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78–186 PS 2002

HOW MUCH ARE AMERICANS AT RISK UNTIL

CONGRESS PASSES TERRORISM INSURANCE

PROTECTION?

HEARING

BEFORE THE

SUBCOMMITTEE ON

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 27, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–57

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Texas

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

SUE W. KELLY, New York, Chair

RON PAUL, Ohio, Vice Chairman

PETER T. KING, New York

ROBERT W. NEY, Texas

CHRISTOPHER COX, California

DAVE WELDON, Florida

WALTER B. JONES, North Carolina

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ERIC CANTOR, Virginia

PATRICK J. TIBERI, Ohio

LUIS V. GUTIERREZ, Illinois

KEN BENTSEN, Texas

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

MICHAEL CAPUANO, Massachusetts

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

(III)

C O N T E N T S

Page

Hearing held on:

February 27, 2002 ............................................................................................ 1

Appendix:

February 27, 2002 ............................................................................................ 43

WITNESSES

WEDNESDAY, FEBRUARY 27, 2002

Beck, Deborah B., Executive Vice President, Real Estate Board of New York .. 231

Hillman, Richard J., Director, Financial Markets and Community Investment,

General Accounting Office ................................................................................... 7

Hunter, J. Robert, Director of Insurance, Consumer Federation of America ..... 28

Kramer, Lisa, President and CEO, Federation of Jewish Philanthropies

Service Corporation .............................................................................................. 24

Mair, David L., President of the Risk and Insurance Management Society;

Director for Risk Management, U.S. Olympic Committee ................................ 20

Quinn, Kieran, President and CEO, Column Financial, Inc., a subsidiary

of Credit Suisse First Boston .............................................................................. 26

Schroeder, Alice D., Senior U.S. Nonlife Equity Insurance Analyst, Morgan

Stanley .................................................................................................................. 31

Serio, Hon. Gregory V., Superintendent of Insurance, New York State Insurance Department .................................................................................................. 10

Warshawsky, Mark J., Deputy Assistant Secretary for Economic Policy, Department of the Treasury .................................................................................... 5

APPENDIX

Prepared statements:

Kelly, Hon. Sue W. ........................................................................................... 44

Oxley, Hon. Michael G. .................................................................................... 47

Biggert, Hon. Judy ........................................................................................... 48

Gutierrez, Hon. Luis V. .................................................................................... 50

Beck, Deborah B. .............................................................................................. 23

Hillman, Richard J. .......................................................................................... 57

Hunter, J. Robert .............................................................................................. 142

Kramer, Lisa ..................................................................................................... 24

Mair, David L. .................................................................................................. 104

Quinn, Kieran ................................................................................................... 137

Schroeder, Alice D. ........................................................................................... 171

Serio, Hon. Gregory V. ..................................................................................... 77

Warshawsky, Mark J. ...................................................................................... 51

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Beck, Deborah B.:

‘‘The Lack of Terrorism Insurance and Its Impact upon Tax Revenue

for New York,’’ February 27, 2002 ............................................................... 119

Written response to questions from Hon. Luis V. Gutierrez ........................ 129

Hunter, J. Robert:

‘‘How the Lack of Federal Back Up for Terrorism Insurance Has Affected

Insurers and Consumers,’’ January 23, 2002 ............................................. 154

Kramer, Lisa:

Written response to questions from Hon. Luis V. Gutierrez ........................ 136

Coalition To Insure Against Terrorism, prepared statement ............................... 181

Page

IV

National Association of Insurance Commissioners, prepared statement ............ 186

National Multi Housing Council, National Apartment Association, prepared

statement .............................................................................................................. 196

Sullivan, Edward C., President, Building and Construction Trades Department, AFL-CIO, prepared statement ................................................................. 203

(1)

HOW MUCH ARE AMERICANS AT RISK

UNTIL CONGRESS PASSES TERRORISM

INSURANCE PROTECTION?

WEDNESDAY, FEBRUARY 27, 2002

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS,

COMMITTEE ON FINANCIAL SERVICES,

Washington, DC.

The subcommittee met, pursuant to call, at 3:35 p.m. in room

2128, Rayburn House Office Building, Hon. Sue W. Kelly,

[chairwoman of the subcommittee], presiding.

Present: Chairwoman Kelly; Representatives Weldon, Biggert,

Ney, Tiberi, Gutierrez, Inslee, and Maloney of NY.

Chairwoman KELLY. First of all I want to apologize to all of you

for the delay here. There is an unusual floor proceeding going on

and I had heard that we had a vote. About 20 minutes ago I heard

there was a vote in 5 minutes. And I thought, well, we will just

wait that 5 minutes and that would save everybody time.

They are still arguing on the floor. So when they get that argument over, we will go back and we will have to vote during this

hearing.

But that being said, I want to thank you all for your patience

and this hearing of the Subcommittee on Oversight and Investigations will come to order.

I want to thank all Members of Congress who are present today,

and there are a couple in the back room here I think that have

come in. Without objection, all Members present will participate

fully in the hearing, and all opening statements and questions are

made part of the official hearing record.

On September 11th, our world fundamentally changed with the

cowardly acts of a handful of terrorists. We all carry with us the

memories of the destruction of that day which deprived families of

loved ones, people of their jobs, and a Nation of one of its greatest

landmarks.

In addition, the losses of September 11th represent the single

largest hit to our insurance industry in the history of the United

States.

Since then, our insurance markets are facing a new reality. Insurers are being asked to insure terrorism risk when they have no

realistic way to determine the fair price for that risk, or in the vast

majority of cases, being able to obtain any reinsurance for it.

This risk is one which no one ever anticipated. Moreover, no one

can presently calculate the proper odds for where or when the next

2

attack will occur. We do know, however, that our Government officials believe that we should expect additional and costly attacks.

Consequently, the vast majority of insurers have been loathe to

cover terrorism, especially for major buildings, factories, or gathering places. Where terrorism insurance is available or is required

by law, insurers must charge high premiums for it and offer very

limited capacity to protect against the risk of insolvency.

Today, nearly 6 months later, we continue to discover further repercussions from the acts of terror on New York and Washington.

One such symptom is the pervasive risk transfer that is currently

occurring from reinsurers to insurers of American businesses leaving such businesses vulnerable to future terrorist attacks.

I think the GAO put it best in their report, and I am quoting

from that report:

‘‘Since the September 11th attacks, the key dynamic taking place

in the insurance industry has been a shifting of the risk for terrorism-related losses from reinsurers to primary insurers and then

to the insured. Reinsurers and insurers have begun shedding their

exposure to terrorism risk as insurance contracts have come up for

renewal, leaving policyholders increasingly exposed to losses from

a terrorist attack.’’

The GAO goes on to say: ‘‘Large companies, businesses of any

size perceived to be in or near a target location, or those with some

concentration of personnel or facilities, are unlikely to be able to

obtain a meaningful level of terrorism coverage at an economically

viable price.’’

The focus of the GAO’s inquiry was on the availability of property and casualty insurance and reinsurance. That is clearly important. But we also need to consider whether there have been similar

detrimental effects with respect to terrorism coverage in the group

life insurance area.

I hope we can get some enlightenment on that question, as well.

It is clear that the current lack of terrorism coverage acts as a

chill factor restraining our economy, which is struggling to recover

from recession. Businesses, particularly in cities and near targets,

seeking to build are being required to carry terrorism insurance.

However, I am informed that there is little or no terrorism coverage available and hence some new construction is being stopped

before it can even start.

This is causing the loss of new jobs at a time when creating jobs

should be one of our highest priorities. In short, the Senate’s leadership failure to act on terrorism insurance legislation is imposing

a fear tax on America, costing real jobs when the country is trying

to pull out of a recession.

In addition, since the Administration says that another terrorist

attack is extremely likely, we must plan for how the Government

should react to such an attack now, not after another attack.

We have learned countless lessons from September 11 on homeland security and distributions from September 11th charities

which could have avoided many problems with a little more planning beforehand.

Acting now will preserve a private market mechanism to provide

terrorism coverage, capital, and a claims processing system.

3

Waiting until Americans suffer the next terrorist attack to respond is irresponsible, inefficient, and will ultimately cost the Government much more than taking responsible action now.

Victims will most likely suffer months of additional delays as

Congress scrambles to create a bureaucracy to determine which

victims get compensated and in what amounts.

This can be especially harmful to small businesses which cannot

afford to wait months after a tragedy while Congress decides

whether or not and how to respond.

As a former small business owner, this concerns me greatly.

Under the leadership of Chairman Oxley, this subcommittee acted

quickly last year to pass legislation, H.R. 3210, the Terrorism Risk

Protection Act, to protect the U.S. economy, its businesses, and its

workers from the negative effects that are materializing today. It

is stuck in the Senate.

I sincerely hope that the Senate leadership will act quickly to

avoid a potential calamity. Today we will hear from a list of very

distinguished witnesses to gain a better understanding of how the

lack of Federal legislation has and will affect commercial consumers, builders, lenders, investors, workers, schools, hospitals,

public entities, and private institutions.

I would like to thank all of the witnesses for appearing today,

and for those of you who submitted written testimony for the

record, and for the witnesses who have extra written testimony I

thank you for submitting that for the record.

At this time, my good friend from Chicago is on the floor, so I

am going to go back to him for his opening statement. But I am

going to right now turn to Mr. Tiberi. Have you an opening statement, Mr. Tiberi?

[The prepared statement of Hon. Sue Kelly can be found on page

44 in the appendix.]

Mr. TIBERI. No.

Chairwoman KELLY. Mrs. Biggert.

Mrs. BIGGERT. Thank you very much, Madam Chairwoman, and

I appreciate your courtesy for allowing me to attend this hearing.

Madam Chairwoman, January 1st has come and gone and, as

predicted, a major change in insurance and reinsurance coverage is

taking place that threatens our economy.

Months ago in the wake of 9/11, many Members here predicted

what has now in effect occurred. Most reinsurance renewals now

exclude coverage for terrorism, and most primary insurers will exclude terrorism coverage in the coming months.

It is because we anticipated this outcome that we on this subcommittee and the Full House acted quickly late last year to pass

a terrorism insurance bill. But sadly, our Senate colleagues did not

take quick action. They did not take any action before the January

1st renewal deadlines, and not since January 1st.

Unfortunately, as with so many other issues during this Congress, when it comes to terrorism insurance and reinsurance coverage, our colleagues across the Capitol seem to have their heads

buried in the sand.

It is my hope that some of our Senate colleagues might be motivated by the comments made this morning by Federal Reserve

Chairman Alan Greenspan, who did not mince his words.

4

He said, quite simply, that passing a terrorism insurance bill is

critical to stabilizing the marketplace. Chairman Greenspan is not

alone in this view.

Even the General Accounting Office has noted that without a terrorism insurance bill there will continue to be a significant drag on

our economy.

Unfortunately, this burden has fallen particularly hard on one

segment of the economy that can least afford to live without terrorism coverage—our public self-insured risk pools.

These risk pools, more than 125 operating in 41 States, help local

governments, school districts, housing authorities, and other public

entities to provide necessary insurance protection. They provide

coverage to those most often at greatest risk—police officers, firefighters and emergency medical personnel, as well as teachers and

students, municipal employees, and many others.

We all know that these public entities cannot absorb the costs of

terrorism risk across their membership base. I have heard from

several risk pools in my State that are desperate for help.

In Illinois, the Assisted Housing Risk Management Association

no longer has coverage for an act of terrorism. That self-insured

pool covers public housing authorities across my State.

The Illinois School District Agency, a self-insured risk pool covering public school districts in Illinois, has been told that its July

1st renewal will have a terrorism exclusion.

And the Department of Insurance in Illinois is now allowing the

exclusion of terrorism coverage in new and renewable policies.

So my State becomes one of the 45 States that are allowing such

exclusions to be written in to policies. The need for Congress to act

has never been greater. Large self-insured pools and individual

self-insurers such as the City of Chicago will pay as much as four

times their expiring premium to buy the additional coverage necessary in the coming year.

Make no mistake, public self-insured risk pools are more vulnerable than other entities. They provide enormous savings to taxpayers. In choosing to do nothing, the Senate threatens to undermine a system that our policemen, firemen, school teachers, tradesmen, assembly line workers, commercial property owners, and others depend on.

Without a Federal solution, our workers, businesses, and public

institutions will suffer. I hope that the members of this panel will

not hesitate to place the blame where it belongs, with the Senate.

I thank you, Madam Chairwoman, and I yield back.

[The prepared statement of Hon. Judy Biggert can be found on

page 48 in the appendix.]

