

and the bonds that back them, that the markets need that kind of 

certainty. 

My understanding is that for the large real estate bonds, they 

tend to cluster around 10 years and greater. So even with a 10-year 

longevity, as soon as the bond is in place, the insurance companies 

are going to begin to doubt whether the insurance will be there. 

The bonds similarly, and the bond markets and the financing, begins to doubt whether it will be there. And I think for the correctness of financing, you need as long of a period as possible, and 

more and more bonds are being used to finance the largest construction projects. Certainly that is what is going to happen with 

the Freedom Tower. 

Finally, I think 15 years is better than 10, because I strongly believe that Oklahoma City should be included in the TRIA and the 

reset provision; I think that anything that has a definition of ‘‘impacted area’’ should be extended and the same benefits should be 

put in for Oklahoma City. And that would require you to go back, 

I think the horrible event was on April 19, 1995, and so I would 

look for an extension to sweep that up, because it is not just a New 

York City problem. It is not even just technically the largest cities 

in the country problem, as we saw there. 

And similarly on pricing, I would even consider recommending that you lower it to $500 million, because again, I think the damage in Oklahoma City was $600 million. I believe the London subway bombings and the bombing in Madrid would also similarly not 

qualify on the money scale. And those to my mind, when you think 

about those kind of attacks, if those occurred here, I think many 

of you would concede that is exactly the kind of terrorism attack 

that would cause underwriters to sort of shun away from the jurisdiction. The reset provisions that give that kind of consideration I 

think should be in place for that magnitude, and so I would consider it. 

To me, the reset provisions for numerocity are simply the opposite of what underwriters normally do, which is if you have car insurance, and you have had three accidents, they justifiably raise 

the premiums. That is the reasonable actuarial approach. And I 

think what the reset provision does there is sort of the opposite; 

it disrupts that. But here I think it is appropriate, because you 

want to do everything you can to invite and to create capacity 

when there is an act. 

So to me, it is not just a New York City phenomenon. Likewise, 

the attack on the Pentagon, which I understand would be excluded 

because it was not a private insured event, but again I would expand the definition to be able to include that. It is not about 

whether private insurance had to step in specifically, it is about 

whether that jurisdiction is now viewed as a likely target for terrorism based on the past. They are trying to predict the future with 

the past. And so to the extent that the reset provision is controversial because it looks like it only favors New York City, because we 

were attacked in the World Trade Center twice, I would do everyVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
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thing I could to recommend to you that you finesse it, so to speak, 

or change it to include a Virginia, a D.C., Oklahoma City, and like 

sizes that we know have already recently occurred that would not 

otherwise be subject to the billion dollar mark. 

I would give the Secretary of the Treasury that kind of discretion. Whether you actually make a precise amount, I think you 

could give more discretion in that regard so that the Secretary 

could designate such events as qualifying for the reset provision. 

Because I could imagine an attack of less than $100 million dollars 

where the reset provision would be appropriate based on how the 

underwriters would approach and begin to actuarially evaluate the 

jurisdiction. 

Finally, I commend the concept of the Blue Ribbon Commission. 

I think this is a very long-term program that needs to be evaluated 

along the way. I think there does need to be better self-help by the 

industry, and the Blue Ribbon Commission could certainly help 

evaluate and make recommendations and incentivize industry to 

that. I think that experience will to some extent improve the situation, and the Blue Ribbon Commission along the way can take that 

into account. 

But I think experience, God willing, will be very limited in this 

area. That is exactly why you need TRIA, and why you have a limited pricing opportunity due to the lack of events. But to the extent 

the department can offer any help or expertise on the commission, 

we would be honored to assist, and I will be happy to answer any 

of your questions. Thank you. 

[The prepared statement of Mr. Dinallo can be found on page 96 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Dinallo. I appreciate the testimony of both Treasury and the State of New York. 

I look at Treasury as being somewhat limiting, and the State of 

New York as saying we have not gone far enough, so we have a 

little bit of conflict there. However, putting all things aside, Mr. 

Nason, do you anticipate that whatever ultimately comes out of the 

subcommittee or the committee in the markup will be a product 

that will be able to be readily supported by the Administration? Or 

do you really see a conflict that we should take into consideration 

that we have to negotiate through every stage and every amendment with the Administration? 

Mr. NASON. Thank you for that question. What I would say, I 

don’t want to presuppose exactly what will come out of the committee, but the three main points that I articulated in terms of the 

length of the program, whether or not private sector retentions 

need to be increased, and an expansion of the program, those are 

the three key elements that we would like to see in any TRIA reauthorization legislation. So if those three issues were addressed— 

Chairman KANJORSKI. Well, 10 years is too long. What is the Administration’s position as to length of time? 

Mr. NASON. Well, I don’t have a particular number to give you 

here, but what we have seen in the past is that there was a significant improvement after 3 years, and there was a period of time to 

study. In the next 2 years, there was a period of time to study, and 

we have a significant data set after 5 years. So 10 years is too long, 

2 years would give you another data set of information, and 3 years 

18

would give you a data set of information. Those are the time periods that we would be looking at. 

Chairman KANJORSKI. In terms of the other provisions that you 

are interested in, what would your suggestions be? 

Mr. NASON. In terms of modifications to H.R. 2761? 

Chairman KANJORSKI. Right. 

Mr. NASON. Sure. The Administration does not believe that we 

need to add group life to the program. The President’s Working 

Group Report and the Treasury’s 2005 report are quite clear that 

it is a functioning market, so that is inconsistent with our view 

that we shouldn’t expand the program. 

I am concerned about the make available provision for CNBR, although I will acknowledge that is by far the most complicated issue 

associated with this debate. And if I could elaborate a little bit on 

how I feel about the CNBR provisions, or how we feel about the 

CNBR provisions, there are two ways we look at this. 

First, I want to acknowledge that, of course, the President’s 

Working Group Report, and the GAO report, say that there is no 

private sector capacity for these risks. That is clear, and I am not 

going to debate that. 

But second, what we do see is that adding a make available requirement is inconsistent with the original intent of TRIA, which 

was to stabilize the environment to deal with economic dislocations. 

Commercial development is happening right now throughout the 

country, even in the urban areas, without a private market for 

CNBR risk. So I am concerned that adding that now is not necessary. 

Just as important is that in our 5-year experience with TRIA, we 

have learned that it is not the most effective vehicle to create a 

market for CNBR risk, if a determination is made that one needs 

to be created. And the reason I say that is because, as I mentioned 

in my testimony, CNBR risk is already covered for workers’ compensation. It could be covered if the insurance industry wanted to 

participate in the market. But because the insurance industry is 

unwilling to participate in the market, the changes to H.R. 2761, 

we are skeptical as to whether or not they would be effective. Because there is a very important distinction, changing the make 

available requirement is not mandating coverage. The statute does 

not mandate CNBR coverage; it just requires the insurance industry to make an offer. For most companies, it would be subject to 

pricing discretion. 

Chairman KANJORSKI. Do you think that since we recognize a 

need for that coverage, we should make it mandatory? 

Mr. NASON. No. What I said to you is I don’t recognize that there 

is a need for coverage. I will acknowledge that there is no coverage. 

But the reason that you would want to mandate coverage is if you 

thought that the country wasn’t moving and developing, and there 

are some risks that the country may be comfortable with being uninsurable. This very well may be one of those categories. But as I 

said in my testimony, it is something that needs to be considered. 

I am just concerned that with the TRIA structure, we haven’t had 

a good experience with that thus far. 

Chairman KANJORSKI. On the NBCR coverage, you would prefer 

that we wait until an event occurs? 

19

Mr. NASON. No, I wouldn’t say that at all. What I would say is 

that right now, TRIA has been pretty ineffective in creating a 

CNBR market, but we should think pretty creatively outside the 

debate about TRIA about what, if anything, the Government 

should do in preparation for an event of that kind. 

Chairman KANJORSKI. So you are thinking a separate piece of 

legislation is appropriate for NBCR tasks? 

Mr. NASON. It is something that the President’s Working Group 

has tried to study. It is something we could have a dialogue with 

industry about. It seems clear to us at the Treasury Department 

that TRIA has not been particularly effective in dealing with the 

CNBR issue. 

Chairman KANJORSKI. Well, we have not been challenged yet. I 

sit in on a lot of the discussions as to whether to include it or not 

include it, and the point is that most terrorist experts in the country think that our largest challenge of the future is to predict how 

we will be attacked. I sat through 9/11, and the 6 weeks thereafter, 

and saw a discombobulated Administration and Congress trying to 

get together to handle just 9/11. I imagine a dirty bomb attack on 

New York, Los Angeles, Chicago, or Oklahoma City would cause 

that same and maybe even more discombobulated reaction by the 

leadership of this country as well as the general population. So I 

cannot understand why the Administration’s argument would be, 

do not do anything unless you can do it perfectly. In fact, the majority of terrorist experts feel that is going to be the next challenge 

if we have one. 

Mr. NASON. If I in any way suggested that ‘‘Don’t do anything,’’ 

would be the Treasury’s policy, that is not what I meant to say. 

And I also would like to say, it is unfortunate to be talking about 

something of this magnitude in a clinical fashion. It is not something that gives me great comfort. All I was trying to say is that 

while it is an important issue, and it is a complicated issue, we are 

very skeptical about whether or not TRIA and changing the available provision would get you the market. 

Chairman KANJORSKI. May I make an invitation to the Administration that, in the next several weeks, you prepare what you think 

would be ideal in this legislation. Then, we can have the advantage 

of that in a markup, and as we go to the full committee hearings 

for markup? 

Mr. NASON. I would be happy to work with you and your staff 

on it. 

Chairman KANJORSKI. I appreciate it. 

The gentleman from New York. I heard an interesting figure yesterday by one of the talking heads in regard to the change of party 

affiliation by the mayor of New York and his prospective political 

future. The thing that struck me as most interesting was that 

there was a little bit of bragging going on that the mayor was very 

successful in creating a $4 billion surplus in the budget of New 

York, and I thought that was great. It immediately struck me that 

since we are struggling with a $275- to $300 billion deficit at the 

Federal level, maybe we should include in the legislation some provision to call upon the City of New York or the State of New York 

to make a major commitment or contribution to the program instead of a reset. 

20

Mr. ACKERMAN. If I might suggest, Mr. Chairman, you might ask 

the mayor to do that personally. Ask the mayor to do it personally. 

Chairman KANJORSKI. What is your thought on that, Mr. 

Dinallo? 

Mr. DINALLO. I think the City and State did, in fact, put up quite 

a lot of resources and money to respond to 9/11. I think it is appropriate for jurisdictions to be responsible and to self-govern in the 

appropriate circumstances, but I don’t think there is any reasonable doubt that the attacks on the World Trade Center and, in fact, 

the attacks on Washington, D.C., were not jurisdictionally based 

attacks. Those were attacks on America. Those were attacks based 

on trying to destroy the financial services economy of this country 

and strike at the heart of our capitalism. And therefore, I think 

that while it is not an unreasonable idea that, as was done there, 

local police, fire, emergency workers, and the Salvation Army 

should come in and do everything they can, I really don’t believe 

that it would be appropriate to have a rule that basically said that 

each city—because I don’t even know which city, God forbid, would 

be next—is responsible to put up billions of dollars that is mandatory because the next one may not have the surplus that Mayor 

Bloomberg, I suppose, is credited for so skillfully managing. 

Chairman KANJORSKI. Yes. You understand, I am a very strong 

proponent of TRIA. I withheld my name as a sponsor of the piece 

of legislation based primarily on two areas identified in my statement, the Christmas tree effect of policies on foreign travel and, of 

course, the reset. It struck me that we have had almost an 

unspoken commitment between two sides of this committee and in 

the Congress in making a bipartisan effort that there would not be 

special favoritism either regionally or on economic class. This legislation probably moves to the extreme of sending a message to my 

constituents and the rest of the constituents of the United States 

that New York wants a special provision that no other area in the 

country will have. And quite frankly, we thought we were rather 

generous with New York in responding to 9/11 with the Federal response and getting involved in creating this legislation— 

Mr. DINALLO. Yes. 

Chairman KANJORSKI. —for future response. Can you understand 

why with the retroactivity— 

Mr. DINALLO. Yes. 

Chairman KANJORSKI. —of reset is so disturbing for me? I would 

have probably supported a prospective reset. 

Mr. DINALLO. And I am here to do everything I can, Mr. Chairman, to try to urge you to change your perspective on this. I personally was disappointed when I realized, when my staff educated 

me, that, no, Oklahoma City would not be covered by this, and the 

Pentagon would not be covered by this. And therefore—I might say 

the Pentagon, I mean the jurisdiction around the Pentagon, and, 

you know, similar incidents, because I believe that on some level, 

our perspective has been skewed horribly by the magnitude and 

the cost magnitude of the World Trade Center coming down. 

I think the next terrorism event will not be in that ballpark, so 

to speak. It will be in the more tens to hundreds of millions of dollars. And I am surprised that the reset provision—which I think 

is actually a good idea from a regulatory pricing point of view and 

21

inviting of capacity—when the events occur, will not reach those 

kinds of events. 

And, I mean, I don’t know what power I have; I am just a simple 

State regulator. But I would urge you to take a look at this and 

say, why shouldn’t Oklahoma be reached? I would imagine that if 

I were riding the subways in Washington, D.C., I would imagine 

that my sense of dread at times is equal to New York City because 

of what Washington, D.C., represents and because of the prior attacks. And therefore, if that is true, I would imagine the underwriters kind of price that in and shun it in a similar way, and that 

is the point of the reset provision. It is basically to correct for the 

natural market forces where they try to predict the future with the 

past and price accordingly. And I think the reset provision from 

that point of view is rational and ought to be extended so that it 

doesn’t look like—which wasn’t the intent, I believe, but it certainly 

looks like it is a New York-based provision, which I simply dispute, 

with all due respect, but agree with the appearance. 

Chairman KANJORSKI. Very good. Now that you have frightened 

the economy in Washington, D.C.—no, this is a serious matter, and 

it is a difficult matter to discuss when we are talking about huge 

destruction of property and a total loss of thousands of future lives. 

All we are trying to do is put a mechanism in place that will forge 

the opportunity to go on and meet that challenge in the future. 

But I appreciate that. I look forward to working with New York, 

both the State of New York and the City of New York. Of course, 

I am always aware of our 29 active members of the New York delegation who have been very successful in coming forth and putting 

this proposal together. We are going to work with them over the 

future years. 

But now, since I have eaten up more than twice of the allotted 

time I should have, I would like to recognize the gentlelady from 

Ohio, Ms. Pryce. 

Ms. PRYCE. Thank you, Mr. Chairman. 

I want to once again thank the panel for the time you have taken 

with us. 

Secretary Nason, I think that you testified that you have seen, 

or Treasury has seen, positive market adjustments in each of the 

5 years since 9/11 vis-a-vis terrorism risk insurance. I wonder if 

you could elaborate a little on how you see the terrorism insurance 

marketplace evolving. Has it been fits and starts? You said 3 years 

and 2 years, and how this 10-year extended period, if we go that 

long or even further as has been suggested this morning, would affect that evolution. 

Mr. NASON. Sure. I would be happy to do that. And I do want 

to say that we have seen a lot of progress with TRIA in the last 

5 years, and the best way to explain that progress is that, to put 

it quite simply, as the Government’s role has decreased, the private 

sector has been ready and willing to step up and fill that void. And 

that is indicated by the fact that there is more terrorism coverage 

throughout the country and in the major urban cities so more people are buying the coverage. But just as important, the prices for 

that terrorism coverage are either lower, or they are stable, which 

suggests that we are not getting to a point where the private sector 

is uncomfortable with providing that coverage. 

22

And we have seen that the industry capacity, starting in 2003, which was around $12 billion, has increased in 2007 to about $36 

billion. That is the deductible retention capacity, by a factor of 

three, so we have seen that the amount of private sector skin in 

the game has been increased significantly. We have seen that takeup—which means more people are buying coverage—has increased 

significantly. We have seen prices stabilize or decrease as the insurance industry has gotten better—has a better understanding of 

how to kind of manage their risk exposure for terrorism insurance. 

And that is exactly what we had hoped the private sector would do 

during each of the 5 years of the TRIA program. 

And how I view the 10-year extension is that there are two 

things. One, a short-term program encourages the private sector to 

innovate because there is always an expectation the program may 

go away. It also encourages the insurance industry to innovate internally, because if there is no Government backstop, they are 

going to have to be able to manage their risk better. And we have 

seen an enormous amount of progress on the insurance company 

side as to how to manage their risk. It also gives the Congress and 

the Government an opportunity to kind of study where things are, 

and that is a very important aspect. If we have a 10-year program, 

you can make the argument that there will still be as much looking 

into the program, but the fact that the program resets and needs 

to be reauthorized, or there is a consideration about reauthorizing 

really creates—really compels people to study where we are. And 

I wouldn’t want to give up on that opportunity. 

