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THE FUTURE OF TERRORISM INSURANCE: 

FOSTERING PRIVATE MARKET INNOVATION 

TO LIMIT TAXPAYER EXPOSURE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

NOVEMBER 13, 2013 

Printed for the use of the Committee on Financial Services 

Serial No. 113–49 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

RANDY NEUGEBAUER, Texas, Chairman 

BLAINE LUETKEMEYER, Missouri, Vice 

Chairman 

EDWARD R. ROYCE, California 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

JAMES A. HIMES, Connecticut 

CAROLYN MCCARTHY, New York 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

November 13, 2013 ........................................................................................... 1 

Appendix: 

November 13, 2013 ........................................................................................... 43 

WITNESSES 

WEDNESDAY, NOVEMBER 13, 2013 

Csiszar, Ernest N., Associate Fellow, R Street Institute ..................................... 12 

Driscoll, Kean, Chief Executive Officer, Validus Re ............................................. 10 

Hartwig, Robert P., President and Economist, the Insurance Information 

Institute ................................................................................................................ 15 

McGovern, Sean, Director, Risk Management, and General Counsel, Lloyd’s 

of London .............................................................................................................. 8 

Seo, John S., Co-Founder and Managing Principal, Fermat Capital Management, LLC ............................................................................................................. 14 

APPENDIX 

Prepared statements: 

Csiszar, Ernest N. ............................................................................................ 44 

Driscoll, Kean ................................................................................................... 59 

Hartwig, Robert P. ........................................................................................... 66 

McGovern, Sean ................................................................................................ 94 

Seo, John S. ....................................................................................................... 100 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Letter to the Treasury from the American Bankers Association, dated 

September 16, 2013 ...................................................................................... 106 

Letter to Representatives Grimm and Maloney from the American Bankers Association, dated March 19, 2013 ........................................................ 110 

Letter to Representatives Neugebauer and Capuano from the U.S. Chamber of Commerce, dated November 12, 2013 .............................................. 111 

Letter to Representatives Neugebauer and Capuano from the Coalition 

to Insure Against Terrorism, dated November 13, 2013 ........................... 113 

Written statement of the Financial Services Roundtable ............................. 115 

Written statement of The Jewish Federations of North America ................ 121 

Letter to Representatives Neugebauer and Capuano from Liberty Mutual 

Insurance, dated November 12, 2013 .......................................................... 122 

Written statement of the National Association of Mutual Insurance Companies ............................................................................................................. 124 

Written statement of the National Association of Professional Surplus 

Lines Offices, Ltd. ......................................................................................... 129 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 131 

Letter to Chairman Hensarling from Texas A&M University, dated November 13, 2013 ............................................................................................ 135 

(1) 

THE FUTURE OF TERRORISM INSURANCE: 

FOSTERING PRIVATE MARKET INNOVATION 

TO LIMIT TAXPAYER EXPOSURE 

Wednesday, November 13, 2013 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING

AND INSURANCE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Luetkemeyer, 

Royce, Capito, Garrett, Westmoreland, Duffy, Stivers, Ross; Capuano, Cleaver, Sherman, Himes, Sinema, and Beatty. 

Ex officio present: Representatives Hensarling and Waters. 

Also present: Representatives Grimm, Maloney, and Green. 

Chairman NEUGEBAUER. Good morning. The Subcommittee on 

Housing and Insurance will come to order. The title of today’s hearing is, ‘‘The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure.’’ 

I am going to limit opening statements to 2 minutes per side, 

and I ask unanimous consent that members of the full Financial 

Services Committee who are not members of the Housing Subcommittee, and who have joined us today, will be entitled to participate in the hearing. 

I will begin now with the opening statements, and I will recognize myself for 5 minutes. 

This is our second in a series of hearings on TRIA, a very important subject. As I mentioned in the title of this hearing, today is 

really to focus on getting more private market participation in this 

process. 

In addition to the previous hearing that we have had, we have 

had numerous sessions, both at the staff level and the Member 

level, with market participants, people who have an interest in 

TRIA and the impact to both the users, the people who are insured 

for terrorism, and the people who provide that, the reinsurance 

market. We have tried to be as inclusive as we can of bringing people in to get their perspectives on this. 

As many of you know, TRIA was passed in 2002. It was meant 

to be temporary. 

And what we know in Washington is that there is really never 

any temporary policy. Temporary moves very quickly to permanent. 

2 

And here we are over 10 years later and we still have this temporary policy on our books. 

The purpose of TRIA initially was to provide a transition period 

for the industry to kind of regroup after the terrible events of September 11th (9/11) where we saw the industry take a hit of, I 

think, over $40 billion. 

The transition really hasn’t taken place as robustly as I think a 

lot of folks hoped and as I think was promised. And so what we 

are here to really to talk about today is how do we accelerate that 

transition period and how do we accelerate the private participation at a larger level. 

Now, there is some good news along the way. The markets have 

stabilized, and today the industry has more capital in reserves 

than ever before in spite of some fairly major big hits that the industry has taken over the last few years. We have had several 

events even larger than 9/11, yet today the industry is capitalized 

and the reinsurance market has a tremendous amount of capital on 

the sidelines. 

Risk modeling has advanced. One of the things we have heard 

from other people who came and gave testimony was that it is hard 

to model this risk for terrorism but, in fact, there has been some 

progress in that. 

And the price of the insurance, the coverage, has reduced by over 

70 percent since those early days. So, there are some encouraging 

factors out there. 

But quite honestly, the innovation in TRIA hasn’t kept pace with 

really the rest of the financial markets. One of the things that we 

enjoy in this world today is some of the most sophisticated financial 

products in the world. And we have provided opportunity to cover 

a number of different kinds of risk in a lot of different ways. Yet 

we haven’t seen that same innovation, quite honestly, in TRIA. 

And so today, as we begin to have our discussion, I am looking 

forward to hearing from this panel. I told my staff earlier that I 

think we have put together an A panel today of some very smart 

people who have different perspectives. 

But I hope that our conversation will center around today that 

if we are to continue to provide terrorism insurance in this country, 

what are the ways that we can do it better, but at the same time, 

make sure that the taxpayers have a smaller footprint. 

One of the things we know about government, particularly the 

U.S. Government, is that we don’t do an extremely good job of pricing risk. 

I don’t think our government, the founders, ever meant for us to 

be in the insurance business. But we have found ourselves in that 

business in a number of ways, whether insuring mortgages or insuring people against flood. 

And when we look across-the-board at those programs, what we 

see today is that the FHA is not adequately capitalized. The flood 

insurance program is $30 billion underwater, and there is no pun 

intended in that statement. 

And so I hope to hear from our witnesses today of ways that we 

can move forward. And what I would say is that my guess is that 

this is our last pre-legislative hearing. 

3 

And where we go from here, we will begin to then put some of 

the ideas that we have heard from market participants and from 

the two hearings that we have had and moving forward with something that we think is a positive direction. 

With that, I yield back my time, and I recognize Mrs. Beatty 

from Ohio for 21⁄2 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman. 

And let me just say to our witnesses today, thank you for being 

here. 

Certainly, as you know, today’s hearing was scheduled specifically for the purpose of evaluating the ability of the private sector 

to sustain a robust terrorism risk insurance market in the absence 

of a Federal Government backstop. 

And I believe it is fair to say that the ability to purchase broadly 

available and reasonably priced terrorism risk insurance is a critical part of our modern American society, covering everything, as 

you know, from property damage to business interruptions to injury or loss of life liability to workers’ compensation. And businesses’ ability to secure terrorism risk coverage facilitates every 

facet of the modern American corporate climate. 

Without broadly available and reasonably priced terrorism risk 

insurance, commercial real estate markets would likely seize up 

and sports entertainment venues could lose their ability to operate. 

I am from a district where we have a large number of venues 

that fall into this category. Even the high-risk office buildings that 

create the iconic skylines from coast to coast would be vacant as 

companies could not justify housing employees in these terrorism 

magnets without workers’ compensation coverage for liability stemming from an act of terror. 

The unpredictable frequency and severity of terrorist attacks prevents the use of normal risk-based pricing models used in other 

forms of insurance. In fact, from all the comments from industry 

participants, insurance and reinsurance industries are simply not 

ready to bear the entire burden of losses from one or more major 

terrorism events. 

And without the extension of the TRIA government backstop, all 

indicators suggest that there would be a large-scale withdrawal of 

this coverage from the market, which would bring us back to the 

untenable position in which we found ourselves in the months following September 11, 2001. 

So I look forward to hearing your testimony, and I thank you for 

being here today. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now, I recognize the vice chairman of the subcommittee, Mr. 

Luetkemeyer, for 2 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Congress originally intended for the terrorism risk insurance program, or TRIA, to be a temporary one to stabilize the insurance 

sector after September 11, 2001. It was passed and then extended 

in order to allow time for the industry to evolve and create private 

market solutions. 

4 

As the chairman has mentioned and I agree, I think it is fair to 

say that a complete transition to the private market has not been 

as rapid or as robust as we would have liked. 

Given what I have studied and heard, I believe there remains a 

real need for TRIA. But I also believe that we can identify ways 

to increase the amount of private sector capital in the program. 

My biggest hope in doing so is that we better protect taxpayers, 

continue to have a robust insurance marketplace, and provide a 

backstop for financial security for the private sector and investors. 

Today, we will more closely examine the current terrorism insurance marketplace and discuss some innovative ways to increase the 

role of the private sector in this field. 

I believe we can take steps to reform TRIA. And while I do support a continuation of an improved program, I do not believe it 

should be a permanent program. 

At the end of this debate, it is my hope that we will have a product that promotes increased stability and taxpayer protection alike, 

as well as begins a process of winding down the government’s role. 

I look forward to a productive hearing, and I thank our witnesses 

for testifying. 

With that, Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentlewoman from New York, Mrs. Maloney, is recognized 

for 2 minutes. 

Mrs. MALONEY. I thank the ranking member and the chairman 

for calling this hearing and I thank all of my colleagues for being 

here. 

The title of this hearing is, ‘‘Fostering Private Market Innovation 

to Limit Taxpayer Exposure.’’ I would just like to point out that 

under the current TRIA program, the taxpayers’ exposure is already extremely limited. Total industry losses have to exceed $100 

million first, and then insurance companies have to pay a deductible equal to about $34 billion. And this is before any government 

money is used. 

Even then, the insurance company has to share a portion of the 

losses with the government. Under TRIA, if, God forbid, a terrorist 

attack caused $50 billion of losses, which is $10 billion more than 

the terrible 9/11 attack, the government would only be on the hook 

for roughly $13.6 billion, according to the Government Accountability Office. 

TRIA is a rare example of a government program that does exactly what Congress intended it to do. It ensures that businesses 

have access to terrorism insurance while also limiting taxpayers’ 

exposure. And it has done all of this without costing taxpayers one 

dime. 

Why, then, would we even think about ending this program? 

Ending this program would harm the fragile economic recovery in 

the short term, and in the long term it would leave our economy 

dangerously exposed in the event of a future terrorist attack. 

I want to thank all of my colleagues for their support in the rebuilding of our Nation after the 9/11 attack. And I especially want 

to thank one of our panelists today from Lloyd’s of London, Sean 

McGovern, because after 9/11 all building stopped in major urban 

areas. No one could get insurance. 

5 

The only place some people—and this was limited—could get insurance was from Lloyd’s of London. So you couldn’t build a shack 

until antiterrorism insurance was put in place, the TRIA program, 

which has not cost a dime. 

So I strongly support Mr. Grimm’s bill to extend this vital program. It is important to our economy. It is important to our Nation. 

And I thank the chairman for having the hearing. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from New Jersey, Mr. Garrett, the chairman of our Capital Markets Subcommittee, is recognized for 21⁄2

minutes. 

Mr. GARRETT. Two minutes is fine. 

First of all, I would like to thank the chairman for holding this 

hearing on potential ideas to encourage private capital and innovation, and at the same time, to protect the taxpayers from footing 

the bill for terrorism coverage. 

I would also like to thank all the witnesses here on the panel before us as well. 

It has been 11 years since TRIA was signed into law, as the 

chairman has already indicated, and it was intended to be a temporary program. And as most of you are aware, TRIA in its current 

form requires the share in the certified act of terror, as was indicated, $100 million if it exceeds that. 

And while the risk is shared between the private insurers and 

the taxpayers, the mandatory recoupment under TRIA does not 

apply to catastrophic losses over a set figure, around $27 billion. 

Recall, then, that on September 11th, those attacks resulted in 

more than $41 billion of losses. 

So today we are here to discuss ideas to further work to protect 

the taxpayer from catastrophic losses. While we hope and pray that 

another September-11th-like event does not occur, we cannot, unfortunately, rule out future attacks on our homeland. 

And given this possibility, it is in the interest of the U.S. taxpayers for Congress to seek out innovative ways to harness the 

power of private markets and private capital to lessen taxpayer exposure. 

So it is my hope that this hearing will provide this committee 

with a better understanding of how we can encourage private sector capital in the terrorism risk insurance marketplace, and ways 

to ensure that taxpayers are, in essence or in reality, not left footing the bill. 

With that, I yield back. 

Chairman NEUGEBAUER. Thank you. 

The gentleman from Connecticut, Mr. Himes, is recognized for 2 

minutes. 

Mr. HIMES. Thank you, Mr. Chairman. I am pleased to be here 

at the second hearing on this very important topic. 

And I would like to take a moment to welcome Mr. John Seo, 

whose company, Fermat Capital, is headquartered in my district, 

I believe in Westport, Connecticut. 

Mr. Seo, I look forward to hearing your testimony. 

And thank you, Mr. Chairman, for holding this hearing. 

I think most of us agree that the goal here is to find a well-balanced insurance structure that steps in where the private market 

6 

fears to tread for as long as that holds true. To those who are perhaps completely ideologically allergic to the idea, there are two 

good reasons in principle to consider having a terrorism risk insurance program. 

The first is the very simple financial concept that risk should be 

managed and ultimately borne by the party that is in the best position to understand that risk. And unlike, perhaps, other kinds of 

risk, it is, of course, our intelligence agencies, our Federal Government that best understands how, when, where, and why a terrorist 

event may occur. And of course, we make the laws that work to 

mitigate the risk of a terrorist event. 

Secondly and far more practically, as we saw on 9/11, and as we 

saw in Hurricane Katrina, and as we saw in Hurricane Sandy, in 

the moment of a catastrophe the Federal Government does step in 

in a big way. I think it is a tribute to us as Americans that when 

Americans are suffering anywhere, we don’t act stingy. We say, 

‘‘We will help you stand up again.’’ 

So as long as we are stepping in, in a big way in any event, we 

should do it in an organized and thoughtful way using an insurance structure that doesn’t represent subsidy, that does not represent crowding out of private players, but represents an orderly 

way, a careful way of thinking about things that we don’t want to 

think about. 

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

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Florida, Mr. Ross, is recognized for 2 minutes. 

Mr. ROSS. Thank you, Mr. Chairman, and thank you for holding 

this hearing. 

As a stalwart of physical conservatism, I agree that taxpayerbacked programs are often poorly designed and managed and end 

up adding too many dollars to our national debt. 

My time as chairman of the Florida House Insurance Committee 

years ago provided me with a deep understanding of the need to 

maximize private capital. And I think we all appreciate the embedded design flaws that led to our current predicament with regard 

to the National Flood Insurance Program. 

Ideologically, I agree that taxpayers should not be asked to foot 

the bill for those who choose to live or build in riskier areas. However, I also believe that we are a body of practicality. 

Practically speaking, I do not think it is feasible to move San 

Francisco away from the San Andreas Fault; neither could we 

move Florida away from flood zones to escape flood risk. Finally, 

we will not eliminate cities, take down iconic structures, or prohibit 

mass gatherings so as to reduce the risk of a terrorist event. 

There are realities of risk in our world for which we must find 

the best workable solutions. In the event of a terrorist attack, I am 

confident that the Federal Government will step in and provide relief to all victims, including those who are uninsured. 

I am a compassionate conservative. I don’t think that relief is a 

bad thing. But I would hope that we would responsibly map out a 

plan for the deployment of private funds to minimize the number 

on the check that this Congress has to write. 

7 

In this subcommittee, we promote responsible risk management, 

identify uncertainty as a cause of slower growth, and view broad 

market participation as an indicator of healthy market conditions. 

It seems to me that the terrorism risk insurance program at its 

root targets these principles. 

Now, could we do it better? Can we adjust the parameters to further engage private capital? Can we help expand the capacity of reinsurance and insurance-linked securities markets? It is certainly 

possible, and I certainly hope so. 

I thank the panel for being here, and I look forward to the testimony. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the ranking member of the full Financial Services Committee, the gentlewoman from California, is recognized for 2 minutes. 

Ms. WATERS. Thank you very much. I am pleased to participate 

in this hearing on the importance of the successful Terrorism Risk 

Insurance Act known as TRIA. For more than a decade TRIA has 

supported critical economic growth by ensuring access to terrorism 

coverage for our largest venues, businesses, and employers. And 

Democrats are strongly committed to renewing this program quickly and without controversy. 

The terrorist attacks of September 11, 2001, caused a tragic loss 

of life and significant disruption to our economy. In addition, insurance losses totaled an estimated $40 billion in today’s dollars. 

Such losses made it financially impossible for many insurers and 

reinsurers to offer terrorism coverage. Most fled the market. Those 

that did offer coverage did so at a cost that was prohibitively high. 

In 2002, Congress enacted TRIA to address the problem. The program makes terrorism insurance both available and affordable—by 

requiring insurance companies to offer coverage to commercial entities in exchange for a Federal backstop—which is used to protect 

against only those terrorism-related losses at the highest levels. 

Support for TRIA is so strong and so widespread that it has been 

reauthorized twice by the House, both times without controversy 

and with overwhelming bipartisan support. 

But as we approach TRIA’s 2014 expiration, leading Republicans 

oppose this measure, arguing that TRIA is hindering private sector 

participation and that private capital is available to cover terrorism 

risk. 

By continuing to drag out this noncontroversial reauthorization, 

they are putting up roadblocks that threaten the renewal and effectiveness of this important program. This hurts our economic 

growth. 

Industry itself has reported that private capital could cover no 

more than a fraction of the gap that would result from TRIA’s expiration. 

Contributing to this problem is an inability to appropriately 

model and price the terrorism risk due to an absence of actuarial 

data. This is because of the extreme difficulty in predicting the frequency, location, and severity of loss associated with a potential 

terrorist attack. Attacks are random, infrequent, and details are 

largely classified. 

8 

Additionally, Republican opponents of TRIA argue that the current structure leaves taxpayers exposed and that increasing private 

participation will limit this exposure. However, TRIA actually reduces taxpayer risk because it keeps most of the terrorism risk 

with the private sector. 

Without TRIA, many buildings, schools, and large venues would 

remain uninsured against terrorist attacks, meaning that the government likely will pick up 100 percent of the tab for catastrophic 

losses. 

But don’t take my word for it. A wide array of TRIA’s policyholders and beneficiaries have expressed support for the program, 

including shopping centers, hotels, and office buildings, to insurers 

and reinsurers, as well as market analysts, lenders, and developers. All these interests and more depend on the quick, clean, and 

long-term reauthorization of TRIA. 

For all these reasons, I believe we need to reauthorize TRIA as 

soon as possible. TRIA must remain in place to ensure a speedy recovery after an attack, to avoid market disruptions, and to protect 

schools, jobs, and businesses. We need to realize that now is not 

the time to be having a debate over alternatives to TRIA. The private market cannot and does not want to step into the void. 

I thank you again for holding this hearing. I continue to believe 

it is of the utmost importance that TRIA is reauthorized quickly, 

cleanly, and for the long term. Democrats support it. Insurers support it. Businesses and the U.S. Chamber of Commerce support it. 

There’s no reason this should not have broad bipartisan support in 

Congress as well. I look forward to the witnesses’ testimony and I 

yield back the balance of my time. 

Chairman NEUGEBAUER. Now, the ranking member of the subcommittee, Mr. Capuano, is recognized for— 

Mr. CAPUANO. Thanks for having this hearing, Mr. Chairman. I 

yield back. 

Chairman NEUGEBAUER. I appreciate that. 

And now, we will go to our witnesses. 

It is my pleasure to introduce: Mr. Sean McGovern, director of 

risk management and general counsel for Lloyd’s of London; Mr. 

Kean Driscoll, chief executive officer of Validus Reinsurance, Limited; Mr. Ernest Csiszar, associate fellow, R Street Institute; Mr. 

John Seo, Co-Founder and Managing Principal, Fermat Capital 

Management, LLC; and Dr. Robert Hartwig, president and economist, the Insurance Information Institute. 

I thank all of you for being here. You will be each recognized for 

5 minutes to summarize your testimony. 

And with that, I will begin with Mr. McGovern. You are recognized for 5 minutes. 

STATEMENT OF SEAN McGOVERN, DIRECTOR, RISK 

MANAGEMENT, AND GENERAL COUNSEL, LLOYD’S OF LONDON 

Mr. MCGOVERN. Thank you, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee for the opportunity to testify this morning on behalf of Lloyd’s of London. 

My name is Sean McGovern. I am responsible for risk management at Lloyd’s and I am also general counsel. 

9 

Over our 325-year history, Lloyd’s has earned a reputation for 

having the capacity, the skill, and the appetite to underwrite the 

world’s most difficult risks. This is particularly true in the United 

States, which is our largest market and where we are a major direct insurer and reinsurer. 

Our specialty is catastrophe coverage, and we have been there to 

support the U.S. economy since the conclusion of the Civil War, cementing our reputation with our response to the 1906 San Francisco earthquake and, more recently, claims paid arising from Hurricanes Katrina, Rita, and Wilma in 2005. 

We know how to underwrite catastrophic risk and we have an 

appetite to take risk that others will not. It is our business. 

With that in mind, our views on terrorism risk and TRIA are informed by the following: First, Lloyd’s paid more claims than any 

other insurer or reinsurer following the tragic events of September 

11th—almost $8 billion. 

Second, Lloyd’s led the development of the standalone terrorism 

risk market in the United States in the days following 9/11. And 

third, Lloyd’s is generally wary of government intervention and believes in free markets and private market solutions wherever possible. 

With all that said, we support the renewal of TRIA. Like it or 

not, the coverage of terrorism risk is different and the United 

States is not the only country confronted with the challenge of ensuring that the national economy is protected in the event of the 

failure of counterterrorism measures. 

The U.K. has lived with the threat of domestic terrorism for 

many years, and while the structure of the government industry 

arrangement is different than TRIA, the U.K. program has an unlimited government backstop. And similar arrangements exist in 

major European economies. 

Terrorism risk is different because, as demonstrated by the tragic events in Boston, risk assessment is very difficult. Frequency 

and severity are very difficult to predict. Only the government has 

access to intelligence information but cannot share it. 

And although terrorism modeling exists, it has limitations. In 

particular, the supply of historic data is much more limited than 

for natural catastrophes. 

Now that is not to say that terrorism risk cannot be underwritten. We have an active and growing standalone terrorism risk 

market in Lloyd’s, but it remains small. 

All of these factors act to substantially limit the appetite of the 

insurance and reinsurance industry to absorb this risk, particularly 

in major urban areas where the density and accumulation of asset 

values. 

TRIA has succeeded in giving the insurance industry the confidence to make terrorism coverage available. Without TRIA, the 

aggregation of risk will quickly lead to the industry to exclude coverage or withdraw capacity from key economic centers in the 

United States. 

While the industry is well-capitalized, it would be wrong to assume that more capital leads to a dramatic increase in the overall 

appetite to write U.S. terrorism risk insurance. Reinsurers need to 

manage risk aggregation and seek diversification. 

10 

Now, we accept the need to assess whether or not TRIA should 

change, and it may well be that the balance between government 

and private market involvement could tilt more towards the private 

market. But any changes to TRIA to facilitate greater private market involvement should not sacrifice the stability that TRIA has already achieved. 

And how changes are made can be just as important as what 

changes are made. For example, sudden and dramatic increases in 

retentions or co-shares could prompt some insurers and reinsurers 

to concentrate their capacity elsewhere. 

By contrast, well-defined, incremental changes over the course of 

a long-term extension of the program may provide a transparent 

process of reductions in the risk borne by taxpayers. 

For the avoidance of doubts, we do not see this as a mechanism 

to transition to a complete removal of TRIA. We struggle with the 

notion that there is no Federal backstop. 

Whatever the future of TRIA, Lloyd’s will remain committed to 

providing the fullest coverage we can to our American customers, 

just as we did immediately after 9/11. But our ability to do that 

will be limited by our need to manage our risk aggregation. 

The same issue will apply to others, and we have no confidence 

that the private sector alone is capable of providing the entirety of 

the coverage that would be needed if TRIA is not renewed. 

Thank you, and I look forward to your questions. 

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

94 of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

And now, Mr. Driscoll, you are recognized for 5 minutes. 

STATEMENT OF KEAN DRISCOLL, CHIEF EXECUTIVE OFFICER, 

VALIDUS RE 

Mr. DRISCOLL. Good morning. My name is Kean Driscoll and I 

am the chief executive officer of Validus Re. I am pleased to appear 

before you today to provide my company’s perspective on possible 

changes to the terrorism risk insurance program that would incent 

more private market involvement. 

I commend Chairman Neugebauer for holding this important 

hearing and I welcome the opportunity to address the Subcommittee on Housing and Insurance. Validus Group is a leader in 

the global insurance and reinsurance markets, operating principally through Talbot Syndicate 1183 at Lloyd’s of London and 

Validus Re. 

Talbot has written direct and facultative terrorism at Lloyd’s for 

more than 12 years, and is now the largest writer of that business 

by income. 

Validus Re is one of the largest standalone property terrorism 

treaty coverage providers in the world, with an estimated 10 percent market share, and it evaluates business opportunities on approximately 90 percent of all direct and facultative terrorism business written throughout the world. 

Since 2001, insurers and reinsurers have worked hard to develop 

a better understanding of conventional terrorism risk. Reinsurers 

have created task forces, consulted military and intelligence experts, hired specialty risk modeling firms, invested in research and 

11 

development, and implemented new underwriting standards, all 

with the intention of offering private market solutions for the 

transfer of conventional terrorism risk. 

Conventional terrorism can be modeled, priced, and managed on 

a portfolio basis. The probability or frequency of an event can be 

estimated, albeit with less certainty than with risk classes of a 

more robust historical record. 

However, the insurance and reinsurance industries have pioneered risk transfer solutions for many other classes of business 

that suffer the same shortcomings. To supplement the lack of a 

rich data set on frequency, we use open source intelligence that 

helps us estimate both the intent and capability of terror threat 

agents. 

The question is not whether conventional terrorism risk can be 

priced, but rather the precision of the parameters in a pricing 

model. We can and do currently price conventional terrorism risk 

and estimate that approximately $7 billion to $8 billion of reinsurance coverage is purchased annually on a standalone basis for conventional U.S. terrorism. This excludes coverage that is included as 

part of general, property, casualty, workers’ compensation, and 

other specialty-lines coverages. 

We believe presently there is adequate reinsurance capacity to cover the insurance industry’s current $27.5 billion retention under 

TRIA. And if the industry retention for conventional terrorism 

grew over time, so too would the capacity of the reinsurance industry for conventional terrorism risk. 

TRIA is valuable to the insurance industry in underwriting conventional terrorism risk, but it takes a one-size-fits-all approach 

that could be modified to encourage more private market insurance 

and reinsurance participation. 

If the committee is inclined to make changes to the program, 

Validus encourages you to tailor the program in accordance with 

the following comments: The program should continue to cover catastrophic terrorism loss scenarios related to nuclear, biological, 

chemical, and radiological attacks. The broader industry cannot effectively address these perils, as the breadth of potential events is 

either unknowable or could potentially bankrupt the industry. 

Cyber terrorism, a peril distinct from cyber liability, should be 

clearly covered by the program. The scope, duration, potential damage, and economic loss from this risk are also unknowable, and 

therefore, uninsurable. The program should clarify the process for 

certifying a terrorism event, including a defined time for making 

the certification. 

Validus has the ability and willingness to assume more conventional terrorism risk exposure and I believe the reinsurance industry also has the ability and willingness to meaningfully expand its 

capacity for conventional terrorism risk. 

To reflect the fact that the industry’s appetite for writing conventional terrorism risk has grown since the last extension, the program could be modified in a variety of ways, including gradually 

increasing the insurance industry retention and size of a qualifying 

terrorism loss under the program. This reduces the likelihood of 

having to fund a loss through taxpayer funds and it avoids shortterm price and capacity dislocation in the broader industry. 

12 

An expansion of the co-participation would better align the insurance industry with the program. The insurance industry is a critical facilitator of effective risk management in virtually every industry, and every facet of life. 

Risky behavior or highly exposed assets typically result in a 

higher premium charge. Policyholders can reduce higher premiums 

through effective risk mitigation techniques. 

Currently, the program impedes the ability of the insurance industry to properly price its products. By shifting the risk of conventional terror attack from the policyholder to the taxpayer, the improper allocation of risk premium facilitates unintended outcomes. 

We see this phenomenon playing out in the flood market, as the 

heavily subsidized National Flood Insurance Program has produced 

significant deficits. Congress should encourage a greater private 

sector risk-bearing role and appropriate risk pricing. 

Insureds and insurers will then have an incentive to mitigate 

risk and price it appropriately and Congress can focus on generally 

becoming a reinsurer of last resort for conventional terrorism risk. 

Finally, special consideration should be made for smaller insurers as well as for the insurance industry generally with respect to 

workers’ comp exposure accumulations in metropolitan areas, both 

of which could be disproportionately impacted in the near term by 

any of the changes to the program. 

Thank you for the opportunity to testify, and we look forward to 

continuing the dialogue as the renewal process continues. 

[The prepared statement of Mr. Driscoll can be found on page 59 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Csiszar, you are now recognized for 5 minutes. 

STATEMENT OF ERNEST N. CSISZAR, ASSOCIATE FELLOW, R 

STREET INSTITUTE 

Mr. CSISZAR. Thank you. Mr. Chairman, and members of the 

subcommittee, I appreciate the opportunity to appear before you 

today. And let me add that while officially I am here on behalf of 

the R Institute, which is an institute committed to free markets, 

to which I am also fully committed, I am also a former insurance 

commissioner, a former president of the NAIC, and I sit on the 

board of a workers’ compensation company that sells this stuff, and 

I sit on the board of a company that buys a lot of terrorism insurance. 

I have a lot more interest in this than just good policy. I have 

some practical reasons for being here as well. 

Having said that, I want to address two issues, really. One, how 

can we make reinsurance more attractive? Because reinsurance is 

really the key here. Without reinsurance, there is no insurance. 

And the second point that I want to address is, can we make the 

insurance-linked security market—and I am sure my friend here 

will pick up on that as well to comment on it—more attractive? 

So to begin with, I think, Mr. Chairman, in your statement you 

came out and said there had been a lot of change—improvement 

in the insurance-reinsurance market. The point really is that the 

capital—when I look back 10 years ago, capital was around $250 

billion, $280 billion. Today, that capital is over $500 billion. It is 

13 

hard to pinpoint an exact number because a lot of insurance companies also sell reinsurance. 

The capital, in particular, has grown between 1 and 5 percent 

every year consistently since—actually, since the financial crisis. 

More money has come in because it is such a—the yield environment in other areas is so low. 

So companies are looking for higher returns and the reinsurance 

industry has naturally benefited from that to the point where I 

would say when I recall Hurricane Hugo in my own State of South 

Carolina, which was a disaster, and Hurricane Andrew, as I recall, 

created severe disruptions in the market. 

Now I look at it and I say, look, here we have had Hurricane 

Sandy, slightly less than $20 billion, and it has barely caused a 

blip. If anything, reinsurance rates have gone down. 

I look at wildfires in California and Nevada and Utah, all 

through the entire West, storms in the Northeast, hurricanes. The 

industry, as a natural course, almost ritualistically every year pays 

out $15 billion, $20 billion to $25 billion in catastrophe. 

So my approach to this entire issue was can the private market, 

in effect, take over at a much higher stage than that $100 million? 

And while I am in favor of renewing TRIA for an extended period 

of time—5 years, 10 years, whatever it may be—I also think that 

I would suggest that we can take steps to make it more privatemarket friendly. 

First of all, my suggestion would be that you take a very close 

look at that $100 million trigger, that it could—when you look at, 

again, what the industry has been able to cover in the billions— 

$20 billion, $15 billion, $25 billion—that trigger can be set much 

higher than what it currently is. 

I would caution that we are not quite sure here whether the 

money that has come into this industry is really what I would call 

hot money—quick in, quick out. I would caution that there are still 

some modeling problems with this. I would caution that the data 

isn’t the best in the world. 

So I would suggest that if you were to take that kind of approach, it can be staggered. All of this is severable. You can do it 

in pieces and parts. But take a close look at that trigger. 

The second thing I would suggest is there is room for increasing 

both the horizontal kind of deductible as well as that vertical kind 

of cost-sharing arrangement. Increase it by 10, 15 percent or so to 

leave the industry with more skin in the game. And also, it would 

reflect the fact that there is much more capacity in the industry. 

And then third, I would suggest you take a close look at charging 

for this. You charge for flood insurance, albeit the charges that you 

have are inadequate. Nonetheless, people pay for flood insurance. 

As far as the insurance-linked securities market is concerned, I 

would suggest you take a very close look at the accounting environment and at the tax environment. 

I would love to bring this industry back onshore. It is down 90 

percent in the Cayman Islands in terms of these special purpose 

vehicles. Bring it back onshore, allow some tax flow so that there 

is no double taxation, perhaps look at how it is reserved, and certainly look at the accounting issue where there is an enormous difVerDate Nov 24 2008 17:39 May 02, 2014 Jkt 086684 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\86684.TXT TERRI
14 

ference between how these insurance-linked securities are treated 

for creditor insurance versus true insurance. 