Chairwoman KELLY. Thank you, Mrs. Biggert.

We have been joined by Dr. Weldon. Dr. Weldon, do you have an

opening statement?

Dr. WELDON. Madam Chairwoman, if I could just for 30 seconds,

I want to commend you on this very important hearing and thank

all of our witnesses for being here.

I am particularly interested in this issue not only on the merits

of the topic being discussed, but as well, the parallels between this

issue and natural disaster insurance and the whole reinsurance

issue.

5

I think there is a fair amount of common sense in that. So I am

looking forward to hearing the testimony of the witnesses. Thank

you.

Chairwoman KELLY. Thank you very much, Dr. Weldon.

Since there are no more opening statements, we will now begin

with our witnesses on our first panel.

Before us today we have Mark Warshawsky, the Deputy Assistant Secretary for Economic Policy at the United States Department

of the Treasury.

Then we will hear from Richard Hillman, the Director of Financial Markets and Community Investments for the U.S. General Accounting Office.

And finally, we have the Honorable Greg Serio, who is the Superintendent from the great State of New York. He is with the New

York State Insurance Department. This is not Mr. Serio’s first time

before this subcommittee and, Mr. Serio, we welcome you back.

Thank you all for joining us here today to share your thoughts

on these issues. Without objection, your written statements will be

made part of the record. You will each be recognized for a 5-minute

summary of your testimony. There are lights in front of you that

will indicate how much time you have. The green light signifies you

are in your first 4 minutes. The yellow light will turn on when you

have 1 minute left. And the red light will turn on when your time

has expired. We hope you will observe the lights.

We will begin with you, Mr. Warshawsky. Thank you.

STATEMENT OF MARK J. WARSHAWSKY, DEPUTY ASSISTANT

SECRETARY FOR ECONOMIC POLICY, U.S. DEPARTMENT OF

THE TREASURY

Mr. WARSHAWSKY. Thank you. Madam Chairwoman and Members of the subcommittee:

I appreciate the opportunity to present to you the views of the

Office of Economic Policy at the Treasury Department on the impacts of the lack of terrorism risk insurance on the American economy.

We appreciate the speedy action of the House in passing legislation last year that would have created a temporary Federal backstop for private insurance.

We look forward to continuing to work with you to restore private insurance coverage for this risk. My testimony is divided into

three parts:

The effects of the terrorist attacks on the ability of a business to

insure against risk;

The impact on the economy; and

Our need in the face of the continued terror threat to move legislation forward.

The impact of the terror attacks of September 11th and the capacity of insurers and reinsurers has been very large. Insured

losses of both primary insurers and of reinsurers over all principal

lines of coverage now are estimated to be about $40 billion.

These will be the largest insured losses in history, far surpassing

those from Hurricane Andrew in 1992. The capital of the industry

was in a sense hit doubly by the attacks. The Stock Market declined sharply following the attacks, reflecting general business unVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
6

certainty, and the insurers’ investment losses accelerated dramatically as a result, creating the possibility of the failure of insurance

companies.

In addition, the attacks revealed to the insurance industry a potential for huge future losses which it had not priced before and

cannot yet readily model.

Terrorism risk is not like normal insurance which pools many

small risks. It is somewhat more comparable to traumatic natural

catastrophes such as hurricanes and earthquakes, but unlike natural catastrophes terrorism risk does not have predictable patterns

and probabilities quantifiable by sophisticated models.

As a consequence of their reduced capital base and the inability

to model terrorism risk, reinsurers have almost entirely stopped assuming terrorism risk.

Primary insurers which rely on the ability to lay off huge risks

to reinsurers are also withdrawing from covering this risk as their

contracts expire.

Primary insurers are being allowed by insurance commissioners

in all States, with the exceptions of New York, California, and

Georgia, to exclude terrorism coverage above certain small dollar

amounts from smaller regulated commercial policies in the future.

Insurance brokers report that terrorism coverage for large commercial properties whose insurance policies are unregulated is difficult or impossible to obtain. And, when available, subject to the

limits of coverage that are much lower than customers need.

And premiums for these properties have increased dramatically.

The total policy costs with limited terrorism coverage is reported

to be roughly double the cost of a property casualty policy without

the terrorism coverage.

These insurance difficulties in turn are affecting the financing of

new real estate projects and the sales of existing properties.

Financing is limited for new construction and the acquisition of

high-profile properties. Lenders are carefully screening the location

and size of buildings. Some are simply refusing to lend to properties that are not fully insured.

Much commercial property development is financed through the

sales of securities backed by mortgages on the properties. The securities depend on good ratings from rating agencies to attract investors.

Rating agencies have indicated that they will substantially downgrade new issues of securities backed by mortgages on high-risk

properties without adequate insurance coverage.

Those deemed high-risk include trophy assets, symbols of America, structures for large gatherings of people, critical infrastructure,

and critical energy providing structures.

The implications of these insurance market conditions and the

economic consequences make it critical for Congress to enact a Federal terrorism risk insurance backstop.

The lack of insurance coverage leading to inefficient risk bearing

and high premium rates imply a drag on our economy and a burden to the nacient recovery, including the potential for loss of even

more jobs.

7

These costs are like a tax increase on the productive capital, a

disincentive to investment, and in the long run a considerable burden for our workers and consumers.

Our enemies have stated that their intent is to cause both economic and physical harm to us. And as the President has warned,

our enemies are persistent, clever, and should not be underestimated.

We firmly believe that our Nation’s battle against the scourge of

terrorism will ultimately be successful, and that private insurance

markets will stabilize in the long run.

But we now know how difficult and costly it can be for the economy to adjust to terrorist events. We want to encourage economic

growth, and we bear a responsibility for assuring that our citizens

are adequately protected against terrorism.

Consequently, we urge that Congress pass a Federal backstop

now before the damage caused by lack of terrorism risk insurance

takes too great a toll on our recovering economy.

We know that you share with us a clear recognition of the importance of this legislation, and we want to work with you to create

the best possible support for our economy and our citizens.

I will be glad to answer any questions.

[The prepared statement of Mark J. Warshawsky can be found

on page 51 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Warshawsky.

Now we go to Mr. Hillman.

STATEMENT OF RICHARD J. HILLMAN, DIRECTOR, FINANCIAL

MARKETS AND COMMUNITY INVESTMENTS, U.S. GENERAL

ACCOUNTING OFFICE

Mr. HILLMAN. Thank you, Madam Chairwoman, and Members of

the subcommittee:

I am pleased to be here today to present the results of our work

on the availability of terrorism insurance in the wake of the tragic

events of September 11th.

As you requested, my testimony today describes how in the absence of Federal action insurance companies and the marketplace

have reacted to the events of September 11th.

My testimony also provides GAO’s initial observations on the potential consequences these market changes may have both in the

event of another terrorist attack and, as we all hope, in the absence

of one.

On my first point, since the September 11th attacks, the key dynamic taking place in the insurance industry has been a shifting

of risk from terrorism-related losses from reinsurers to primary insurers and then to the insured.

The tragic events of September 11th brought to light the huge

potential insurance company exposures that they could face in the

event of another terrorist attack.

Faced with a continuing uncertainty about the frequency and

magnitude of future attacks, and at the same time warnings by

Government and military leaders of new attacks to come, both insurers and reinsurers have largely determined that terrorism is not

an insurable risk at this time.

8

As a result, in the closing months of last year reinsurers, followed by direct insurers, began announcing that they could not afford to continue providing coverage for potential terrorism losses.

Because reinsurance markets are global in scope, and because reinsurance transactions are considered to be contracts between sophisticated parties, neither the prices nor the conditions of such

coverage are subject to direct regulation.

As a result, after September 11th, reinsurers had little difficulty

excluding terrorism from coverage. Generally these exclusions became effective on policy renewal dates, many of which were clustered at the beginning of January.

Industry sources confirm that little reinsurance is being written

today that includes coverage for terrorism. As reinsurers walk

away from terrorism insurance, primary insurers’ exposures increase, at least in the short run.

Faced with this kind of exposure and the risks that they do not

believe can be priced, industry observers and participants have told

us that the primary insurers are beginning to emulate their reinsurance counterparts and exclude terrorism coverage from some

commercial insurance policies.

However, a number of factors affect both the speed and the extent to which primary insurers can insulate themselves from terrorism losses. Direct commercial property casualty insurers withdrawal has been slower and less complete than reinsurers because,

with the exception of some large risks, direct insurers need regulatory approval to exclude terrorism.

Moreover, there are legal requirements in some States that preclude insurers from excluding terrorism from coverage for Workers

Compensation and for fire following an event, irrespective of its

cause.

However, the rapid submission of the ISO exclusion language in

which the State insurance regulators and the generally rapid positive response by regulators clearly indicate the urgency of primary

insurers’ desire to be able to exclude terrorism from commercial

property casualty insurance coverage.

Over the next year, as insurance policies renew, a growing share

will likely exclude coverage for terrorism, absent some intervening

factor. Thus, risks that were formerly held by reinsurers and insurers will gradually be shifted back to the policyholders.

Now all policyholders are affected by this shift to the same extent. Indeed, small, low-risk businesses and properties may feel little effect. However, large risks and those where there are factors

that give rise to a perception of risk such as location, concentration,

or hazardous activity, are experiencing problems obtaining insurance for terrorist events and policyholders are thus bearing more

of the risks of loss themselves.

Regarding my second point, the effects of the risk shift from reinsurers and insurers to businesses and property owners can be invited into two parts:

What would happen in the event of another terrorist attack?

And what is happening even in the absence of another attack?

Many of the most severe potential negative consequences resulting from a lack of terrorism insurance coverage will only become

evident if another terrorist attack occurs.

9

The shifting of risk from reinsurers to primary insurers to commercial property holders and other affected parties could place

more risks and economic burden on businesses and the public at

large should another terrorist attack similar to a September 11th

occur.

Consequently, a lack of such coverage in the event of another attack could have more serious effects on businesses as well as their

employers, lenders, suppliers, and customers.

Another significant consequence of the insurers exiting the market for terrorism coverage is the loss of their claims handling mechanisms for effectively and efficiently responding to victims of an attack.

However, even in the absence of an actual terrorist event, there

are growing indications that some sectors of the economy—notably

real estate and commercial lending—are beginning to experience

difficulties because some properties and businesses are unable to

find sufficient terrorism coverage at any price.

Such large property owners or developers reported that they are

having to underinsure or go bare by self-insuring for terrorist risk

because of the lack of available coverage or very limited coverage

for the quoted prices.

Developers, financial institutions, and the insurance industry observers have told us of cases where lenders or investors were reluctant to commit resources to projects that could not be insured

against terrorist attacks because they were unwilling to expose

themselves to risks that insurers could not price.

In my written statement are examples of these effects and recent

news articles have identified still others.

In summary, our Government leaders continue to warn of imminent and credible terrorist threats. Should one of these threats become a reality in a world where insurers ar no longer the first line

of protection for businesses, the economic consequences could be

very different from those following September 11th.

As businesses both large and small are faced with uninsured

losses that threaten their ability to survive, Congress could be

faced with a time-critical decision to intervene or not. Deciding

whether Congress should act to help businesses obtain insurance

against losses caused by terrorism is properly a matter of public

policy. The consequences of continued inaction, however, may be

real and are potentially large.

Madam Chairwoman, this concludes my prepared statement and

I would be happy to respond to any questions.

[The prepared statement of Richard J. Hillman can be found on

page 57 in the appendix.]

Chairwoman KELLY. Thank you, very much. As perhaps you see

the lights up there, we have been called back not for one vote but,

as I understand it, for perhaps a series of votes. Unfortunately, I

had intended to start the hearing and let it go right straight

through, but if we have a series of votes I am going to be unable

to do that because we all have to be on the floor to vote.

So I am going to temporarily recess the hearing for a brief period

until the voting is finished on the floor. I am sorry. Procedurally,

what is happening on the floor right now is very interesting to people who are students of the Congress, but it is taking your time

10

and I apologize to people who have planes to catch and so forth.

We had hoped to get this done in a timely manner. Apparently we

are not going to be able to.

So I am temporarily going to recess this hearing. We will come

back when the votes have finished. Thank you very much for your

patience.

[Recess.]

Chairwoman KELLY. This hearing will now resume. Thank you

very much for your patience. I apologize for the time.

Let’s go now to Mr. Serio.

STATEMENT OF HON. GREGORY V. SERIO, SUPERINTENDENT,

NEW YORK STATE INSURANCE DEPARTMENT.