Ms. PRYCE. Thank you. 

And, Superintendent Dinallo—is that how you pronounce your 

name? 

Mr. DINALLO. Yes. 

Ms. PRYCE. Noting that the NAIC has in the past recommended 

that Congress change tax laws for insurers to avoid penalties and 

encourage the accumulation of reserves, and I mentioned that in 

my statement, would you support including in TRIA or in a separate provision out of a different committee, obviously, allowing for 

tax reserving or pooling? Will you be requiring your insurers in 

New York to increase their capital to back up risk? And how do you 

see that from your position as a State regulator? 

Mr. DINALLO. I think I alluded to this a little bit in my prior testimony that I am definitely a supporter, and we in the Department 

are considering the regulation that will mandate the insurers do 

some kind of reserving around catastrophic and terrorist premiums, because I think it is important for the public to see, and 

for the Government to see, where the money is going so that we 

can point to it and say, here is the amount that is reserved for a 

rainy day, and if it is below the event, then presumably premiums 

will have to be raised because the reserve was sufficient to cover 

the event. 

I don’t know if it is necessary to give the industry the tax-deferred status that you are asking about. The problem would be, I 

think, many of the larger insurers could deal with it, and, in fact, 

have privately told me they could handle it. It might have a difficult impact on the smaller insurers, who might not have the capital to do the reserving. But then there is a fair argument that 

23

maybe for catastrophic coverage and terrorism coverage, you only 

want certain players in the game anyway. So it kind of cuts both 

ways. I am wrestling with that right now. 

Ms. PRYCE. So you don’t necessarily go along with the majority 

of your Commission? 

Mr. DINALLO. Well, I think what they are saying is that there 

ought to be a tax-deferred status, and I am saying I think it could 

go either way. I think it would help more of the underwriters, but 

I think the first step would be to mandate it, and maybe see who 

can handle it, frankly. But I think it is a really good mechanism 

for fiscal responsibility and for the public to be able to see why 

there is an increase in the premiums and where they are going. 

The only thing I would like to just comment about, when you 

talk about how the companies are better managing their risk, the 

take-ups have improved, and pricing has improved, capacity has 

improved, I want to make sure we don’t lose sight of what, I guess, 

is arguably the obvious. Arguably this is because TRIA is in place; 

in other words, you put in the backstop. I don’t know if you recall 

the curve that I did, but you have cut off that right end of the 

curve. If you uncut off the right end of the curve, I would at least 

want to make the subcommittee aware that the pricing potential 

that you have put in place is erect. 

Ms. PRYCE. Well, in my statement I actually had my staff change 

it from ‘‘phase out’’ to ‘‘phase down,’’ and it is important that there 

is a Federal backstop. I am not one who proposes there be none at 

all, but I do think we need to look at it more often than 10 years. 

I am aware of my time, and I yield back. Thank you, gentlemen. 

Chairman KANJORSKI. Thank you, Ms. Pryce. 

Now from the State of New York, our good friend, Mr. Ackerman. 

Mr. ACKERMAN. The great State of New York. A word about New 

York. We are special. We are special like every other State is special. One of the things that make us special is the fact that we are 

in great measure one of the largest donor States to our Federal system, putting into this great country so much more in dollars than 

we receive back, much more than many other States, and we do not 

do that begrudgingly. We are happy to do that. We are proud to 

do that. 

And one of the reasons that we are able to do that is because of 

the economy of the State of New York. Part of that economy makes 

our real estate very, very valuable. We don’t want to be treated any 

differently than any other State, but we want to be treated as part 

of this country, and if there is an attack on New York, it is not because someone declared war on New York; it is because somebody 

has declared war on America. 

Nobody is writing a check for hundreds of billions of dollars to 

the State of New York for fun or for free. There is no outlay of Federal dollars coming from this at the outset. The only way New York 

gets this great benefit of which we speak today is if we suffer another tremendous attack. If anybody thinks that makes us special, 

I hope and pray and don’t wish anything bad upon you, but relieve 

us of that burden. If somebody could tell us how we can get rid of 

that target on our back, which we have not placed, but certainly 

do have, we would gladly give that up if somebody else would want 

to assume that risk. 

24

There is no payday here from which we benefit. There is just relief in the case that we suffer, and only in case we suffer. This 

money appears only if there is an attack on New York or anyplace 

else that has an attack of that kind of dimension. This isn’t something that we seek advantage over somebody else in the country. 

Believe that of us if you can. And our congressional delegation 

bipartisanly has supported, and will support, any disaster that 

takes place anywhere in the country. I don’t know if New York has 

ever voted against aid or assistance in the history of this republic 

to anyplace else in the country. Nobody is sending us money unless 

there is a disaster. 

I do have a question, Mr. Chairman, first of Secretary Nason, if 

I might. The Administration prides itself on being tough on terror, 

and the President said many things in addition to, ‘‘Either you are 

with us or against us.’’ He said, in addressing the Congress of the 

Nation, ‘‘Terrorist attacks can shake the foundation of our biggest 

buildings, but they cannot touch the foundation of America. These 

acts shatter steel, but they cannot dent the steel of American resolve.’’ 

If, after listening to and reading the Administration’s testimony, 

I think maybe the President meant to say that they can’t dent the 

steel of American resolve. And unless terrorist acts are successful 

in manipulating the private market for terrorism insurance, in that 

case we fold. I don’t know if that is the President’s position, and 

it shouldn’t be our position. You know, if we let the terrorists dictate the terms of the market and the terms of our real estate and 

the terms of where we build or how we build, then the terrorists 

have won. If they tell us we can’t rebuild what they have destroyed 

where we want to build it, they have won. 

They should not be dictating this. And the claim that the market 

will take care of the marketplace, these are extraordinary circumstances, and the reset position, if you blow up the subway system in—whether it is New York or some other great subway system in America, you are going to tell that municipality to rebuild 

the subway system in a different location? Rebuild your subway 

system in some other city or State? I mean, it makes no sense. How 

might you respond, Mr. Secretary? 

Mr. NASON. Let me begin my remarks by saying that I agree 

with the President’s sentiment in that quote, and I also agree with 

your sentiment that New York is special and needs to be treated 

as such, because it has experienced what it had to experience after 

September 11th. So I agree with that. 

Mr. ACKERMAN. Let me just say, we are not treating New York 

special because of that. It is only if that happens again. 

Mr. NASON. When I said that, I wasn’t referring to the retroactive reset provision. I was saying that New York experienced 

something awful on September 11th, and I am not going to sit here 

and not acknowledge that. It did. And how I respond to that is in 

my testimony today, and the Administration’s position on TRIA is 

not inconsistent with saying that these are difficult risks. Our position is simply that we shouldn’t backtrack; we should continue to 

build on the progress that we have seen over TRIA in the last 5 

years, and we should continue to build on that success. Those are 

25

the three points that we made in our testimony, and that is our 

position on TRIA. 

Mr. ACKERMAN. Superintendent Dinallo? 

Mr. DINALLO. I agree with you that the reset provision has unfortunately been viewed as somehow a New York-only benefit, and I 

just have this—respectfully, as I have been able to do, both disagree with that and urge the subcommittee to consider some 

changes to extend it, to make it the fact as opposed to de facto proNew York. I think that it should be expanded to—in a manner that 

would give benefit or acknowledgment to Oklahoma City, or the 

Virginia-D.C. area because of the Pentagon attack, and I think that 

is perfectly appropriate. And I do believe that the amount even is 

set high because I don’t believe that the underwriters approach it 

from a question of exactly how much the loss was, but—within reason, but whether it is a likely target of attack, and in part they 

base that on the past, and that is like someone’s driving record. 

So I think that you are 100 percent right, Congressman. It is not 

about New York. It is about attacks on America, and for a lot of 

reasons, it is often concentrated in cities because they are considered somewhat symbolic of certain ways of life, and capitalism and 

financial services often, and because there are high concentrations 

of people in those areas. But, you know, the next place could be the 

heartland under a similar attempt to terrorize and get at other 

parts of America that are beautiful. 

Mr. ACKERMAN. A final question for Secretary Nason. If the terrorists blow up Baltimore Harbor, where should we rebuild it? 

Mr. NASON. I don’t have an answer for that, sir. 

Mr. ACKERMAN. Exactly. Exactly my point. But it shouldn’t be 

the terrorists’ choice. 

Mr. NASON. Sure. 

Chairman KANJORSKI. The gentleman from New York Mr. King. 

Mr. KING. Thank you very much, Mr. Chairman. And, Mr. Chairman, I can understand why people might think that there is some 

special treatment here for New York, but let me just mention several things. 

There is no doubt, under every threat and risk analysis that has 

been done and is being done, not only is New York number one on 

the list, no one else is even a close second. That is the reality. Believe me, it is an honor we could very much do without, but it is 

the reality we are going to have to face as far into the future as 

any of us can foresee. 

As far as whether or not New York makes a contribution, I will 

just give you one specific example. The City of New York Police Department has 1,000 police officers, 1,000 police officers focusing entirely on counterterrorism. This is around the clock. They have 

more Arabic translators than the FBI. They are working in many 

ways undercover. They are in many ways public displays. 

As far as the World Trade Center itself, one plot or threat we can 

discuss was the one that was made known last year, which was 

thwarted, the attempt to blow up the subway leading to the World 

Trade Center. That was just within the last year was stopped. 

Now, not only do we know that, terrorists know it, of course, but 

so do insurers, and so do real estate developers. This has a real impact on the economy of New York. 

26

And, Superintendent Dinallo, if I could just ask you, I know in 

your prepared statement you made the point that to get a good rating on bonds to finance construction, it should be in coterminous 

with the length of TRIA, quite frankly. 

Now, let me ask you very factually. Since those go at 10 years, 

what impact would that have, as opposed to 15 years, as far as getting the financing you need at a decent rating on bonds? And how 

will it impact the market? 

Mr. DINALLO. My objective opinion is that 10 years is good, but 

15 years is significantly better, because the bonds for large real estate development projects are clustered around 10 years. So if the 

median is 10 years, you are going to have quite a few that are beyond 10 years, and the ones that are 10 years are going to immediately be questionable, so to speak, upon the first day of issuance 

when there is only a 10-year—so right now if TRIA were passed 

today with the 10-year horizon, you would quickly be into 7 or 8 

years, where you would have 10-year bonds being the preferable 

and the preferred way the market would approach it. But a TRIA 

life span less than that, and that would not be good for the market. 

Mr. KING. I know that the rebuilding is being planned, some of 

it is under way, some of the World Trade Center is up. But how 

much—is there a sufficient insurance and reinsurance available? 

How difficult is it to obtain? 

Mr. DINALLO. Well, the experts—the large commercial brokers 

that have been consulted on this say that the estimation is that 

there is $750 million available now, and the World Trade Center 

project alone is an insurable asset, so to speak, of $20 billion. So 

we are—right now we are well, well short. Now, much like settling 

the World Trade Center private litigation, which some people said, 

well, what is the big deal about that, it was already starting to go 

up, but what you really end up insuring, as we saw on 9/11, is the 

buildings themselves to a large extent and so right now the insurable interest, so to speak, and what is there is not very much. So 

a lot of the money and the work has been put in on the plans, the 

contractors building the foundation, the famous bathtub and other 

aspects. Where you are really going to need the insurance is when 

the actual tower goes up and World Trade Center site—I guess it 

is 2, 3, 4, 5 are put up. 

So I think that the answer is that there is quite a lot to go, and 

there is a real capacity issue in lower Manhattan, which I personally believe again is starting to sound like New York is, you 

know—is, like my grandmother used to say, you know, crying poverty with a loaf of bread under each arm. But it is that way because we have suffered the attacks, and I think any other city that 

suffered these attacks would have a similar capacity problem. 

Mr. KING. If I could just also then just ask one final question before my time runs out. On CNBR, we know whether it is New 

York, Chicago, L.A., or anyplace in the country, if they are hit with 

a nuclear attack, the Federal Government is going to come in to 

help alleviate the cost, to put in money. Doesn’t it make more sense 

to try to get the insurance industry engaged up front rather than 

have just the Federal Government coming in to bail everyone out 

at the end? 

27

Mr. DINALLO. Well, I agree. The observation that there has not 

been a lot of activity on the private side because of CNBR, I think, 

is because of the lack of it in the TRIA existent legislation. That 

backstop that we have discussed that I showed in my chart is essential to get capacity and rational pricing, because when you are 

talking about CNBR in particular, which was the far end of the 

curve that I showed, you are talking about potential events that 

have been estimated in the $750 billion range, and that from a 

pricing perspective just makes it essentially impossible to price unless you have certainty that at some upper level whether it is $50 

million or $100 million, it is going to be cut off. And without that 

for CNBR, although we can all instinctively know the Federal Government—I thank them greatly—would step in, you need to have, 

from the pricing perspective, some cutoff. 

Mr. KING. Thank you, Mr. Dinallo. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you, Mr. King. 

The gentleman from New York, Mr. Meeks, for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

I am sitting here shocked, quite honestly, because never have I 

ever thought that this hearing or a large part of it would be having 

to defend the City of New York. To me, this issue is not about the 

City of New York; it is about protecting our country. New York 

happened to be a victim of terrorism, and to some degree, I am 

hearing, you could almost say, because the victim happened to be 

the financial center in this country, it doesn’t matter that they are 

victims. So what? They were victimized, or New York was victimized because it is the financial capital of this country. It is representative of the United States of America. And so as opposed to 

saying, you know, or thinking that New York is just one that has 

all of this money and, as a result, it is receiving some treatment 

unfairly, it is shocking to me. 

I am here, and I think that, you know, when we have a crisis 

anywhere in this Nation, what should be important is to make sure 

that we fix it. I don’t think any member of the New York delegation objected to anything that goes—I mean, I agree, Oklahoma 

City should definitely be included here. Virginia and Washington, 

D.C., should definitely be included here. And if we have a crisis 

anyplace in this country, we have to come together. The tragedy 

that took place in New Orleans with Katrina, I don’t think any 

member of the New York delegation said, ‘‘Oh, Louisiana should 

not receive funds because of that natural disaster.’’ This should be 

something that is uniting us as a country because we are all one. 

In these kinds of incidents, it is not a New York City incident, it 

is not—when we had the tragedy in Oklahoma City, that was not 

an Oklahoma City incident. What took place in New Orleans 

wasn’t a New Orleans or Louisiana incident. It was an American 

incident. And when we are talking about fighting terrorism, we are 

talking about fighting it as Americans. 

When I look at this bill, I am not looking at this bill simply because of New York. God forbid something happens in Los Angeles. 

God forbid something happens in Chicago. I want to make sure 

that they are protected. I want to make sure that we as a Nation 

continue to move on and that our economies continue to strive. 

28

Clearly this is not about New York, and so I am just taken aback 

that we are talking so much about, well, New York, this is exclusively for New York. But if, in fact, other cities are not included 

in this bill, then we should change it. And I will be the first to fight 

and support any amendment that includes every State if some 

States feel that they are left out, because this is what this is really 

all about. 

My question, and I guess I will give it to you first, Mr. Superintendent, because it is just about the structure of CNBR. I have 

had a number of small insurers who are concerned about the structure, you know, because with the amount of money, it seems like 

both are small as far as deductibles are concerned. I was wondering, what would your comments be about how best to structure 

CNBR for small insurers? 

Mr. DINALLO. Well, I think that is actually a fair issue. I think 

the small insurers do have a concern that is appropriate that if 

others make available a requirement, it could be too expensive. But 

right now, you know, I think what will happen is the work with 

the insurance regulators on what the correct price should be, and 

I don’t see why the pricing would really be any different than what 

they are already giving for the terrorism coverage. The enormity of 

it is obvious, but the incident numbers would be about the same 

potentially. And I think that the way to deal with it is—what you 

have already done, you have given a lower deductible from 20 percent to 7.5 percent, which I think is a very good thing, and maybe 

it could be further modified to take into account the smaller insurers that I think have an argument that they will be impacted by 

it. But they are already now going to be impacted by offering terrorism coverage, the conventional terrorism coverage, and CNBR 

which has such an alarming aspect to it, but it really has an 

alarming aspect on the uppermost reaches, which I am kind of presuming for these discussions is going to be part of TRIA, so I don’t 

see such a serious distinction. 

Just to note on the financial capital center of the world being 

New York, I will just say one thing: Heading the Blue Ribbon Commission for the Governor on financial services competitiveness, you 

know, it will not be Chicago or Denver or Los Angeles that picks 

up and becomes the new—and, I mean, our competition on that is 

London and Asia and Paris. And so to the extent that people don’t 

feel comfortable doing business in New York from a financial services perspective because of terrorism, it will go to other countries’ 

benefits, not to other cities, I believe. And it is just going to be a 

tragedy for the country’s economy, not for New York City specifically. 