Again, I thank you for the opportunity and, of course, I am open 

to questions whenever this committee is ready. Thank you very 

much. 

[The prepared statement of Mr. Csiszar can be found on page 44 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

Dr. Seo? 

STATEMENT OF JOHN S. SEO, CO-FOUNDER AND MANAGING 

PRINCIPAL, FERMAT CAPITAL MANAGEMENT, LLC 

Mr. SEO. Thank you, Mr. Chairman. Good morning. 

My name is John Seo. I am a co-founder and managing principal, 

along with my brother, Nelson Seo, of Fermat Capital Management, which is believed to be the largest investment manager of catastrophe bonds, or so-called cat bonds, worldwide. 

Hurricane Andrew in 1992 and the Northridge Earthquake in 

1994 caused many insurers to realize that they were sitting on top 

of a risk of ruin they didn’t realize they had before. It was judged 

that the capital market, with its much bigger capital base, could 

safely remove this risk of ruin from insurers and so the cat bond 

market was invented in the mid to late 1990s. 

To investors, cat bonds operate just like corporate bonds, depending on your point of view. Corporate bonds are effectively cat bonds 

that happen to cover credit risk and cat bonds are just corporate 

bonds that cover insurance risk. 

Over the years, the reinsurance equivalent of cat bonds, 

collateralized reinsurance, as paralleled the development of the cat 

bond market virtually dollar for dollar. Together, cat bonds and 

collateralized reinsurance are called insurance-linked securities or 

just ILS. Today, I will speak to the ILS market as it relates to terrorism insurance. 

The ILS market currently stands at $45 billion. Risk coverage 

has gone beyond hurricane and earthquake to include such things 

as tornado, hail, wildfire, disease, flood, and of course, terrorism. 

The ILS investor base is distinctly global in nature and enjoys 

significant participation from all investor categories. 

Innovation remains a hallmark of ILS markets. For example, a 

flood bond covering the New York Metropolitan Transportation Authority was issued this year in July. 

It is generally accepted that we are at the beginning of a burgeoning market for flood bonds. Only a few years ago, most market 

observers would have considered such a thing as nearly impossible. 

Regarding terrorism specifically, the cat bond side of the ILS 

market covers only $1.4 billion in terrorism risk. If we extrapolate 

that to the other half of the ILS market we can reasonably estimate that capital markets cover roughly $3 billion of terrorism risk 

today in total. 

At current rates of growth, the ILS market is expected to be in 

the range of $150 billion to $200 billion by 2020. By mere extrapolation from our current condition, this would put ILS terrorism capacity at $9 billion to $12 billion by the end of this decade. 

15 

Now, I know some market observers have questioned whether or 

not capital markets are fundamentally cut out for terrorism risk. 

In particular, a common misunderstanding is that investors strictly 

avoid ILS investments that cover events which may also cause temporary drops in the stock market. 

I say plainly, this is not true. If it were, we would have no earthquake bonds. 

I explain all of this in excruciating detail in my written testimony so let me summarize my view on this matter as follows: ILS 

investors care mainly about fair compensation for the risk and everything else is secondary to that. 

I now end my testimony by briefly touching on two ways to increase capital markets efficiency for terrorism risk. Cat bond coverage for terrorism risk is typically bundled with life and health 

risks. Of course, that is not surprising, but additional bundling 

could increase efficiency of coverage, for example, bundling terrorism, life, and earthquake risk in one transaction. 

The main intuition here is simple: Risk bundling reduces frictional cost. 

Finally, coverage for terrorism risk in the cat bond market currently includes NBCR. There is no doubt in my mind that NBCR 

coverage is holding back market capacity. 

If NBCR were more commonly excluded from coverage, capital 

markets’ capacity for terrorism risk would increase significantly 

from current levels. 

Thank for this opportunity to testify before the Subcommittee on 

Housing and Insurance today. I look forward to answering any 

questions you may have. 

[The prepared statement of Dr. Seo can be found on page 100 of 

the appendix.] 

Chairman NEUGEBAUER. Dr. Hartwig, you are recognized for 5 

minutes. 

STATEMENT OF ROBERT P. HARTWIG, PRESIDENT AND 

ECONOMIST, THE INSURANCE INFORMATION INSTITUTE 

Mr. HARTWIG. Thank you, Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee. My name is Robert Hartwig and I am president and economist for the Insurance 

Information Institute, an international property-casualty insurance 

trade association. 

I appreciate the opportunity to have been asked by the committee to provide testimony on TRIA and the market for terrorism 

insurance in the United States. 

The terrorist attacks of September 11, 2001, produced insured 

losses larger than any natural or manmade event in history. 

Claims paid by insurers to their policyholders eventually totaled 

$42 billion in today’s terms. 

Exclusions proliferated, prices soared, and very little private sector capacity for terrorism entered the market as the general consensus emerged that terrorism risk is fundamentally not insurable. 

Only when TRIA was enacted by Congress in late 2002 did stability finally return to the market and coverage for terrorist attacks 

resume. 

16 

Eleven years later, the war on terror is far from over, as April’s 

Boston Marathon bombings attest. But TRIA by all objective measures is now an unqualified success. 

The program not only succeeded in restoring stability to the 

country’s vital insurance and reinsurance markets, but it has done 

so at effectively no cost to taxpayers. 

Indeed, TRIA as currently structured provides at least eight levels of protection to taxpayers while fostering competition among insurers of all sizes. And I document those in my written testimony. 

The unambiguous success of TRIA demonstrates that the Act has 

become an indispensable component of the country’s national security infrastructure. Under TRIA, private insurance, not government 

aid, is the principal funding and delivering mechanism that will 

drive rebuilding efforts and economic recovery after any future attack. 

One hundred percent of the losses up to $100 billion will be financed directly by private insurers or can be recouped in full 

through assessments on the private sector. In the event TRIA is allowed to expire or its structure significantly altered, the preponderance of the burden for funding post-attack recovery efforts could 

well shift to the Federal taxpayer. 

While there is no question that private insurers and reinsurers 

would continue to offer limited amounts of terrorism coverage, 

there is also no question that in the absence of TRIA, private insurance and reinsurance market capacity, for several reasons, will be 

diminished relative to what is currently available and purchased 

today. 

Primary insurers, for example, may be forced to scale back their 

sale of terrorism insurance due to rating agency and regulatory 

pressure. Already, the leading insurance rating agency, A.M. Best 

Company, has subjected insurers to stress tests involving simulated terrorist attack scenarios. 

Those insurers that failed the stress test are required to present 

an action plan detailing the steps that they will take to ‘‘reduce 

concentration of exposure to terrorism risk, should TRIA protection 

change materially.’’ 

In the event the insurer’s action plan is deemed to be insufficient, ‘‘the rating unit will face negative rating pressure.’’ 

A.M. Best concerns run deeper still, adding that while private reinsurance is currently available in the market, future availability 

and affordability of this coverage is ‘‘uncertain in the event TRIA 

is not renewed or if the program changes significantly.’’ 

The same stress test analysis shows that smaller insurers would 

be disproportionately impacted by major changes in TRIA. Preserving a TRIA structure that encourages market participation 

among insurers of all sizes is critical. 

More than 90 percent of small- and medium-sized insurers write 

TRIA coverage today. An Insurance Information Institute analysis 

of market shares indicates that insurers with less than $1 billion 

in surplus provided nearly a quarter of the U.S. TRIA capacity in 

2012. 

One corollary to this finding is that many insurers, particularly 

small- and medium-sized insurers, are already at or near their 

maximum exposure to terrorism risk. This means that changes to 

17 

the program that would increase their exposure would not motivate 

them to write more coverage. 

Indeed, the opposite is likely to happen. The bottom line is that 

any dramatic changes to the program are likely to be highly disruptive to a large share of the market, potentially reducing competition. 

Expiration of TRIA or a major restructuring of its key provision 

threatens to turn the market, in effect, into Swiss cheese. By that, 

I mean a market that on its surface may give the appearance of 

being solid but which, in reality, is riddled with holes. 

These holes are coverage gaps and shortfalls that could leave 

millions of American businesses and workers as well as taxpayers 

needlessly vulnerable. These holes and gaps will impact every industry in every region of the country, and the Federal Government 

will be called upon to fill these gaps in the event of future attacks. 

In conclusion, a purely objective assessment of TRIA in its current form is very encouraging from a cost-benefit perspective. TRIA 

has brought much needed stability and capacity to the market, 

benefiting the entire U.S. economy, and it has done so within a fiscally responsible framework. 

The program has no major structural defects. Moreover, there is 

no evidence that the existence of TRIA crowds out capacity or stifles innovation in traditional or ILS markets. In the 11 years since 

TRIA was enacted, private sector capacity has gradually expanded 

in the market not in spite of TRIA but because of it. 

Thank you for the opportunity to testify before the committee 

today. I would be happy to respond to your questions. 

[The statement of Dr. Hartwig can be found on page 66 of the 

appendix.] 

Chairman NEUGEBAUER. I thank the gentleman, and I thank the 

panel. 

And we will now go to a question-and-answer period. Each Member will be recognized for 5 minutes. 

And I will recognize myself for 5 minutes. 

Mr. Driscoll, since 9/11 the global insurance and reinsurance industry has shown remarkable resilience. They have taken, I 

think—for example, in 5 of the last 11 years since 9/11, insurers 

and reinsurers have absorbed catastrophic losses greater than $47 

billion. 

Despite these losses, the industry capital has hit near-record 

highs and the reinsurance capital particularly is over $500 billion. 

With these strong capital positions in both the insurance industry 

and the reinsurance, coupled with the modeling efforts that have 

moved forward on terrorism insurance, it appears to me that the 

industry is ripe to have more private sector participation. Would 

you agree with that? 

Mr. DRISCOLL. Absolutely. We have grown the capital base of our 

industry over 300 percent since 2001. We responded to Hurricanes 

Katrina, Rita, and Wilma in 2005, the four storms that impacted 

Florida in 2004 to the financial crisis in 2008, and to over $100 billion in natural cat losses in 2011 on a global basis. And our industry collective balance sheet has never been stronger. 

18 

Further to that, I think the willingness and ability to both price 

and manage conventional terrorism risk is at an all-time high. So, 

I absolutely agree with your comments. 

Chairman NEUGEBAUER. Thank you. 

Mr. Csiszar, insured losses from the 9/11 attacks in today’s dol- lars I think is estimated to be over $40 billion. The industry was 

able to absorb that, with some difficulty. 

So 12 years removed from that, we have not seen any attacks. 

But there have been major efforts in modeling terrorism. You mentioned in your testimony that the current $100 million 

trigger is probably too low, and that there is capacity in the industry to take on more of that risk. And so would the fact that the 

industry has, over the last few years, absorbed fairly major events 

in the $25 billion, $30 billion, $40 billion range, what would be 

your suggestion as an appropriate trigger if we were to change 

that? 

Mr. CSISZAR. I look at two things, Mr. Chairman. First of all, if 

you were to withdraw the entire backstop you are looking at creating a crater of 20 percent, basically. That is huge. They can’t 

handle that. 

So what could we put in place to make it palatable? One thing 

I looked at, for instance, was we have these ILS, they are called, 

industry loss warranties. And these are in the private markets. 

What is the trigger in the private market? In the private market, 

ironically, the most typical trigger for an ILW, industry loss warranty, is $20 billion. Now, you can purchase $10 billion or $15 billion, but it is a lot more expensive to purchase that. 

So my thought, in looking at what the industry loses on an annual basis, as I said earlier, almost ritualistically paid out in catastrophes, is somewhere between $15 billion and $25 billion. Then, 

you have this industry loss warranty trigger at $20 billion. Somewhere in that range is what I would suggest. 

Chairman NEUGEBAUER. Thank you. 

Mr. McGovern, recently some insurers have expressed their willingness to underwrite terrorism risk for commercial property even 

if the current program were to expire. For example, John Doyle, 

AIG CEO of Global Commercial Insurance, said he could see a 

market emerging fairly quickly for property risk absent a backstop. 

The CEO global corporate at Zurich also said his company would 

continue to offer property coverage to his clients without a backstop. Mr. Greenberg, CEO of CBR, has also made similar comments. 

Since Lloyd’s is one of the industry’s leaders in providing standalone terrorism insurance, at a minimum do you feel that the current program is too generous for property coverage? 

Mr. MCGOVERN. Lloyd’s is a major leader in the standalone market but I think we need to keep the level of capacity in perspective. 

We calculate that our standalone terrorism market in premium 

terms at Lloyd’s for U.S. risks amounts to $460 million of premium 

for U.S. standalone terrorism. 

Put that in the context of our overall premium income from the United States at $12 billion. I think that tells you something about 

the capacity of the market to allocate capacity to major U.S. terrorism risks. 

19 

I think the other point that—and it is clear that capacity is growing. I think what we worry about is the aggregation of risk in key 

urban centers where asset values mean the ability of the industry 

to absorb major exposures is always going to be somewhat limited. 

Chairman NEUGEBAUER. My time has expired. 

And now the gentlewoman from California, the ranking member 

of the full Financial Services Committee, Ms. Waters, is recognized 

for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Neugebauer. 

And I would like to thank all of our panelists who are here today. 

Of course, we all think about TRIA in relationship to 9/11. And 

as it was said by perhaps more than one of the panelists today, 

there is nothing to compare with what took place on 9/11—the destruction, the loss of life and property, et cetera. 

And so I am somewhat baffled by any resistance to making sure 

that we have the kind of coverage that TRIA would provide in the 

event of another terrorist attack. Those of us who—I guess all of 

us are concerned about terrorism. All of us are concerned about the 

ability for our country to not only prohibit these kinds of acts but 

about restoration in the event of such catastrophe. 

Now, we have a lot of information. I am told that reinsurance is 

a vital component of terrorism insurance coverage; in the aftermath of September 11th, the reinsurance industry fled the market. 

Can you discuss the extent to which the reinsurance industry 

has re-entered the market, if at all? How limited is current insurance capacity? 

And I guess I would like to start with Mr. Sean McGovern, the 

director of risk management and general counsel at Lloyd’s of London. Would you respond to that? 

Mr. MCGOVERN. Thank you for the question. It is clear that the 

reinsurance market overall has grown, the global market has 

grown, the North American reinsurance market has grown. And indeed, the reinsurance market for terrorism risk has grown. 

And the estimates I have heard is that the terrorism reinsurance 

market in the United States is about $6 billion to $10 billion. Compare that to the industry retentions, which are currently estimated 

to be about $35 billion. There is clearly somewhat of a gap there. 

Now, it is clear that the reinsurance market could grow further. 

I think the challenge we all have is that clearly, thankfully, we 

have not had an event for many, many years. And that inevitably 

has an impact on availability and price. 

It is true to say that when events occur, people take different 

view of risk and people price risk differently. And that inevitably 

has an impact on capacity and price. 

Ms. WATERS. So what you are telling me in essence is that if an 

event such as 9/11 occurred today, that the reinsurance market, 

even with its growth, would not be able to handle it. Is that correct? 

Mr. MCGOVERN. No. That is not what I am saying. I am saying 

that actually the reinsurance industry could handle that because of 

TRIA. The TRIA program actually gives the insurance and the reinsurance industry the confidence to offer and make available coverage. 

Ms. WATERS. Thank you very much. 

20 

Mr. Hartwig, you gave very powerful testimony. And I learned 

something about the stress tests that you described. 

Could you tell us how those stress tests are being carried out? 

Who is being identified as the companies that have capacity, stress 

tests? And how is it going? 

Mr. HARTWIG. Right. So it is the best known of the rating agencies, insurance rating agencies, A.M. Best, which has carried out 

these tests. They have looked at nearly 900 so-called rating units, 

and they have looked at several hundred that have significant terrorism exposure. 

And the test that they basically run them through at this point 

is actually a very, very modest test, something like a 5- to 6-ton 

truck bomb, okay? That doesn’t even come close to approaching a 

9/11-type event. 

And so what they have found is that in the absence of TRIA or 

a major restructuring of TRIA that would require insurers to take 

on much more risk, they found that some insurers are, in effect, 

overexposed today under that scenario in the absence of TRIA or 

a TRIA that is significantly restructured. 

Obviously, the larger the event that you would have, you would 

expect to see more of this experience. So each and every one of 

these insurers are going to be required to put together a plan, and 

if that plan is inadequate they potentially face downgrade action. 

That raises their cost of capital, could cause the cost of their reinsurance to rise, and many customers may not do business with 

them, and those kinds of scenarios. 

So it is an environment in which it is possible where, under 

these stress tests, the available capacity winds up being reduced in 

the marketplace, reducing competition. 

The point I wanted to make there is that small insurers may be 

small, but small- and medium-sized insurers as a group provide a 

quarter of the TRIA capacity in the market today. 

Chairman NEUGEBAUER. The time of the gentlelady has expired. 

Ms. WATERS. Thank you very much. 

Chairman NEUGEBAUER. The vice chairman of the subcommittee, 

Mr. Luetkemeyer, the gentleman from Missouri, is recognized for 

5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. McGovern, as someone who is from another country who insures risks around the world, you indicated that there are other 

countries that have terrorism insurance coverage for their properties in those countries and you participate in those. 

Can you explain or give us an idea of some of the backstops that 

other governments have? And are there any governments that do 

not provide this backstop, so that the businesses within those countries are totally insured by the private sector or take the risk themselves? 

Mr. MCGOVERN. There are a variety of programs around the 

world. Some countries don’t have programs. But in the major European economies like the U.K., France, and Germany, for example, 

there are programs that have existed for some considerable time. 

Perhaps focus on the U.K. The U.K. program is a pooling program with the industry, so there is an industry pool. The backstop 

21 

that the government provides is unlimited for all types of terrorism 

cover. The industry pays a premium for that coverage. 

Pool Re, which is the company that operates the pool, is sitting 

on 5 billion pounds worth of assets. So it can be made to work, to 

have a mechanism whereby the industry pays for the government 

backstop. Arrangements in other countries are different. 

Mr. LUETKEMEYER. Okay. You indicated that you apparently had 

insured or provided terrorism risk insurance here in this country 

before 9/11. Is that correct? 

Mr. MCGOVERN. Terrorism insurance was generally just folded 

into all risk policies, so it wasn’t— 

Mr. LUETKEMEYER. Okay. My question is, if you were here before 

9/11, how did you model it? 

Mr. MCGOVERN. Interestingly, before 9/11 no one really modeled 

terrorism risk in the United States. We modeled terrorism risk in 

the U.K. 

Mr. LUETKEMEYER. So it was just a throw-in coverage at that 

point. 

Mr. MCGOVERN. It was not excluded from the policy. 

Mr. LUETKEMEYER. Since then you do model, I take it? 

Mr. MCGOVERN. We do model, and there have been developments 

in modeling terrorism risk. But those models are limited by the 

quality of real event information. 

Mr. LUETKEMEYER. Okay. One of the things that has been discussed a couple different times already—and Mr. Hartwig brought 

it up—is the problem with if we change the structure of our system 

right now we may squeeze out some of the small or midsize guys. 

Mr. Driscoll’s testimony indicates that there continues to be an 

influx of cash into this industry, into the reinsurance industry, so 

that there is capacity to take on more risk. 

Mr. Driscoll, how do you respond to Mr. Hartwig’s comment 

about the risk to the small or midsize folks? Are they growing 

enough to accept some more additional risk themselves, to be a 

continued participant if we make changes? Or do you think that if 

we make some significant changes they may be out in the cold, 

they won’t be able to participate in this? 

Mr. DRISCOLL. Yes. The smaller insurance companies are a critically vital, important component of the overall industry, but a very 

important part of our portfolio. 

And we are sensitive, I think, to the needs of smaller insurance 

companies. They tend to be much more reliant on purchasing reinsurance protection for really any perils, whether it be natural catastrophes or terrorism. 

So from our perspective as a reinsurance capacity provider, we 

are raising our hands saying we are willing to support the smaller 

segments of the insurance industry. 

The challenge that the smaller insurance companies have is the 

inability to effectively recoup terrorism rate. And this is really a 

function of the fact that TRIA is a subsidized program. It inhibits 

the natural process of charging an appropriate risk premium. 

At the State level, a lot of these companies are inhibited with 

how much terrorism premium they are able to recoup. So there is 

a natural mechanism by modifying TRIA and opening up the 

amount of risk that the private industry is willing to take that 

22 

should feed through into the ability for insurance companies, particularly smaller ones, to charge more premium and thus be able 

to purchase more reinsurance. So there is really a natural environment that exists. 

Mr. LUETKEMEYER. One last question before I run out of time 

here along the same line. It would seem to me that as you sort of 

transition away from the government backstop, larger—a much 

more large—a larger portion being taken over by the private sector, 

is there—do you think the reaction by the private sector would be 

to be able to cap themselves with their own risk? 

In other words, if you are a small company, you would only take 

a certain portion. You wouldn’t have an unlimited backstop on the 

upper end. You would only take on so much risk and then you 

would partner with somebody else to be able to take on a large 

risk? Or is that a viable option? 

Mr. DRISCOLL. Yes. I think that it is a viable option. A central 

tenet of any well-run and well-managed insurance company is to 

balance the amount of risk you take against your capital base. So 

that process occurs every day. 

And there are financial mechanisms, particularly within the reinsurance industry, that will help facilitate the capital construct of 

smaller insurance companies, whether it be proportional or excess 

protections. 

Mr. LUETKEMEYER. Thank you. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Missouri, Mr. Cleaver, is recognized for 5 

minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I am going to be a little parochial in presenting my questions. 

I am from Missouri, and you have a problem if you live in Missouri 

because if you come to Kansas, people say they land—‘‘I have just 

landed here in Kansas.’’ 

And of course if you land in Kansas, you die, because there is no 

airport. Some sports person just wrote a deal last week about the 

9-0 Chiefs saying, ‘‘We are going to play descendants of Dorothy.’’ 

And of course, I don’t think a woman in Missouri is named Dorothy. 

But one of the things that we have to deal with is we have—the 

Missouri River is the longest river in North America. It is the longest tributary in the United States. 

Well, 54 bridges, all of which are insured by TRIA, or that is a 

part of the insurance. Most people when they think about terrorism, they are thinking of New York, the East Coast, Los Angeles, or maybe Chicago. 

But we have serious targets, or what we think would be targets. 

So this is not, for me, just a committee exercise. It is very real. Our 

power and light company is insured through TRIA. 

I guess one of the questions I am interested in—maybe just hearing any of you—and I try to avoid volatile words, but how many 

of you believe that TRIA is corporate welfare? Is there anybody 

who believes that? 

Mr. DRISCOLL. I will answer that question. I wouldn’t use the 

phrase ‘‘corporate welfare,’’ but there is an unnatural element to 

23 

TRIA in the sense that it is free and you are trying to transfer risk 

for free. And so in that respect it creates unintended consequences 

that in some cases are beneficial, but more often than not are problematic. 

Mr. CLEAVER. Anyone else? 

Mr. Hartwig? 

Mr. HARTWIG. Again, as has been alluded to a number of times, 

I think, on this panel and on the committee, I think that we have 

to look at the unique nature of terrorism risk, that ultimately the 

bearer of that risk should be the entity that possesses the greatest 

information associated with that risk. 

And that is certainly not anybody at this table. In fact, that is 

the Federal Government. 

And so when you are in a position like that, I think we have to 

rethink the particular issue here, that it is absolutely appropriate, 

in a circumstance such as this, that some of the risk be shared in 

a public-private sector manner. 

Mr. CLEAVER. Does TRIA replace what would be significant government exposure, Mr. Seo? 

Mr. SEO. I’m sorry. Would you repeat the question. Does it replace— 

Mr. CLEAVER. Yes. 

Mr. SEO. —what would be— 

Mr. CLEAVER. Significant exposure by the Federal Government. 

Mr. SEO. I see. 

Mr. CLEAVER. By the taxpayers. 

Mr. SEO. Right. Potentially, it does. There is a delicate balance 

in the industry around a risk like this. 

So I think there is some credence to the notion that by taking 

on the risk in a controlled manner through TRIA, the government 

is potentially reducing its long-term liability. 

And actually to answer your question about the welfare, I think 

initially not, but of course, the question is when does it cross over 

and become that way? And that is an over-time issue, not necessarily by-design issue. 

Mr. CLEAVER. Yes. 

Mr. HARTWIG. Sir? 

Could I—just very quickly, it absolutely—TRIA does insulate the 

taxpayer, again, to the tune of many, many tens of billions of dollars. But you are also, in effect, you are buying the delivery mechanism. 

The reality is that the Federal Government has no effective 

means for delivering the benefits in the absence of a TRIA-like 

structure where it utilizes or piggybacks, in effect, on insurers. 

In the absence of a TRIA situation, you wind up with a postSandy, FEMA-type scenario where people are still waiting for their 

Federal Government aid. 

Mr. CLEAVER. Yes. 

Mr. McGovern, what do you think would happen to the uninsured losses if there is a terrorist event? Who do you think will be 

approached to deal with uninsured losses? 

Mr. MCGOVERN. The insurance industry will deal with the insured losses as it has always done— 

Mr. CLEAVER. No, but the uninsured? 

24 

Mr. MCGOVERN. The uninsured losses? 

Mr. CLEAVER. Yes. 

Mr. MCGOVERN. That is a matter for Congress and the Federal 

Government. 

Mr. CLEAVER. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now, the gentleman from New Jersey, Mr. Garrett, is recognized 

for 5 minutes. 

Mr. GARRETT. Again, thank you, Mr. Chairman, for holding this 

hearing. I just have a couple of questions. 

Mr. McGovern, I will start with you, I guess. The CEO of one of 

the world’s larger terrorism insurers was recently asked about the 

modelability of conventional terrorism risk, and that CEO stated 

that the insurance industry ‘‘doesn’t service itself well by claiming 

that terrorism risk can’t be modeled effectively,’’ and ‘‘The argument that the industry cannot underwrite conventional terrorism 

was a classic example of driving business out of the market and 

into the government solutions.’’ 

Would you like to comment? Do you disagree with the statement 

of I guess one of your competitors out there? 

Mr. MCGOVERN. It is true to say that terrorism risk modeling 

does exist. But, as I said in my testimony, it is in its infancy. At 

the end of the day, models are just models. They should inform 

your decision; they shouldn’t drive your decision. 

Models are at their most reliable when they have lots of real-life 

world events inputted, which is why catastrophe risk modeling is 

so much more advanced than terrorism risk modeling, because we 

have had a lot of natural catastrophe events, which makes models 

more reliable. 

Mr. GARRETT. Okay. 

Mr. MCGOVERN. Terrorism risk models are there, but I think 

people have a cautious approach to value of those risk models— 

Mr. GARRETT. How long have you been doing it in Europe, modeling it? 

Mr. MCGOVERN. I wouldn’t want to put a year on it, but clearly— 

Mr. GARRETT. Ballpark, like 5 years, 6 years? 

Mr. MCGOVERN. Probably 20 years. 

Mr. GARRETT. Yes, because it goes back quite a ways, I thought. 

Yes. 

Mr. MCGOVERN. Yes. 

Mr. GARRETT. How many years is an appropriate amount of time 

to say we actually have a model there? 

Mr. MCGOVERN. Thankfully, the frequency of these events is very 

low— 

Mr. GARRETT. Right. 

Mr. MCGOVERN. And that has an impact on the validity of models. 

Mr. GARRETT. Right. 

Dr. Hartwig, you said there are no major structural defects in 

the law right now. Let’s look at Boston. Can you or anybody else 

tell me, was Boston a terrorist attack event? Has that decision 

been made yet? 

Mr. HARTWIG. As defined under TRIA, there has been no certification associated with that. In my testimony, and I think in the 

25 

testimony of others, I think that there has been a call for a clarification of the certification process. 

Mr. GARRETT. That is a pretty big major structural—if we don’t— 

after an event which, if you recall, was— 

Mr. HARTWIG. I think it is generally agreed that there needs to 

be some tightening of that certification process, and I and others 

have called for that. 

Mr. GARRETT. Okay. 

Mr. Driscoll, in order to not establish, but to grow the market 

into these areas, if we were to modify TRIA as it stands right 

now—raise the caps, do some other structural changes, what have 

you—is there an appropriate length of time that we should do so 

in legislation? 

In other words, you have two ends of any spectrum, right? One 

is to say, ‘‘We are going to do this—the next TRIA bill is only going 

to be for 12 months, so the next one is going to be a permanent 

temporary program.’’ 

So what would the industry be looking at in order to be responsive? 

Mr. DRISCOLL. I can only speak for Validus Re rather than the 

industry, but— 

Mr. GARRETT. Okay. 

Mr. DRISCOLL. —from our perspective, the changes to the program that we think would be most beneficial should be largely 

nuanced. 

One, there is a permanence that could be considered in context 

of nuclear, chemical, biological, and radiological. From our perspective, we feel strongly that those are uninsurable risks, not in the 

determination of frequency, but the severity and potential to bankrupt the industry. And so, a government backstop with respect to 

that element or that type of terrorism is vitally important. 

With respect to conventional, the industry capital base is growing. It continues to grow. We are highly confident in its permanence and reliability. 

We would expect that any changes to avoid dislocation in the 

market, whether it to be to workers’ comp insurers or smaller insurers or the largest insurers, should be done gradually over time. 

And so whether that is 2 years or 5 years, there ought to be a 

glide path that would help the industry capital flow in, and respond to the additional demand. 

Mr. GARRETT. Okay. 

And I guess I will just make a comment on a question—that is 

to a question on the other side. At the end of the day, anything 

that we do here is not eliminating the risk. Is that correct? 

Mr. DRISCOLL. Absolutely. 

Mr. GARRETT. And so all we are really doing is deciding who 

pays, whether it is the person who—the individual, the entity who 

has the beneficial use of the asset— 

Mr. DRISCOLL. Yes. 

Mr. GARRETT. —whether that person pays for the fact or the 

privilege or the right of having that asset, or whether it is the 

American taxpayer who is actually footing the bill. 

That is ultimately what we are deciding. Who pays? The person 

who benefits or the taxpayer? 

26 

Mr. DRISCOLL. Absolutely. The strength of our industry is the 

capital construct that helps facilitate fund inflows after disruptive 

events to help rebuild our infrastructure and get our citizens back 

on their feet. 

Mr. GARRETT. Thanks a lot. I appreciate it. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentlewoman from Arizona, Ms. Sinema, is recognized for 5 

minutes. 

Ms. SINEMA. Thank you, Mr. Chairman. 

My question is directed to any of the gentlemen who are on the 

panel. And thank you all so much for being here today. 

My district in Arizona is home to the largest public university in 

the country, Arizona State University. There is significant concern 

at home that with a possible elimination of TRIA coverage or without the opportunity to get TRIA coverage that ASU may not be 

able to afford terrorism coverage on its own. 

I am wondering if any of you could expand on the impact that 

the expiration or adjustment of TRIA would have on our Nation’s 

public universities such as mine. 

Mr. MCGOVERN. I can’t comment specifically on universities, but 

I think if we felt—if Lloyd’s felt that TRIA was crowding out the 

private market, our testimony would be different today. 

Second, and as I have said before and as other panelists have 

said, capacity is in the market because TRIA exists. Without TRIA, 

I think there would be uncertainty for policyholders around the 

country as to whether or not they would be able to get adequate 

coverage for terrorism risk. 

Mr. HARTWIG. And if I could add on specifically to your question 

about universities, when you think about the diversity of the exposures of property, liability, workers’ compensation, exposures that 

exist on a campus like ASU, you are talking about scientific facilities, you are talking about sports stadiums, you are talking about 

dormitories with thousands of students, classrooms with thousands 

of students. You are talking about many other types of—you are 

talking about infrastructure associated with the university. 

You are talking about a type of risk that can only be insured 

today really because of the existence of TRIA, just to echo what Mr. 

McGovern said. It is a very diverse risk and I think one that is particularly dependent on TRIA. 

Ms. SINEMA. Thank you, Mr. Chairman. 

And, Dr. Hartwig, a follow-up question: I remember in the immediate aftermath of September 11th, the commercial property and 

casualty insurance market for terrorism coverage basically evaporated. And then again in 2005 and 2007, when expiration of the 

program was looming in Congress, a majority of insurance companies in our country moved to file conditional exclusions, indicating 

that they wouldn’t be interested in offering terrorism coverage absent TRIA. 

Has anything changed in the market since 2007 that would give 

this panel or this body cause for optimism that the private market 

is willing to accept significantly more terrorism risk than we have 

seen in the past? 

Mr. HARTWIG. Incrementally, over the last 6 or 7 years, we have 

seen some capacity come into the market, and, as I said, incremenVerDate Nov 24 2008 17:39 May 02, 2014 Jkt 086684 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\86684.TXT TERRI
27 

tally. And as I said in my testimony, the reason that capacity came 

in is not in spite of TRIA; it is because of it. 

It is also because of the fact that we have not had a major successful terrorist attack on U.S. soil. Again, if we had had one—and 

there have been dozens of attempts on U.S. soil, thankfully, all but 

one of which has been thwarted—I think we would be having a 

very different conversation here today. 

So at the end of the day, it is likely that these conditional exclusions are going to come back into the market as we move into 2014 

and markets begin to look ahead to the 01/01/2015 period, a period 

in which TRIA might not be in place without a reauthorization. 

Ms. SINEMA. Thank you. 

And Mr. Chairman and panel, one final question. 

Dr. Hartwig, you briefly mentioned the issue of workers’ compensation insurance. Businesses in Arizona are required to purchase workers’ compensation insurance. They don’t have the option 

to exclude coverage for acts of terrorism in the context of workers’ 

comp. So for those that provide workers’ comp coverage, it is mandatory to include this terrorism coverage. 

What would be the impact of this body not reauthorizing TRIA 

or significantly changing the structure of TRIA to individuals who 

are purchasing workers’ compensation for their employees? 