Mr. SERIO. Thank you, Madam Chairwoman. It is a pleasure to

be here, and I appreciate the opportunity to give you a sense of

what we have seen in the New York market.

As you might say, you can’t get any closer than we have been to

the situation, and that continues even as the recovery efforts continue at Ground Zero.

I am going to deviate from my prepared oral comments and just

give a sense of what we have found. It is very similar to what has

been testified to already.

The availability issue is one that we have seen coming for some

time. Back in December of 2001, the Insurance Department surveyed the commercial property and casualty business companies

writing in New York, and this is what we found:

As far back as December, we knew that 54 percent of the companies writing business in New York planned to reduce coverage limits on both new and renewal business.

We knew that 12 percent planned to materially curtail the number of policies written in certain lines of business. Eleven percent

had ceased writing or materially reduced the number of policies

written in New York. And 18 percent did so outside of New York

as well. So it is not just related to New York.

Twelve percent planned to cease writing or materially reduce the

number of policies in New York for 2002, and 24 percent of the

companies responding said they planned to reduce their writings

outside of New York in 2002 as well.

Eighty-one percent of the insurers responding to our survey are

licensed in our Free Trade Zone, which is an area where you can

write sophisticated risks free of rate and form regulation, but that

they were going to exclude or limit coverage for acts of terrorism.

And that 83 percent indicated that their reinsurers excluded or

limited coverage for acts of terrorism.

So we knew that. And living in New York, and having our offices

just blocks from Ground Zero, we also found by local meetings and

public forums that the New York Insurance Department has been

undertaking over the last several weeks and will continue to do so,

we have found that a lot of what was answered in our surveys in

December are coming true now in the market.

Our public forums have had one business after the other coming

before us, talking about difficulties in gaining coverages, particularly going bare or particular difficulties getting terrorism coverage.

11

We have met with local business groups. Some of the groups are

here today, and you will hear them in the second panel. In speaking with business owners, one on one, and in walking tours that

I have done not just in Lower Manhattan but also in Albany, on

Long Island, and throughout Upstate New York, we are finding

that this is not a New York-centric problem; that it is very much

indeed a problem throughout all of New York and, by our numbers,

clearly one that is starting to affect other States as well.

The second question that you had in the letter to us inviting us

to testify:

What is the impact on the economy?

Well, I can tell you that it hasn’t been geographic in nature. It

is not sector-oriented. And let me just add one more observation.

It is not just limited to businesses. Governments themselves have

had tremendous difficulty getting insurance coverages, particularly

terrorism coverages, and largely because they are what might be

considered to be terrorist risks or targets, but also because, as natural places of assembly for large numbers of people, carriers are reluctant to write Government risks, including public buildings of assembly, bridges, and other types of publicly operated or Government-operated facilities.

The economic viability of the insurance industry to absorb losses,

which was the third question in the letter to us, really cuts to the

heart of the matter.

That is, that if it is a man-made threat, as the Chair has noted,

that the threat of future and different terrorist acts are still with

us.

I have as much of a concern over what happens in the court of

natural disasters that might come up, and the ability of the industry to weather those storms.

Hurricane season is just 3 months away and is before, by the

way, the next largest reinsurance renewal period, and I can tell

you that every Gulf State and every State on the East Coast of the

United States needs to be concerned about the event of a natural

disaster having that second shoe dropping effect on the insurance

community in the United States. And that is something that certainly begs the question of some action here in Congress.

Another point I would like to make is that we have been looking

at insurance companies not just as insurers and having the capacity to cover risks, but also as participants in the marketplace as

businesses, and more importantly as investors in the real estate

market in New York and in other large cities.

I can tell you that there is an insurance company that is, or has

been known to be the single, or second-largest real property owner

in the City of New York. What are the implications, when you consider that those investments that they have serve as the admitted

assets of those companies if those assets are now suddenly challenged because they don’t have all-risk coverage or go bare for terrorism coverage?

So we have to take a look at that issue, as well.

The Department’s response has been, since 9/11, first to deal

with the claims’ issues at hand; but, second, to get to the question

of how do we maintain coverage going forward.

12

The most profound action that we have taken and one that certainly raised the hackles of certainly the trade press in the insurance community, was to deny—and I think I used the term—I

wasn’t inclined to approve terrorism exclusions.

That is because, as I looked outside my window in Lower Manhattan, and also from our perspective around the rest of the State,

terrorism coverage, or terrorism exclusions, I should say, that are

overly broad simply are in violation of the State law.

They may work for other constituencies in other jurisdictions,

and maybe that is one of the beauties of the State-based system of

insurance regulation, but for New York terrorism exclusions were

not appropriate.

We have pushed back to the companies to give us more definitive

exclusions, more narrower language with respect to those exclusions, but I can tell you that at the end of the day we do not want

to make businesses and consumers the last stop on the ‘‘Pass-TheExposure Express.’’

And for all of these reasons, we believe that time is now passing

for Congress to take action, and we believe that this is nothing

new. We are not talking about new ground. But that it is something that, with the examples we have used in the past, either permanent facilities or temporary facilities that we have used in New

York in the past, I think we can settle the challenge that is in front

of us.

Thank you.

[The prepared statement of Gregory V. Serio can be found on

page 77 in the appendix.]

Chairwoman KELLY. We thank you, Mr. Serio.

I am going to ask a couple of questions of you, Mr. Warshawsky.

In your written testimony you compare the current economic impact of a lack of adequate terrorism coverage to a tax on productive

capital.

I wanted to know if you would elaborate that for us a little bit.

Mr. WARSHAWSKY. Sure. Basically it comes in two mechanisms.

The lack of adequate, or any insurance increases the risk exposure

of businesses. And as the risks increase, risk has a cost. And the

cost is either reflected in increased cost in borrowing, or a decline

in equity values, and therefore that sums to an increased cost of

capital like a tax on capital.

The other extent to which there is the tax of course is the increase in the premium on any insurance which is purchased. So

those two summed together would be considered what I would call

quote, unquote, a ‘‘tax’’ on productive capital.

Chairwoman KELLY. Thank you. Another question for you.

In your written testimony, you note that those who argue that

the lack of a current dramatic impact proves legislation is unnecessary, that they misunderstand the problem.

The witnesses that we have heard today of the three of you seem

to agree with that. I would like you to just elaborate a bit on that,

too, please.

Mr. WARSHAWSKY. Sure. Basically there are sort of two prongs to

that, as well. The most significant one is going forward. That is,

that many properties, many businesses and governments as we’ve

13

just heard are exposed. They are either inadequately insured or not

insured at all.

And if there were to be another terrorist attack, then there

would be a need to hurry up and devise some other method.

So, you know, that does not speak to the current impact; it

speaks to the future impact, which I think is what I was referring

to as a misunderstanding of the fundamental problem.

That being said, I think we have found an impact already, an

economic impact, as we have discussed both in terms of real estate

development and other sectors of the economy, and so I think the

impact is there as well.

Chairwoman KELLY. Thank you.

Mr. Serio, you categorized the market effect of a lack of available

terrorism insurance as a slow death by a thousand cuts. Interesting simile. Rather than a second capitation. And yet, you feel

that the Federal Government should act now?

Mr. SERIO. My creativity aside——

[Laughter.]

Mr. SERIO. I have to tell you, what we are really finding in the

marketplace—and this has been part of the concern that we have

had about the pass-through down to businesses and consumers—

as much as it has been a challenge to the primary carriers to have

them retain the risk for terrorism losses and exposures, it has

given us an opportunity to really get our hands around not just the

core of the issue, but also how comprehensive the issue is to the

overall primary insurance market.

When it comes down and you have the pass-through to individual

businesses, it is diluted by each business, as well as by each expiration of coverage and each renewal period, or each renewal cycle

for each type of business.

Something we have seen in our Department has been that we

have been getting calls, one business, one sector at a time, and it

has been difficult to really articulate or to illustrate the burgeoning

problem when we have had to do it one sector, one business at a

time.

So the primary carriers may feel that they are taking the heat

on this, but I think it has really allowed us to illustrate quite clearly what the implications have been arising from the lack of reinsurance for terrorism.

Chairwoman KELLY. The other thing I noticed, you picked a

number of different areas, but one that particularly stood out with

me was you noted that hospitals are having difficulty in getting

adequate terrorism coverage for their facilities.

What happens to these hospitals and their employees if they

can’t get coverage? And what happens if there is another terrorist

attack? We in New York know how very vulnerable we are to something like that, and how might this end up affecting other health

care costs in New York?

Mr. SERIO. Actually the hospitals, and I have to appreciate them

coming forward, and I know they are here today, they really were

the first illustration of a major sector of dysfunction with respect

to getting coverage.

They had a renewal cycle back in November, and it has only

been recently that we have been starting to look at what is the exVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
14

ponential impact, as you’ve suggested in the question, and what

happens if you have a health care facility that is only covered for

a portion of their true liabilities? And given the health care industry in New York where there is a large public/private interplay in

the financing of hospitals and health care facilities, you are talking

about a broader exposure not just in terms of general health care

costs but also in terms of public health care financing as well.

I think the hospital representative can probably better demonstrate that, but that is part of that exponential concern that we

have that it will go far beyond just the bricks and mortar of those

hospitals to getting into actual health care financing dilemmas and

challenges for us if a hospital that is underinsured were to have

a loss.

Chairwoman KELLY. Thank you, very much.

My time is up. I am turning now to the Ranking Member, my

friend Mr. Gutierrez.

Mr. Gutierrez.

Mr. GUTIERREZ. Chairwoman Kelly, Members of the subcommittee, and distinguished guests, I am pleased that we are

holding this important hearing today to discuss an issue that is

very present in people’s minds since September 11th.

I am sure that all of us in this room let out a collective sigh of

relief and joy when the Winter Olympic Games concluded without

incident. As our Nation continues to recover from the events of

September 11th, I remain confident that the insurance market will

also recover.

Nevertheless, and not surprisingly, we all have different views as

to how long this recovery is expected to take and how exactly it will

happen.

Only last October we heard testimony about the fact that there

was great uncertainty as to what would happen if Congress did not

act to provide backup for terrorist insurance.

At the time, there was widespread belief that either the industry

would experience a devastating setback, or that the potential consequences would at least be severe enough that Congress should

worry.

Well, Congress does worry. However, I also understand that the

terrorist attacks may have just only begun to effect the market

mechanisms to provide terrorism insurance.

While it is reassuring to know that the worst-case scenario did

not play out, many answers are still missing. For instance, how

much longer before the market corrects itself and the current cycle

changes?

What is the cost for this potentially long process?

Has the fact that Congress has not yet provided backup legislation been as detrimental as it was feared in the Fall of 2001?

These are all valid questions that warrant honest answers. Your

acceptance to appear before this panel today brings us a step closer

in obtaining these answers and expediting a solution to the current

problems.

I want to thank our guests for joining us today and I, as always,

look forward to all of their testimony.

15

I would ask the Chairwoman Kelly to provide me an opportunity

to put in writing questions to the members that are here before us,

and to please excuse me for the remainder of this hearing.

Chairwoman KELLY. Thank you, Mr. Gutierrez, for being here.

We understand you have other things that you need, that you must

do. And of course, by unanimous consent, we accept your statement

for the record.

Dr. Weldon.

Dr. WELDON. Thank you, Madam Chairwoman.

Let me begin with—it’s Warshawsky? Is that correct?

Mr. WARSHAWSKY. Yes.

Dr. WELDON. In your testimony you mentioned the similarity between the losses incurred by acts of terrorism and catastrophic risk

like earthquakes and hurricanes. You also mentioned that natural

catastrophes have predictable patterns that allow for the assumption and diversification of risk, distinguishing them from terrorism.

However, in my State of Florida and in California, and other

States that have had catastrophic risk exposure in recent years,

the residential property insurance market seems similar to the recent trends in the terrorism insurance market where high premiums and relatively low coverage is being offered for catastrophic

risks.

Could you comment on this, particularly with respect to the premium prices and the capacity of insurers to cover losses?

Mr. WARSHAWSKY. Sure. Basically, as I said, there are similarities and there are also differences between the two types of risk.

The similarity obviously is in the, at times, very large losses that

could be experienced.

The dissimilarities are twofold. One is that typically we have

only experienced the terrorism, major terrorism risk once, but what

we saw was there was a major—at the same time, of the insured

losses, there was a major decline in investment prices.

That introduced more of a risk to the insurer in terms of, because both risks could happen at the same time. That is less likely

to happen because of the more and isolated nature of the natural

disasters.