Mr. MEEKS. Thank you. And, Mr. Secretary, let me just ask one 

quick question. I see my time is almost out. And when we unfortunately talk about terrorism now, generally it is not something that 

we think about that is from a government necessarily. But we 

also—and we fear that some of these rogue nations could get their 

hands on a nuclear weapon. But in CNBR, let’s say, for example, 

it did get in the hands of a country, and there was a nuclear attack 

or a biological attack from a country, which basically means there 

is an act of war, should TRIA be—does it trigger in then because 

it is an act of war? 

29

Mr. NASON. The definition of whether or not a terrorist event 

would be a certified terrorist event is quite broad. With the facts 

that you have suggested right there, if an individual undertook 

such an attack, I have to believe that the process that we have in 

place at the Treasury Department would call that a certified act, 

because that would be acting on behalf of a foreign person or an 

interest. And you have to be comfortable with the fact that we are 

going to—we are going to cut the right direction if there is some 

ambiguity there. 

Chairman KANJORSKI. Thank you, Mr. Meeks. I am going to take 

the prerogative of the chair for a moment because—not that I was 

offended—but I hear your plea that this seems to be a hearing directed at New York. I want to assure you that it is not. 

I also want to assure you that for 5 years, we have had terrorism 

insurance provisions in the United States without reset provisions. 

According to the testimony of the superintendent, the program has 

worked rather well and we encourage it. As late as yesterday, after 

discussing this reset with a group of people, I heard the comment 

back from some people not formally representing New York, but in 

the business community of New York, that the reset is so important to New York that they would rather have no bill if it did not 

include the reset provisions. 

Now, I want to put it very directly to you, Mr. Superintendent, 

is that your position or the position of New York? 

Mr. DINALLO. No. 

Chairman KANJORSKI. Because if it is, I could save an awful lot 

of time and go on to other legislation. 

Mr. DINALLO. I would prefer you not save that time. As I said 

in my opening statement, I think you have done a remarkable job. 

I think the bill, with or without the reset provision, is a great 

achievement. I just—all I was trying to get at was—and I think 

Congressman Meeks’s point is well taken—that I really was personally shocked when I realized that other attacks on this country 

were not covered by the reset provision. 

I am just calling it like I see it. I have my staff here. I was appalled and surprised by the optics of it and apparently the de facto 

reality of it only being a New York benefit, and I would rather see 

it extended to other jurisdictions, and that the Secretary be given 

the opportunity to define self-insured out of it. 

Chairman KANJORSKI. We appreciate that. Let me go one step 

further. We do not look at this as a benefit of New York to have 

a reset provision. This is all a question of who will pay when or 

if there is another attack. What is the fair allocation of this? Quite 

frankly, so that my friends from New York understand, look, what 

we are arguing about is the investors and the buyers of this insurance that are either going to save money or pay a little bit more 

if we do or do not have a reset provision. This is not going to affect 

one iota of people of the State of New York or the governmental 

institutions of the State of New York. It is going to affect really a 

very small group of real estate investors within New York and potentially bond buyers and mortgage holders of the property of the 

State of New York. We do not want to hurt them. On the other 

hand, we do represent the entire country, and we have made a representation in our response to terrorism insurance for the last 5 

30

years that everybody has been treated fairly and equally in the 

country. This is the first time that we have this significant request 

for a change from fairness, and some of us are not comfortable with 

it. That is it. 

Now we will move on to our next gentleman, Mr. Feeney of the 

great State of Florida, for 5 minutes. 

Mr. FEENEY. Well, thank you, Mr. Chairman. You may be interested to know that I am originally from the great State of Pennsylvania. 

Chairman KANJORSKI. I knew there was something good about 

you. 

Mr. FEENEY. Like many transplants in Florida. And Florida had 

some experience in insurance markets collapsing. I was in the 

State legislature after Hurricane Andrew in 1992, and I will tell 

you, I view the TRIA issue through the lens of my experience as 

a policymaker in Florida. And the chairman of the full committee, 

Mr. Frank, said earlier that Adam Smith really isn’t relevant to 

this conversation, given the nuclear threat, but I believe that Adam 

Smith is always relevant when we are talking about capital because nobody ever explained how and why capital moves better 

than Mr. Smith. 

I would suggest that I was growing bias in favor of free markets, 

so I am very sympathetic to the Treasury’s position here. Having 

said that, there are times when the markets collapse in insurance. 

We have seen that in Florida, hurricane responses, and there are 

times when the market simply is not capable of reacting quickly 

enough. And unfortunately the government’s choice is either to 

allow a recession or a depression to occur or to find a way to transition from a catastrophic event, whether it is man-made or in this 

case—in this case man-made, or whether it is a natural event. 

But my preference is always to give back to the private market. 

I believe that reinsurance ultimately ought to work in a terrorist 

threat because we have commercial buildings in Malaysia, in Hong 

Kong, and all over the Far East and Europe, in any developed 

countries that potentially could be targeted by terrorists. There is 

this huge need and market globally for terrorist reinsurance. 

And so my goal, Mr. Nason, is exactly the same as Treasury’s, 

even if I think some of the picture you have painted may be a little 

bit rosy in terms of the length of time it is going to take. I want 

to vote for a TRIA bill, but I want to only vote for one that is going 

to get us back towards a healthy market, whether that is 7 years 

or 10 years or 12 or 14 years. 

Mr. Nason, could you give me some encouragement that we could 

craft a bill, and give me some ideas of what ought to be in that 

bill as we continue the transition from 9/11 and go back to a 

healthy market. What types of things would you suggest that we 

have in this bill other than the timeline which we have talked 

about? 

By the way, the Ways and Means Committee hopefully will encourage commercial insurance companies to build up their reserves 

with favorable tax treatment. That is one way we can reduce the 

risk over time to taxpayers, and I think that ought to be done post 

haste. I don’t know why the Ways and Means Committee hasn’t 

made that a priority. 

31

Could you give me some additional ideas of what we ought to 

have in this bill to move us steadily and surely towards private reinsurance dominating the market once again in the future? 

Mr. NASON. I would be happy to do that, and I also wanted to 

say at the outset that we at the Treasury strongly support the 

chairman’s views on the reset provisions and the fact that we have 

had a program that has worked quite well, and changing it in that 

way doesn’t seem to be a step in the right direction. 

In answer to your question, Congressman, what I would do is I 

would look at the extension act in 2005 as the template for what 

we would like to see going forward. There are some very clear 

things that we can do. We can continue to increase private sector 

retentions. They have gone up every single year that we have had 

the program. For some reason we have stopped that. We are not 

at all convinced that private sector capacity is at its maximum, so 

we don’t see any reason why we shouldn’t continue to increase private industry retentions. That is the first thing. 

The second thing I would say is the trigger amount. There are 

three ways that you can increase retentions—increasing the deductible, copay, and triggers. This bill lowers the trigger amount; 

$50 million seems like a lot of money, $100 million seems like a 

lot of money, and it is a lot of money. But it isn’t a lot of money 

when you consider the aggregate loss that a particular event may 

cause; $50 million or $100 million is essentially a small amount in 

terms of a loss that the insurance industry can handle from the 

private sector. So I would certainly not want to see the trigger levels decrease. I would want them to be— 

Mr. FEENEY. The argument there is that if you penalize small 

companies, you may drive them out of the market. How do you respond to that? 

Mr. NASON. I don’t believe that to be true, and here is why: The trigger right now is $100 million. It is an aggregate loss for the entire event, not insurer by insurer. So what happens is if you had 

a $100 million event, then the TRIA program is triggered. Then 

you move to a separate calculation to figure out how much each 

separate insurance company’s skin in the game is. It is very unlikely that for a $100 million event, you would have $100 million, 

$90 million, or $70 million of exposure for a particular small insurance company. 

Mr. FEENEY. Ben Franklin started the first insurance company, 

and he knew at that time that you should diversify the risks that 

you have in your portfolio. 

Mr. NASON. That is exactly where I was going to go, Congressman, because if that is the case, if a small insurance company has 

all its surplus tied to one disaggregated risk, that is bad risk management practice. 

Mr. FEENEY. We had some companies after Hurricane Andrew 

that did exactly that in south Florida; they had 90 or 100 percent 

of their policies. So our regulators in some of our States learned 

what Ben Franklin taught us years ago. 

I see my time is up. You understand what my goal is. I am not 

thrilled with the bill, although I understand the need for some sort 

of TRIA transition. 

Chairman KANJORSKI. Thank you very much, Mr. Feeney. 

32

We are going to pass on to the gentleman from Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, let me be clear. I have some reservations about 

the reset provision, particularly the retroactivity of it. At the same 

time, on balance I support the concept of the bill for the very simple reason that I don’t see it as a major item either way, if you 

want the truth. The prospective reset I do see as a major item. I 

think that is an important aspect of it. The retroactive one, financially I just don’t see a major financial impact by it, number one. 

Number two is, let us be serious. There is nobody here who has 

had more difficulty with the City of New York than me. Fenway 

Park is in my district. 

Mrs. MCCARTHY. That is your problem. 

Mr. CAPUANO. To get a little revenge, the Yankees still haven’t 

won a world championship in this century. That is okay. 

But at the same time I also realize, again, it doesn’t take empirical data, just common sense, that New York has the highest 

chance, the highest likelihood of the next terrorist attack. There is 

no way around it. It is for 1,000 different reasons that we all know, 

you know, intuitively. And that being the case, a minor financial 

impact, which I am not even sure there will be one, but whatever 

minor financial impact there is shouldn’t be enough to derail a necessary bill, number one. 

Number two, it recognizes the reality that New York developers 

will probably have a more difficult time getting ahold of affordable 

insurance. 

So for me, yes, I have some concerns. They are philosophical concerns. I share them. At the same time, they don’t rise to the level 

of substantive concerns that I have on the retroactive aspect of it. 

I do, however, have some concerns about CNBR, nuclear, biological, 

chemical attacks. And I say that for the very simple reason that 

people, when they use the term—first of all, most people don’t use 

the term, but those of us who come to use it always think in terms 

of the biggest, most catastrophic issues, a major nuclear attack on 

any major American property. I don’t believe that we can cover 

that. I believe that Congress should be back in session doing pretty 

much what we did for New York if, God forbid, that ever happens. 

But each one of those situations presents a real possibility in today’s world of a small attack. 

For some reason, people have forgotten that we had an anthrax 

attack that wasn’t widespread, didn’t affect millions of people, but 

did impact this economy very greatly. We could have a dirty bomb 

that might impact only a small area of any one of our cities; that 

a chemical release like the one in London’s subway, again, not the 

entire city, but a significant aspect of it. And I don’t disagree that 

private enterprise should do it, but right now they are not doing 

it. It is effectively not offered. And I totally agree. I would love to 

hear either today or anytime suggestions on how we can get it to 

be offered without these provisions, these provisions that I said 

right from the beginning are not necessarily there because they 

somehow came down on the tabloids, and we decided that this is 

the way to do it, it is the best idea we have at the moment. If there 

is a better way out there to get CNBR coverage affordable and 

33

available to our major developers, I, for one, am more than open 

to hearing how to do it. 

So I want to make it clear, as I said right from the beginning, 

there is nothing in this bill, not the trigger, not the CNBR requirements, not the reset, that is somehow sacrosanct to those of us who 

worked on this bill. This bill, like everything else, is the best we 

can do in an area where nobody is a true expert, trying to cobble 

together enough people who would be satisfied with the bill to 

move it forward because something is better than nothing. And I 

would ask both gentlemen, if they have suggestions, specific suggestions, positive suggestions, on how we can improve this bill specifically relative to CNBR, I would love to hear them. I am not trying to put you on the spot today. I am not suggesting you are going 

to whip it out of your pocket and give it to us. But if you have 

them, please get them to us. 

I won’t speak on behalf of everyone else, I will speak for myself. 

I won’t just reject it out of hand. If it works and it makes sense, 

I am more than happy to embrace it. And with that, if either of 

you can offer insight on those items, I would be happy to hear 

them. 

Mr. NASON. Let me just say as a native New Englander, I share 

your angst about what the Yankees have done to our great community. I want to make something very clear. I in no way want to suggest that the CNBR issue isn’t complicated, and I in no way want 

to suggest it isn’t a problem. The only thing I was trying to suggest 

in my testimony and in my points is that right now if insurance 

companies were to offer CNBR coverage, TRIA will pay for it. Right 

now, TRIA will pay workers’ compensation aspects of CNBR coverage. 

All we are doing is changing our offering provisions; I am skeptical we will change the market. That doesn’t in any way suggest 

that it is not an issue, and it doesn’t in any way suggest that we 

don’t consider it. I am not here to say because it is not perfect, it 

isn’t good. I want to be clear that changing the make available provision in the statute is unlikely within the TRIA construct to create 

a large market for CNBR. That was my only point. 

Mr. CAPUANO. That is a fair point, and I accept it. Again, I am 

not sure, I don’t know. If there are suggestions on how to do it, 

that would be very helpful. 

Mr. DINALLO. I have two comments. One is I really do believe 

that the problem for underwriters is, again, pricing rationally is 

the far end of the curve. If you see it in health insurance, you see 

it in life insurance, and you see it in property insurance. So I think 

by putting it in, you will encourage a lot more pricing incapacity, 

and you will see a difference. That is my belief. 

The other is what Ranking Member Pryce was getting at, and 

Congressman Feeney, is that it is maybe the area for a small experiment, which is if you put in a requirement or the option for 

tax-free reserving coupled with—this is what I wanted to tell you 

before, I forgot—you have to also adjust FASB 5, because there is 

a good argument that if you put in tax-free reserving, they can’t 

take advantage of it because FASB 5 requires that the reserving—

having been a company and done this, it is very difficult—the reserving has to be probable and estimatable. So you have to have 

34

enough data to give a probability to it and an estimation to the 

event, like a litigation, say, for instance. You reserve for a litigation. You have a concept that it is going to cost you $40 million to 

pay it, and you have a greater than 50 percent chance of losing it, 

so you could reserve for it. That is the basic rule. 

On terrorism, it is very hard, obviously, because all this discussion we are having, is very hard to both estimate and give a probability to it, so you may have to put in a change and an exception 

in a sense under FASB 5 accounting rules to be able to reserve for 

terrorism or CNBR events. And if you go for the tax-deferred reserving, I am almost certain the companies—I have talked to them 

about this—will feel a lot more calm from an FEC perspective and 

enforcement perspective if you give them some latitude on reserving there because technically they could be in violation of the reserving requirements. 

Mr. CAPUANO. Thank you, gentlemen. 

Chairman KANJORSKI. The former chairman of the subcommittee, 

my good friend from Louisiana, Mr. Baker. 

Mr. BAKER. Thank you, Mr. Chairman. 

I have had casual interest in the topic in years past and want 

to renew a broad observation as opposed to specific elements of the 

bill before us. 

It seems that in the prior efforts on terrorism extension, that we 

gradually, but with certainty, increased private market skin in the 

game while gradually, but with certainty, reduced taxpayer exposure. Note, Mr. Nason, that in your testimony, or in answer to 

questions, you said that private sector retentions were up year over 

year throughout the existing programs. This is in a period of time 

when U.S. commercial real estate has enjoyed significant profitability. Now, that doesn’t appear on its face to represent a dilemma 

that requires us to now move to a system where we are going to 

set a 10-year program clock, which in essence means you don’t reopen this thing until it is about to need reauthorization, expand 

the required classes of coverage, you freeze the ability after 1 year 

to significantly price-risk appropriately. 

Is that likely, Mr. Nason, to bring more private capital into the 

market? Or what in a very broad systemic analysis—and make it 

short—do you think the two differing approaches offer to the taxpayer and to continue commercial real estate success? 

Mr. NASON. Thank you for that question. I can keep it very short. 

It is a step in the wrong direction. What we have seen over the last 

5 years is exactly what we had hoped to see. 

Mr. BAKER. Great answer. You can stop there. Let me give you 

one more follow-up. Given that, and some have said make a suggestion about what we should do. Well, we should go back to—I 

wasn’t really that enthused about the 2005 version, but that is a 

starting point and make modifications. If you start there, and you 

really must do something, if you just had a mandate urge and you 

just had to mandate at all costs, how about this? How about you 

tell people you must carry, and you must offer, but let the market 

price the risk? 

Now, what does that mean to New York and what does that 

mean to Pennsylvania and what does that mean to Baton Rouge? 

That means if you have a relatively low likelihood of exposure to 

35

claims, you are going to have a relatively, comparably speaking, 

low premium. But if you are in New York, guess what? You are 

going to pay more. Guess what? Katrina victims are going to pay 

incredibly higher premiums for property and casualty coverage if 

you live below Interstate 10 in south Louisiana. 