Mr. HARTWIG. Basically, every employer in America has to buy 

workers’ compensation coverage. It is required by law in all 50 

States, not just in Arizona. And it is also the case that under law, 

insurers cannot exclude terrorism coverage under a workers’ compensation policy. 

So I think we have heard several times on the panel already that 

is a particular area of concern that really if there is a bottleneck 

in terms of capacity, it exists in a number of places, but it is particularly explicit or particularly strong in the area of workers’ compensation. 

Ms. SINEMA. Thank you, Mr. Chairman. 

And thank you, Dr. Hartwig. 

Mr. Chairman, this is a growing concern for employers in my district so thank you for allowing me the opportunity to speak. 

Mr. DRISCOLL. Mr. Chairman, may I have a moment just to respond to one of the earlier questions, with respect to post-event and 

the industry response? 

I think it is important to understand that the perception around 

transnational terrorism risk prior to 2011 within the insurance industry was that it was not a major risk. And so I think it is reasonable post-event for there to be a natural reassessment of risk. We 

see that with any unique event that occurs in our industry. 

Since that time, the market has responded with significant additional capacity and additional capital for terrorism risk. 

Ms. SINEMA. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Florida, Mr. Ross, is recognized for 

5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

As I mentioned in my opening statement, I very much believe in 

market-based solutions for risk problems, and I see TRIA as being 

a necessary evil at the time that we created it. Based on the testiVerDate Nov 24 2008 17:39 May 02, 2014 Jkt 086684 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\86684.TXT TERRI
28 

mony today, I understand the significance of maintaining TRIA in 

place, but I also understand that it is very important that we have 

to make a transition. 

And hearing from the panel today that we have a significant 

amount of private capital and capacity in the private markets out 

there is very encouraging. Now, how do we make that transition 

to provide more incentives and less impediments, is an issue that 

we have to face. 

Dr. Seo, one of the things that has intrigued me ever since I read 

your article several years ago about the Nation’s casino has been 

the use of ILSs. These cat bonds—we have used them in Florida 

for our Florida Hurricane Catastrophe Fund—seem to be an opportunity for diversification and growth, in terms of market share, 

that may offer us an opportunity to make available more capacity 

in the private sector. 

You mention in your testimony that if terrorism risk were bundled with natural catastrophe risk, such as hurricane and earthquake, the efficiency of ILS coverage for terrorism risk could potentially be improved. Would you elaborate how this would benefit all 

types of coverage, not only terrorism, but maybe also natural catastrophe coverage? 

Mr. SEO. In this case, actually, the benefit was to the terrorism 

risk. 

Mr. ROSS. Right. 

Mr. SEO. And I would say that the impact on the natural catastrophe coverage is relatively neutral. 

Mr. ROSS. But it wouldn’t—would you consider there would be an 

increase or a decrease, or would it just remain stable? 

Mr. SEO. Overall efficiency in the system would be increased for 

sure— 

Mr. ROSS. Good. 

Mr. SEO. —by doing this type of bundling arrangement. See, that 

is the difficulty when you isolate risk too much on a standalone 

basis—any risk—it becomes very expensive to cover. 

Mr. ROSS. So you combine the risks? 

Mr. SEO. Correct. 

Mr. ROSS. Let me ask you this question: Could we—and I hate 

to digress on this, but I have to ask this question because the NFIP 

is an issue that we have to face, but could the use of these insurance-linked securities assist us in diluting and reducing the 

amount of premiums in the flood insurance program? 

Mr. SEO. Yes, absolutely. 

Mr. ROSS. Good. 

Mr. Driscoll, one of the things that I am concerned about is not 

only incentives, but impediments to private capital. And I am sure 

you are familiar with the Obama-Neal reinsurance tax that is out 

there, which concerns me greatly. 

Do you feel that this tax would limit the capacity or the capability of insurers and reinsurers to take on more risk from terrorism or flooding and thus be counterproductive to our long-term 

plan to try to bring back or at least create a private market and 

reduce the size of government involvement? 

Mr. DRISCOLL. Yes. Whether it is flooding, terrorism, or any 

other natural peril, reinsurers need to be able to pool risk to gain 

29 

diversification. And any limits on affiliated reinsurance would impede global risk-pooling— 

Mr. ROSS. Significantly. 

Mr. DRISCOLL. —and that, in essence, fragments group capital 

and would impede market development, and I think ultimately it 

increases consumer price. 

Mr. ROSS. Dr. Hartwig, it has been talked about, in fact by Mr. 

Csiszar, with regard to workers’ compensation insurance. Look, it 

is as strict liability statute. It requires that every employer provide 

it. We understand that it is backed predominantly by reinsurance 

and reinsurance instruments. 

And I think that the impact financially doesn’t come initially 

from the occurrence of an event as to the availability and affordability of workers’ comp insurance. It has to do with whether there 

is a market that allows for affordable and available workers’ compensation insurance. 

So I guess my question is—and I will go to you, Dr. Hartwig— 

TRIA expires December in 2014. If it expires, what impact would 

there be on the workers’ compensation market for availability and 

affordability of insurance? 

Mr. HARTWIG. For workers’ compensation, I think there would be 

a pretty swift and a pretty significant impact. It would begin well 

before the end of next year, as again, we are looking forward into 

2015. But some carriers might even position themselves ahead of 

time. 

Under the expectation of a lack of TRIA protection beginning in 

2015 you would expect insurers, because of this aggregation issue 

that they have with respect to workers’ comp risk, property risk, 

liability risk, and everything that they are exposed to, they would 

need to pare that back in some way. 

They are also very concerned about workers’ comp because the 

potential liability under a workers’ comp claim is effectively unlimited. A building has a certain value; for a human life, someone who 

may be a quadriplegic, it is unbounded. 

Mr. ROSS. Quickly, Mr. Driscoll, I have 10 seconds—you talked 

about risk mitigation. I think risk management is absolutely important. What do you consider to be risk mitigation in terrorism insurance? 

Mr. DRISCOLL. I think, very quickly in context of property, because it is a huge topic— 

Mr. ROSS. Structural. 

Mr. DRISCOLL. Structurally, I think there are boundaries that 

could be put in place. There are security measures that are put in 

place. There are a variety of factors. 

All of these things are methods to not only improve the risk but 

to actually reduce the premium associated with the terrorism surcharge. 

Mr. ROSS. Thank you. 

My time has expired. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentlewoman from Ohio, Mrs. Beatty, is recognized for 5 

minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman, and Ranking 

Member Capuano. 

30 

And again, to all of our panelists, let me just repeat what I said 

in my opening remarks, and thank you for being here and for your 

testimony. 

As you can probably imagine, it is just amazing for me to be a 

freshman serving here in Congress and to be able to go back and 

say to my constituents that I have had the opportunity to address 

such scholarly individuals as you. 

It is also equally amazing to be sitting here and talking about 

all of the issues with TRIA that we are talking about today in this 

wonderful America that we live in. It is very difficult for me to 

even believe that I would be sitting in a hearing where people 

would be against TRIA, against anything that would be protecting 

us and insuring us from terrorism. 

I want to start by also thanking you, because I used to represent 

one of the largest single campus universities in the United States 

and worked there as a senior vice president. So when you think 

about not only universities but K–12 institutions, I want my constituents to see that we are putting a face on what we are doing. 

And I appreciated your answers and responses to that as well as 

to the workers’ compensation question that my colleague asked of 

you. 

Let me switch and ask you, as we think about policy price sensitivities and government support, has anyone examined the price 

sensitivities of changes in the trigger value, deductible amount, or 

co-sharing percentages? 

And I can start with you, Mr. McGovern. 

Mr. MCGOVERN. We haven’t done any of that analysis. And that 

clearly is the balancing act that Congress is going to need to grapple with as it looks at whether it wants to make changes to the 

TRIA program. 

On the one hand, how do you make changes to the program to 

introduce more private capacity into the market without, on the 

other hand, reducing take-up rates in the market or increasing 

price? Take-up rates generally seem to be around 60 percent nationwide. That is regarded as a success. 

If you are changing the program in the name of increasing taxpayer protection, if those changes result in higher prices and lower 

take-up rates, I would just ask you whether you have achieved 

what you set out to achieve in making those changes. 

Mrs. BEATTY. Any other comments on that? 

Mr. CSISZAR. If I could add to that, again, if I look at all the natural catastrophes, and if I look at an event like Hurricane Sandy, 

in the aftermath of every event, reinsurance prices actually drop, 

because new capacity comes into the industry in the expectation of 

making a greater profit. And the next thing you know, they are all 

going after market share and the profitability that they expected 

evaporates rather quickly and prices drop. 

Mrs. BEATTY. Let me also ask you, what sort of contingency planning has any of your industries undertaken to ensure continuity of 

coverages for businesses that have secured terrorism risk coverage 

in the event that there, God forbid, would be a terrorist attack 

which results in damages that are in excess of the $100 billion cap? 

Mr. MCGOVERN. As I mentioned in my testimony, I think Lloyd’s 

has a reputation for continuing to provide coverage when other peoVerDate Nov 24 2008 17:39 May 02, 2014 Jkt 086684 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\86684.TXT TERRI
31 

ple don’t. And certainly that was the case after 9/11, as was noted 

by Congresswoman Maloney. 

Lloyd’s takes its commitments to its policyholders extremely seriously, and whether it is after a natural catastrophe event or after 

a terrorism event, we will continue to provide as much capacity as 

we are able to. But as I said in my testimony, we always have to 

be very mindful of how we are managing our aggregate exposures. 

Mrs. BEATTY. And lastly, as we approach the 2014 date, as we 

look at reauthorization, we have proposals before us with a 5-year 

reauthorization and a 10-year reauthorization. Do you have any 

opinions on that, assuming you would be favorable to a 5- or 10- 

year reauthorization? 

Mr. MCGOVERN. Lloyd’s is in favor of a long-term extension to 

TRIA. Whether or not Congress wishes to make any changes to the 

TRIA program, our belief is that those should be made in the context of maintaining the stability that the TRIA program has already provided, so basically keeping the structure of TRIA as is. 

If there are going to be changes, bearing in mind the balancing 

act that I mentioned earlier, those should be small, incremental 

changes over a long period of time, which would allow the industry 

to adapt. 

Mr. HARTWIG. And if I could echo that, again, I think what 

makes the most sense from an economic stability standpoint, from 

a stability standpoint within the insurance business in general, is 

a long-term extension. And I should add that when we look abroad 

at many of the terrorism insurance programs that are abroad, 

these are long-term permanent programs in effect. They are permanent. 

Mrs. BEATTY. Thank you. That sounds like a 10-year extension 

to me. 

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from Wisconsin, Mr. Duffy, is recognized 

for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I appreciate the panel appearing today. I just want to be clear 

on a couple of facts. In the private market policyholders actually 

pay a premium for the coverage that they receive. Is that correct? 

Does anybody disagree with that? 

And the way that the current TRIA legislation works is that the 

taxpayer does not collect a premium for the coverage that they provide. Is that also correct? Do we all agree with that? 

Does that provide a competitive advantage when you look at the 

private market getting involved in terrorism insurance, Mr. 

Csiszar? 

Mr. CSISZAR. Clearly, it is a subsidy. 

Mr. DUFFY. Thank you. I would agree. 

Mr. CSISZAR. And to the extent that it is a subsidy, I think my 

friend, Mr. Driscoll, put it well before. The price signals disappear. 

This is is not a natural market, whereas if you were to charge a 

price—and I would suggest we don’t make the same mistake as we 

did with the flood insurance, which we underpriced, which made 

things worse, actually, in a way—but there is certainly that if you 

can have an actuarially sound premium and that would send the 

32 

appropriate price signals to the market, not just in terms of capacity but also mitigation efforts. 

Mr. DUFFY. Does anybody disagree with that on the panel? 

Mr. DRISCOLL. I am a little dubious about the ability of the Federal Government to set a well-established and sound actuarial 

price, and I say that with the utmost passion—utmost respect. I 

think the private market can effectively do that, but I am concerned about— 

Mr. DUFFY. But if people— 

Mr. DRISCOLL. I am concerned that if you establish a premium 

rate within TRIA, it truly does become a permanent vehicle. 

Mr. DUFFY. And I share that concern as well, but to think that 

we provide reinsurance and don’t collect a premium, though, I 

don’t—I share your concern, too, about the government being able 

to price that. 

Mr. DRISCOLL. There is a post-event recoupment mechanism, so 

there should be, it is never net neutral, but it is designed to be net 

neutral in terms of the impact on the taxpayer. But it is—again, 

it is—there are challenges there. 

Mr. DUFFY. I agree. My concern is that no market works like 

that, though, that we are going to try to recoup the cost at some 

later point from people who may be in the space or not be in the 

space. It doesn’t make a lot of sense for me when I try to protect 

the taxpayer, but I do get the recoupment. 

Mr. McGovern, would you like to respond? 

Mr. MCGOVERN. I was just going to add that our experience in 

the U.K. with Pool Re, where the industry does pay for the government backstop, that is not an actuarial-based pricing; it is a pricing 

based off your relevant premium. So it is not actuarially sound as 

a pricing mechanism. It effectively amounts to a tax, and clearly 

what you have is then you create an infrastructure and bureaucracy around the management of the collection and distribution of 

those funds. 

Mr. DUFFY. But it is actually—it is not a tax because they are 

providing a product, right? You are actually getting a product, 

which is reinsurance for terrorism. So the tax argument doesn’t 

really work, does it? 

Mr. MCGOVERN. It creates a fund. That is the first fund available 

for losses outside of people’s limits. 

Mr. DUFFY. But one would argue that you tax to then redistribute. You are actually paying a fee for a service, which is reinsurance, correct? 

Mr. MCGOVERN. Yes, that is right. 

Mr. DUFFY. And so I want to make sure that—I don’t think the 

argument that this is a tax holds water. 

Mr. Csiszar as well, is it your testimony that you believe that the 

$100 million trigger is too low and it could actually go up to $20 

billion? Is that your testimony? 

Mr. CSISZAR. Yes. 

Mr. DUFFY. Okay. Does anyone disagree that the $100 million 

trigger is too low, or does everyone—does the panel think—Mr. 

Hartwig, do you think the $100 million trigger is about right? 

Mr. HARTWIG. I think the programs work very well with the current $100 million trigger, and when we look at the fact that the 

33 

industry overall is retaining somewhere in the $35 billion range in 

aggregate, we can see that, in fact, within that space, there has 

been plenty of participation by private insurers, by private reinsurers, and there is the ability to expand. As we have already heard, there is only maybe $7 billion, $8 bil- lion, $9 billion dollars of private reinsurance cover for the terrorism 

market in place today. So there is plenty of gap, there is plenty of 

room in here to expand. 

Mr. DRISCOLL. Just to clarify, on that $7 billion, $8 billion dollars, that is standalone terrorism treaty reinsurance sold in the 

United States. There are many, many billions of dollars of other 

terrorism limit sold in the reinsurance market that is bundled together with property and/or casualty. So the market is substantially bigger than—I just want to be crystal clear on that. 

Mr. DUFFY. Mr. Driscoll, do you agree that we could increase the 

$100 million trigger? 

Mr. DRISCOLL. I think with respect to conventional terrorism— 

with nuclear, chemical, biological, and radiological, it is a different 

dynamic. It is a different type of peril. 

But I think with conventional terrorism, the single risk market 

right now has been estimated by third parties as $2 billion to $2.5 

billion. That is one single location. These are large commercial locations, typically in metropolitan areas. 

I think if you view the $100 million trigger in the context of a 

single risk, undoubtedly the market has much more capacity for 

that. So yes, I would agree. 

Mr. DUFFY. My time has expired. I yield back. 

I would have liked to have gotten to you, Mr. Csiszar. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from California, Mr. Sherman, is recognized for 

5 minutes. 

Mr. SHERMAN. I understand the desire to try to protect the taxpayer and the Treasury, but as we have seen with flood insurance, 

but even more here with terrorism insurance, if the event occurs 

Congress is going to pass the supplemental appropriations bill. We 

can come into this room and be as stingy as Ayn Rand might inspire us to be, but if there is an actual terrorist instance and we 

are on the Floor, we will be as generous as Monty Hall. 

There is no way to protect the Treasury, especially when we are 

in here. If a hurricane hits, it is not the fault of the Federal Government. And I realize there are environmentalists and climate 

change and whatever, but certainly the hurricanes that have hit so 

far. If a terrorist attack occurs on U.S. soil, that will be regarded 

as a failure of American antiterrorism policy directed by the Federal Government. 

So I think our effort here is to develop a system by which the 

Federal Government will either get premiums in advance or a recruitment process, encourage people to have insurance, and know 

that we will be providing aid to those who suffer uninsured losses 

from a terrorist act. 

Now, Dr. Hartwig, there have been some who maintain that 

there have been major improvements in the capital sector’s ability 

to model and price for terrorism risk. Are you aware of such improvements? 

34 

Mr. Royce and I just got out of the Foreign Affairs Committee. 

I don’t think there is anyone involved in foreign policy who could 

give you an actuarially reasonable estimate of what the risk is of 

a major terrorist act here in the United States. Do you have any— 

could anybody in your world know how to do this? 

Mr. HARTWIG. I think nobody at this table has accurately predicted a terrorist attack before it happened, and I don’t think we 

are about to. And we have heard several times that our ability to 

model terrorism is very crude and in early stages relative to natural disaster risks such as hurricanes, where we have thousands 

and thousands of actual data points to run in the system. We have 

absolutely nothing close to that when it comes to terrorism. 

Mr. SHERMAN. And the very fact that we have different rates in 

different areas—I represent a desert; flood insurance is cheap or 

unnecessary in most areas. Earthquake insurance is more expensive in Los Angeles than it is in Kansas. That is because you actually know what might happen. 

I can’t tell you that the Rose Bowl has less or more risk of a terrorist attack than some stadium in another part of the country. 

Mr. Csiszar, you said that yield may drive or is driving capital 

flows into the private reinsurance market. We are seeing yields on 

bonds and other safer instruments going up. Wouldn’t that leave 

the need for government to continue to act in this capacity, at least 

for several more years as we see yields on more traditional investments growing? 

Mr. CSISZAR. This sector, I think it is fair to say, attracts investors that have a taste for higher risk. And I don’t think that doesn’t 

change. That risk premium keeps moving up with the yield on 

Treasuries and so on. You will always have that spread. 

So my sense of it is that it is probably more permanent capital, 

but on the other hand, the jury is still out because this is a phenomenon that we have only seen in the last 3 or 4 or 5 years since 

the financial crisis. 

Mr. SHERMAN. Okay, but it is—the additional advantage this 

market has due to the low risks—low yields prevailing in the economy will probably evaporate before Congress acts on the legislation 

that we are considering. 

Mr. CSISZAR. It depends on what the Federal Reserve does, I 

guess. 

Mr. SHERMAN. We will have another hearing on that. 

Let’s see—my time has virtually expired. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And Mr. Royce from California is recognized for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. 

As chairman of the House Foreign Affairs Committee, it is clear 

to me that the threat of global terrorism has not dissipated since 

2001. So the question before us today is not whether terrorism insurance is needed for commercial policyholders; the question is 

what role the Federal Government should play, and will play going 

forward in the marketplace. 

And I was going to ask Mr. Driscoll, in your opening statement 

you state that there is adequate reinsurance capacity to cover the 

insurance industry’s current $27.5 billion retention under TRIA, 

and that capacity could grow over time. 

35 

How do we gauge this capacity? What sources and numbers 

should we be looking to as policymakers? How do we maximize the 

capital stock there, the private capital stock? 

And then I was going to ask Mr. McGovern for his comments on 

this as well. If this committee does adopt a policy of changing the 

industry retention level, what numbers should we look to? Should 

it be flexible? Should it be based on market conditions? 

And so let’s hear from you gentlemen, if I could. 

Mr. DRISCOLL. Sure. I think it is probably helpful to think about 

that $27.5 billion in the context of a few other figures. 

The notional limit purchased on a global basis for natural catastrophe is over $300 billion currently. The capital base of the industry is close to half a trillion dollars. 

Terrorism within the United States on a standalone basis, as I 

noted earlier, is $7 billion to $8 billion, but a number substantially 

larger than that if you include terrorism that is purchased on a 

bundled basis with other traditional insurance coverages. 

And so I think that the best way to source that information, the 

best way to collect a view on industry capital is probably work with 

trade bodies like the Reinsurance Association of America (RAA) or 

Avier, which represents Bermuda insurance and reinsurance carriers, and clearly working with Lloyd’s of London, which is not only 

one of the largest global writers of insurance terrorism but also reinsurance terrorism. 

Mr. ROYCE. Let’s hear what Lloyd’s of London has to say about 

it. 

Mr. MCGOVERN. Congressman, it is very difficult to predict, and 

you are probably sensing that there are some differences of opinion 

about what we think the reinsurance industry could cope with. And 

I think the problem is that I think the reinsurance industry is very 

well-capitalized, unquestionably, but that doesn’t necessarily lead 

to a very dramatic increase in the reinsurer’s ability to provide reinsurance capacity, particularly in major urban areas with large accumulations of asset values, when the decisions about the deployment of reinsurance capacity will come down to an assessment 

about how individual reinsurers are managing their aggregate exposures. 

So it is a complex issue. It is not my place to sort of throw out 

numbers without understanding what the implications would be. 

Because as I have said before, the balancing act for Congress in 

looking at TRIA renewal is if step changes are made with the intention of increasing private market participation, but that 

doesn’t—that leads to a reduction in take-up rates among commercial policyholders, which are currently pretty good, then actually 

you have reduced the amount of the insurance capital at risk rather than increased it. 

Mr. ROYCE. Let me ask another question, and it goes back to 

something we did in 2005 in the House. It never made it into final 

law, but in our version of TRIA reauthorization at that time there 

was a mechanism allowing direct writers to establish TRIA capital 

reserve funds, and these funds gave the option to set aside premiums collected under TRIA to help ensure that taxpayers are repaid for government outlays in the event of an attack. Insurer obliVerDate Nov 24 2008 17:39 May 02, 2014 Jkt 086684 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\86684.TXT TERRI
36 

gations under the program, including deductibles and including the 

co-share requirements, could also be met with these funds. 

And I would ask Mr. Hartwig and Mr. Csiszar, do you support 

looking at similar reserve mechanisms as we look towards TRIA reauthorization? 

Mr. HARTWIG. If you are talking about reserving in advance 

types of situations, and I think maybe that is what you are discussing there, I think that there has historically been an issue with 

that, and the issue with that is these typically wouldn’t be recognized for tax purposes. And so, these become extraordinarily expensive. 

Mr. ROYCE. We had believed at the time that we had worked out 

something with the Ways and Means Committee that would guarantee that we had avoided that pitfall, but— 

Mr. HARTWIG. That is the principal objection I have heard in the 

past, so I am not sure it is mine to render a final opinion on that. 

I certainly would defer to the advocacy trades in the organization 

who would be in contact with their members on that. 

Mr. CSISZAR. Congressman, I didn’t mention it in my verbal summary, but in my written testimony it is pretty clear that I would 

support that kind of a reserve mechanism. 

The reality of it is that European companies—the U.K., France, 

Italy, Germany, Spain, you name it, the OECD, European OECD 

countries—do, in fact, have what they call equalization reserves. 

And not just for terrorism, but for catastrophes in general. 

Mr. ROYCE. I think we should rename them, Mr. Chairman. 

Thank you, Mr. Csiszar. I appreciate it. 

My time has expired. Thank you, sir. 

Chairman NEUGEBAUER. I thank the gentleman. 

The ranking member of the subcommittee, Mr. Capuano, is recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

I want to thank the members of the panel for being here again 

for another TRIA hearing. 

I just want to be clear: There is no one on this panel who actually believes that if, God forbid, there was another significant terrorist attack in a downtown metropolitan area or in a cornfield in 

the middle of the Breadbasket that the American people should not 

respond to that immediately and do whatever it took to deal with 

the issues. Does anybody here think that we should not respond? 

I knew the answer is no. I presume the answer is no. But if you 

have the coverage to say we shouldn’t, please do. 

So that being the case, oh, go ahead? 

Mr. SEO. I’m sorry. I am not sure what you mean by respond. 

Respond— 

Mr. CAPUANO. Respond to whatever it took to deal with the issue, 

with or without TRIA or anything else. Do you think that the U.S. 

Government, the people of America, should allow their fellow citizens to suffer a nuclear or biological attack without action? 

I didn’t think so. So now, all we are talking about is when do we 

step in. We are not talking about whether we will. 

There is nothing that anybody here has suggested nor has suggested to me ever that the American people shouldn’t step in at 

37 

some point. The question is when? What is the degree? That is the 

argument from day one. 

And here is the question—the question that I thought Mrs. 

Beatty asked very clearly that did not get a response. It is my understanding that when any business—not just insurance—when 

they have a larger risk of loss, that is a major factor in determining 

the cost of the item. 

When risk of loss goes up, cost goes up. That is natural. Commercial enterprise. That is the way it should be. 

So therefore, Mr. McGovern, if I told you your company now would be exposed to something more than $100 million, now you 

are going to be potentially exposed to $500 million, pick a number, 

would that not play a factor in your determining rates to be 

charged? 

Mr. MCGOVERN. It certainly would. The risk profile changes and 

the costs associated— 

Mr. CAPUANO. Mr. Driscoll, would you take that into consideration in determining rates? 

Mr. DRISCOLL. We manage risk concurrent with the size of our 

capital base, so yes. I think the— 

Mr. CAPUANO. So risk doesn’t matter? Potential loss doesn’t matter? 

Mr. DRISCOLL. —size of the industry, loss potential is important. 

Mr. CAPUANO. No, no, I am asking for your company. Your company— 

Mr. DRISCOLL. We take as much risk on as we think is prudent 

with respect to managing for our shareholders and— 

Mr. CAPUANO. And risk doesn’t play a factor in determining 

rates? 

Mr. DRISCOLL. No, risk, absolutely does. That is what I— 

Mr. CAPUANO. So it does? 

Mr. DRISCOLL. Yes. 

Mr. CAPUANO. So if your risk is exposed to a higher number, your 

rates will go up. It is natural. I don’t think it is a complicated question. 

Mr. DRISCOLL. Sure, yes. 

Mr. CAPUANO. So if we change these triggers, it is unequivocal, 

it is indebatable that rates will go up. Now, how much? Nobody 

seems to know or seem to care, but they go up. 

When rates go up, what happens when things get more expensive? People don’t buy it. Therefore the take-up rate goes down. 

That 62 percent or whatever it is we are hitting now goes down. 

Does anyone here think that the take-up rate should go down? 

See, here we are again. We have a system with all of its problems. And again, I have said from day one—I was here every time 

we have had a TRIA hearing—I don’t like the program. I would 

like to come up with a better program. But it seems to be working. 

We have a great take-up rate that the industry told us a long 

time ago that 60 percent take-up rate is reasonable. It is normal. 

It is the target. We are there. I don’t get any complaints from people buying the insurance that it is too expensive. 

Mr. DUFFY. Would the gentleman yield? 

Mr. CAPUANO. No, not at the moment. 

Mr. DUFFY. Okay. 

38 

Mr. CAPUANO. I didn’t interrupt you, so but what you have—go 

right ahead. 

Mr. DUFFY. I was going to ask you, are we talking about TRIA 

or Obamacare? I am— 

Mr. CAPUANO. That is exactly why I didn’t yield. 

Mr. DRISCOLL. Congressman, can I— 

Mr. CAPUANO. I have just spent an hour-and-a-half listening to 

your nonsense, and you can’t listen for 5 minutes to mine. 

Mr. DRISCOLL. Congressman, can I just with respect to the evolution of TRIA, to your point on rates, I think we would all agree 

that since 2001, the average per unit cost for terrorism has gone 

down pretty consistently, whether it be metropolitan or rural areas. 

We have seen an expansion of the private market— 

Mr. CAPUANO. My time is limited. This is not a new issue to me. 

I just look at a program that is working, that I am not getting 

any complaints about except by a few idealistic ivory tower types, 

but I am not getting complaints about from anybody in the business, and I am being asked to fix something that doesn’t seem to 

be broken. It seems to be working. 

And that kind of concerns me, particularly when I am also told 

that—we are told we are interested in small businesses coming in, 

yet I am also told—tell me if I am wrong—that 67 percent of the 

companies writing TRIA insurance right now are valued at less 

than $100 million. If we change that trigger, we would probably 

push a whole bunch of them out. 

How is that good for competition and pricing? Now, I am not opposed—I am not sitting here philosophically telling you TRIA is 

wonderful. I am actually agreeing, it is not. 

But unless I hear a specific proposal with specific consequences 

from those proposals so they have some idea what we are doing, 

it is awfully difficult to argue that we should mess with something 

that is working, that has worked reasonably well, that no one is 

complaining about. 

And so therefore, if you have concerns about the program, I 

share them, but I think you have an obligation to give us specific 

proposals with specific consequences of those proposals as you see 

them. And then, we can have a discussion. 

Other than that, this is a very nice and interesting philosophical 

discussion that doesn’t amount to a hill of beans when everything 

is said and done because I still need things built, I still need people 

employed, and I still use up more of my time than I should. 

Thank you, Mr. Chairman, for your indulgence. 

Chairman NEUGEBAUER. I thank the gentlemen. 

And now the gentleman from Ohio, Mr. Stivers, is recognized for 

5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you having 

this hearing. 

The benefit of going last is all the stupid questions have already 

been asked, and if you are smart, you know what to stay away 

from. I want to try to use my time as a summary. 

You all agree that TRIA should be authorized, correct? Could we 

just go down the line? 

Mr. MCGOVERN. Agreed. 

39 

Mr. DRISCOLL. Yes. We are proposing modifications, but overall 

agreed. 

Mr. STIVERS. Yes. I understand. 

Mr. CSISZAR. Yes. 

Mr. SEO. Yes. 

Mr. STIVERS. All right, so the panel all agreed that TRIA should 

be reauthorized. 

And, Dr. Hartwig, I want to focus—I want to correct the record 

on something. A few of our committee members have said something that is incorrect in this hearing and your testimony helped 

bear it out, but is recoupment limited to only $27.5 billion under 

TRIA or can it go up? 

Mr. HARTWIG. No. The $27.5 billion is basically the industry’s retention. Above that, there are a couple of recoupment mechanisms. 

One is mandatory— 

Mr. STIVERS. The Treasury Secretary can allow recoupment to go 

above that amount, correct? Yes or no? That is all I need. Thank 

you. 

Mr. HARTWIG. Yes. Exactly, yes, to the top. 

Mr. STIVERS. Thank you so much. 

So let’s talk about some changes you all agree on, I believe, from 

listening to your testimony. You all agree that we need a certification timeline, correct? Is there anybody who disagrees with that? 

Okay. And I have heard most of you say, and I think there is— 

Mr. Csiszar is maybe a holdout, that changes in the program on 

an incremental basis, on a threshold trigger, on an aggregate retention, and a copay of excess retention, as long as it is incremental, 

I think four of the five of you agree with that. Let’s—hold on, let’s 

make sure that that is correct. Is that correct? 

Mr. CSISZAR. Make it five out of five— 

Mr. STIVERS. Okay, five out of five agree that incremental changes—but $20 billion is a little bit more than incremental, sir. 

Okay. So you all agree, five out of five, that some incremental 

changes make some sense, and I think that is really important to 

note. 

And I want to take off on something that Mr. Capuano just 

asked. I want to think through some of the risks as we make 

changes. I happen to represent a district that has grange insurance, motorists’ insurance, State auto insurance, some small P&C 

and workers’ comp carriers that, if the changes are too big, too 

quick, the result will be that those smaller companies will exit the 

marketplace, and it will actually concentrate the risk in fewer companies, and will there or will there not be fewer private dollars at 

risk in the marketplace because it will be concentrated in fewer 

companies? 

Would everybody agree with that statement? Would anybody disagree with that statement? Let me—nobody disagreed. Okay. 

So I think that it is really important that we pay attention and 

only make incremental changes so as not to push the small insurers out of the marketplace. And, I think that you all agreed that 

there is more private capital in the marketplace now that is competing for market share and actually resulting in lower prices for 

P&C and workers’ comp with regard to the terrorism risk out 

there. As long as we make those incremental changes, is it true to 

40 

say that the private capital and the increase of private capital will 

be deployed in a way as to continue to decrease the prices for ultimate customers over the time period? 

Isn’t that where the private capital will deploy, Mr. Hartwig? Do 

you want to— 

Mr. HARTWIG. Assuming no major event or sequence of events. 

Mr. STIVERS. Correct. Right. Okay. Well, we also haven’t had a 

major event since 2001. 

Mr. HARTWIG. I think it is easy to underplay the importance of 

that. 

Mr. STIVERS. Yes. And that is why we are here in a time in 2013 

when the program has actually never been used, so—and I do want 

to just engage in a conversation with Mr. Csiszar, because you 

have—I think you are the—are you the only one on the panel who 

wants to charge an up-front premium? 

Because I actually think that the current mechanism works pretty well. There is a recoupment on the back end and I believe it will 

happen. I believe it is set in such a way that it can happen. We 

can change and play with the numbers in a way, but I am frankly 

worried because the Federal Government has such a horrendous 

record, whether it is FHA, flood insurance—any time the Federal 

Government actually tries to price risk, it is a horrendous disaster, 

and I guess I am just curious why you would want to do that in 

this case? 

Mr. CSISZAR. Better to have something than nothing— 

Mr. STIVERS. Okay. I understand, better to have something than 

nothing. However, the recoupment at 133 percent is something, 

and it is a mechanism that I believe will work. It is currently guaranteed on the first $27.5 billion, but I think there is a way to 

change some of those things in an incremental way over time. 

In fact, every time we have reauthorized TRIA, we have messed 

around or moved around the aggregate retention, the copay for excessive reserves, and also the trigger. So it is logical to see that we 

can move those things, but I think in an incremental way. 