The second difference is, it was my understanding that insurers

and reinsurers have devoted a lot of effort and intelligence to trying to find patterns in natural disasters, and I believe that that enables them to more accurately price the risk.

That has been used, I’m told, for example in the issuance of catastrophe bonds that have been used both in California and in Florida. But that has not yet come online. I am not sure if it is able

to, but it certainly has not yet come online in this risk.

Dr. WELDON. Do you see a parallel between some of the withdrawal of coverage? There has been withdrawal of coverage in the

case of terrorism risk, and there has been some withdrawal of coverage in the case of catastrophic risk. I know in the State of Florida, prior to Andrew, we had 1200 companies offering product. We

now have, I believe, less than 200 offering homeowners insurance

policies.

Mr. WARSHAWSKY. Well, the comparison there certainly motivated our analysis in terms of viewing this as the likely trajectory

of losses in the experience in the insurance market.

16

So following Hurricane Andrew, the dislocation was 18 months

to 3 years, and I think here too that is something you cannot

project exactly what would happen, but something like that would

be expected here as well.

That is why Treasury proposed, the Administration proposed a

temporary insurance backup.

Dr. WELDON. Mr. Hillman, you state that another terrorist attack will place the economic loss on policyholders because insurers

have withdrawn or limited their risk to such exposures.

Would you agree that this is the same dynamic that is occurring

regarding catastrophic risks from hurricanes and earthquakes?

Mr. HILLMAN. Certainly with terrorism insurance this risk-shifting process that is taking place is much more dramatic than what

has been experienced in the past associated with natural disasters

for very similar reasons that my friend from Treasury has stated:

That there are opportunities to develop sophisticated modeling

methods with which to determine with some predictability the

prices for natural catastrophe insurance. That today does not exist

for terrorism insurance, and therefore you are finding reinsurers

and primary insurers in the industry fleeing from the marketplace.

Dr. WELDON. Mr. Serio, I believe you may have commented on

this in your opening statement. I got here a little late, but in addition to the exposure to terrorism, New York obviously also experienced some exposure due to catastrophes such as hurricanes. I

grew up in New York and I remember some of the hurricanes that

came through there.

New York has consolidated its response to these risks in its

Emergency Management Office. What have been the impacts of the

September 11th attacks on New York’s ability to respond or prepare for other disasters such as a natural disaster?

Mr. SERIO. I think—and getting the Insurance Department more

directly involved with the Emergency Management infrastructure I

think has given us a new perspective on that very question—I

think the direct answer to your question is in how the Emergency

Management infrastructure responded to the crash of Flight 587 in

the Rockaways just 2 months after the World Trade Center disaster.

I can say that both the State Emergency Management apparatus

and the City Emergency Management apparatus, which you may

know was destroyed entirely in Building 7 of World Trade, is now

up and running in temporary quarters in Brooklyn, but never had

there been a default in the interface between the City and State

Emergency Managers, and I think that is in large part the reason

why the response to World Trade and American Airlines was so

good.

And so as we approach hurricane season, I think that the State

of New York and its localities are in a good position to respond to

a natural disaster.

The industry I think is also in a good position to respond to a

natural disaster because of what they learned from World Trade.

I think their concern is certainly more financial than procedural

in terms of their ability to get in and to handle a large risk, something in the order of whether it’s an Andrew at $19 billion or something like World Trade which is substantially more.

17

Dr. WELDON. I was very interested in your comments about the

nature of the real estate investments for some of the insurance

companies.

Do you feel that the reinsurance market as it currently exists

today is adequately serving the insurance needs of the major insurers in the City and State of New York?

Mr. SERIO. Up to this point in time, we have not been receiving

complaints from the primary insurance market as to the inability

or the failure of their reinsurers to pay. Out of the $15 billion that has either been claimed or paid up

to this point, that still has largely come out of the primary carriers,

although the reinsurers as their layers start to—the attachment

points start to be met, they have been paying them and we have

not had any unusual deviations from the normal practice of timely

payment of reinsurance recoverables.

So they seem to be doing as well a job in paying their primary

carriers as the primary carriers are in paying their insureds and

their commercial insureds.

Dr. WELDON. Do either of the other two witnesses want to comment on the status of the reinsurance industry and the impact of

this disaster on that? Did you have anything to add to what Mr.

Serio said?

Mr. WARSHAWSKY. Nothing to add.

Mr. HILLMAN. Nothing.

Dr. WELDON. Thank you very much, Madam Chairwoman, for

this very interesting hearing that we have had.

Chairwoman KELLY. Thank you, Dr. Weldon.

I would like to ask a couple of other questions here. I would like

to go on with what Mr. Serio was saying.

Mr. Serio, on page 13 you testified about the dangerous risk

shifting to policyholders and the resulting economic drag.

What about the effects on group life and workers compensation

markets that are so important for protecting our citizens? And how

are those markets now being affected by this situation?

Mr. SERIO. The over-concentration-of-risk issue has really come

home to roost in the group life and in the workers compensation

area.

We have a situation not just in New York but frankly countrywide where reinsurance for workers compensation has, I think one

commentary said, it has evaporated.

There is significant concern for catastrophic reinsurance for

workers compensation. Already in New York and in other States

the rating services, the New York State Compensation Insurance

Rating Board has already approached the Department for an emergency rate increase to cover the catastrophic reinsurance expense

that they are incurring right now. We are in discussions with them

on that question.

But if it is reinsurance which is not usually part of the rate base

for workers compensation, what we may end up with is either a

workers compensation environment where if they cannot get adequate recoveries for their rates, they will significantly curtail the

writing of workers compensation business.

In turn, the residual markets will once again become primary

carriers and the primary writers in those markets, and I do not

18

think that is good for business. And frankly, it is not good for the

State that sponsors the residual market.

Chairwoman KELLY. Thank you, very much. It does not paint a

very rosy picture.

Mr. Hillman, the GAO report concludes that the potential negative consequences of not having terrorism insurance are cause for

concern.

It seems to me like it may be a very nice way of saying we

should be concerned. If you say that the consequences of continued

inaction may be real and are potentially large, what are the benefits right now of putting in a contingent Federal backstop in place

versus the cost of just waiting around until another terrorist attack

happens and considering how to respond at that point?

Mr. HILLMAN. The decision rests with the Congress as to whether

or not they ought to implement a plan, but there are at least several reasons that I could think of as to why it would be better to

act now.

Number one, simply it would be a prudent act to develop a plan

when you have the time to develop a plan right. Under a crisis in

the event of another attack would not be the right time to be thinking about how to deal with the terrible situation.

Second, you want to keep insurers capital and their claims processing capacity in the game. What we have found from the results

of our study is that the claims processing capability of the insurance industry will be quickly evaporating as they insulate themselves from this market.

In the event of another attack, then, it may require the Federal

Government to institute new claims’ processing capabilities, which

is a daunting task.

Finally, acting now would strengthen confidence in all the markets, its participants, lenders, businesses, and insurers, and that

could only be good for the economy.

Chairwoman KELLY. Mr. Hillman, do you think that the need—

and this is not a trick question—do you think the need for legislation at this point is more about insuring the solvency of the insurance industry? Or more about preventing a risk transfer to the vulnerable policyholders, stopping economic drag, and creating an efficient response mechanism to future terrorist attacks?

Mr. HILLMAN. With this risk shifting that we have been talking

about, more risks are first going to be placed off of reinsurers and

onto insurers.

In the event of another attack, that could mean then that these

primary insurers could have more solvency issues than we have

seen in the past.

If an attack would occur later, the insurers themselves would become insulated. And then the problem is going to rest with businesses, and it is going to rest with their employees, their lenders,

their suppliers, creating much more economic concern than the

major concerns of a September 11th.

Chairwoman KELLY. It sounds as though you are describing, all

of you are describing a ripple effect that is gaining with each wave

out. Am I correct in that assumption?

Mr. HILLMAN. [Nods in the affirmative.]

Mr. WARSHAWSKY. [Nods in the affirmative.]

19

Mr. SERIO. [Nods in the affirmative.]

Chairwoman KELLY. You can do something besides nod so we can

get this on the record.

Mr. HILLMAN. Yes.

Mr. SERIO. Yes.

[Laughter.]

Mr. WARSHAWSKY. Well, let me do more than nod. Basically sort

of the ripple comes in at least two ways. One is, as the insurance

contracts expire the lack of terrorism risk insurance becomes more

and more widespread.

The second ripple effect is through the investment process. What

we have noticed is progressively the rating agencies for, we’ve focused on commercial-backed, commercial mortgage-backed securities, there is a progressive realization and work in that area, and

that is another ripple effect.

I think that can be repeated in other sectors of the economy in

other aspects.

Chairwoman KELLY. Thank you, very much.

Mr. Serio.

Mr. SERIO. Yes. If I could just add to that, and this is something

that I don’t think people are seeing just yet, is the wave or the ripple that comes up. People are concerned about the size of the wave,

but I think as Dr. Weldon being from both New York and Florida

knows, it is the undertow that is actually more dangerous.

What we are concerned with is not so much the wave as it goes

down toward the businesses and the consumers, but what is that

backlash, or what is that undertow back from the consumers and

the businesses?

That is really where you are going to see the real economic impact if we do not deal with the ripple or the wave as it comes up

in the first instance.

Chairwoman KELLY. I want to thank you all. There are no more

questions, I don’t believe—Dr. Weldon?

Dr. WELDON. No.

Chairwoman KELLY. I want to note that there are some Members

who may have additional questions. They may wish to submit these

questions in writing. So without objection, the hearing record will

remain open for 30 days for Members to submit written questions

to the witnesses and to place their responses in the record.

The first panel is excused with our grateful thanks for your

spending so much time. We are greatly appreciative. If the second

panel will take their seats at the witness table, I will begin the introductions.

While the second panel is taking their seats, I would like to note

that I have written testimony that has been submitted by Edward

C. Sullivan, the President of the Building and Construction Trades

Department of the AFL-CIO. He says in that testimony that:

‘‘Every day that goes by between now and the time Congress

completes action on terrorism insurance legislation presents an increasing threat to our members whose livelihood is dependent upon

a robust and healthy atmosphere for building and construction.

Every day that goes by without a Federal terrorism insurance law

on the books presents a serious and escalating threat to the building and construction industry as a whole, and likely to downstream

20

industries like suppliers. This translates into a threat to our economy and a loss of jobs for our members. A Federal backstop for terrorism insurance can do away with both of these threats, and it is

as simple as that.’’

We will insert, with unanimous consent, the entire statement of

Edward C. Sullivan into the record.

[The prepared statement of Edward C. Sullivan can be found on

page 203 in the appendix.]

Chairwoman KELLY. And now I would like to introduce the second panel. For our second panel, we will begin with David Mair—

am I pronouncing that correctly?

Mr. MAIR. Yes, ma’am.

Chairwoman KELLY. Thank you. David Mair, President of the

Risk Insurance Management Society, and Director for Risk Management for the U.S. Olympic Committee.

Next we will listen to Deborah Beck, the Executive Vice President of the Real Estate Board of New York.

Then we will hear from Lisa Kramer, who is the President and

CEO of the Federation of Jewish Philanthropies Service Corporation.

Next we will hear from Kieran Quinn, the President and CEO of

the Column Financial, Incorporated, a subsidiary of Credit Suisse

First Boston.

After Mr. Quinn we will hear from Robert Hunter, the Director

of Insurance for the Consumer Federation of America. Mr. Hunter

has been before the subcommittee before and we welcome you back,

Mr. Hunter.

Finally, we will hear from Alice Schroeder, Senior U.S. Nonlife

Equity Insurance Analyst for Morgan Stanley.

I want to thank you all for taking so much time out of your busy

schedules to join us here today, and I really appreciate your being

here and staying with us for this long period of time that unfortunately this has been that we have had with the floor delay.

So without objection, your written statements will be made part

of the record. You will each be recognized in turn for a 5-minute

summary of your testimony, and we will begin with you, Mr. Mair.

STATEMENT OF DAVID I. MAIR, PRESIDENT, RISK AND INSURANCE MANAGEMENT SOCIETY, ASSOCIATE DIRECTOR FOR

RISK MANAGEMENT, U.S. OLYMPIC COMMITTEE

Mr. MAIR. Thank you, Madam Chairwoman.

As you indicated, my name is David Mair. I am the Director of

Risk Management for the United States Olympic Committee, and

the President of the Risk and Insurance Management Society.

RIMS is the largest professional organization for risk managers

worldwide. Some will come to you, Madam Chairwoman, and suggest to you that they represent the consumers of commercial property and casualty insurance.