That is fair. I am not even going to get into all the reset business. I am just going to simply say you ought to get Government 

out of the pricing business, preempt the State regulatory constraints on the market, and if you are going to mandate, which if 

you got the votes you will, then at least let market function work 

in response to your dictatorial requirements. Otherwise, I feel almost with a high degree of certainty, that there will be withdrawals from the markets, either involuntarily because of small 

claims against the little guys who can’t afford a $50 million trigger, 

certainly can’t afford a $100 million dollar trigger. And why, on the 

face of it, would we not accept a pooling mechanism, where companies could voluntarily enter into circumstances for voluntary pooling for tax-free reserves to offset against the adverse consequences 

of that $50 million trigger? That seemed to me to be a harmless 

give. It is not in the bill. 

So there are very specific suggestions that can be made to help 

move this bill along in a significantly less threatening way to the 

United States taxpayer. Otherwise just nationalize the whole business. Just put the taxpayers on the bottom line and say if we have 

a car wreck on Third Street in downtown Baton Rouge we are 

going to cover it. We seem to be sliding slowly down that big hill. 

But there is just no sensibility in telling anybody in this country 

you must do something, and by the way we are not going to pay 

for it. 

I yield back. 

Chairman KANJORSKI. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. The September 2006 report from the President’s Working Group on Financial Markets concludes that, ‘‘No private market for CNBR terrorism insurance existed prior to September 11th, none exists 

today, and none is likely to exist in the foreseeable future.’’ That 

conclusion is consistent with that of the GAO Office on NBCR 

Risks released at the same time. 

Do you believe that the threat of terrorism—I am addressing this 

to either or both of you—do you believe the threat of terrorism in 

the United States has disappeared since 2005, when Congress extended TRIA? 

Mr. NASON. I do not, no. 

Mr. DINALLO. No. I don’t believe it at all. 

Mr. MOORE OF KANSAS. Well, we would certainly be in agreement 

on that. Are you aware of the State Department’s Country Reports 

on Terrorism 2006, which concluded that global terrorist attacks 

increased over the last year, and that al Qaeda has rebuilt itself? 

Are you familiar with that? 

Mr. DINALLO. I am not precisely familiar with the report, but it 

sounds like a logical, if not data supported, fact. 

Mr. MOORE OF KANSAS. All right. 

Mr. NASON. I have the same views as the superintendent. 

36

Mr. MOORE OF KANSAS. Do you consider the State Department’s 

report based on statistics from the National Counterterrorism Center to be credible? And if so, doesn’t that suggest the continued 

need for TRIA with a NBCR component? If there is in fact a terrorist threat that still exists, and I think we all agree that is the 

case, shouldn’t there be a TRIA with a NBCR component? 

Mr. DINALLO. When I testified previously, I thought that NBCR 

should be included in TRIA, as this bill has. And part of it was actually, to get at Congressman Baker’s point, which was that those 

are the events that will be so far off the curve that actually even 

if you are an unlikely target, compared to say New York City, those 

events drive the pricing. 

Mr. MOORE OF KANSAS. Mr. Nason, do you have a comment? 

Mr. NASON. Yes. My comment is that of course I am not going 

to challenge the conclusion that there is a terrorism threat. My 

only comment is a more technical one, which is that I am not sure 

that the provisions in H.R. 2761 are going to get you the market 

for CNBR that you are looking for. 

Mr. MOORE OF KANSAS. To the best of your knowledge, has a significant private market for terrorism reinsurance been created 

since 2005, and does a private terrorism reinsurance market look 

likely to exist in the future, particularly for NBCR risks? 

Mr. DINALLO. No. 

Mr. NASON. If there is not primary coverage for CNBR risks, it 

is unlikely there is going to be reinsurance for CNBR risks. That 

is right. 

Mr. MOORE OF KANSAS. Final question. Does it make sense in 

your opinion for Congress to continue extending TRIA in 2-year intervals or other short-term intervals, or does it make more sense 

from an economic and financial standpoint, and as a matter of public policy, to extend TRIA for a longer period of time, ideally until 

a time when we don’t have to worry about terrorism and threat of 

terrorism in the future? Are 2-year extensions the way to go? 

Mr. NASON. As I mentioned earlier, I don’t believe a long-term 

extension is necessary. I don’t think it is necessary to secure financing for commercial development. And I do think it will encourage market complacency. And I do think it will make sure that we 

don’t continue to study the effects of the program going forward. 

Mr. DINALLO. I think 2-year extensions are highly disruptive to 

both the insurance market and the real estate market, which 

seems to be the primary market that we are discussing today. I 

think from a pricing perspective, it gives a lot of uncertainty to 

both of those activities, especially in that short of a period. 

Mr. MOORE OF KANSAS. Thank you. 

Chairman KANJORSKI. Thank you, Mr. Moore. Mr. Roskam? 

Mr. ROSKAM. Thank you, Mr. Chairman. Just a couple of quick 

questions really. Could you both comment on whether you believe 

NBCR is an insurable risk? And I have heard from a whole host 

of folks in the industry who have come into my office and said you 

can’t put a number on this. You can’t put a price tag on this. You 

can’t put any predictable model around this. And it just strikes me 

that that is a threshold question that is really before us today. Do 

either of you have an opinion? 

37

Mr. DINALLO. The markets will price anything if people are willing to pay for it. I think it is an insurable risk. I think Congressman Capuano’s comments are well taken. Not all NBCR events are 

going to be of the trillion dollar variety. Some could be very much 

less. In fact, arguably, the Oklahoma City event was a chemical attack. It was built basically out of chemicals bought at Home Depot 

at the time, I think. And so you could argue that you could have 

quite a sizable event, but not a, you know, a $750 billion event that 

is an NBCR. I think that because of the lack of a backstop, because 

of a lack of chopping off the far end of the curve, which those 

events are the ones that drive the farthest end of the curve, it is 

therefore essentially impossible for insurers to price. If you put the 

backstop in place, they will price even on NBCR, because they are 

only going to be responsible, as we discussed today, for a certain 

portion of the curve. 

Mr. ROSKAM. Okay. So your view is it is insurable absent that 

further extension of the curve, or it is predictable, or it is measurable and you can get your hands around it, but you can’t get your 

hands around the top end. Mr. Secretary? 

Mr. NASON. My view is that—and I am not an insurance underwriter—but my view is that the markets have struggled with this 

issue for years and years. The market has had a difficult time dealing with CNBR from terrorist events and from accidental events. 

I would say the State regulators have had problems with dealing 

with the insurability of CNBR risks. And the fact is that they have 

permitted exclusions for these because it is a very difficult thing to 

deal with from their perspective. And my view right now is the best 

evidence we have on the uninsurability or difficult aspects of this 

is the fact that today, right now, if an insurance company decided 

to offer CNBR coverage it would be backstopped by TRIA, and none 

of them are offering it, or to a very, very small extent are offering 

it. 

I am not an insurance underwriter, so I don’t want to say whether or not it is, but the evidence that I said in those three buckets 

seems to suggest strongly that it is an issue the insurance industry 

does not want to take on. 

Mr. ROSKAM. Do you both have an opinion about the sort of natural pressure that takes place between—with State regulators, in 

particular maybe, Mr. Commissioner, what kind of pressure are 

you under to—I don’t know if you are elected, in which case there 

is a certain type of natural pressure. If you are appointed, you are 

insulated from some of that pressure, depending upon how the appointment is structured, but you know what I am getting at. How 

much pressure are we putting State regulators under to underprice 

the coverage of NBCR? 

Mr. DINALLO. I happen to be appointed. 

Mr. ROSKAM. Which in this context is a good thing. 

Mr. DINALLO. But I work for Eliot Spitzer, so I am under tremendous pressure all the time. The answer I think is that one of the 

reasons to have regulated pricing is because it is appropriate for 

the regulator, in partnership with the industry, to set prices for 

which the industry can accept. And my point is particularly with 

NBCR, where you have a mixed industry, both small and large, 

and the small industry has appropriately objected, as this comVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
38

mittee has heard, to the burden for NBCR, it may be the exactly 

right time for there to be a certain, as you say, pricing pressure 

or artificiality that it is not a perfect market for the pricing, because if you priced it to the extent that say a Travelers could handle, it is not going to be something as say some of the smaller 

regionals can handle, and therefore it is probably an appropriate 

opportunity for a regulated price. 

Mr. ROSKAM. Regulated by who? Regulated by you as the regulator or in negotiation back and forth? 

Mr. DINALLO. Yes, in the property area, at least in New York 

State, it would be a price, it would be—we would end up in a—I 

use this term very carefully—a negotiated but regulated price. 

Mr. ROSKAM. So negotiated in that you both have this ability—

you have the ultimate stick, but they have the ability to pull out 

of the marketplace. 

Mr. DINALLO. That is right. There are two kinds. There is file 

and use, where they just put it on the table, which is what we have 

with health insurance, and then there is prior approval, which essentially ends up with a worked out price. I think here, at least for 

some of it, we would be in that. 

Mr. ROSKAM. You can imagine the scenario where you would 

have a popularly elected insurance commissioner, and I don’t know 

how many of those there are around the country, I would assume 

that there are some— 

Mr. DINALLO. Yes. 

Mr. ROSKAM. —and would be under tremendous pressure then, 

just in the force of a political campaign, to drive the actual cost of 

that down. Mr. Secretary, do you have an opinion on any of that? 

Mr. NASON. Sure. I mean generally what I would like to say is 

that price controls lead to ineffective pricing and inefficient economic outcomes. So whenever you have a Government regulatory 

body setting prices, you generally will force people in and out of the 

market, because the pricing is not right for the people to participate in a market. The argument I would add to this is that—and 

it is relevant to the CNBR debate—we haven’t seen a lot of CNBR 

coverage despite the fact that most of these products, at least for 

the bigger urban areas or the large developers, they could buy 

these products outside of the regulated market in the surplus lines 

market, where there isn’t as much—where there isn’t any price 

controls. So the fact that you have full price discretion in those 

markets and you still don’t see a lot of movement in this area 

seems to suggest what we may get if we change the make available 

provision here. 

Mr. ROSKAM. Thank you both. Thank you, Mr. Chairman. I yield 

back. 

Chairman KANJORSKI. Thank you very much. Mr. Scott of Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. Let me ask this question 

first of Mr. Nason. Given the gravity of this issue, given the need 

for certainty, given the need for stability, what are your arguments 

against a 10-year extension? 

Mr. NASON. I would argue that the insurance industry right now 

is in a much more stable place than it was after September 11th. 

We have enormous amounts of policyholder surplus that are, if I 

39

am not precisely right, I want to be right, but we are at or above 

pre-September 11th levels in terms of policyholder surplus. So 

there is a significant amount of stability within the insurance industry right now. Even taking that into account, our view is that 

in order to continue to promote more stability, TRIA should just 

continue to build on the path of progress that we have seen in the 

last 5 years. 

Mr. SCOTT. So what length of extension would you recommend? 

Mr. NASON. I am trying to be constructive here, and saying that 

short term is better than 10 years, because I see 10 years as long 

term. I don’t have a magic answer for you, whether it is 2 years, 

3 years, 4 years, or 5 years. What we do believe, and we believe 

it is very important, is that it constantly be reevaluated. So short 

term requires a constant reevaluation. 

Mr. SCOTT. Why would you think if it is 10 years, it would not 

be reevaluated? 

Mr. NASON. Evidence of looking at how other Federal Government programs have kind of evolved and expanded over time seems 

to suggest the rigorous analysis associated with reauthorization 

would provide us the type of rigorous analysis that we at Treasury 

would be looking for. 

Mr. SCOTT. Have we ever had another Government program with 

the magnitude, the tragic consequences of inaction of these terrorist attacks? Do we have something of a comparable level that we 

have done to compare it to? 

Mr. NASON. I am not exactly sure how to answer that question. 

There have been temporary programs that have been reauthorized 

over a period of time. I certainly would in no way mean to suggest 

that terrorism isn’t a very serious subject. 

Mr. SCOTT. How do you feel about this, Mr.— 

Mr. DINALLO. Dinallo. 

Mr. SCOTT. —Dinallo. What is your recommendation on the best 

amount of time? 

Mr. DINALLO. My recommendation when I first testified on this 

was either a permanency or 15 years, because I don’t think you are 

going to ever get the amount of data that you will need for accurate 

pricing at the far end of the event horizon. And so I think that you 

are always going to have this problem. And in some sense it is a 

good problem that you have that you don’t have so many events 

that you can actually accurately price. But it is a very bad situation, because underwriters are not going to step in when they are, 

as I said, pricing blind. And it is not about the—this is—I can’t 

think of any other way to phrase it—the averagely priced terrorism 

event. It is about the far end of the curve that moves the median, 

it moves the average pricing for the rest of the curve, for the overall premium pricing. Because they have to take into account the 

largest events, and that drives up the prices for the more average 

pricing. 

And so I think that you are always going to be faced with this 

problem, because the potential for a trillion dollar event exists, and 

the potential for things well in excess of $100 million exists. So 

Congress in its wisdom has put in a backstop, which is a form of 

subsidy, I suppose, but it is one that just permits there to be any 

pricing at all rather than none at a rational price. 

40

I actually agree with Mr. Nason that one could argue that the 

backstop could be raised a bit. In other words, it is not as if the 

industry has shown a lack of ability to pay for these events. We are 

talking about how they would price for these events. And you could 

go in and say, well, we are going to change the backstop to a higher amount and see how that changes the pricing. They just need—

I believe, this is my opinion—they just need some backstop so they 

can accurately price, because essentially it has a close to infinite 

end to the curve and without anything in place for a long period 

of time they can’t accurately price. 

Mr. SCOTT. Now, finally, you mentioned 10 or 15 years. Which 

would you recommend if you had your choice? 

Mr. DINALLO. I would recommend 15 years for three reasons: It 

is longer than 10 years; it would encompass Oklahoma City if you 

changed the floor on the reset provision; and the mean of bond 

pricing duration for large scale real estate projects across the country, not just in New York, is clustered around 10 years, which 

means 10 years is an unfortunate number, because just when you 

begin to put TRIA in place, you are going to create uncertainty on 

those bond pricing, because they are 10-year bonds. So I would do 

15 years because you would net a large, large percentage of the 

bonds also, which would give certainty to the financial markets 

which fund the real estate projects that we have been discussing 

today. 

Mr. SCOTT. Thank you, sir. I yield back. 

Chairman KANJORSKI. Thank you, Mr. Scott. The gentleman 

from Connecticut, Mr. Shays. 

Mr. SHAYS. Thank you very much. Mr. Chairman, I note this is 

your first panel, and you have another panel that is not small. I 

would just like to say that Mr. Nason, I read your entire statement, 

which obviously you couldn’t have read at this hearing, and the 

theme is pretty clear. You come right back to your three critical 

elements: that programming be made temporary and short term; 

that private sector retentions are increased; and that there is no 

expansion of the program. It seems to me that if you weighted it, 

number two, from my perspective, outweighs number one and number three big time. And the challenge we had is last time around 

this committee was able to use a jurisdictional issue of allowing for 

greater reserves to be built up through our pooling mechanism in 

the committee. But really, the Ways and Means Committee needs 

to weigh in on this. For me, unless we are able to allow companies 

to build up reserves, we don’t have any other alternative than to 

move forward with the legislation that we have. It seems obvious 

to me. We are just not going to not do something. 

I would like you to comment. 

Mr. NASON. We would—any advancement in the private sector’s 

ability to take on this risk in a more efficient way, that would be 

a step in the right direction from our perspective. There seems to 

be a question as to whether or not those reserving mechanisms will 

actually get you the more capacity that you are looking for, but it 

is certainly something. 

Mr. SHAYS. Why wouldn’t it get you there? Because one thing we 

can say is that a terrorist attack doesn’t happen, at least not now, 

every day. But the attacks on the Twin Towers were in 1993 and 

41

2001, so, you know, based on that calculation, 2009 is going to be 

an interesting year. I mean it is not going to happen every day, but 

when it happens it is going to be something we are well aware of. 

My point to you is if they build up reserves over a course of 10, 

15, or 20 years, wouldn’t that be something we would want? And 

what kind of effort is the Administration making with, particularly 

Ways and Means, to see that happens? 

Mr. NASON. Well, building up reserves is something that we 

want, and I am happy to work with the folks on Ways and Means 

to talk about that. But as to your first question, why wouldn’t it 

get us there? Well, unless you require that those tax-free build-up 

reserves to be segregated to deal with terrorism risk or restrictions 

of that nature, there is nothing that would prevent the insurance 

company from using the tax-free build-up to pay a bigger dividend 

or write more policies. So there is a tension in terms of you are giving them a benefit, but—if you are giving them a benefit to deal 

with terrorism insurance, and you want to make sure that benefit 

is yielded— 

Mr. SHAYS. That is not hard to do. Everything plows back into 

the reserve. Everything. 

Mr. NASON. All right. So with the proper constraints it certainly 

is worth talking with Ways and Means about. I certainly agree. 

Mr. SHAYS. Well, I think it is certainly worth more than talking. 