So, thank you for your testimony. I think you have given us great 

perspective on the fact that we need to reauthorize TRIA and we 

need to do it pretty soon because there are people who are writing 

policies starting in January that actually will go past the expiration date, and so that creates some real uncertainty in the marketplace. 

Again, thank you for your testimony. I’m sorry I have gone over 

my time, but I look forward to working constructively with Republicans and Democrats to get TRIA reauthorized. Thank you all. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And I would like to thank each of our witnesses today. I think 

we have had a productive session today. 

I thank my colleagues for participating in a very productive dialogue. As I said at the beginning, I think it is important now that 

the committee have a swift and deliberative process here to bring 

some certainty to the market. 

While this program expires in 13 months, many of these policies 

will begin to be written here right after the first of the year, and 

41 

so it is my intention to move forward in a way to bring as much 

certainty to the marketplace as we can. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is now adjourned. 

[Whereupon, at 12:06 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

November 13, 2013 

44 


86684.001

TESTIMONY OF ERNEST N. CSISZAR 

Associate Fellow 

R Street Institute 

"The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer 

Exposure" 

House Financial Services Subcommittee on Housing and Insurance 

November 13, 2013 
45 


86684.002

2 

My name is Ernest N. Csiszar and I am a former insurance commissioner from the State of South 

Carolina and former President of the National Association of Insurance Commissioners ("NAIC"). I am 

currently a Clinical Professor of Insurance at the University of South Carolina's Darla Moore School of 

Business and I am an Associate Fellow of the R Street Institute, a public policy think tank devoted to a 

free market economy. I also serve as a Director on the Boards of a number of property and casualty 

insurance companies, induding a specialty company that underwrites Workers' Compensation coverage. 

I am also a member of the Board of Directors of a large infrastructure development company that 

purchases significant amounts of terrorism insurance coverage for its projects. 

I am pleased to appear before you today so as to share my perspective on two different, albeit related, 

matters: 

(1) Whether or not the Terrorism Risk Insurance Act ("TRIA"), as amended and currently 

scheduled to sunset at year-end 2014, should be extended or renewed; and 

(2) Whether there are any legislative or regulatory measures that could be implemented to 

make the market for private terrorism insurance more attractive and enhance the growth of 

insurance-linked securities ("ILS"). 

I thank and commend Chairman Neugebauer for holding this important hearing and I welcome the 

privilege to address the Subcommittee on Housing and Insurance. 

(1) THE RENEWAL OR EXTENSION OF TRIA 

Let me state at the very outset that I favor the renewal of TRIA, albeit with some significant 

amendments. There are times when, even as a committed opponent of government intrusion, I must 

admit that a private market may have failed or may not become fully functional without some 

intervention by government. Terrorism insurance happens to fall into that category. I do not believe 
46 


86684.003

3 

that the insurance and reinsurance industries are ready to bear the entire burden of losses from one or 

more major terrorism events, particularly those committed by nuclear, biological, chemical, or 

radioactive means (UNBCR"), or some form of cyber-assault. Nor for that matter are the capital markets 

immediately ready to stand in place of TRIA for those types of risk. Terrorism continues to provide the 

most devastating, expensive, and disruptive loss scenarios imaginable and matters such as the current 

unrest in the Middle East and North Africa have only exacerbated the concerns with underwriting 

terrorism insurance within the insurance and reinsurance industries. 

Nonetheless, genuine progress is being made in developing the private terrorism insurance market. 

Modeling has improved, underwriting is more nuanced, and there has been an influx of new private 

capital into the market. Capacity in the private market is up, competition is fierce and prices are down, 

and a sizable market for private standalone global coverage has developed. I am convinced however 

that a failure to renew TRIA in the face of the continuing unabated threat of terrorism - thereby 

eliminating the $100 billion federal backstop as well as the mandate to offer coverage - would lead to 

severe disruptions in availability, exclusion, and pricing. The risk of that occurring is simply too high. 

Reinsurers, in particular, can enter and exit a market freely as relatively unregulated entities. The 

industry tends to react to a shock by withdrawing capacity, exiting entirely from the impacted market, 

making prices unattractive to buyers, or excluding coverage. Dramatic price increases sometimes follow 

for other lines of business. And since there is no upper bound for terrorism risk losses'

, one could 

expect these price increases to be enormous. 

Let me provide some additional perspective. TRIA was first put in place in 2002, and then amended in 

2005 and extended in 2007. Post September 11, 2001, TRIA succeeded in preventing what would have 

been a prolonged and wholesale disruption in the market as many insurers and reinsurers were 

1 As noted later in this testimony, Workers' Compensation insurance must be offered under State law without 

limits. Furthermore, some potential terrorist threats, such as the explosion of a nudear device in the midst of 

Manhattan, are estimated to cost over $1 trillion. 
47 


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4 

prepared to either withdraw from coverage, exclude coverage or invoke the war exclusion that most 

policies contained. Other lines of business would also have been impacted via price increases. That did 

not happen substantially because ofTRIA which encouraged reinsurers to continue to back their insurer 

clients with the risk transfer mechanism needed to make TRIA work. For an insurer to be forced to offer 

terrorism coverage to its customers - as TRIA requires - the purchase of reinsurance is not an option. It 

is a necessity. It protects the company from insolvency and allows the company to continue to ply its 

trade post-event. Without reinsurance, there is no insurance! And it is not just any reinsurance that will 

do. Insurers need reinsurers who are committed to providing terrorism coverage - reinsurers that are 

well-capitalized, pay their claims quickly, and stand by their insurer clients without hesitation after a 

large catastrophic event. 

Hence, the issue of whether or not to renew TRIA is first and foremost an issue that impacts reinsurers 

the most and it is to their potential reaction that this Committee must look if it were to take as dramatic 

a step as to recommend non-renewal. 

So let's focus on reinsurance for a moment. Today, the threat of another major terrorism attack 

involving NBCR or some forms of cyber-attack continues to be among the most feared and potentially 

the most costly and devastating disasters faced by reinsurers. I think that I can fairly say that the 

industry does not treat terrorism as a matter of "if' - rather, a "when" and "how severe" and "how 

often" and "in how many places". Despite the continuing threat however, reinsurers have succeeded in 

attracting significant new capital since 2002, and particularly since 2007. And, as is the case after every 

catastrophic event, the industry has managed time and again to find the capital lost due to catastrophes. 

The industry now has roughly $510 billion in total capital available and that capital has been increasing 

at the rate of 1% to 5% each year since 2006. $100 billion in new capital is expected over the next ten 

years. This, of course, is capital that must support many uses besides terrorism - and in many places 
48 


86684.005

5 

other than United States. Terrorism is not the only line of business sustained by that capital. Reinsurers 

allocate capital to other lines as well whether it is auto, homeowners', liability and commercial. Nor is 

the United States the only place in which they do business. Reinsurance is a global industry, largely 

located off-shore. Thus, reinsurance capital allocations tend to move quickly to whatever lines or 

locations offer the most favorable conditions for returns on capital. 

As a result, the reinsurance industry has been able to absorb the huge losses from September 11 and 

from many a natural catastrophe since then, and yet recapitalize lost capital quickly after an event. New 

capacity' seems to move in quickly after an event supported by expectations of improved pricing and 

higher profits. Interestingly however, to the benefit of consumers, these expectations rarely seem to 

materialize for very long as new capital flows in and competition for market share takes its toll. As a 

result, the industry has evolved to the point where paying for yearly catastrophic losses of as much as 

$20 billion to $25 billion seems to have become routine. Whether it is catastrophic fires and 

earthquakes in California and the American West, sinkholes and hurricanes in the Southeast or 

tornadoes, hail, and winter storms in the Midwest and the Northeast - these catastrophes have become 

a repetitive, predictable, annual ritual for the industry: it responds by paying for these losses without 

much of a blip in either availability or pricing. Losses of this size have come to be expected it seems. 

Specifically, even in the immediate aftermath of Hurricane Sandy, the second most expensive storm in 

U.s. history, property catastrophe reinsurance costs continued to decrease as a whole and for most 

reinsurance programs. 

2 New reinsurers tend to enter the market with new capital. Within less than three months after Hurricane Katrina 

in 2005, for instance, eight new reinsurers with $8 billion in new capital had entered the cat market. Also, 

reinsurers formed sidecar facilities. $4 billion or more came in through these sidecars. Sidecars are capital 

facilities that are sponsored by reinsurers. Much like a quota-share reinsurance arrangement, an investor in a 

sidecar takes on a proportion of the risks for a limited category of policies, typically catastrophe exposures, for a 

limited period oftime. 
49 


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6 

As for TRIA, the federal backstop continues to be the mainstay for domestic terrorism coverage in the 

United States. A sizable market for stand-alone commercial coverage has developed. That market tends 

to serve clients with broader global needs for terrorism coverage, self-insuring captive company clients, 

and clients interested in coverage up to the $100 million trigger. Since TRIA covers United States 

territory only, the commercial market also tends to cater to clients interested in both domestic and 

international coverage, frequently on a "difference in conditions/difference in limits" ("Ole/OIL") basis' 

grounded in a TRIA-based master policy. 

In developing these stand-alone terrorism facilities, reinsurers are benefiting from the currently 

depressed global yields environment by being able to offer higher yields derived from terrorism 

coverage. It is worth a reminder though that the higher yields are also a reflection of higher risk for 

those institutional investors like pension funds, hedge funds, private equity, and specialist funds who 

invest in these facilities. Nonetheless, it has been reported that as much as $2 billion and more of 

terrorism coverage per client may be available in the private market, depending on location, 

accumulation, and concentration. Moreover, such new terrorism facilities in the billions of dollars are 

also being set up by others including brokers, and, hence not surprisingly, prices for customers with 

more than $1 billion of total insured value have dropped to median rates of $19 per $1 million, down 

from double and triple that rate in earlier years'. 

For those of us who ultimately favor private markets, these are clear signs of progress in the private 

market. Nonetheless, some words of caution are in order: 

, OIC refers to a policy designed to broaden coverage by providing coverage for perils that are excluded on 

standard coverage forms or supplementing international policies that are written by admitted insurers in the 

applicable foreign countries. OIC policies are often used to fill the gaps between the coverage provided by a 

multinational organization's master insurance policies and coverage provided by policies purchased locally in 

accordance with each country's insurance requirements so that the organization has uniformity of coverage 

regardless of location. Oil, on the other hand, refers to a provision contained in a master international insurance 

program that provides coverage for the difference in limits between the limits of local underlying policies and the 

limits of the master international policy. 

4 See Marsh's "2013 Terrorism Risk Insurance Report". 
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86684.007

7 

1. Not renewing TRIA would open $100 billion crater in the industry's capital structure. That's 

roughly a 20% hit to the industry's entire capitalS - by any measure, a huge loss of capital that 

would have to be filled - and filled quickly at a time when forecasts for new capital over the next 

10 years indicate $100 billion level. 

2. Some potential - and almost unthinkably probable - terrorist attacks could be of such a 

substantial magnitude as to be beyond the pale of even as significant amount of capital as is 

currently available to the industry. Think of that nuclear device in the center of Manhattan. 

This is a particular problem for Workers' Compensation insurance which prevents the exclusion 

of terrorism coverage, mandates unlimited coverage, and prohibits the exclusion of nuclear, 

chemical, biological, and radiation ("NCBR") related coverage. This has broader economic 

implications regarding employment, jobs, and economic development, given that no business 

can operate without Workers' Compensation insurance. 

3. It is difficult to tell whether the new capital that has come into the business is of a long-term 

nature or whether it is of the "quick in and quick out hot money" type driven by investors out 

for yield in an otherwise zero interest and nominal yield environment. With competitive forces 

at work, as new capital has come into the business, reinsurers have had a difficult time 

maintaining rates while protecting their individual market share and, as another sign, yields on 

cat bonds, for instance, have been plunging and only time will tell how much of this capital is of 

a more permanent nature. Will the new capital will "stick" or exit in the face of ever-diminishing 

returns? That remains an open question. 

4. It has also been suggested that a good proportion of this new capital comes from naIve investors 

who have yet to be tested by any significant losses. Cat bonds, for instance, have only been 

S The ratio of cat losses to gross surplus is a good indicator of the ability to absorb losses from terrorism. 
51 


86684.008

8 

triggered three times out of 200 issues within that last fifteen years. Investors may lose interest 

if their capital were to be wiped out by a sufficiently large event. 

5. Availability and pricing of insurance and reinsurance for catastrophic events depends heavily on 

modeling the frequency and severity of potential losses. The severity of terrorist events can be 

modeled reasonably well. The problem lies with frequency. Mother Nature is reasonably 

predictable. Human beings are not. The intervention of human agency in terrorist events 

makes frequency essentially unpredictable6

. Moreover, it leaves little room for ex ante 

mitigation measures, given that an event could occur anywhere. The problem is further 

complicated by the fact that models without good data fall into the category of "garbage in, 

garbage out". Clearly for good reasons, the best data and information regarding the likelihood 

and impact of a potential terrorist event lies with the intelligence and law enforcement agencies 

and is unavailable to reinsurers'. Unfortunately, that only complicates the modeling process so 

vital to providing terrorism insurance coverage. 

6. Natural catastrophes are "low probability - high severity" events, the proverbial fat-tail events 

or "black swans". Terrorism is not like other tail risk. It is arguable that terrorism presents the 

industry with "high probability - high severity" events perhaps on a multiple venue and 

sequential basis, events that are ultimately uninsurable without some form of government 

program of last resort. Indeed, most other OECD states have had government-backed terrorism 

insurance pools for twenty years or more, though with a wide variety of intervention 

mechanisms. 

Based on these thoughts, I make the following suggestions to this Committee: 

6 Although some experts believe that human behavior can eventually be modeled via game theory, mathematical 

power laws and chaos theory, these scientific efforts remain in their infancy. 

7 The types of attacks that do occur, or are aborted or interdicted, would provide good information pertaining to 

vulnerability of targets, target selection and potential multiple target attacks, and generally speaking, to the 

terrorists' modi operandi. 
52 


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9 

1. Renew TRIA - renew it for a long enough period to avoid uncertainty in the near-term and long 

enough for some of these issues to play themselves out, 5 to 10 years perhaps. Private markets, 

as history has proven, sometimes take as much as a generation or two to develop. But raise the 

$100 million loss trigger significantly - perhaps to as much as $20 billion or $25 billion- in line 

with the routine payouts for other types of catastrophic losses. This would also bring the TRIA 

program in line with loss triggers in the private markets for industry loss warranties ("ILW") 8. 

There is simply no good reason to keep the trigger at its current low level. 

2. Raise the horizontal deductible from its current 20% to 40% of the past year's direct earned 

premium for the commercial lines subject to TRIA and raise the quota share cost-sharing 

arrangement for insurers from 15% to 25% of losses that exceed an insurer's deductible, in 

recognition of the increase in capacity in the industry since 2002 and in the evolution of a 

private stand-alone market since then. This might also stimulate additional private mitigation 

efforts. 

3. Charge a risk-based price for providing the backstop. There is no reason for not collecting an 

actuarially sound premium for the government's willingness to continue to provide the $100 

billion federal backstop. Government - taxpayers, that is - should be compensated for the 

service. 

4. Use a portion of the industry's premiums, or other funds available to Treasury, to invest in risk 

transfer, including reinsurance, catastrophe bonds or other vehicles. This initiative would 

8 As an indicator of a more realistic trigger, in the private market, for instance, a typicallLW usually triggers at $20 

billion in industry-wide losses. Industry loss warranties (ILW) are financial instruments which payoff when the 

industry-wide losses from a catastrophe exceed a certain industry loss index. While lower triggers of $10 billion 

and $15 billion are available for purchase, they can be very costly. Hurricane Sandy provides a good example. On 

March 22, 2013, Property Claim Services (PCS) issued its loss estimate for Sandy, falling just short of the typicallLW 

trigger of $20 billion in estimated insured losses. The storm was a close call for many IlW with $20 billion triggers. 

Sandy has actually set in motion a rethink of the entire ILW trigger structure, given that it was no more than a 

Category 1 storm and, upon reaching land, more like a tropical depression. 
53 


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10 

protect taxpayers and support the growth of the terrorism risk market, encouraging private 

investment in models, data sets and other capabilities. Also by accessing the private market, the 

program would facilitate risk validation and third-party views of exposure, the efficacy of 

mitigation initiatives and the effectiveness of prevention regimes. 

5. Each of these suggestions could of course be introduced on staggered basis over all or part of 

the renewal period. 

(2) IMPROVING THE ATTRACTIVENESS OF TERRORISM INSURANCE MARKETS AND ENHANCING 

GROWTH IN THE ILS MARKETS 

Reinsurance is but one market for the transfer of risk for an insurer. Another option lies in the capital 

markets, with investors assuming the risk via IlS. The two transfer mechanisms operate alongside and 

complement and supplement each other. Given the liquidity, depth, and resilience of global capital 

markets, they are by far the most effective means for pooling, transferring and diversifying risks of all 

kinds, including insurance risks. In the past 25 years, they have played an increasingly more prominent 

role by innovating new ways to transfer risks. 

IlS either securitize insurance risks 9 or transform such risks into derivatives. They are ideally suited for 

catastrophe financing. IlS include catastrophe bonds, exchange-traded catastrophe futures and options, 

catastrophe swaps, non-indemnity types of derivatives such as industry loss warranties as well as 

collateralized reinsurance products written on an indemnity basis and transformed into securities. 

Some of these instruments are liquid and some are not. Some are private and over the counter, others 

are exchange-traded. Some IlS provide for up front funding while others pay ex-post with no up front 

9 Typically, a sponsoring insurance or reinsurance company or it could be a corporation (e.g., Disneyland and Universal 

Studios transactions) or a state (e.g., Mexico's earthquake issue) - enters into a financial arrangement with a Special Purpose 

Vehicle (SPV) and, in exchange for a transfer of premiums to the SPY, the SPY assumes the payment of claims. The SPV invests 

these premiums in high quality instruments and, in turn, issues notes to investors who receive a stream of payments based on 

risk and use of funds. 
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11 

funding. While no IlS specific to terrorism coverage have been issued, increased capacity in the ILS 

catastrophe market would likely generate a flow-over of additional capital allocations to terrorism 

insurance. 

ILS now make up over 15% of the property catastrophe reinsurance market!o. From a risk standpoint, 

the capital markets and rating agencies typically treat them akin to high-yield corporate bonds (e.g., junk 

bonds). By far the most common and liquid ILS is the catastrophe bond. $40 billion in cat bonds have 

been issued in the last ten years with about $19 billion currently outstanding. That may not seem like 

much when you consider the industry's total cat exposure of about $300 billion in potential catastropherelated claims. Nonetheless, the numbers reflect impressive growth, given that ten years ago that figure 

was a mere $4 billion. Indeed, a small niche market has become a major supplier of capacity to insurers 

and reinsurers alike. And if forecasts are correct, today's amount is expected to quadruple again within 

the next decade. There is also evidence that substantial additional risk is being funded through ILS 

instruments other than cat bonds". 

While equity and hedge funds were among the early movers into the ILS market, there has been a 

recent surge of interest from investors with longer-term time horizons such as pension funds, mutual 

funds, and wealth managers. Some of these entrants are much larger than reinsurers are and, hence, 

have a much greater ability to absorb greater volatility and more severe losses. Apart from increased 

yields derived from larger risk premiums, ILS offers investors access to a largely uncorrelated asset 

class12, thereby enhancing the potential for diversification. There is also a relatively healthy secondary 

market. Reinsurers both participate and compete with IlS. Not surprisingly, between new reinsurance 

capital and ILS, reinsurance premiums have been forced down by 15% this year alone. 

10 See PwC's 2013 "Expanding the potential of IlS" report. 

11 Given that most of these are private, over the counter transactions, the evidence is anecdotal. 

12 Unrelated to the more traditional fixed income and equity instruments that is. 
55 


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12 

Each ILS requires a bankruptcy-remote Special Purpose Vehicle ("SPV") and, while sponsors and 

investors are mostly from the United States and Europe, the Cayman Islands have become the domicile 

of choice for these SpVS13. In recent years, the Caymans have passed legislation that makes them more 

attractive for both SPVs and investors. They have also developed a regulatory environment specific to 

these types of transactions which recognizes the sophistication and higher risk appetite of customers 

that operate in these markets. Moreover, these types of transactions are often fully collateralized, and 

hence the fees are high and the capital requirements are usually low". From a fiscal standpoint, SPVs 

typically receive pass-through treatment as the investment income accumulated within an SPY is 

intended to be paid out to future claimants. 

The use of off-shore SPVs by u.s. entities can be explained by a number of reasons: (1) restrictive GAAP 

and statutory accounting treatment, resulting in disparate treatment between ILS and reinsurance; (2) 

taxation issues; (3) uneven and inhibitive state insurance regulations, especially regarding credit for 

reinsurance provisions; and (4) reserve treatment. For instance, the NAIC model legislation permits an 

insurance company to set up an on-shore Spy for an ILS but then, unlike the case for traditional 

reinsurance, prevents a credit to capital until the bond is triggered and the sponsor is indemnified by the 

SPY. Traditional indemnity-based reinsurance, on the other hand, reflects the transfer of risk as credit 

to capital immediately upon signing of a reinsurance contract. To add a further complication, a NAIC 

model law is nothing more than a recommended law - not every state adopts these models, either 

uniformly or in their entirety. Hence, regulation from state to state is uneven, a very costly and 

inefficient route for what is in essence a one-time event for each SPY. 

The NAIC has also adopted a Special Purpose Reinsurance Vehicle (SPRV) model law, allowing on-shore 

special purpose reinsurers to issue insurance-linked debt to back up a reinsurance program. The model 

law however only applies to cases that employ an indemnity-based trigger. Unfortunately, many 

13 Cayman is the domicile of chOice for over 90% of all catastrophe bond related SPVs. 

14 Capital can be as low as $500, though regulators typically adjust that based on the specifics of the bond issue. 
56 


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13 

transactions employ non-indemnity triggers and these are treated purely as additional debt, without any 

credit to capital whatsoever. 

Regulatory certainty in the U.s. is even more opaque when exchange-traded insurance derivatives are 

involved where many State regulators have not even addressed to issue. Not surprisingly - and to the 

detriment of the U.S. -the popularity of going off-shore! 

In light of the above, I would suggest the following with a view to facilitating the development of the ILS 

market: 

1. Initiate a review15 of all legal, regulatory, accounting and fiscal treatment of insurance-linked 

securities and derivatives with a dual aim to develop a soup-to-nuts platform for issuing ILS onshore and provide for appropriate accounting, regulatory, and fiscal treatment based on the 

risks inherent in the various types of instruments. Issues to be addressed could include a 

separate licensing facility for SPVs, equal accounting and regulatory treatment between 

reinsurance and ILS where warranted based on risk characteristics, exemptions from the FrankDodd legislation and the Federal Reserve systemic risk provisions; clarifying bankruptcy 

remoteness; exemptions from consumer protections which are not relevant in this context, and 

so on. 

2. Overall, ILS would also benefit from a uniform, a sensible regulatory framework. NAIC model 

laws, of course, do not have the force of law in any U.s. jurisdiction. Although many states 

adopt laws following NAIC models in whole or in part, it always remains to be seen how many 

states will adopt them eventually and at what pace. Reports at the Spring National Meeting 

2013 indicate, for instance, that 11 states have adopted revisions to their credit for reinsurance 

statutes and/or regulations to implement reduced collateral requirements mandated by the 

15 See the GAO's 2002 report entitled "Catastrophe Insurance Risks: The role of risk-linked securities and factors 

affecting their use" and subsequent GAO 2003 report "Catastrophe Insurance Risks: Status of efforts to securitize 

natural catastrophe and terrorism risk", 
57 


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14 

Dodd-Frank legislation and modeled in the NAIC's amendments to its Credit for Reinsurance 

Model Law and Regulations ("Amended Credit for Reinsurance Model Act"). Twelve (12) others 

have indicated their intention to do so, leaving the remainder of the states without any position 

on the matter at this time. As regards full implementation, only Florida and New York have 

actually approved any reinsurers for collateral reduction at this time. Moreover, even when the 

NAIC passes a model law of regulation, states are at liberty to make changes at the local level, 

thereby replacing intended uniformity with a "hodge podge" of local variations. Some argue 

that the situation would change if the NAIC were to make model laws a condition of state 

accreditation, in which case all states almost certainly would adopt them in full and without 

change. But then again, changes to NAIC accreditation standards generally take four or more 

years to become effective. Real change in a timely manner at the State level to develop 

attractive ILS markets is therefore unlikely. Given that ILS are in the nature of capital market 

instruments, federal legislation may well be appropriate. 

3. Pass through taxation treatment!6 - which eliminates taxation at the SPV level and thus avoids 

double taxation-with favorable implementing requirements could facilitate expanded use of 

ILS and, as a by-product, increase the flow of private capital into the terrorism market. 

As for making reinsurance more attractive: 

1. Allow for the use of reserves for catastrophic events. For insurers and reinsurers, a more 

favorable fiscal treatment of catastrophe (including terrorism) or equalization reserves17 may 

increase the availability oftraditional insurance/reinsurance. In its 2005 report, the GAO noted 

16 Much like the mortgage industry is permitted to do through the use of Real Estate Mortgage Investment 

Conduits ("REMICs). 

17 These are long-term reserves kept for the purpose of preventing cash-flow depletion in the event of significant 

unforeseen catastrophes, including terrorism events. 
58 


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15 

some discrepancies between the U.S. and European fiscal treatment of catastrophe reserves's. 

A number of European countries allow insurance companies to establish tax-deductible reserves 

for potential losses associated with catastrophic events, although each country differs in the 

way it allows reserves to be set-up and used'9• In the U.S., on the other hand, catastrophe 

reserves are not tax-deductible. Tax-deductible reserves would offer several potential benefits: 

they would provide insurers and reinsurers with financial incentives to increase their capital and 

expand capacity without endangering solvency or contractual commitments. They would also 

lower the costs of catastrophic coverage, including terrorism in all likelihood. Opponents have 

noted that permitting insurers to take ex ante tax-free reserves may open the door to deceptive 

or even fraudulent accounting. At the very least, the issue warrants serious study. 

To conclude, I wish to thank Chairman Neugebauer for this opportunity to comment at this hearing and I 

look forward to working with the members of this Subcommittee towards a resolution of these issues. 

Thank you! 

l8 See GAO 2005 report entitled "Catastrophe risk: U.S. and European approaches to insure natural catastrophe and terrorism 

Risks", 

'9 Germany, France, Italy, Spain, Switzerland, and the United Kingdom all allow tax·deductible reserves. 
59 


86684.016

Testimony of Kean Driscoll 

Chief Executive Officer 

Validus Re 

House Financial Services Subcommittee 

on 

Housing and Insurance 

Hearing on 

"The Future of Terrorism Insurance: 

Fostering Private Market Innovation to Limit Taxpayer 

Exposure" 

November 13, 2013 
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86684.017

My name is Kean Driscoll and I am the Chief Executive Officer of Valid us Re. I am 

pleased to appear before you today to provide my company's perspective on possible changes to 

the Terrorism Risk Insurance Program ("TRIP" or the "Program") that would incent morc 

private market involvement. I commend Chairman Neugebauer for holding this important 

hearing and welcome the opportunity to address the Subcommittee on Insurance, Housing, and 

Community Opportunity. 

Validus Group ("Validus") is a leader in the global insurance and reinsurance markets, 

operating principally through Talbot Syndicate 1183 at Lloyd's of London, and Validus Re. 

Talbot has written direct and facultative terrorism business at Lloyd's for more than 12 years and 

it is now the largest writer of that business by income. Validus Re is one of the largest standalone property terrorism treaty coverage providers in the world, with an estimated 10% market 

share, and it evaluates business opportunities on approximately 90% of all direct and facultative 

terrorism business written throughout the world. Validus' guiding objective, through its 

operating subsidiaries, is to maximize its return on equity subject to prudent risk constraints on 

the amount of capital its exposes to any single loss event. 

Background on Reinsurance 

Reinsurance is commonly referred to as the insurance of insurance companies. The 

reinsurance market is global and plays an important role in maintaining the financial health of 

the insurance marketplace and ensuring the availability of property and casualty insurance in the 

United States. Reinsurance may be used by insurers for several reasons. One of the most 

common purposes is to transfer risk from the primary insurer for catastrophic events, including 

hurricanes, earthquakes, and conventional acts of terrorism. Reinsurers have responded 

financially to virtually every major U.S. catastrophe over the past century. By way of example, 

1 
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86684.018

60% of the losses related to the events of September lith were absorbed by the global 

reinsurance industry, and in 2005, 61 % of Hurricanes Katrina, Rita and Wilma losses were 

ultimately borne by reinsurers. 

Background of the Terrorism Risk Insurance Program 

TRIP was enacted in response to the September 11, 2001 terrorist attacks, which forced 

all Americans to confront the previously unforeseen realities associated with a catastrophic 

terrorist attack on U.S. soil. Although the insurance and reinsurance industry responded in an 

unwavering manner, the events changed the way the industry views the terrorism risk. 

TRIP was created to provide a federal backstop, whieh allowed the insurance industry to 

provide terrorism coverage to U.S. businesses. By limiting insurers' exposure to catastrophic 

terrorism losses, TRIP improved the private market for such coverage. The reinsurance industry 

strongly supported adoption of the Terrorism Risk Insurance Act in 2002, the 2005 Terrorism 

Risk Insurance Extension Act (TRIEA) and the 2007 Terrorism Risk Insurance Program 

Reauthorization Act (TRIPRA). 

Reinsurers' Role Under TRIP 

TRIP provides a large amount of reinsurance-like protection for commercial insurance 

exposures. Individual insurers retain a significant amount of terrorism risk losses through both a 

company deductible and a co-pay requirement for losses above the retention before TRIP 

funding is available. The insurance industry has significant financial risk and exposure to acts of 

terrorism because of the significant retentions under TRIP, the mandatory offer of coverage 

required under TRIP, state regulatory action related to rates and exclusions, and rating agency 

scrutiny. 

2 
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86684.019

Insurers may seek reinsurance from the private market to reduce the conventional 

terrorism exposure they face for potential losses between the deductible and loss-sharing 

provisions of TRIP. A reinsurer's ability to provide this coverage is limited by the amount of 

conventional terrorism risk it is willing and able to supply based on the amount of capital it 

allocates to terrorism coverage and its own specific risk evaluation. Because reinsurers are not 

covered by TRIP, reinsurers view TRIP in the context of the benefits provided to the broader 

industry as a whole. 

The Current Reinsurance Market 

Since 200 I, insurers and reinsurers have worked hard to develop a better understanding 

of conventional terrorism risk. Reinsurers have created task forces, consulted military and 

intelligence experts, hired specialty risk modeling firms, invested in research and development, 

and implemented new underwriting standards all with the intention of offering private market 

solutions for the transfer of conventional terrorism risk. Conventional terrorism can be modeled, 

priced, and managed on a portfolio basis. The probability or frequency of an event can be 

estimated, albeit with less certainty than risk classes with a more robust historical record; 

however, the insurance and reinsurance industries have pioneered risk transfer solutions for 

many other classes of business that suffer the same shortcomings. To supplement the lack of a 

rich data set on frequency, we use open source intelligence that helps us estimate both the intent 

and capability of terror threat agents. This information is consolidated into an event set that helps 

us estimate the probability of various attack types at different targets. 

Once we have established a perspective on frequency, we use well established modeling 

techniques to quantify hazard severity, vulnerability and financial loss. There is very good data 

on damageability from various blast sizes with secondary effects. 

3 
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The question is not whether conventional terrorism risk can be priced, but rather, the 

precision of the parameters in a pricing model. We can and do currently price conventional 

terrorism risk, and estimate that approximately $7-8 billion of reinsurance coverage is purchased 

annually on a stand-alone basis for conventional U.S. terrorism. This excludes coverage that is 

included as part of general property/casualty, worker's compensation and other specialty lines 

coverages. We believe presently there is adequate reinsurance capacity to cover the insurance 

industry's current $27.5 billion retention under TRIP, and if the industry retention for 

conventional terrorism exposure grew over time, so to would the capacity of the reinsurance 

industry for conventional terrorism risk. 

TRIP Renewal 

TRIP is valuable to the insurance industry in underwriting conventional terrorism risk but it 

takes a "one size fits all" approach that could be modified to encourage more private market 

insurance and reinsurance participation. If the Committee is inclined to make changes to the 

Program, Validus encourages you to tailor the Program in accordance with the following 

comments. 

1. The Program should continue to cover catastrophic terrorism loss scenarios related to 

nuclear, biological, chemical and radiological ("NBCR") attacks. The broader industry 

cannot effectively address these perils as the breadth of potential events is either 

unknowable or could potentially bankrupt the industry. 

2. Cyber terrorism, a peril distinct from cyber liability, should be clearly covered by the 

Program. The scope, duration, potential damage and economic losses from this risk are also 

unknowable, and therefore, uninsurable. 

4 
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86684.021

3. The Program should clarify the process for certifying a terrorism event, including a defined 

time for making the certification 

4. Validus has the ability and willingness to assume more conventional terrorism risk 

exposure, and I believe the reinsurance industry also has the ability and willingness to 

meaningfully expand its capacity for conventional terrorism risk. To reflect the fact that the 

industry's appetite for writing conventional terrorism risk has grown since the last 

extension, the Program could be modified through a variety of ways, including: 

a. Gradually increasing the insurance industry retention and the size of a qualifying 

terrorism loss under the Program. This reduces the likelihood of having to fund a 

loss through taxpayer funds and it avoids short-term price and capacity 

dislocation in the broader industry. 

b. An expansion of the co-participation which would better align the insurance 

industry with the Program. 