I am here today because we are the consumers and appreciate

the opportunity to share directly with you our story of what has

happened in the months since September 11th.

Insurance is a key part of the infrastructure, the financial infrastructure for business in the United States. It provides the capability to address the costs of unforeseen and unpredictable and preVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
21

ventable events, and it provides coverage for companies both large

and small.

There are many in the fall who looked and said: ‘‘This is an insurance industry issue.’’ I want to submit to you today that it was

not then nor is it now. This is an issue for policyholders.

The buck has now stopped with those consumers of insurance in

cities and towns across America. Companies both large and small

now assume nearly all of the risk of owning commercial properties

and of operating businesses in the United States. These companies

are now working and living in a Nation that has been targeted for

terror by a most unpredictable type of an enemy.

Some have said to you that this is a very complex situation, and

it is, but it is also yet one that I think can be summarized with

a fairly simple analogy.

We have been placed on the interstate highway system in our

automobiles at highway speed with the protective steel sidebeams

having been taken out of our cars and our seat belts taken away.

If nothing happens to us in the United States, we are all going

to be fine in this situation. However, if that truck, known as terrorism today, broadsides us in an intersection, the results are going

to be devastating.

That is the situation that we are in today in the absence of insurance for terrorism.

In November of 2000, the press was coming to us with the Olympic Games coming up and asking, ‘‘How is this going to impact

you?’’ I had the luxury, in mid-November, of being able to say to

members of the press the United States Olympic Committee is

going to be fine. We have policies that expire after the Olympic

Games, which have now just concluded. However, at the end of November that situation changed dramatically when one of our carrier’s rating was downgraded, forcing us back into the insurance

marketplace trying to find general liability coverage for the Olympic team going to the games in Salt Lake City.

The insurance marketplace, at a time it was already concerned

about terrorism coverage, looked at the headlines which said

‘‘Olympics’’ and ‘‘Security’’ in the same banner headlines day after

day after day, and they were rightly concerned.

We went 70 days without being able to find coverage, and finally

were able to place it on February the 9th, the day of opening ceremonies for the Olympic games.

We were, however, able to place that at 45 percent of our expired

limit. We couldn’t get any more. We placed it at a 250 percent rate

increase without terrorism coverage.

Later that same day, we were able to find stand-alone coverage

by going to the same carrier that had been downgraded, which no

longer met our requirements, and basically calling in a favor. Because we already had a 3-year guaranteed rate program that simply we couldn’t utilize because of the downgrade, nor could we get

excess coverage written over the top of that.

We were able to place that terrorism coverage at 5 percent of our

expired limit for 100 percent of the expiring premium.

Some will tell you, Madam Chairwoman, Mr. Weldon, that there

is coverage available in the marketplace today, and that it may be

affordable. Well, in our membership we have 900 companies that

22

represent small businesses, companies with less than 500 employees. They can’t take that same rate increase that we incurred only

because we were concerned about America’s athletes and the interests of America’s Olympic teams at the games.

In small businesses, as you know, that comes right off the owner’s dining room table. It comes right out of the pockets of their

family, their disposable income, and what they can afford to pay

their work force.

Is there a drag? Yes. Is it happening slowly? Absolutely. This is

a crisis that is happening in slow motion.

My father is a small businessman in Oklahoma. His insurance

coverages does not renew until July. He has not seen the impact

of this yet. But he will.

Large businesses have been looked at with the comment that

there are all kinds of alternative risk financing vehicles that they

can utilize, and that is generally true. But those same large vehicles go to the reinsurance community and are buying insurance

which is today not available.

It simply cannot be found at any price.

The Congress has had its own experience. When Anthrax was

found in the Senate office buildings, that building was closed for

a matter of months at a cost of millions of dollars, with the Federal

Treasury serving as the backstop.

Imagine what would have happened had that been a mid-sized

business somewhere. Without the availability of terrorism insurance, they would have been unable to afford that cost, and they

simply would of had to close their doors and go away with a loss

of jobs there.

There are some who will tell you that, in an attempt to deflect

the focus, this is a simple issue. It’s an issue of increased prices.

It’s an issue of whether or not claims costs from September 11th

will be paid.

It is simply not that easy, nor that simple, at one level. More important is whether the terrorism coverage that will exist will be

there to respond, and today it simply is not.

I am a risk manager. My job is to identify the causes for loss and

prevent them to the greatest degree that I and my colleagues can,

in our businesses.

The environment we are in today is similar to looking at a national forest and saying: ‘‘I don’t see smoke, therefore there’s no

fire.’’ We should more appropriately be looking to see whether there

are unattended campfires ready to catch and set fire to the woods

around us. Unfortunately, it is the terrorists lurking in the shadows who hold the matches.

Again, we are in a car on the highway. The steel beams have

been taken away from us. We are simply waiting to see, by action

of the Congress, by action of the Senate, whether those steel beams

will be put back in the car before something happens.

I thank you for the time, and I will appreciate the opportunity

to answer questions as you ask them.

[The complete statement of David I. Mair can be found on page

XX in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Mair.

Ms. Beck.

23

STATEMENT OF DEBORAH B. BECK, EXECUTIVE VICE

PRESIDENT, REAL ESTATE BOARD OF NEW YORK

Ms. BECK. Chairwoman Kelly, thank you for the opportunity to

appear on behalf of the real estate industry.

My association represents over 5,000 owners, builders, institutional owners, and investors, as well as others involved in New

York City real estate.

Our members also have interests across the Nation and globally.

You may have seen the New York Times piece today, which unfortunately missed the point where terrorism insurance for large commercial properties is concerned.

I am here to confirm that every day without legislative action is

putting America’s economy further at risk. Lenders demand terrorism coverage for making or renewing large-scale loans. Limited

availability is stopping them from doing so.

Investment in real estate is faltering as the risk of loss from terrorism is being transferred from insurers to commercial property

owners.

As of January 1st, 70 percent of reinsurance for terrorism ceased.

By July 1st, there will be none. Without reinsurance, the primary

carriers will not cover terrorism risks for large urban or suburban,

or for other properties near what are considered to be terrorism

targets.

While lenders insist on full terrorism coverage, only four companies are offering it, limited in the aggregate to $10 billion.

In New York City alone, high-rise office and residential buildings

have a replacement cost of $300 billion, not including our valuable

religious institutions, universities, hospitals, and the like.

Here are some specifics of pending defaults, stymied sales, stymied refinancings, and deferred construction projects, a direct result of the lack of terrorism coverage. There are more details in my

written submission.

A real estate portfolio with property in cities like Chicago, Boston, and New York, and elsewhere, carried blanket coverage of a

billion dollars before September 11. Since then, for this owner and

in general blanket coverage is no longer available on renewal. Now,

the owners are technically in default on their loan.

Owners of a $3 billion mixed portfolio in the Mid-Atlantic and

New England States operate by building and then borrowing

against completed projects to finance future ones. They cannot get

adequate permanent financing on a recently completed fully occupied building because terrorism insurance is not available. The

company has 2,000 employees, some of whose jobs are now at risk.

A bank agreed to refinance a $200 million mortgage, but in January suddenly withdrew from the transaction over the terrorism insurance issue just before closing. In this and in another similar

case, lenders are stalling by discussing everything but terrorism insurance.

Mortgage brokers we have spoken to assume the lenders want to

be ready to lend and hope that Government will resolve the terrorism insurance issue before they must decide whether to commit.

An East Coast and Chicago hotel builder with projects averaging

$300 million cannot finance without terrorism coverage and so will

24

not start any new construction. Hotel industry unemployment will

increase.

Inadequate terrorism coverage may kill the sale of a Times Square building priced at close to $600 million, and the Mall of

America is at risk of default because of the terrorism insurance

problem.

A major university has no coverage for terrorist incidents involving its laboratories. Its’ research may have to be restricted at a potential cost of scientific advances. I add here that any terrorism insurance now written specifically excludes nuclear, chemical, and biological acts, the very type of assaults the public fears the most.

There have been, or soon will be, similar cases in every district

represented on this panel. For all its urgency, the lack of terrorism

insurance has remained a silent crisis. Owners have not complained publicly because they do not want to frighten the public or

their tenants, investors, lenders, and potential purchasers.

In addition, policy renewals are staggered so many pre–9/11 policies will remain in effect for several more months. Those covered

owners are terribly concerned by the current lack of adequate coverage and hope Congress will address the problem quickly.

In summary, these are the grim prospects if steps are not taken:

Sales of high value property will be few. Prices will drop. Property tax assessments and recording sales tax revenues will also

drop and localities will face harsh budgetary choices.

I am inserting for the record an analysis by Cushman & Wakefield of likely lost tax revenues for New York City and New York

State alone this year if Congress fails to act.

Owners in default will have to renegotiate, pay higher interest

rates, and be compelled to take larger equity positions. Owners will

not have funds to make needed improvements or do transactions.

Construction and rehabilitation work for the trades will fall off.

Lenders will loan less, declare owners in default, and maybe foreclose. Bank profits will drop.

The Senate must act on legislation now. Only the Federal Government can provide temporary backup terrorism insurance coverage. This initiative would not be a bailout for the insurance industry, but an effective defense to protect us, your constituents,

from the economic aftershock of 9/11.

I would be happy to answer your questions.

[The prepared statement of Deborah B. Beck can be found on

page 23 in the appendix.]

Chairwoman KELLY. Thank you, Ms. Beck.

We go now to Ms. Kramer.

STATEMENT OF LISA KRAMER, PRESIDENT AND CEO, FEDERATION OF JEWISH PHILANTHROPIES SERVICE CORPORATION

Ms. KRAMER. Thank you. Good afternoon, Chairwoman Kelly, Dr.

Weldon, and Members of the subcommittee:

I am the President of FOJP Service Corporation. FOJP is a nonprofit membership corporation. We serve as risk management advisors to United Jewish Appeal, Federation of Jewish Philanthropies

of New York and its beneficiaries, among which are six major academic medical centers, many long-term care facilities, and 110 social service agencies, community centers, Ys, and camps.

25

These institutions are at the forefront of providing cutting edge

medical care, a broad array of mental health services, cultural,

educational, and physical fitness programs, services for the elderly

and for immigrants, camping and daycare for the young and the elderly, and employment counseling and training for those seeking

jobs.

Services are provided on a non-sectarian basis to a population

that reflects the diversity that New York State is known for, and

often to people who have nowhere else to turn. Our facilities provide services and health care to millions of people year-in and yearout.

In its capacity as risk management advisor to these institutions,

FOJP works with leading insurance brokers to procure lines of

property and casualty insurance coverage that are essential to protect the institutions from liabilities and losses.

In May of 2001, through two of the largest insurance brokers in

the world, FOJP began the process of marketing the renewal of the

all-risk property insurance that covers loss of or damage to the real

property of its client institutions, property valued in excess of $8.5

billion.

The renewal date was November 1st, 2001. In July of 2001, each

of our brokers was assigned seven of the world’s largest and most

respected property insurers to which to market FOJP’s coverage.

Sealed bids were due on September 17th. The brokers were actively in the process of seeking renewal quotations when the attacks of September 11 took place. An already hardening property

casualty insurance market became a nightmare for insurance consumers.

FOJP stopped the competitive bidding process and used one

broker to scratch and claw the worldwide insurance market for a

renewal program. Before the November 1 renewal, FOJP’s clients

enjoyed property insurance limits of over $8 billion. Following the

November 1 renewal, and despite the extraordinary efforts of one

of the world’s largest insurance brokers, 16 international insurance

companies in combination provided a program with significantly

less coverage and dramatically increased costs.

Most alarming, however, was that terrorism exclusions were

added to the policies. Upstate hospitals, particularly in Buffalo and

Albany, have seen their insurance limits drastically reduced, both

their deductibles and premiums dramatically increased, and all

had terrorism exclusions inserted in their policies as well.

The combination of significantly reduced limits and terrorism exclusions experienced by the FOJP program has become commonplace, posing a serious threat to the ability of non-profit health care

and social service institutions to continue to provide the services

that are so important to the poor, the aged, the sick, the disabled,

and to those of us who are lucky enough to enjoy cultural and educational services without the burden of sickness or disability.

Each of FOJP’s largest hospital clients has over $500 million in

long-term debt, as well as more than $100 million in short-term

loans for new construction. In the event that one single terrorist

act even far below the magnitude of September 11 seriously damages or destroys any significant property in the United States, the

effects of such a scenario could be far-reaching and devastating.

26

Lender agencies will realize that they are the insurer of last resort. Institutions will be unable to rebuild because of terrorism exclusions, and there will be defaults to private mortgagees and Government lenders.