It is one of your basic three points. It is worth fighting for. Otherwise, I am going to go with the committee bill. Do you want to 

make a comment? 

Mr. DINALLO. I would just urge you—I actually support that. And 

I would just urge you again to keep—for the subcommittee and 

Ways and Means to keep their eye on the ball of FSMI 5, as I said 

before. You put publicly traded companies in an uncomfortable position if you offer them this reserving opportunity, which some 

have kind of gotten into lots of trouble for, as we know, improperly 

reserving, if they can’t be given some latitude under FSMI 5 for the 

must be estimable and—well, estimable and probable requirement. 

So you need to, along with changing the tax law, you need to probably change FSMI 5. It is a small adjustment, which I am sure 

they would support, and I don’t think the SEC would come down 

on them like crazy, but you should probably do that. 

I would also just say it is sort of an interesting question, you 

might also ask people to do the following study. Tax-deferred reserving or tax-free reserving is also a form of subsidy, right? You 

are saving—I mean you are doing something that is favorable to 

the industry there. They are not paying out taxes or giving policy 

money back. It would be an interesting question to just ask what 

kind of a benefit or subsidy is that to the insurance industry. 

Mr. SHAYS. Or a cost to the Federal Government. 

Mr. DINALLO. Yes. I meant on taxes that they are not paying, 

yes. 

Mr. SHAYS. Exactly. The opportunity costs. 

Mr. DINALLO. I don’t know. It is an interesting trade-off. Maybe 

across the whole insurance industry, tax-free reserving is less— 

Mr. SHAYS. I hear what you are saying, and it is a very helpful 

response. The bottom line for me is we can’t raise those three 

points, though, without having it mean something. And the only 

42

way you are going to see point two in your recommendation of your 

three critical points is if they are allowed to build up reserves. 

Mr. NASON. I agree there are lots of ways to address point two, 

which is what we did in the 2005 extension as well, which is just 

increasing retention. And one way of getting there would be increasing reserves. So I agree with that. 

Mr. SHAYS. Thank you. 

Chairman KANJORSKI. Thank you very much. The gentlelady 

from Illinois, Ms. Bean. 

Ms. BEAN. Thank you, Mr. Chairman, and to our panelists for 

your testimony today. Mr. Dinallo, it is a pleasure to see you again. 

I know you were kind enough to testify for those of us who traveled 

to New York for a hearing on this subject earlier in the year, and 

I think you, at that time, and earlier today, had eloquently stated 

your case for a longer term extension, I think ideally 15 years, of 

this TRIA bill. So I appreciate that. 

My question is for Secretary Nason relative to the CNBR risks, 

and what the private sector is willing to do or not do relative to 

those risks. From what I have heard in some of your responses to 

some other questions, it appears you are not contradicting the conclusion that I am coming to that when the President’s Working 

Group in late 2006 indicated that there was no private market for 

CNBR terrorism risk insurance prior to September 11th, that none 

exists today, and none is likely in the foreseeable future, it sounds 

like you are not contradicting that or suggesting that one has since 

developed. Is that correct? 

Mr. NASON. That is correct. 

Ms. BEAN. Okay. So that being the case, who should cover those 

risks from such a catastrophe? 

Mr. NASON. There are two ways to look at it. There is a question 

as to whether or not the Government should participate in those 

markets, and there is a question about whether or not they should 

be uninsurable risks, as they have been for decades. 

Ms. BEAN. And your own recommendation? 

Mr. NASON. I believe it is something worth considering. What I 

am most concerned about is a hope, and it is just a hope, that the 

private market will evolve with some of the changes in H.R. 2761. 

I think that we need to have a broader discussion about what, if 

anything, to do about CNBR. And I don’t think that changing the 

make available requirement is going to get you there. I wish I 

could give you an answer as to how to solve this problem, but it 

is a problem that has existed for decades. 

Ms. BEAN. Thank you very much. I yield back. 

Chairman KANJORSKI. Thank you. Mr. Donnelly? 

Mr. DONNELLY. Thank you, Mr. Chairman. This would be for Mr. 

Nason. Do you think a TRIA period of 2 years would reduce the 

amount of investors in construction in a place like New York City 

or have an effect on values there? Would it create additional uncertainty? 

Mr. NASON. Well, I will start with the end of the question, which 

is, would it create additional uncertainty? It might. What I would 

say is that if you look at what has happened in the last 5 years, 

we have had commercial development with the existence of a temVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
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porary program. So I don’t see construction stopping with a shortterm extension of the TRIA program. 

Mr. DONNELLY. So the extension to 10 years in your view would 

not—it would provide additional certainty for investors, but the 2-

year program doesn’t slow down the potential construction that 

would occur? 

Mr. NASON. What I would say is the benefits—the negatives associated with a long-term program in terms of insuring market—

basically insuring market complacency, insuring that we don’t 

study this issue regularly outweighs the marginal amounts of uncertainty associated with 2 years simply because the facts are clear 

that commercial real estate is being developed with a short-term 

program. 

Mr. DONNELLY. Thank you very much. I yield back, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much. And now to the 

ever patient lady from New York, who has been so involved in this 

program. To explain to the audience, we have not been ignoring the 

young lady, who showed up much earlier than most members, but 

because she is not a member of the subcommittee, she must wait 

until the end. Mrs. Maloney of New York. 

Mrs. MALONEY. Thank you so much, Mr. Chairman. And I particularly want to thank you for responding to my request to come 

to New York and hear from our elected and business community 

about the tremendous need. And you did that very early on. It was 

very important. Our mayor, when he was a Republican, spoke passionately about the need for 15 years. And whatever party he is in, 

he is committed to this issue. Let me just put that straight. And 

he has called many of us repeatedly, expressing the need for 15 

years. I want to underscore what our superintendent has testified 

so eloquently, that part of our homeland security is our economic 

security, and terrorists should not be able to dictate where we are 

going to build and expand in our country. 

After that terrible event of 9/11, I thank all of my colleagues, and 

really this country, that responded to New York, who helped us in 

so many ways. But truly the most important way was TRIA, the 

antiterrorism risk insurance. Because before TRIA, respectfully, 

Mr. Nason, we could not build anything. All of our building stopped 

until we got TRIA. We weren’t rebuilding. People were afraid to 

build without insurance. And what I am hearing from my constituents, and maybe we need to clarify that in another report, or more 

factual evidence, but what I hear from my constituents is that they 

cannot get insurance, and the insurance that they are getting now 

is predicated on an extension of TRIA. They are telling me that 

they get a policy that says TRIA will insure you until January, it 

is January of this year, when it expires. And if it expires, they have 

no more insurance. And they are paying through the roof for it. I 

have heard that some have even gone to London to get insurance, 

because even with the provision of getting it afterwards, they cannot get it. And I congratulate the Administration for really now 

supporting TRIA. At one point there was testimony and reports 

that we did not need it. And I congratulate Secretary Paulson and 

you and others that realize that we need this program. But I really 

44

feel that we need it long term for the stability of our financial markets. 

We heard in that testimony in New York that they could not rebuild lower Manhattan without a bill that gives at least 15 years, 

so that the bonds necessary to finance the rebuilding of Ground 

Zero can be issued. And I just would like to ask Superintendent 

Dinallo to really make clear the statement or clarify the need for 

a long-term stable solution. Really, we need to get a factual study, 

but what I am hearing from the real estate industry and from the 

trade organizations is that our people to this day cannot get insurance unless there is a guarantee that there is going to be a TRIA 

there, and if it is not there, then they don’t get it. 

So I would like you to clarify on that. And also I support his testimony to expand the reset. I think that was very, very important. 

I would like to ask him whether he thinks the reset should be 

made permanent. 

Mr. DINALLO. On the 15 years, I would say that the most cogent 

driver of it is that you want these projects to be done by investment grade rated bonds that have a time horizon of at least 10 

years. That seems to be the preferred method of financing, and it 

is increasingly the method of financing. So 10 years to me was just 

kind of an unfortunate number, because they are clustered, I am 

told, they are clustered around 10 years. And so you invite a lot 

more high grade bond investment if you are at 15 years, which is—

I should have mentioned the grade quality of the bonds. I do believe that no matter what we do we will be back to this issue again. 

It will never be—‘‘knock on wood’’ as one of the Congressman did—

there will never be enough events that you would ever get accurate 

pricing such that you would ever seriously consider anything other 

than adjusting TRIA, which is what I think the Blue Ribbon Commission will ably do. So you could have it 15 years and still have 

the Commission weigh in with recommendations every couple of 

years. And you certainly are correct that without TRIA, there is not 

going to be a pricing possibility. And the longer you put it in place, 

I believe the more capacity you will attract to the market. 

You had a second question, but I forgot. I apologize. 

Mrs. MALONEY. Well, also the Blue Ribbon Commission, you 

mentioned your support for that. Could you indicate some of the 

issues you would like them to explore and possible people you 

would like to see appointed to it? 

Mr. DINALLO. I think—well, I volunteered the department’s expertise if it could be at all helpful. But what I was saying was, for 

instance, one of them we have hit upon today. I really believe that 

the tax-deferred reserving, for instance, is something that should 

be looked at, but it needs to be studied, the cost-benefit analysis 

needs to be done, and the proper adjustments to FSMI 5 and the 

tax code have to be put in place. And that might be an excellent 

thing, for instance, for the Blue Ribbon Commission to do. 

Also whether reinsurance can be brought in, in a more robust 

way, is something that seems to be an issue here that should be 

discussed. And NBCR, I agree with Mr. Nason, it is a very complicated issue. And maybe that is something that in 2 years you see 

whether there has been takeup, and whether adjustments have to 

be made. You have to look at the markets and see whether you had 

45

a negative impact on the small insurers through NBCR, because 

they seem to believe that is going to happen. And so I think it is 

a good way—to me what I heard about, I thought it was a rational 

compromise to putting in a long life span for TRIA, but saying but 

we are not just going to throw up this forever Federal program 

without adjustment, which I think is appropriate, and instead we 

are going to put in some experts to help adjust it along the way. 

And Congress, I would assume, would be able to deal with those 

changes not just every 15 years, but in a more regular periodicity. 

Mrs. MALONEY. And also briefly on the reset provision, I certainly support your testimony to expand it, but do you believe it 

should be made permanent, the reset provision? 

Mr. DINALLO. I think—I am in favor—I am a proponent of the 

reset provision applied nationally, encompassing all significant terrorist attacks. I don’t think there should be a reset provision if 

someone throws a firecracker through a window. I think there 

should be a reset provision for all significant terrorist attacks. Because underwriters will rationally want to raise premiums and 

price higher for that jurisdiction based on experience. They are also 

mandated from a fiduciary duty point of view to do that. And I 

think that is really not how we should be dealing with terrorism 

coverage. It is not quite the same as car insurance coverage. If you 

have multiple accidents you should be paying a higher premium. 

But that goes to what kind of a driver you are for whatever reason, 

and the risk there needs to be accounted for by the insurance company. But here, if you have multiple terrorist attacks in a jurisdiction, well, I don’t think that is something the jurisdiction should 

have to carry without something else that countervails the natural 

tendency of the reinsurers to shun away from that jurisdiction. I 

thought the reset provision was a good way to attract capacity and 

counterweigh against that natural shunning away based upon past 

events. 

Mrs. MALONEY. My time has expired, but if I could just ask this 

one question of Treasury. Mr. Nason, you testified that Government has no role in NBCR, but you have no answer for how to deal 

with it. If Government has no role, and everyone agrees it is a 

huge threat, how do we deal with it? 

Mr. NASON. I am not sure I testified that Government has no 

role. What I testified for is there is no current market for it. And 

what I also said is that I wish I had an answer for this to you, but 

this is a question that hasn’t been answered for the decades where 

we have had nuclear risks. So I wish I had an answer for you, but 

I don’t. 

Mrs. MALONEY. Well, my time has expired. Thank you very 

much, Mr. Chairman, for your leadership. Thank you. 

Chairman KANJORSKI. Thank you very much, Ms. Maloney. 

Mrs. MALONEY. I thank particularly our superintendent from 

New York for your help on this issue. And thank you, Mr. Nason. 

Chairman KANJORSKI. That completes the first panel. I want to 

thank the Secretary and the superintendent for being so patient 

with all of us. I want to note that there are probably members who 

may have additional questions of this panel which they may wish 

to submit in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to 

46

these witnesses and to place their responses in the record. Thank 

you very much, Mr. Secretary. 

Mr. DINALLO. Thank you, Mr. Chairman. 

Chairman KANJORSKI. We will get started with the second panel 

if we may. If I am counting correctly—do we have all eight in 

place? I think we do. Yes. Let me proceed with the introductions. 

We have the former Governor, the Honorable Mark Racicot, chief 

executive officer and president of the American Insurance Association. Then we have Mr. Christopher J. Nassetta, president and 

chief executive officer of Host Hotels and Resorts, Incorporated, 

and chairman of The Real Estate Roundtable, on behalf of the Coalition to Insure Against Terrorism. After that, we have Ms. Jill Dalton, managing director of global properties and multinational practice, Marsh, Incorporated, on behalf of the Council of Insurance 

Agents and Brokers. 

Now I would like to call upon Mrs. Maloney to introduce her constituent. 

Ms. MALONEY. Thank you, thank you so much. I am so thrilled 

that one of my friends and neighbors is here. I am delighted to introduce my constituent, Karen Emek. Dr. Emek is a partner in 

CBS Coverage Group, a major New York insurance agency, and she 

is widely regarded as an expert on insurance issues, and has literally testified before this committee many, many times. She has 

also played a leadership role in the industry for many, many years, 

most recently as the immediate past chair of the Independent Insurance Agents and Brokers of New York. She has been very involved in this issue of terrorism risk insurance, and is the author 

of numerous articles and testimony on the permanent solution to 

the problem, as well as TRIA as we know it. 

I look forward, as always, to seeing her and hearing her testimony, and I thank you for this courtesy to allow me to introduce 

my constituent. Thank you. 

Chairman KANJORSKI. Thank you, Ms. Maloney. And since she is 

your constituent, she must be brilliant. 

Mr. Warren Heck is chairman and chief executive officer of 

Greater New York Mutual Insurance Company, on behalf of the 

National Association of Mutual Insurance Companies and the Property Casualty Insurance Association of America. Then we have, 

from the good Commonwealth of Pennsylvania, Dr. Howard 

Kunreuther, Cecilia Yen Koo professor of decision sciences and 

public policy, co-director of risk management and decision processes 

center, the Wharton School of the University of Pennsylvania. Mr. 

Frank Nutter, president, Reinsurance Association of America. And 

then finally, Mr. Dennis W. Smith, president and chief executive officer, Missouri Employers Mutual Insurance. 

Welcome all. May I say that we are going to take your written 

statements and submit them in their entirety in the record. 

Of course, as you heard, the last session carried on considerably 

longer than we thought it would. Although terrorism insurance is 

a very important subject, at 2:00 this afternoon, this room is being 

reserved for another hearing on housing. There are more people in 

housing than there are who buy risk insurance, therefore, they are 

going to throw us out of this room to allow the Housing SubVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
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committee to proceed. So we are constrained to about an hour and 

15 minutes. 

With that in mind, I am going to ask my colleagues when they 

come up for questioning to certainly talk or ask questions for no 

longer than 5 minutes, and even rein them in from there. 

The participants on the panel, I would ask you, knowing full well 

your full statement will be submitted for the record, to restrict your 

overall comments on your statement to 5 minutes so that we can 

move through the panel. That will give us approximately 40 minutes, and that will allow us approximately half an hour for questions after that. 

May we start with the Governor? 

STATEMENT OF THE HON. MARC RACICOT, CHIEF EXECUTIVE 

OFFICER AND PRESIDENT, AMERICAN INSURANCE ASSOCIATION 

Mr. RACICOT. Thank you, Mr. Chairman. I would like to express 

AIA’s deep appreciation for this committee’s steadfast commitment 

to the TRIA program and the vital role it plays in protecting our 

Nation’s economic security. I would also like to commend your recognition that more needs to be done to strengthen TRIA with respect to NBCR—nuclear, biological, chemical or radiological-related 

risk. I intend to offer brief remarks today to discuss three important aspects of H.R. 2761: Number one, the importance of a workable TRIA program to the health of the terrorism insurance market; number two, the critical need to address unique challenges 

posed by NBCR risk; and, number three, the need to preempt State 

regulatory constraints that impair, rather than enhance, private 

sector capacity. 

First, the importance of TRIA and the urgent need for its extension. Every expert who has examined the program agrees that it 

has worked to make terrorism insurance more widely available and 

affordable. However, it is clear that we know more now about terrorism risk and terrorism insurance markets than we did in 2002. 