5. The insurance industry is a critical facilitator of effective risk management in virtually every 

industry, and every facet of life. Risky behavior, or highly exposed assets typically result in 

a higher premium charge. Policyholders can reduce higher premiums through effective risk 

mitigation techniques. Currently, the Program impedes the ability of the insurance industry 

to properly price its products, by shifting the risk of a conventional terror attack from the 

policyholder to the taxpayer. The improper allocation of a risk premium facilitates 

unintended outcomes. We see this phenomenon playing out in the flood market, as the 

heavily subsidized National Flood Insurance Program ("NFIP") has produced significant 

deficits. Congress should encourage a greater private sector risk bearing role and appropriate 

risk pricing. Insureds and insurers will then have an incentive to mitigate risk and price it 

5 
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appropriately, and Congress can focus on genuinely beeoming a "reinsurer" of last resort for 

conventional terrorism risk. 

6. Finally, special consideration should be made for smaller insurers, as well as for the 

insurance industry generally with respect to workers compensation exposure accumulations 

in metropolitan areas, which could be disproportionately impacted in the near term by any 

of the changes to the Program. 

Thank you for the 0PPoliunity to testify. We look forward to continuing this dialogue as the 

renewal process moves forward. 

6 
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The Future of Terrorism Insurance: 

Fostering Private Market Innovation 

to Limit Taxpayer Exposure 

United States House of Representatives 

Financial Services Subcommittee 

on Housing and Insurance 

Testimony of 

Robert P. Hartwig, Ph.D., CPCU 

President & Economist 

Insurance Information Institute 

New York, NY 

November 13, 2013 

Washington, DC 
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Thank you, Representative Neugebauer, Ranking Member Capuano and members of the 

Committee. 

Good morning. My name is Robert Hartwig and I am President and Economist for the 

Insurance Information Institute, an international property/casualty insurance trade 

association based in New York City. 1 I am also a Chartered Property Casualty 

Underwriter (CPCU) and have worked on a wide variety of insurance issues during my 

20 years in the property/casualty insurance and reinsurance industries, including many 

related to the industry's exposure to catastrophic loss, including acts or terrorism.2 The 

Institute's members account for nearly 70 percent of all property/casualty insurance 

premiums written in the United States. Its primary mission is to improve understanding 

of the insurance industry and the key role it plays in the U.S. and global economy. 

I have been asked by the Committee to provide testimony on the current state the 

Terrorism Risk Insurance Program and the market for terrorism insurance in the United 

States. For the purposes of my testimony, I will address the following issues: 

(i) The immediate impacts of the September 11,2001 attacks on insurance and 

reinsurance markets; 

(ii) The essential role that TRIA plays with the nation's national security 

infrastructure and its benefits to consumers, businesses and communities; 

(iii) Taxpayer protection features of TRIA; 

(iv) Private sector insurer and reinsurer involvement in terrorism insurance 

markets since 9111 ; 

(v) The unique nature of terrorism risk and the limits of private sector 

involvement in terrorism insurance markets; 

(vi) Changes in the terrorism threat landscape since the enactment of the original 

TRIA legislation in 2002 and the impacts on terrorism insurance; 

(vii) Potential economic, ratings agency and insurance market impacts if TRIA is 

not extended; 

(viii) Obstacles to insuring and reinsuring losses arising from acts of terrorism; 

(ix) Cyber terrorism and certification timelines. 

1 Contact information: Tel: (212) 346-5520; Email: bobh@iii.org. 

2 See Terrorism Risk: A Constant Threat, Robert P. Hartwig and Claire Wilkinson, Insurance Information 

Institute, June 2013: http://www.iii.org/white papers/terrorism-risk-a-constant-threat-2013.html. 

2 
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Impacts of the September 11, 2001 Terrorist Attack on Insurance Markets 

The terrorist attacks of September 11, 200 I, produced insured losses larger than any 

natural or man-made event in history. Claims paid by insurers to their policyholders 

eventually totaled some $32.5 billion dollars-$42.1 billion in 2012 dollars (Exhibit 1) 

and to this day remains the second most costly insurance event in United States history 

(Exhibit 2). 3 The insured losses arising from the events of that fateful day were 

unprecedented in virtually every respect, producing catastrophic losses not only in 

property coverages, but also for the first time in the workers compensation line. The 

sheer enormity of the loss-coming from an entirely unforeseen peril for which no 

premium had been collected-combined with the possibility of future attacks, produced 

financial shockwaves that shook insurance markets worldwide and provoked an 

extraordinarily swift and severe underwriting and pricing reaction by insurers and 

reinsurers. 

Terrorism Exclusions and Price Shocks in the Wake a/the 9/11 Attack 

The shock of the September 11 attack led insurers and reinsurers to exclude coverage 

arising from acts of terrorism from virtually all commercial property and liability 

policies. Before 9111 terrorism exclusions were virtually nonexistent in commercial 

insurance contracts sold in the United States. The economic consequences of such 

exclusions were quick to manifest themselves. Major commercial property construction 

projects around the country, unable to secure coverage against the now very real risk of 

terrorist attack, were in jeopardy of being tabled, hurting job grov.1:h at a time of rapidly 

rising unemployment and when much of the country was in recession. Banks, in tum, 

threatened to choke off lending to businesses if borrowers failed to secure coverage 

against terrorist acts. The problem was not confined to high profile "trophy" properties 

located in major metropolitan areas. Shopping malls, office complexes, factories, sports 

stadiums, hotels, utilities, airports, port facilities and other critical infrastructure all across 

the United States were impacted. In short, the macroeconomic consequences associated 

with the lack of terrorism coverage were beginning to exact a severe toll on businesses 

J The loss totals do not include the March 20 I 0 settlement of up to $657.5 million announced by New York 

City officials and plaintiffs' lawyers to compensate about 10,000 workers whose health was damaged 

during the rescue and cleanup at the World Trade Center. 

3 
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and workers alike. [Note: The potential macroeconomic implications of allowing TRIA 

to expire in 2014 are discussed in greater detail in the next section of this paper). 

Even as exclusions proliferated, prices soared. The average rate increase for a business 

seeking to renew coverage in the fourth quarter of 200 I was nearly 30 percent. 

Reinsurance prices rose sharply as well. Very little private sector coverage for terrorism 

entered the market as a general consensus emerged that terrorism risk is fundamentally 

not insurable. Insurers, who arc regulated by the states, therefore took the unprecedented 

step of seeking to establish a risk sharing plan with the federal government in the event of 

future attacks. Only when the Terrorism Risk Insurance Act (TRIA) was enacted by 

Congress in November 2002-fourteen months after the attack--did stability finally 

return to the market and coverage for terrorist attacks resume. In the eleven years since 

enactment, stability remains a hallmark of this market primarily due to the continued 

existence of TRIA. That said, the market for terrorism insurance today-in late 2013-is 

already showing signs of stress associated with uncertainty over the future of TRIA. 

Already a number of major commercial insurers have stated that policyholders will soon 

be notified that coverage for certain terrorist acts could be altered or discontinued if 

TRIA is allowed to expire. 4 

TRIA, National Security and Protection of the Nation's Critical Financial 

Infrastructure 

The war on terror is far from over, as the recent Boston Marathon bombings attest, but 

TRIA by all objective measures is now a proven and unqualified success. The program 

not only succeeded in restoring stability to the country's vital insurance and reinsurance 

markets in the years immediately following 9/11, but it continues more than a decade 

later to deliver substantive, direct benefits to millions of businesses, workers, consumers 

and the overall economy-all at essentially no cost to taxpayers. 

Upwards of 60 percent of businesses purchased terrorism coverage nationally in 2012, up 

from 27 percent in 2003, the tirst full year of the program (Exhibit 3). Industries 

responsible for much of the country's critical infrastructure such as power and utilities, 

4 "Unease Over Terrorism Insurance Rattles Market," Commercial Mortgage Alert, November 1,2013. 

4 
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telecommunications and health care, along with financial institutions and local 

government have take-up rates that approach or exceed 70 percent. Moreover, the takeup rate for workers compensation is effectively 100 percent, meaning that every worker 

in America is protected against injuries suffered as the result of a terrorist attack. 

The unambiguous success of TRIA demonstrates that the Act has become an invaluable 

component of the country's national security infrastructure. The continued operation of 

the nation's financial institutions-including its insurers--during and throughout the 

aftermath of a major terrorist attack-is absolutely essential to ensure a smooth and 

expedited recovery from the massive economic and operational shocks of the sort that 

occurred after the 9/11 attacks and that are certain to accompany future such events, 

irrespective of where in the country they occur. Failure to institutionalize a permanent 

plan to protect the nation's financial infrastructure leaves the country unnecessarily 

vulnerable to economic instability and risk of recession. 

Macroeconomic Impacts of the TRIA Expiration 

A 2004 study co-authored by R. Glenn Hubbard, Columbia University's Business School 

Dean and a former chairman of the U.S. Council of Economic Advisors, quantified the 

potential macroeconomic impacts of a failure to extend TRIA. 5 The study concluded that 

within three years of the expiration of TRIA (in the absence of a major terrorist attack), 

GDP could fall by 0.4 percent, household net worth by 0.9 percent and employment by 

0.2 percent. Applying the findings of that study to the current period suggests that 

expiration of the current Aet could lead to a meaningful drag on economic growth, 

reducing real GDP by an estimated $69 billion by 2017, depressing household net worth 

by an estimated $798 billion and remove 290,000 jobs from the economy.6 

5 R. Glenn Hubbard and Bruce Deal, The Economic Ejfects of Federal Participation in Terrorism Risk, 

Analysis Group, September 14, 2004. 

6 Figures cited in Table I are Insurance Information Institute estimates based on findings of the study 

referenced in footnote 3. 

5 
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Table 1 

POTENTIAL MACROECONOMIC IMPACTS ASSOCIATED WITH THE 

EXPIRATION OF TRIA 

As Table 1 demonstrates, terrorism remains a threat to the country's national economic 

security, especially in the context of the still fragile economic recovery. Consequently, 

maintaining a Terrorism Risk Insurance Program as a component of the country's 

comprehensive national security plan and infrastructure is both rcasonable and prudent. It 

is also imminently affordable. Indeed, the cost to American taxpayers is effectively zero. 

Taxpayer Protection Features ofthe Terrorism Risk Insurance Act 

TRIA from its inception was designed as a terrorism risk sharing mechanism between the 

public and private sector-with an overwhelming share of the risk being borne by private 

insurers, a share which has increased steadily over time. Today, all but the very largcst 

(and least likely) terrorist attacks would be financed entirely within the private sector. In 

the event of a truly catastrophic attack, TRIA provides the government with the ability to 

fully recoup any and all federal monies paid. In other words, there would be no cost to 

the taxpayer. 

As a point offact, from the date of TRIA's enactment in November 2002 through today, 

a span of almost exactly 11 years, the federal government and therefore taxpayers have 

paid nothing (apart from negligible administrative expenses) under the program. The 

6 
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recent Boston Marathon bombings provide an illustrative example. All of the 207 

property/casualty claims filed in the wake of that event were handled by private insurers 

who have made payments to policyholders totaling at least $1.18 million.? Not one 

taxpayer dollar was used to pay any of these claims. 

TRIA's structure actually provides at least eight distinct layers of taxpayer protection as 

displayed schematically in Exhibit 4's Pyramid of Taxpayer Protection. Each of those 

layers is discussed in turn below. 

SUMMARY OF 8 KEY TAXPAYER PROTECTION 

FEATURES UNDER TRIA 

1. CERTIFICATION DEFINITION: Criteria Must Be Met8 

• Definition of a Certified Act of Terrorism: The 2007 extension of 

TRIA, likes its predecessors, requires that a detailed set of criteria be met 

before an act of terror can be "certified." Specifically, the term "act of 

terrorism" refers only to an act that is certified by the [Treasury 1 

Secretary, in concurrence with the Secretary of State and the Attorney 

General of the United States: 

i. to be an act of terrorism; 

ii. to be a violent act or an act that is dangerous to human life, 

property or infrastructure; 

iii. to have resulted in damage within the United States, or outside of 

the United States in the case US air carriers, vessels and/or 

missions; 

iv. to have been committed by and individuals as part of an effort to 

coerce the civilian population of the United States or to influence 

the policy or affect the conduct of the US government by coercion. 

7 As of July 26 (latest available). PIC insurers also held $1.41 million in reserves for claims associated with 

the bombings. Figures are from the Massachusetts Division ofInsurance as reported in BestWire Services, 

PIC Insurers Have Paid $1.18 Million in Boston Marathon Bombing Related Claims. September 3. 2013. 

8 United States Treasury accessed as of 9/22/13 at http://www.trcasury.gov/resource-centerlfinmkts/Oocuments/TRlAasamended-CompositeTextPost.pdf. 

7 
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2. CERTIFICATION THRESHOLD (TRIGGER): $5 Million 

• $5 Million Minimum: Under the 2007 reauthorization of TRIA, no aet 

shall be certified by the Secretary as an act of terrorism if property and 

casualty losses, in the aggregate, do not exceed $5 million. 

• Acts of War Exclusion: TRIA further stipulates that no act may be 

certified as an act of terrorism if the act is committed as part of the course 

of a war declared by Congress (this provision does not apply to workers 

compensation). 

3. TRIGGERING EVENT THRESHOLD: $100 Million 

• Under the 2007 reauthorization of TRIA the triggering event threshold 

was set at $100 million, up from $5 million in the original act and $50 

million in 2006. This means that Federal funds will be paid out only in the 

event of a terrorist act that produces total insurance industry losses above 

this threshold (even if the event is certified by the Treasury Secretary as a 

terrorist act). 

4. INDIVIDUAL INSURER DEDUCTIBLES: 20% of Premiums 

• The amount of terrorism losses that an individual insurer must pay before 

federal assistance becomes available. The level rose to 20 percent of an 

insurer's direct earned premiums for commercial property/casualty 

insunmce in 2007 where it currently remains (up from 17.5% in 2006, 15 

percent in 2005, 10% in 2004 and 7% in 2003). 

5. INSURER CO-PAYMENT IN EXCESS OF RETENTION: 15% of Loss 

• The share of losses that insurers pay above their individual retentions rose 

to 15 percent in 2007 where it remains today, up from 10 percent in 2006 

and prior years. 

6. INDUSTRY AGGREGATE RETENTION: $27.5 Billion 

• Under the 2007 reauthorization, the industry as a whole must ultimately 

cover a total of $27.5 billion of the losses through deductibles and 

copayments (assuming an event of $27.5 billion or greater). This amount 

was increased to $27.5 billion in 2007, up from $25 billion in 2006, $15 

billion in 2005, $12.5 billion 2004 and $10 billion in 2003 (Figure 7). 

Government expenditure above this amount can be recouped. 

7. GOVERNMENT RECOUPMENT: Full Taxpayer Protection 

• Mandatory Recoupment: TRIA mandates that the government recoup 

133 percent of the difference between the actual amount it has paid and 

the required retention. This recoupment comes via a surcharge on 

8 
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86684.031

commercial insurance policyholders not to exceed 3 percent of premium 

for insurance coverages that fall under the program. 

Discretionary Recoupment: If the insured loss exceeds the $27.5 billion 

threshold, federal expenditures may be recouped for amounts in excess of 

the threshold at the discretion of the Secretary of the Treasury. 

8. HARD CAP: $100 Billion 

• Program Limit: Losses within a program year are capped at $100 

billion, inclusive of both insurer and government participation. Neither 

the government nor insurers would be required to pay losses for certified 

acts beyond this amount. 

Additional Taxpayer Protection Features of TRIA 

Several other features of TRIA serve as additional protections to taxpayers. 

Commercial Lines Only: Only claims occurring in certain property/casualty commercial 

lines of insurance are included in the calculations of insured losses under TRIA (auto and 

homeowners insurance, life insurance and health insurance have always been excluded). 

In addition, the number of lines covered under TRIA has been narrowed over time. At 

TRIA's inception in 2002 approximately 44 percent of property/casualty insurance 

industry premiums were covered under the Act. By 2012 that figure had dropped to 

approximately 35 percent. Excluded commercial lines of coverage under the Act today 

include: mortgage and title insurance, financial guaranty, medical malpractice, 

reinsurance, commercial auto, burglary and theft, surety, professional liability (except 

directors and officers coverage) and farmowners mllltiped!. 

State Guaranty Funds: In the unlikely event that an insurer becomes severely impaired 

or insolvent as a consequence of a terrorist attack, state insurance regulators will take 

corrective action. If the insurer's assets are insufficient to meet its liabilities, the 

resources of the appropriate state guaranty fund(s) could be called upon to satisfy those 

liabilities. Guaranty associations obtain funds for their operations and payment of claims 

through assessments against the solvent insurance companies licensed to do business in 

9 
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the state and from the recovery of amounts paid on claims from the insolvent estate. 9 All 

guaranty fund resources are therefore ultimately derived from the industry itself. No 

taxpayer dollars are ever involved. 

Make Available Requirement (Mandatory Offer of Coverage): Commercial insurers 

are required to offer coverage against terrorist acts and by law, workers compensation 

must include coverage against such acts. These requirements have led to widespread 

participation in the program. The take-up rate for terrorism coverage in 2012 was 62 

percent according to a recent study by insurance broker Marsh. 1O The take-up rate for 

workers compensation is effectively 100 percent, meaning that every worker in America 

is protected against injuries suffered as the result of a terrorist attack. 

TRIA Will Reduce Taxpayer Funded Post-Attack Disaster Aid Costs 

The very fact that terrorism coverage is so widely purchased today and that coverage 

already extends to every American worker through the workers compensation system 

means that fewer government (taxpayer) resources will be called upon in the wake of any 

future terrorist attack. Allowing TRIA to expire will reduce the market penetration of 

terrorism coverage as prices rise and insurers limit their exposure across all lines of 

coverage, including workers compensation. Consequently, the uninsured share of losses 

will rise, increasing the pressure on the government to compensate victims for their 

uninsured losses. This will impair the ability of individual businesses, affected 

communities and the overall economy's ability to recover. A sharp spike in business 

failures, higher unemployment and reduced GDP growth are just a few of the adverse 

consequences that are certain to follow in the event of a major terrorist attack in the 

absence of TRIA. In summary, government will be called upon to act in the aftermath of 

a major terrorist attack. TRIA provides an efficient means for ensuring that most of the 

costs are financed and administered by the private sector rather than the taxpayer. 

9 National Conference oflnsurance Guaranty Funds accessed September 22, 20 \3 at: 

http://www.ncigf.orglmedialfi les/Primer-20 12.pdf 

10 Marsh, 2013 Terrorism Risk Insurance Report, May 2013. 

10 
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86684.033

Use of Insurer Claim Management Infrastructure Will Save Taxpayer Money, 

Improve Post-Attack Response 

Private insurers are today the principal source and conduit for the rapid and direct 

delivery of recovery funds to victims of terrorist attacks. In the event that TRIA is 

allowed to expire, the government lacks any formal structure or experience for adjusting, 

managing and delivering benefits to victims of complex commercial property and 

liability claims, nor does it have any formal fraud monitoring capability. Maintaining 

TRIA not only ensures that the costs of future terrorist attacks will be borne primarily by 

the private sector, it enhances the quality of the outcome. Again, in the absence of TRIA 

there is no question that the federal government will be called upon to act. TRIA ensures 

that that much of those costs will be borne and administered by the private insurers. 

Private Insurer and Reinsurance Participation in the Market for Terrorism 

Insurance Today 

One primary goal of TRIA and it successors has been to encourage private sector 

capacity to enter (and remain) in the marketplace so that an increasing share of losses 

from future terrorist attacks could be borne in the private sector. 

There is no question that billions of dollars in capacity has been attracted to the terrorism 

risk insurance market. Evidence of the program's success in this respect has been 

documented by a number of government entities and other organizations. In its latest 

report on terrorism risk insurance market conditions, the President's Working Group on 

Financial Markets noted that the program provides an incentive to property/casualty 

insurers and reinsurers who might not otherwise provide terrorism insurance at current 

capacity levels or prices. II The U.S. Government Accountability Office (GAO), 

commenting on the availability and affordability of terrorism coverage in large 

metropolitan areas, reported that with a few exceptions, commercial property terrorism 

insurance appears to be available nationwide at rates policyholders believe is reasonable, 

suggesting ample capacity. 12 

11 Market Conditions for Terrorism Risk Insurance 20j(), Report of the President's Working Group on 

Financial Markets. 

12 Initial Results on Availability of Terrorism Insurance in Specific Geographic fvfarkets, GAO-08-9J9R, 

July 2008. 

II 
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Note that this statement is very different from an assessment that such capacity would 

exist in the absence of a terrorism backstop. Again, it is important to emphasize that the 

majority of the coverage that exists in the market today exists because of the continued 

existence of the Terrorism Risk Insurance Program. Insurance broker Aon estimates that 

70% to 80% of the market would encounter terrorism exclusions if the program were 

discontinued. Thus capacity in the market is largely contingent upon the continuation of 

the program. As detailed earlier in this testimony, policy language that would exclude 

coverage against terrorist attacks returned to the market each time the expiration of TRIA 

has loomed. 

The so-called market for "standalone" terrorism coverage also provides evidence that in 

the absence of a Terrorism Risk Insurance Program, coverage capacity (supply) will fall 

well short of demand. Insurance brokers Marsh and Aon both report that the "theoretical" 

maximum amount of coverage available per risk in the "standalone" market is 

approximately $2 billion with larger sums available under some circumstances. This is in 

contrast with limits of just $150 million or less available in early 2002 before TRIA was 

enacted. At the time, such coverage also was subject to high deductibles equal to 7 to \0 

percent of the stated value of the coverage. 13 While the sums available in the market 

today may seem large, especially in comparison to 2002, there are many risks for which 

the coverage is inadequate. Consider, for example, that back in 2001 (prior to the 

introduction of terrorism exclusions) the twin towers at the World Trade Center site were 

insured for $3.55 billion-more than what is generally available in the market today. 

Multibillion dollars risks are now quite common in the United States, from office and 

shopping complexes to large manufacturing facilities, sports stadiums, transportation 

hubs and encrgy infrastructure not to mention infrastructure such as bridges, tunnels and 

dams. These exposures exist in every state. 

Reinsurance capacity, which was extremely limited in the aftermath of 9/11, is up as 

well. A 2011 report from reinsurance broker Guy Carpenter noted that there is between 

13 September 11. 2001: One Hundred Minutes a/Terror that Changed the Global Insurance Industry 

Forever, Robert P. Hartwig, John Liner Review, January 2002. 

12 
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$6 billion and $8 billion of terrorism reinsurance capacity available in the U.S. market, 

but cautions that the market remains vulnerable to a major terrorism loss. The $6 billion 

to $8 billion in terrorism reinsurance capacity stands in stark contrast to approximately 

$100 billion in reinsurance capacity available in the market today against traditional risks 

(mostly property catastrophe risks). A continued cautious approach is clearly required. 

Indeed, many modeled terrorism loss scenarios result in insured losses in the tens or even 

hundreds of billions of dollars-some even exceeding the claims paying capital of the 

entire industry. As noted previously, much of the capacity in the market today is 

predicated on the existence of the Terrorism Risk Insurance Program. In the absence of 

the program, reinsurance capacity would be greatly reduced. 

Capital Markets and Terrorism Risk 

Capital markets are playing an increasingly important role in providing capacity against 

losses arising from large natural disaster events which are becoming increasingly 

frequent in the United States and around the world. Capital market reinsurance capacity 

for U.S. natural catastrophe risks is estimated at $30 billion to $40 billion. However, 

investor appetite for catastrophe risk is so far limited to natural catastrophes such as 

hurricanes and earthquakes. Investors are attracted to investments in backing natural 

disasters risks in part because the performance of these assets is entirely uncorrelated 

with the performance of traditional financial market instruments such as stocks and 

bonds. A recession, for example, will impact the value of stocks and corporate bond 

prices but will have no impact on the likelihood of sustaining a loss on a catastrophe 

bond. 

Investors to date have shown no appetite for terrorism risk because in the event of a 

major terrorist attack the performance of securitized terrorism risk instruments (such as 

catastrophe bonds) and tradition equity market and fixed income investment vehicles are 

likely to be highly correlated. For example, a large-scale terrorist attack could cause 

bonds exposed to the event to lose all or part of their value, leading to large losses for 

investors while stock markets plunge (as they did in the wake of the September 11,2001 

attack). Investor disinterest in terrorism risk is also a function of the inability to model 

13 
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86684.036

and therefore price) such risks with anything close to the same degree of precision as 

tradition natural disaster risk. 

Changes in the Terrorism Threat Landscape and Impacts on Terrorism Insurance 

Markets 

In the immediate aftermath of 911 I the ability of commercial policyholders to purchase 

adequate limits of terrorism coverage at affordable prices was severely constrained. 

Commercial property owners and businesses were faced with substantially reduced 

protection for terrorism-related risks, in addition to higher property/casualty rates overall. 

As a result, many were forced to go without coverage or only partly insure their assets. 

Today, reports of property owners having problems securing terrorism coverage due to a 

lack of capacity in the market are no longer making headline news. Indeed, it is therefore 

tempting to conclude that in the eleven years since TRIA was first implemented that 

insurance markets have fully adjusted to the post-9f11 environment and that insurers and 

reinsurers have concluded that terrorism is a fully insurance risk. 

The reality is quite different. The fact of the matter is that terrorism risk today is almost 

every bit as uninsurable as it was a decade ago. Recent major successes in the war on 

terror, including the killing of al-Qaida leader Osama bin Laden in 2011, do not alter this 

conclusion. This is because the current stability in the terrorism insurance market in the 

United States is due almost entirely to two factors: 

(i) There has been no successful large-scale terrorist attack on U.S. soil since 

2001, and 

(ii) TRIA remains in place. 

The influence of both of these factors is discussed in the sections that follow. 

14 
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86684.037

Absence of Successful Attacks Does Not Imply Terrorism Risk is Inconsequential 

The fact that there has been no successful large-scale terrorist attack in the United States 

in eleven years is a remarkable achievement. It is a testimony to the hard work and 

dedication of this nation's counterterrorism agencies and the bravery of the men and 

women in uniform who fought and continue to fight battles abroad to keep us safe here at 

home. 

Unfortunately, the threat from terrorist attack in the United States is both real and 

substantial and will remain as such for the foreseeable future. Indeed, the U.S. State 

Department warned in a recent report that despite the death of bin Laden and other key 

al-Qaeda figures, the terrorist network's affiliates and adherents remain adaptable and 

resilient, and constitute "an enduring and serious threat to our national security." 14 

Table 2 below shows that interest in attacking targets within the United States remains 

undiminished-with four terrorist plots executed or interdicted within the past year alone. 

Indeed, it is clear from Table 2 that in addition to an ongoing threat from foreign terrorist 

networks, the United States also faces homegrown (domestic) terrorist threats from 

radical individuals, who may be inspired by al-Qaida and others, but may have little or no 

actual connection to militant groups. 

Catastrophe modeler Risk Management Solutions (RMS) points to an increase in the 

number of homegrown plots in the U.S. in recent years. IS Many of these have been 

thwarted, such as the 2012 attempt by Quazi Ahsam Nafis to blow up the Federal Reserve 

Bank of New York and Mohamed Osman Mohamud who targeted a Portland, Oregon, 

Christmas tree lighting ceremony. Also among the more notable unsuccessful attacks was 

an April 2013 attempt to blow up an Amtrak train en route between New York and 

Toronto. Other thwarted attacks against passenger and cargo aircraft, including the 

Christmas Day 2009 attempt to blow-up a jet over Detroit, are indicative of an ongoing 

risk to aviation infrastructure. 

14 Counlly Reports on Terrorism 2011, U.S. Department of State, July 31, 2012. 

15IUvlS Terrorism Risk Briefing, July 2012. 

15 
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Table 2 also shows that terrorists are interesting in attacking targets across the United 

States, not just in large urban areas. Cities such as Springfield, Illinois and Lubbock, 

Texas, have also been targeted. It also important to note that the largest act of domestic 

terrorism in United States history was the truck bombing of the Alfred P. Murrah Federal 

Building in Oklahoma City in April 1995, which killed 166 people and produced insured 

property losses totaling $189 million (in 2012 dollars). 

Another evolving threat is cyber-terrorism. Recent high profile attacks, such as the 

sabotaging of Iran's nuclear program via the Stuxnet computer worm and malicious 

infiltration attempts here in the U.S. by foreign entities, underscore the growing threat to 

both national security and the economy. 

All these factors suggest that terrorism risk will be a constant and evolving threat for the 

foreseeable future. 

16 
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Table 2 

RECENT TERRORIST ATTACKS AND ATTEMPTS IN THE UNITED STATES 

APeif 

April,2013 

November, 2012 

October, 2012 

August, 2012 

May, 2012 

July 27, 2011 

June 22, 2011 

May 11, 2011 

February 23, 2011 

December S, 2010 

November 26,2010 

October, 2010 

May 1,2010 

2009 

September, 2009 

September, 2009 

September. 2009 

May, 2009 

May, 2009 

MA 

New York City, NYToronto 

New York City, NY 

New York City, NY 

Ludowici, GA 

TBD 

Fort Hood, TX 

Seattle, WA 

New York City, NY 

Lubbock, TX 

Baltimore, MD 

Portland, OR 

D,C, 

Over Detroit, MI 

New York City, 

Springfield, IL 

Dallas, TX 

New York 

Various U,S, targets 

al-Qaida links arrested in Toronto, Canada for 

blow up Amtrak passenger train en route from New York 

Brothers Rases Alam Qa~l and Sheheryay Alam 

to detonate Ii weapon of mass aelllru91IC'!1 

landmark 

Quazi Mohammad Rezwanul Ahsan Nafis arrested in plot to blow up 

Federal Reserve Bank in New York City 

U,S, Pic Naser Jason Abdo arrested and charged with plotting 

bomb on fellow soldiers at Fort HoOd 

Two men arrested in plot to attack military recruiting station in Seattle 

Ahmed Ferhanl and Mohamed Mamdouh arrested in plot to attack Manhattan synagogue, 

and political 

in New York, 

Attempted plot to bomb D,C,-area metro stations 

WV ~ 

six for conspiring to plan attacks on U.S, 

Chicago 

Source: Federal Bureau of Investigation (FBI); various news reports; Insurance Information Institute, 

17 
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Potential Impacts If TRIA Is Not Extended 

Without question, TRIA and its successors are the principal reason for the continued 

stability in the insurance and reinsurance market for terrorism insurance today. As 

discussed previously, TRIA is credited with restoring terrorism coverage in commercial 

insurance policies upon its enactment in late 2002. 

Potential macroeconomic effects of allowing TRIA to expire-reduced economic growth 

and fewer jobs-were discussed earlier. In terms of impacts on insurance markets there is 

no question that coverage will become more expensive and less available-and in many 

cases unavailable. The question is not a theoretical one. In 2004, more than a year 

before the original Act's expiration at year-end 2005, terrorism exclusions once again 

emerged for policies with exposure extending into 2006. This was an unmistakable 

indication that insurance and reinsurance markets felt that terrorism risk, at least for 

larger scale attacks, remained uninsurable in the private sector. After Congress agreed to 

extend the program for another two years under the Terrorism Risk Insurance Extension 

Act of 2005 (TRIEA), terrorism coverage remained available and affordable in the 

market. However, with TRIEA's looming expiration in year-end 2006, terrorism 

exclusions once again appeared in the market, signaling the market's assessment that 

terrorism risk remained fundamentally uninsurable. These exclusions largely disappeared 

following passage of a 7-year extension of the program under the Terrorism Risk 

Insurance Program Reauthorization Act of 2007 (TRIPRA). With TRIPRA's expiration 

now a little more than one year away (year-end 2014), it is virtually certain that terrorism 

exclusions will soon reappear in the market. Indeed, insurance broker Aon estimates that 

at least 80 percent of the commercial property market will be impacted by these 

exclusions and other restrictions. 

Studies by various organizations, including the University of Pennsylvania'S Wharton 

School Risk Center, the RAND Corporation and the Organization for Economic Cooperation and Development (OECD), have supported the idea of a substantive federal 

role in terrorism insurance. In particular, the Wharton School found that TRIA has had a 

positive effect on availability of terrorism coverage and also has significantly contributed 

18 
84 


86684.041

to reducing insurance premiums. 16 The OECD notes, however, that the financial (capital) 

markets have thus far shown little appetite for terrorism risk. 

Ratings Implications 

Although expiration of TRIA is currently more than a year away, insurance ratings 

agencies are compelled to take action today by subjecting insurers to "stress tests" to 

ascertain their ability to absorb losses in the event of a terrorist attack. 17 Ratings agency 

A.M. Best scenario recently employed in its stress test a deterministic scenario simulating 

a conventional weapon attack similar to a "five- or six- ton TNT truck bomb, with no 

restrictions placed on the radius and assuming the attack occurs when the buildings are at 

their highest occupancy." A.M. Best found that 226 of the 889 "ratings units" it examined 

had exposure to such a scenario and 34 (3.8%) of these ratings units failed the stress test. 

Consequently, the companies will be required to "present and action plan detailing the 

steps they will take to reduce concentration of exposure to terrorism risk, should TRIPRA 

protection change materially." In the event that the insurer's action plan is deemed to be 

"insufficient" then the "rating unit will face negative rating pressure, likely in the form of 

assigning a negative outlook." [italics added] 

A.M. Best's concerns run deeper still, adding that while private reinsurance is currently 

available in the market, future availability and affordability of this coverage is 

"uncertain" in the event TRIA is not renewed or if the program changes significantly. 

It is also worth noting that the A.M. Best analysis shows that smaller insurers would be 

disproportionately impacted by the expiration of TRIA. For those rating units with 

terrorism exposure under the A.M. Best criteria and with surplus (i.e., effectively net 

worth) under $500 million, 19 percent failed the stress tests. For those with surplus 

between $500 million and $1 billion, 11 percent failed. 