Lenders may respond by requiring terrorism coverage before

lending any additional money to similar institutions. The institutions will then face the choice of foregoing essential programs necessary to fulfill their mission, or paying exorbitant terrorism premiums for insufficient coverage.

A leading writer of terrorism coverage recently quoted the FOJP

program a premium of over $4.2 million for only $50 million in coverage. Premiums of this size are simply not affordable in the current fiscal environment.

Leaving aside the day-to-day financial stress non-profit institutions bear in providing services, basic insurance costs are rising

precipitously. There is no money in any budget to pay the premiums that are being quoted for terrorism coverage, if such coverage could be found at all. And even if the money could be found,

the limits being offered are seriously inadequate.

If one of our insured hospitals were to be seriously damaged or

destroyed by a terrorist act, $50 million in coverage would make

but a small dent in the hospital’s financial obligations and rebuilding costs.

The issue of insurance coverage for property loss caused by acts

of terrorism is a serious one. Coverage is either unavailable or coverage that is available is inadequate in limits and unaffordable in

price.

We need Congress to act, and to act quickly. Thank you.

[The prepared statement of Lisa Kramer can be found on page

24 in the appendix.]

Chairwoman KELLY. Thank you, Ms. Kramer.

We move now to Mr. Quinn.

STATEMENT OF KIERAN P. QUINN, PRESIDENT AND CEO, COLUMN FINANCIAL, INC., A SUBSIDIARY OF CREDIT SUISSE

FIRST BOSTON

Mr. QUINN. Good afternoon, Madam Chairwoman, and Members

of the subcommittee:

I appreciate the opportunity to be here today to discuss terrorism

and its effects on the commercial real estate finance industry.

In 2002, Column Financial closed 549 individual loans for a total

of $5.8 billion. The smallest loan was about a million dollars. The

largest loan was $480 million.

Since 1/1, we have turned down roughly 9 to 10 loans valued at

approximately $500 million only because they lacked terrorism insurance. Today we will not consider any loan in excess of $50 million without full terrorism insurance coverage. We will scrutinize

all loans in excess of $20 million if they have any terrorism exclusions. And we have been anticipating we will receive all-risk policies on smaller loans. It is early in the year. We have not seen everything yet.

My competitors are also turning down loans because of the lack

of terrorism insurance. High risk office buildings in high profile citVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
27

ies such as New York, Washington, Chicago, LA, will be extremely

difficult to finance without terrorism insurance.

My fear is if another attack occurs, the insurance markets may

shut down. To put the finance industry, the commercial real estate

finance industry in perspective, our total outstanding commercial

mortgage debt equals $1.7 trillion. Property taxes alone provide almost half of all Government funding, and more than 70 percent of

the local tax bases throughout the country.

The real estate industry contributes approximately 11 percent of

the Gross Domestic Product. 2001 was a record-setting year for

commercial and multi-family loan production. New CMBS totaled

over $76 billion in the U.S. alone.

Many of these loans were already in the pipeline before September 11th, but more importantly most lenders and originators

continued to lend with the assumption that Congress would act and

pass terrorism reinsurance backstop.

Loan production volumes for 2002 will be at risk if terrorism insurance coverage remains unavailable. During 2001, commercial

real estate finance activity in Chicago alone was $10 billion. In Los

Angeles, it was $10 billion. In New York, it was $12 billion.

This could represent a loss of business for lenders and developers. It could also represent a loss of future construction jobs and

a current loss of transfer taxes to the localities.

Furthermore, pension funds and life insurance companies invest

directly in commercial real estate as owners, and many of their investors, including average Americans who rely on fixed incomes,

will see an industry downturn effect seriously adversely affect their

retirement savings.

Currently there is a risk transfer occurring from the insurance

industry to commercial business. Forty-six States have approved

exclusions for terrorism, war, and military action and the use of

nuclear, biological, or chemical material. This risk is being transferred to borrowers and to lenders, thus making the lenders the insurers of last resort.

If this situation remains, lenders will not be able to continue to

make loans. I am here to say that lending capacity in 2002 is being

dramatically affected by the lack of available terrorism insurance

coverage.

My company is not the only lending institution affected. Several

Manhattan high rise projects whose collective values equal about

a billion dollars have lost funding because terrorism insurance

could not be obtained.

Another company has established a policy to exclude funding

consideration for all loans excluding $25 million without terrorism

insurance. Many servicers of commercial mortgage-backed securities have concerns about insurance coverage on existing issuances

on existing properties.

If the same insurance coverage is not available when policies are

renewed, there is a possibility that loan covenants will be violated

because the required all-risk coverage may not be provided.

Another major commercial mortgage lender with a $10 billion

mortgage portfolio who originates large loans for securitization has

decided to protect itself by requiring terrorism insurance on all new

loans.

28

Borrowers frequently are unable to obtain the required terrorism

insurance, making it impossible for the lender to close the loan.

The rating agencies are reacting to the lack of available terrorism insurance. Fitch & Moody’s are in the process of creating

new criteria to categorize this risk.

If Congress fails to pass legislation, these new guidelines could

cause rating downgrades in new and existing deals.

In addition, special scrutiny is being given to the sort of small,

run-of-the-mill properties in close proximity to these high profile

properties because we don’t know where the next attack is coming.

I am a commercial real estate lender. I am paid and trained to

assess and price risk. But I am trained to deal with certain types

of risk, and this is one I have no training to assess and deal with.

I can assess the risk of a K-Mart bankruptcy. I can assess the

risk of a building burning down and collecting on insurance. But

if I cannot assess the risk, and my borrower cannot obtain insurance, I cannot make the loan.

I submit that the time to act is now, before another terrorist incident occurs. Act now while we have the luxury of being able to give

careful consideration of how a program should be crafted.

The need and purpose of Government reinsurance backstop is to

stabilize and restore confidence to the markets. If and when another attack occurs, the Federal backstop will ensure against market disruption and panic.

I urge Congress to pass terrorism reinsurance backstop legislation, and I applaud the Financial Services Committee for taking

the lead in this area.

Thank you.

[The prepared statement of Kieran P. Quinn can be found on

page 137 in the appendix.]

Chairwoman KELLY. Thank you very much, Mr. Quinn.

We move to Mr. Hunter now.

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF

INSURANCE, CONSUMER FEDERATION OF AMERICA

Mr. HUNTER. Thank you, Madam Chairwoman.

Chairwoman KELLY. Mr. Hunter, will you please push the button

to turn on the microphone.

Mr. HUNTER. Yes. Thank you.

Chairwoman KELLY. Thank you.

Mr. HUNTER. Thank you very much. It is nice to be back before

you.

You will remember that CFA was one of the early and strongest

supporters of the bill that passed this subcommittee unanimously,

or the Full Committee, and went to the floor of the House, because

as I testified before the Senate I was very afraid of what might

happen after January 1.

We did not support the ultimate bill because we thought the tort

restrictions were too Draconian, but we did think that the Committee, particularly Chairman Oxley and Chairman Baker, did a

great job here at the Committee level.

Because of the lack of Congressional action last year, we got to

test whether the crisis that we feared would happen, and what

would happen. There were many dire predictions, and we now can

29

test did all these dire predictions come true? And the answer is,

they did not.

Terrorism coverage, which was obtainable immediately after the

September attacks, is becoming more widely available in larger

amounts. Premiums are falling as more insurers enter the market.

That is a quote from this morning’s New York Times.

The world’s largest commercial insurer, AIG, has just asked the

Federal Government not to offer airlines war and terrorism insurance anymore because, as Mr. Greenberg put it, we as taxpayers

do not want to compete with our own Government for business that

the commercial sector can underwrite.

Ground Zero’s cleanup and construction project at the World

Trade Center has been written in a wrapup policy by Liberty Mutual.

The capital markets raised $24 billions in 10 weeks, which is

breathtaking, said Alice Schroeder of Morgan Stanley. More money

was raised in new capital than actually was paid out as a result

of September 11th, when you consider taxes.

Lloyds of London says that new capacity has helped brokers obtain higher limits of $50 million to $100 million easy to obtain for

good risks, he said, for terrorism. And by using capacity in Bermuda and the U.S. markets, brokers can obtain $200 million, the

Lloyd’s broker said. Lloyd’s now comfortably places $200 million of

coverage for any one building.

Insurers are developing ways to rate terrorism coverage, including new computer models which have been developed for that purpose. Some larger commercial accounts are using the Liability Risk

Retention Act to cover the liability part of the terrorism risk, for

example airlines are doing that in Vermont.

Captive insurance companies are forming to cover terrorism, for

instance, for the construction trades. Banks are freely loaning

money, and Mr. Greenspan this morning confirmed that. He said,

quote: ‘‘To date there does not appear to be the case that there are

any widespread problems. We have not seen any impact of that nature on the banks.’’

And I could go on with many, many more positive things. So CFA

undertook a major study of the insurance market. We found that

the insurance market is wealthy and overcapitalized. High rates

are a serious problem for mid-sized and larger commercial insureds, but that is much more related to the economic cycle of the

insurance industry than terrorism.

The larger firms are finding alternative ways to deal with the

problem such as self-insurance and creation of captives, and even

securitization of risk.

The rate problem is caused by their classic turn in the economic

cycle, but the hard market is anticipated to be short because of the

excess capital in the insurance industry.

Banks are freely loaning money. GAO has today released its report. It points to real estate and commercial lending as potential

trouble spots. It cited ten examples of problems, eight of which are

in these areas. The others are terror targets, a mall in an airport.

Of the ten, four are located in New York, maybe more, at least

four.

30

CFA agrees there are problems developing in certain areas, but

as GAO says, quote: ‘‘The extent of negative economic impacts of

a lack of terrorism coverage is not yet clear. Ultimate impact on

the economy cannot be gauged.’’

This is not to say there are no problems. High prices are a serious problem because of the cycle turn. In the mid-1970s and mid1980s, we experienced crises like this. The mid-1980s crisis was

much worse than the one we are currently in. You may remember

that Time Magazine had a cover that said ‘‘Sorry, America, Your

Insurance Has Been Cancelled.’’

The price increases in the hard market caused by this cycle term

began in late 2000. The terrorist attack sped up these price increases into what many seasoned industry analysts see as price

gouging today. But terrorism did not cause the price increases.

What should Congress do today?

One, I think you should not rush into passing a full backup bill.

You should continue to have the GAO review what the problem is,

and to look at the problems and see what the limits are. Real estate trophy risks, other trophy targets, particularly in New York

City. You should document that.

Congress should be prepared to act if an event occurs quickly,

just as you did with the airlines. GAO raises the important question of how to deliver payments, but there are ways to do that.

Even the insurance companies do not have adjusters to cover say

major earthquakes, and there are services available for ways to deliver money if you decide to do something after the fact.

You may decide to target the ultimate bill, if there is one, to the

specific risk. the terrorist targets and the trophy risks. Those are

the problems. So maybe something like a coverage only in excess

of a $500 million retention per entity.

Big business wants an all-industry bailout rather than a specific

backstop. I don’t think they need it.

Second, if any Federal backup bill is required, the House version

is the right way to go in terms of a payback mechanism. We totally

agree with that.

Third, we think you should consider developing private sector alternatives. For example, expanding the Liability Risk Retention

Act to cover property insurance. Why shouldn’t the wholes of these

aircraft be able to be covered by the airlines, just like they are

going to cover their liabilities? The Risk Retention Act is a very important tool to give alternatives to the private sector.

And finally, any bill that does pass you have to address rate

gouging. If you pass a backup bill, it would be foolish to not have

a price reduction as part of the bill. I would be happy to answer

questions at the appropriate time.

[The prepared statement of J. Robert Hunter can be found on

page 142 in the appendix.]

Chairwoman KELLY. Thank you, Mr. Hunter. I read your testimony. I found it very interesting, but it certainly seems to me you

may not have interviewed the other panelists.

We move now to Ms. Schroeder.

31

STATEMENT OF ALICE D. SCHROEDER, SENIOR U.S. NONLIFE

EQUITY INSURANCE ANALYST, MORGAN STANLEY.

Ms. SCHROEDER. Thank you. Good afternoon, Madam Chairwoman and Members of the subcommittee:

I appreciate the opportunity to appear before you today. As an

equity analyst, I am an observer of the industry, but I also represent the owners of the companies who supply capital to the industry, and I am the only representative of the owners of the insurance companies here today.

The risk of terrorism which was formerly borne by insurers is

now being distributed more broadly throughout the economy. This

afternoon the financial institutions research team of Morgan Stanley issued a report on this subject.