TRIA can be improved to better reflect 5 years of real world experience. To this end, several of the provisions of H.R. 2761 would improve the program’s record of success. These include incorporation 

of domestic acts of terrorism, strengthening the program’s duration, and maintaining the current per company retention levels for 

conventional terrorism attacks. We urge you to act decisively to 

keep these provisions intact. We also strongly advise that you advance the bill as quickly as possible in order to avoid the type of 

market disruption that thrives on uncertainty. 

Second, the need for a more robust NBCR backstop. NBCR attacks are the 21st century equivalent of war, plain and simple, and 

they require a resolute response from our Government. A one kiloton bomb, which is about one-tenth of the size of the Hiroshima 

explosion, can be easily transported in a truck, a container ship, or 

even a backpack, and could devastate any U.S. city. 

We support the bill’s provisions to strengthen TRIA’s NBCR provisions, and respectfully suggest that they could be made even 

more effective. The bill establishes a 7.5 percent insured deductible 

for NBCR events, in part to account for the inability of insurers to 

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48

ment. It also calibrates the co-shares paid by insurers depending 

on the magnitude of the loss above the per company retentions. 

These are very positive steps. However, we believe that eliminating or further reducing the insurer co-share would help to build 

capacity to manage what remains a very difficult risk to understand and to quantify. The bill also recognizes that NBCR attacks 

may well exceed the current TRIA program cap of $100 billion. It 

therefore provides additional legal certainty to insurers by clarifying that the limits of an insurer’s financial exposure to all losses, 

including workers’ compensation and other State-mandated coverages, are limited to the carrier’s applicable deductible and coshare payments. There are also provisions to reimburse insurers 

for payments exceeding the cap in certain defined situations. 

It is indeed unfortunate that we need to grapple with scenarios 

where horrific terrorist attacks could result in losses that exceed 

the nearly unimaginable level of $100 billion. Nonetheless, we believe that H.R. 2761 deals with this situation in a fiscally responsible, sensible manner, and we highly commend the committee for 

the effort you have made in this regard. 

Third and finally, it prevents States’ regulations from undermining TRIA’s goals. The current State regulatory system has 

made it more difficult for insurers to commit capacity to terrorism 

risk and provide policies that can be adapted to what policyholders 

really want. H.R. 2761 takes limited steps to preempt State regulation and terrorism risk insurance rates and forms that might undermine the program’s basic objectives by reinstituting the year 

one limited rate form preemption of the original TRIA, but only for 

NBCR risk. This is a good start in our judgment, but insurers’ experience during TRIA’s first year of demonstration back in 2002 

and 2003 reveals that the preemption was easily disregarded in 

some States. We believe that a stronger preemption would further 

improve the health of terrorism insurance markets. 

The private property casualty industry system provided essential 

economic support in helping our Nation to recover from the tragedy 

of 9/11. Insurers and their policyholders have worked tirelessly to 

adjust to the new realities of terrorism risk. TRIA has played, and 

must continue to play, a critical role. At this important juncture, 

the program inevitably, in our judgment, must be extended and improved if we expect to preserve the economic security of this country. 

Thank you, Mr. Chairman, for your efforts to do both through 

H.R. 2761. 

[The prepared statement of Governor Racicot can be found on 

page 204 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Governor. Our second presenter will be Mr. Christopher J. Nassetta. 

STATEMENT OF CHRISTOPHER J. NASSETTA, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, HOST HOTEL AND RESORTS, 

INC., AND CHAIRMAN, THE REAL ESTATE ROUNDTABLE, ON 

BEHALF OF THE COALITION TO INSURE AGAINST TERRORISM 

Mr. NASSETTA. Good morning, Chairman Kanjorski, and members of the subcommittee. Thank you very much for holding this 

49

hearing and allowing me to testify today. My name is Chris 

Nassetta, and I am the CEO of Host Hotels and Resorts, one of the 

largest owner of hotels in the world. I also serve as chairman of 

the Real Estate Roundtable, and second vice chair of the National 

Association of Real Estate Investment Trusts. I am appearing 

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

CIAT. 

CIAT represents 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. CIAT commends the sponsors of the Terrorism 

Risk Insurance Revision and Extension Act of 2007 for developing 

a proposal which is responsive to the major issues identified by 

CIAT and other stakeholders. We look forward to working with 

Congress and other stakeholders in completing this very important 

legislation. 

Sometimes the subject of today’s hearing is characterized as an 

insurance industry issue. I respectfully suggest that it is not. Instead, it is an issue of national economic security. It is ultimately 

an issue of jobs, and it is an issue of protecting the investments 

of pensioners, shareholders, bondholders, and individuals from 

across the Nation. 

Since 9/11, you have worked hard to find solutions to the economic risks associated with terrorism. The terrorism insurance law 

you enacted certainly has been welcomed and very much appreciated. But the current law, as you know, is set to expire at the 

end of this year. Holding this hearing here today certainly demonstrates that you know that the essential facts that caused Congress to enact TRIA in 2002 have not changed. Terrorism continues 

to be an unpredictable threat, with potentially mammoth losses associated with it. 

Insurers continue to say terrorism risk is uninsurable. Our economy continues to need terrorism insurance in order to function in 

the face of a continuing terrorist threat. American businesses must 

have adequate insurance and coverage to effectively manage economic risks and protect the economic value of their underlying assets. Without terrorism risk coverage, America’s economic infrastructure would be totally exposed, and America’s businesses, lenders, shareholders, pensioners, and bondholders would be forced to 

bear the full brunt of terrorism risk. 

I support market solutions to problems, but the fact is that a 

meaningful private market for terrorism risk insurance has not existed and is not likely to develop. Terrorism risk is a national problem that requires a Federal solution. 

I commend you for the work you have done in crafting H.R. 2761, 

and I am pleased to announce today that the Coalition to Insure 

Against Terrorism supports this legislation. This bill includes the 

key provisions proposed by CIAT over the past months. Perhaps 

most important to policyholders are four provisions. First, the program term would be extended to 10 years. We applaud you for recognizing that long-term extension affords policyholders with the 

certainty necessary for long-term projects and economic activity to 

move forward. 

50

Second, the bill would eliminate the distinction between foreign 

and domestic acts. As the London bombings and the foiled Kennedy 

Airport plot demonstrate, we must be prepared for homegrown terrorism, as well as threats from abroad. 

Third, the bill would give businesses the option to purchase insurance for the most catastrophic terrorism risks, the types of risks 

our Government warns us about repeatedly, by encouraging meaningful insurance against weapons of mass destruction through a 

mandatory make available program for nuclear, biological, chemical, and radiological—so-called NBCR—risks. 

Fourth, the bill returns the program trigger to last year’s level of $50 million, which should encourage smaller insurers to return 

or remain in this market. 

In conclusion, we stand ready to assist this subcommittee and 

the Congress in enacting this very important legislation. 

Thank you for the opportunity to testify here today, and I am 

happy to answer any questions you might have. 

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

183 of the appendix.] 

Chairman KANJORSKI. Thank you, Mr. Nassetta. Our third presenter is Ms. Jill Dalton. 

STATEMENT OF JILL M. DALTON, MANAGING DIRECTOR, 

GLOBAL PROPERTY AND MULTINATIONAL PRACTICE, 

MARSH, INC., ON BEHALF OF THE COUNCIL OF INSURANCE 

AGENTS AND BROKERS 

Ms. DALTON. Good afternoon, Chairman Kanjorski, and members 

of the committee. Thank you very much. My name is Jill Dalton. 

I am a managing director at Marsh, and I am the leader of the terrorism specialty practice there. I am also very pleased here to be 

a representative of the Council of Insurance Agents and Brokers. 

And again thank you for your leadership on this issue. We are very 

glad that you are addressing the extension of the Terrorism Risk 

Insurance Act. 

We have reviewed the draft bill that has been proposed, and for 

the most part, we support it. We like the 10-year term that is proposed because, as Mr. Nassetta said, our clients need the certainty 

of coverage in the long term. 

Now, I know that when TRIA was first proposed that Marsh was 

a strong advocate for a short-term and a temporary solution. Instinctively, we don’t necessarily support a large Government role in 

our business. So maybe this seems a little bit like a flip-flop, but 

the truth is that the assumptions we made in 2002 have not been 

realized. Back then, we thought that the reinsurance market would 

rebound with capacity, and we thought the risk would abate. It is 

really a simple equation of supply and demand. But we know now 

that the reinsurance market doesn’t have nearly enough capacity 

to meet the demand, and there appears to be little appetite to expand the supply that they do offer. 

We also know that the demand is high and is increasing. Marsh 

supplies data to the committee and our clients, which we have included in our written testimony, and based upon our data in 2006, 

60 percent of Marsh’s clients purchased property terrorism risk in 

2006, and in the first quarter of 2007, it was 64 percent. 

51

I would also like to point out that even with TRIA, not every client is able to buy all the coverage they want. Wisely, the insurers 

are carefully monitoring their accumulations, and they pay attention to the fire-following laws where they apply. Sometimes this 

means that underwriters offer reduced limits to our clients or they 

decline completely. And this is an especially big problem when terrorism insurance is required by lenders or through other contractual obligations. 

Our data also debunks the myth that the risk of a terrorist attack is only a concern for large banks or real estate developers in 

the big cities. I will give you a few examples. In 2006, we saw takeup rates for educational institutions go up by 17 percent, and for 

energy concerns, it went up by 26 percent. Geographically, in the 

Midwest we saw takeup rates go from 58 percent to 63 percent, 

which is a meaningful increase. 

So with the demand, the shortage of supply, and the fear of more 

events, which is heightened by the 2005 bombings in London, and 

more recently the arrests around the threats at Fort Dix and JFK, 

which were thankfully averted, we feel that the longer term program is needed, and so we thank you for your recognition of that. 

We are also happy that the bill eliminates the distinction between domestic and foreign terrorism acts, and we are pleased to 

see the committee grappling with the difficult issue of the NBCR 

events. There definitely is a concern among policyholders that the 

next event could be a chemical or a biological attack, and if that 

happened tomorrow, it would be largely uninsured. We support this 

as an offer for make mandatory because even though it is included 

in the bill today, there is little or no offering for it. We recognize 

the insurers’ concerns, which I am sure my colleagues down the 

row will talk about. So we are glad to see the committee’s recognition of those concerns with the significantly reduced retention and 

the step down mechanism. It may not be enough to satisfy them, 

but again that is why we are here today, to talk about that. On 

this subject, the details of the bill will really matter. And as the 

committee goes forward, we hope that we can help out with that. 

We think that separate pricing for our clients for NBCR and for 

conventional terrorism risk is very important. Our clients, we want 

to help them make informed decisions, and our objective is to make 

sure they have as many options as possible. We also want to see 

that this extension enhances capacity and doesn’t undermine it. 

To summarize, and to end up, we support the other provisions 

of the bill, the reduced trigger. We support the addition of group 

life. We support the changes to provide the legal certainty and to 

clarify the application of the cap. We as brokers know what can 

happen when a policyholder and an insurer have a disagreement 

over how these aggregates apply and how caps are applied. We 

support the formation of the Commission. And we will continue to 

provide our data, which we hope will help the group find a longterm, permanent solution that will benefit all the stakeholders. 

So again Mr. Chairman, I want to thank you, and also Ranking 

Member Pryce, and the other members of the committee for your 

leadership, and for allowing me to appear before you today. Thank 

you. 

52

[The prepared statement of Ms. Dalton can be found on page 78 

of the appendix.] 

Chairman KANJORSKI. Thank you, Ms. Dalton. Now, Ms. Emek. 

STATEMENT OF SHARON EMEK, PH.D., C.I.C. PARTNER, CBS 

COVERAGE GROUP, INC., ON BEHALF OF THE INDEPENDENT 

INSURANCE AGENTS AND BROKERS OF AMERICA 

Ms. EMEK. Good morning, Chairman Kanjorski, Ranking Member 

Pryce, 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 the immediate past Chair of the Board of the Independent Insurance Agents and Brokers of New York. 

Members of the Big I, as we are known, serve as the intermediaries between consumers and insurance companies. We see 

the insurance market from both perspectives. We understand its 

capabilities and constraints. 

I would like to begin by complimenting this committee and Congress for passing TRIA in 2002, and its extension in 2005. The Federal backstop created by these laws has worked well. However, as 

we all know, TRIA is again scheduled to expire at the end of this 

year. Without a long-term extension, we anticipate that coverage 

would become very expensive and not affordable to smaller and 

mid-sized businesses. And it is not just in big cities. It is crucial 

that all businesses have access to affordable insurance to protect 

them from this risk. Without affordable terrorism insurance, businesses are at risk of not only losing all their hard-earned assets, 

but putting all their employees and their families in economic jeopardy. And I personally have seen what can happen without proper 

protection in a catastrophe. 

The Big I believes that a long-term private-public partnership remains essential to the challenge of keeping terrorism risk insurance available, and we fully support H.R. 2761’s 10-year extension 

of the backstop. The terrorism insurance market is not ready to 

stand on its own by the end of this year, nor is it likely to be ready 

until such time as the threat of terrorism has significantly diminished. 

All the experts have weighed in on the issue that terrorism does 

not fit within insurable criteria. The Big I believes that a long-term 

extension of TRIA is essential to maintain economic security in this 

country and to provide our businesses with certainty and the ability to do long-term planning. Businesses do not want to be left 

wondering whether they will still be able to obtain terrorism coverage in a few years. They need certainty, not only for peace of 

mind, but to carry out their business. 

For example, some building projects in Manhattan require a 10-

year builder’s risk policy, and they need to know that terrorism 

risk will be covered. 

H.R. 2761 also provides a number of provisions that would give 

insurers additional legal certainty, an important element to keep 

coverage affordable and to build more market capacity. Moreover, 

maintaining the current company deductibles and copays over the 

53

extension period will keep small and regional insurance companies 

competitive, which is essential for maintaining available and affordable terrorism coverage. Accordingly, the Big I strongly supports these provisions of H.R. 2761. 

We also believe that any long-term solution to protect the Nation’s economy in the face of substantial terrorism losses must address potential losses from nuclear, biological, chemical, or radiological events. Although NBCR losses are perhaps the most catastrophic type of terrorist attacks, coverage for these types of losses 

is currently excluded from most terrorism insurance despite policyholders’ desires for such coverage. H.R. 2761 would fill this gap and 

further enhance TRIA’s vital public-private partnership by expanding its make available requirement to include NBCR. 

The bill also recognizes the difficulties insurers face in providing 

this by providing a lower deductible and a step down mechanism 

to decrease insurer copayments for large NBCR events. We believe 

these provisions reasonably balance both consumers’ needs for such 

insurance and insurers’ difficulty in underwriting such exposures. 

I would also like to stress the point that terrorism risk is not just 

a big city problem, which highlights the importance of maintaining 

a reasonable trigger level and the program to ensure coverage for 

all communities large and small. H.R. 2761 returns the trigger to 

$50 million, which is essential for small and regional insurance 

companies. It will create more capacity for these companies, enabling them to compete in higher concentrated risk environments. 

This will have a significant benefit for small businesses, whose offices and buildings are in these environments, as they will have 

more competitive premiums. 

The Big I strongly supports this position. The Big I strongly supports the elimination of the distinction between domestic and international terrorism. Domestic terrorism, which presents many of the 

same characteristics as international terrorism, is a very serious 

threat, and coverage for this risk is largely unobtainable in the 

marketplace today. My business customers don’t see a distinction 

between foreign and domestic terrorism and don’t want this distinction in their insurance coverage. 

H.R. 2761 wisely includes a number of provisions that facilitate 

long-term solutions over the course of the proposed 10-year extension, including reports from Treasury at regular intervals and a 19-

member commission to propose solutions. The Big I strongly supports this approach, and is pleased that the views of the Independent Insurance Agents and Brokers will be represented on the 

commission. With the program’s expiration only 6 months away, 

the need for action is urgent. 

The Big I strongly supports H.R. 2761. This type of thoughtful 

approach is essential to insuring the affordability and availability 

of terrorism insurance. 

We thank Representative Capuano and Chairman Frank for introducing this important legislation and thank Chairman Kanjorski 

and Ranking Member Pryce for holding the hearing today. We look 

forward to working with this committee and the House leadership 

to pass this bill. 

Thank you. 

54

[The prepared statement of Ms. Emek can be found on page 101 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Ms. Emek. 

Our next witness is Mr. Heck. 

STATEMENT OF WARREN HECK, CPCU, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, GREATER NEW YORK MUTUAL INSURANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES AND THE PROPERTY CASUALTY INSURANCE ASSOCIATION OF AMERICA 

Mr. HECK. Thank you, Chairman Kanjorski, and members of the 

committee. My name is Warren Heck, and I am chairman and chief 

executive officer of Greater New York Mutual Insurance Company. 

I am testifying today on behalf of the National Association of Mutual Insurance Companies, NAMIC, and the Property Casualty Insurers Association of America, PCI, who share many member companies in common. My views are informed by my firsthand experience as a major writer of terrorism risk insurance in New York 

City both before and after the horrific events of 9/11 and as chairman of NAMIC’s TRIA Task Force. 