16 Evaluating the Effectiveness a/Terrorism Risk Financing Solutions, Howard C. Kunreuther and Erwann 

O. Michel-Kerjan, September 2007, National Bureau of Economic Research. 

17 "The Future ofTRIPRA Remains Uncertain, Ratings Pressure Intensifies," Best's Briefing, October 9, 

2013. 

19 
85 


86684.042

This finding is notable. An Insurance Information Institute analysis of market share 

indicates that insurers with less than $500 million in surplus serviced approximately 16.8 

percent of TRIA-backed coverages in 2012 while insurers with surplus of under $1 

billion accounted for nearly a quarter of the market (23.6 percent). One corollary to this 

finding is that many insurers-particularly small and medium-size insurers-are already 

at or near their maximum exposure to terrorism risk. Changes to the program that would 

increase their exposure (or an outright end to the program) would not motivate them to 

write more coverage. Indeed, the opposite is likely to happen. The bottom line is that 

any dramatic changes to the program are likely to be highly disruptive to a large share of 

the market. 

A.M. Best also found that rating units with large workers compensation exposures were 

the most vulnerable under the stress test scenario. Because terrorism protection is 

mandatory under workers compensation policies, "This leaves ratings units with large 

workers comp terrorism risks even less options when contemplating how to reduce 

exposure." 

Finally, it is important to recognize that the five- to six-ton TNT truck bomb scenario 

employed in the A.M. Best stress test should by no means me construed as worst-case 

scenario. Much larger events are possible which would produce greater stress on rating 

units and likely increase failure rates. 

Evidence from Other Countries: Terrorism Risk Insurance Programs Abroad 

Additional evidence that terrorism risk is fundamentally uninsurable comes from abroad. 

A number of countries have established their own terrorism risk insurance programs and 

these have operated successfully, often for many years. Australia, Austria, Belgium, 

France, Germany, the Netherlands, Spain, Switzerland and the United Kingdom have all 

created programs to cover terrorism in the event of an attack on their own soil. 18 None of 

these countries is considering the discontinuation of its program. 

18 In 1993, the British government formed a mutual reinsurance pool for terrorist coverage following acts of 

terrorism by the Irish Republican Army. Insurance companies pay premiums at rates set by the pool. The 

primary insurer pays the entire claim for terrorist damage but is reimbursed by the pool for losses in excess 

ofa certain amount per event and per year based on its share of the total market. Following 9111, coverage 

20 
86 


86684.043

This begs the question as to why-twelve years after the 9/11 attaek and a deeade after 

the initial terrorism risk insuranee program legislation was enaeted-terrorism risk, 

partieularly for large-seale attaeks, is still viewed as uninsurable? The answer is 

surprisingly simple and explains why even the absenee of a successful major attaek on 

U.S. soil since 2001 does not alter this assessment. 

Obstacles to Insnring Losses Arising from Acts of Terrorism 

Simply put, acts of terror violate all four of the basic requirements traditionally associated 

with insurability of a risk. In situations where these requirements cannot be met, it is 

diffieult or impossible to ascertain the premium to be charged and/or difficult or 

impossible to achieve the necessary spread of risk to avoid excessive exposure to 

catastrophic loss, thereby threatening the insurer's solvency. Consequently, such a risk 

would generally be deemed to be commercially not viable (i.e., insurable) in whole or in 

part. 

The four basic requirements for insurability of a risk are detailed below (as well in 

Exhibits 4A and 48), with a description of how terrorism risk violates each requirement: 

1. Estimable Frequency: Insurers require a large number of observations to 

develop predictive, statistically sound rate-making models (an actuarial concept 

known as "credibility"). For example, insurers handle millions of auto, home, 

workers compensation and business property claims every year, providing them 

with vast amounts of data from which they can reliably estimate the frequency of 

such claims. For major catastrophic risks such as hurricanes and earthquakes that 

occur less frequently insurers still maintain databases with hundreds or even 

thousands of these events, supplemented by sophisticated catastrophe models, that 

help provide statistically reliable estimates offrequency. Terrorism risk is clearly 

different in this respect. 

was extended to cover all risks, except war, including nuclear and biological contamination, aircraft impact 

and flooding, if caused by terrorist attacks. The British government acts as the reinsurer of last resort, 

guaranteeing payments above the industry retention. 

21 
87 


86684.044

Obstacle: There are very few data points on which to base frequency estimates 

for acts of terror in the United States, thus estimates lack any true actuarial 

credibility. The opinions of experts on the likelihood of terrorist attacks, which 

might be viewed by some as substitutes for actuarially credible data, are also 

highly subjective. At any given time, there is a wide range of viewpoints among 

national security expelts on the likelihood, location and/or attack modality. 

Moreover, insurers have no access to data used internally by counterterrorism 

agencies. Given the paucity of historical data and diversity and shifting nature of 

expert opinions, catastrophe models used to estimate terrorism risk are relatively 

undeveloped compared to those used to assess natural hazard risks. The bottom 

line is that estimating the frequency of terror attacks with any degree of accuracy 

(credibility) is extraordinarily challenging, if not impossible in many 

circumstances. 

2. Estimable Severity: Insurability requires that the maximum possible/probable 

loss be estimable in order to calculate the insurer's exposure (in dollar terms) and 

minimize its "probability of ruin." No insurer can expose itself to losses of a 

magnitude that present an unreasonable risk of insolvency. 

Obstacle: Potential losses arising from terrorist attacks are virtually unbounded. 

In this sense terrorism risk is akin to war risk, which is almost universally 

excluded from commercial insurance policies worldwide. Consequently, losses 

arising from acts of terror can easily exceed an insurer's claims paying capital 

resources. Workers compensation coverage, which does not permit any 

exclusions or limitation if injuries or deaths arise from terrorist acts, can lead to 

extreme losses that on their own could potentially bankrupt an insurer under some 

attack scenarios. In addition, when it comes to estimating losses from potential 

terrorist attacks there also appears to be significant variability in outcomes (i.e., 

disagreement on estimated severity impacts), underscoring the degree of 

uncertainty associated with potential terrorist attacks. 

22 
88 


86684.045

3. Diversifiable Risk: Insurability requires that the losses can be spread across a 

large number of risks. This is an application of the "Law of Large Numbers" and 

helps makes losses more manageable and less volatile. Failure to achieve an 

adequate spread of risk increases the risk of insolvency in the same way that an 

undiversified portfolio of stocks (or any asset) is riskier than a well-diversified 

portfolio. 

Obstacle: Terrorism attacks are likely to be highly concentrated geographically 

(e.g., World Trade Center site), concentrated within an industry (e.g., power 

plants, airports) or within a certain span of time (e.g., coordinated attack). 

4. Random Loss Distribution/Fortuity: Insurability requires that the probability of 

a loss occurring be random or fortuitous. This implies that individual events must 

be unpredictable in terms of timing, location and magnitude. 

Obstacle: Terrorism attacks are planned, coordinated and deliberate acts of destruction. 

Again, they are likely to be highly concentrated geographically (e.g., World Trade Center 

site) or concentrated within an industry (e.g., power plants). Terrorists engage in 

"dynamic target shifting" whereby terrorists shift from "hardened targets" to "soft 

targets" which implies that losses are not random or fortuitous in nature. The April 2013 

Boston Marathon bombing was an example of an attack on a soft target. It is also not 

difficult to imagine attacks occurring in the United States similar to the September 2013 

attack on an upscale shopping mall (another soft target) in Nairobi, Kenya, by alShabaab, a Somali-based terrorist group with links to al-Qaeda. 

Additional Issues for Consideration in Conjunction with TRIA Reauthorization 

Certification Deadline: While TRlA spells out a highly detailed set of criteria that must 

be met for an event to be officially certified as a "terrorist act," TRIA offers no time line 

or deadline by which such a certification must be made. Although the Boston Marathon 

bombings occurred more than five months ago (on April 15,2013), there has to date been 

no certification by the Treasury Department nor has there been any statement by Treasury 

23 
89 


86684.046

that the event would not be certified. Indeed, Treasury has offered no guidance as to 

whether any such dctermination is ever forthcoming. This situation has created some 

uncertainty and confusion for policyholders, insurers and other impacted parties. A 

simple and reasonable solution would be to require that a certification detennination must 

be made within a specified number of days after the event. 

Cyber Terrorism: The threat both to national security and the economy posed by cyber 

terrorism is a growing concern for governments and businesses around the world, with 

critical infrastructure, such as power plants, transportation, and communication 

infrastructure at risk. 19 The Department of Homeland Security received reports of some 

198 attacks on critical infrastructure systems in the U.S. in 2012, a 52 percent increase on 

2011. 20 

Former U.S. Homeland Security Secretary Janet Napolitano recently warned that a 

"cyber 91l 1" could happen imminently and noted that critical infrastructure - including 

water, electricity and gas - is very vulnerable to such a strike. 21 

Earlier, in an October 2012 speech then U.S. Defense Secretary Leon Panetta warned that 

the United States was facing a possible "cyber Pearl Harbor" scenario, and increasingly 

vulnerable to foreign cyber attacks on its critical infrastructure networks. Such attacks are 

targeting the computer control systems that operate chemical, electricity and water plants 

and transportation networks, Panetta said. 

Summary 

In the twelve years since the tragedy of the September 11, 2001 terrorist attack on the 

United States, much has been learned about the nature of terrorism risk and its 

insurability. There is no question that the Terrorism Risk Insurance Act and its 

successors brought much needed stability to the market in the aftermath of the most 

costly insurance loss in global history. In the decade since, private sector insurers, 

reinsurers and the federal government have successfully partnered with one another in 

19 Cyber Risks: The Growing Threat, Robert P. Hartwig and Claire Wilkinson, Insurance Information 

Institute, April 2013. 

20 As Hacking Against u.s. Rises, Experts Try to Pin Downlvfotive, the New York Times, March 3, 2013 

21 Napolitano warns of risk of major cyber attack, Newsday, January 24, 2013, 

24 
90 


86684.047

order to maintain that stability, providing tangible benefits for businesses large and 

small-and their employees-all across America. 

The looming expiration of the TRIA at the end of 2014 brings to a head the question of 

whether terrorism risk is now, or ever will be, a risk that can be managed entirely within 

the private sector. The evidence, both in the United States and from similar programs 

abroad, is that market stability in terms of both pricing and availability of terrorism 

coverage, as well as the ability to maintain adequate and expanding levels of capacity 

over time, are contingent on the continued existence of the Terrorism Risk Insurance 

Program. Moreover, based on recent ratings agency "stress test" analyses, significant 

changes to the program could prove to be very disruptive to markets. 

Thank you for you for the opportunity to testify before the Committee today. I would be 

happy to respond to any questions you may have. 

25 
91 


86684.048

Event 

$1.3 (3%) Aviation 

$C.6i:r.:t"j 

Workers 

Comp 

$2.3 (So/.) 

'. msured !ass -eS1!~I~ fOi$-sp, 11 terr"fiS~ iol~m:k In,,lw:les pfOp~rty, b{a!M.$S lman\l-pfir)l'" wnrR~rs comp, B\ll$licn TI!.iH, lwbiilfy, ~Vi'!1'It 

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26 
92 


86684.049
93 


86684.050

28 
94 


86684.051

LLOYD'S 

Testimony of 

Sean McGovern 

Director, Risk Management and General Counsel 

Lloyd's of London 

Before the Subcommittee on Housing & Insurance 

Of the United States House of Representatives 

Committee on Financial Services 

Hearing Entitled "The Future of Terrorism Insurance: 

Fostering Private Market Innovation to Limit Taxpayer Exposure" 

November 13, 2013 

Introduction 

Thank you Chairman Neugebauer, Ranking Member Capuano, and members ofthe 

Subcommittee for the opportunity to testifY today. My name is Sean McGovern. I have 

responsibility for Risk Management at Lloyd's and am also General Counsel. It is a 

privilege to share our views on the Terrorism Risk Insurance Act, which we believe has been 

an extremely successful program. 

From its beginnings in Edward Lloyd's coffee house in the late 17th Century, Lloyd's has 

been at the forefront of insuring unusual and specialized risks. 

Lloyd's has long been a large participant in the US insurance market, through both direct 

insurance and reinsurance. Our specialism is catastrophe coverage and we have been there 

to support the US economy in the face of many tragedies over hundreds of years, cementing 

our reputation with our response to the 1906 San Francisco earthquake and more recently in 

the very substantial claims arising from Katrina, Rita and Wilma in 2005. We know how to 

underwrite catastrophic risk and we have an appetite to take risk that others will not - it is 

our business. 

I would like to begin by noting some of the experience on which our views on terrorism risk 

in general, and on TRIA in particular, are founded. 

• Lloyd's paid more claims than any other insurer or reinsurer following the tragic 

events of September 11th - almost $8 billion. 

• Lloyd's is a major provider of standalone terrorism coverage globally. We most 

recently incurred over $70 million of claims following the September 2013 Westgate 

Mall attack in Kenya. 

Page 10f6 
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86684.052

• Lloyd's led the development ofthe standalone terrorism market in the US in the days 

following 9/11- a point acknowledged by Congresswoman Maloney at the full 

Committee hearing in September. I 

• Lloyd's is generally wary of Government intervention and believes in free markets 

and private market solutions whenever possible. 

• Lloyd's market has specialist providers of property and casualty insurance and 

reinsurance and also a growing standalone terrorism market. 

Terrorism risk is different to other catastrophe risk 

Notwithstanding all of the above, the nature of terrorism risk is simply different from other 

perils, even natural catastrophe perils. To name just a few of the differences: 

• Risk assessment for terrorism is very difficult - frequency and severity are extremely 

hard to predict. 

• Only the Government has access to intelligence information regarding terror threats 

and it cannot share that information with industry, nor should it. 

• As the recent tragic events in Boston demonstrated, the likelihood and the mode of 

attack are highly variable - which adds to the uncertainty around the potential 

maximum size of an event. 

• Although modeling exists, it has limitations - in particular, due to the infrequency of 

extreme terror events, there is much less historical data available to draw upon than 

exists for natural catastrophes. 

None ofthis means that terrorism risk cannot ever be underwritten - we already do so after 

all. Nevertheless, all these factors act to substantially limit the appetite of the insurance and 

reinsurance industry to absorb this risk, particularly in major urban areas due to the density 

and accumulation of asset value. 

TRIA is still necessary 

Lloyd's supports the renewal ofTRlA. The basic market conditions that necessitated TRIA 

still exist - commercial policyholders need insurance to protect the US economy against 

terrorism losses. But, as outlined above, the coverage of terrorism risk is different from other 

risks. 

TRIA has been successful in giving the insurance industry the confidence to make terrorism 

coverage available. The availability and high take-up rates of terrorism risk insurance across 

all sectors of the economy are already well-documented in the record before the Committee. 

This availability has had a positive impact on pricing which has encouraged take-up and the 

result is that the Federal Government and ultimately the tax-payer are insulated from 

potential losses. Since TRIA, through the recoupment provisions, operates essentially as a 

post event cost-sharing mechanism, the high threshold for Federal involvement ensures that 

private capacity will absorb all but the most extreme losses. 

I From transcript of September 19 HCFS Hearing on TRIA: "the only place some companies 

could get insurance was Lloyd's of London. Why was Lloyd's of London able, in very limited ways, to 

provide insurance, yet no insurance company in America was providing insurance to anyone -- any 

business in New York" 

Page 2of6 
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86684.053

Without TRIA however, the aggregation of risk would quickly lead the industry to exclude 

coverage or withdraw capacity from key economic centres in the US. 

There is much talk about the excess capital in the insurance industry and its ability to take on 

more terrorism risk. Nonetheless, it would be wrong to assume that more capital leads to a 

dramatic increase in the overall appetite to write US terrorism. Reinsurers need to manage 

risk aggregation and seek diversification. It is important also to bear in mind that there has so 

far been no TRIA certified terrorist attack since the program began, let alone one that 

reached the trigger for Government support. Should such an event occur, it is likely that 

capacity and risk appetite would be affected - just as with other catastrophe perils. 

Lloyd's is likewise skeptical of suggestions that the ILS market could provide sufficient 

capacity to meet demand for terrorism cover absent TRIA. With 9/11 as the precedent, 

terrorism correlates more closely with adverse market events than even severe natural 

catastrophes2

, which would limit appetite from ILS investors who are typically looking for 

risks that do not correlate with financial market risk. ILS investors also typically seek very 

tightly modeled risks. Modeling techniques have been developed for terrorism risks, but 

they are limited by the relative paucity of historical data available regarding extreme 

terrorism losses. While we do not doubt that there will be some appetite from the ILS 

market, it is no cure-all. 

Further factors that need to be considered include the appetite of the cedents to write the 

original risks without TRIA's backstop and "make available" requirement. Moreover, total 

reinsurance capacity does not cater only for terrorism risk - and increasing demand outside 

the United States offers reinsurers opportunity for portfolio diversification. 

More broadly, the United States is by no means the only country confronted with the 

challenge of ensuring the national economy is protected in the event of a failure of counterterrorism measures. The UK has lived with the threat of domestic terrorism for many years. 

Whilst the structure of the co-operation between Government and industry to make terrorism 

cover available in the UK is different from TRIA, the program ("Pool Re") is covered by an 

unlimited Government backstop. Similar arrangements exist in the major European 

economies (see Appendix A), as well as many other industrialised nations - despite none 

having experienced a terrorist event of the magnitude of 9/1 1. 

Looking Ahead to Future of TRIA 

Lloyd's believes the current TRIA structure is the right framework within which to 

encourage greater private market innovation in meeting the demand for terrorism cover. It 

ensures private sector involvement from the first dollar. It allows the expertise and 

innovation that have been developed in the context of the TRIA backdrop to evolve, rather 

than be discarded. 

2 The Dow had lost nearly 1400 points from its pre-September 11th close in the first week of 

trading after the markets reopened. By contrast, the Dow was generally stable following 

Hurricane Katrina; even gaining in the first week after the storm. 

Page30fS 
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86684.054

While current modeling methodologies do give some ability to individual insurers to manage 

their own exposure to terrorism risk, they do not offer any assurance that sufficient cover 

will be available to meet overall demand. In that scenario, the consequences can be dramatic 

- as demonstrated by the economic paralysis we saw in late 2001 and 2002. 

We accept the need to assess whether or not TRIA should change - and it may well be that 

the balance between Government and private market involvement could tilt more towards 

the private market. But any changes to TRIA to facilitate greater private insurance and 

reinsurance capacity should not sacrifice the stability TRIA has already achieved. 

How changes are made can be just as important as what changes are made. For example, 

sudden or drastic increases in the retentions or co-shares could prompt some insurers to 

concentrate their capacity elsewhere. 

While Lloyd's recognises and supports the goal of reducing the Government's overall 

exposure to terrorism risk, the best way to increase private participation and benefit from the 

expertise that TRIA has enabled the industry to develop, would be through incremental 

changes over the course of a long-term extension of the program. 

Hanging the sword ofDamocles over the entire edifice every few years creates instability 

and damaging uncertainty - for industry (the insurance industry and other impacted 

industries, such as commercial real estate), policyholders and taxpayers alike. By contrast, 

well-defined incremental changes over the course of a long-term extension of the program 

may provide a transparent process of reductions in the risk borne by the taxpayer. This 

would also be consistent with supporting gradually increasing industry appetite and capacity 

to underwrite terrorism risk. 

Making those step-changes contingent on regular, independent assessments of availability 

and capacity may give a means to safeguard the steady development of a stable private 

market for terrorism cover. 

However it is important to note that Lloyd's does not envisage the end-point of such a 

transition being the complete removal of TRIA. For the reasons we have outlined, we 

believe that TRIA will continue to be needed in some form for the foreseeable future. This 

is not because of any particular failure of either industry or of government, but as a 

consequence of sociological and political changes both within and without the United States. 

Increasing urbanization combined with growing geo-political tensions has created 

'tinderbox' conditions both for the emergence of new terrorist threats and also their capacity 

to inflict concentrated destruction. While it may be possible to increase private participation 

in covering terrorism risk, we struggle with the notion that there could be no federal 

backstop. 

Nevertheless, some improvements could also be made to the administrative aspects of TRIA. 

The Boston Marathon attack revealed a need to clarify the operation of the certification 

process, due to market effects even where federal compensation is not at issue. 

Page4of6 
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86684.055

Most commercial insurance policies in the U.S. market cover or exclude terrorism peril by 

reference to a certified "act of terrorism" under TRIA. The lack of guidance to date on 

whether the Boston attack constitutes an "act of terrorism" therefore continues to create 

significant uncertainty for claims adjusters, particularly in relation to various c1aimshandling obligations (and time lines) that insurers face under State laws. 

Where exclusions in property policies turn on certification of an event, the decision of 

whether or not to certify an event must be made by an independent body not a political one, 

and either of the insurer or the insured should be able to request a determination. 

Some aspects of the program, however, should not change. For example, the design of the 

program as a retrospective assessment is preferable to pre-event pooling, which is always 

complex for an extremely low-frequency, but potentially catastrophic loss risk. 

Likewise the recoupment mechanism protects taxpayers and essentially means that federal 

support provides bridge liquidity for those insurers hardest hit by an event. 

Conclusion 

Whatever the future of TRIA, Lloyd's will remain committed to providing the fullest cover it 

can to its American customers - just as we did immediately after 9/11, before TRIA was 

enacted. 

But our ability to do that will be limited by our need to manage our risk aggregation. The 

same issue will apply across the industry and we have no confidence that the private sector 

alone is capable of providing the entirety of the coverage that would be needed should TRIA 

not be renewed. 

TRIA has been and continues to be an effective plan for stabilizing the economy in the wake 

of uncertain terrorism risk, while also ensuring a smooth economic recovery following a 

future attack. We believe that it should be renewed. 

Avenues for increasing private involvement may exist, but must be explored in such a way 

that the market is protected should additional private market capacity fail to materialize. We 

look forward to working with the Subcommittee on finding ways to do this. 

Thank you, and I am happy answer any questions. 

Page SofS 
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86684.056

Appendix A - European Government Terrorism Pools 

W'U' E . T E .. B II F b 2011 

COUNTRY GOVERNMENT POOl COMPUl.SORYI UMlTATIOHS 

OPTIONAL 

Austria 

Bdgium 

lJenmark 

Finland 

France 

Germany 

Italy 

Nethcrland~ 

Nonvay 

Port"",,1 

Spain 

Swcd(.'n 

S\\itzerland 

Osterreichischer 

Verskherungspool zur Dcckung 

von Terrorisiken 

No govemrllcnt pool is in p{t\(X' 

~u government pool. !tQW€\>Cl' 

a fund (.Istablisht'<l in Jun~ 2U08 

takt's elfcl."! when ins:urt'r.s r"~$CI"\'CS hiwe h(l(:'n <,xhausted 

No gD1.'emmcnt pool is in place 

GAIlE!\.T 

Extrcmus 

No government pool is in place 

Nedcrhuldsc 

Ht.',,"'cr,Wkcringsmaatsc-happij\'UOT 

Terrorism<.'1;cnadcn (NU'I) 

No Am'ernmcnt pool is ill plaec 

No government pool is in place 

COllsuH'io 

No government pool is in place 

No government pool is 

inpiace 

United Kingdom Pool lle 

Optional 

Compulsory 

Optional 

Optional 

Compulsory 

Optional 

optional 

Opthmal 

Oplion:.1 

Optional 

Compulsory 

Optional 

optional 

Notcompulsoty, 

howL",-erifcoveris 

n.-quin..>d it must be 

purchased for all 

proporticsofthc 

lnsurndand the Insured 

may elect to purc.hasc 

cov-crfor property and 

business interruption 

or property ollly 

Limit C5 million per lo{;ation 

SiJtt.':t! May 2008 it ha.:; oocn 

manJattlryt'ortl?rrorisminsurant"Cto 

lJt>. provid-ed by an Belgian in. ... utcrs 

Most insurers now exdudc 

terrorism cuvct' from policies so 

('O\"t'f has to be purdlt\s,,·d $cp~trntety 

if n.'quin.'(d 

Tv."O-ioeai insurers provide tt.~rrorism 

buy~btl('kwithin theirstandiitrd 

property poUt'y 

Terrorism exclusions apply for largeris:kft abQve a stated limit. being 

('20 miHion or 20% of the .sum 

insured. whichever is gr~atC'r, 

Covcris 'bv~ht hal.:.'k~vi3 GAUE...-\T 

CuveravaHabJe via Extremlls 

for fisks exceeding C25 miUion. 

Terrorism huy~back for sums 

insured below this value is gt'n~ra.lly 

;WlIUuhle via the primary lnsufC'T 

The majmity of polides exduclc 

t~rf()rislll<:over wher·£.> tht.' Hun 

jn.s~lr(>d £xC'ceds £5U mill ion 

Government p~J·ol provides (."Ovcr for 

risks upto (75 million per locatiun 

per annum 

Tl'rrorism cover is generally 

-excluded from cOlmnerdal risks with 

a limih.>d write hack. Coverts not 

readily available in the O}X't\. market 

Cover is usuaUy eXI . .'iudcd from pi'fSnnaJ and ('Hmme-rdal risks 

Cotlsordo provides tCrt'lJrl:-olu 

buy-back ct)wr. 8uhjt"Ct h) an 

Uppl'opriate prt'mhun 

Terrorism norm •. -illy excluded from 

1'l'Operty politi, .. and i. not readily 

available UlIuUj!h U", I",w market. 

\\1k're R'quirctl thisha.'l tu be secun'<l 

through UK' globul insurant't' mal'ke-t 

All primary p'"Opcrty polkieswith a sum insurede-xceeding 

CHl-'lO million exclude tcrrori.t;,m 

{'over. Commercial and industrial risks 

also contain a terrorism cxdusionfQf 

risksbdowClIl'lOmiUioll 

Covcr is ~ubj{'d to th£' same limits as 

the UK proportydamage/business 

interruption policy. The Poolltc 

programme provides for terrorism 

on an "'aU risks' ba.~is, but excludes 

adsot'war 

Page6of6 
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86684.057

The Future of Terrorism Insurance: 

Fostering Private Market Innovation 

To 

Limit Taxpayer Exposure 

Subcommittee on Housing and Insurance, 

Committee on Financial Services, 

United States House of Representatives 

Testimony of 

Dr. John S. Seo 

Co-founder & Managing Principal 

Fermat Capital Management, LLC 

Westport, CT 

Wednesday, November 13, 2013 

Washington, DC 
101 


86684.058

1. Introduction 

I thank the Subcommittee on Housing and Insurance for inviting me to testify at this hearing on 

the potential role of the so-called Insurance-Linked Securities (ILS) market to privatize a greater 

part of the terrorism insurance market in the United States. The most commonly known part of the 

ILS market is the catastrophe bond (cat bond) market. The other, less-well known part of the ILS 

market is broadly termed collateralized reinsurance, which encompasses a broad array of 

reinsurance activity. What collateralized reinsurance has in common with cat bonds is that risk 

capital from outside the traditional insurance and reinsurance market are used to back up 

promises to pay for insured catastrophe losses. In my testimony today, I will speak broadly about 

the ILS market, with details and evidence taken largely from the cat bond market. 

My name is John Seo. I am a co-founder and managing principal along with my brother, Nelson 

Seo, of Fermat Capital Management, LLC, which is believed to be the largest investment 

manager of cat bonds worldwide. Fermat Capital today has $4.5 billion of assets under 

management, all of it in ILS with a majority in cat bonds. Over the last 15 years, in addition to my 

"day job" of being a cat bond portfolio manager, I have also been privileged to serve as a stateappointed advisor to the Florida Hurricane Catastrophe Fund and as a bank-appointed advisor to 

The World Bank's Global Facility for Disaster Reduction and Recovery. In these additional roles, I 

was asked to help explore mechanisms to privatize catastrophe risks held directly or indirectly by 

the State of Florida and The World Bank. 

I have been asked by the Subcommittee to testify on the current state and outlook of the ILS 

market, to discuss common misunderstandings about the ILS market appetite for terrorism risk, 

and to discuss ways to increase the efficiency of ILS coverage for terrorism risk. Before I get to 

that, I am afraid I must give a brief history of the ILS market because this market is still so new 

and its role in insurance markets is still not widely understood. I also think the Subcommittee will 

find the history of the ILS market relevant to the current situation in terrorism insurance. 

2. A Brief History of the ILS Market 

The ILS market had its beginning in the mid-to-Iate 1990s in the aftermath of Hurricane Andrew in 

1992 and the Northridge Earthquake in 1994. These two events brought about insured losses of 

approximately $15 billion each. While such losses unto themselves were somewhat manageable 

by the insurance market, they were approximately 10 times larger than expected. This had two 

implications for the insurance market in the mid-1990s. 

The first implication was that, as things stood, insurance companies were potentially "broke", in 

the sense that they likely did not have enough capital to weather worst-case loss scenarios -

they were potentially under-reserved by up to 10 times for the "Big One" in hurricane and 

earthquake. The second implication was that insurance companies were potentially "blind", in the 

sense that their traditional actuarial methods provided no reasonable indication of worst-case loss 

scenarios. Not surprisingly, being potentially broke and blind in regard to hurricane and 

earthquake, the insurance market for these risks collapsed in the mid-to-Iate 1990s, and state 

governments had to step in. Although significant progress has been made since then to bring 

private markets back into the U.S. hurricane and earthquake insurance markets, that progress 

has been the greatest on the commercial side of the market. Even today, almost 20 years later, in 

Florida the state owns over 70 percent of homeowners' hurricane risk on the beach; and in 

California the state owns over 70 percent of homeowners' earthquake risk on the fault-line. 

In response to this dire situation in the mid-to-Iate 1990s, a relative handful of enterprising 

professionals on Wall Street created the ILS market. Two key visions drove the early formation of 

the ILS market. 
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The first vision is the most well known: that capital markets had the potential to easily absorb the 

worst-case losses of hurricanes and earthquakes. Vast as it is, the insurance market only has a 

capital base that, depending on how you measure it, is 50 to 100 times smaller than the capital 

base that backs ILS markeis. With an appropriately sized capital base, ILS markets were 

expected one day to restore the insurability condition to hurricane and earthquake risks and 

create a "win-win" situation, between insurers, on one hand, and reinsurers and ILS investors, on 

the other. Note ILS investors are alongside reinsurers because they both perform similar roles, 

each in a complementary way. ILS and traditional reinsurance help insurers shoulder their 

greatest risk burdens. ILS does this with global capital diversification; reinsurance, with global risk 

diversification. 

The second vision driving the early formation of the ILS market is less well known: capital 

markets would make cutting-edge catastrophe models ("cat models") more mainstream in 

commercial usage. Though in much wider use today, cat models were only being used by a small 

handful of pioneering insurance and reinsurance companies 20 years ago. By putting the promise 

of vast amounts of risk capital behind the latest technologies for risk estimation, it was believed 

that ILS markets could accelerate insurance industry adoption of modern cat rnodeling 

techniques. This would eventually make catastrophe insurance markets more transparent, which 

would increase the efficiency of catastrophe risk financing in all forms. 

These two elements, the promise of a huge capital base and the adoption of cutting-edge cat 

models, were together intended to solve the "broke and blind" problem that afflicted the insurance 

industry in the aftermath of Hurricane Andrew and the Northridge Earthquake. The jury is still out 

on whether these two visions of the ILS market will ultimately materialize, but progress to date 

has been excellent by most anyone's measure. 

While investment activity on the non-cat bond side of the ILS market bears a close resemblance 

to traditional reinsurance activity, the cat bond side of the ILS market has become a distinct and 

well-accepted sub-sector of the corporate bond market. Just like corporate bonds, cat bonds are 

typically rated, listed with public exchanges, and are actively traded in the over-the-counter 

market. Unlike traditional corporate bonds, however, cat bonds collectively provide explicit 

coverage for hurricane, earthquake, tornado, hail, wildfire, disease, flood, terrorism risk and 

potentially any other quantifiable risks that would be called a catastrophe by the insurance 

market. In return for bearing these risks, cat bond investors receive a high coupon, higher 

typically than those of comparably rated corporate bonds. This high coupon acts as a kind of 

insurance premium for ILS investors. 

3. Current state and outlook of the Insurance-Linked Securities (ILS) market 

From its beginnings in the mid-to-Iate 1990s, the ILS market has grown to $45 billion this year, 

with $20 billion of that coming from the cat bond market. The non-cat bond side of the ILS market 

is typically a "buy and hold" market with annually renewed contracts, while the cat bond side of 

the ILS market is actively traded on a daily basis. The cat bond market is expected to see over $7 

billion in secondary market trading volume this year. ILS investors are found on every habitable 

continent in the world and range from high net-worth individuals, family offices, foundations, 

endowments, insurance companies, private banks, hedge funds, specialty ILS managers, money 

managers, mutual funds, pension funds and sovereign wealth funds. Specialty ILS managers 

collectively have several hundred distinct investors from among all the investor classes just 

mentioned, who pool their money in ILS fund vehicles, some of which are onshore, listed, and 

regulated in the UK, Europe, or Australia. New ILS investment vehicles are announced every 

month now. 

As has always been the case, high levels of innovation continue to characterize the ILS market. It 

is not unusual for a risk to be considered "a bridge too far" in one year, then commonplace a few 

years later. For example, a cat bond covering the New York Metropolitan Transportation Authority 
103 


86684.060

(MTA) for flood risk was successfully placed in the market this year in July. ILS professionals now 

believe the MT A cat bond to be the first of many such flood bonds that will be issued in coming 

years; yet, even a few years ago, many of those same ILS professionals considered a burgeoning 

market for flood bonds to be improbable. This is not an unusual experience in the ILS market. 

Regarding the coverage of terrorism risk specifically, I report to the Subcommittee that the cat 

bond market alone currently covers only $1.4 billion in terrorism risk. If we extrapolate that to the 

non-cat bond side of the ILS market, we could reasonably estimate that the ILS market in total 

covers roughly $3 billion in insured terrorism risk today. 