We have analyzed the real estate, banking, asset management,

and insurance industries to discuss and understand how the risk

has shifted out of the insurance industry toward other sectors of

the economy. Collectively we estimate that there are approximately $12 billion

of assets exposed in the commercial area in the United States, excluding homes and personal assets—excuse me, $12 trillion, which

obviously greatly exceeds any capacity that the insurance industry

could possibly hope to provide for terrorism coverage.

There is no possible way the insurance industry could deal with

that.

Lenders have shown varying degrees of concern about the lack

of coverage in their portfolio, depending on their business mix, with

many beginning to demand coverage. Others, we are aware, have

begun to ask borrowers to explicitly self-insure, shifting the risk directly to their customers.

Property and business owners are seeking insurance coverages,

but they are generally not finding it for the higher risk properties,

and for large groups of employees for workers compensation.

Many, however, still have coverage which will expire later in the

year. And those who have already lost coverage appear to have

varying levels of concern depending on how they assess their own

risk.

Mathematically, the effects of customers and insurers to avoid

the risk collectively does not protect the economy against terrorism.

The risk has only been redistributed.

We think you need to understand the assumptions that are being

made by participants in the economy in thinking about this, as we

have discussed them with many people.

It appears that many are assuming that if there were another

event, the Federal Government would provide essentially unlimited

post-event funding; that the funding would be in proportion to economic losses regardless of insurance coverage; and that any capital

destroyed, any debts owed, and any insurance claims owed would

all be paid by the Government.

It also appears that some may be assuming that any further attacks would be an act of war. In other words, that insurance coverage might not even apply.

We also believe there are other reasons why there has not been

more panic and visible economic disruption, including the fact that

insurance policies renew throughout the year, and that many peoVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
32

ple are assessing their individual risk odds as low. But it is important to separate panic behavior from real economic disruption.

As analysts, we deal in facts and data. And the economic disruption is the fact that significant risk has been shifted from insurers

to their customers. That is a fact. It is a simple economic fact that

we believe cannot be disputed.

Even if every exposed party retains its own risk collectively and

has no complaints about doing so, the risk remains in the economy

and has not been addressed.

We believe, however, that complaints about the disruption will

worsen over time because as more insurance policies renew, more

coverage will be lost. And the limited insurance capacity that is

available is being used now by those whose coverages are expiring

early in the year. So you have some inequities that may result from

that.

The insurance industry will develop over time some additional

capacity for terrorism coverage, but it will fall far short of the requirements. For example, the $20 billion of capital that was raised by the industry last fall was all raised by investors for the reinsurance industry, and that money is not being used to cover terrorism, and

those investors certainly had no intention of covering terrorism

risk.

The rating agencies commented that there was a rating threat

here, but so far there have been no downgrades. We expect that

over time that may change.

And finally, institutional investors currently are in a state of ignorance, not seeing disclosure. They would certainly like to know

more about their investments and what the status of the equities

that they own have.

The SEC is considering this issue, but we are certainly in favor

of disclosure.

So to sum up here, a brief perspective on the insurance industry.

From the point of view of an equity investor, insurance companies

generally destroy rather than create value for their shareholders.

They compete for market share ferociously and are quick to

underprice their product, given the opportunity. From our perspective, customers get an extremely good deal subsidized by shareholders, and if insurers could gain market share by covering terrorism, we believe they would be doing it right now if there were

any way to underwrite terrorism successfully. We simply do not believe there is.

The shortage of insurance capacity, along with the simple and

obvious mathematics of terrorism losses, indicate to us that there

is a problem here that needs to be solved. So on behalf of the

shareholders who provide critical risk capital to this industry, we

urge your careful consideration of these issues.

One thing to especially keep in mind is whether the shareholders

will recapitalize the industry if there is another event.

Thank you.

[The prepared statement of Alice D. Schroeder can be found on

page 171 in the appendix.]

Chairwoman KELLY. We thank you very much, Ms. Schroeder.

Mr. Mair, I would like to ask you a question or two.

33

As the representative of the commercial consumers, the businesses most directly affected by a lack of terrorism coverage fall

into your category, and I wonder if you could explain to us the risk

transfer that is occurring from insurers to the businesses and the

vulnerability of commercial policyholders to another terrorist attack from your perspective if they fail to obtain terrorism coverage.

Mr. MAIR. As I said, Madam Chairwoman, the RIMS membership includes approximately 84 percent of the Fortune 1000, and on

the smaller end, over 900 businesses with less than 500 employees.

Those small organizations rely on insurance coverage to recover

from catastrophe. In the absence of that, those companies simply

do not have the resources to reopen their doors again.

By example, in the middle sector in my organization, every dollar

that I pay for insurance is a dollar that the U.S. Olympic Committee cannot use to train athletes. It is a dollar that a company

of my size cannot use to pay an employee to pay for health benefits.

On the uppermost end, these are companies that have the ability

to retain more of that risk, to spread more of it across multiple

properties, but still yet those are going to have an impact should

those losses materialize, or should those higher costs continue to be

absorbed by those organizations.

Simply put, those are going to be transferred through the chain,

through the supply chain, to the ultimate buyers, to the consumers.

Chairwoman KELLY. Thank you.

Mr. Mair, your fellow panelists here, Mr. Hunter, in his testimony wrote that larger firms are finding alternative ways to deal

with the problem such as self-insurance, creation of captive insurance companies, and securitization.

You represent the companies you spoke of, the Fortune 500 and

Fortune 100 companies, and a lot of smaller businesses. Do you

find this to be the case? Or are there large companies that are in

need of this Federal legislation?

Mr. MAIR. Let me answer those questions in reverse order.

There are clearly large companies that need this legislation. It is

dynamic, it is required, and it is required today.

The same companies that are banding together to form captives,

to use alternative risk transfer vehicles, still look to the reinsurance markets. They are not banding together and creating those

captives for unlimited losses. They are all capped within working

layers of loss that are predictable and understandable and

fundable.

Where the reinsurance industry has pulled itself away, where it

has left, they are left with the fullness of that liability. And none

of them, even the largest, have the ability to absorb that on their

own.

And by the way, I really disagree with something. You mentioned

Mr. Hunter’s testimony. I have to tell you on behalf of the consumers of insurance, I really strongly disagree with the Consumer

Federation of America’s assertions. I think they have looked at the

right fact patterns, but at best hit the outer ring of the bullseye.

Chairwoman KELLY. Thank you, very much.

Ms. Schroeder, how many investors do you think are aware that

their investments may no longer be protected by terrorism insurVerDate 11-MAY-2000 13:41 Aug 23, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\78186.TXT HBANK1 PsN: HBANK1
34

ance? And if the Senate fails to act, is this not putting both the investors and the lenders at a significant risk?

Ms. SCHROEDER. Yes. Investors are in a state of ignorance right

now because they know there is risk, but there is no disclosure of

lack of insurance. So there is a creeping miasma of risk out there

and concern, but they don’t know which companies to apply it to

because, while insurance coverage has been withdrawn, they do not

know yet if the policy has expired for the company that they happen to own, for example.

They know that risk is rising, and they are. generally speaking,

aware. There are certainly varying levels of awareness among investors however, and we believe investors are becoming more

aware of that. For example, Lehman and Morgan Stanley this week

have both issued major reports on this matter, the first to be

issued.

So we expect that over time investors are going to become more

and more concerned.

Chairwoman KELLY. Thank you.

Ms. Beck, why do you think some real estate transactions are occurring in the face of the unavailability problem?

Ms. BECK. Well, I know of one in Chicago that took place and

was sufficiently interested to find out how, since it was a large

transaction. And I did call and found out that the owners have a

blanket policy in effect until early summer. Because of their relationship with the insurance company that had provided the blanket, they were able to include the new purchase in the pre-9/11 existing blanket policy.

But, as I mentioned on renewal, now there is no blanket coverage

being provided for large portfolio owners. I might also, if I may ask

your indulgence, comment on Mr. Hunter’s analysis of the situation.

I wish I were as sanguine as he that if we waited long enough

the free market would come up with a solution. I just wonder—and

this may be a little unfair, Mr. Hunter—but I just wonder if you

were hanging over a cliff, if you would like to wait there while

someone created a business to rescue you.

Chairwoman KELLY. Thank you, Ms. Beck.

Mr. Hunter, do you want to attempt an answer here?

[Laughter.]

Mr. HUNTER. Sure. Well, actually I think there are some problems. I said that. And I think the Congress needs to reconsider how

to address the real problems that may exist in certain limited parts

of the economy. That is just not the kind of situation that was predicted; it is not happening; and you cannot create it. It is just not

there.

Chairwoman KELLY. Well, Mr. Hunter, it has been 6 months

since 9/11——

Mr. HUNTER. And one-third of the direct insurance is now written because 25 percent of the commercial business comes up on

January 1 of the direct business, not the reinsurance. Seventy percent of the reinsurance expired on January 1, but 25 percent of

policies attached on January 1, the direct policies, and since then

about—so we’re at about a third of the policies out there and we’re

not hearing anything.

35

Ms. BECK. May I comment?

Chairwoman KELLY. Ms. Beck, yes.

Ms. BECK. Thank you, Madam Chairwoman.

I think that when Mr. Hunter says that the policies have been

written, he is not aware perhaps that acts of terrorism have been

excluded from coverage.

In the States that are not covered by the ISO exclusion, which

permit States to allow insurers to exclude terrorism coverage—in

the States that still are not approving that exclusion, you have 35

percent of the commercial property market.

In our market in New York, I know for certain that several billion dollars worth of real estate is either grossly under-insured for

terrorism, or has had no coverage for terrorism in those same 3

months. And I know that in a survey that you did, Mr. Hunter, you

may not have had access to nor would it necessarily have been disclosed to you, because, as I mentioned in my testimony, property

owners are frightened to make public this fact, either to potential

terrorists or to their investors or lenders or anyone else, for that

matter, including their tenants who also might be frightened knowing that there is no coverage for acts of terrorism.

Furthermore, anybody who has renewed insurance is not getting

coverage for the very risks that I think our Government is most

concerned about: bioterrorism, chemical or nuclear terrorist acts.

I do not question that what you have in your study is correct, but

it is missing are some of the most critical underlying facts affecting

the large commercial properties.

Chairwoman KELLY. Ms. Schroeder, did I see your hand on that?

Ms. SCHROEDER. Yes. I was just going to add that there has been

some evidence from the NCCI which runs the Workers Compensation Pool that since January 1 it has become very, very difficult for

large employers to buy workers compensation because you cannot

exclude terrorism coverage from that product. And that is a very

significant shift since January 1, which would indicate that the

lack of reinsurance coverage is what is triggering the primary companies to stop selling the product to large employers.

Chairwoman KELLY. Thank you.

I am out of time, so I am going to turn to Dr. Weldon.

Dr. Weldon.

Dr. WELDON. Yes. I have a question for Mr. Hunter. Those tort

provisions, you referred to them as being Draconian, I would like

you to amplify on that just a little bit, because I thought if we were

going to be putting basically the Treasury of the United States at

risk for coverage for these things, it was reasonable to place some

restrictions on the trial bar to raid the Treasury.

And I am just a little shocked to hear that from you. You know,

you go to buy a ladder at K-Mart or Wal-Mart, it is about twice

the price it should be because of the insurance on the ladder and

all that.

So from a consumer perspective, can you explain where you are

coming from on that issue?

Mr. HUNTER. Sure. Well, I supported tort restrictions as it

passed this Committee. There were restrictions.

Dr. WELDON. OK.

Mr. HUNTER. And I supported that.

36

Dr. WELDON. So when the question was before the

Committee——

Mr. HUNTER. It went to the floor and they tacked on a whole new

set of much broader restrictions that went way beyond just terrorism, and I was opposed to that. I thought it was—first of all, it

was non-germane, and second, it was Draconian.

Dr. WELDON. Ms. Kramer, did I understand your testimony correctly that you now have a lot of exposure; that you just cannot get

insurance?

Ms. KRAMER. Well, that is absolutely right. We cannot get coverage for terrorism. And that applies not only to the hospitals and

agencies in the FOJP program, but as I mentioned we’ve talked to

the hospitals in Upstate New York and I know from personal experience hospitals outside of New York City and New York State are

experiencing the same thing.

I want to just comment for a moment on both what Mr. Mair

said and also what Mr. Hunter said. Mr. Mair made the point that

the problem may be up at the reinsurance level. We have a captive,

but that captive is in no way, shape, or form able to subsidize and

take care of terrorism coverage.