Before turning to the point on which I wish to focus today, the 

mandatory inclusion of NBCR coverage, let me say that NAMIC 

and PCI strongly support all of the provisions of the new extension 

except for the NBCR provision. 

I would also like to say something about the trigger, which we 

heard testimony on today. Earlier we heard that small and medium-sized companies do not have an exposure to the trigger, 

whether it is $50 million or $100 million, because it is an industry 

trigger, and nothing could be further from the truth of that. I 

speak to you as the chief underwriting officer of my company, a 

company that writes many, many properties in New York. We are 

the largest writer of co-op apartment buildings and office buildings, 

and those properties—as you know, New York has very large properties. We write properties up to $100 million on a single building. 

If we had a loss, a terrorism loss, that was under $100 million with 

a $100 million trigger, we would not have TRIA coverage. That 

would utilize at least a third of our surplus. So it might impair the 

company. And I just want to emphasize that the $50 million trigger 

is essential for small and medium-sized companies. 

Getting into NBCR, most respectfully we do not believe that the 

bill should include NBCR coverage. Attacks utilizing weapons of 

mass destruction, NBCR, are the ultimate in uninsurable events 

and can have a qualitatively different consequence than non-NBCR 

risks. In contrast to the attacks on 9/11, for example, an attack in 

which a 10-kiloton-suitcase-type device was exploded 120 feet 

above the ground would kill everyone in the surrounding 30-mile 

radius and destroy or render unlivable all properties in that area. 

This type of threat presents dramatically larger and more concentrated risk exposure than any other threat we know of. 

Providing our citizens with financial protection against attacks 

using weapons of mass destruction is fundamentally a duty of the 

Federal Government, not the insurance industry. For that reason, 

except for workers’ compensation, all States allow, and most commercial property insurance property contain, nuclear exclusions. 

55

All States also allow nuclear radiation exclusions, and most policies 

contain filed and approved nuclear pollution exclusions. That is 

how the private sector insurance industry and its regulators have 

historically handled NBCR risk. 

As for the capital markets, while they have limited appetite for 

non-NBCR terrorism risk, they have zero appetite for NBCR coverage. In this regard, they take their signals from the reinsurance 

market. Given the market’s response, NAMIC and PCI believe 

strongly that the Congress should not overturn State law and rewrite insurance contracts to include these uninsurable risks. 

I would also note that demand for private NBCR coverage appears to be focused narrowly on large and commercial developments in a few at-risk cities. It does not appear to be widespread 

throughout the economy. Moreover, construction activity, as we 

heard today, has recovered from its post-9/11 losses without this 

protection. Rolling NBCR into terrorism coverage would likely result in significantly increased premiums and have the unintended 

effect of reducing the take-up rate for terrorism insurance. 

Requiring any retention of the NBCR risk by primary insurers 

even when the Federal program bears most of the risk would be 

counterproductive if insurers cannot find private reinsurance and 

are unable to resolve a set of very serious operational concerns and 

issues. Importantly, because insurers would be immediately required to have capital sufficient to back this new risk and would 

face potentially reduced financial strength ratings, we would also 

expect to see an immediate diminution of capacity available to provide this coverage. Many small and mutual insurers would probably not be able to raise sufficient capital quickly enough to stay 

in business. The most likely outcome would be reduced, not expanded, capacity for all lines of insurance as insurers divert capital 

from other products to support this risk they would be required to 

bear. 

In addition, creating new stand-alone NBCR coverage would lead 

to adverse selection in that only the most vulnerable risks would 

opt for the coverage. 

NAMIC and PCI agree that we should address this issue of 

NBCR risk, but requiring retention of any level of NBCR risk by 

primary insurers, even with a significant level of Federal participation, could jeopardize the market for terrorism coverage. The 2005 

RAND Center for Terrorism Risk Management Policy report concluded that NBCR attacks, ‘‘pose a challenge that may be most appropriately covered through a direct Government insurance program.’’ 

NAMIC and PCI recommend that rather than rushing in to add 

NBCR to an effectively working TRIA program, Congress should 

commission a study to include the complex economic, legal, moral, 

and practical issues surrounding the losses from weapons of mass 

destruction. 

We also heard today something about the American Academy report of about a year ago in which they indicated that a nuclear attack in New York could amount to as much as $778 billion. We 

heard from several people testifying that the insurance industry 

can handle that. It is hard to understand how the industry can 

handle that when the industry has capital which totals about $750 

56

billion. And, of course, we all know that capital is allocated to other 

lines; it is not only for terrorism. 

Mr. Chairman and committee members, thank you again for the 

opportunity to talk with you today on this issue of vital importance 

to me, NAMIC and PCI, member companies, policyholders and the 

U.S. economy. The proposal before you goes a long way toward establishing an effective long-term terrorism insurance plan to maximize the ability of our country to recover from terrorist attacks. We 

urge you to remove the NBCR make-available requirement and to 

move the legislation forward. Thank you. 

[The prepared statement of Mr. Heck can be found on page 109 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Heck. 

Dr. Kunreuther, from the University of Pennsylvania. 

STATEMENT OF DR. HOWARD KUNREUTHER, PH.D., CECILIA 

YEN KOO PROFESSOR OF DECISION SCIENCES AND PUBLIC 

POLICY, CO-DIRECTOR RISK MANAGEMENT AND DECISION 

PROCESSES CENTER, WHARTON SCHOOL, UNIVERSITY OF 

PENNSYLVANIA 

Mr. KUNREUTHER. Thank you, Chairman Kanjorski, and members of the subcommittee. It is a real honor to be here today, and 

I appreciate the opportunity to have a chance to share some ideas 

with respect to the new bill and some general principles. 

I should say at the outset, our Wharton Risk Management and 

Decision Processes Center has been studying low-probability, highconsequence events over the last 23 years, and in particular, since 

9/11, we have focused on the challenges associated with terrorism 

insurance. 

What I would like to do in these 5 minutes is three things: One, 

to summarize a few key principles which should guide the analyses 

of insurance and other risk-transfer mechanisms for dealing with 

extreme events; two, to indicate what are some of the special features of terrorism that need to be considered in determining whether this risk is insurable through some public-private partnership; 

and three, to discuss how these principles and special features tie 

into the current bill. And I will be very brief here because my prepared statement includes a great deal more information. 

First on principles, risk-based premiums, principle, number one. 

Insurance and reinsurance premiums should reflect the risk to the 

extent possible, for two principal reasons. One is it signals to people living in hazard-prone areas or wherever they may live what 

hazards they face and encourages them to engage in mitigation 

measures to the extent that this is feasible. 

Second principle, equitability. Insurance and risk-transfer mechanisms should be fair to insurers, reinsurers, policyholders, and the 

general taxpayer where there is Federal participation. 

Third principle: Insurers will want to minimize the likelihood of 

insolvency. 

Fourth principle: There should be sufficient demand for coverage 

so that insurers can feel that they can market it. 

Fifth principle: You should minimize gaming. There shouldn’t be 

economic incentives for insurers or policyholders to take advantage 

57

of provisions of the insurance or risk-transfer programs by undertaking strategic behavior. 

Let us turn to terrorism. Terrorism really differs from other 

events that are insurable, like automobile or even natural hazards. 

It has certain characteristics. I want to highlight three of them 

here. One is the potential for catastrophic losses that we have 

heard about from many of our witnesses throughout the day, and 

clearly the committee is very aware of. It is very hard to put a 

probability on these events, and the losses can be catastrophic. The 

recent RAND study on nuclear bombs concluded that it can cause 

$630 billion in damage to commercial property and workers’ compensation claims from that kind of an accident. So we have issues 

associated with the possibility of insolvency of some insurers if the 

private sector is going to handle this on its own. 

Second, interdependent security. This is an issue that we have 

been spending a good deal of time on over the last few years. Interdependencies can cause problems even indirectly. I will give you 

one example that we are all aware of. In the case of the 9/11 attacks, security failures at Boston’s Logan Airport led to crashes at 

the World Trade Center, and any protective efforts that could have 

been taken would have been useless given what happened. And so 

we do have this question of interdependency. 

And the third—and this really differs from natural hazards. 

There is a shifting to unprotected targets. The terrorists may respond to security measures by shifting their attention to more vulnerable targets. They may choose those less protected targets simply because there may be heightened security in other areas. 

There are other aspects as well, but I don’t have time at the moment to go through them. What I would like to do is just highlight 

a few features of the bill and raise them for your consideration as 

you go forward with respect to these principles. 

First, on risk-based premiums. Even though it may be difficult 

to achieve risk-based premiums for terrorism, State insurance regulators should not restrict rates unduly to the extent that insurers 

will not want to offer terrorism coverage. Currently, some States 

limit the premiums that insurers can charge for terrorism coverage. 

Secondly, on equitability. There are several features of this bill 

that are very attractive on these grounds. First the notion of reducing the trigger from $100 million to $50 million really helps the 

small companies. We heard from Mr. Heck and other witnesses 

that this may be a very important aspect. 

Second, including domestic and foreign terrorist attacks as issues 

for TRIA makes good sense because it is very difficult to necessarily distinguish between them. 

The third consideration is equitability, which is one I know that 

the committee has considered, has been part of the other bills, is 

who should pay for the losses following a terrorist attack? We have 

done some studies on this in terms of the current TRIA legislation 

and have concluded that anything below a $25 billion loss, insurers 

will fully cover, between a $25 billion and a $40 billion loss, insurers and policyholders will share the costs with the proportions depending on how many policyholders purchase coverage. When the 

58

losses are at $100 billion, the taxpayers will pay about 50 percent 

of the loss. 

The final principle is to minimize gaming. If TRIA is reviewed 

on a regular basis, this reduces the likelihood of insurers engaging 

in gaming behavior. 

Let me conclude with a few summary points. The extension of 

TRIA is an important and necessary solution to providing insurance protection to commercial firms. The current bill should address the five key principles that I put forward. The bill does create 

a Blue Ribbon Commission to propose long-term solutions for covering terrorism risk by the private industry. Such a commission in 

consultation with the Presidential Working Group and financial 

markets could explore the objectives of a terrorist risk-financing 

program, how to achieve them through alternative risk-sharing and 

risk-reducing mechanisms, such as more effectively deploying the 

capital of reinsurers, facilitating the use of terrorism insurancelinked securities, the reserving question that has been discussed 

this morning, mutual insurance pools, and developing incentive 

programs for encouraging mitigation and investment in security. 

Finally, the Commission could also examine how other countries 

cope with the terrorism risk to determine whether these approaches merit consideration for the United States. 

Thank you very much for the honor to be able to testify here this 

morning. 

Chairman KANJORSKI. Thank you very much, Professor. 

[The prepared statement of Dr. Kunreuther can be found on page 

124 of the appendix.] 

Chairman KANJORSKI. Mr. Frank Nutter. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA 

Mr. NUTTER. Mr. Chairman, I represent today the Reinsurance 

Association of America. It is an honor to appear before the committee. The Association represents property and casualty companies specializing in assuming reinsurance. We wish to applaud you, 

Mr. Chairman, and Ranking Member Pryce, for your leadership on 

this issue. We also thank the members of the committee that have 

sponsored this legislation. 

Reinsurance is commonly referred to as the insurance of insurance companies. One of the most important purposes is to protect 

insurers from catastrophic losses resulting from various perils, including hurricanes, earthquakes, fires, and floods. To this end, reinsurers have assisted in the recovery after virtually every major 

catastrophic event in the country. With respect to the events of 

September 11th, two-thirds of the losses that were absorbed by the 

insurance industry were passed through to the reinsurance industry. 

The RAA strongly supported the adoption of TRIA in 2002 and 

its extension in 2005. We believe the program is necessary and 

working well. The RAA supports H.R. 2761 as an important step 

toward the continuation of this Federal program. 

We understand the committee’s interest in understanding the 

impact certain features of the proposal may have on the growth of 

the private reinsurance market under the program and thus offer 

59

the following observations. With respect to program duration, we 

applaud the bill’s sponsor for acknowledging that a 2-year extension is commercially very difficult. An extended program will provide an opportunity for insurers to continue to build capacity. 

There is no reason to believe at this point that private reinsurance 

will significantly develop over the next 10 years, thus a continued 

public-private program for an extended period is appropriate. 

With regard to the copays and deductibles, the RAA supports 

maintaining a 20 percent direct earned premium deductible and 

the 15 percent copay. We believe retentions provide plenty of room 

for the private reinsurance market to operate under the program. 

With regard to the event size, the RAA supports lowering the 

event size to provide small companies with meaningful protection. 

The RAA supports the addition of group life as a covered line under 

this legislation. 

With respect to NBCR and the mandatory offer, we have not 

taken a position on this, largely because reinsurance is not covered 

under the legislation. But it should be noted that there is even less 

private reinsurance for NBCR risk than for conventional terrorism 

risk. It is very difficult, and it will continue to be very difficult for 

direct companies to purchase private reinsurance to help them 

manage their 7.5 percent NBCR retention. 

We support the creation of a Blue Ribbon Commission to study 

long-term solutions, and appreciate the committee’s and the bill’s 

supporters inclusion of reinsurance representatives. 

We also support something that has been mentioned by several 

members of the panel, and that is that the committee should consider including a key market reform that addresses the challenges 

that the State regulatory system pose for direct companies in managing this risk. State regulation of terrorism insurance rates and 

forms can undermine the program’s basic objectives and should be 

preempted. 

Primary insurers seek private reinsurance to help reduce the 

large gap in terror coverage they face under the company retention 

and the loss-sharing provisions of TRIA. The industry retention 

under TRIA, which we roughly estimate to be $35 billion, leaves 

plenty of room for private reinsurance to operate. Five-and-a-half 

years into this program, the reinsurance market is only providing 

about $6 billion to $8 billion of reinsurance protection for primary 

insurance companies. Observations by some that TRIA may be infringing on the development of a private reinsurance market are, 

in our view, without basis. In fact, the opposite is true. TRIA has 

established definitive loss parameters that provide reinsurers with 

a defined layer in which to share the retained risk of loss the primary insurers face. 

Favorable loss experience and surplus growth may moderately 

increase the supply of private reinsurance terrorism coverage, but 

not to the extent that it would fill the current capacity needs of the 

primary industry. NBCR capacity is believed to be about 15 to 20 

percent of the non-NBCR capacity for terrorism provided by the reinsurance market, and when it is available, pricing for coverage 

that includes NBCR is reported to be at a significant premium and 

coverage amounts restricted. 

60

One key question asked by policymakers is the role that capital 

markets may play in assuming terrorism insurance risks through 

the use of catastrophe bonds, which have been used increasingly by 

the financial markets to absorb and spread natural catastrophe 

risk. I have included in my statement the size of the catastrophe 

bond market. It should also be noted that nearly $32 billion of new 

capital is created in the reinsurance area since Hurricane Katrina, 

yet none of this new capital has been dedicated to terrorism risk 

because the capital markets lack any real appetite for terrorism 

coverage. 

There is no reason to believe that terrorism bonds or capital markets are likely to be a significant provider of terrorism coverage in 

the foreseeable future. Due to the nature of the terrorism peril, the 

RAA believes that private-market mechanisms alone are insufficient to spread the risk of catastrophe terrorism loss in a meaningful way. The RAA believes that H.R. 2761 goes a long way towards 

establishing an effective long-term solution. Thank you. 

[The prepared statement of Mr. Nutter can be found on page 192 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Nutter. 

Our final presenter is Mr. Dennis Smith. 

STATEMENT OF DENNIS W. SMITH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MISSOURI EMPLOYERS MUTUAL INSURANCE 

Mr. SMITH. Thank you, Mr. Chairman. Chairman Kanjorski, and 

Ranking Member Pryce, thank you for the opportunity to come 

here. Having been a former State senator in Missouri, I can appreciate the complexity and difficulty of your decisions, so I applaud 

you. 

Missouri Employers Mutual Insurance was established by the 

legislature in 1993. I am also the first vice president of the American Association of State Compensation Insurance Funds. There 

are 26 such funds in the Nation, the Commonwealth of Pennsylvania among them. Ohio, New York, Arizona, Texas, California, 

Colorado, Oklahoma, Louisiana, New Mexico and several others, all 

of those are ones that are represented on the committee, Mr. Chairman. 

The State funds support the extension of TRIA, and the length 

of the extension you have proposed should bring stability to the 

marketplace. However, for reasons I will set out in my testimony, 

further changes to the trigger levels, copays, and deductibles are 

crucial to the ability of State funds to survive financially a catastrophic event. 

State funds for insuring workers’ compensation are very unique, 

in a very unique line. In that regard, most State funds are the 

markets of last resort in their respective States, therefore, they are 

always in the market. They cannot deny coverage. There are no exclusions. It is a statutory coverage including all terrorism events, 

NBCR and everything else. Injuries have a very long tail. Many 

single-claimant losses can result in multimillion-dollar cases, and 

can last for in excess of 40 years. So in that unique nature, Mr. 