From its current base, some market observers expect the ILS market to triple in size over the next 

five years and create $150 to 200 billion in total risk capacity before the end of this decade. Using 

only simple extrapolation from our current state, this expected growth trend would take ILS 

capacity for terrorism risk to $9 to $12 billion by the end of this decade. If the ILS market should 

more widely adopt coverage of terrorism risk, the ILS market capacity for terrorism risk could 

easily rise to $20 to $30 billion by the end of the decade. There are the usual caveats that must 

surround this rosier projection, but it is definitely not out of the realm of future possibility. 

4. Common misunderstandings about the ILS market appetite for terrorism risk 

Unless a particular part of the ILS market is growing by leaps and bounds, it is common for 

misunderstanding to arise around the market appetite for the risk or risks in question. Some of 

these misunderstandings stem from a lack of information, and some of these misunderstandings 

come from mixing and confusing the preferences expressed among different investor classes. I 

would like to address one of each kind of misunderstanding now. 

The first common misunderstanding is that ILS markets have shown no appetite for terrorism risk 

to date. I assume that such a view is largely due to a lack of information, so I will simply layout 

the numbers on this issue now. The ILS market for terrorism risk began with Golden Goal 

Finance, Ltd., a $250 million cat bond deal brought to market in October 2013. Golden Goal 

provided terrorism cancellation coverage to FIFA for the 2006 World Cup. At the time, merely two 

years after 9/11, Golden Goal was 7 percent of the outstanding cat bond market, quite large for a 

single cat bond issue. As such, Golden Goal at the time of issuance was the third largest cat 

bond issue in the market out of 25 outstanding issues. In the ten years since the issuance of 

Golden Goal, terrorism risk has remained at 7 percent of the cat bond market, growing from $250 

million to $1.4 billion in cat bond coverage over the last 10 years, which comes out to a 19 

percent compound annual growth rate. Admittedly, these figures do not indicate an overwhelming 

trend of historical growth, but they certainly do not support the conclusion that ILS markets have 

exhibited no appetite for terrorism risk to date. Given the proper information, it seems clear that 

ILS markets to date have kept an open mind on terrorism risk-nothing more and nothing less. 

Another common misunderstanding is that ILS investors strictly avoid correlation risk. This very 

common misperception about ILS investors deserves careful discussion. Confusion around this 

issue is understandable. 

Without getting into too much detail here, ILS markets are supported by a mixture of so-called 

fast and slow money. Fast money typically comes from hedge funds; slow money, from pension 

funds. According to the latest figures from Swiss Re Capital Markets, hedge funds make up less 

than 5 percent of the ILS market. Pension funds are more difficult to track directly because they 

tend to invest through specialty ILS managers. As one such manager myself, I would gauge 

pension fund participation in the ILS market to be 60 percent. 

Fast money is the most vocal about correlation risk in ILS. Part of this concern is sincere. Fast 

money often runs highly leveraged positions, in long-short pairing as well. Even a relatively small 

and brief departure from correlation assumptions can cause big trouble for fast money. This 
104 


86684.061

makes fast money naturally sensitized to the possibility of minute flaws in correlation 

assumptions. Nonetheless, part of the concern expressed around ILS correlation by fast money is 

a codified way of asking for a higher yield. Fast money reasons that slow money, which I will 

discuss soon, keeps ILS yields low on the assumption of non-correlation. Fast money goes on to 

reason that any potential correlation is uncompensated; and, therefore, greater than normal yield 

is required for ILS with any potential correlation issues. By the way, this concern applies to most 

earthquake bonds as much as it would to terrorism bonds. 

Armed with this kind of reasoning, which borders on militancy at times, fast money can stay on 

the sidelines for years at a time, waiting for what it perceives as distressed yields before entering 

a particular part of the ILS market. Perhaps the incorrect view that alilLS investors are 

hypersensitive to correlation risk comes from the fast money side of the market, but fast money, 

as already noted, is only a small part of the overalilLS market capacity. 

Slow money is clearly enamored with the general low correlation of ILS to stocks and bonds. 

Perhaps this, too, could mislead a market observer. By incorrectly combining slow money 

declarations of love for the low correlation of ILS with the non-correlation militancy of fast money, 

it is possible to come up with the false, composite picture that alilLS investors are a tough bunch 

when it comes to ILS correlation risk. Yet, this is simply not true. 

Slow money likes ILS and believes ILS offer returns that have a low correlation to stock and bond 

returns. There is no doubt about this, but the sentiment is more declarative than prescriptive. First 

of all, slow money defines correlation on a much longer time scale than does fast money-years 

as opposed to days, weeks or months. Does a prolonged economic recession increase the risk of 

an insured loss event? Does an insured loss event increase the risk of a prolonged recession? 

Measured on such long time scales, to my knowledge, no significant correlation between ILS and 

traditional markets has ever been found. Low correlation with traditional investments is desired by 

slow money, but the insistence is not so strict that zero correlation is required. Furthermore, the 

long time scale used to gauge correlation washes out most short-term effects usually associated 

with, or defined as, correlation. 

Perhaps just as important as the long time scales on which slow money operates, slow money is 

also thoughtful about its approach to alternatives markets like ILS. Even if there were some 

possibility that an insured loss event might cause longer term damage to stock and bond returns, 

slow money would ask: is that risk, already borne by stock and bond investors, better 

compensated in ILS than in stocks and bonds? The answer to that question is almost universally: 

"ILS pays better for the risk." This is because stock and bond investors are almost never 

compensated for bearing extreme event risk, whereas ILS investors are almost always paid for 

the extreme event risks they cover. As you might hope and expect, with slow money, any lack of 

correlation with stock and bond returns is icing on the cake, but fair compensation for the risk is of 

the greatest importance in the end. 

5. Ways to increase the efficiency of ILS coverage for terrorism risk 

I would like to end my testimony by briefly describing two ways to increase the efficiency of ILS 

coverage for terrorism risk, which could help the ILS market get to a higher adoption of terrorism 

risk coverage than might be expected at the current pace of progress. 

Greater efficiency of ILS coverage is generally achieved by bundling of coverage with risks that 

are better understood or exclusion of risks that are less well understood or both. Let me explain 

while being more specific. 

ILS coverage for terrorism risk in the cat bond market has never occurred on a pure, standalone 

basis. ILS coverage for terrorism risk in the cat bond market is typically bundled with so-called 

extreme mortality risk, which includes mass threats to human life from disease and earthquake. 
105 


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This bundling is natural and unsurprising, but the bundling of terrorism risk with other risks likely 

occurs because risk coverage generally becomes more efficient the more risks are put together in 

a single contract. I am leaving out a great deal of technical details, but the intuition here is simple: 

risk bundling reduces the negative effects of transaction costs and economic rents for capital. 

Ideally, the new risks that are being brought into the bundle are better understood, improving the 

average quality of the risk bundle. Sometimes, other competing market inefficiencies can come 

into play to counter the benefits of risk bundling, so this is not always a cure all. Nonetheless, if 

terrorism risk were bundled with natural catastrophe risks such as hurricane and earthquake, the 

efficiency of ILS coverage for terrorism risk could potentially be improved. 

Finally, ILS coverage for terrorism risk in the cat bond market currently includes nuclear, 

biological, chemical, and radiological (NBCR) causes of loss. Cat models attempt to take into 

account both conventional and NBCR sources of terrorism losses, but the ILS market believes 

that NBCR risks are much less well understood than conventional terrorism risks. If NBCR were 

excluded from ILS coverage, the efficiency of ILS coverage for the remaining conventional 

terrorism risk would be improved greatly. 

6. Closing 

Thank you for this opportunity to testify to the Subcommittee today. I look forward to answering 

any questions you may have. 
106 


86684.063

~I American 

Bankers 

Association 

Building Success. Togethar. 

September 16, 2013 

Filed via http://www.regulations.IiIOY 

J. Kevin A. McKechnie 

Senior Vice President & Director 

Office of Insurance Advocacy 

202-663-5172 

kmckechn@aba.com 

President's Working Group on Financial Markets: Terrorism Risk Insurance Analysis 

CIO Kevin Meehan 

Federal Insurance Office 

U.S. Department of the Treasury 

Room 1319 

MT. Department of the Treasury 

1500 Pennsylvania Avenue NW. 

Washington. DC 20220 

Re: President's Working Group on Financial Markets: Terrorism Risk Insurance 

Analysis 

Dear Mr. Meehan: 

The American Bankers Association and its insurance and securities subsidiaries. the 

American Bankers Insurance Association (ABIA) and the ABA Securities Association 

(ABASA)1. appreciate the opportunity to provide comments about the long-term 

availability and affordability of terrorism risk insurance.' We believe we are in a unique 

position to comment since a Financial Holding Company. of which ABA represents many. 

may act as a lender. insurance broker. and securities underwriter for a variety of large 

corporate customers. Because of our cumulative experience in these markets. we believe 

that TRIA is vital to the smooth operation of the capital markets and. therefore. the 

economy at large. 

At th.e time Congress last considered and passed re-authorization of TRIA in 2007. we 

commented that TRIA "prOVides capacity and reliable pricing for terrorism risk insurance 

in a market that otherwise has been unable to accurately and efficiently price risks 

associated with terrorist events." 

There have been no material changes to the insurance marketplace since then that would 

compel us to change our opinion. TRIA is necessary to help companies that need terrorism 

coverage solve the problem of being unable to obtain it. 

J The American Bankers Insurance Association (ABIA) and the ABA Securities Association (ABASA) .r. 

separately chartered trade associations and subsidiaries of the American Bankers Association. 

1 See 78 Fed. Reg. 42588 (July 16. 2013). . 

J 120 Connecticut Avenue. NW I Washington. DC 20036 I j-SOO-BANKERS I aba.com 
107 


86684.064

Were TRIA to lapse, a variety of undesirable market conditions would result, lenders would 

not be able to underwrite or syndicate large commer~ialloans; companies would not be 

able to secure coverage for terrorism risk, a necessary precedent to securing real estaterelated credit; and, existing loans made with the condition that terrorism risk coverage be 

continuous would be found in default. 

Holders and issuers of Commercial Mortgage Backed Securities (CMBS) would also be 

negatively affected as rating agencies might judge these assets adversely. One rating 

agency, Fitch, said this: 

"Fitch may decline to rate or cap its ratings on CMBS transactions with inadequate telrorisrn 

insurance.,,3 

While lapse would be the worst possible condition, we also want to point out that market 

disruptions are being experienced currently due to contract terms extending beyond the 

expiration date of the program. For example, insurance policies with terrorism coverage 

for any term extending beyond 2014 can't be issued to commercial customers. Accordingly, 

multi-year commercial loan products, which require property insurance policies backing 

them, are at risk now; new loans and refinancing can only be issued on a short term basis 

or not at all. 

We appreciated previous opportunities to provide information to the Treasury. Please find 

our comments addressing questions regarding coverage and expiration of the TRIA 

program below. 

Coverage 

Our members' experiences with terrorism risk insurance have indicated that absent TRIA. 

the ava!lability of coverage would be minimal and the private insurance marketplace would 

function ineffiCiently at best. Previous reauthorizations ofTRiA have expanded available 

coverage and allowed for tbe market to function in a more effective fashion. 

The 2007 reauthorization covered domestic terror events in addition to those of a foreign 

nature, removing ambiguities about whether a particular event would be covered, or not. 

Given the events in Boston earlier this year, we find this provision highly relevant. We 

recommend that this provision remain. It has benefited both policyholders and insurers. 

We also want to point out that the most valuable provision in the Act is the "make 

available" provision, where property and casualty insurers who offer property coverage to 

a commercial customer must make terrorism coverage available as well. It's critical this 

provision survive re-authorization too. 

:'.~'Fit~h Ratings' R~ort: U.S. Terrorism Reip~..!!!"!!!1ce: LoominI!.Yncerta!!!Iy. of Program Renewal" ~uly 31, 201~_ 

American Bankers Association 

2 
108 


86684.065

Despite the increased clarity and efficiency afforded by TRIA, corporate insurance 

customers in high-risk urban areas still encounter difficulty obtaining coverage with 

sufficient limits. This is due in large pait to the inability of the marketplace to ascertain the 

potential risks of a terrorist event in urban centers and, with confidence, provide the 

capacity needed to address those needs. 

Without TRIA, it is our judgment that coverages for such high risks would be virtually 

unavailable. 

Expiration 

We believe it is important to address TRIA fe-authorization now, before the program 

expires at the end of next year. We do not believe states would be able to mandate 

sufficient policy requirements to protect commercial consumers needing terrorism risk 

insurance coverage in the absence of this federal program. 

In addition, the private sector has not demonstrated an ability to provide terrorism risk 

coverage at affordable prices, absent TRIA. Terrorism risk cannot be underwritten by 

traditional means since data on predicted frequency and severity in any given location is 

unobtainable. As a result, there is no reason to presume that coverage levels and prices 

would remain consistent if TRIA were allowed to expire. 

Conversely, many observers suggest that TRIA inhibits the development of capacity in the 

traditional re-insurance marketplace. We believe this to be true in principle. Accordingly, to 

encourage private market development we urge the government to consider reducing the 

potential liability TRIA represents to the Treasury. Over time, more efficient markets may 

evolve to a point where TRIA may be discontinued. 

We want to point out, however, that several large brokers like Marsh and Willis report that 

right now, affordable terrorism risk insurance only exists because TRIA does too. We 

believe them. 

Legislative Vehicles 

Several bills have been introduced in the House that propose to extend the TRIA program 

for at least 5 years. This seems to be the minimum practicable extension sufficient to allow 

insurance markets to respond. Other bills extend the program for 10 years. We are in favor 

of either approach. 

Various enhancements to TRIA are also proposed; 

._------------- .---.---------.. --- 3 

American Bankers AssOCiation 
109 


86684.066

• Changing the aggregate financial responsibility of the Treasury in the event of an 

attack: 

• In addition to the Secretary of the Treasury, including the Secretary of the 

Department of Homeland Security in the certification process for acts of terrorism; 

and, 

• Changing the "recoupment" provisions TRIA requires the Secretary of the Treasury 

to impose. 

Each of these provisions would enhance the value of the program and we encourage the 

Administration to support them; however, the most important feature of the legislation is 

that it suggests the TRIA program be reauthorized promptly. 

We strongly support that intent. 

Should you have any questions regarding these comments or wish to obtain any further 

information from the ABA. please contact me at (202) 663-5172 or by email at 

kmkechn@aba.com. 

Regards, 

J. Kevin A. McKechnie 

SVP & Director, Office of Insurance Advocacy 

-------,.,----.-"'--- -------------- 4 

American Bankers Association 
110 


86684.067

I£ aull<IinG~ TqS/1tl,... .. 

March 19,2013 

The Honorable Michael Grimm 

U. S. House of Representatives 

Washington, D.C. 20515 

J. Kevin A. McKechnie 

Senior Vice President & Director 

Office of Insurance Advocacy 

202-663-5172 

kmckechn@aba.com 

The Honorable Carolyn Maloney 

U. S. House of Representatives 

Washington, D.C. 20515 

RE: Support for R.N.. 508, TRIA Re-authorization 

Dear Representative Grimm and Representative Maloney: 

The American Bankers Insurance Association (ABIA), the insurance subsidiary of the American 

Bankers Association (ABA), would like to thank you for introducing H.R. 508. We have long 

been advocates for the Terrorism Risk Insurance Act, supported its creation and re-authorization 

and now strongly support its extension for a further 5 years. 

ABA, ABIA, and scores of other major industry trade groups are part of an industry coalition, 

the Coalition to Insure Against Terrorism (CIAT), that supports the continuation or the program. 

The Coalition maintains that telrorism risk remains effectively uninsurable without the 

govenunent backstop, and the cost to our economy would be too great if such coverage was not 

available. 

It is vital that the economy continue to rebuild and we see the availability of comprehensive 

commercial insurance, including coverage for terrorism risk, as an important component of 

recovery. We look forward to working with you and the bi-partisan group of sponsors already 

assembled to enact this legislation. 

Sincerely, 

J. Kevin A. McKechnie 

SVP & Director 

Office ofInsurance Advocacy 
111 


86684.068

CHAMBER OF COMMERCE O[?THE 

UNITED STATES OF AMERICA 

R. BRUCE JOSTEN EXECUTNE V1CBPMSIDENT 

GOVERNMENT AFFAlllS 

1615 H STREET. N,W. 

WASHINGTON, D.C. ZOO6z..2000 

202l463 M53I 0 

November 12,2013 

The Honorable Randy Neugebauer 

Chairman 

Subcommittee on Housing and Insurance 

Committee on Financial Services 

U.S. House of Representatives 

Washington, DC 20515 

The Honorable Michael E. Capuano 

Ranking Member 

Subcommittee on Housing and Insurance 

Committee on Financial Services 

U.S. House of Representatives 

Washington, DC 20515 

Dear Chairman Neugebauer and Ranking Member Capuano: 

The U.S. Chamber of Commerce, the world's largest business federation representing the 

interests of more than three million businesses of all sizes, sectors, and regions, as well as state 

and local chambers and industry associations, and dedicated to promoting, protecting, and 

defending America's free enterprise system, thanks you for holding the hearing entitled "The 

Future of Terrorism lrisurance: Fostering Private Market Innovation to Limit Taxpayer 

Exposure." 

In the months following the 9/1 1 terrorist attacks, the inability for insurance 

policyholders to secure terrorism risk insurance contributed to a paralysis in the economy, 

especially in the construction, travel and tourism, and real estate finance sectors. Since its initial 

enactment in 2002, the Terrorism Risk Insurance Act (TRIA) has served as a vital public-private 

risk sharing mechanism, ensuring that private terrorism risk insurance coverage remains 

commercially available and that the U.S. economy could more swiftly recover in the event of a 

terrorist attack. 

Catastrophic terrorism remains an uninsurable risk because its frequency and location 

cannot be accurately predicted, and its potential scale could be devastating. Without the backstop 

that TRIA provides, the priVate insurance market would be unable to provide adequate levels of 

terrorism risk insurance. TRIA continues to promote long-term availability of terrorism risk 

insurance for catastrophic terror events and provides a standard of stability for financial markets 

and recovery after such an attack. 

In the absence of TRIA, the federal government would almost certainly be called upon to 

make significant expenditures after a large-scale attack on the United States. The Chamber 

strongly supports TRIA's current structure as it ensures the involvement of private sector capital 

from the outset while also protecting U.S. taxpayers. TRIA requires that individual insurance 

. companies pay a deductible equivalent to one-fifth of their premiums for all TRIA-covered lines 

and then requires 15% copayment of all losses above their deductible, utilizing substantial 

private sector capital to pay losses from an attack before any involvement from the federal 

government. To further protect taxpayers, the program also mandates a recoupment mechanism 

to ensure that the federal government can be made whole after an attack. 
112 


86684.069

While TRIA is currently set to expire at the end of 20 14, the Chamber strongly urges 

Congress to reauthorize this program sooner rather than later. As the Chamber's member 

companies map out plans for the next 14 months and beyond, the ability to secure terrorism risk 

insurance is crucial to ensuring that the American business community has the certainty that it 

needs to continue to move forward with projects and create jobs. 

The Chamber thanks you again for holding this hearing and looks forward to working 

with the Committee to secure swift reauthorization of this important program. 

Sincerely, 

/~k R. Bruce Josten 

cc: Members of the Subcommittee on Housing and Insurance 
113 


86684.070

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CIAT COALITION TO INSURE 

AGAINST TERRORISM 

www.insureagainstterrorism.org 

November 13, 2013 

The Honorable Randy Neugebauer 

Chairman 

Subcommittee on Housing & Insurance 

Committee on Financial Services 

United States House of Representatives 

Washington, DC 20515 

The Honorable Michael Capuano 

Ranking Member 

Subcommittee on Housing & Insurance 

Committee on Financial Services 

United States House of Representatives 

Washington, DC 20515 

Dear Chairman Neugebauer and Ranking Member Capuano: 

Thank you for convening this important hearing to further examine the Terrorism 

Risk Insurance Act (TRIA). CIAT is a broad' coalition of commercial insurance 

consumers, formed immediately after 9111 to seek a way to restore availability of 

commercial terrorism insurance for American businesses and the broader economy. 

CIAT's diverse membership represents, among others, commercial real estate, banking, 

energy, construction, hotel and hospitality, entertainment, manufacturing, transportation, 

the major league sports, as well as public sector buyers of insurance including colleges 

and universities. CIA T is the true consumer voice on terrorism risk insurance, as we are 

comprised of the principal policyholders of commerciai property and casualty lines of 

insurance in the United States. 

CIA T strongly SUPPolls the TRIA program. For more than a decade, TRIA has 

made it possible for businesses to purchase the terrorism risk coverage they need at almost 

no cost to the taxpayer. TRIA brought stability to a marketplace that was severely 

paralyzed following 9/11, and it remains a criticai component of ensuring economic 

continuity following another large-scale terrorist attack. It is imperative that TRIA be 

extended beyond 2014. A recent study by Fitch Ratings concluded that it is "unlikely that 

substantiai private market capacity would arise as a substitute" were TRlA to expire'. 

Bloomberg Government's analysis concurs, indicating I'there is no reason to assume that 

reinsurers will re-enter the market if the TRIA program expires, and every reason to 

assume that the availability of coverage will fall.'" We remember all too well what 

happens when terrorism coverage is not available: commercial borrowers lose their ability 

to get financing - or go into technical default on financing covenants, billions of dollars in 

real estate-related transactions stalled or cancelled, hundreds of thousands of jobs lost. 

Simply letting TRIA expire is not a realistic option. 

Under TRIA, all insurance against terrorism risk is written in the private 

marketplace with no upfront federal liability. All losses recognized in the TRIA plan go 

first through the private insurance mechanism where much of the loss is retained by 

design. In the absence of TRIA, which ensures industry participation, the federai share of 

such a disaster could well be larger. TRIA replaces government exposure with private 

capital, since insurers retain the cost of all but the largest terror incidents. 

• • • 1875 J Street, NW, Suite 600, Washington. D.C. 20006-5413 

Phone 202-739-9400 Fax 202-739-9401 
114 


86684.071

As a coalition of primarily commercial entities, we instinctively prefer private market 

solutions. However, the unique characteristics of terrorism (e.g., adaptive, intentionally driven to 

inflict catastrophic damage, can strike anytime/anywhere, etc.), significantly hampers the reliability 

of traditional actuarial risk models, thus necessitating a program like TRIA. To this end, we believe 

one of the strengths of TRIA is the manner in which it utilizes the private insurance marketplace to 

manage terrorism risk - indeed, as mentioned above all exposure under TRIA starts with private 

insurance contracts and, due to both significant retentions and the recoupment mechanism, the 

ultimate risk-bearers under TRIA are the policyholders and the private insurers. We are always 

willing, however, to consider ways to further limit taxpayer exposure under the program, as which 

we know is your focus as well. 

Overall, we support the current structure of TRIA and are wary of major structural changes. 

We are open to modifications so long as they do not have the effect of restricting the availability of 

terrorism insurance. The current retrospective pooling arrangement, nevertheless, has advantages 

over various "pre-funding" mechanisms because: 

• the retrospective pooling arrangement avoids the need to set contribution rates based on 

some guess as to how much in terrorism losses there will be 

• a pre-funded pool poses temptation to spend the funds on other purposes 

• the uncertain nature and timing of large terrorist attacks leads to the risk that a pre-funded 

pool could be either insufficient or over-capitalized 

With respect to the various private sector retention levels under TRIA (i.e., the program 

trigger, insurer deductibles, etc.), we remain concemed that increasing these levels too much too 

quickly could restrict the availability of terrorism insurance. We understand, after all, that 

reinsurance capacity for even the existing retention levels under TRIA is Iimited.3 This fact alone 

demonstrates that TRIA is not "crowding out" the private sector. 

Lastly, reasonable measures to attract greater reinsurance and other private sector capacity 

to the terrorism insurance marketplace are to be encouraged. To date, however, we see no evidence 

that creative private sector capital alternatives such as CAT Bonds and insurance link securities are 

sufficiently developed to inject meaningful private capital into the terrorism insurance marketplace. 

Ultimately, it is important that Congress find ways to incentivize this without impairing TRIA to 

ensure that terrorism insurance remains available in the event that private sector capacity does not 

develop to the degree assumed. 

We are committed to working with you as you craft a solution to extend TRIA beyond 

2014, and we again thank you on your leadership on this critical issue. 

Sincerely, 

The Coalition to Insure Against Terrorism 

I Fitch Ratings u.s. Terrorism Reinsurance: Looming Uncertainty of Program Renewal, 1 (2013). 

'Bloomberg Government, Extending Terrorism Insurance: The case is strongfor maintaining afederal 

backslop in a markelloo risky/or private sector alone, 5 (2013). 

) According to Eric Smith of Swiss Re, "Based on the most recent estimate, the total amount of reinsurance 

capacity available for terrorism in the United States is approximately $6-10b -- well below the $27.5b 

insurance marketplace aggregate retention under TRIA and the $34-35b cumulative insurer loss retentions." 

The Terrorism Risk Insurance Act 0/2002; Hearing Be/ore the H Comm. on Financial Services, 113lh Congo 

(2013) (statement ofJ. Eric Smith, President & CEO, Swiss Re Americas, at 4). 

• • • 1875 I Street, NW, Suite 600, Washington, D.C. 20006-5413 

Phone 202·739·9400 Fax 202·739·9401 
115 


86684.072

• F:INAN(~IAL 

SLltVJC~[~S 

ItOUNl)···I·ABLE: 

Committee on Financial Services 

Subcommittee on Insurance and Housing 

"The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit 

Taxpayer Exposure" 

November 11, 2013 
116 


86684.073

The Financial Services Roundtable ("FSR") thanks Chairman Neugebauer and 

Ranking Member Capuano for holding this important hearing entitled "The Future of 

Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure." 

We applaud your consideration of Terrorism Risk Insurance Act ("TRIA") and appreciate 

the opportunity to submit comments for the record. 

FSR supports the long·term reauthorization of TRIA. TRIA establishes a public" 

private partnership that enables the private sector to offer terrorism risk insurance and 

absorb substantial property and casualty losses resulting from acts of terrorism. Under 

this framework, FSR believes TRIA achieves its public policy goals of supporting a private 

market for terrorism risk insurance, fostering economic resiliency before and after a 

terrorist attack, and limiting taxpayer losses following a terrorist attack against the nation. 

'This hearing is an important step in assessing the program and informing 

policymakers about this marketplace for terrorism insurance coverage. The last time 

Congress voted on TRIA was in 2007, and many of the Financial Services Committee 

members have never considered this program. 

FSR represents 100 of the largest integrated financial services companies providing 

banking, insurance, investment products and services to the American consumer. FSR 

member companies fuel America's economic engine, accounting directly for $92.7 trillion in 

managed assets, $1.2 trillion in revenue, and 2.3 million jobs. 

Our diverse membership gives FSR a unique perspective on TRIA. FSR member 

companies not only include the insurers and reinsurers that offer terrorism coverage, but 

also banks and investors that must protect their investments from terrorism"related 

events, companies that need workers compensation protection for their employees and the 

very policyholders that must insure against terrorism loss. TRIA was not established for 

insurers, but rather for policyholders - investors, developers, lenders, and employers, all of 

whom drive economic growth and create jobs. 

TRIA BACKGROUND 

Congress approved the Terrorism Risk Insurance Act of 2002 on November 26, 2002, 

after private terrorism insurance constricted following the terrorist attacks of 2001. The 

September 11,2001, attacks totaled approximately $31.6 billion (in 2001 dollars), and 

Congress enacted TRIA in response to widespread concern that the lack of terrorism 

insurance would have a tangible adverse impact on the U.S. economy. 

TRIA was a three year program authorized through 2005 and then reauthorized 

again in 2005 and 2007 in recognition of the ongoing terrorist threat and the inability of 

insurers to underwrite the threat and make a sufficient private market for terrorism 

coverage. The existing law is set to expire on December 31, 2013. 

TRlA'S FRAMEWORK 

TRIA ensures that the private sector offers terrorism risk coverage and ultimately 

absorbs some if not all of the loss from an attack. Extraordinary losses that exceed 

2 
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86684.074

substantial private funding levels will be shared between the private and public sector, as 

outlined below. The existing program's structure requires substantial private sector capital 

before any public money becomes involved, and that public money which may be called 

upon is subject to a meaningful recoupment formula. 

TRIA only covers certified acts of terrorism (as determined by the U.S. Department 

of the Treasury), requiring, among other things, property and casualty losses that exceed $5 

million. The current version of TRIA has a "program trigger" of $100 million, under which 

the private sector absorbs all loss. If losses exceed $100 million, each individual insurance 

company will realize the entire loss up to 20 percent of its previous year's annual direct 

written premiums from commercial and property lines (this is the program 

deductible). Though that deductible varies depending on the premiums written, it is 

currently estimated to be approximately $34 billion.' 

Iflosses exceed this level, private insurers begin to share losses with the federal 

government; the government absorbs 85 percent of additional losses and the private sector 

absorbs the remaining 15 percent. In effect, this government participation is a liquidity 

mechanism, where the government payments, should there be any, provide immediate 

liquidity to the insurer, allowing policyholders and claimants to receive insurance claims 

payments quickly. The law requires that government will recoup from insurers 133 percent 

of public funds provided up to $27.5 billion; losses above that amount are subject to 

recoupment in the government's discretion. Government funding for events that occur after 

January 1,2012, must be collected by September 30,2017, under current law. 

TERRORISM RISK CANNOT BE UNDERWRITTEN 

Terrorism is a risk, particularly for major attacks that could lead to massive damages, that 

cannot be underwritten at the present time. Effective insurance underwriting requires the ability 

to predict the frequency, location, and severity ofloss. Though the typical insurance risks can be 

unpredictable, when those events are pooled over a large enough area and time line, the 

randomness of those events can provide a better understanding of the frequency and severity and 

location of events and inform underwriting, pooling and risk management decisions by insurers. 

Terrorism, however, presents an additional complication because it is purposeful, and 

indeed, the very nature of terrorism is to evade prediction. Insurers continue to seek modeling 

methodologies; however, underwriters have yet to identify a proven model that can work with 

existing and available data to predict this risk in an accurate enough way with the erratic and 

purposeful behavior of terrorists. The industry, thankfully, lacks meaningful data regarding 

severity, nature, extent, impact or duration of Nuclear, Chemical Biological, and Radiological 

(NCBR) attacks. Neither the frequency nor severity of an attack can currently be accurately 

predicted or credibly modeled. A terrorist may not act for years and then strike multiple times in 

mUltiple different ways and locations, none of which is predictable. This lack of predictability is 

compounded by the fact that terrorism is a dynamic risk: "Terrorism involves strategic human 

behavior and represents a dynamic threat that is intentional, responsive to countermeasures, and 

1 We bel, Baird. Congressional Research Service. Terrorism Risk Insurance: Issue Analysis and Overview of Current 

Program. April 26, 2013. 

3 
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86684.075

purposefully unpredictable.,,2 To the extent that the terrorist threat is identified, the threat is 

likely to evolve and change to avoid being thwarted. This risk, perversely driven by human 

creativity and unlimited in scope, makes underwriting terrorist risk an impossibility. 

Furthermore, terrorists seek to disguise intent and their planned actions making it even more 

difficult to predict attacks or outcomes. 

Without TRIA, the insurance industry's ability to insure property or absorb losses 

following a severe terrorist attack will be severely compromised. This is compounded by the 

state law requirement to cover workers compensation coverage. Regardless of whether TRIA is 

reauthorized, workers compensation must be covered. This leaves coverage providers vulnerable 

to substantial downside risk from terrorist attacks, including non-conventional NCBR attacks. 

Without TRIA in place, this downside risk related to workers compensation coverage jeopardizes 

the solvency of insurers, potentially leaving policyholders unprotected in the aftermath of a 

tragedy. 

If TRIA expires, private sector capacity will diminish significantly, as exhibited in the months 

after September 11, prior to TRIA's enactment. The lack of market capacity will result in very 

limited and costly coverage options. This will impact the ability of entities to access coverage 

necessary to secure financing and investment, to proceed with development, to secure mandatory 

workers compensation coverage and to protect the businesses that are critical to our economy. It 

is, therefore, critical that the U.S. continues to partner with the insurance industry to assure 

policyholder access to critically important coverages. 

TERRORISM RISK INSURANCE MARKETPLACE 

The Financial Services Roundtable and its member companies share the 

Committee's goal of creating a robust private marketplace for terrorism risk insurance. 

The nature of terrorism risk, however, is unique and without TRIA no such marketplace 

would exist at this time. 

Take'up Rates 

The marketplace and take'up rate for terrorism risk insurance has evolved 

substantially since the inception of the program. According to Marsh's 2013 study, "In 

2003, the first full year TRIA was in effect, the take'up rate was 27 percent but has since 

increased steadily, remaining in the low 60 percent range since 2009." Take'up rate varies 

between sectors and regions and company size. 

Pricing for terrorism risk has also evolved over the life of the program. Initially, 

coverage was priced at approximately 7 percent of property premium during the third 

quarter of2003. Over time, however, price levels declined, ultimately stabilizing between 

3 - 5 percent of property premium range. Price levels, of course, vary according to the size 

location, and industry. 

2 Hubbard, Glenn and Bruce Deal. The Economic Effects of Federal Participation in Terrorism Risk. September 

2004. 

4 
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86684.076

Capacity 

Under TRIA, primary writers in the commercial space are mandated under the 

"make available" provision to offer terrorism risk coverage; policyholders, however, are not 

required to purchase the coverage (absent state requirements for coverages such as workers 

compensation or lender requirements as part of a commercial mortgage). Given the "make 

available" mandate, primary commercial writers provide the capacity or coverage that 

would not exist otherwise. 