When we go to our insurance companies, the primary carriers

happen to be excess and surplus lines companies and they do not

even need approval. They do not need the approval of the Superintendent of Insurance in New York for excluding terrorism.

Then you move to the reinsurers and their prices are, when you

can get a little bit of coverage, are exorbitant. The hospitals and

the agencies in our program, the hospitals particularly, are cashstrapped. They have only got a few weeks of cash on hand.

In the September 11th attack, two of our hospitals were seriously

affected and, fortunately, because of our program pre the last renewal, had coverage for major business interruption losses.

In addition, our agencies throughout the city who had to gear up

to take care of victims of September 11th and their families, their

services were also interrupted. So you are talking about thousands

of people in the City of New York who are not getting the health

care services, or access to it, let alone social service agency services

all because of a terrorist act. And that one was covered. The next

one is not.

Dr. WELDON. Does your organization consider itself at higher

risk to be targeted in light of the virulent anti-semitic sentiments

of these terrorists?

Ms. KRAMER. Well, bear in mind that the agencies and the hospitals are non-sectarian, and therefore offer their services to people

of all walks of life, all religions, races, and so forth.

Dr. WELDON. But the name on the door is——

Ms. KRAMER. The name on the door of my organization, FOJP

Service Corporation, of course, has Federation of Jewish Philanthropies in the title. But the hospitals and the agencies are not

necessarily, you know——

Dr. WELDON. Labeled that way.

Ms. KRAMER.——labeled.

Dr. WELDON. OK. Mr. Hunter, do you want to comment on this

situation? We have got a major charitable organization in this

country that is exposed.

37

Mr. HUNTER. Yes. Obviously I think the major kinds of risks that

are exposed, particularly if they are targets, I think Congress

should consider if there is some role for Congress maybe coming in

at the high level as an excess carrier, because I think you can get

lower levels of terrorism coverage for terror.

But I do not think you need to take that and then expand that

to a general bill the way the current bill stands as it passed the

House. I do not think you need that kind of general coverage anymore. I do not think it is necessary, based upon what we are learning.

Dr. WELDON. I see some people who want to respond to that.

Ms. BECK. I would like to mention that I have been discussing

the issue with representatives of another major religious organization that is not affiliated with Ms. Kramer’s, but has many, many

properties throughout the country. I have given its name to the

General Accounting Office, because I just learned on Monday that

they were prepared to talk to the GAO. Unfortunately, my message

did not get to the staff in Chicago. The insurance dilemma is a

widespread problem for religious institutions of all denominations

across the country.

I think that we are very fortunate that Ms. Kramer is here

today, because in her example she had insurance that was to be

renewed, I believe you said on November 1st, and that is really

germane here, because we have this staggered schedule of renewals

coming up.

And there are still a large number of entities that have insurance written before 9/11. But what you are hearing today is

analagous to the Galapagos Islands, tips of volcanic mountains. In

the ocean, if the Pacific starts receeding you are going to see this

problem in stark relief—and it will worsen if Congress does not

act—creating some reinsurance mechanism must be done, and done

very quickly.

Mr. HUNTER. You know, Mr. Weldon, if that is true that there

are many religious institutions with this problem, that is a classic

example of why you would want to look at the Risk Retention Act

as possibly expanding it. Because the Risk Retention Act which

helped solve the liability crisis of the mid-1980s and the mid-1970s,

is limited to liability insurance. And it allows groups to get together all over the country and form to either buy insurance as a

group, or to self-insure themselves.

And it is a very good tool, because it offers alternatives. It also

kind of scares the insurance companies into making more reasonable bids. And it is something that should be looked at, because

Congress in both the last crises we had like this used that tool, and

I think it would be a perfect tool if you expanded that to property

and workers comp here.

Dr. WELDON. Did you want to comment on that, Ms. Schroeder?

Ms. SCHROEDER. Yes. I just do not view that as a feasible solution because the kind of small events that a risk retention group

could handle, you could already buy adequate coverage for.

The kind of large events that you need coverage for, no risk retention group could possibly capitalize. So economically I think it

is a good idea, but I think you already have capability to cover

those kinds of risk.

38

The insurance industry is happy to provide capacity for small,

reasonable acts of terrorism that they have the capacity to cover.

It is the large events that they do not have the capital for. And if

the entire insurance industry does not have the capital, how can

a risk retention group made up of non-profits do it?

Ms. BECK. And that is our point, as well. We were approached

by several hospitals as though we had the capital to invest in starting up a risk retention group, and there might be one or two hospitals in the New York State or New York City area that have

some capital to throw at this problem. But these are, as I said,

cash-strapped institutions. They are not-for-profit and they cannot

afford to self-insure or go into a risk retention group, and there is

no affordable coverage being made available from any of the insurers or reinsurers.

Our concern is that, as the cost of this coverage has become prohibitive—covering the expense takes money as it is transferred to

an operation that previously did not cost near this much in terms

of funds.

That situation is simply going to raise the cost of health care in

New York and elsewhere. How else are you going to pay for the

physicians and the services?

Mr. MAIR. Mr. Weldon, if I might, before you conclude your time,

Mr. Hunter cited three sources in saying to you that there is coverage available. He cited today’s New York Times in which Joe

Treaster indicated that there was coverage widely available at reduced costs.

I spoke with Mr. Treaster in an interview for that article yesterday, and what he indicated to me was he was able to find one program in which the cost had gone from 20 cents on the dollar to 5

cents on the dollar.

With all due respect to Mr. Treaster, you can sell me the Hope

Diamond at half its value and I still cannot afford it. It does not

become available.

Mr. Hunter also made reference to Lloyd’s, and the fact that coverage was available there. Lloyd’s is beginning to exclude fire-following coverage, an issue that is growing in 30 States now in

which that coverage remains even following the terrorism exclusion.

That does not suggest to me that coverage is available.

And he cited, as well, Hank Greenberg, Chairman of AIG, saying

that on the aviation side that Government need not do anything.

Well, in that same New York Times article, Mr. Greenberg is cited

as saying that Congress not acting is like going to war without an

army, and urged the Congress to act.

I concur with Mr. Greenberg in that respect. And again, thank

you for allowing me to interrupt.

Dr. WELDON. By the way, the way I deal with the New York

Times is that I just don’t read it.

[Laughter.]

Dr. WELDON. If the Chairlady would just indulge me for one little

question, could you, Ms. Schroeder, could you just explain to me

how insurance companies destroy equity?

Ms. SCHROEDER. Yes. How they destroy equity is they sell the

product too cheaply. Insurance is a derivative, and by that I mean

39

that the premium they charge is a fraction of the risk that they

take on.

So when they underprice the product, they can destroy massive

amounts of value. Over the last 10 years, insurance companies

have earned on average on their capital 8.5 percent, which is about

what a corporate bond would earn. And that is on average.

That is during a period when they got big windfall gains from

being invested in equities. And if you took those windfall gains

away, they would have lost money.

They also got big windfall gains from basically deflation of their

costs that were nothing that they did.

The risk that an investor takes on from investing in a stock, they

need to get paid for that risk more than a bond. So value destruction is if you only get paid what you get for owning a bond when

you’re taking the risk of an equity, and especially when that return

you did get came from something that was an accident like the equity market, not from the basic business of selling insurance.

The insurance companies typically lose something like 10 cents

for every dollar of premium that they sell on the basic business of

selling insurance. So customers get a $1.10 worth of claims and expenses for every $1 they give to the insurer for premiums.

Dr. WELDON. Thank you, very much. I will go sell all my insurance stocks immediately.

[Laughter.]

Ms. SCHROEDER. Most people do.

[Laughter.]

Dr. WELDON. Just kidding about selling those stocks.

Mr. HUNTER. They’re up at a rate of 15 percent since September

10th.

Ms. SCHROEDER. And where are they from 1998?

Chairwoman KELLY. Thank you very much, Dr. Weldon.

I want to go to Ms. Kramer just for a second. Ms. Kramer, I want

to tell you that because of the area that I represent in New York,

I am well aware of the Federation of Jewish Philanthropies and all

of the good work that you do. You are all over my District doing

wonderful things, which is why I am so concerned about your risk.

According to the GAO report, that exclusion that is being used

by the insurers excludes not only terrorism but also the commission of any dangerous or violent act intended to intimidate any segment of the population, or to express any opposition to a philosophy

or ideology.

I am concerned, ma’am, that you are able to get insurance to

keep on doing those good works in the face of potential for criminal

activity for bioterrorism, things like that.

I would like you to speak to that, because I think that your risk

is increased in that regard.

Ms. KRAMER. Well, let me say two things.

First with regard to the hospitals in our program, we have more

than just Jewish hospitals. Right in New York City, you know, we

have got hospitals from other religious affiliations as well as I commented on Upstate New York.

Now second, we have already encountered not only difficulty but

it has been impossible to get bioterrorism coverage. So what do we

see? We see hospitals all over the United States preparing their

40

disaster recovery plans so that they can treat the public in the

event of a bioterrorism attack. But who is there for them?

And so at the cost of treating the public, there will be no coverage and no money available to rebuild or to cover property that

is damaged, or people’s lives and health that is injured, and that

is the problem. Where will the money come from for them?

So my concern is that we have already seen and encountered the

difficulty. We cannot get bioterrorism coverage.

Chairwoman KELLY. So as long as the Senate does not act on

this bill, you are continuing at risk?

Ms. KRAMER. We are.

Chairwoman KELLY. And so are the people, the women, the children, the families that you serve?

Ms. KRAMER. All of those segments of the population are extremely vulnerable right now, and that is why we think it is important that Congress act now as opposed to putting this off any

longer.

Chairwoman KELLY. Thank you very much.

I just want one final question to you, Mr. Quinn.

Mr. Hunter says that there is little if any problem with loans in

the current market for terrorism insurance. I would like you to tell

me if you agree or disagree with that statement.

Mr. QUINN. I strongly disagree. I think he made a comment earlier that banks are lending. Banks make all types of loans—consumer loans, lines of credit to buy inventories and to finance accounts receivables. The world that I live in lends on commercial

properties, a specific loan on a specific asset.

It even goes broader than that. The financial markets that we

operate in rely on confidence. Insurance is a critical component of

the collateral that I lend on and the confidence behind the industry

that I work with. It is vital to everything that we do.

Chairwoman KELLY. What effect would another terrorist attack

have on your business and on your industry if Congress fails to

pass this terrorism insurance protection?

Mr. QUINN. If I cannot get insurance on these properties, I cannot make loans. I am the permanent lender. I am the one who

takes the construction lender out, or the bank loan out. All these

loans will back up at the banks and they will be unable to make

any new loans, and construction will grind to a halt.

Chairwoman KELLY. As I would assume, Ms. Beck, real estate

transactions would also, because the banks cannot do the loans on

those, either.

Ms. BECK. Well, we are already seeing that. But I think that,

while lenders are making commitments on a lower loan-to-value

ratio now than since the early 1990s when they had to foreclose on

a number of properties because of our economic decline at that

time, I think lenders will face a real problem if owners cannot get

the terrorism insurance and the building is, in fact, destroyed. The

lender generally having a non-recourse loan will be totally out-ofpocket for that particular piece of property.

I hope we will not have any further terrorism incidents. Were

that so, the FISC will be protected even with legislation passed by

the Congress, because we comtemplate backup insurance in the

41

event of an attack. FISC is not saying, ‘‘We are going to hand out

money now.’’

This is a very important distinction to make in talking about this

subject. We have a Financial Committee at the Real Estate Board

of Lenders and Mortgage Brokers that meets monthly. From what

I am hearing, since January first, no large loans have been made

on either renewals or on transactions.

This is very, very serious. I cannot promise that we can get you

all the data, but we are hearing in our private meetings that this

crisis is just going to continue to get worse and worse. Without congressional action, you can expect a domino effect that will be increasingly evident as the months pass.

Chairwoman KELLY. Well, certainly there does seem to be a concern when you have the Administration confirming the likelihood

at or near 100 percent of our having another terrorist attack. There

certainly is a concern.

There are, I am sure, questions from other Members who have

not been able to get to this hearing today. I want to make a note

of that and say that, without objection, I am going to hold the hearing record open for 30 days so that Members can submit written

questions to the witnesses and we can place their responses in the

record.

I want to especially thank this panel for honoring us with the

time that it took for us to get through this hearing, and for being

so very patient with that delay and with the quality of your answers here today.

This panel is excused with the subcommittee’s great thanks.

With that, this hearing is adjourned.

[Whereupon, at 6:20 p.m., the hearing was adjourned.]

(43)

A P P E N D I X

February 27, 2002

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