Chairman, one of our requests is that you consider the possibility 

61

of State funds or some element of them to be included on the Blue 

Ribbon Commission because of the unique nature. 

As I said, Treasury Secretary Nason indicated that if we wrote 

risk in a certain area, concentrated risk in a certain area, that is 

not good insurance practice. I will submit to the committee, Mr. 

Chairman, that we do not have that choice by-and-large. We have 

to insure them no matter what. Should an event, NBCR or other 

terrorism, occur in a high-risk concentration area, solvency of the 

State fund would be threatened, and it would not be there for other 

normal injuries that occur on a regular basis. 

Mr. Chairman, there is a trio of TRIA provisions that holds especially negative consequences for State funds in the event of a terrorism loss: high program trigger; high deductibles; and high 

copays. The current trigger of $100 million could consume the entire surplus of Missouri Employers Mutual and all or a substantial 

portion of other State funds surplus. The trigger of $50 million 

would therefore be an improvement. Nevertheless even this reduced trigger, along with deductibles and copays, would consume 

such a large percentage of our policyholder surplus, that they could 

threaten our solvency and our rating by the rating bureaus. Leaving the deductibles copays unchanged has the effect of substantially mitigating any potential relief offered by a lower trigger; 

therefore, I urge the committee to seek further trigger reductions 

as the legislative process moves forward. 

What is the real exposure here? I think it was alluded to a couple 

of times that it would be difficult for an entity to have this kind 

of loss. We had modeling done by Guy Carpenter, who is a recognized international reinsurance broker, and they said a 2-ton bomb 

in one of our strategically placed sports venues that we have insured on a regular basis over the years in a large city in Missouri 

would create a $200 million workers’ comp loss. That is just a 2-

ton bomb, Mr. Chairman, not a 5-ton or not an NBCR event. That 

would, therefore, make us insolvent, and without these funds in 

place, the taxpayers of the State would be required to pick up the 

costs in the case of an insolvency. This is from an attack on the 

United States, we think, and not on our State in particular. 

Mr. Chairman, in your consideration of extending the Federal 

terrorism insurance program, it is crucial to recognize the impact 

that high program triggers, and copays and deductibles will have 

on smaller insurers and on State fund insurers. We do not have the 

discretion to withdraw from our market if high triggers, copays, 

and deductibles create unreasonable financial risks for the size of 

our policyholders’ surplus. Terrorism exposure under the current 

terms clearly puts safety and soundness of my company and other 

State funds at risk in the event of a catastrophic terrorist attack. 

I urge the committee to adopt lower triggers along with lower 

copays and deductibles for both conventional terrorism and NBCR 

coverage. Such action will provide the meaningful backstop necessary to preserve the viability of this important coverage when it 

is most urgently needed. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Smith. 

[The prepared statement of Mr. Smith can be found on page 210 

of the appendix.] 

62

Chairman KANJORSKI. Well, thank you to the whole panel for 

being concise. I think it would be reasonable to say that this panel 

supports the authorization and reenactment and an extension of 

TRIA; is that correct? Did I miss something? That is a good question. Are there any specific parts of it that are so onerous to any 

member of the panel that if they are included in the final legislation, you would prefer to have no legislation as opposed to those 

onerous parts, such as NBCR? 

Mr. HECK. I could take a stab at that. You know, I have a great 

fear that the inclusion of NBCR mandatory make available is going 

to undermine the program. The program has worked very, very 

successfully. We see the availability is there. The take-up rate has 

been increasing. I think if you add NBCR, you are going to lose the 

smaller companies. 

We all know that in an extreme event, there are going to be a 

lot of failures of insurance companies. It is not the kind of exposure 

that private industry can assume, I believe, in private enterprise, 

and if we had a product that we could put out on the market, 

charge a premium, and we think could work for us, we would certainly adopt NBCR. It just isn’t something that private carriers can 

do. 

Chairman KANJORSKI. I tend to agree with your position, with 

one or two elements. One, if we have such an attack on a large 

scale, a $750 billion event, I suspect that the country will be substantially shaken to its core, and potentially could fail to survive 

economically as a result of that event. 

Secondly, the experience that we had after 9/11 was that it really 

did take 6 to 12 weeks to even get a piece of legislation structured 

and put together. Then ultimately, because of the ridiculous handling by the Administration, it took us 14 months to have it on the 

street and in place. If we get a nuclear-type attack or chemical-type 

attack, this will force us to pre-think how things should be handled. At least we will have had some thought out there as to how 

to respond to it without just waiting for the Congress to come together and act. That is basically our thinking. 

Mr. HECK. Well, you know, I agree with that; however, I think 

we should implement something that is workable. And if you really 

think about what the industry can do, the industry could be a great 

help. It has thousands of personnel that are involved in adjusting 

claims. It can assist in recovery from a terrible, horrific event, but 

it doesn’t have the capital to pay the losses. And to have companies 

fail at a time when there is such chaos in the country after a horrible event like, you know, a weapon of mass destruction killing 

people and destroying a lot of property doesn’t seem to make sense. 

And in addition to that, I think we are going to lose a lot of policyholders from the take-up rate. 

Chairman KANJORSKI. What would you think if we were able to 

lower the deductible to a de minimis level? 

Mr. HECK. I don’t think it is the deductible that is the problem, 

I think it is the coinsurance, because if you take 15 percent of a 

$750 million event—and, you know, we talk about the industry 

event. There are individual companies that are much smaller. They 

can’t sustain that kind of a loss. So really it is the coinsurance that 

63

is a problem. If you eliminated the coinsurance, that could be helpful. 

Chairman KANJORSKI. Well, I am pleased to hear your— 

Mr. KUNREUTHER. Can I make a very brief comment on this, Mr. 

Chairman? There are two key issues, it seems to me, that need to 

be put on the table with respect to NCBR. One is who is going to 

be providing that coverage? It may very well be that the larger 

firms are the ones who are going to have to deal with that. And 

we have heard it this morning. It may be very difficult for the 

small firms to do that. 

The second point relates to the State regulatory agencies and 

what role they will play in terms of restricting rates, because to the 

extent that they say, you can’t charge more than a certain amount, 

that could be a problem. 

And then the third point that we are all aware of is that it is 

included in workers’ compensation today, and the fact that it is included in workers’ compensation requires some kind of treatment, 

I think, in terms of how one will deal with that. So I just want to 

put those three issues on the table 

Mr. HECK. Can I make one point about that? If you look at all 

of the insurance companies, there are a lot of insurance companies 

in our country. The number that have either writings or capital 

structures, surplus of $1 billion or more, very, very small number. 

It is under 60. It is under 60 companies in the whole United States 

that have in excess of $1 billion in surplus and $1 billion in 

writings. 

It is essential that we keep the small companies in the business 

of writing insurance, including workers’ compensation. I believe 

when you eliminate all the large companies, the smaller companies—I read a statistic recently—have over 40 percent of all the 

workers’ compensation business. So I don’t think—and if you look 

at my company, it is a medium-sized company. We are the fourth 

largest writer of commercial multiperil in New York State. We insure a great amount of New York City. We couldn’t stay in the 

business. So I think it is a serious matter if we eliminate the smaller companies. 

Chairman KANJORSKI. No, I agree with you. That is one of the 

reasons we wanted to reduce the trigger mechanism, in order to get 

some coverage in there. 

That is a segue into something else that I ask generally: reset. 

Are there any strong feelings, as I have, on reset? And if we were 

to change reset, would that cause you to not support the continuation and reauthorization of the legislation? Is there anybody that 

wants to address the reset issue? Or do you just want to be politically nice and put it on the shelf? 

Ms. EMEK. I would be glad to address it. 

We support the reset, and Superintendent Dinallo’s point about 

making it cover Oklahoma City and other areas so that it is more 

equitable makes sense. 

Chairman KANJORSKI. I appreciate you are generally in the New 

York area, so stay consistent. There is nothing wrong with that. 

But if we were to change it, make it only prospective or actually 

do away with it as it exists today, would that cause you not to 

want us to pass an additional extension? 

64

Ms. EMEK. Absolutely not. We would totally still support passing 

the legislation. I would like to just add, the same thing holds true 

for NBCR. I think that is the first legislation. It is better to have 

something in place than to have nothing in place. We have to be 

proactive. We can fix it as we go along, as we see the take-up rates 

in NBCR. So the key here is to get this legislation passed as quickly as possible, and then we can fix things as we see things come 

up. 

Chairman KANJORSKI. Very good. 

Mr. RACICOT. Mr. Chairman, can I just offer one thought or comment about both of those questions? 

Chairman KANJORSKI. Sure. 

Mr. RACICOT. I believe that there is a certain misimpression 

about retention levels and deductibles contributing to capacity. 

Simply by increasing those numbers, cosmetically it appears at 

first glance that somehow private markets have more invested in 

the process. Literally the reason that you see more coverage available, more take-up rates and a decline in cost is because TRIA is 

in place and offers some boundaries to the potential insolvency or 

financial risk to the individual companies regardless of size. So it 

is a fact that the reset mechanism will, in fact, increase capacity 

for those very same reasons. But I don’t know a company that I 

work with that writes to 20 percent of their direct written premium 

because they are placing 20 percent of their company at risk by 

doing so. So you can increase that to 25 percent or 30 percent if 

you want, but it will not provide one additional dollar. In fact, it 

may diminish what is available because they have to plan to that 

number. 

And that is why this notion that somehow just simply 

cosmetically rearranging the numbers, which really have no relationship to anything to begin with, will somehow increase capacity 

is a fallacy. And that is the sad circumstance surrounding, I think, 

some of the testimony this morning we heard from Treasury. They 

make that assumption. They simply don’t want to be confused by 

the facts. 

Chairman KANJORSKI. Thank you very much, Governor. 

I will pass it on to my good friend, Ranking Member Pryce, so 

we can keep to our time constraints. 

Ms. PRYCE. Thank you very much, Mr. Chairman. And I want to 

add my thanks for the panel’s patience. It has been a long morning 

and dragging into a longer afternoon. 

I am sorry that I missed your testimony, Governor Racicot, and 

Mr. Nassetta. Is that how you say it? Nassetta. All right. It is the 

glasses. 

Anyway, but I do appreciate the insights that we have all gathered today from your expertise. 

Now, it is no mystery to anyone that many people on this side 

of the room up here believe that this is too long a bill in duration; 

that we as a Congress need to oversee these types of programs on 

a more regular basis; that 10 years doesn’t even give us the institutional memory, as you once referred to it, Mr. Chairman, of having 

the same group of members even around when the next reauthorization comes. 

65

And, Professor Kunreuther, you mentioned something in your 

testimony that I am curious about, and I am not even sure what 

it means, but you use the term ‘‘gaming.’’ I mean, is that in the 

common parlance definition of gaming? Or what is gaming, and 

how would a shorter duration help us to eliminate gaming? 

Mr. KUNREUTHER. Well, I appreciate the fact that term can be 

interpreted in many different ways, particularly the word, ‘‘game,’’ 

so let me explain what at least we have done in terms of raising 

that question. 

There are opportunities, particularly if a program is permanent, 

for some insurers, particularly depending upon their deductible 

surplus levels, to actually take steps by insuring very, very large 

blocks of property in one area where, after it actually exceeds the 

deductible surplus level, they only have to pay 10 percent of the 

loss because then it gets transferred on to other commercial policyholders. And we point that out, and I point that out in my written 

statement as to how that might actually work. But what essentially 

it does is it says you don’t want to have a situation which is inequitable because everyone else is paying for the losses simply because 

one insurer is then only having to pay 10 percent and all the other 

policyholders pay more. 

Now, that will logically not happen if it turns out a program is 

reviewed on a more regular basis or—and the Blue Ribbon Commission is a part of that whole process—if there is a way of taking 

a look at that. If there was a permanent program in place, there 

could easily be incentives for that to happen. 

So we just point that out, not necessarily saying that it will happen. We have some caveats as to why it may not happen. But we 

also wanted to raise the issue in general that strategizing in the 

context of a program is something you would want to avoid. This 

is one example of that, and the fact that you could have a more 

regular review—and I don’t want to come down on any terms of 

time period, but rather to say, you know, that it is a regular review, and also you have people looking at the program is an important element in terms of going forward. 

And I would be happy to talk further with obviously you and 

other members about that at another time. I don’t want to monopolize— 

Ms. PRYCE. Okay. I think that is one of many reasons that we 

probably would prefer a shorter duration. 

I am also very interested in anyone on this panel’s impressions 

as to the reserving that would be required as a result of some of 

these mandates and how we might better prepare the insurance industry with the tools they need in terms of our tax code and whatever else we could do to make that more sensible. And whoever 

wants to go first may. 

Mr. HECK. I could comment on that. I think if we had such a program to enable carriers over time to set money aside, we know that 

these extreme events are not frequency events, they are severity. 

They may not happen for 5, 10, or 20 years, and if companies have 

the ability to set reserves without paying taxes on those funds, 

they could accumulate enough money to pay a loss when it does 

occur. So it is something worth considering. 

66

Ms. PRYCE. And so what if they don’t have these reserves? Then 

who pays the loss? I guess I don’t understand— 

Mr. HECK. They take it out of their surplus. The money that goes 

into surplus is taxed money by the time it gets into its surplus, and 

so it accumulates at a very, very slow pace. If there is a way to 

revise the tax code so that companies can set reserves prior to declaring those moneys as net income, then they can set that money 

aside. So it is a way to build the reserve for an eventual event that 

could be catastrophic, and it is really a very good idea. 

Ms. PRYCE. Anybody else care to comment on that? 

Mr. NUTTER. If I could just offer a comment. There are several 

moving parts here. I just remind you that one of the things that 

Superintendent Dinallo mentioned is that you do have accounting 

guidance that also is at play here. The insurance commissioners 

and the NAIC have statutory accounting requirements which do 

not permit this now, and the premise for not having reserves of 

this nature is that they are so contingent in nature that it is so 

difficult to assess what the risk is, and the probability of loss, that 

it is difficult to set the reserves. So there is— 

Ms. PRYCE. According to the accounting guidance? 

Mr. NUTTER. According to the accounting guidance, that is right. 

Mr. RACICOT. Congressman Pryce, just one other thought that 

you might keep in mind, and that is when you allocate capital to 

such reserves, you obviously are removing it from other possibilities, more diverse products, more coverages, more places, more 

time. So there is a competing imperative that one has to keep in 

mind as well. 

Ms. DALTON. I would like to just also mention the impact that 

the rating agencies have on those reserves that do get set aside. 

They have an awful lot of influence in how the insurers behave and 

what kind of capacity they will set aside for catastrophic risks, 

whether it is terrorism or earthquake or flood. 

And also another factor that is definitely impacting capacity is 

the fire-following laws in some of the States— 

Ms. PRYCE. Which laws? 

Ms. DALTON. The fire-following laws. Those laws also have—for 

example, in New York, have a very serious impact on how insurers 

allocate capacity. 

Ms. PRYCE. Okay. All right. 

Mr. KUNREUTHER. I would like to make a very brief comment 

that if you don’t have reserves, then insurers will have to hold 

more capital, and as a result of that, premiums will go up. So I 

think there are these trade-offs. Without getting into the details on 

how the reserve system would work, the less opportunity insurers 

have for this, the more they will have to hold capital on their own, 

and the higher the premiums would have to be to reflect the fact 

they have that capital on hand. 

Ms. PRYCE. Thank you. 

My time has expired. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much. Ms. Pryce. 

I want to thank the panel for their patience again; we appreciate 

it. 

Professor, I just want to comment on the University of Pennsylvania. I am very prejudiced toward it because I have a peculiar hisVerDate 0ct 09 2002 16:31 Oct 29, 2007 Jkt 037559 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 K:\DOCS\37559.TXT HFIN PsN: TERRIE
67

tory in my family. My father was a Wharton graduate, 1919, and 

law, 1922. My brother was a graduate in the 1960’s of the Wharton 

School, and I have a nephew who went there. So I do not know 

that there is any other family, certainly in Pennsylvania, with 

three generations at the Wharton School and university law school. 

Mr. KUNREUTHER. Thank you very much. We would love to invite 

you to visit us. 

Chairman KANJORSKI. We will be, and particularly as we take up 

other insurance issues, which the committee is going to be very active on. I look forward to using your great wisdom. Thank you very 

much. 

The committee stands adjourned. Incidentally, if members have 

additional questions, they can submit them in writing. Without objection, the hearing record will remain open for 30 days for members to submit written questions to the witnesses, and to place 

their responses in the record. 

Chairman KANJORSKI. The hearing is adjourned. 

[Whereupon, at 1:50 p.m., the hearing was adjourned.] 

(69)

A P P E N D I X

June 21, 2007

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