Reinsurance influences the availability of terrorism risk insurance because the 

transfer of risk from insurer to reinsurer allows the insurer to spread its risk and frees up 

capital, which allows insurers to provide additional capacity to the marketplace. According 

to the 2010 President's Working Group Report, reinsurance capacity ranges between $6 . 

$10 billion. Although capacity may have increased since the report was issued, the 

available reinsurance coverage does not appear to be sufficient at those or even moderately 

increased capacity levels. 

The private sector continues to explore whether the capital markets could provide 

addition risk spreading mechanisms for terrorism insurance, thus increasing capacity for 

primary insurers. To date, however, there is not an active securitization market for 

terrorism risk. While our members are eager to identify stable sources of additional capital 

for the market place, there is no viable option to meet demand at this point. 

Many risk professionals believe the termination of TRIA would reduce coverage and 

decrease the affordability and availability ofterrorism coverage. According to a poll by the 

Risk and Insurance Management Society (RIMS), 45 percent of respondents expected a 

decrease in terrorism coverage limits while 24 percent believed coverage would no longer be 

offered by insurers upon expiration of TRIA. 

The Committee is considering what adjustments should be made to the program to 

increase the marketplace for terrorism risk insurance, foster economic resiliency before and 

after a terrorist attack, and limit taxpayer losses following such a tragedy. These are 

important goals to have top of mind as changes to the program are contemplated. Although 

the question is not whether available terrorism risk insurance coverage would be sufficient 

should TRIA expire, any adjustments to the program should be closely scrutinized as to 

their impact on private sector participation in the market and supply of coverage. 

As noted in the above description of TRIA's framework, there are key attachment 

points to determine when an attack is considered for certification and when public funds 

must be deployed and then recouped from the private sector. FSR believes that TRIA's 

current framework effectively accomplishes its public policy goals, but also understands the 

Committee's goal to increase private sector involvement. This goal, however, and the 

adjustments made to achieve it, should be weighed against potential harm they do to 

marketplace capacity and the functioning of the program. 

As a result, FSR recommends that any adjustments to the program - whether new 

ideas or adjustments to existing attachment points - ensure the program is authorized on a 

5 
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86684.077

long·term basis; continues to function effectively for all market participants; and provides 

an orderly mechanism to ensure economic resiliency before and after an attack. 

Workers Compensation 

Under state law, insurers cannot exclude workers compensation from coverage, 

whether or not TRIA is in place. This leaves insurers vulnerable to substantial downside 

risk from terrorist attacks, including non'conventional NCBR attacks. Without TRIA in 

place, this downside risk related to workers compensation coverage jeopardizes the solvency 

of insurers, potentially leaving policyholders unprotected in the aftermath of a tragedy. 

Consequently, the workers compensation market may experience a variance in pricing and 

capacity based on the framework and existence of the program. 

Commercial Lending 

The market for terrorism risk insurance and the take up rate has important 

implications for commercial lending because commercial lenders include terrorism risk 

insurance coverage requirements for loans over a certain size or where the project being 

financed is in proximity to areas identified as potential targets for terrorist attacks. 

Lenders have adopted these coverage requirements to help mitigate risk that banks are 

uncomfortable assessing and ultimately holding. lfthe terrorism insurance market 

constricts and reduces policyholders' ability to access terrorism risk coverage, both existing 

and future commercial loans would be severely affected. 

Existing commercial loans that require terrorism risk insurance do not condition a 

borrower's performance of this requirement on the existence of TRIA or excuse performance 

if the insurance is unavailable or prohibitively expensive. As many commercial loans span 

multiple years, even decades, borrowers are required to purchase and renew terrorism 

coverage for the duration of their loans regardless of whether TRIA is reauthorized or 

functioning marketplace for terrorism risk insurance exists. If these borrowers and 

policyholders do not repurchase coverage, they would be in violation ofthe loan covenant; 

depending on the contractual language, the lender would be able to call the loan. 

Borrowers would be forced to purchase coverage no matter how difficult or costly to access, 

or face consequences for violating the loan covenant. Lenders would be forced to examine 

each loan and assess whether to call the loan or adjust the terms in some way to mitigate 

this now unprotected risk. This would result in substantial economic disruption and 

potential added risk for all participants in the transaction. 

For future loans, lenders would assess each loan that triggers its terrorism risk 

insurance requirement on a case'bY'case basis. This would lead to greater uncertainty in 

the marketplace and put lenders in the business of trying to model terrorism risk - a risk 

that insurers themselves cannot model at the present time. 

CONCLUSION 

The Financial Services Roundtable appreciates the Committee holding this hearing. 

We thank you for the opportunity to submit comments for the record and we look forward to 

our continued work with the Committee on this important issue. 

6 
121 


86684.078

.Jewisll 

OF NORTH AMERICA 

In Support of Renewing the Terrorism Risk Insurance Act 

November 12, 2013 

The Jewish Federations of North America strongly support extending the Terrorism Risk 

Insurance Act (TRIA), which will expire in December 2014. 

JFNA is the umbrella organization of 153 local federations and 300 independent 

communities which serve, support, and lead one of the Nation's largest and longest serving 

charitable networks that provide health, human services, and other critical humanitarian 

assistance at the community level. We are headquartered in New York City (with office in 

Washington, DC and Los Angeles) and our system's hospitals, nursing homes, social 

services agencies, and community centers are located in practically every major urban area 

in the United States. 

Given the well documented threats from extremists at home and abroad to Jewish 

communal security, we believe that our institutions across the country represent a segment 

of the nonprofit sector that is particularly at risk of and vulnerable to terrorist attacks. During 

a recent threat briefing we received from House Homeland Security Chairman Mike McCaul 

and other experts informed us that Jewish institutions remain high on the list of terrorist 

targets and that the narrative that is evolving is getting worse, and not better, for our 

community. This is the backstop through which we view TRIA. 

In surveying our institutions, we have found that TRIA has successfully ensured that the 

insurance market continues to make widely available to them adequate and affordable 

terrorism coverage since 9/11. Our system's catastrophic exposure has remained 

significantly reduced as a consequence of TRIA. 

We are not a small enterprise. Our network serves tens of thousands of individuals and 

families in need, weekly. In times of disaster - whether in the recovery from Super Storm 

Sandy, Hurricane Katrina, or the attacks on September 11 th, among them - our agencies 

help to rebuild communities through the provision of health care, counseling, shelter, 

resettlement, job training, food, family support services, and emergency cash assistance. 

We are often home-base to emergency responders for staging and coordination. TRIA has 

proven essential to our ability to carry out these vital services, both in the regular course of 

our work and in times of extenuating circumstances. 

For these reasons, we urge Congress to support renewal of the Terrorism Risk Insurance 

Act. 

Point of Contact: Robert B. Goldberg. Senior Director, Legislative Affairs. at: 202-736-5881 or 

rob.goldberg@jewishfederations.ora. 
122 


86684.079

~·Libe~Mutuat \P INSURANCE 

November 12, 2013 

The Honorable Randy Neugebauer 

Chairman, Housing & Insurance Subcommittee 

The Committee on Financial Services 

United States Congress 

The Honorable Michael Capuano 

Ranking Member, Housing & Insurance Subcommittee 

The Committee oil Financial Services 

United States Congress 

Dear Chairman Neugebauer and Ranking Member Capuano: 

S. COLIN DOWLING 

Vice Presi<1cnt & Chief Fcdern1 Affairs Officer 

901 15'" Street, NW, Suite 250 

Washington, DC 20005 

Telephone: (202) 289-7472 

Fax: (202) 408-1282 

Email: Colin.Dowling@LibertyMutuaLcom 

Liberty Mutual appreciates ·the opportunity to weigh in with the House Financial Services 

Committee and express our continued, strong support for the Terrorism Risk Insurance Program. 

TRIA facilitates a private market for terrorism risk insurance for America's businesses by providing 

a high-level financial backstop in the event of catastrophic terrorist attacks 011 our country. 

Constructed as a simple program, it has worked well, as intended. Terrorism insurance is readily 

available to businesses and employers of all kinds and sizes, enabling billions of dollars of business 

transactions to go forward. 

Perhaps a commentary 011 our times, the United States remains under the constant and very real 

threat of future attacks. We experienced it in our own great city of Boston earlier this year. Make no 

mistake; terrorists attack the United States, not an individual city or business. As a result, it is wholly 

appropriate that the federal government continue to playa role in the terrorism risk insurance 

mechanism that works as a safety net for the entire U.S. economy. Such a mechanism secures the 

ability of our nation to take care of injured workers and their families, rebuild buildings, and reinvest 

in our economy following the financial devastation caused by future attacks. 

Liberty Mutual supports the goal of a robust private insurance market whenever that market is 

possible. Insurers already put significant capital 011 the line to offer terrorism coverage to our 

policyholders. Industry capital in TRIA-covered lines is toughly $250b, while models estimate 

multiple terrorist events of more than $750b. Despite the existence of some additional capacity in 

the private market for selected lin~s in selected locations - not including lluclear, biological, 

chemical, and radiological risks - there still remains a deficiency in the market to cover the types of 

losses that only a government could withstand. Workers compensation presents an especially 

unique clial,lenge because the market is not free and the coverage is prescribed by state law. 

Workers must be protected. 

Liberty Mutual Insurance 

Rcspotlsibillty~ W'hst's yom-poHcy?@ 
123 


86684.080

The stated goal of this hearing is to explore ways to foster private market innovation to limit 

ta>.-payer exposure. Liberty Mutual wholeheartedly supports that goal. As you explore options to 

increase private market participation, we hope that we can be constructive in those discussions, 

while preserving the mechanism already in place that has worked so well. 

Sincerely, 

S. Colin Dowling 

Vice President & 

Chief Federal Affairs Officer 

Liberty Mutual Insurance 
124 


86684.081

J'.I~IVI I < :® 

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Statement 

of 

National Association of Mutual Insurance Companies 

to the 

United States House of Representatives 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

Hearing on 

The Future of Terrorism Insurance: Fostering Private Market Innovation 

to 

Limit Taxpayer Exposure 

November 13,2013 
125 


86684.082

Comments of the National Association of Mutual Insurance Companies 

The Future of Terrorism Insurance 

November 13, 2013 

Introduction 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to 

Page 2 

provide testimony on the Terrorism Risk Insurance Act (TRIA) and the private market for 

terrorism insurance. 

NAMIC is the largest and most diverse property/casualty trade association in the 

country, with 1,400 regional and local mutual insurance member companies on main 

streets across America joining many of the country's largest national insurers who also 

call NAMIC their home. Member companies serve more than 135 million auto, home 

and business policyholders, writing in excess of $196 billion in annual premiums that 

account for 50 percent of the automobile/ homeowners market and 31 percent of the 

business insurance market. More than 200,000 people are employed by NAMIC 

member companies. 

It is our firm belief that in the absence of a terrorism loss management plan such as 

TRIA, no self-sustaining private market for terrorism risk coverage is likely to develop. 

However, the existence of TRIA allows a viable private market to function for a difficult 

peril which involves strategic human behavior and represents a dynamic threat that is 

intentional, responsive to countermeasures, and purposefully unpredictable. 

The hearing today seeks to discover ways of fostering private sector innovation for 

covering terrorism risks. We would suggest that we must start from the understanding 

that the TRIA program was an highly innovative and well-designed mechanism to 

encourage the private sector to put its capital at risk for losses that result from what 

amount to acts of war - which have always been considered uninsurable events with 

either an implicit or explicit expectation that financial responsibility resided with the 

governments involved. Having learned the lessons of 9/11, most insurers are not likely 

to offer terrorism coverage in a fully private market. 

In fact, it is the unique structure of the program's recoupment mechanism that takes 

losses that could render a single company insolvent and spreads them throughout the 

private sector and over time. This mechanism allows for a large and temporal transfer 

of risk that would not occur in a fully private market, but in the end does utilize private 

capital. 

In considering changes to the present system, we would caution against adopting 

solutions in search of problems. In fact, alterations that increase the exposure to 

individual companies could have the unintended consequence of reducing overall 

capital in this market. Through TRIA, the private sector already has a tremendous 

amount of capital involved in the terrorism risk insurance market and under current law 

every penny the federal government pays out can be recovered. 
126 


86684.083

Comments of the National Association of Mutual Insurance Companies 

The Future of Terrorism Insurance 

November 13,2013 

TRIA Structure Designed for Individual Company Participation 

Page 3 

Many discussions surrounding the private terrorism risk insurance market focus on 

aggregate numbers i.e. how much market capacity exists, industry exposures, etc. 

However, the design of the TRIA program focuses on something entirely different and, 

in our view, more appropriate: the individual company. The program is structured this 

way to take into account the unique risk posed by terrorism and the fact that losses are 

not likely to be spread evenly among a large number of insurers even in a catastrophic 

event. 

The current program requires all insurers selling covered lines to offer terrorism 

coverage, compelling many insurers that had previously exited that market to return and 

dramatically reducing the amount of potentially uninsured losses in the event of an 

attack. In return, the federal mechanism for risk-sharing provides more definitive loss 

parameters for each company; specifically, the individual company retention (20% of the 

prior year's direct earned premium for covered commercial lines) and the co-pay (15% 

of all losses above the individual company retention). By placing a ceiling on individual 

company terrorism exposure, insurers have the benefit of knowing their total possible 

losses, allowing them to make coverage available and price accordingly. 

It is important to note that simply because an individual company's losses are capped, 

this does not mean that the private sector participation ends there and the federal 

taxpayer pays for the rest. Rather, TRIA works through its recoupment mechanism to 

take those losses and spread them back throughout the private sector and over time. In 

this way, TRIA acts as a shock-absorber for the U.S. economy to reduce the financial 

impact of a jarring terrorism event. 

By law the federal government must recoup the difference between insurers' total costs 

and the industry aggregate retention of $27.5 billion (assuming the total cost of the 

event with government payments is $27.5 billion or higher) over time through 

surcharges on every policy covered by TRIA. Since 2007, the government must 

actually recoup 133 percent of this mandatory recoupment. In the event the insurers' 

total costs exceed $27.5 billion then the government can still recoup whatever money it 

pays out, but this is at the discretion of the Treasury Secretary. The recoupment is 

done through an assessment on every TRIA-covered, commercial line sold in the U.S. 

over time. The initial outlays of the federal government that are so important to 

maintaining an individual company's solvency are in fact borne by the private sector 

(and paid back with interest for the mandatory recoupments). Taxpayers are 

completely protected under TRIA. 

The structure of the program is important - it is why questions of overall industry 

capacity can distract from the serious concerns about terrorism risk that remain for 

individual insurance companies. Even in a catastrophic event, the losses are not likely 

to be spread evenly among a large number of insurers. This is especially so in the case 

terrorism because perpetrators have the ability to precisely target particular properties 

or assets. Hence, insurance companies may either suffer no losses or else they could 
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Comments of the National Association of Mutual Insurance Companies Page 4 

The Future of Terrorism Insurance 

November 13, 2013 

suffer losses sufficient to threaten their very existence. The TRIA program - through 

the mechanism of initial federal outlays recovered through recoupment - allows this "bet 

the company" risk to be spread throughout the private sector and over time in a manner 

that cannot be duplicated by the private sector. 

Altering the Program 

Most insurers would likely not offer terrorism coverage in the absence of a federal risksharing mechanism like TRIA.1 It was only with a program in place that put some 

structure around an ill-defined catastrophic risk that the private sector was able and 

willing to participate at current levels. We cannot hastily conclude that because the 

private sector can handle a portion of the risk, it could figure out a way to handle all of it. 

Similarly, assuming that substantively altering the federal government's role will simply 

result in private market innovation that has heretofore failed to materialize is unwise. 

Although individual market players may indicate willingness to take on greater exposure 

in the abstract, there has been an unwillingness to accept a significantly larger portion 

of this potentially devastating risk, in particular when it comes to offering affordable 

limits to protect the solvency of the workers' compensation insurers. 

That said, even if there were a guarantee that reinsurers would provide coverage where 

and when the markets needed it, relying too heavily on them is problematic. Not least 

of these problems concerns the question of what happens following another large 

catastrophic event and the limited capacity that has developed is depleted? The U.S. 

commercial insurance market would be right back to where it was following 9/11 with 

constrained markets and limited availability with no guarantee (particularly if the event in 

question is of an unforeseen nature) that the capacity and willingness to take on 

terrorism exposure would return. 

Additionally, in seeking to accomplish the goal of increasing private sector participation 

in the terrorism insurance market, it is important to recognize the presence of other risks 

that need to be insured in our dynamic economy. That capacity cannot be exposed 

beyond a reasonable level without failing in its primary purpose - supporting the 

economy by protecting against non-terrorism related losses and events. In the event of 

a major attack, substantially depleted reserves and surpluses, and insolvencies could 

mean that policyholders of non-covered lines could go unprotected. A company that 

engages in business that endangers the ability to pay on existing or future policies is 

violating its duties to existing policyholders. 

Finally, NAMIC would caution policymakers not to assume that they can guarantee 

increased private sector participation through statutory changes. Increasing the 

nominal amount of private sector involvement in the current TRIA structure does not 

I Recent research by Aon shows that more than 85 percent of insurers will no longer insure terror risk if 

the federal program went away. http://www.carriermanagement.com/news/2013/09/17/113143.htm. 

Additionally, State insurance regulators indicate that they have not seen evidence suggesting that the 

insurance marketplace is capable or willing to voluntarily take on a substantial portion of the risk of 

providing coverage for acts of terrorism in the absence of the program. 
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Comments of the National Association of Mutual Insurance Companies 

The Future of Terrorism Insurance 

November 13, 2013 

Page 5 

immediately translate into an increase in private sector capital in the marketplace. In 

fact, altering trigger levels or individual company retentions may cause market 

participants - particularly small and medium-sized companies - to exit, thereby 

reducing total private capital. An effective terrorism loss management plan depends on 

participation by insurers of all sizes and structures. 

Conclusion 

Private insurance companies, including mutual companies, are return-seeking 

operations. Therefore, if they believe there is an opportunity to earn an economic return 

and it is possible to do so in accordance with an overall successful business model, 

then they will. In other words, if there was money to be made in insuring against 

terrorism risk, coverage would be offered without government intervention. To that 

point, the companies would be arguing for less-not more-government intervention to 

increase that earning potential. The fact that they are uniformly not dOing so and in fact 

suggesting that without the TRIA program private coverage would not expand and 

instead retract, is telling. 

Under the current TRIA program the private sector is heavily involved in absorbing the 

losses from a terrorist attack against the U.S. Ultimately, it is involved in covering all the 

losses at the discretion of the Treasury Secretary. This private sector involvement 

reduces the unaddressed needs of victims which in turn reduces the need for 

government intervention - thus taxpayer exposure - post attack. In contemplating 

altering the current mechanism, it is important to identify the specific problems that need 

to be addressed. 

In the end, the purpose of the program is not to protect insurers, but to make sure that 

the economy can recover in as orderly a fashion as possible from a terrorist event. In 

order to encourage private sector involvement in the terrorism insurance marketplace -

and thereby protect and promote our nation's finances, security, and economic strength 

- we should maintain long-term a terrorism loss management plan on the model of 

TRIA that is functioning well. 
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I~~\ 

NAPSLO 

'" National Association of 

Professional Surplus Unes 

Offices, ltd. 

Testimony of 

200 NE 54th St, Ste. 200 

Kans<isCity, M064118 

816.741.3910 

F 816.741.5409 

the National Association of Professional Surplus Lines Offices 

Before the 

House Financial Services Committee, 

Subcommittee on Housing and Insurance 

NAPSlO is the national trade association representing the surplus Hnes industry and the wholesale 

insurance distribution system. Since its formation in 1975, NAPSlO has become the authoritative voice 

of the surplus lines industry, advocating for the industry's vital role as a "safety valve" for hard~to~place 

and specialty insurance risks and for the industry's importance in the insurance marketplace and global 

economy, NAPSlO members also play an important role in creating new insurance products in response 

to the needs of an ever~changing social, business and insurance environment. 

NAPSlO's membership consists of approximately 400 brokerage member firms, 100 company member 

firms and 200 associate member firms, all of whom operate over 1,500 offices representing 

approximately 15,000 to 20,000 individual brokers, insurance company professionals, underwriters and 

other insurance professionals in the 50 states and the District of Columbia. NAPSlO is unique in that 

both surplus lines brokers and surplus lines companies are full members of the association; thus NAPSlO 

represents and speaks for the surplus lines wholesale marketplace. We appreciate the opportunity to 

submit testimony to today's hearing. 

NAPSlO commends the Committee for its continued focus on the Terrorism Risk Insurance Act (TRIA), 

particularly in light of its pending expiration at the end of 2014. In considering an extension of any 

program it is important to evaluate how the program has functioned and what aspects, specifically, are 

key to its success. NAPSlO believes TRIA has been successful primarily because it serves as a tool for 

insurers to better manage the risk of terrorism events and provides certainty to the industry in offering 

private capital and solutions to policyholders. Surplus lines insurers currently provide certain terrorism 

coverage pursuant to the mandatory provisions and sublect to the deductib!es and triggers of the 

existing federal program. 

In general, we believe private market solutions should be exhausted before government-sponsored 

programs or residua! markets are considered, and governments should not provide coverage options the 

private or open market is able to address, However, NAPSLO believes a role exists for the federal 

government in the management of terrorism risk, especially with respect to the areas of workers' 

compensation and nuclear, biological, chemical or radiological exposures (NBCR), While insurers can 

model the severity of a hypothetical terrorist attack, it is impossible to model the likelihood or 

www,napslo,org 
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frequency of such attacks. As a result, we support a thoughtful and thorough review of TRIA with a goal 

of maintaining or increasing opportunities for capacity and solutions in the private market. 

Many argue the deductibles and limits of the existing program and the lack of any triggering events has 

effectively already shifted terrorism risk to the private market. Under existing TRIA triggers and insurer 

liability caps, a significant terrorism event will have a material impact on the industry, and could cause 

financial impairment for certain smaller insurers. TRIA's caps on insurer liability provide some level of 

certainty and help insurers better manage the risk; increasing these caps would reduce the level of 

certainty in terrorism risk management, will place smaller insurers at greater risk, and may further limit 

the availability of private capital solutions for terrorism risks. 

Another key consideration for the Committee is the timing on an extension to the program. While the 

program does not expire until the end of next year, it is important that Congress act quickly as insurers 

issue policies with coverage periods beyond 2014 and it is vital to have certainty with respect to the 

provisions of TRIA beyond its expiration date. Therefore, we thank the Committee and its leadership for 

its timely review of this program and would encourage its continued focus until an extension has been 

enacted. 

Thank you again for the opportunity to comment on this important issue. 
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Testimony ofthe 

Property Casualty Insurers Association of America (PCI) 

Subcommittee on Housing and Insurance 

Committee on Financial Services 

United States House of Representatives 

November 13, 2013 

The Property and Casualty Insurers Association of America (PCI) commends Chairman 

Neugebauer and the Subcommittee on Housing and Insurance for holding this hearing 

on "The Future of Terrorism Insurance: Fostering Privet Market Innovation to Limit 

Taxpayer Exposure." PCI is composed of more than 1,000 member business, home and 

auto insurance companies, representing the broadest cross-section of any national 

insurance trade association. PCI members write more than $195 billion in direct 

premium, which is 39 percent of the nation's property-casualty insurance. 

As we indicated in our September testimony to the full Committee, PCI believes it is 

appropriate for members to inquire whether there are any changes that could be made 

to attract even greater private capital to support terrorism risks. We agree that the 

program should continue to seek to maximize commercial participation. Indeed, that 

goal is harmonious with PCI's mission to promote and protect the viability of a 

competitive private insurance market for the benefit of consumers and insurers. 

However, PCI also hopes that Members of the Subcommittee will recognize the 

enormous success of the Terrorism Risk Insurance program in providing widely 

available private sector terrorism risk coverage to consumers in a fiscally responsible 

manner that reduces the need for government catastrophe assistance after a 

catastrophic terrorism event. Having a terrorism risk insurance plan in place that 

protects economic resiliency and national security is essential to our country's future 

growth. 

TRIA Program Maximizes Private Sector Participation. The current TRIA program 

does an excellent job of keeping commercial insurers participating in the terrorism 

insurance market, thus protecting taxpayers from most terrorism losses. Commercial 

insurers pay losses through their annual TRIA deductibles and then additional co-pays 

even if federal payments are made. This keeps commercial insurers on the hook for all 

but the most catastrophic terrorism losses. Indeed, over the past twelve years, the 

commercial insurance industry's participation in writing terrorism risks has gradually 

increased as insurer deductibles and co-pays have increased. The Congress wisely 

designed the program to keep the maximum amount of private capital at work in the 

market, reserving a government role only for catastrophic events that commercial 

insurers simply cannot handle alone. In addition, when federal payments are made, 

taxpayers are protected by a mechanism that allows federal payments to be recouped 

from the insurance marketplace. And this recoupment is mandatory for all but the 

largest of losses. Taken together, these features make TRIA an extraordinarily fiscally 

responsible program. 
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PCI is very concerned about the unintended consequences of proposals to increase the 

thresholds for the insurer deductible, co-payor the program trigger. The current TRIA 

deductible is already high at 20 percent of the prior year's direct earned premium. For 

large insurers, the deductible is so high that many already are unlikely ever to access 

the backstop, even though the backstop was meant to be a quid pro quo for accepting 

the "make available" requirement to which they are still subject. 

A deductible increase will also significantly and negatively impact smaller and medium 

sized insurers. Ninety-four percent of companies writing TRIA lines of insurance are 

small or medium-sized. These insurers write over 21 percent of the TRIA-covered lines 

of business in the nation, including numerous specialty lines and businesses. If TRIA is 

reauthorized with excessively high deductibles, then the retained risks to smaller and 

mid-sized insurers and some large insurers would exceed their maximum acceptable 

loss limits and they would be driven out of the market. Indeed, subsequent to the 

Committee's September hearing, the A.M. Best Company issued a briefing paper 

suggesting that, even at the current 20% deductible, a number of small to mid-sized 

insurers may be subject to ratings downgrades. 

Since TRIA requires insurers to make terrorism coverage available for covered lines, 

the only way insurers can avoid exceeding their maximum acceptable risks is to exit 

some TRIA-covered lines or risks altogether, making not just terrorism coverage but 

also the underlying insurance for high profile risks far less available. Congress would 

thus create a significant moral hazard, severely constricting the number of insurers 

willing and able to underwrite higher profile risks, driving those insurers out of certain 

markets and greatly reducing the available private capital and competition for 

consumers. 

The impact on surplus is only made worse by the insurer's TRIA retention (coinsurance 

share) of an additional 15 percent of losses above its deductible. While insurers have 

some certainty in the trigger and their individual deductible, an insurer's co-share is 

potentially unlimited other than the $100 billion aggregate marketplace loss cap. The 

uncertain and relatively unlimited co-share is particularly difficult to self-insure or 

reinsure since terrorism events are not independently correlated. The fundamental 

genius of TRIA is that it caps the liabilities for an otherwise largely unpredictable 

terrorism risk for the marketplace, allowing insurers to underwrite at least a large portion 

of the non-catastrophic exposures. However the unlimited co-shares undermine the 

liability caps, and could significantly undermine the private market if further increased. 

The current $100 million trigger means that no insurer will be reimbursed unless the 

total industry TRIA losses exceed $100 million. It is important to emphasize that this 

does not mean that the government pays all losses above $100 million - only that the 

program becomes available to participate with the private sector in paying claims when 

aggregate annual losses reach that amount. As noted above, commercial insurers will 

continue to bear the risk of loss for all but the largest catastrophic attacks. And many 

commercial policyholders will continue to bear a sizable amount of self-insurance before 

2 
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86684.090

reaching their insurance. But an increase in the trigger threatens to undermine smaller 

insurers in particular because it puts too high a fraction of a smaller company's capital 

at risk, particularly for multiple attacks that may be harder to reinsure. Those 

companies have a smaller surplus and are thus less well-equipped to handle a large hit 

to surplus such as might result from being forced to accept a larger level of terrorism 

risk. To avoid this risk, small and medium-sized companies are likely to exit certain 

TRIA lines or risks if the trigger is excessively increased. This, in turn, would negatively 

impact competition; currently only 6 percent of TRIA-lines insurers write 78 percent of 

the business. Insurance consumers have more choices, prices are lower, and product 

innovation is enhanced when the greatest possible number of strong, viable competitors 

serves the market. 

Certification. Consumers rely on insurers to make timely payment of insured losses. 

Insurers in turn rely on TRIA's certification process to determine whether a terrorist 

attack is considered an act of terrorism and thus whether the consumer potentially 

insurer would be covered. The Boston attack has raised a number of issues about how 

well the TRIA certification process works. State laws generally require timely payment of 

claims. However, there is no requirement that the Treasury Secretary make a 

determination to certify an act of terrorism within any particular time period. In many 

cases consumers would not be able to know if their losses were covered until a 

certification decision is made (if ever), and insurers would have to make claims payment 

decisions based on terrorism coverage without knowing whether an event will meet the 

federal classification. Consumers and insurers are thus both disadvantaged by the 

uncertainty, increasing the likelihood of litigation and forcing insurers to either make 

inappropriate claims payments or potentially violating state Unfair Claims Practices laws 

and regulations. Particularly for large losses, it could take months for liability and 

business interruption losses to be finalized, and one of the three government officials 

required for certification could be unavailable for a time, pushing the timing of the 

government certification process far past the needs of consumers and insurers. 

The responsibility for data collection to determine whether to certify an event as an act 

of terrorism under TRIA is also undefined. Treasury can impose data calls directly on 

insurers for the purposes of determining federal loss payments and recoupments, but 

the statute and regulations fail to provide guidance on data collection for purposes of an 

initial certification. The Committee should consider program changes that could improve 

the data collection requirements in ways that will provide greater certainty to the 

marketplace. 

Clarification of Treatment NBCR and Cyber Risks. The current understanding within 

the industry and at Treasury is that the TRIA program covers nuclear, chemical, 

biological, and radiological (NBCR) risks as well as cyber risks to the extent that 

insurers provide such coverage to their policyholders. The requirement that insurers 

make those coverages available applies only to the extent coverage for non-terrorism 

related NCBR and cyber risks is provided in the underlying policy. However, given the 

significant potential liabilities that could arise from these risks, especially NCBR, 

Congress should provide statutory clarity as to how these risks are covered. 

3 
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86684.091

The American People Support TRIA. Earlier this year, PCI conducted some polling 

and focus groups to learn what voters think about how their government protects them 

from the effects of terrorist attacks. Among the key findings were: 

• A majority of voters, 72%, agree that responsibility for the costs from injuries to 

workers and property damages from a terrorist attack should be a combination of the 

federal government and private insurance companies. 

• A majority of voters agree that it is important for America's economy to have a plan 

in place before an attack to ensure large projects can be built in a timely, cost 

effective manner. 

• 90% of the participants agree that the federal government should be at least in part 

responsible for protecting against losses from terrorist attacks against the United 

States. 

• A majority of voters, 64% agree that it is difficult for insurance companies to provide 

affordable terrorism insurance because of the randomness and difficulty in predicting 

the likelihood or magnitude of terrorist attacks. 

• A rural-urban divide does not exist; 68% of voters understand the national economic 

implications of a terrorist attack. 

• 67.6% of voters favor continuing the Terrorism Risk Insurance program. 

The study showed unmistakably that Americans want their government to have a risk 

management program in place to protect the U.S. economy against the effects of a 

catastrophic terrorist attack and that both the commercial insurance industry and the 

government have important roles to play in such a plan. 

Conclusion. It is essential for America's economy to have a terrorism insurance plan in 

place to ensure large projects can be built in a timely, cost effective manner after an 

attack occurs which would help keep the economy stable and provide jobs. Having a 

terrorism risk insurance plan in place helps thwart the devastating economic impacts of 

a terrorist attack and protects our national security. TRIA is a fiscally responsible 

program that has cost the taxpayers almost nothing in its 11 year existence while 

protecting economic resiliency and reducing the need for additional government 

catastrophic response programs that can be far more costly after the fact. PCI strongly 

supports reauthorization of the current TRIA program with thresholds that will continue 

to encourage the full marketplace to provide private sector capital to compete and 

ensure availability of coverage. PCI also supports efforts to clarify TRIA's application 

and coverage, particularly with respect to improving the terrorism event certification 

process. 

4 
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86684.092

OFFICE OF THE PRESIDENT 

1246TAMU 

November 13,2013 

The Honorable Jeb Hensarling 

Chairman, House Committee on Financial Services 

2228 Rayburn HOB 

Washington, D.C. 20515 

Dear Mr. Chairman: 

As you continue with hearings regarding the future of the Terrorism Risk Insurance Act of 

2002 (TRJA), I appreciate this opportunity to share Texas A&M's experience with this 

legislation. 

On any given day, Texas A&M hosts a variety of public events as well as conducts sensitive 

and indeed, in some cases, classified research for sponsoring federal agencies. Consequently 

the risk profile of facilities throughout our campus is elevated to potential terrorist threats. 

We take steps to secure these facilities and implement risk mitigation measures to prevent or 

minimize the impact of threats to these facilities. 

In addressing the potential financial impact of a terrorist event. the University purchases 

insurance coverage that is made available through the TRJA. The availability of this program 

has certainly decreased the state's financial exposure. Commercial coverage for terrorist 

activities has not developed to replace the current program made available through TRIA. 

In my role as a member of the Department of Homeland Security's Academic Advisory 

Committee-and in my capacity as Chair of the Subcommittee on Campus Resilience-I am 

always available to discuss my perspective on this important issue with you or staff in more 

detail. 

Thank you for the opportunity to share our experience with this program as you evaluate 

future legislative action. Please contact me or Scott Sudduth in our Washington office at 202-

461-3488, ssudduth@tamus.edu, if you have further questions or if we can assist you in any 

way. 

President 

College Station, TX 77843~ 1246 

Tel. 979.845.2217 Fax, 979.845.5027 

www,tamu.edu 

o